CIAO DATE: 1/99

A Review of U.S. Efforts to Address Market Access Barriers in Japan

U.S. companies with market access problems in Japan often raise a similar set of issues. In some sectors, restrictive regulations or regulatory practices make it difficult for the company to obtain approval to sell its product or service, or otherwise obstruct or hinder its operations. Once past the regulatory hurdles, or in those sectors that are relatively unregulated, the company often encounters a closed distribution system, cartel-like behavior, entrenched dealing arrangements, or other restrictive market practices or structures.

Since the 1980s, the United States has tried a variety of approaches to attack these same core sets of issues. Although the initiatives have taken on many different names, the agreements consistently have fallen into four categories:

0. Agreements addressing the regulatory system in a given sector ("regulatory" agreements);

1. Agreements imposing government procurement procedures in a given sector ("procurement" agreements);

2. Agreements aimed directly at anticompetitive or market restrictive practices and structures in a given sector ("MITI" agreements); and

3. Cross-sectoral agreements aimed at structural issues ("structural" agreements).

In each of these categories, the United States has achieved a handful of limited successes, a rare but occasional clear success, and an undeniable series of flops. The regulatory agreement category may get the prize for achieving steady but limited progress. The MITI Agreement category contains both the greatest success and the greatest failures. The procurement agreement category includes no stars, a few duds, and some that have achieved limited, incremental progress. The structural agreement category has produced a few practical benefits, and has educated U.S. officials on problems and approaches to solving them in sectoral agreements or other contexts. But these efforts have fallen well short of any wholesale restructuring of the Japanese market.

When it has come, success often has required returning to a sector repeatedly with followup agreements and threats of enforcement actions before a breakthrough finally is achieved. In other cases, efforts to address the problems have gone through several cycles with little net progress.

The United States has relied on four key tools of leverage, often employing one or more in a given negotiation: (1) use of the inherent power and prestige of the United States and the dynamics of the bilateral relationship; (2) alignment with domestic Japanese interests; (3) threats of unilateral sanctions; and (4) threat of the General Agreement on Tariffs and Trade (GATT) or World Trade Organization (WTO) action. Unfortunately, while the strength of the first two tools is undiminished, the use of unilateral sanctions has become much more difficult in the WTO era, and the United States has not been capable of compensating adequately for this difficulty with other tools such as affirmative use of the WTO or competition policy. Nowhere is the decline in leverage more starkly apparent than in the MITI agreement category, in which MITI--seemingly taking a cue from Ed Lincoln's Foreign Affairs article--refuses even to meet with United States Trade Representative (USTR) staff on the types of bilateral issues addressed in those agreements. Overcoming this situation requires a substantial dedication of energy and resources to better develop and apply these and other new tools in the old mix.

The Four Categories

• Regulatory Agreements

  The regulatory agreements address sectors where industry may face market structure/market practice barriers in addition to regulatory barriers. These agreements, however, take aim at the regulatory barriers in the hope that reducing those barriers will suffice to increase competitive pressure in the market and generate opportunity for foreign firms.

  Telecommunications has been one of the most active sectors for U.S.-Japan deregulation agreements since the 1980s. Agreements include:

  • MOSS telecommunications agreement (1985)

  • Cellular Telephone and Third-Party Radio agreement (1989)

  • Agreement on International Value-Added Networks (IVANS) (1990)

  • Clarification of IVANS (1991)

  • Cellular Telephones Agreement (1994)

  • Enhanced Initiative on Deregulation (Birmingham Commitments) (1998)

  These agreements are at least partially responsible for some progress for foreign suppliers in the Japanese market. Most notably, the 1994 cellular phones agreement--which was essentially an enforcement action to correct violations of, or gaps and ambiguities in, the 1989 Cellular phones agreement and 1985 MOSS agreement--brought substantial new opportunities in Japan for foreign suppliers and significant new competition in the market. Prices for cellular phone service dropped significantly, demand boomed, and NTT's grand plan to dominate low-cost cellular service in Asia with its "Personal Handyphone System" has been beaten to near extinction.

  Some other progress is observable as well in the telecom sector. New common carriers have emerged in Japan to compete with NTT. The 1998 Birmingham commitments forcing NTT to lower interconnection charges and the 1997 WTO Basic Telecom Agreement's prohibitions of anticompetitive behavior regarding interconnection hold out the possibility for increasing the competitive pressures on NTT. That said, few would mistake Japan for a fully open and competitive telecommunications market.

  The medical device and pharmaceutical sectors also have received significant attention in bilateral deregulation agreements, including the MOSS agreement in 1986 and the Enhanced Initiative on Deregulation in 1998. Regulatory changes in these agreements, most importantly regarding the approval of new products, have combined with strong U.S. competitiveness to win foreign companies significant market shares in each of these sectors: 16 percent in pharmaceuticals (44 percent if products licensed to Japanese firms are counted); and 33 percent in medical devices. In the case of pharmaceuticals, Japan Fair Trade Commission (JFTC) guidance in weakening the links between Japanese pharmaceutical companies and their distributors also helped U.S. and European pharmaceutical companies improve their competitive position in Japan. Further regulatory reform of the new product approval process could position foreign pharmaceutical companies for further substantial gains in Japan.

  The financial services sector has been a more recent area of focus for U.S.-Japan deregulation agreements. The most important examples are the 1994 insurance agreement, the 1995 financial services agreement, and the 1996 insurance agreement. Financial services also are included in the Enhanced Initiative on Deregulation.

  Bilateral agreements obviously cannot claim credit for all of the change currently going on in the Japanese financial sector, but they have played a meaningful role in some specific areas. For example, the 1995 financial services agreement allowed U.S. investment advisors to enter the pension fund management business in Japan, and U.S. investment advisors now control over eight percent of the market. The need to compete with the foreign companies to achieve higher returns has helped fuel other changes.

  The 1996 insurance agreement--which arose as an enforcement of the 1994 agreement--required abolition of cartel pricing in the nonlife insurance sector by July 1998, an action sometimes cited in Japan as a key Big Bang achievement in the insurance sector. U.S. and European insurance companies have begun to take advantage of these changes to make gains in the market, although difficulties in the so-called "third sector" may outweigh their gains.

  The housing and construction materials sector is another area of long-time effort by the U.S. in its talks with Japan, including a MOSS wood products agreement in 1986, a "Super 301" wood products agreement in 1990, an exchange of letters on wood products in 1996, and commitments on housing and construction materials under the Enhanced Initiative on Deregulation. These agreements primarily address standards, product approvals, and tariffs. They have contributed to a modest increase in Japan's use of foreign construction products, although foreign penetration of the market remains low, and standards and tariffs continue to create barriers.

• Government Procurement Agreements

  The U.S. government's foray into bilateral government procurement agreements with Japan began with the NTT procurement agreement in 1980, which has been updated and/or extended every few years since, most recently in 1997. The NTT agreement aimed at imposing more open and transparent procurement procedures on the telecom giant in order to improve the chances for foreign firms to win bids. In practice, the foreign share of NTT's procurements crept up to a 5 to10 percent share in the mid-1980s, where it has essentially stayed ever since.

  In the late 1980s, the United States began an expanded push in to the government procurement area, with a series of agreements:

  • Supercomputer procurement (1987)

  • Second Supercomputer agreement (1990)

  • Major Projects Arrangement (construction sector) (1988)

  • Revised Major Projects Arrangement (1991)

  • Action plan on construction (1994)

  • Satellite procurement agreement (1990)

  • Computer procurement agreement (1992)

  • Framework telecommunications equipment procurement agreement (1994)

  • Framework medical technology procurement agreement (1994)

  In some of these sectors, the government procurement share of the market had significant value, but in several cases it did not. Nevertheless, these agreements were based on the theory that while the barriers in the private market--keiretsu arrangements and market-restrictive structures and practices--were difficult to attack in a bilateral agreement, in the government procurement sector, the Japanese government could not deny its role in the market, and increased purchases by the government sector could help set an example and clear the way for increased purchases by the private sector. Generally in these agreements, the United States attempted to couple improved procurement procedures with an explicit agreement or implicit demand that Japan buy more foreign products.

  The results have been less than impressive. In computers, the foreign share of government purchases grew in the first years of the agreement, from 9 percent in 1992 to 14 percent in 1994, but then began to fall again. In supercomputers, for a few years Japan made sure to purchase at least a few Cray and other U.S. machines, but its interest in this agreement has diminished since the U.S. government intervened, unfairly in Japan's view, against NEC in its bid for a U.S. government supercomputer procurement in 1996. The satellite agreement probably helped U.S. companies win bids, but only five procurements fell under the scope of the agreement during its first five years (for a total value of $1 billion). In telecommunications, the 1994 agreement covers procurement worth significantly less than $1 billion per year, of which foreign companies hold a share of around 10 percent. The medical technology agreement covers a slightly larger share of the market (about 16 percent of the market is in the government sector), and foreign firms hold about one-third of that government market. It is unclear whether the improved procurement procedures have helped foreign firms increase sales. In the construction sector, the Major Projects Arrangements helped win foreign firms some important contracts in the covered projects, but the progress did not translate into improvements in the private construction market, and the gains were not sustained.

• MITI Agreements

  Unlike the procurement agreements, the MITI agreements attempt to tackle head-on the problems of closed distribution systems and other collusive or restrictive practices or structures in a given sector. The agreements in this category include:

  • Semiconductors (1986, 1991, 1996);

  • Flat glass (1992 action plan, 1995 agreement);

  • Paper products (1992);

  • Autos and auto parts (MOSS talks 1986, action plan 1990, voluntary purchase targets 1992, agreement 1995).

  The barriers and efforts in the film case also fit this category.

  In each of these sectors, including film, U.S. pressure induced the Japan Fair Trade Commission to undertake a survey of the sector. The survey, conducted by the economic division rather than the investigation division of the JFTC, did not involve any compulsory process; instead, it relied on industry's voluntary responses to the JFTC's survey questionnaires. Without use of compulsory process, the JFTC in each case unsurprisingly found insufficient evidence of competition law violations, although it did point out troubling behavior in the market. Rather than pass the matter to the investigation department for further inquiry, the economics side of the JFTC pursued it no further, except to conduct follow-up surveys a year or so later. The follow-up surveys invariably found the industry to have satisfactorily addressed each problem raised in the previous survey (a survey by the economics side of the JFTC has led to an investigation by the enforcement side of the JFTC only once in the history of the JFTC).

  Without a fruitful outcome from the JFTC, the United States pursued several mechanisms in the bilateral agreements (except film) to attempt to breach the barriers. The United States sought commitments from MITI to use "administrative guidance" to distributors to carry and to customers to use more foreign products, and to competing suppliers not to interfere with their distributors' or customers' increased handling or purchase of foreign products. The United States also sought commitments from the JFTC to more closely monitor and to more vigorously enforce competition laws in the given sector. The United States pressed for detailed data to monitor developments and create pressure for increased purchases. Finally, the United States leaned on MITI to ensure the attainment of specific market share targets for foreign firms.

  Only the last tool worked to any degree at all in the MITI agreements. Specifically, the now legendary semiconductor agreement contained a 20 percent foreign market share target, and the United States strongly pressured Japan to hit that target. Foreign share broke through 20 percent in the last quarter of 1994, the deadline under the 1991 agreement for the target, having increased from 8 percent at the time of the original 1986 semiconductor agreement. By the end of 1996, foreign share of the Japanese semiconductor market stood above 30 percent.

  The other successful use of targets involved the "voluntary" foreign parts purchase plans by the Japanese auto companies, announced during the Bush-Miyazawa summit in 1992. The purchase plans envisioned substantial increases in the purchase of foreign parts by the Japanese automakers and their "transplants" in the United States. They largely hit those targets. In the 1995 auto agreement, the Japanese automakers announced they would further increase U.S. parts purchases by achieving NAFTA-origin status for their cars produced in North America.

  Outside the areas with targets, the MITI agreements have yielded little if anything. The restrictive distribution structures in the flat-glass sector remain unchanged and foreign market share is flat at the levels existing on the date of the agreement. The paper and paperboard products agreement expired in 1997 with foreign industry standing essentially where it stood in 1992. In the automotive sector, a spurt of imports in the strong-yen days following the 1995 agreement has reversed dramatically in the current weak-yen recessionary times. (Local parts purchases by the transplants, however, remain strong).

• Structural Agreements

  The 1989 to 1991 Structural Impediments Initiative (SII) took an in-depth look at several of the cross-cutting structural barriers affecting market access in Japan for foreign suppliers, including distribution structures, exclusionary business practices, keiretsu relationships, and pricing mechanisms (along with land-use rules). It proposed a series of deregulation steps and actions to strengthen competition policy enforcement and the application of market mechanisms in Japan. The subject matter of the SII talks continued under the Clinton administration's 1993 Framework Agreement and, more recently, under the Enhanced Initiative on Deregulation.

  While it is risky to oversimplify the outcome of these multifaceted structural talks, it is safe to conclude that some of the more targeted deregulation commitments in the SII have been helpful for foreign suppliers. For example, the loosening of the large-scale retail stores law created opportunity for some big foreign retailers, such as Toys R Us, to expand in Japan, and it has helped large Japanese retailers as well. Good evidence indicates that growth in large stores and chain stores helps increase access to the market for foreign products (by creating an efficient alternative distribution channel).

  Although one can point to progress in some of the targeted deregulation measures, the structural talks achieved no more than minor changes in the institutional strength and enforcement policies of the JFTC, or in the prevalence or resiliency of restrictive distribution structures, keiretsu relationships, and other restrictive practices and structures. The talks, however, have been useful in educating U.S. negotiators and policymakers about Japanese market access barriers and the possibilities and limitations for addressing them.

Use of Leverage

Although success from these bilateral agreements has been uneven, concluding the agreements has required using leverage. The U.S. did not employ a direct or implied threat of sanctions in every case. For example, the U.S. did not threaten Japan in connection with the Enhanced Initiative on Deregulation; instead, President Clinton emphasized in talks with Prime Minister Hashimoto the importance of the matter. The prime minister probably was willing to accept the initiative in part because it fit with his own policies emphasizing regulatory reform to revitalize Japan. Once the initiative was launched, it created a deadline and expectation of positive outcomes that helped the United States achieve some modest but useful commitments in particular sectors. This use of announced deadlines for progress, normally tied to heads of state meetings or other high-level meetings, has been a useful device to force action and raise expectations of an outcome in other talks as well. Of course, that sword has two edges, as the United States also feels pressure to meet the expectations for announcing an agreement and thus may compromise to close the deal.

This use of high-level political dialogue to win commitments, however, clearly has limits. For one thing, part of the reason Japan occasionally may be willing to act on the president's requests is an underlying desire to manage tensions to avoid escalation toward sanctions or a negative reaction in Congress. But also, the record stands clear that many of the bilateral agreements were achieved only with the express or implied threat of sanctions. Such was the case, for example, with the insurance, auto, flat glass, cellular telephones, satellites, supercomputer, wood products, computer, and construction agreements. Also, not discussed above, were the recent harbor practices and civil-aviation agreements, in which the threat of sanctions was directly and bluntly applied (these agreements probably fit best in the Structural Agreement and Regulatory Agreement categories, respectively). In other talks, such as for the Framework procurement agreements, the likelihood of sanctions in the event of failure was clearly understood even if it was not explicitly stated.

The WTO has substantially weakened the capability to use sanctions, for two reasons. First, the WTO created stronger and more effective dispute resolution procedures than exist under GATT, which made it possible for Japan to challenge sanctions that were illegal but effectively not challengeable under GATT. Specifically, under GATT the United States could block the establishment of a panel and the adoption of a panel report, and could otherwise delay proceedings. The United States does not have that option in the WTO.

The significance of these new procedures was starkly apparent in the 1995 auto case, in which the United States threatened tariff sanctions that would have been illegal under GATT 1947, and that were similar to sanctions the United States had threatened or used before. Unlike under GATT, however, Japan was able to immediately start a case against the U.S. actions in the WTO. The United States, of course, could have gone forward to impose sanctions in spite of the case, and run out the clock on the case for as long as possible. Some observers suggest the United States should have done so. In any event, the impression now exists, in the United States and Japan, that the United States is not willing to sustain a WTO challenge as a cost of imposing sanctions.

Second, the WTO covers a significantly greater scope of activities than GATT 1947. If the United States is not willing to sustain a WTO challenge for the use of unilateral sanctions, it must look for sanctions outside the coverage of the WTO. WTO's broad reach leaves little that could be useful for sanctions, except perhaps the aviation and maritime sectors.

While the strengthened and extended rules of the WTO make it more difficult for the United States to apply unilateral sanctions, they also should create new ways for the United States to bring pressure on Japan for more open markets. Indeed, the United States has brought nine GATT or WTO cases against Japan, and with the glaring exception of film, has achieved victory or a favorable settlement in each.

The problem, of course, is that the eight cases other than film do not address the core problem of regulatory barriers, administrative guidance, and coordinated private sector-public sector actions that characterized the film case and that afflict many industrial sectors besides film. Rather, the other cases addressed clear and explicit laws and regulations, such as taxes, quotas, or phytosanitary standards, affecting such products as beef and citrus, leather, tobacco, alcoholic beverages, fruit, and other agricultural products, but not particularly common for industrial products or services.

In theory, the film case did not exclude the possibility of challenging administrative guidance and restrictive government-industry behavior. However, it set a high threshold for the level of evidence needed to prove those government actions, and a demanding standard for determining whether a country should have known about the barriers and taken them into account in subsequent tariff negotiations. As a practical matter, a successful WTO case requires clear and explicit laws and regulations showing discrimination, or at least market restrictive actions by the Japanese government since the close of the Uruguay Round.

In short, the United States faces a problem in finding leverage to attack the types of barriers that have been the subject of complaint by many U.S. industries, and Japan knows it. One sees the results in many places: MITI's unwillingness to extend the paper or flat glass agreement, a fall-off of foreign purchases under the procurement agreements, the lack of any results in sectors watch-listed under Super 301, strong opposition to extending the NTT agreement again. The United States has seemed capable of keeping up some pressure in the deregulation initiative, but that initiative is not sufficient to address the breadth of the United States' market access concerns.

Possible Steps

Observers could look at this situation and suggest in all seriousness that the United States simply not worry about it. Bilateral trade initiatives with Japan have only rarely accomplished more than modest or gradual gains. Broader changes in the world economy and financial system and internal political-economic developments in Japan are bringing as much or more change in Japan as could be expected from bilateral trade initiatives (although, as Ed Lincoln's paper (referenced earlier) shows, those changes should not be overstated). The WTO continues to lower formal trade barriers and bring new areas within reach of its strong dispute settlement procedures.

Inaction, however, seems unlikely to be a satisfactory political response to the ballooning trade imbalance, especially in the context of a slowing U.S. economy. Also, despite the many frustrations and gradual nature of progress, bilateral trade negotiations probably have yielded billions of dollars of improvement in the annual trade and current account balances. Growth in penetration of the Japanese market by the semiconductor, pharmaceutical, medical device, and financial services sectors alone should account for that much. Again, the bilateral agreements in these sectors are not the only factors leading to that growth, but they have contributed.

For these reasons, it seems important to continue striving for ways to apply leverage. The following steps might help.

• Better Use of the WTO

  The limits for using the WTO to address core market access problems in Japan have not been reached. Dedicated efforts should be spent to address old and new bilateral problems under the expanding multilateral agreement. For example:

  • As of nine months ago, basic telecommunications are covered by the WTO, including commitments by Japan to enforce minimum competition policy standards to its common carriers. U.S. government and industry should dedicate significant resources to finding ways to use those commitments to buttress efforts to pursue a more open and competitive telecommunications market in Japan.

  • Large construction projects in Japan now are covered under the WTO procurement agreement, and it may be possible to find violations of that agreement to use as pressure for greater market access.

  • Standards and other technical barriers in Japan might be challengeable under the WTO agreement on technical barriers to trade.

  • The GATT agreement might provide avenues to attack problems afflicting goods, as the United States found in the bananas case against Europe.

  An example of how WTO leverage can help supplement or substitute for unilateral sanctions leverage arose in a 1997 case involving a large telecommunications procurement by Japan's National Police Agency. USTR informed Japan that it considered the procurement procedures to be a violation of both the bilateral Framework Agreement on telecom procurement and the WTO procurement agreement. USTR threatened to take either unilateral sanctions or WTO action by a certain deadline. The threat of sanctions drove the process toward resolution, while the WTO argument provided a face-saving way for the Japanese side to back down without the appearance of yielding to sanctions.

  The United States needs to look for more such ways to mix and match the tools in its kit.

• Coordinated Competition Effort

  The United States needs to rediscover the theme that unifies its market access concerns in many sectors: restrictive market structures, business practices, and arrangements. The paper, flat glass, film, autos, and auto parts sectors share a nearly identical core concern: closed distribution structures.

  USTR and Justice must achieve better coordination on these types of issues. The USTR Japan office should have a full-time antitrust expert on staff who works with U.S. industry to develop the detailed information needed to interest and persuade the Department of Justice of the existence of market-restrictive structures and practices in Japan that are reachable through competition laws. The USTR antitrust expert should have a seat at the table in Justice's negotiations with the JFTC for an antitrust cooperation agreement, and should push hard to ensure that the agreement and other cooperative efforts improve the U.S. capability to raise and address restrictive market structures and practices in Japan.

  Among other problems, the Justice-JFTC cooperation should find ways to improve the gathering of evidence in Japan. The JFTC's record has been consistently not to find an antimonopoly law violation because it does not use compulsory process to gather evidence. U.S. industry cannot get the evidence on its own because of the lack of discovery procedures in Japan. The Justice Department does not have authority to gather evidence in Japan. Remedying this problem should be a top priority of the bilateral discussions; it is, however, unlikely to be so without a dedicated effort by USTR staff and U.S. industry.

  The United States also should press the JFTC to lower its threshold for opening a formal investigation and for using compulsory process. As a practical matter, the current JFTC practice provides that it will not open an investigation unless someone hands it a nearly complete case demonstrating an antimonopoly law violation, something one does not ordinarily obtain without an investigation.

  To help build momentum for these types of outcomes, the U.S. government and/or industry should package together the several sectors with these similar or identical concerns, and press for them to be dealt with systematically.

• Use Sanctions When Needed

  The United States also should not allow the continued perception that it is unwilling to threaten sanctions. If the United States is unable to make progress on removing significant market access barriers in a particular sector or group of sectors, it should roll out the threat of sanctions, provided that:

  • the United States has a clearly achievable objective;

  • industry has demonstrated its willingness to strongly and effectively support the effort, despite the potential backlash from the Japanese government; and

  • strong support and coordination exist among the different executive branch agencies and the Congress.

  When threatening sanctions, the United States could look for measures that are more defensible under the WTO than traditional tariff sanctions. For example, under Section 301 USTR has the authority to impose fees on Japanese shipping as the Federal Maritime Commission did in 1997. The aviation sector provides another potentially WTO-proof target for action: the imposition of fees on Japanese passenger airlines, which also is within USTR's authority under Section 301. Of course, sanctions such as these raise problems in the industries concerned, and with the agencies that normally regulate such industries. But they do provide a potential for leverage far more WTO proof than tariff sanctions.

  The use of traditional tariff sanctions, however, should not be ruled out, if the trade imbalance and need for action in particular sectors become serious enough. The basic calculus of the auto talks could again apply: even if the U.S. ultimately lost the case, it likely would take at least 18 months to reach that outcome, which would be a long time to sustain prohibitive tariffs in an important export sector for Japan. While some might be concerned that such an action stresses the WTO system, it probably would survive with no worse damage than it sustained from handing the United States a loss in the film case. A single application of sanctions in this way could restore credibility to the threat of sanctions, and make it easier to achieve results without actually employing them, in many other future cases.