No. 25 — June 30, 2000

Feature Article


Douglas Ostrom

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The abortive efforts of the world's trade ministers to launch a new round of global trade talks in Seattle last November put the five-year-old World Trade Organization in the spotlight as never before. The international focus on the Seattle meetings was in part a consequence of the growing realization that the Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade, which was completed in late 1993, had resulted in changes to the global trade regime that were more far-reaching than were realized at the time. The WTO already has significantly altered trade policymaking in the United States and Japan. For example, Japanese trade policy has become more multilaterally oriented, although the durability of that thrust remains in doubt.

The ways in which the two nations position themselves for a possible resumption of international trade negotiations or cope within the existing framework will have important implications for the world trading order. Japan likely will continue to be a relatively passive participant in the development of a future liberalization agenda. Moreover, Japanese thinking is not expected to be influenced much by the new attitudes toward the WTO that were on display in Seattle. U.S. opinion, in contrast, will be shaped not only by the stance of the president elected in November but also by a sense among some Americans that U.S. trade policy since World War II has been too single-minded in its pursuit of increased exports by corporate America. These critics want to put on the table such considerations as labor and environmental standards as well as the appropriate role of science in the determination of trade restrictions. While such a position can be construed as protectionist — and often does serve as cover for that objective — policymakers on both sides of the Pacific are learning that the new opinions on trade are not so easily categorized.


The Battle In Seattle

Representatives of 134 nations gathered in Seattle last November to launch a new round of multilateral trade negotiations that would build on the results of the Uruguay Round of trade liberalization talks, which lasted from 1986 until late 1993 and created the World Trade Organization as a replacement for the General Agreement on Tariffs and Trade. Not only did the delegates encounter surprisingly strong opposition in the streets of Seattle, but they also found fellow trade ministers almost as intransigent. In the end, WTO members were unable to craft even a face-saving communique, let alone agree on launching a new round of discussions (see JEI Report No. 46B, December 10, 1999). Seven months later, the WTO still bears the scars of the bruising battle in Seattle. In all likelihood, a new round of multilateral trade negotiations will not begin until early in the term of the U.S. president to be elected this November, if then.

Outside of Seattle, analysts tended to lump the various protest groups together. In the collective view, whatever the purported cause — whether American unions insisting on the inclusion of labor standards in trade arrangements, French dairy producers trying to protect their cheese industry, or Japanese farmers lobbying to close a partly open rice market — the protesters basically were promoting the same objective: protectionism — from time immemorial, the enemy of free trade in general and multilateral trade talks in particular. Such a conclusion may be oversimplistic, especially in light of the issues that resonated in the Pacific Northwest city and that undoubtedly influenced both those who sought success for the talks and the demonstrators. However, it is the impression that lingers.

Seattle seemed a particularly appropriate launch site for a round of trade talks in which Japan and the People's Republic of China were expected to play key roles. The city long ago proclaimed itself the "Gateway to the Orient" based on its position as the West Coast city geographically closest to Tokyo and most other Asian ports. Having had this perspective for most of the 20th century, Seattle residents were particularly conscious of Asia's big economies. Many, in fact, liked to think of Seattle as a 21st-century city in which Japan played a prominent role. In recent years, that vision was fused with and reinforced by the reality that a number of software and Internet giants like Microsoft Corp. and Inc. were headquartered in the Seattle area.

Arguably, its Asian orientation and high technology reputation were reasons that Seattle was selected for what was expected to be an agreement among WTO members to begin new talks that would accelerate the pace of globalization — and that would spread on the wings of Boeing jets, also made in the Seattle area. Moreover, in what its advocates believed was still another example of forward thinking, Seattle had earned a reputation as a "green" city, best exemplified by its recycling program, which had become a national model.

The demonstrators who filled Seattle's streets and forced the rescheduling of some of the WTO meetings came from all over the planet, yet their diverse arguments probably found a more receptive audience in that city than they would have elsewhere. One indication of the accuracy of this proposition was the much lesser impact that the same groups had a few months later when they took their protests to Washington, D.C. in what proved to be a futile effort to disrupt the spring meetings of the International Monetary Fund and the World Bank.

The strong local interest in the preparatory meetings and the international media coverage garnered by the demonstrations helped to give the events in Seattle a far higher profile than the launch agreements behind previous GATT trade talks. The idea of another round of trade negotiations became genuinely controversial, and WTO became a household acronym. In the United States at least, interest was much greater than at any time during the Uruguay Round. In fact, public forums regarding those talks had been guaranteed room-emptiers, even among the policy wonks of the nation's capital.


What The Uruguay Round Wrought

With the benefit of hindsight, the accomplishments of the Uruguay Round, named after the South American country where the negotiations were launched, were significant.1 To cite just one example, the number of trade complaints filed with the WTO for arbitration jumped by roughly 300 percent compared with the GATT days, and the actions taken in the wake of decisions favorable to petitioners have been more significant. Interestingly, the controversies that attracted the greatest attention during the Uruguay Round negotiations have proved to be relatively unimportant.2

Agriculture - For most of the Uruguay Round's eight-year duration, the media focused on the disagreements between the United States and the European Union over agricultural issues. The position of the Reagan, Bush and Clinton administrations was that such market-distorting measures as subsidies and import bans should be eliminated or scaled back drastically. The EU resisted vociferously, apparently with the tacit support of Japan and a handful of other countries that mainly were food importers. The final agreement did reduce nonconforming market measures in the EU, Japan and elsewhere but less than originally sought by Washington.

Only at the very end of the round did Japan's prohibition on rice imports surface as a central issue. With the intervention of Washington, however, Tokyo was given a way around the Uruguay Round's agricultural goal of tariffication — the process of converting import bans and other barriers to foreign sales into tariffs.3 Japan agreed to permit rice imports equal to 4 percent of its 1986-88 average consumption beginning in FY 1995, a figure that would rise year by year to 8 percent in FY 2000. No duties would be assessed on these imports. Given Japanese prices that were as much as 10 times higher than world levels, imported rice was expected to find a ready market in Japan.

Beyond this six-year period, Japan had the right to again postpone tariffication — provided that it made "additional and acceptable" concessions to trading partners. In short, the issue of rice would have to be revisited in 2000.

By late 1998, however, the combination of falling domestic rice consumption, bumper local harvests and rising imports had saddled Japan once more with expensive excess stocks of rice. The powers-that-be in Tokyo had a sudden change of heart about tariffication, realizing that it actually offered more protection than the existing system. In December, the government informed the WTO that it intended to switch import regimes as of April 1, 1999. By doing so, it was able to limit the increase in rice imports to a flat 0.4 percent a year through FY 2000 rather than a rising fraction (see JEI Report No. 2B, January 15, 1999). Under the new system, rice imported above the minimum access amount would be subject to a prohibitively high tax tariff. Most analysts expected Washington to challenge this cap on sales, but for various reasons, it did not.

For all the hoopla, neither rice nor other agricultural issues were the most contentious matters arising out of the Uruguay Round or in Seattle. Two other irksome provisions stood out.

The WTO as World Government? - The first issue involves the WTO's very existence. In the early postwar era, trade negotiators considered setting up an International Trade Organization to correspond to the then-new World Bank and International Monetary Fund but were rebuffed by U.S. opposition. Instead, the General Agreement on Tariffs and Trade was established in 1948. Although it lacked the legal standing of the World Bank or the IMF, it acted as a de facto ITO.

The Uruguay Round, the eighth and final series of trade negotiations completed under GATT, created the WTO and gave the new international trade arbiter the enforcement power that GATT had lacked. Although the WTO, like the GATT system, uses a dispute-settlement process to ensure adherence to trade agreements, GATT allowed a defendant country to block a negative finding. Hence, a less-than-perfect stick to enforce rulings — the right of an offended party to impose punishment in the form of trade restrictions or to seek compensation — became even weaker.

This stalemate ended under the WTO. A nation faced with an adverse ruling now has fewer choices. It can accept the finding and agree to alter the offensive practice or, if that change is not deemed politically viable, it can opt for the sanction imposed. Alternatively, the decision can be appealed within the WTO, with the same options should the ruling be upheld. Admittedly, a defendant can stall, trying to minimize the extent to which it has to either change its practice or accept punishment, but not indefinitely.

Clearly, a small country bringing a case against a powerful nation has limited ability to impose sanctions with any bite should the remedy not be accepted. Even so, the efficacy of the WTO process has been demonstrated several times. For instance, in a case resolved in 1997, Venezuela and Brazil challenged the United States over gasoline standards and won. Moreover, Washington agreed to change its practice, which involved rules related to "clean" fuels. The decision — and Washington's acceptance of it — was a sign to environmentalists that the WTO had compromised this country's ability to protect the environment. The fact that the WTO's procedures were less than transparent made things worse.

The apparent loss of sovereignty to the WTO has enraged a broad spectrum of American politicians — everyone from Ralph Nader to Steve Forbes to Pat Buchanan, all past or prospective presidential candidates. Their misgivings echo those that half a century ago left the ITO stillborn. In a few instances, objections to the WTO's powers have been linked to similar complaints about the World Bank and the IMF. To these critics, the three organizations make up a triumvirate of world government, with headquarters split between Washington, home to the World Bank and the IMF, and Geneva, the WTO's base.

Believers in the triumvirate theory generally are unpersuaded by legal opinion that finds that the processes and the procedures of neither the WTO nor the World Bank and the IMF result in any meaningful loss of sovereignty.4 Such views usually note that the three bodies lack both taxing authority and armies and are voluntary organizations from which member nations can withdraw at will. Moreover, the power to punish by sanction would exist with or without the WTO.

Agreement on the Application of Sanitary and Phytosanitary Measures - This pact proved to be the real sleeper of the Uruguay Round. The SPS agreement stipulates that measures to protect human, animal or plant life must be based on scientific fact and applied nondiscriminatorily regardless of the national origin of the good or the service being regulated.

Every country has rules to protect human health, the environment and important plants and animals. Uruguay Round negotiators accepted the legitimacy — and even the necessity — of such regulations, but they sought to prevent them from being used to restrain trade.

At the conclusion of the Uruguay Round, the conventional wisdom was that the adoption of the SPS agreement was a win for Washington. For one, the comparatively greater transparency of U.S. regulatory procedures increases the likelihood that this country's SPS measures are scientifically founded. Also, American science, particularly as practiced in the public policy arena, sets the global standard, thus reducing the chance of a successful challenge. Finally, as the world's biggest exporter of farm and food products, the United States was the target of many of the questionable measures enforced by foreign countries in the name of food safety. In short, to the extent that SPS regulatory regimes were brought in line with the new WTO rules, U.S. farmers and food processors stood to gain.

Japan, perennially the world's top food importer, appeared to be on the opposite side of the SPS issue. Its rules are less transparent and its government-sponsored science perhaps not as good as that of the United States. The Ministry of Agriculture, Forestry and Fisheries traditionally has been the gatekeeper, attempting to block or limit imports of agricultural goods that compete against typically much more expensive domestic products. Furthermore, the Japanese tend to regard domestic products as safer than the imported alternatives.5

In fact, Washington has found itself on both sides of the SPS issue since the WTO rules took effect in 1995. Whether the United States wins or loses, however, the controversy over the regulations seems to intensify. For example, Washington successfully challenged the EU's treatment of hormones in beef. Brussels opted to accept penalties drafted by the White House rather than to change its regulations, although the sanctions remain controversial in Europe. The French farmers who demonstrated in Seattle were protesting the nature of the retaliation, which includes stiff U.S. tariffs on French cheese, rather than the ruling on hormones per se.

The best-known SPS case brought before the WTO to date involved sea turtles, which were represented on the streets of Seattle by hundreds of protesters dressed in green turtle costumes. Washington's rules to protect endangered sea turtles include a requirement that shrimp fisherman use special nets equipped with so-called turtle-excluder devices; these permit sea turtles to escape.

Shrimp exporters to the United States challenged these rules, arguing that they lacked a scientific basis and discriminated against foreign producers. The preliminary WTO ruling found that the U.S. regulations indeed were both unscientific and discriminatory. The appeals body concluded, however, that they were not unscientific but were discriminatory because all foreign producers — even those using TEDs — were restricted from the American market if any shrimpers from the same country were found to be killing sea turtles with the traditional technology. As it had in the gasoline case, Washington backed down and began to permit the import of shrimp harvested with the approved nets.

The upshot is that sea turtles get exactly the same degree of protection that they would have received in the absence of the WTO finding. This situation, however, has not stopped the emergence of a "turtle-Teamster" coalition to oppose the WTO as it currently is constituted, let alone how it might be after another round of negotiations to strengthen it.

The United States has used the SPS agreement to expand American exports in a way more in keeping with initial expectations. The target was Japan and MAFF's requirement that potential exporters of every variety of fruit and vegetable subject to quarantine provide conclusive evidence that a treatment deemed effective in eliminating a suspected problem with one variety was equally efficacious for others. For years, Department of Agriculture experts had tried to convince their counterparts that MAFF's rule was unfounded for apples and, by extension, other quarantined produce. No matter how much proof was marshaled, though, Japanese authorities were unpersuaded. Fed up, the United States took Japan to the WTO in the spring of 1997.

A dispute-settlement panel sided with the United States in the fall of 1998, concluding that Japan's varietal testing requirement for apples had no scientific basis. The WTO appeals body upheld this finding after Tokyo, in a last-ditch effort to protect domestic apple producers, appealed the ruling (see JEI Report No. 9B, March 5, 1999). As a result, Pacific Northwest apple growers no longer have to go through the expensive, time-consuming process of proving the effectiveness of methyl bromide fumigation and cold storage in killing the codling moth for each apple variety they want to sell in Japan. Washington state apple producers estimated at the time that as a result of the ruling, their annual sales there could increase by about $25 million.6

The SPS agreement clearly has the potential to increase trade, although U.S. apple exporters interested in the Japanese market still have not realized that promise. Unquestionably, too, the pact has reduced the ability of foreign governments to hide protectionism behind the mask of measures purportedly designed to protect public health or, as in the apple case, the spread of infestation to the domestic crop. Sometimes, the opponents of the SPS agreement simply are protectionists, preferring local production. In other instances, however, their motivations are rooted in a back-to-nature mentality that resonates far beyond trade.

One probable effect of the apple decision, for example, is the increased use of pesticides on certain produce exported to Japan. While the scientific consensus is that careful use of products like methyl bromide is safe, many consumers disagree — and not without some reason, given shifting scientific opinion. Less than 100 years ago in the United States, arsenic was considered safe for use in apple orchards. Today, arguments that would be quickly rejected by a WTO panel of experts as unscientific are widely accepted by millions of Americans and millions of others abroad.

In any event, one lesson that American economic policymakers ought to have learned from the fiasco in Seattle is that the domestic consensus around a particular trade initiative is not what it was even during the Uruguay Round. More than a few Americans probably would oppose the SPS agreement, if they were aware of it, in part because these rules seem to limit the ability of the United States to exclude imports that are undesirable from a health or an environmental standpoint. Even though the scientific consensus may find acceptable the types and the amounts of agricultural chemicals, additives and other inputs used in the food production chain, some members of the public may believe otherwise. Opponents may rightly feel that the task of keeping the product in question off store shelves is rendered more difficult because they must convince not only elected and regulatory officials in Washington, but faceless bureaucrats in Geneva as well.

To some extent, the SPS agreement shifts the political economy of trade policy in the United States. In the past, policymakers could assume that producers would push hard for greater market opportunities abroad and, at the same time, would resist competing imports. Voters were paying no attention, or so it was thought, even though their collective interest in cheaper and better imports outweighed that of producers in restricting such goods. Thus, whenever trade-liberalization pacts were concluded, U.S. policymakers stressed to anyone who would listen that increased exports would follow.

Not a few Americans now believe that modern U.S. agriculture produces unsafe foods because environmentally questionable practices are used and that it also threatens family farms at home and abroad. To enlarge the market for the products of agribusiness through higher exports only compounds the problem, according to this view, whose proponents not only discount the benefits of increased exports but also believe that they are one of the problems created by the WTO.

Whether such a view should be described as protectionist is a matter of semantics. Surely, it is something different than resistance to imports, the traditional definition. Just as certainly, opinions like this one complicate U.S. trade strategy, which routinely has taken the benefits of higher U.S. exports as a given.

More generally, the opposition to a new round of international trade talks is a by-product of the success of the WTO and other agreements that emerged from the Uruguay Round. GATT's ineffectiveness practically guaranteed that it would have few vocal critics. In fact, certain anti-trade activists thought that the Uruguay Round would not change the world trading regime much and, therefore, did not bother mobilizing. Now that they have been proved wrong, they are determined not to lose more ground through further negotiations that could yield even more far-reaching agreements.

On the Japanese side, the political calculus is easy, at least in terms of the SPS agreement: it has little support. Since the agreement's provisions typically do not affect manufactured goods, which constitute the overwhelming share of Japanese exports, they are not a means of increasing sales abroad. Consumers in Japan might be expected to welcome procedures that limit MAFF's protectionist role and allow in a wider variety of cheaper and tastier fruits, vegetables and other foods. However, shoppers are just as likely to want MAFF to stand guard against what they view as the unsavory new world of hormone-treated meat, genetically altered foods, pesticide-laced apples and other products of American agribusiness. Just because science endorses a certain process as safe does not mean that the Japanese consumer does.

MAFF and the Japanese public appear to be on the same wavelength in the case of genetically modified organisms. Both oppose the official U.S. stance, which is that little need exists for specific controls on bioengineered crops or food products made from them. In fact, Tokyo has suggested that the next WTO round take up the issue of GMOs, food safety and organic foods from a "broad perspective."7


Other Initiatives In The WTO

Both the United States and Japan have used the revamped WTO dispute-settlement process to address what they consider to be the other's abuses of international trade rules. An early instance involved shochu, a potent alcoholic drink consumed traditionally mainly in southern Japan. In an apparent effort to protect the country's numerous small-scale shochu producers, Tokyo assessed lower taxes on shochu than on other alcoholic beverages, whether made domestically or abroad. The effect was to favor shochu. In late 1997, after the United States, the EU and Canada had complained to the WTO, Tokyo agreed to realign tax rates (see JEI Report No. 1B, January 9, 1998).

Kodak and Fujifilm - Easily the most contentious bilateral case that has come before the WTO involved the matchup in Japan of the world's two largest producers of photographic products: Eastman Kodak Co. and Fuji Photo Film Co., Ltd. Although Kodak first petitioned the Clinton administration in May 1995, the WTO process did not begin until August 1996, when Washington requested a dispute-settlement panel after failing to reach a resolution in one-on-one talks with Tokyo. The trade arbiter handed Japan a big victory in its preliminary finding in December 1997 and in its final ruling a month later (see JEI Report No. 5B, February 6, 1998).

The importance of this case far exceeds the fact that two household names were at loggerheads over conditions of competition in Japan. Kodak's complaints about Fujifilm's marketing practices and the government's complicity in them took the WTO well beyond border issues and even outside specific WTO procedures for dealing with situations where domestic rules or the market environment affects trade. At the heart of Kodak's indictment as presented by Washington to the WTO was the claim that Fujifilm and Tokyo had rigged the Japanese market, primarily through the distribution system, so that Kodak could not compete effectively despite the lack of restrictive tariffs or other import obstacles or domestic rules or procedures specifically addressed in WTO agreements.

According to one view prevalent in Japan, Washington in effect took Tokyo to task for being too passive about domestic business practices. In other words, the United States tried to use the WTO to obtain changes that it had been unable to accomplish in bilateral negotiations.8 People who find merit in the Kodak/U.S. view note the possibility that even private anticompetitive practices that are not in violation of trade laws, domestic or international, may restrict trade. Ironically, the implication is that quotas, antitrust enforcement actions or other measures are necessary in some instances to ensure that trade conforms with market principles.

As noted by Brookings Institution economist Edward Lincoln in his book, Troubled Times: U.S.-Japan Trade Relations in the 1990s, the American case brought to Geneva was built around three WTO articles: nullification, transparency and national treatment.9 Kodak and Washington sought to prove, for example, that Fujifilm and Tokyo had acted to nullify the tariff concessions that Japan had granted during previous multilateral trade negotiations by erecting an alternative means of restricting imports that was beyond the reach of international trade law.

The WTO nullification article makes such maneuvers actionable under certain circumstances. Kodak supporters have tended to argue that the WTO's failure to buy the U.S. multinational's argument gave Japan a green light to violate the spirit if not the letter of international trade pacts. Conversely, Fujifilm proponents might respond that with its decision, the WTO prevented an unprecedented expansion of outside authority into what essentially is a domestic arena.

On balance, Mr. Lincoln argues, the outcome of the Kodak proceeding suggests much more restricted use of WTO mechanisms vis-a-vis Japan than previously might have been imagined. He notes that the dispute-settlement panel upheld the relevancy to the case of the three cited WTO articles but that the panelists found unpersuasive the evidence submitted by the United States. Mr. Lincoln concludes that:

In so doing, the panel established a very high standard of proof, which may be difficult to meet in very many market access cases concerning Japan. Much of what occurs between government and business is verbal and opaque, leaving little or no paper trail of evidence. And the government-private boundary is quite indistinct. Therefore, the ability to use these aspects of the WTO in disputes with Japan remains in much doubt.10

In terms of the issues as framed in the streets of Seattle, Fujifilm's position clearly is much closer to that of the protesters than Kodak's. To some demonstrators, the WTO is an out-of-control monster that needs to be tamed or killed. Tokyo, too, feared an expansion of WTO authority if it lost the case. Had the largely American crowd in Seattle weighed in on the Kodak-Fujifilm dispute, logical consistency would require them to take a position contrary to that of the U.S. government and in support of Japan.

Japanese Initiatives - While in the GATT era, Tokyo never took full advantage of the international dispute-resolution mechanisms then in place, the government has asked the WTO to referee several trade disagreements with the United States and some other Japanese trading partners. For example, when, in the midst of the extremely high-profile spring 1995 transpacific dispute over market access opportunities in Japan for foreign-made vehicles and parts, Washington threatened to slap punitive tariffs on Japanese luxury cars and to go to the WTO, Tokyo beat it to the punch with a filing of its own (see JEI Report No. 19B, May 19, 1995). Although Japan's complaint was withdrawn after the two sides reached a negotiated settlement (see JEI Report No. 24B, June 30, 1995), many analysts felt that Tokyo would have prevailed. In fact, in the opinion of some experts, the terms of the automotive trade pact reflected America's vulnerability to a WTO case. Furthermore, in the five years since, the Clinton administration has not resorted to the tactic of threatening market-excluding tariffs in a trade dispute with Japan.

Twice, Tokyo also has contested in the WTO U.S. procedures for handling dumping complaints. International trade rules permit measures against imports sold at unfairly low prices, even though such actions restrict trade, but they lay out processes that the nation trying to end dumping must follow. First, Japan joined the EU in successfully challenging in late March 2000 the little-used Antidumping Act of 1916 after a U.S. steel company used it to sue several importers of Japanese steel. At almost the same time, the WTO approved the formation of a panel at Tokyo's request to rule whether the Department of Commerce and the International Trade Commission had complied with U.S. obligations under the WTO in finding that Japanese steel mills had underpriced carbon hot-rolled steel products by as much as 67.14 percent and that these sales had injured domestic steelmakers (see JEI Report No. 7B, February 18, 2000).


The Road Ahead

A New Round? - The debacle in Seattle led to predictions that a new round of multilateral trade talks probably would have to await the next administration in Washington. With each passing day, that prospect appears more likely. Indeed, given the extremely low profile to date of trade issues in the campaigns of the mainstream candidates, initiating another round of negotiations may not be a priority for either a Gore or a Bush presidency.

Nonetheless, since national positions usually change at a glacial pace, the objectives of the United States and Japan for the next round, whenever it occurs, are clear. Washington will push mostly for further liberalization of trade in services and agriculture — the issues that make up the so-called built-in agenda because they were addressed only partly in the Uruguay Round. Labor standards and environmental issues may or may not be a priority, depending on who occupies the White House. Japan will discuss agriculture and services only reluctantly. Substantive talks in these areas are scheduled to start this year, but progress is likely to be extremely slow in the absence of any motivation on the part of those in a defensive position to cut a deal.

Japan insisted in Seattle that the U.S. antidumping regime be part of a new round. Ostensibly, it wants to give developing economies a stake in a positive outcome to the negotiations. Of course, some emerging nations impose dumping penalties of their own, making Tokyo's suggestion of a united front with the Third World on this issue misleading. At the end of June 1999, for example, India had in place 60 antidumping measures but was on the receiving end of only 28. Eighty-three antidumping orders were in effect against Japanese companies compared with 70 for American suppliers.11

In general, Tokyo would like to cripple U.S. antidumping procedures in order to end what it considers to be the harassment of Japanese firms, especially steel exporters. With a majority of the House of Representatives on record supporting the exclusion of Washington's antidumping system from the agenda for a new round, Japan's demand to have this subject addressed could scuttle the talks at the outset.

Competition Policy - One topic likely to be missing from the agenda for the next multilateral trade negotiations is competition policy. Tokyo claims to want this issue on the table, but what it really has in mind are proposals that would limit the ability of other nations to restrict competition by means of their antidumping laws.

For analogous reasons, Washington opposes making competition policy a focus of the expected talks.12 This stance, which contrasts with that of the EU, carries a high cost. Several transpacific controversies in recent years have revolved around American allegations that Japanese firms engage in anticompetitive behavior, with the result that U.S. companies are excluded from the market or their
role is circumscribed. Washington typically says that it wants to discuss this problem bilaterally. Tokyo usually refuses, maintaining that the United States should take the issue either to the WTO or to Japanese antitrust authorities. The White House and Kodak respectively tried these options; both failed.

The market access problems confronting U.S. suppliers of paper and flat glass are similar to those that Kodak said it endured.13 Japan refused to extend a 1992 paper market-opening agreement and a similar 1995 pact covering flat glass despite American producers' continued dissatisfaction with their sales opportunities in Japan (see JEI Report No. 15B, April 18, 1997, and No. 47B, December 17, 1999). Nor has either the U.S. government or American industry received any satisfaction when they complained directly to Japan's Fair Trade Commission.

Washington is not without recourse with respect to what it sees as the deficiencies of competition policy in Japan. Following up on an announcement made during the May 1999 summit between President Clinton and the late Prime Minister Keizo Obuchi (see JEI Report No. 25B, July 2, 1999), the United States and Japan signed an agreement this past October to cooperate on antitrust enforcement (see JEI Report No. 39B, October 15, 1999).

The developers of the accord, which is similar to U.S. arrangements with Canada and the EU, expect the two sides to work particularly closely on international antitrust matters. Perhaps the most significant provision of the agreement is the incorporation of what is known as positive comity, under which "each antitrust agency would give careful consideration to a request by the other to take antitrust enforcement action against illegal behavior occurring within its jurisdiction that injures the other party's interest." Japanese news reports speculated at the time that Washington would use the accord to compel Tokyo to crack down on allegedly anticompetitive practices in the flat glass market (see JEI Report No. 24B, June 25, 1999).

The new agreement has yet to be tested, however. Analysts agree that serious stonewalling by the JFTC could cripple the pact's effectiveness. In that case, the White House, if so disposed, might resort to extraterritorial enforcement under the so-called Footnote 159 authority of U.S. antitrust laws — an option rigorously opposed by Tokyo and the capitals of other industrial nations when it was resurrected by the Bush administration eight years ago (see JEI Report No. 15B, April 7, 1992). However, this provision has seen little use, either before its 1988 deactivation by the Reagan administration or since its 1992 reinstatement.

Like its predecessor, the Clinton administration repeatedly has pushed Tokyo to beef up antitrust enforcement — for example, by increasing funding and staffing for the JFTC. However, most experts on this side of the Pacific are unimpressed by the results that the Clinton trade team has achieved through such forums as the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy.

In sum, while no shortage of alternatives exist for trying to take Japanese firms to task for their anticompetitive behavior at home, none so far has had much impact. For that reason, Washington's lack of enthusiasm for putting competition policy on the agenda for a new trade round is a little surprising. If, as some analysts predict, the White House eventually relents and allows negotiations forcing a limited revision of the American antidumping regime, its price could be discussions leading toward an international agreement on competition policy. Such an outcome could be seen as increasing the likelihood that skewed conditions of competition in Japan's photographic film, paper, flat glass and other markets would be addressed.

Regional Trade Agreements - For years, Tokyo stood on the sidelines as the United States, European countries and some of Japan's Asian economic partners created trading blocs like the North American Free Trade Agreement, the EU and the Association of Southeast Asian Nations. The government basically said that Japan had cast its lot with multilateralism, as exemplified by GATT. In so doing, however, Tokyo appeared to be trying to head off tie-ups among Japanese trading partners that would leave the world's second-largest economy on the outside.

The government's difficulties with regional arrangements were evident at the November 1998 Asia Pacific Economic Cooperation forum in Kuala Lumpur, Malaysia. Tokyo's refusal to agree to cut tariffs on fish and wood products caused the derailment of the so-called Early Voluntary Sectoral Liberalization effort — a plan designed to reduce barriers to trade in nine "priority" areas and eventually in 15 sectors.14 With the failure of the EVSL initiative, APEC looked much less appealing as an alternative to the WTO.

Tokyo appears to be reexamining its position on regional trade arrangements. The rethinking is said to have picked up speed recently, partly as a result of the failure of WTO members to launch a new round of multilateral trade negotiations, but a Japanese news report ties the change to a specific meeting of officials in October 1998.15

Tokyo might see bilateral or regional trade agreements as a substitute means of keeping up the momentum for freer trade. In any event, Japan has taken some very tentative steps toward negotiating free-trade arrangements with Singapore, South Korea and Mexico (see JEI Report No. 15B, April 14, 2000). Moreover, at least a few Japanese business leaders have called for a similar pact with the United States.

Wider Use of the WTO - Washington, while disappointed with the outcome of the Kodak case and frustrated in its attempt to get a new trade-liberalization round off the ground, has continued efforts to expand the WTO's authority within the existing framework. By the end of July, for instance, the Clinton administration will decide whether to ask the Geneva organization to determine whether the unduly high fees that Nippon Telegraph and Telephone Corp.'s two regional operating units charge other carriers to access their networks are contrary to the terms of the 1998 WTO Basic Telecommunications Agreement (see JEI Report No. 19B, May 12, 2000). Although arguably a domestic matter, Washington believes that Tokyo's unwillingness to slash interconnect charges deeply and quickly could violate its obligations to guarantee cost-based tariffs and to regulate the local communications market impartially.


WTO And Bilateralism

Not a few analysts have noted that Tokyo has become far less interested in bilateral negotiations since the mid-1990s, if not before.16 The Kodak-Fujifilm case, for example, ended up before the WTO because Japan refused to address the issues raised in a transpacific forum. Similarly, direct discussions on flat glass, paper and insurance have gone nowhere in recent years.

A number of American observers have decried this tendency, noting, among other things, that bilateral negotiations often are about creating new rules, not merely adjudicating old ones, as WTO dispute-settlement panels do. As such, these talks sometimes resemble a multilateral trade-liberalization round but go much faster. In this view, reliance only on the WTO option forecloses a valuable alternative for updating the rules of international commerce, especially if a new MTN series is not a short-term likelihood.

Tokyo's embrace of regional trade agreements, however reluctant, renders somewhat inconsistent its refusal to work bilaterally with the United States on problems involving trade. On occasion, Japanese trade policymakers appear to base their opposition to transpacific deals more on political calculation than on deep-seated principle. For example, when asked this past spring about the prospects for a new automotive trade agreement to replace the 1995 accord that expires in December, Nobuo Tanaka, the senior Ministry of International Trade and Industry official at Japan's embassy in Washington, responded that there would be no need for one unless the United States was in a recession.17 Since the accord pertains to access to the Japanese market, not the American one, the only reason to predicate an extended agreement on the state of the U.S. economy would be a sense that political pressure on Japan would rise in the event of an American downturn.

One difficulty identified by Mr. Lincoln and others is that future WTO agreements could remove or weaken some levers of influence traditionally employed by Washington in market-opening negotiations with Japan. For example, prohibitive tariffs on imports from Japan, as threatened in the 1995 automotive talks, presumably would trigger a quick Japanese appeal to the WTO. The United States then could be left with the equally unpalatable choices of violating international trade rules by, for example, imposing the high duties anyway in the knowledge that a WTO dispute-resolution panel would throw them out, confining bilateral talks to areas not yet covered by the WTO framework or resorting to informal means to vent its frustration.

Over time, the bilateral option is likely to reemerge, if only because an American recession eventually will occur. Even then, new WTO mechanisms might reduce U.S. leverage. Such an outcome would force Washington to get more serious about ensuring a stronger WTO as well as give renewed attention to other multilateral negotiating forums. However, negotiations intended to broaden and deepen international trade rules will make the protracted Uruguay Round look like a cake walk. Few policymakers, regardless of nationality, will be able to overlook the new factors brought into play by the protesters in Seattle. In fact, the concerns that they raised could lead to what traditional advocates of free trade see as backsliding in the quest for a more global trading system.

To appease people in the United States and Europe worried about the national sovereignty implications of the WTO and the food safety issue, to name only two controversies, adjustments in these areas may have to be made in the next round of multilateral trade negotiations. In contrast, public opinion in Japan has counted for little in the formulation of that country's trade policy and does not now seem to be any more influential than in the past.

In trying to accommodate some of Japan's concerns about the U.S. antidumping regime, the United States may find that it has to include competition policy in a global agreement. On balance, however, the United States, the EU and possibly China will determine the agenda for any future international trade negotiations. Japan will play a remarkably small role in this effect considering that, even after a decade of stagnation, it still is the world's second-largest economy.

Hitomi Kano provided research assistance.

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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1aa The talks that were to be launched in Seattle were to be called the Seattle Round, the Clinton Round or the Millennium Round, depending on who was talking. At this juncture, the first suggestion is highly unlikely for obvious reasons, as is the second after the president's alleged role in sabotaging the discussions in Seattle. Wags have suggested that the third is a perfect description of how long it will take participants to reach agreement on new market-opening arrangements. Return to Text

2aa See Douglas Ostrom, "The Uruguay Round: What It Means For Japan And The World Economy," JEI Report No. 7A, February 18, 1994. Return to Text

3aa See Susan MacKnight, "Decision Time For Japan's Rice Program," JEI Report No. 2A, January 14, 1994. Return to Text

4aa For an example of such an opinion, see William H. Lash III and Daniel T. Griswold, WTO Report Card II: An Exercise or Surrender of U.S. Sovereignty (Trade Briefing Paper No. 9) (Washington, D.C.: Cato Institute, May 4, 2000). Available at pubs/briefs/tpb-009es.html. Return to Text

5aa See Susan MacKnight, "Big Could Be Bigger: U.S. Farm And Food Sales To Japan," JEI Report No. 28A, July 26, 1996. Return to Text

6aa Paul Shukovsky, "Ruling on Japan boosts state apple growers," Seattle Post-Intelligencer, February 23, 1999. Available at gttl/articles/ruling~1.htm. Return to Text

7aa See Jon Choy, "Gene-Modified Foods Giving Japanese Industry And Government Indigestion," JEI Report No. 5A, February 4, 2000, especially pp. 5 and Appendix pp. 1-2. Return to Text

8aa Kazunori Ishiguro, "The WTO New Round and Japan's Role," Japan Review of International Affairs, XIII, No. 4 (Winter 1999), pp. 232 and 235. See also Douglas Ostrom, "U.S.-Japan Trade Relations: Bilateral Versus Multilateral Options," JEI Report No. 43A, November 14, 1997, especially p. 5. Return to Text

9aa Edward J. Lincoln, Troubled Times: U.S.-Japan Trade Relations in the 1990s (Washington, D.C.: The Brookings Institution, 1999), pp. 227-233. Return to Text

10aa Ibid., p. 233. Return to Text

11aa Ministry of International Trade and Industry, White Paper on International Trade 2000 (Executive Summary). Available at Return to Text

12aa Such an idea, however, is not without its American advocates. See, for example, Peter Morici, Antitrust in the Global Trading System: Reconciling U.S., Japanese and EU Approaches (Washington, D.C.: Economic Strategy Institute, 2000). Return to Text

13aa Hearing before the Subcommittee on Antitrust, Business Rights, and Competition of the Committee on the Judiciary, United States Senate, 106th Congress, First Session, Issues Relating to International Antitrust Cooperation and Enforcement, Including Positive Comity Agreements, The Flat Glass Industry, and Problems With The Japanese Market, May 4, 1999. See also Susan MacKnight, "Ties That Exclude: Manufacturer-Distributor Relationships In Japan," JEI Report No. 29A, August 4, 1995. Return to Text

14aa Marc Castellano, "What Happened To APEC? A Decade Of Taking Two Steps Forward, One Back," JEI Report No. 18A, May 7, 1999, especially pp. 4-5. Return to Text

15aa Yasumasa Shimizu, "Bilateral talks signal shift in trade policy," The Nikkei Weekly, January 24, 2000, p. 4. Return to Text

16aa See Ostrom (1997), op.cit. Return to Text

17aa Nobuo Tanaka, "A New Japanese Economy?" Presentation to the New America Foundation, Washington, D.C., April 26, 2000. Return to Text

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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