No. 14 — April 7, 2000


Weekly Review


Tokyo and Washington missed their March 31 target date for completing the third and final report on regulatory reform under the White House's latest Japan market-opening framework. Insiders report that during high-level talks in Tokyo March 21 to March 23, the two sides made progress — often significant, according to these sources — in almost all of the six areas covered by the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy: housing, medical devices and pharmaceuticals, financial services, energy and the basket category of structural barriers. The spoiler was telecommunications, particularly the fees that the two regional operating units of Nippon Telegraph and Telephone Corp. charge other common carriers to connect with their local-access networks.

No one — certainly not Deputy U.S. Trade Representative Richard Fisher or Deputy Foreign Minister Yoshiji Nogami, the principals in the Enhanced Initiative negotiations — was surprised by this outcome. The United States and Japan have wrestled with the interconnection-rate issue since the first Enhanced Initiative status report came out in May 1998. In it, Tokyo agreed to what in effect was a deep reduction in the country's internationally out-of-line tariffs before yearend 2000 by adopting a so-called long-run incremental cost pricing methodology. Any number of meetings between government experts over the last five months, including one March 20, had failed to move Washington and Tokyo close enough on the depth of the cut and its timing to reach a settlement (see JEI Report No. 4B, January 28, 2000). Neither did the intervention of Messrs. Fisher and Nogami in the discussions in February (see JEI Report No. 6B, February 11, 2000) and again in late March provide grounds for a compromise. Ditto for the standing U.S. threat to take Japan to the World Trade Organization if it failed to come up with an acceptable formula.

The Clinton negotiating team — which, for once, has the broad support of corporate Japan for its position on deregulation — made a last-ditch attempt to strike a deal on telecommunications before the March 31 deadline for the Enhanced Initiative progress report. Mr. Fisher proposed to Mr. Nogami an interconnection rate-cutting plan that bridged a big part of the difference between the offers then on the table. Under it, Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp. would phase in over two years from the end of 2000 the 22.5 percent decrease in local-access charges that the Ministry of Posts and Telecommunications had said the pair of near-monopoly carriers could live with. That done, they would implement the full 41.1 percent fee cut that the United States had argued should go into effect at the end of this year. The MPT participants did not bite. Anything more or faster than a 22.5 percent reduction over four years would cause unacceptable financial hardship for the two regional NTT firms, their protectors maintained. The Japanese side reportedly did offer to front-load the 22.5 percent decline, but American negotiators rejected this counterproposal out of hand.

From the beginning of the 1999-2000 cycle of Enhanced Initiative discussions, Washington and Tokyo policymakers involved in this deregulation effort have known that the real due date for their final report is the eve of the July 21-23 summit of the leaders of the Group of Seven industrial nations plus Russia on Okinawa. This elastic deadline no doubt has contributed, if only at the margin, to MPT's standpat position on changes in interconnection charges. To ensure that the Japanese government understands that the July time frame for a decision is not infinitely extendible and to underscore the White House's determination to win deep and near-term cuts in NTT local-access tariffs, the Office of the U.S. Trade Representative released the results of this year's review of Japan's compliance with bilateral and international telecommunications trade pacts separate from those of other countries evaluated under Section 1377 of the 1988 Omnibus Trade and Competitiveness Act.

In a prepared March 30 statement, USTR Charlene Barshefsky said that Japan's stance on interconnection rates could violate its obligations under the 1998 WTO Basic Telecommunications Agreement to guarantee cost-based tariffs and to regulate the domestic communications market impartially. At the time, she said that the Clinton administration would decide by the end of July whether to go the WTO complaint route or to pursue some other course. This deadline was amended to July 28 when the White House issued the outcomes of the other Section 1377 reviews April 4. As they had said before, U.S. trade officials indicated in private that Washington's preferred solution remains settlement of the NTT interconnection-rate issue rather than punitive action. The choice, though, is Tokyo's.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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