Oct 15, 1992

JAPAN'S AMBIVALENT MULTILATERALISM AND BILATERALISM.

GENEVA, OCTOBER 13 (CHAKRAVARTHI RAGHAVAN) -- The review of Japan trade policies at the GATT Council this week brought out the ambivalence of its support to multilateralism and commitment to Uruguay Round, even as it avoids trade disputes with the U.S. and EC, through voluntary export agreements and market-opening measures for their exports.

The Japanese policies came under review, for the second time since 1989 Uruguay Round mid-term accord, under the Trade Policy Review Mechanism (TPRM) exercise, based on a GATT secretariat study and the government's own report.

The GATT report, and the secretariat's summary which is what most media personnel read and report on, suggests the secretariat has sought to put some positive gloss over Japanese trade policies, including the nexus of relationships between the Japanese government and its Ministry of International Trade and Industry (MITI) and the various industrial, business and private sector interest.

It also questions some of the criticisms commonly levelled against Japan's keiratsus or Japanese market structure and practice militating against imports.

Nevertheless, the Japanese delegation at the Council would appear to have been critical of the secretariat even for what it had said or implied in the detailed text of the report.

In the summing up at the end of the two-day meeting, GATT Council Chairman Balkrishan Zutshi brought out that the Council members had emphasised the Japan's responsibility, as a major beneficiary of the multilateral trading system, for ensuring that the system remained open, liberal and effective.

And while recognising the steps taken by Japan over the past two years to open its markets in some areas, the Council members underscored the need to ensure that all parties benefit from such market-opening measures.

In this connection, they also noted the importance of a speedy and successful conclusion of the Uruguay Round and Japan's commitment to this, and urged Japan to review its own position in agriculture so that it would be able to take a more determined leadership role in guiding the overall negotiations forward in its critical concluding phase.

Japan, the Council members further stressed (according to the summing up), had to make further progress in reducing non-tariff barriers, including the liberalisation and acceleration of administrative procedures in such fields as standards, testing and certification, and sanitary/phytosanitary restrictions.

The GATT members also looked forward to greater "clarity and transparency" in administrative guidance and stronger administration of anti-monopoly and restrictive business practices legislation.

All trade measures, including bilateral arrangements, taken or promoted by the Japanese government or industry, they said, should be on an MFN basis and in keeping with GATT rules, in order to support the credibility of and confidence in the multilateral system.

The secretariat review suggests that the restrictive impact of practices such as keiretsu (major corporate groups) or the Japanese market distribution system inhibiting imports "may be less important than often claimed".

The Japanese willingness to "manage sensitive exports" through grey area measures like voluntary export restraint agreements rather than have a trade dispute or use the multilateral system to assert its rights, as also its current policy of encouraging imports through subsidising the imports has however been criticised.

While Japan also gets high marks for having increased its imports of manufactures from the developing countries, these are seen to be essentially in relation to the output of Japanese enterprises and investments abroad.

The average tariff in Japan on semi-manufactures is almost double that on raw materials.

Tariff escalation at the semi-processed stage is more pronounced for manufactured products, where the unweighted average tariff of 6.4 percent is over five times for raw materials.

Agricultural products too are affected, with semi-manufactured products on average being dutiable at 26.7 percent or over four times the average of 5.9 percent for raw materials.

The GATT report is critical of the recent government import promotion measures, through fiscal incentives. These may reduce trade frictions, but may also have resource allocation implications for the domestic economy and assist in increasing exports by reducing cost of production.

But the Council discussion brought out that except for one or two countries, few agreed with this theoretical neo-classical arguments. Most others welcomed the Japanese action - perhaps an indication of the distance between theory and real life in trade.

The study underlines that Japan has been "a ready partner" in entering into bilateral agreements with the U.S. on Japanese imports of sensitive products, though, even where these are in products where the U.S. has comparative advantage, any discriminatory treatment is avoided - such as in the 1991 semiconductor arrangement.

But recent arrangements in the automobile sector go beyond by giving government endorsement to specific bilateral objectives, set in the framework of industry-to-industry agreements covering purchases by Japanese firms of automotive parts from U.S. suppliers.

Japan has also demonstrated its willingness to manage sensitive exports through voluntary export restraint agreements and export monitoring arrangements in products where Japan is highly competitive.

"The tendency for major trading partners to press for, and Japan's readiness to agree to, management of specific trade problems as a means of addressing bilateral imbalances could, if left unchecked, subject the multilateral system to potentially damaging pressures", the report says, adding, "even the perception by other governments that such trends may be occurring risks undermining confidence in the trading system, as third countries increasingly feel that their trading opportunities are being adversely affected".

While Japan's tariffs are generally low, in some important areas of domestic production, they are relatively high, with tariff peaks of up to 60 percent existing as above-quota rates on certain treated leather and leather footwear, and 20 percent in other areas including leather and wood products and textiles and clothing items.

The "temporary" tariff reductions in Japan are concentrated on low tariff items and this, while reducing average tariffs by about one-fifth, has increased overall tariff dispersion by one-quarter.

The report, and the council discussions, also were critical of the extent of Japanese protection and support in agriculture, even as Japan remains the world's largest food importer.

Farm support policies have raised food prices well above international levels: on average they are double world prices and four to five times the border price on rice and milk products, three times for sugar.

Outside of agriculture, a hard core of protection continues to exist in some industrial sectors - leather and leather footwear, textiles and clothing.

While Japan continues to stand outside and criticise regional and bilateral trade deals, its readiness to accept bilateral solutions to trade problems, the secretariat says, "continues to give the impression of a country which, while seeking to reduce frictions with all trading partners, favours the growth of grey-area measures and of managed trade in certain sensitive areas".

On the subject of investments, despite some of the measures to encourage investments and historically large inward flows during the 1980s, the present stock of Foreign Direct Investment (FDI) in Japan is still less than one-fifteenth of Japanese FDI abroad, and small by comparison to total productive capacity in Japan.

However, the reasons for this are not considered to be due to any undue restrictions on affiliates, but to factors such as high costs, especially of land, difficulties of getting qualified personnel and complexity of doing business in Japan.

Japan's scheme of General System of Preferences (favouring developing countries), according to a survey in the 1980ís, suggested that they were generally trade creating, and not diversionary, but accounted only for 740 million dollars of imports. This, the GATT says, is hardly surprising given the large number of exempt products in agriculture and textiles, combined with the binding quotas applied to more competitive imports.

In the discussions in the Council, members made a number of points:

* The low share of Japan's imports of manufactures from the developing countries, and the need for it to expand GSP coverage and ceiling levels,

* Need to put administrative guidance into written and if possible regulatory forms (Japan has said it is committed to this),

* Need for more stringent policing of the anti-monopoly arrangements and of keiretsus,

* Japan's continuing use of voluntary export restraints to certain markets could result in diversion of trade to third markets,

* The stagnation of imports of manufactures into Japan between 1989 and 1991.