1:34 PM Apr 6, 1995

US, EU ASSAIL JAPAN'S 'CLOSED MARKETS'

Geneva 5 Apr (Chakravarthi Raghavan) -- The United States and the European Union joined forces at the World Trade Organization to assail Japan's trade policies and practices, which they complained is responsible for less imports (from them) and racking up Japan's trade surpluses.

The occasion was the two-day discussion of Japanese trade policies under the WTO's Trade Policy Review Mechanism (TPRM) exercise.

The US and EU complaints about the Japanese markets were also echoed by several others.

The whole range of Japanese policies and failures -- deregulation, government procurement, import policies, investment policies -- as well as the competition policy and its application visavis the horizontal and vertical groupings of Japanese corporations -- kigo-shudan and keiratsu -- were cited by the two major trading partners.

The Japanese TPRM exercise has come in the wake of recent announcements by Washington and Brussels of their intentions to take Japan to the WTO and its Dispute Settlement system -- not in terms so much of specific measures or regulations, but in reality in terms of "non-violation" complaints i.e. adverse effects on their trade.

The WTO/GATT secretariat's own report gave a positive assessment. It spoke of Japan eliminating a number of voluntary export restraints with the US and the EU, its increased use of international standards and growing trade and investment in Asia.

All these the secretariat said should help Japan shift from its "past emphasis on bilateralism in trade relations" and move towards greater integration in the multilateral trading system.

Unlike the US, EU others who voiced criticism, the secretariat report said Japan was making firm progress in domestic deregulation and that this combined with its implementation of Uruguay Round agreements should ensure improved access to Japan's market.

Critics though charged in effect that rules and regulations were one thing, but the practice as seen in its effects was another - and blamed it all on the 'closed system'.

While the US and EU noted that Japan continuous to pile up current account surpluses, the secretariat said that while the surpluses in 1993 in terms of US dollars rose to record levels, it declined in yen terms and as a share of GDP. In the first nine months of 1994, the current account surplus fell in dollar terms by 1.4%, but by 9.2% in yen terms from the corresponding period of 1993.

In dollar terms, Japan's merchandise trade surplus grew from $64 billion in 1990 to $132 billion in 1992, then increased less rapidly to $142 billion in 1993 and growing by three percent in Jan-September 1994 (compared to similar period in 1993). But in yen terms, the surplus fell by some six percent in 1993 and 5.2 percent in Jan-Sep 1994, compared to same period in 1993.

During the first 11 months of 1994, import volumes increased by 15 percent and of exports by about 1.4 percent relative to the same period in 1993.

The direction of Japan's trade also changed markedly. The share of East Asia in exports and imports increased from 30 and 28 percent to 36 and 33 percent between 1990 and 1993 -- about half the increase by trade with China.

The share with America (mainly US) in merchandise trade had been stable or falling -- at around 30% of imports and 36% of exports --while in respect of Europe shares of exports to and imports from declined from 23 to 19 percent and from 19 to 16.5 percent.

(Other reports (including by UNCTAD) have shown that while outward FDI by US leads to more US exports (and not imports), in the case of Japan, its outward FDI (to Asia) has been marked by increased imports, including of manufactures.)

While the secretariat saw these positively, the US and EU were assailing this pattern of Japanese outward FDI to Asia and imports by the Japanese firms from these sources as indicative of the non-market practices - that these showed "tying-in" purchases, rather than buying according to the market principles from the cheapest sources.

While some participants welcomed the Japanese import promotion policies and efforts, there were also fears of its likely distortive nature when used on a selective basis (as part of bilateral arrangements).

Looking at it in terms of competition policies and corporate practices in Japan, the secretariat report noted complaints that Japense keiretsus or corporate linkages, create considerable entry barriers for foreign new comers and are a major source of anti-competitive practices and the response that keiretsus, by enhancing vertical and horizontal integration, benefits producers and consumers.

These views need not be inconsistent, the secretariat said. By creating vertical and horizontal linkages, keiretsus may combine virtues of promoting competition (among parts suppliers) with maintenance of practices affecting entry.

Keiretsu term is used to include groupings or officials: horizontal ones called kigyo-shudan, vertical affiliation called seisan-keiretsu and vertical distribution affiliation ryutsu-keiretsu.

Trade observers noted that while the US and EU spoke to complain of such vertical and horizontal links for purchases and sales, in relation to their own TNCs -- their principals and branches or affiliates in developing countries, whereby inputs are purchased from the principals and sold to principals or its affiliates -- complaints of anti-competitive restrictive business practices are often dismissed on the argument that it is not the vertical or horizontal links of TNCs that matter but only their effects on competition overall, with the burden of proving anti-competition on the countries complaining.

On the deregulation issue - whether it is moving fast enough - Japan said that while deregulation was a top priority for the government, such reforms took time to have effects on the economy.

Concerns were voiced over Japanese remaining restrictions (tariff peaks and tariff escalation) in sectors such as leather, footwear and processed food products.

Developing countries welcomed Japan's decision to extend by 10 years its GSP schemes, but wanted removal of ceilings on imports of products of interest to the developing countries.

While the secretariat report had spoken of Japan increasingly accepting international standards, participants in the debate spoke of the low number of such standards coinciding with international norms and the difficulties faced by foreign firms in government procurement.

Concerns were voiced over the US-Japan bilateral agreements -- on financial services recently and other market-opening agreements. But both the US and Japan said that these benefits would be multilateralized under the WTO/GATT's most-favoured-nation principle.

The secretariat report said about the trade and current account surpluses of Japan that following a surplus in 1991, when there was substantial recall of funds by Japanese investors, the long-term capital account resumed its "normal" pattern of deficits in 1992 and 1993, while the real effective exchange rate of the yen had appreciated substantially.

The difference between yen and dollar values of trade and current account, the report said, "have contributed to differing appreciation of the situation and, perhaps, to trade deficits during the period."