No. 8 — March 1, 1996


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Chronology of U.S.-Japan Relations and Japanese Economic Developments in 1995



Negotiators for this country and Japan put in long hours looking for a different ending to the retaliation/counterretaliation script that transpacific trade watcher wrote after the mid-April automotive talks failed to produce a breakthrough. Meeting in Vancouver, British Columbia or the nearby resort of Whistler, the site of this year's first quadrilateral trade ministers' get-together, expert- and subcabinet-level representatives of the two governments search for the makings of a consensus on how to expand sales of foreign vehicles in Japan and a plan for deregulating the Japanese replacement parts market. According to the Japanese participants, an agreement is within reach on these two issues. Their American counterparts do not put the same optimistic spin on the talks, but they, too, agree that the main sticking point involves Japanese vehicle makers' post-FY 1994 plans for buying production parts from offshore suppliers.


The Nikkei average close above 17,000 for the first time in nearly a month, climbing 1.6 percent to finish at 17,088.66.


President Clinton tells the Detroit Free Press that "the United States is committed to taking strong action" if no automotive deal is reached.


For the first time USTR Kantor and MITI Minister Hashimoto try their hand at breaking the stalemate in the automotive negotiations. In a six-hour session May 3 and lengthier final discussions two days later they tackle the primary obstacle to agreement: Washington's demand for upward revisions in the OE parts sourcing targets Japanese companies announced in March 1994 and leading manufacturers' refusal to budge. The top U.S. trade official says at a press briefing in Whistler, British Columbia after the one-on-one discussions collapse that the Clinton administration is willing to make a joint statement with the Murayama government that "would make clear that any voluntary plans would not be treated as commitments but as business forecasts" — a reference to the industry's fear that the White House again would transform what are supposed to be projections into numerical targets. This offer does not break the impasse because, as Mr. Hashimoto notes in a separate news conference, the substance of what Washington wants on the parts purchasing issue has not changed. That includes Tokyo endorsing industry's plans.


The president's top economic advisers unanimously agree on a course of action to recommend to Mr. Clinton to force Japan to bend on an automotive trade agreement. The results of the previously scheduled morning meeting of cabinet-level National Economic Council members are not disclosed, but analysts assume the group endorsed punitive tariffs on made-in-Japan automotive products, most likely luxury cars.


Mr. Kantor briefs Mr. Clinton on the NEC's proposed strategy for upping the pressure on Tokyo to compromise on all three issues involved in the automotive negotiations. Winning the president's support reportedly comes easily.


Prime Minister Murayama's cabinet reaffirms that Tokyo will file a complaint with the World Trade Organization if Washington releases a list of proposed sanctions targets. The government's chief spokesman subsequently tells reporters that Japan is willing to resume the automotive negotiations if the United States drops its requirement for improved production parts purchasing plans.


The Japanese cabinet approves the outlines of a ¥2.7 trillion-plus ($27.3 billion) supplementary budget for FY 1995. Finance Minister Takemura says that most of the extra spending, which will be financed entirely through borrowing, represents new outlays rather than reprogrammed expenditures. Slightly over half of the money is earmarked for earthquake reconstruction, with relatively limited amounts tied directly or indirectly to helping companies cope with the strong yen or reining in Japan's massive trade surplus.

In a surprise announcement Mr. Kantor tells a packed White House press conference that Washington has alerted the World Trade Organization that the United States expects to file within 45 days a complaint charging that Japanese government policies and practices affecting the automotive market are at odds with the spirit, if not the letter, of world trade rules — or, in legal terms, that these actions have "nullified and impaired" benefits accruing to the United States and other member countries under the WTO. The pending challenge, the top American trade negotiator says, is in addition to the administration's plan to go the sanctions route, if necessary, to gain an acceptable automotive pact from Japan. Clearing the way for such a move, he announces that USTR has determined under Section 301 that specific Japanese policies and practices affecting the aftermarket for automotive parts and accessories are unreasonable and discriminatory because they severely restrict sales opportunities for American suppliers. Within a few days, Mr. Kantor adds, the government will publish a list of possible retaliation targets in connection with the Section 301 finding.


Trade policymakers in Tokyo profess to be unmoved by the highest profile demonstration to date of Washington's resolve to win, one way or the other, a better Japanese market environment for American and other foreign manufacturers of vehicles and parts. Threats of retaliation and a WTO case will not be any more successful than negotiations in persuading Japan to accept the "managed trade" solutions that the United States is advocating, indicates Japan's chief automotive negotiator, Mr. Sakamoto.

Worries over the impact of the sanctions Washington has threatened against Japan send the Nikkei average down 2.2 percent to a close of 16,461.73 after a small drop the day before.

Although concerned about the economic impact of the strong yen down the road, EPA does not change its conclusion in a new monthly report on the economy that a slow recovery is underway.


All of the automotive retaliation talk perversely helps the dollar regain more of the ground it lost in April, although other developments provide the major support. In Tokyo trading the yen finishes at ¥86.35.


Prime Minister Murayama's cabinet endorses and sends to the Diet the ¥2.7 trillion ($27.3 billion) supplemental budget.


Mr. Kantor announces that the Clinton administration is ready to slap 100 percent penalty tariffs on made-in-Japan luxury cars imported into the United States in retaliation for the barriers Japan maintains on access to the aftermarket for parts and accessories. While that target is the expected one, the U.S. trade official catches everyone off guard by saying that sanctions probably would cover $5.9 billion in trade — the 1994 import value of the 13 luxury car models on the hit list; trade and industry watchers had been led to believe by White House insiders that Washington would retaliate against $1 billion-plus of imports. Adding to the pressure on Japanese government policymakers and industry executives, Mr. Kantor discloses that sanctions, if imposed, would be retroactive to May 20 rather than effective sometime after June 28, the administration's deadline for a retaliation determination.


Tokyo, as promised, challenges Washington's Section 301 finding on blocked access to the replacement parts market and its retaliation announcement in a three-charge WTO complaint. It also seeks consultations with the United States on an "urgent basis," a request that requires the start of talks within 10 days. Senior Japanese officials state separately that the government will not use the WTO forum to reopen negotiations with the Clinton administration.


In a move that surprises trade watchers and, by their own account, Clinton administration economic policymakers Eastman Kodak Co. seeks Washington's help via the Section 301 process in ending what the world photographic industry leader claims are decades of anticompetitive business practices in the Japanese market for consumer photographic film and paper. At the heart of the complaint is the charge that exclusionary activities generally traceable to Fuji Photo Film Co., Ltd. block Kodak's access to the local distribution system. Kodak further argues that the Japanese government has condoned or at least ignored these efforts to prevent key wholesalers and retailers from handling U.S.-made products. The big multinational says that it is not seeking a fixed or guaranteed level of sales in Japan. Neither is it interested in retaliation against Fuji Photo Film or other Japanese competitors. All the company wants are government-to-government talks resulting in the elimination of the market access barriers cited in its complaint. USTR has until July 2 to decide whether to accept Kodak's complaint and launch a yearlong investigation.


The initial supplementary budget for FY 1995 clears the Diet's upper house after being approved the day before by the House of Representatives.

MITI takes up the problem of Japanese firms losing international competitiveness in its 1995 white paper on international trade. Dictating this focus is the spreading fear in Japan that manufacturers unable to compete on a cost basis with foreign producers because of the latest run-up in the yen's value will move production to low-wage countries, leaving a "hollowed-out" corporation at home. To forestall this outcome the report's drafters say that barriers to competition must be removed or at least lowered. They cite as possible solutions more foreign investment in Japan and deregulation.


Participants in the Organization for Economic Cooperation and Development's annual ministerial-level meeting snub Japan's attempt to include in the closing economic statement a denunciation of unilateral trade measures as violations of international rules — part of a campaign by Tokyo to rally support among other OECD members for its position that the sanctions threatened by the United States in the automotive fight are WTO-inconsistent.


Japan remained the world's largest creditor nation in 1994 for the fourth straight year, MOF reports. With the country continuing to run a huge current account surplus, net overseas assets climbed 12.8 percent from yearend 1993.


The dollar, which had been trading in the ¥86 to ¥87 range for the previous two weeks, closes in Tokyo at ¥84.20 on worries that the Fed might ease credit conditions to counter a seeming slowdown in the U.S. economy.

Midlevel negotiators for the United States and Japan report that they basically have wrapped up discussions on three of the six areas to be covered by an agreement to encourage foreign direct investment in Japan. The virtually settled subjects are government facilitation, deregulation and policies to increase the availability of commercial real estate and facilitate the recruitment of workers by foreign firms. Still under discussion are direct government promotion, tax incentives and support for mergers and acquisitions.

Washington turns down Tokyo's request for consultations May 29 on its WTO complaint. Mr. Kantor suggests instead in a letter to Mr. Hashimoto that the two governments meet June 20 and 21 in Washington. That date ostensibly is proposed to ensure that the automotive fight does not deflect attention from the important issues scheduled to be taken up at the June 15-17 summit of the leaders of the Group of Seven nations in Halifax, Nova Scotia. In reality the White House sees a chance to increase the pressure on Japan by delaying talks until close to the June 28 deadline for a retaliation determination.


Mr. Hashimoto fires back a letter to Mr. Kantor saying that consultations must start no later than June 15 and be held in Geneva, WTO's headquarters. He pointedly reminds his counterpart that WTO rules for nonemergency cases — which Japan's complaint has become by default — require Washington to meet with Tokyo within 30 days of its request for discussions.

Unemployment in Japan hit an all-time monthly high of 3.2 percent in April, the Management and Coordination reports. It attributes the 0.2 percentage point rise to the effects of the Great Hanshin Earthquake and the strong yen.


The Fed makes a preemptive strike in foreign exchange markets to forestall another bout of pressure on the dollar. It is joined by 10 European central banks and the Bank of Japan in a move that Treasury Secretary Rubin describes as in line with "the exchange rate objectives in the April 25 communique of the G-7" finance ministers and central bankers. The dollar ends in Tokyo at ¥83.20, extremely close to its finish the two previous days.

Backing up its Section 301 petition, Kodak releases a nearly 300-page study — Privatizing Protection: Japanese Market Barriers in Consumer Photographic Film and Consumer Photographic Paper — that spokespeople say details decades of exclusionary business tactics by archrival Fuji Photo Film in the Japanese marketplace.

An unidentified Clinton administration official discloses that Washington soon will propose sanctions on Japanese cargo flights because of Tokyo's continued refusal to allow Federal Express Corp. and other American carriers to start service on additional routes beyond Japan. U.S. aviation negotiators argue that the 1952 agreement governing transpacific air transport gives FedEx and two other designated American carriers automatic rights to these routes. Ministry of Transport officials are holding out for a rewrite of a pact that they long have maintained is skewed in favor of U.S. airlines.


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