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

Masabumi Suzuki

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 o
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