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Japan's Commercial Policy in the 1980s and 1990s
3.1 Japan-US Trade Frictions
Japan experienced various types of trade frictions with advanced economies, particularly the US, due to its explosive export growth. Trade frictions between Japan and the US go back to the 1950s and spread from Japanese exports of clothing and textiles, electrical appliances, and iron and steel, to the exports and imports of automobiles and high-technology products—such as machine tools and semiconductors—and the imports of agricultural products in the 1980s.7 Facing a surge of imports of certain products from Japan, the US government occasionally requested the Japanese government to voluntarily restrain exports of these products. Textiles and steel were primary examples. Some Japanese industries that encountered trade threats in the US, such as the textile, color television, and iron and steel industries, were persuaded to adopt “voluntary export restraints.” Other firms started to invest in assembly or production plants in the US, for example, in the electrical appliance and automotive industries, to avoid protectionist trade measures. Some Japanese firms shifted their production plants to East Asia to avoid discriminatory trade measures imposed by the US authorities on Japanese products.
Bilateral trade frictions
In the early 1980s when the Reagan administration adopted a mix of tight monetary policy and lax fiscal policy, US imports surged and Japan's exports to the US expanded, reflecting the rising demand in the US and the real appreciation of the US dollar. As a result, not only did both Japan's trade surpluses and the US trade deficits rise (see Figure 4 [ PDF 19.6KB | 1 page ]) but also the Japan-US bilateral trade imbalance expanded, which led to a new stage of Japan-US trade frictions focusing on economy-wide structural issues, going beyond sectoral trade frictions.
The US government took the view that Japan's distorted market structure, closed to foreign products and conducive to creating trade surpluses,8 was the fundamental cause of both Japan's trade surplus and the US deficits. The Japanese market was closed because of high import barriers to foreign products due not only to border restrictions—such as tariffs and quantitative restrictions—but also due to “behind-the-border” regulations and market practices. So the US government argued that if the Japanese market had been opened by reducing such import barriers, US exports to Japan would have risen and the US-Japan bilateral trade imbalance and the overall US deficit would have declined. Therefore, Japan should open up its economy to foreign competition by eliminating import unfriendly restrictions and practices.
In contrast, the Japanese side took the view that the large trade imbalance reflected the large savings and investment imbalances in the US and Japan (Komiya and Itoh 1988). Unless these domestic imbalances were corrected, the trade imbalance would persist. To reduce the trade deficit, the US was advised to reduce the budget deficit and increase household savings. To reduce the trade surplus, Japan would stimulate domestic demand through structural reforms and deregulation of various restrictions. The “Maekawa Report” (Economic Structural Adjustment for International Coordination) produced in 1986 urged the Japanese government to implement such a policy.
In the “Structural Impediments Initiative” (1989-1990), the US addressed squarely the need to deregulate Japan's “closed” markets for automobiles, color film, retail distribution services and insurance services and demanded that the Japanese government dismantle undue restrictions and cease interventions that would limit imports from abroad. The US side pointed out that exclusive transactions practices among Japanese firms, the Large-scale Retail Store Law, and other measures restricted imports of foreign products. Exclusive transactions practices, based on the “keiretsu system,” were considered to put foreign competitors at a disadvantage because they were outsiders of the group.9 The Large-scale Retail Store Law, which limited the operations of large-scale stores, was considered to inhibit the import of goods to Japan through American style large-scale retail stores. The US argued that such unjust public interventions should be lifted so as not to impede imports of foreign products.
Case of semiconductor disputes
The case of semiconductor disputes was an interesting one as it resulted in “voluntary import expansion” on the part of Japanese firms. Japanese semiconductor producers had been expanding their market share for semiconductors globally, including in the US and Japan. The Semiconductor Industry Association of the United States argued that US producers were disadvantaged because of (i) the Japanese government's public support for Japanese firms and (ii) the exclusive keiretsu relationships among Japanese firms in Japan, despite the fact that Japanese firms could freely compete against US firms in the US market.10 The US took the position that as the import barriers in Japan distorted the country's resource allocation, it would be desirable for the government to intervene in order to correct such distortions by raising the share of foreign products in the market. The US pressured Japan to accept such market opening measures with a threat of using Section 301 of the Trade Act of 1974 (Super 301).11 Given that the activation of Super 301 would severely restrict Japan's exports to US markets, the Japanese government yielded to the US demand. The two sides reached the semiconductor trade agreement (SCTA) in 1986 to increase the share of foreign-produced semiconductors to 20% in the Japanese semiconductor market on the assumption that the Japanese government could manage market shares of the private semiconductor industry.12
Itoh and Shimoi (2009) argued that the Japan-US bilateral semiconductor agreement was trade distorting. First, there was no convincing evidence of the presence of import barriers. Even if such barriers had existed, an appropriate policy would have been to directly address such barriers themselves rather than agreeing on a certain numerical target. Second, the US intention was to increase the share of US-produced, rather than foreign-produced, semiconductors in Japan's market. That is, the “voluntary import expansion” was not designed to increase overall imports of foreign semiconductors from abroad but to secure a certain market share of foreign (largely US) products. To the extent that this type of “managed trade” did not expand overall import value or did not reduce semiconductor prices, it likely distorted the market and did not necessarily serve the interest of consumers.
In contrast, Tyson (1993) argued that the major impediments to the Japanese semiconductor market were rooted in the unique character of Japanese business organizations and their distinctive relationships with one another and with the Japanese government. She contended that voluntary import expansions were inferior to the first-best approach of unimpeded market competition, but that they could sometimes prove more useful than doing nothing when such competition was constrained by structural impediments and foreign trading practices. Hence, the SCTA was useful in stimulating competition in the Japanese market where competition was effectively hampered.
Essentially, the US government used the threat of severely restricting imports of major products from Japan, and this aggressive US policy towards Japan generated resentlment in Japan. Nonetheless, to the extent that the Japanese government addressed many “behind-the-border” regulations, there is no doubt that the policy had a positive impact on Japanese market openness, efficiency and transparency, and improved the economic welfare of Japanese consumers.
3.2 Japan-Europe Trade Frictions
Japan also had some trade frictions with Europe, although they did not become as contentious as the Japan-US trade frictions. As was the case for Japan-US trade frictions, expansion of Japan's trade surplus with Europe precipitated Japan-Europe trade frictions. Japan-Europe trade frictions in the post-WW II period began in the late 1960s, when the European Community (EC) imposed import restrictions on rapidly increasing Japanese exports of color televisions. Trade frictions continued into the 1970s and 1980s as products that caused problems expanded to include electronic machinery, automobiles and machine tools. During the 1970s, Japanese producers of automobiles, videocassette recorders, machine tools, microwave ovens, semiconductors and other products responded to trade frictions mainly through voluntary export restraints. However, the EC began to use anti-dumping litigation and duties to limit Japanese exports of ball bearings, copying machines, printers, microwave ovens, and semiconductors. The European governments attempted to protect and promote European producers, particularly those in electronics industries, by limiting imports of Japanese products. Responding to these measures, Japanese firms actively set up production bases in the EC by undertaking FDI.
One noted case of Europe's import restrictions against Japanese products took place in Poitiers, an inland city in France, between October 1982 and April 1983. In the so-called “Battle of Poitiers,” the French Government limited the customs processing of all Japanese videocassette recorders to a small customs house in Poitiers.13 As a result of this import restricting measure, as many as 60,000 Japanese videocassette recorders were piled up in the warehouse one month after the implementation of the measure.14 At that time no French electronic producers were manufacturing videocassette recorders, thus French government's accusation claiming that the imports of Japanese videocassette recorders brought injury to French electronic producers was unfounded.
During the 1980s Japan's trade surplus against Europe expanded and its magnitude was even larger than Europe's total exports to Japan. Irritated by this huge trade imbalance, European governments and the EC criticized Japan for having a closed market. Furthermore, emotional reactions, such as accusing Japanese people of being workaholics living in rabbit hutches, erupted in Europe.15 Nonetheless, the Japan-Europe trade frictions did not go as deep as the Japan-US trade conflicts in the sense of urging Japan to address the structurally ”closed” nature of the economy and market. Japan-EC trade frictions dissipated in the 1990s mainly because of the yen appreciation, rise of Japanese FDI in Europe and the resulting expansion of local production, and less aggressive export behavior of Japanese firms.
3.3 The Role of the WTO and APEC
Uruguay Round under GATT
The Uruguay Round of multilateral trade negotiations under the auspices of GATT started in 1986 and was concluded in 1994. Although the negotiations lasted eight long years, the Uruguay Round made substantial progress towards liberalizing trade and FDI. The achievements included: a reduction in tariff rates; framework agreements on trade in services, on intellectual property rights, and on trade-related investment measures; a timetable for phasing out all quantitative restrictions on trade; first steps towards bringing agricultural trade more firmly under a multilateral discipline; a stronger dispute settlement mechanism; and the establishment of the WTO.
Japan did not play a critical role in the Uruguay Round because it could not offer sufficient concessions on agricultural liberalization. In the negotiations, Japan argued that agricultural goods trade should be treated differently from manufactured goods trade because of the multi-functional role of agriculture—such as protecting the environment and preserving nature. But due to the lack of international support, Japan could neither lead nor exercise influence over the negotiations. Domestically, agricultural interests strongly advocated the continuation of protection, while non-agricultural interests did not present a sufficiently compelling case for opening the agricultural goods market.
Nonetheless the Uruguay Round agreement had significant impacts on Japan's commercial policy. First, partial liberalization of agricultural trade, including rice imports, was achieved. Japanese trade negotiators were persuaded that the country could no longer maintain the policy of protecting the agricultural sector while enjoying the benefit of liberalization of manufacturing trade. Although their original position stated that “no grain of rice would be allowed to come to the Japanese market,” in the end they had to accept the “minimum access” approach to rice imports. Essentially, Japan abandoned its policy of prohibiting the import of rice and began to allow a certain amount of rice imports, equivalent of 4-8% of domestic consumption. Soon after this, Japan shifted to tariffication of rice imports by setting a prohibitively high tariff rate of 778% on rice imports.
To deal with the trade adjustment in agriculture, necessitated by the partial liberalization of rice imports, the Japanese government provided to the domestic agricultural industry as much as six trillion yen. Although the intention could be justified, the program was not successful in facilitating meaningful adjustment, because a large part of the funds were not spent for upgrading skills of impacted workers, enhancing labor productivity, or concentrating farm land in the hands of large-scale productive farmers, but for different purposes such as drilling for hot springs or paving country roads.
Second, the way Japan handled the bilateral trade frictions with the US changed in a fundamental way. Before the establishment of the WTO, Japan tended to respond to the US pressure to reduce its exports to the US and open its market to US products by agreeing to “voluntary export restraints” and “voluntary import expansion,” respectively. With the establishment of the WTO, Japan began to use its enhanced dispute settlement mechanism.16
The Japanese government essentially found three reasons for bringing the bilateral issues to the multilateral mechanism of WTO dispute settlement. First, the multilateral forum would deliver decisions based on objective trading rules and norms, rather than the asymmetric bargaining power between disputing parties. Second, even if Japan lost the case, it would be easier for the government to convince the domestic stakeholders to accept the WTO decisions and to make the appropriate national policy responses, such as adjustment policies. Third, such policy responses would take the form of addressing the fundamental problem, such as changing domestic regulations, rules and procedures, rather than putting in place “managed trade” measures such as numerical targets.
Japan indeed took the case of color film dispute to the WTO panel. Eastman Kodak argued that Japan's film market was unduly controlled by Fuji Film and, as a result, closed to foreign products, such as Kodak film, and in 1995 presented the case for sanctioning Japan to the US Trade Representative. The Japanese government argued against Eastman Kodak and brought the case to the WTO. The WTO panel delivered its decision in support of Japan in 1998.
Since this incident, there has been no major Japan-US bilateral trade dispute. Six factors could explain this. First, the availability of the WTO's dispute settlement mechanism may well have deterred the US authorities from resorting to bilateral negotiations with trade sanction threats. Second, Japan undertook a number of policy reforms such as those in the financial system and corporate governance, the areas that were the main focus of US concerns over the structure of the Japanese economy. Third, Japanese firms began to expand production in the US through FDI and, thus, created a local constituency that sometimes opposed US government's policymaking that could have limited imports from Japan. Fourth, Japan's trade surplus was no longer the most important source of the US trade deficit, as the US deficit began to balloon in the second half of the 1990s. The trade and economic structure of Japan had changed in a way not to run a large bilateral trade imbalance with the US. Fifth, the stagnation of the Japanese economy after the bursting of the asset market bubble may have reduced the US perception of the Japan threat. Finally, rising competition from, and expanding trade deficits with, emerging East Asian economies began to divert US attention away from Japan towards these economies, such as PRC.
A voluntary and unilateral approach under APEC has also contributed to the liberalization and facilitation of trade and FDI for Japan as well as emerging East Asian economies. Established in 1989, APEC began with 12 members and has grown into a trans-regional cooperation organization with 21 members.17 This forum's membership includes some with great influence in the world economy, such as the US, Japan, PRC, and Russia. APEC has been the only international economic forum in which the US and East Asian economies hold policy dialogue on a wide range of economic issues and pursue trade and investment liberalization outside of the GATT/WTO.
APEC's aim has been to promote free and open regional trade and investment and contribute to economic growth in the Asia-Pacific region and the world. The means employed to attain this end have been the liberalization and facilitation of trade and investment and engaging in economic and technical cooperation. Decisions to act are left to the discretion of each member without including legally binding negotiations, treaties, and conventions, such as those imposed by the WTO. In addition, APEC liberalization measures are also applied to non-members, thereby enforcing most-favored-nation (MFN) treatment without discrimination. Thus, its approach has been termed as “open regionalism.”
Japan has played an important role in APEC. On the occasion of the organization's birth, it joined with Australia in performing the role of midwife, and subsequently it has made major contributions in many areas, including organization building and cooperative activities. In Bogor, Indonesia, APEC in 1994 agreed on what was considered to be its primary goal: the achievement of free and open trade and investment by no later than 2010 in the case of developed economies and no later than 2020 in the case of developing economies. But it was in Osaka, Japan, that APEC in 1995 adopted an action plan for achieving this goal, the Osaka Action Agenda. This agenda specified principles, frameworks, and actions in the three areas of trade and investment liberalization, trade and investment facilitation, and economic and technical cooperation. Among the general principles for liberalization and facilitation were comprehensiveness, WTO consistency, comparability, and nondiscrimination. The economic and technical cooperation was to be implemented by the APEC members as soon as they were ready, making use of action, forums, and other means. For Japan—and other developed economies in the APEC region—2010 is both the deadline to meet the Bogor goal and also the year in which it hosts the annual APEC summit. Strictly interpreted, the Bogor goal is unlikely to be met, but there is no question that APEC has facilitated significant trade and investment liberalization in the Asia-Pacific.
One of the most significant achievements was to help both PRC and Taipei,China to join the WTO in December 2001 and January 2002, respectively. However, the effectiveness of APEC has been challenged recently due to its limited role played at the time of the 1997-1998 Asian financial crisis and the slow progress of unilateral, voluntary liberalization since the early 2000s.
Japan's slow tariff reduction
Since its accession to the GATT, Japan has been liberalizing trade by cutting tariff rates, reducing quantitative restrictions, and addressing other non-tariff barriers. Figure 5 [ PDF 84.6KB | 1 page ] demonstrates how Japan has been reducing the average tariff rates over the past 20 years. Japan saw a significant tariff reduction in 1995 as a result of the conclusion of the Uruguay Round, but the tariff reduction since then has been very slow. This is in sharp contrast with other high income OECD countries and the world as a whole. Although Japan's average tariff rates are much lower than the world average and marginally lower than the high income OECD country average, the rest of the world has been reducing tariffs since 1996, while Japan has not. This implies that if the Doha Development Round negotiations should become stalled, Japan needs to find another way to further reduce the tariff rates.
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