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Toward Constructive International Trade Dispute Resolution: Lessons from Recent U.S.-Japan Disputes on Restrictive Practices

Introduction
It has long been said that the United States and Japan should manage their trade friction wisely so not to embitter the overall relationship between the two countries. This is based upon recognition of the importance of the Japan-U.S. relationship on the one hand, and of the possibility of serious trade friction on the other. This precept is effective because there always remains the possibility of trade friction that the two countries may not be able to handle in a mutually satisfactory way.

This paper addresses the question of how to deal with Japan-U.S. trade disputes, focusing specifically on disputes relating to restrictive private practices.

Why is it important to discuss disputes over restrictive practices?

First, it is one of the thorniest kinds of disputes between Japan and the United States in recent years. Since the 1980s, many disputes have arisen, due, at least in part, to U.S. allegations that Japanese markets are closed to imports because of restrictive practices such as exclusive dealings between domestic manufacturers and distributors. It is further alleged that the practices are tolerated and even encouraged by the government. However, the two countries do not seem to have found a way to constructively resolve such disputes.

Second, the interaction between trade and competition policies has become an issue of high priority for governments and scholars worldwide. With regard to trade policy, while concerns about border barriers such as tariffs and quantitative import restrictions are reducing with the progress of trade liberalization, concerns about the effect on trade of policies that used to be considered "domestic"-e.g., competition policy, labor policy, environmental policy, etc.-are growing. With regard to competition policy, the globalization of business activities and markets has made competition policy closely associated with cross border issues. However, there are no established international rules-either substantive or procedural-regarding competition policy or regulation of anti-competitive practices affecting trade. For example, the WTO/GATT does not have binding rules concerning such practices.

Third, from the Japanese viewpoint, competition policy is becoming even more important for Japan as its government proceeds with deregulation. Relatedly, the way of handling disputes on restrictive practices will considerably impact the future development of the Japanese competition policy. In short, such disputes should be handled in such a way as to help strengthen that policy.

The analysis here is placed on the context of Japan-U.S. relations. But considering the factors described above, if Japan and the Unites States could construct a better way to deal with disputes over restrictive practices, it would benefit other countries that may have similar disputes.

It may also suggest alternative international efforts to develop more effective rules related to trade and competition.

First, the lessons learned from recent Japan-U.S. trade disputes, especially the case regarding the Japanese consumer photographic film and paper markets (hereinafter the "film case" or the "film dispute"), will be closely examined. Next, methods for handling disputes over restrictive practices in the near future will be discussed. Finally, recommendations are offered with respect to the future economic relationship between Japan and the United States.

The intent of this analysis is to develop a desirable and practical procedure for dispute resolution. The detailed case studies in this paper-especially the film case-do not represent an attempt to discuss or endorse either party's arguments on the issues in question. Furthermore, this paper will not delve into the theoretical issue of what practices should be regarded as "restrictive."

The conclusions may be summarized as follows:

  • While recent Japan-U.S. trade disputes show the growing emphasis on resorting to multilateral dispute settlement mechanisms, the film case shows that the current multilateral system is not well equipped to deal with such disputes (and will not be so in the near future). Furthermore, in this case, bilateral talks did not work properly.

  • While the two countries should contribute to the multilateral efforts on the issues of trade and competition, they should also consider establishing a bilateral process of dispute resolution. One option is a mechanism with the following three-steps: cooperation between competition authorities based on the principle of "positive comity"; consultations among competition and trade agencies of the two countries; and finally, a non-binding recommendation by a group of experts.

  • The cooperation on competition policy and the new bilateral dispute resolution mechanism may be pursued in a broader, more comprehensive and cooperative arrangement for trade and investment expansion between the two countries. One possibility is that they start exploring an arrangement like the Transatlantic Economic Partnership between the United States and the European Union.

Section 1: International Efforts to Control Restrictive Practices

Before discussing Japan-U.S. trade disputes, it would be useful to briefly review international efforts concerning restrictive practices.

Efforts up to the Present

The question of how to deal with private practices in the context of international trade is, in fact, not new. The 1948 Havana Charter, which was conceived to create the International Trade Organization (ITO), contained a scheme for controlling private restrictive practices.

However, the ITO never came to fruition and those rules on private practices were not carried over into the General Agreement on Tariffs and Trade (GATT).

In 1960, the Contracting Parties of GATT adopted a Decision on Arrangements for Consultations on Restrictive Business Practices (the "1960 GATT Decision").

The consultation mechanism based on this Decision was not used for more than thirty-five years, and was triggered for the first time during the course of the film dispute.

The World Trade Organization (WTO) agreements, which came into effect as a result of the Uruguay round negotiations, contain some provisions with respect to restrictive practices in specific sectors.

However, there are no binding or general rules on restrictive practices.

At the first WTO Ministerial meeting in 1996, the Ministers agreed to establish a working group to address the issue of the interaction of trade and competition.

The report of the Working Group (WG), which was issued in December 1998, describes comprehensively the discussions at the WG.

But its conclusion simply recommended that the General Council decide that "the Working Group shall continue the educative work that it has been undertaking," without giving a clear guideline for future work.

The Organisation for Economic Co-Operation and Development (OECD) serves as a forum for the competition authorities of its member countries to promote mutual cooperation.

One concrete product is the recommendation of the Council regarding cooperation between national competition authorities.

The recommendation deters conflicts in the member countries' competition enforcement activities, especially extraterritorial enforcement, and effectively tackles the international aspects of anti-competitive practices. The recommendation has worked as a model for bilateral agreements on cooperation between competition authorities, rather than serving as a basis for avoidance or resolution of actual cases.

Other multilateral institutions (e.g., the United Nations) have worked on this issue with little effect so far.

Some regional arrangements (e.g., the EU) have been successful in harmonizing competition policy, but their impact is naturally limited to within the region.

The Asian Pacific Economic Cooperation (APEC) forum also has undertaken activities on competition policy, but they are mainly for educative purposes.

Between Japan and the United States, the bilateral Friendship, Commerce and Navigation Treaty provides a consultation mechanism to be used in relation to business practices which allegedly have "harmful effects upon commerce.

However, this mechanism has never been utilized.

Future Options

A growing number of scholars, officials, lawyers and others are proposing ideas regarding the interaction of trade and competition policies. The main focus is currently on the role of the WTO in this area. Below are the some of the major WTO options proposed with respect to competition policy.

  • Setting international competition rules or principles. Some argue for an international agreement on competition policy. The contents of the proposed agreements vary, from substantive rules (minimum standards) on specific types of private practices to an agreement on basic principles regarding a "framework, procedure and comity."

  • Linking competition and the WTO trade policy disciplines. This proposal would introduce competition law principles into the WTO Agreement, especially its rules on antidumping measures. The accommodation of trade policy measures (especially antidumping measures) to competition policy, although not discussed in this paper, is an indispensable aspect of the issue of "trade and competition."

  • Extending the reach of the WTO dispute settlement mechanisms based on "non-violation" complaints. The purpose of this idea is to apply the current WTO Dispute Settlement system to disputes on restrictive practices. This view will be examined later in this paper.

  • Granting the WTO secretariat a greater competition advocacy role. One approach suggests expanding the WTO's Trade Policy Mechanism to cover competition policy issues. Another would mandate the WTO to undertake research on the competitive effects of government policies.

  • Taking no action. Some are opposed to the idea of putting competition policy issues on the WTO agenda for fear that it might lead to watered down principles that would weaken the existing, more effective rules.

    Considering the diversity of the expressed views and also the real situation of the WTO Working Group, it will take a great deal of time and effort to reach any consensus on a multilateral plan for dealing with the issues of trade and competition.

    Section 2: Review of Recent Japan-U.S. Trade Disputes

    Japan-U.S. Trade relations since the 1980s

    Until the 1970s, trade disputes between Japan and the United States were mostly related to the surging exports of Japanese products (e.g., steel, color televisions, and automobiles) to the United States. In the 1980s however, the two countries began to have more disputes over the alleged difficulties foreign producers face when trying to enter Japanese markets. Many of those disputes were based on U.S. allegations about closed distribution systems and other collusive or restrictive market practices/structures in Japan.

    The disputes relating to private practices have been handled in two different ways. The first is through cross-sectoral talks: i.e., talks under the Structural Impediments Initiative (SII, 1989-1991), the Framework Agreement (1993-) and the Enhanced Initiative on Deregulation (1997-). In these talks, the U. S. government raised the issues of restrictive practices as a cross-sectoral, structural problem with the Japanese market as a whole, and the Japanese government, although not necessarily agreeing with the U.S. allegations about the Japanese market, responded by strengthening the Antimonopoly Law and improving its enforcement.

    The other approach is a sectoral one. U.S. allegations about restrictive practices in such specific sectors as semiconductors, flat glass, paper products and autos/auto parts have been directed to the Japanese government, mainly to the Ministry of International Trade and Industry (MITI), and to the Japan Fair Trade Commission (JFTC) to a lesser extent.

    The earlier sectoral disputes typically began with the initiation or suggestion thereof of the U.S. Section 301 procedure. The two governments rarely shared a common view about the situation of the relevant market (e.g., whether there were actually restrictive practices in the market) and the real causes of the alleged low import penetration to the Japanese market. Somehow though, they managed to conclude agreements with remedial actions, often including MITI's commitment to use administrative guidance to encourage imports.

    However, the Japanese government's (especially MITI's) attitude to such sectoral disputes changed in the mid-1990s. It became more cautious about giving administrative guidance to industries regarding market access of imports. The reasons for such a shift in attitude were as follows:

  • First, the general trend in Japanese government and society is toward less government intervention in markets and more transparency in the administrative process, a trend was also pushed by the U.S. government in the SII talks. As was evident in the Administrative Procedure Act which came into effect in 1994, the Japanese government recognizes now that it should minimize use of informal actions such as administrative guidance, and rely more on formal actions.

  • Second, some Japanese officials doubt the efficacy of such guidance as a means to resolve trade disputes. The agreements containing Japanese commitments to administrative guidance calmed down trade disputes in the short run, but in the long run, they did not necessarily lead to satisfactory results, especially for the U.S. side.

  • Third was the determination to pursue a "rule-based" trade policy. In the 1990s, the Japanese government, especially MITI, came to advocate a "rule-based approach" in dealing with trade disputes. This approach sees internationally accepted rules as criteria to judge foreign countries' actions. This approach counters the "result-based" approach which claims foreign countries' actions to be "unfair" based on unfavorable results of trade (e.g., low imports) and often urges managed trade.

  • The advent of the WTO in January 1995, and its strengthened disciplines and dispute settlement mechanism, Japan finds it more feasible to adhere to the "rule-based" approach.

    From the Japanese viewpoint, the autos/auto parts dispute was significant in the history of Japan-U.S. trade relations in the sense that the Japanese government decidedly demonstrated its new approach to handling trade disputes.

    The Japanese government eventually requested consultations on the dispute at the WTO, though it was settled through bilateral negotiations outside the WTO on June 28, 1995.

    The U.S. allegations in the autos/auto parts dispute included those related to restrictive practices of Japanese companies. One of the joint announcements made at the conclusion of the dispute was related to the reinforcement of the JFTC and its policy.

    The Film Dispute

    The First Stage - Section 301 Proceedings

    In May 1995, Kodak, a U.S. photographic product company, submitted a petition to the U.S. Trade Representative (USTR), urging it to initiate a Section 301 procedure regarding the Japanese consumer photographic film and paper markets. Thus, the film case was initiated just when the tension between the two countries was reaching its peak in the autos/auto parts dispute.

    Kodak alleged that Japanese domestic photographic film and paper manufacturers, especially Fujifilm, foreclosed the Japanese photographic film and paper markets by engaging in anti-competitive business practices with their distributors. The Japanese government's toleration of the practices was allegedly "unreasonable" as defined by Section 301. The film dispute was the first case that utilized the "toleration" provision.

    In July 1995, the USTR decided to initiate an investigation of Kodak's complaint as called for by Section 301.

    Under Section 301, the U.S. government is supposed to have consultations with related governments. Hence the USTR requested consultations with the Japanese government, but the Japanese government declined to go into substantive discussions on this matter. The position of the Japanese government at this stage included the following points.

  • As Kodak's request for remedies indicates, the essence of its allegations relates to private practices.

  • Kodak's allegations concerning the JFTC's toleration of anti-competitive practices and MITI's assistance in the establishment of an anti-competitive market structure are groundless. Until and unless it is established that there exist anti-competitive practices in the market, allegations concerning government toleration or encouragement of such practices are simply irrelevant.

  • It is the responsibility of the JFTC to determine whether there is any violation of the Antimonopoly Law in the Japanese market, and recognizes no violation of the Antimonopoly Law.

  • The Japanese government will not engage in negotiations on issues raised in the context of Section 301, because this approach, with the threat of unilateral measures, is inconsistent with the WTO agreements.

    For the Japanese side, Kodak's initiation of this case was unexpected because the company had never approached the JFTC or any other Japanese government agencies concerning its complaints about the Japanese markets. In fact, it was only in August 1996 that the company submitted its allegations with the JFTC, after the U.S. government suggested that the company do so.

    During the period of the USTR's investigation under Section 301, it was MITI, rather than the JFTC, with which the U.S. side (the USTR and Kodak) wanted to talk.

    The Japanese took several steps in response.

    First, MITI proposed that the trade policy agencies (i.e., the USTR and MITI) should encourage the competition policy authorities (i.e., the U.S. Department of Justice and the JFTC) to discuss this case and similar cases if they occur in the future.

    However, this proposal did not bear any tangible results

    Second, the Japanese government tried to promote a case study on the photographic film markets in major countries (the United States, Japan and some European countries) at the OECD in the context of its activities on the interrelation of trade and competition policies. But this idea was not realized, either.

    Third, the JFTC started a survey of the Japanese photographic film and paper markets in the spring of 1996. The result of the survey was made public in July 1997.

    Nevertheless, on June 13, 1996, the USTR announced that it found the practices by the Japanese government "unreasonable" under Section 301 and decided to request consultations in accordance with WTO agreements.

    The Second Stage - WTO Proceedings

    U.S. Requests for Consultations at the WTO - The U.S. government requested from the Japanese government three separate sets of consultations under the auspices of the WTO.

  • The first prong of the U.S. request was based on Article XXIII:1 of GATT. The U.S. argument was that the Japanese had taken "liberalization countermeasures" since the late 1960s to protect their domestic consumer photographic film and paper markets for its domestic producers in the process of trade and investment liberalization.

  • The U.S. government requested another set of consultations with Japan under the General Agreement of Trade in Services (GATS), arguing that Japan's Large Scale Retail Store Law and related legislation and regulations were in violation of Article III and Article XVI of the GATS as well as nullified or impaired benefits accruing to the United States under the GATS within the meaning of Article XXIII:3.

  • The U.S. government also requested consultations with Japan concerning certain business practices in the Japanese consumer photographic film and paper markets, saying that "the United States has obtained significant evidence that Japanese manufacturers, wholesalers, and retailers of these products engage in business practices that restrict competition in international trade for consumer photographic film and paper by adversely affecting the channels of distribution and limiting price competition in the Japanese market." This request was made pursuant to the 1960 GATT Decision.

    Hewing its central topic, the paper will describe the developments of the first and third requests by the U.S. government below.

    The Case on "Liberalization Countermeasures" - On the GATT case, the United States and Japan had one round of consultations in July 1996, but could not resolve the dispute. A panel was established in October 1996 at the request of the U. S. government.

    The U.S. government made the following arguments.

  • The government of Japan has taken "liberalization countermeasures" since the late 1960s to rebuild the distribution system for consumer photographic film and paper into an exclusive system run by domestic manufacturers, which locks out foreign film and paper.

  • The "liberalization countermeasures" consist of three kinds of measures. The first category, "distribution countermeasures," was implemented in order to tie up domestic manufacturers and domestic wholesalers by encouraging cross-shareholdings, tightened payment terms and large rebates, thus closing the existing distribution channels toward foreign companies.

  • The second category is the Large Scale Store Law and its related regulations, which restrict development of large-scale retail stores that would have served as alternative channels for the distribution and sale of foreign film.

  • The third category is the Premiums Law and related regulations. These impede sales promotion for foreign products by restricting advertising and premium offers.

  • The "liberalization countermeasures," collectively and individually, nullified or impaired benefits accruing to the United States under GATT.

    The first category ("distribution countermeasures") also violates Article III of GATT while some measures in the second and third categories violate Article X of GATT.

    The Japanese government rebutted almost all arguments by the United States as follows.

  • The United States misrepresents the measures actually taken by the Japanese government. The policies related to distribution were taken to modernize and improve the efficiency of the distribution sector in the 1960s and 1970s. The Large Scale Retail Store Law is designed to ensure that a variety of small, medium and large-scale retailers exist, thereby protecting the interests of consumers and promoting sound development of the retail industry. The Premiums Law restricts excessive premiums and misleading advertisements to protect consumers and ensure fair competition, just like similar laws in other major countries.

  • There is no causal link between the measures by the Japanese government and changes in the structure of Japanese markets and distribution. First, Japanese film distribution was already well along the path to "single brand" wholesaling before the government ever took the alleged measures.

  • Second, a single-brand distribution is not peculiar to Japan, but it is a worldwide phenomenon in the film market, as Kodak's own distribution structure in the U.S. market illustrates. Third, imported film's share of the Japanese market has been expanding since the 1970s when the so-called "liberalization countermeasures" allegedly established a closed market structure.

  • The claims made by the United States regarding the state of the Japanese film market are also mistaken. First, primary wholesalers who handle single brands have chosen to do so as a matter of business judgement. Primary wholesalers that handle Fuji products are under no contractual obligation to handle Fuji products exclusively. Nor are there any regulations restricting foreign companies from developing relationships with primary wholesalers.

  • Second, foreign films do have access to downstream Japanese distribution channels. In the case of Kodak film, "Nippon Kodak", as Kodak's primarily wholesaler, has broad access to secondary wholesalers and retailers. The claim that Kodak is experiencing bottlenecks because it cannot get its products handled by the "tokuyakuten" that handle Fuji films is mistaken.

    Japan also emphasized that this case has important systemic implications for the WTO dispute settlement system.

  • The U.S. non-violation claims are urging a dramatic expansion of what has historically been an exceptional and limited remedy. In all previous non-violation cases, the measures in dispute were essentially either tariff or product-specific subsidies which had a clear impact on the competitive conditions of the products concerned. However, this case deals with actions in a variety of forms, most of which cannot be termed government measures, took place in the past, and were not product-specific in nature.

  • The U.S. claims regarding "distribution countermeasures" boil down to an attack against private practices of single brand wholesale distribution of film. No binding GATT rules concerning private practices has ever been established. It is particularly difficult to define the effects of vertical relationships on competition. The panel should take a cautious approach in examining such claims and not engage itself in a rule-making exercise in this respect.

  • The U.S. government suggests that as a remedy for this case, the Japanese government should take steps to "undo the exclusionary aspects of the distribution system . . . that its measures have brought about." Such a suggestion is essentially to request a type of affirmative action. This is an extraordinary remedy which would involve the panel in the restructuring of the Japanese distribution sector. For a panel to make such a decision would be a radical expansion of the authority granted under the current GATT/WTO dispute settlement system.

    After exchanges of two written submissions from both parties and two rounds of substantive meetings among the panel and the parties, the panel issued its final report in March 1997, which was adopted by the Dispute Settlement Body on April 22, 1997.

    The panel rejected all of the U.S. claims. Its conclusions were, in short, as follows.

  • The case should take issue not with market structures themselves but with the measures of the Japanese government.

  • The measures related to distribution policy were introduced to improve the efficiency of the distribution sector. No causal link between those measures and the single brand distribution was found. On the contrary, that distribution structure was observed elsewhere in the world, including the United States, and it had been in existence in Japan prior to the time the alleged measures were taken. The measures related to the Large Scale Retail Store Law and the Premiums Law were not found to upset the competitive relationship between domestic and foreign products.

    The Consultations based on the 1960 GATT Decision - Having received the U.S. request for consultations based on the 1960 GATT Decision, the Japanese government took a cautious attitude toward entering the requested consultations.

    There was a consensus within the Japanese government that it should accept the U.S. request for consultations. However, partly because this was the first case in which a procedure under the Decision was initiated, there were some concerns about how to proceed. Generally speaking, these concerns centered on two questions.

    First, what standard should be used to define "restrictive practices?" Although this issue was not discussed in detail to reach a consensus among the related agencies, officials involved generally seemed to share the view that the Japanese Antimonopoly Law should be the standard by which private practices in the Japanese markets should be judged.

    Second, what would be the results of the consultations? On the U.S. side, the USTR had already concluded as a finding of the Section 301 investigation that the Japanese government had tolerated anti-competitive practices in its markets. With no substantive guidelines nor any involvement of third parties under the GATT Decision expected, it seemed very difficult to change the U.S. position that the USTR had already declared to the public.

    There seemed little hope of having constructive exchange of information and views at the consultations. It was even feared that the only outcome of the consultations might be the exposure of the two countries' diverging positions, igniting some political backlash which could lead to sanctions under Section 301.

    The Japanese government then took two steps. First, Japan tried to clarify the position of the United States. Specifically, Japan sent a letter asking the U.S. government what specific practices it considered as restrictive and by what standard it did so.

    The United States responded by listing various kinds of alleged restrictive business practices.

    As for the standard, the United States said, "My Government understands that all of the above practices may be cognizable under Japan's Antimonopoly Act, and are the type of practices generally addressed by comparable competition laws of other nations. As such, these are clearly among the sorts of business practices that should be the subject of consultations under the above-referenced (1960 GATT) Decision."

    Second, the Japanese government requested consultations regarding business practices in the U.S. photographic film and paper markets based on the 1960 GATT Decision. This action was taken based upon the following considerations:

  • The Japanese industries, and thus its government, had actual concerns about business practices in the U.S. film market. In the U.S. antitrust litigation regarding the consent decrees on Kodak which preceded the film case, the U.S. Department of Justice, as well as Japanese and European manufacturers, had expressed concerns about the company's practices. The Japanese government was eager to hear the U.S. explanation as to its treatment of private practices in its domestic market.

  • Japan's concern over the lack of standards might be mitigated by putting the practices at issue in a comparative perspective. It seemed particularly appropriate to analyze a film market from a comparative viewpoint, because film markets are oligopolistic worldwide, with only four or five manufacturing companies competing globally. If the United States agreed, the two countries could discuss both the practices in Japan and the United States in the same setting of consultations. But as the United States appeared not to agree on such an arrangement, Japan decided to request a separate set of consultations that would proceed in a format closely paralleling the consultations based on the U.S. request.

    Japan responded to the United States that it accepted the U.S. request on the condition that the United States accept the Japanese request for consultations. However, the United States did not accept the Japanese request, so no consultations were held.

    After the WTO Proceedings - the Third Stage?

    In February 1998, the U.S. government announced that the administration would establish an interagency monitoring and enforcement committee to "review implementation of formal representations made by the Government of Japan during the course of the previous year to a World Trade Organization (WTO) panel regarding its efforts, to ensure the openness of its market to imports of film."

    In the first report issued in August 1998, the "interagency Film Monitoring and Enforcement Committee" stated that although its analysis showed that foreign firms' market access was improving in the non-traditional, relatively more open segment of the market, the Japanese government needed to take additional actions to open its photographic film and paper market and eliminate business practices that unreasonably restrict competition in this sector.

    Lessons from the Dispute

    What can be drawn from the Japan-U.S. disputes, especially the film case? First, the lessons for the future resolution of trade disputes on restrictive practices in general will be discussed. Next, the lessons in connection with the Japan-U.S. relations in particular will be examined.

    Lessons for Disputes on Private Practices in General

    Deference to Domestic Competition Authority - Issues related to restrictive practices are likely to require the very difficult task of fact-finding, because it can be difficult to obtain evidence of private practices that are often complex and not easily identifiable. Moreover, at present there are no clear standards by which to evaluate those practices other than domestic competition regulations.

    Given those factors, as well as the basic principle of state sovereignty, a domestic competition authority with compulsory power for gathering evidence should be in the best position to carry out fact-finding and evaluation of alleged private practices. This is the concept of "comity" upon which the international cooperation arrangements between competition authorities are based. The same approach should be taken when a case on restrictive practices is brought to a trade agency as a trade dispute.

    The Section 301 process in the film case was contrary to such an approach. From the beginning of the procedure, without being consulted or informed about the complaint, the JFTC was strongly criticized in public for its "toleration" of anti-competitive practices. The USTR, a trade agency, tried to play the roles of fact-finder, standard setter and judge of private practices in the Japanese market. Such a way of presenting an issue with expressed distrust of, rather than deference to, the domestic competition authority was quite counterproductive.

    Some antitrust specialists have suggested that the JFTC should have carried out its own investigation of the Japanese film market right after the film case was initiated.

    However, the JFTC had difficulty doing so. First, the U.S. side did not request that the JFTC investigate until Kodak contacted it after the summer of 1996 (after the initiation of the WTO process).

    Second, the JFTC must have recognized that it had little ground to initiate an investigation of the film market, because it had been closely monitoring that market under the special regulation regarding monopolistic markets by the Antimonopoly Law.

    It should be noted, however, that as Japan kept saying during this dispute, the JFTC was willing to receive any information to support suspicions of anti-competitive practices. Third, it might have been that the JFTC feared that the initiation of an investigation could be taken and publicized by the U.S. side as a self-admission of lax enforcement of the Japanese competition policy.

    If the allegation of anti-competitive practices had been properly referred to the JFTC by Kodak or the U.S. antitrust authority, the JFTC would have acted in a responsible way. At that point, if the U.S. side were not satisfied with the JFTC's decision, an exchange of views between the two governments would have been possible.

    The Limitations of the Current WTO Dispute Settlement System - The WTO panel process in the film case had many implications concerning both substantive and procedural rules under GATT. However, analysis here will focus on the implications with respect to the possibility of the WTO Dispute Settlement (DS) system being used to resolve disputes over restrictive practices.

    Some say that the panel decision on the film case shows that the WTO is not competent in dealing with "informal and complex" cases. However, it would be wrong-headed to imply that the WTO panel had to reject the U.S. claims in this specific case because it lacked competence to examine the claims. This particular panel could examine the U.S. claims sufficiently to make a decision, and it did so competently. However, it must be admitted that the panel procedure and its decision showed, implicitly rather than explicitly, the limitations of the current WTO DS system's ability in dealing with disputes over restrictive practices.

    First, recall that the U.S. claims at the WTO did not include the "toleration" allegation, i.e., an allegation that the Japanese government had tolerated anti-competitive practices that adversely affected the competitive conditions for foreign products. If that allegation had been presented, the panel would have been faced with the controversial question of whether or not a WTO panel could decide on the appropriateness of a certain country's implementation or rules of competition policy.

    Second, it may be possible to interpret the panel's position on the question of whether or not a WTO panel can review private practices, as a positive one. As Japan argued in the panel proceedings, in order to conclude that the so-called "distribution countermeasures" nullified or impaired U.S. benefits under GATT, the panel would have to find that: first, the market structure (a combination of various private practices) was attributable to the government measures; and second, that the market structure adversely affected the competitive conditions for foreign products. The second stage of the finding would have inevitably involved an evaluation of private practices. The fact that the panel did not reject the U.S. claims at the outset might mean that the panel took a positive stance as to whether or not it could review the effects of private practices on trade. However, we should probably not read the panel decision that way. Since the panel denied the causal link between the government measures and the market structure, it did not need to decide on whether the market structure was trade restrictive or not.

    Thus, it would be more accurate to see that the panel left the question regarding the scope of the examination by a WTO panel open.

    Third, then, suppose that the panel tried to decide on private practices. What would have happened? The panel would have quite possibly faced real problems and both the process and the result would have revealed the limitations of the current WTO DS system in dealing with private practices.

    The first problem that the panel would have faced would have been its inability, as a panel, to carry out comprehensive fact-finding about private, market practices. The current WTO DS system is presumed to deal with governmental actions, which normally do not call for an extensive process of identification.

    On the other hand, private practices are often invisible and complex, and such fact-finding can be a difficult task. In the film case, there was such a discrepancy between the factual arguments of the United States and Japan that, although both parties submitted voluminous materials, including affidavits of officers of relevant companies, the panel would have felt it necessary to gather more evidence. However, the current panel system is not equipped with substantial rules or mechanisms for fact-finding. It may also be necessary to let the related private entities, such as Kodak and Fujifilm in the film case, be directly involved in the panel procedure to make the panel decision both convincing and acceptable for the private sector. However, such direct involvement is not allowed under the current system and could only be possible after the fundamental character of the WTO DS system is reassessed.

    In short, it is recognized-at least by this author-that the panel would face great difficulty in undertaking effective fact-finding about private, market practices.

    The second problem is the lack of substantive standards by which to evaluate the effects of private practices. This is one of the very reasons for the international efforts relating to trade and competition to be pursued. In the film case, it would have been of particular concern if the panel had examined the alleged private practices, because the practices belonged the category of vertical restraints.

    The third problem relates to remedies. The ultimate remedy under the current WTO DS system is the withdrawal of the challenged government measures.

    In the case of non-violation claims under GATT, compensation can be the final remedy, but if the measures at issue are withdrawn, no compensation is necessary.

    In any case, the remedies are basically proactive, not retroactive. What then, would have happened if the panel had accepted the U.S. claims about the "distribution countermeasures" and Japan had agreed to remove those measures? Even if the U.S. allegations were true, no substantial change would have occurred in the market structure, because the alleged measures were at most administrative guidance. Asked what remedies it wished to have, the U.S. delegation responded to the panel by indicating its desire for "steps to undo the exclusionary aspects of the distribution system ... that its measures have brought about."

    This request seems to be virtually equivalent to saying that if a subsidy is found to violate the WTO agreement, not only the subsidy itself should be removed but its residual effects on the recipient firms should also be removed. Such an action is not conceived as a remedy under the current WTO DS system. Thus, there would have been a problem with respect to remedies in this case.

    As seen above, the limitations of the WTO DS system were rather implicitly recognized. Considering such limitations, the idea of extending the current WTO DS mechanism based on non-violation claims to disputes on restrictive practices would not be a good option.

    Lessons from Japan-U.S. Trade Disputes

    Are Bilateral Negotiations of Lesser Importance? - Some people argue that the recent disputes, especially the film case, show the reluctance of the Japanese side to have bilateral talks with its trade partners, including the United States. But this view is misplaced.

    The reason that Japan declined to have substantive discussions in the film case-before it was taken to the WTO-was, in short, because Japan could not agree to the procedure taken by the U.S. side in that specific case. For Japan, the problems were three-fold. First, the case was initiated under Section 301, which Japan considers problematic in light of the WTO agreements. Second, negotiations were supposed to be between the trade agencies, i.e., the USTR and MITI, although the main subject was anti-competitive private practices. Third, negotiations were proposed in spite of the fact that the company had never filed a complaint with competition authorities in either Japan or in the United States.

    The position taken by the Japanese government in the film case should not be generalized out of context.

    The case actually demonstrated that bilateral dispute resolution will continue to play a key role in the handling of disputes on restrictive practices, at least under the current situation of still-ongoing multilateral efforts in this area.

    Need for Trust-building of the Japanese Competition Policy - The U.S. government and U.S. industry both appear to have distrusted Japanese competition policy for a long time, and the distrust has probably never been expressed so unreservedly as in the film case. There may be room for arguments on whether such distrust has grounds. But Japan has to recognize this deep-rooted distrust, and should enforce the competition policy for which it is accountable-both domestically and internationally. Sound competition policy is also an important element of the economic structural reform that Japan is currently tackling. From this viewpoint, it is hoped that disputes on restrictive practices will be handled in such a way as to enhance, or at least not degrade, the credibility of the Japanese competition policy.

    Section 3: Options for Future Constructive Dispute Resolution

    Overview

    Some U.S. commentators believe that the recent cases revealed the importance of unilateral sanctions as a leverage. They cite the fact that WTO rules do not cover restrictive practices, which are "the most significant and pervasive market barriers in the developed world today." They argue that furthermore, since Japan appears to perceive Section 301 action as ineffective, and certain measures to revitalize Section 301 procedures, such as legislation to authorize the unilateral imposition of fines on foreign firms engaging in anti-competitive practices, should be taken.

    Others argue that a single application of sanctions-even though such action would stress the WTO system-"could restore credibility to the threat of sanctions, and make it easier to achieve results without actually employing them, in other future cases."

    However, such options would not work, and would, in fact, be rather counterproductive. Given the lack of international rules on restrictive practices, the complexities of the disputes, and the difficulties in obtaining evidence to ascertain related facts, effective dispute resolution should be based on the spirit of cooperation, not confrontation. As suggested in the previous section, the resolution of such disputes should be pursued first through the cooperation of competition authorities, with due deference given to the decision of domestic authority. At the same time, since there is a possibility that the two countries could not resolve disputes at this stage, they would need to prepare further steps.

    Proposal of a Procedure for Bilateral Dispute Resolution

    Both Japan and the United States should contribute to the international efforts being made at forums such as the WTO and OECD on the issue of the interrelation of trade and competition. However, it would be unrealistic to expect that any tangible result could be achieved from those efforts in the near future.

    How to deal with possible disputes on restrictive practices is an urgent concern for developed countries. Under current circumstances, it would be more practical for the two countries to pursue bilateral channels for constructive resolution of such disputes. One possibility would be a three-step procedure as explained below.

  • The first step would be a process of cooperation between competition policy authorities. When any private entity or government agency has a complaint about restrictive effects of private practices in the other country, it should first consult the competition policy authority in its own country. Trade agencies could input their views to respective competition policy authorities, but competition policy authorities must be able to make their decisions independently.

  • The second step would be consultation. If the aggrieved government is not satisfied with the decision by the competition policy authority in the other country, it could request consultation with the other government. Relevant trade agencies could participate in the consultation.

  • The third step would be the referral of the matter to a group of experts for its recommendation. Either country could request the establishment of a group of antitrust or trade experts to review the competition policy authority's decision and issue a non-binding recommendation on an ad hoc basis.

    The idea behind the first step is that based on the concept of "positive comity," such disputes should be first addressed by means of cooperation between competition policy authorities. Fortunately, Japan and the United States have now reached a substantive agreement for antitrust cooperation.

    This agreement is expected to include "positive comity" provisions. Close cooperation in investigations is also desirable not only for facilitating the resolution of specific disputes but also for enhancing the mutual trust between the competition authorities in general.

    One potential problem could involve the relations between the trade and competition agencies. This could become an issue when a case is raised as a trade issue rather than a competition policy issue by, for example, filing a petition in accordance with the "toleration" provision under Section 301. Such a case should be referred to the U.S. competition authority and be put on the track of antitrust cooperation.

    As for the second step, since there would be a basis for discussion-namely the competition authority's findings and legal evaluation, as well as the preliminary views of the aggrieved country's competition authority-consultations could be expected to be more fruitful than if the first step is not pursued. Trade agencies could participate in this process.

    Should consultations not lead to a mutually acceptable conclusion, the two countries would need to consider recourse to other procedures. Some existing mechanisms, such as the good offices of the Competition Law and Policy Committee of the OECD with a view to conciliation, may be worth pursuing.

    Certainly, though, one promising option would be to set up a panel of experts to suggest a recommendation on the dispute.

    The panel of three to five competition experts would review the results of the fact-finding, the analysis and arguments of both parties, and would issue a report containing a recommendation for an appropriate resolution to the dispute.

    Its recommendation would inevitably be non-binding, because of the lack of agreed-upon standards. The establishment of a panel with a binding authority would be unfeasible for both countries as a matter of policy, politics and law.

    Even so, the panel's recommendation could have a certain moral authority and could become an impetus for the countries to solve future disputes in a cooperative manner.

    Some Reflections from a Broader Perspective

    Few words are necessary to explain how important Japan-U.S. relations are for the two countries, and for the world. In economic terms, the recent Asian economic crisis reemphasized that collaborative Japan-U.S. economic relations are indispensable for the stable growth of the world economy. The cooperative leadership by the two countries is also key in the promotion of further global trade liberalization in the next century.

    Japan-U.S. economic relations have often been overshadowed by trade friction. In recent years though, partly due to the long lasting prosperity of the U.S. economy, tensions have been minimized. This has provided a good opportunity to reconsider Japan-U.S. economic relations in the longer-term and from a broader point of view. As such, the two countries should explore a comprehensive and collaborative framework for strengthening their economic relations, such as coordination of competition policy.

    The concept of a Japan-U.S. free trade arrangement (or agreement) was frequently discussed in the late 1980s.

    Ambassador Mansfield (former U.S. Ambassador to Japan) was one of the advocates of this idea.

    However, the momentum for such a concept has almost entirely disappeared. Probably owing to a combination of such factors as a fear of its harmful effects on the on-going Uruguay Round negotiations at GATT, the GATT/WTO system in general, the establishment of the Asian Pacific Economic Cooperation (APEC) group, and skepticism about the potential effects of such an arrangement.

    But the United States, for its part, continues to be active in the formation of regional trade/economic arrangements. In the 1990s, by including Mexico, the United States enlarged the U.S.-Canada FTA into the North American Free Trade Agreement (NAFTA). It also launched a negotiation on the Free Trade Area of the Americas (FTAA) in the Western Hemisphere and initiated a broad framework of cooperation in economic policies with the EU under the Transatlantic Economic Partnership (TEP) agreement.

    As for Japan, it still remains one of a small number of countries within the WTO that is not member to any regional preferential trading arrangement.

    Japanese government used to take a very cautious position about regional arrangements for fear of their potentially negative impact on global trade liberalization. Recently, however, Japan appears to be shifting to a more positive stance. In fact, Japan initiated negotiations on an investment treaty with the Republic of Korea (ROK) in October 1998. As part of those negotiations, the two countries have assigned their research institutions to study the possibility of a bilateral free trade agreement. In March 1999, during his visit to the ROK, Japanese Prime Minister Obuchi made a speech at Korea University in which he advocated a study on the idea of forming a free trade area in Northeast Asia with Japan and the ROK as its core members.

    Considering the history of the Japan-Korea relationship, the formation of an FTA would have a significant political as well as economic meaning for the two countries. Some government-supported studies are also being conducted with regard to the ideas of free trade agreements with Mexico and Canada, respectively.

    Certainly, Japan is now showing a much more positive attitude toward the concept of regional trade agreements. Given such developments, it seems that it would be natural and timely for Japan and the United States to explore some kind of future trade/economic arrangement.

    Should Japan and the United States set up a comprehensive framework for their economic relationship? If so, what kind of arrangement it should be?

    First, the two countries can and should reach a cooperative framework that is beneficial for both parties and does not undermine global efforts toward trade liberalization.

    Second, as for the contents of the framework, much emphasis should be placed on the harmonization and coordination of domestic policies and regulations. Border barriers such as tariffs have become fairly low in both countries while harmonizing and coordinating their domestic policies (competition policy is a notable example) is becoming more important for facilitating trade and investment. Moreover, the WTO's coverage of domestic economic policies is still limited and will not be dramatically expanded in the near future.

    From such a point of view, TEP might be regarded as a model for a new Japan-U.S. arrangement. TEP is not a free trade agreement (which is, according to Article XXIV of the GATT, supposed to form an association of nations with duty free treatment for substantially all trade between members). Rather, it pursues cooperative efforts on such issues as technical barriers, services, government procurement, intellectual property, the environment, regulations in agriculture, competition policy and multilateral trade liberation.

    A scheme like the Transatlantic Business Dialogue (TABD), which feeds business proposals to the relevant governments, would also be worth exploring for Japanese and U.S. businesses. Although the possibility of a Japan-U.S. FTA need not be precluded from long-term consideration, an arrangement like the TEP would be more realistic in the near future, and more desirable in terms of its impact on multilateral liberalization.

    Third, Japan and the United States need not restrict the nature of a comprehensive and cooperative arrangement to that of a bilateral relationship. Including third countries or even entire regions, especially those that have a comparable or even stronger arrangement with either Japan or the United States, would be worth considering. For Japan, it will require serious assessment of the viability of different methods by which to link a new Japan-U.S. arrangement with a new Japan-ROK arrangement (possibly an FTA). This issue is even more important because of the potential expansion of the new Japan-ROK economic relationship throughout Northeast Asia. Therefore, the linkage may have considerable effects not only on the future of Japan-U.S.-ROK economic relations, but also on what roles Japan and the United States will play for the further development of the Northeast Asian economy as a whole.

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  • SERIES: Working Papers by CEAP Visiting Fellows | Number 3