WT/DS44/R
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I. PROCEDURAL HISTORY
1.1 On13June1996, theUnited States requested consultations1withJapan pursuant toArticle 4.4
oftheDisputeSettlementUnderstanding(DSU)andArticleXXIII:1oftheGeneralAgreementonTariffs
andTrade 1994 (GATT) regarding certain laws, regulations andrequirements ofJapan affecting the
distribution, offering forsaleandinternal saleofimported consumer photographic filmandpaper.2
TheUnited States considered thattheJapanese measures specified initsconsultation request violated
theobligations ofJapan under GATT, including Article IIIandArticle X,andthatthose measures
nullified orimpaired benefits accruing totheUnited States directly orindirectly under GATT, within
themeaning ofArticle XXIII:1(a) and(b).TheUnited States further stated thatitreserved theright
toraise additional factual claims andlegal matters during thecourse oftheconsultations. The
consultations were heldon11July1996, butfailed toresolve thedispute.
1.2 On20September 1996, theUnited States requested theestablishment ofaPanel pursuant to
Articles 4and6oftheDSU.3Initsrequest, theUnited States alleged thatJapan hasimplemented
andmaintains certain laws, regulations, requirements andmeasures (hereinafter collectively "measures"
or"'countermeasures '")4affecting thedistribution, offering forsale,andinternal saleofimported
consumer photographic filmandpaper. TheUSconsidered thatsuchmeasures nullify orimpair benefits
accruing toit,within themeaning ofArticle XXIII:1(a), asaresult ofthefailure ofJapan tocarry
outitsobligations under Articles IIIandXofGATT. More specifically, theUnited States claimed
thattheJapanese Government measures:
a. were implemented andmaintained soastoafford protection todomestic production
ofconsumer photographic filmandpaper within themeaning ofArticle III:1ofGATT;
b. conflict withArticle III:4ofGATT byaffecting theconditions ofcompetition forthe
distribution, offering forsale,andinternal saleofconsumer photographic filmand
paper inamanner thataccords lessfavourable treatment toimported filmandpaper
thantocomparable products ofnational origin; and
c. conflict withArticles X:1andX:3ofGATT because themeasures lacktransparency
inthattheywere notpromptly published andwere notadministered inauniform,
impartial andreasonable manner.
Inaddition, theUnited States claimed thattheapplication ofthesemeasures byJapan nullifies orimpairs,
within themeaning ofArticle XXIII:1(b) ofGATT, thetariff concessions thatJapan made onblack
andwhite andcolour consumer photographic filmandpaper intheKennedy Round, Tokyo Round,
andUruguay Round multilateral tariff negotiations. TheUSclaims arediscussed inmore detail in
PartIIIbelow.
1Therequest wascirculated asWT/DS44/1 on21June 1996.
2Theterm"consumer photographic film" asusedbytheUnited States includes bothcolour andblack andwhite film
designed andusedforcapturing personal images byconsumers through stillphotography using silver halide technology.
Itincludes bothnegative andreversal (slide) film, andincludes filmincorporated inso-called "single-use cameras" which
arereturned along withthefilmtothephotoprocessing facility. Itexcludes various specialized films usedbyprofessional
photographers forresale ("professional" film)andvarious other specialty films (x-ray film,microfilm). Theterm"consumer
photographic paper" asusedbytheUnited States refers tophotosensitive paper usedtomake stillcolour andblack andwhite
photographic prints from consumer photographic filmfortheimages andapplications typically demanded byconsumers.
3Therequest wascirculated asWT/DS44/2 on23September 1996.
4Theparties disagree onthetranslation ontheJapanese word taisaku .TheUnited States uses"countermeasure", whereas
inJapan 'sview, "measure" or"policy inresponse to"aremore adequate. SeeAnnex onTranslation Problems, translation
issue 1.WT/DS44/R
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1.3 Atitsmeeting on16October 1996,5theDispute Settlement Body (DSB) established aPanel
inaccordance withArticle 6oftheDSU. However, since Japan expressed itsconcerns about the
procedural problems oftheUSpanel request, theDSBagreed thattheterms ofreference weretobe
drawn upbytheparties tothedispute within 20daysinaccordance withArticle 7.1oftheDSU.
Theparties tothedispute failed toagree ontheterms ofreference and,asaresult, thestandard terms
ofreference assetoutinArticle 7.1oftheDSU were applied:
"Toexamine, inthelightoftherelevant provisions ofthecovered agreements cited
bytheUnited States indocument WT/DS44/2, thematter referred totheDSBbythe
United States inthatdocument andtomake suchfindings aswillassist theDSBin
makingtherecommendationsoringivingtherulingsprovidedforinthoseagreements".6
1.4 TheEuropean Communities andMexico reserved theirrights asthirdparties tothedispute.
1.5 On12December 1996 theUnited States, pursuant toArticle 8.7oftheDSU7,requested the
Director-General todetermine thecomposition ofthePanel.
1.6 On17December 1996, theDirector-General composed thePanel asfollows:
Chairman: Mr.William Rossier
Members: Mr.Adrian Macey
Mr.Victor LuizdoPrado
1.7 ThePanel heldtwosubstantive meetings withtheparties tothedispute. Thefirstwasheld
on17and18April 1997, andthesecond on2and3June1997. ThePanel hadonemeeting with
thethirdparties tothedispute, on18April 1997.
1.8 Inviewofthefactthatthedispute involved theconsideration ofalargevolume ofdocuments,
which werepredominantly intheJapanese language, itwasessential thatthesedocuments betranslated
intotheworking language ofthePanel, which wasEnglish. Itwasessential thatsuchtranslations be
correct, andthatintheevent ofanydisagreement between theparties astothecorrect translation,
amechanism beestablished toresolve suchtranslation problems.
1.9 Inthisregard, thePanel, inconsultations withtheparties, drewupProcedures fortheResolution
ofPossible Translation Issues. These provided asfollows -
1. Theparty firstrelying onaJapanese-language document inawritten submission or
oralpresentation shallprovide copies ofthefullJapanese-language document andtherelevant
portions inEnglish atthetimethattheparty firstmakes reference tothedocument inthePanel
proceedings.
2. Ifoneparty believes thatadditional portions ofapreviously submitted document are
relevant, itshallthensupply theadditional translation atthetimethatthatparty firstmakes
reference tothedocument inthePanel proceedings.
5WT/DSB/M/24.
6WT/DS44/3, dated 7December 1996.
7Article 8.7oftheDSU: "Ifthere isnoagreement onthepanelists within 20daysafterthedateoftheestablishment
ofapanel, attherequest ofeither party, theDirector-General, inconsultation withtheChairman oftheDSBandtheChairman
oftherelevant Council orCommittee, shall determine thecomposition ofthepanel byappointing thepanelists whom the
Director-General considers most appropriate inaccordance withanyrelevant special oradditional rules orprocedures of
thecovered agreement orcovered agreements which areatissue inthedispute, afterconsulting withtheparties tothedispute.
TheChairman oftheDSBshallinform theMembers ofthecomposition ofthepanel thusformed nolaterthan10daysafter
thedatetheChairman receives such arequest".WT/DS44/R
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3. Ifonepartydisagrees withtheotherparty'stranslation ofaJapanese-language document
orportion thereof, itshall prepare analternative version ofthecontested portion ofthe
translation. Thisshallbesubmitted tothePanel andtotheother party withsupporting written
argumentation asneeded. Theother party mayalsosubmit itsargumentation atthisstage.
4. Totheextent relevant fortheresolution ofthelegalissues involved inthiscase, the
Panel shall attempt toresolve anytranslation problem submitted toit,having recourse as
necessary toindependent experts appointed bythePanel, ortosuchother means asthePanel
deems appropriate tothecircumstances.
1.10 ThePanel appointed thefollowing translation experts:
Professor Zentaro Kitagawa, Kyoto Comparative LawCenter, Kyoto, Japan; and
Professor Michael Young, Center forJapanese Legal Studies, Columbia University School
ofLaw, NewYork, USA.
1.11 Thetranslation problems raised bytheparties which weresubmitted totheexperts, andthe
responses bybothexperts areattached tothisreport inan"Annex onTranslation Problems".
1.12 ThePanel issued thedescriptive parttotheparties on22September 1997. Theinterim report
wasissued on5December 1997. Pursuant toArticle 15.2oftheDSU, bothparties submitted written
requests forthePanel toreview precise aspects oftheinterim report on19December 1997, butdid
notaskforafurther meeting todiscuss theissues identified intheirrequests. ThePanel issued the
finalreport totheparties on30January 1998.WT/DS44/R
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II. SUMMARY OFFACTUAL ASPECTS
A. THE MARKET FOR PHOTOGRAPHIC FILM AND PAPER INJAPAN
2.1 Thisdispute concerns thedistribution ofimported consumer photographic filmandpaper in
Japan. Throughout thisreport, theterms "photographic filmandpaper" and"photographic materials"
shallbeunderstood tomean consumer photographic filmandpaper orconsumer photographic materials.
2.2 Thehistory oftheJapanese tariff bindings andapplied ratesforphotographic filmandpaper
inJapan areasfollows:
ROUND FILM PAPER
B&W Colour B&W Colour
Pre-Kennedy (1964) 30%* 40%* 25%* 40%*
Kennedy Round (1967) 15.0% 40%* 12.5% 40%*
Tokyo Round (1979) 7.2% 4.0% 6.6% 4.0%
Uruguay Round (1994) Free Free Free Free
(*=Applied, notbound)
Until1970-72, black andwhite filmandpaper werethepredominant products usedinJapan. Thereafter,
thedominant products werecolour filmandpaper. Today, colour filmandpaper account for97percent
ofJapan'stotalmarket forconsumer photographic materials, withblack andwhite filmandpaper
accounting foronly3percent.
2.3 Japan'sphotographic materials market issupplied byfourmanufacturers, twodomestic and
twoforeign.8Thetwodomestic manufacturers areFujiPhoto Film, Ltd.(Fuji), andKonica Corporation
(Konica). Thetwoforeign manufacturers, Eastman Kodak Company oftheUnited States (Kodak)
andAgfa-Gevaert Aktiengesellschaft ofGermany (Agfa).
2.4 Japan notes thatsince 1965 theshare ofimports intheJapanese market forcolour filmhas
ranged from9percent toapeakof20.0percent in1981. According totheUnited States andJapan ,
theimport share oftheJapanese market forphotographic filmwasaround 15percent by1995 and
thatofthis,Kodak 'sshare isaround 10percent andAgfa'saround 5percent ofthemarket. Japan
further submits thatforblack andwhite filmtheshare ofimports hasranged from about 2percent
in1965peaking ataround 41.4percent in1985andsettling ataround 25percent by1995. According
toJapan, Kodak 'sshare oftheblack andwhite market hasincreased from 3.6percent in1967 toa
peakof17.6percent in1983.
2.5 TheUnited States submits thatforeign filmmanufacturers distribute alloftheirfilmthrough
wholly-owned localsalessubsidiaries. Two-thirds ofKodak filmis,inturn, soldtoretailers, 9per
centissoldtoso-called secondary photospecialty wholesalers, withtheremaining soldthrough Kodak-
affiliated photofinishing laboratories. Agfa'slocalsubsidiary sells90percentofitsfilmtoretailers
andtheresttosecondary wholesalers. Fujisellsallofitsfilmtoprimary wholesalers, whothenresell
through regional secondary wholesalers and8percentthrough laboratories, while theremainder is
solddirect toretail. Konica sellsthrough salessubsidiaries thatwereonceindependent photospecialty
wholesalers.
8Polaroid, which specializes ininstant-print film, alsosellsphotographic materials inJapan. However, theUnited States
isnotclaiming nullification andimpairment orviolation withregard toinstant-print film. Two domestic manufacturers,
Oriental Photo Industrial Co.,Ltd.andMitsubishi Paper Mills, Ltd., produce paper only. Allfourdomestic photographic
manufacturers distribute paper tophoto finishing laboratories.WT/DS44/R
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2.6 According totheUnited States andJapan ,photographic filmissoldinJapan by280,000
retailers. These retailers canbedivided intothree groups:
(a) Traditional photospecialty stores, whose primary lineofbusiness isthesaleoffilm,
cameras andaccessories. There aresome 30,000 suchstores, selling roughly halfofthefilmsold
intheJapanese market.
(b) General merchandise stores (including supermarkets anddiscount, department, drug
andconvenience stores). There aresome 70,000 suchstores, selling roughly one-third ofthefilm
sold.
(c) Other retail outlets (including kiosks, tourist resorts, parks andother small outlets).
There aresome 180,000 such outlets, selling theremainder ofthefilmnotsoldbytraditional
photospecialty andgeneral merchandise stores.
B. JAPANESE ENTITIES AND MEASURES RELATED TOTHE USCLAIMS
2.7 Assummarized inSections IIIandIV,theclaims raised bytheUnited States concern two
principal government agencies, several councils andbusiness associations, andnumerous specific
measures. The"countermeasures" aredivided bytheUnited States intothree broad categories:
(1)distribution "countermeasures", which allegedly encouraged andfacilitated thecreation ofmarket
structures forfilmandpaper inwhich imports areexcluded from traditional distribution channels
(collectively referred tobytheUnited States as"distribution countermeasures"); (2)theLarge Stores
Law, which allegedly restricts thegrowth ofanalternative distribution channel forfilm; and(3)
restrictions onpremiums andmisleading representations under thePremiums Law, which allegedly
disadvantage imports byrestricting salespromotions (collectively referred tobytheUnited States as
"promotions countermeasures"). TheUnited States refers tothethree setsofmeasures collectively
as"liberalization countermeasures."9
2.8 Thissection contains descriptions ofthetwoprincipal Japanese government agencies andother
entities (i.e., several councils andbusiness associations) whose activities havebeenchallenged bythe
United States. Theprovisions ofspecific measures challenged bytheUnited States aredescribed in
relevant partsunder therelevant entity, except forthe1967Cabinet Decision, which issetoutseparately
atthebeginning. Theprovisions ofthese measures aresetoutheresoastoprovide asingle reference
point containing thebackground andtextofthese measures forthearguments oftheparties andthe
findings ofthePanel. Theinclusion ofameasure orselected textofameasure inthissection does
notaddress whether itisa"measure" asthattermisusedinatechnical sense inanyparticular GATT
provision.
1. 1967 CABINET DECISION
2.9 TheUnitedStatesfocusesattentionontheCabinetDecisionConcerningLiberalizationofInward
Direct Investment of6June1967 ("1967 Cabinet Decision").10Thiswasadecision oftheCabinet
oftheGovernment ofJapan regarding liberalization ofdirect investment andthe"(counter)measures"
9AccordingtotheUnitedStates,the"distributioncountermeasures",LargeStoresLawandrelatedmeasures,and"promotion
countermeasures" incombination nullify orimpair benefits within themeaning ofArticle XXIII:1(b). The"distribution
countermeasures", asaset,alsoviolate Article III:4andnullify orimpair benefits within themeaning ofArticle XXIII:1(b).
TheLarge Stores Lawandrelated measures alsonullify orimpair benefits within themeaning ofArticle XXIII:1(b), inthe
context oftherestrictive distribution structure inJapan. And, thepromotions countermeasures, asaset,nullify orimpair
benefits within themeaning ofArticle XXIII:1(b), inthecontext oftherestrictive distribution structure inJapan. Thespecific
failures topublish laws, regulations, oradministrative rulings ofgeneral application discussed below eachconstitute aviolation
ofArticle X:1.
101967 Cabinet Decision, USEx.67-6.WT/DS44/R
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thatshould betaken inproceeding withliberalization. TheGovernment ofJapan hadrequested the
Foreign Investment Council ("FIC") toconduct anenquiry regarding inward direct investment. It
wasonthebasis ofthereport ofthisCouncil thattheGovernment ofJapan made itsDecision. In
thisdecision theJapanese Government expressed itssupport fortheReport oftheForeign Investment
Council Expert Committee of2June1967("1967 FICReport").11TheFICwasestablished pursuant
totheLawConcerning Foreign Investment, which provided itwould beestablished asanorganization
attached totheMinistry ofFinance withtheMinister ofFinance asitschairman.12The1967FICReport
was,inturn, based ontheReport oftheFICExpert Committee of17May1967 ("1967 FICExpert
Committee Report").13Regarding theregulation ofunfair trade practices, the1967 FICExpert
Committee Report alsostated whatfollows:
"(1) When foreign capital isbrought intoJapan, itispossible foraparent company
tousevastamounts ofcapital toengage indumping, offer premiums, andconduct
large-scale publicity andadvertising, etc.Inthefuture, asliberalization ofdirect
investment inthedomestic market progresses, suchriskmayconceivably bereinforced.
Therefore, insuchasituation, itisnecessary tofullystudy whether theseactions qualify
asunfair trade practices asdefined inArticle 2oftheAntimonopoly Lawandcanbe
regulated pursuant toprovisions under Article 19ofthesaidAntimonopoly Lawor
theLawAgainst Unjustifiable Premiums andMisleading Representations.
(2) Fortheapplication oftheAntimonopoly Law, while onemaynotspecifically
select foreign capital affiliated firms fordifferential treatment, foreign capital affiliated
firms nevertheless havethestrong capital andtechnological background oftheparent
company andareusually inaneconomically strong position. Consequently, itis
believed thattheywilloftenbecome theobject ofregulation oftheAntimonopoly Law.
Onthispoint, wemustbeabletoapply standards todealwithanydisorderly activities
byforeign capital because existing standards ofregulation ofunfair trade practices
arenotnecessarily clearandwemay, forexample, clarify them bymaking useofa
special designation orsome other method".14
(3) Fortheprovision oflarge-scale premiums, itisbelieved thatestablishing fair
competition codes pursuant tothe[Premiums Law] withassistance fromtheindustry
thatmight beaffected, would beaneffective ["countermeasure"]".15
The1967 Cabinet Decision provided thefollowing basic direction forthe"(counter)measures" tobe
taken incarrying outcapital liberalization:
"One. Basic Policy Concerning theLiberalization Inward Direct Investment
1.Basic Attitude Toward theLiberalization ofInward Direct Investment
Ourcountry hasbeenendeavouring todeepen itstieswiththeinternational
economic community through suchmeans astheliberalization offoreign trade, foreign
exchange andparticipation intheKennedy Round tariff cutnegotiations. Now we
arepreparedtomoveforwardalsowithregardtotheliberalizationofcapitalmovements.
11USEx.67-5A.
12Article 19oftheForeign Investment Law.
13USEx.67-5B.
14Ibid., p.3.
15Ibid.WT/DS44/R
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Under theseinternal andexternal circumstances, itistimetogather theenergy
andwisdom ofthe[Japanese] people inorder tofurther develop oureconomy andto
improve thestandard ofliving. Fortheliberalization ofcapital movements, andin
particular, theliberalization ofinward direct investment, which isanissue withthis
Council, ithasbeendetermined thatthiscountry should betaken todealwiththem
asindependent tasks, inorder todeepen cooperation withtheinternational economic
community andplanthelong-term development ofourowneconomy ...
Asforournationaleconomyasliberalizationprogresses,althoughforeigncapital
mayadvance intomany ofourindustries, itishoped thatourfirms willbeableto
compete fairly andeffectively withthemfairly andcooperate withthemonequal terms,
thereby promoting national economic interests. Thelargest future goalofthepeople,
business circles andgovernment mustbetheswift attainment ofsuchastage byour
national economy ...
Inorder tofacilitate suchactivities onthepartoftheprivate sector, andguide
andcomplement these efforts, thegovernment, too,mustmake unprecedented efforts
torevitalize science andtechnology andresearch anddevelopment, while paying close
attention totheimprovement ofindustrial system andthefinancial system soastocreate
anenvironment inwhich theeconomy cancopewithliberalization. Atthesametime,
thegovernment should taketheinitiative bysetting anexample ofgoodadministration
befitting theageofliberalization bymaking itsownfinance andadministration efficient
andmodernized andlowering thecostofadministration. Itishoped thatsuchefforts
willbuild thebasis onwhich ourenterprises cancompete against foreign capital on
equal terms. Themeasures forliberalization should bereviewed afteranappropriate
interval ofonetotwoyears toexpand thescope ofliberalization, taking into
consideration theresults ofefforts made bytheprivate sector andtheeffect of
government measures.
...
If,therefore, ourenterprises aretocompete against foreign capital onequal
terms, thefollowing would benecessary: companies mustimprove theirownquality
andpursue theorganization oftheindustrial system, intensively strengthen thecapacity
fortechnological development, organize thefinancial system inparallel withthe
organization oftheindustrial system, andlower oflong-term interest rates.
Ontheother hand, itwould benecessary torestrain foreign enterprises coming
intoJapan afterliberalization fromdisturbing order indomestic industries, byresorting
tothestrength oftheirsuperior power, andfrom advancing intothenon-liberalized
sectors byevading control.
Theestablishment ofthese"(counter)measures" forstrengthening thecapacity
ofourenterprises forinternational competition andforpreventing foreign enterprises
from disturbing order inourindustries andmarket would beabasic necessity ifthe
liberalization istobepromoted andifourpeople aretoenjoy itseconomic benefits.
...
Thebasicdirectionofthe"(counter)measures"thatthegovernmentshouldadopt
arethefollowing three points:
1) Prevent disorder thatmayarisefrom theadvancement offoreign capital;WT/DS44/R
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2) Create thefoundation toenable ourenterprises tocompete with foreign
enterprises onequal terms;
3) Actively strengthen thequality of[domestic] enterprises andreorganize the
industrial system sothattheycanfullycompete withforeign capital.16
...
Modernization lagsbehind mostinthedistribution sector. Here, thepower
ofresistance against theinroad offoreign capital isweak, andtheimpact offoreign
capital advancing intothissector willalsoposesignificant impact ontheproduction
sector.Itisnecessary,therefore,toimplementcountermeasuresinsupportoftheefforts
ofindustry withtheobjectives ofmodernizing thedistribution structure, fundamentally
strengthening theenterprises inthissector, andestablishing amass salessystem."17
2.10 Japan submits thatthe1967 Cabinet Decision wasformally repealed 26December 1980.18
TheUnited States contends thattherepeal affects onlytheportion oftheCabinet Decision relating
tocontrols oninternational investment inJapan. TheUnited States alleges thatthe1980 decision did
notrevoke thedistribution policies andliberalization "countermeasures" directed bythe1967Cabinet
Decision.
2. MITI AND RELATED ITEMS
2.11 TheUSsubmissions focus inparticular ontheactivities oftheJapanese Ministry ofInternational
Trade andIndustry (MITI). Among otherthings andofparticular concern inthisproceeding, according
totheUnited States, MITI established various groups inthe1960s and1970s toexamine issues related
todistribution ofgoods, bothgenerally andinrespect ofphotographic materials. Inaddition, MITI
isresponsible inpartfortheimplementation oftheLarge Scale Retail Store Law, oneoftheprincipal
measures challenged bytheUnited States.
(a) Industrial Structure Council Distribution Committee: Sixth andSeventh Interim Reports
2.12 TheUnited States notes thatin1964, MITI established theIndustrial Structure Council,
authorizing itto"investigate andexamine important issues concerning industrial structure" inresponse
toaninquiry bytheMITI Minister.19TheIndustrial Structure Council isanadvisory council, composed
ofacademics andindustry representatives. MITI plays animportant roleinstaffing20theCouncil and
thegeneral affairs oftheCouncil aremanaged byMITI, itsIndustrial Policy Bureau andIndustrial
16MITI History Vol.17,pp.379-388, (provisional translation) USEx.67-6, pp.3-4.
171967 Cabinet Decision, p.6,USEx.67-6. According totheUnited States ,onthesame daytheCabinet announced
itsdecision, theChief Cabinet Secretary issued aformal statement directing foreign firms tointer alia:"collaborate with
ourindustry 'sefforts tovoluntarily maintain order; cooperate withtheimprovement ofinternational balance ofpayments,
such asexport promotion; hireJapanese nationals asexecutives ...[and] cooperate withtheeconomic policies ofthe
government." Chief Cabinet Secretariat Talk, Regarding Implementation ofLiberalization Measures forInward Direct
Investment, 6June1967, reprinted inYoshida Fujio, Capital Liberalization andForeign Investment Law, 30October 1967,
p.160, USEx.67-16.
18Cabinet Decision of26December 1980 Concerning theApplication Policy ofInward Investments, Japan Ex.B-55.
19Article 102oftheCabinet Order No.390. TheIndustrial Structure Council Order provides thattheISCbe"composed
ofnomore than130members" tobe"appointed bytheMinister ofInternational Trade andIndustry." Industrial Structure
Council Order, Cabinet Order No.79,31March 1964, Japan Ex.B-3.
20Japan disagrees withtheUSallegation thattheDistribution Committee wasstaffed byMITI officials andcontends
thattheIndustrial Structure Council including theDistribution Committee consists ofpersons withlearning andexperience
appointed byMITI. Investigations, deliberations, anddecision-making areallcarried outbythemembers. According to
Japan, although MITI officials sometimes attended meetings asobservers, theytakenopartinthedecision-making process.WT/DS44/R
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Structure Division.21TheIndustrial Structure Division hasresponsibility for"matters pertaining to
theIndustrial Structure Council".22
2.13 TheUnited States notes thattheCouncil established theDistribution Committee tostudy and
report onmatters relating totheJapanese distribution system. TheDistribution Committee issued 19
interim reports between 1964 and1995. Bothparties refertoanumber ofthese interim reports in
theirsubmissions andtheUnited States liststwoofthem, theSixth Interim Report on"Distribution
Modernization Outlook andIssues (5August 1968)23andtheSeventh Interim Report on"Systemization
ofDistribution Activities" (22July1969)24,asamong thespecific measures thatitischallenging in
thisdispute. Assetoutinthedescription oftheparties 'arguments, theparties citedifferent parts
ofthereports tosupport theircontentions astothegeneral thrust ofthereports.
(i) The1968 Sixth Interim Report
2.14 TheSixth Interim Report dealtwithabroad spectrum ofissues withabearing ondistribution.
These issues were categorized intofourparts:
(i) thestrengthening andmodernizing ofpersons incharge ofdistribution functions;
(ii) theadjustment ofmarket conditions;
(iii) therationalization ofphysical distribution;
(iv) theadjustment oftheenvironment which isthecommon basis fortherealization of
these issues.
TheReport listed thegoals ofdistribution policy forthenextfiveyears as:
(i) organization andcooperative business formation;
(1) theformation ofvoluntary chains;
(2) theformation ofcombinations among stores intheretail industry group
department stores, group supermarkets, universal markets, etc.;
(3) theredevelopment orconstruction inshopping districts;
(4) theintegrationoffunctionsbasedonwholesaleindustrycollectivization(general
wholesale centres, wholesale trade complexes);
(ii) themodernization ofmanagement methods andfacilities;
(iii) securing thelabour force andeducation ofpersonnel;
(iv) therationalization oftrade practices andtrade system;
(v) reform ofphysical distribution technology;
(vi) therationalization ofconditions oflocation;
(vii) theformation ofadistribution information network andimprovement ofstatistics;
(viii) facilitating financial aspect ofdistribution.
According totheUnited States, theReport alsoaddressed thenegative impact liberalization could have
ondistribution inJapan, notwithstanding thatliberalization could rationalize andmodernize theJapanese
distribution system:
21Article 7oftheIndustrial Structure Council Order, USEx.64-1 andJapan Ex.B-3.
22TheUnited States provides inUSEx.52-2 thefollowing translation:
TheIndustrial Structure Division isincharge ofthefollowing administrative matters:
1. development of,aswellascomprehensive coordination inimplementing, thepolicies andplans relating tothe
industrial structure relating tobusiness under thesupervision oftheMITI;
2. general management ofadministrative matters pertaining tonewindustries under thesupervision oftheMITI; and
3. matters pertaining totheIndustrial Structure Council.
23USEx.68-8, andJapan Ex.B-7.
24USEx.69-4.WT/DS44/R
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1. There isariskthatgrowth sectors willfallunder themonopolistic control of
foreign capital, resulting fromthedifference incapital resources andthelike.
2. There isariskthattheprocess ofsalesexpansion byforeign capital affiliated
distribution enterprises willaggravate excessive competition andhinder the
smoothimplementationofdistributionmodernizationplans,andthe[established]
order oftrade willbedisrupted.
3. There isariskthatthemanufacturing sector willbedominated bycontrolling
thesalesroutes, bringing about theinternational subcontracting ofJapanese
industry.25
(ii) The1969 Seventh Interim Report
2.15 TheUnited States alsosubmits thattheSeventh Interim Report wasissued asa"first stepin
meeting thechallenges currently facing Japan'sdistribution sector". Although theReport notes that
theaimofsystemization26inthedistribution system wastoimprove functionality andproductivity,
itspecifically identified thethreat offoreign capital asareason toreform thedistribution sector:
"Today, amidst callsfortheactive promotion ofcapital liberalization inthedistribution
sector, wethinkthatefforts tosystemize distribution haveavitalimportance instrategic
significance. ...[T]he systems gap[between Japan andAmerica] isexpected tohave
adecisive effect ondistribution activities inparticular, theconcerted efforts ofthe
government andtheprivate sector must bedirected atsystemization from thepoint
ofviewofacapital liberalization countermeasure.
...
[I]tistruethatoneeffect ofsystemizing Japan'sdistribution system isthesimplification
ofentry [intoJapan'smarket] byforeign capital, [enterprises] which aremore adept
atsystemsmethodology.[But]tomakeinroads,weshouldinsteademphasizepreventing
theimmense impact thatwould befeltifforeign capital tooktheleadinsystemizing
Japan'sdistribution activities, andquickly develop asystem sufficiently capable of
countering therational systems introduced byforeign capital."27
IntheUSview, theReport acknowledged thatsystemization must beapproached bylooking atthe
distribution system asasingle whole andnotasacluster ofseparate andindividual distribution functions.
Itwasacknowledged thatwithrespect togoods, themost important factor isdistribution, andthat
systemization could onlyprogress around thecentralized processing ofphysical distribution control
atdistribution centres andstock points. TheCommittee identified threeapproaches tosystemization:
(i) thecommodity approach;
(ii) theinstitutional approach;
(iii) thefunctional approach.
TheCommittee proposed thefollowing policies forthegovernment toadopt:
25Sixth Interim Report, p.8,USEx.68-8.
26ItisJapan 'sview thatMITI distinguished rationalization andsystematic policies. TheUnited States doesnotfollow
thisdistinction andusesthesingle term "systemization" tocover bothconcepts.
27Industrial Structure Council Distribution Committee, Systemization ofDistribution Activities (Seventh Interim Report),
22July1969, p.4,USEx.69-4.WT/DS44/R
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(i) establishing aDistribution Systemization Council;28
(ii) presenting guide posts andpromoting standardization;
(iii) establishing asystem forproviding distribution-related information;
(iv) providing incentives intheareas offinancing, taxation, etc.
(b) 1969 Survey onTransaction Terms
2.16 In1968, theInstitute forDistribution Research, aprivate, butMITI-affiliated organization,
wascommissioned byMITI toconduct asurvey oftransaction terms inseveral industries. Itssurvey
ontransactions terms inthefilmindustry (1969 Survey)29wassubmitted bytheInstitute toMITI in
1969, and(re-)published byMITI in1971.30Thepurpose ofthisSurvey was"toresearch current
trade practices, isolate problems, andprepare basic materials todevelop andspread rational trade
practices."31TheSurvey identified foreign companies andchanges indistribution asproblems:
"Aswehavealready seen,thereisaviewandanimpression thattheindustry ofgeneral
usephotographic film, based onanoligopoly oftwodomestic manufacturers, is
superficially inastable andnormal stateinwhich contract formation anddocumentation
oftransactions areprogressing. Consider, however, onepostulate:
(1) Iftheoligopoly ofthetwodomestic manufacturers isbroken upby
aforeign company; and
(2) Ifanew[distribution] route emerges tocompete against theroute of
photographic material dealers, which isthecoreexisting route inthe
distribution market.
There maybeveryfewobservers whohaveasense ofcrisis regarding (1)and(2)as
realistic issues; however, theyshould nowbeconsidered asthemost concrete and
realistic problems.32
Based onthese perceived problems, theSurvey made thefollowing policy recommendation:
Given thissituation, itisnecessary toformulate measures before hand inorder to
minimize theanticipated disorder inthedistribution market. Thisiswhyitissignificant
torationalize andstandardize transaction terms andtocreate an[established] order
ofdistribution.33
28Seesection II.B.1.(d) (discussing theestablishment oftheDistribution Systemization Promotion Council, which produced
the1971 Basic PlanfortheSystemization ofIndustry).
29Institute ofDistribution Research, Fact-Finding Survey Report Pertaining toTransaction Terms: Actual Conditions
ofTransaction Practices intheWholesale Industry, March 1969, USEx.15.Thesurvey became thebasis forMITI’sJuly
1970"Guidelines fortheStandardization ofTransaction Terms forthePhotofilm Industry." Seep.3,USEx.70-4. According
totheUnited States, in1971, MITI republished anedited version ofthesurvey under itsownname. MITI Business Bureau,
Actual Conditions ofTransaction Terms intheWholesale Industry, 21August 1971, USEx.20.
30Theparties disagree onthepublication dateofthe1969 Survey. According totheUnited States ,the1969 Survey
waspublished in1969 andre-published byMITI in1971. Japan contends thatin1969, theInstitute forDistribution Research
submitted thesurvey toMITI andthatiswaspublished byMITI onlyin1971.
31USEx.20,p.7.
32USEx.15,p.62.
33Ibid., p.63.WT/DS44/R
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(c) 1970 Guidelines forRationalizing Terms ofTrade forPhotographic Film
2.17 In1970, MITI'sTransaction Terms Standardization Committee, published "Guidelines for
Rationalizing Terms ofTrade forPhotographic Film" (1970 Guidelines)34.TheCommittee wasset
upbyMITI tostudy thequestion ofstandardization oftransaction terms inindustry generally, and
inlightofcapital liberalization, more specifically.35
2.18 According totheUnited States, theintroduction ofthe1970Guidelines noted that,"[I]norder
toprevent disruption oftheestablished order oftrade byforeign businesses withpowerful capital
strength, thestandards forrational transaction terms must beclarified."36
2.19 Theguidelines were asfollows:
"I. Transaction terms concerning salescontracts
(1) Stocking method
Current situation .Themost commonly usedstocking method forboththe
wholesalers (i.e., resalers) andretailers ispurchasing.
(2) Discounts
Current situation .When welookatthecurrent situation ofthecashdiscount
system(thesystemofdiscountingtransactionpriceaccordingtothelengthoftheaccount
paymentperiod)mainlyamongthewholesalers,weseethatalargenumberofbusinesses
receive discounts forpurchasing, andoverhalfofthebusinesses usethissystem for
selling aswell. Furthermore, forthemostofthese, thecriteria fordiscounting appear
tobemade clear inadvance.
Concerning thevolume discount system (thesystem ofdiscounting the
transaction priceaccording tothevolume ofasingle order), themajority ofwholesalers
enjoy thissystem forpurchasing, butonlyafewuseitforsellers. Thevolume discount
hasgenerally come tobeusedlessasthesizeofthetransaction grows, because the
burden ontheseller isgreater.
Problems andDirection ofCorrective Measures .Boththecashdiscount and
volume discount systems arerelatively systematized, butthediscount amount isoften
paidatafixed datesuchasattheendofa[certain] termafterthecompletion ofthe
transaction, thispractice makes itdifficult todifferentiate from arebate. Itisbest
ifthecorresponding amount isdiscounted andsettled atthetimeofaccount settlement
since thenthediscount criteria ismade clearinadvance. Anegative trend isseenfor
volume discounts, butitisdesirable tomove inthedirection ofusing theminthephoto
filmindustry from theperspective ofreducing distribution costs.
(3) Rebates
Current situation .Forrebates (returning tothebuyer aportion oftheamount
paidbythebuyer) fromthewholesales suppliers, mostbusinesses receive rebates in
much thesame wayasdiscounts. There arethree ways toreceive rebates: directly
34USEx.70-4, andJapan B-24.
35Ibid.
36Ibid., p.2.Thispolicy objective wasreiterated inthe1971 Basic Plan. Seesection II.B.1.(d).WT/DS44/R
Page13
from themanufacturer, from themanufacturer through thetokuyakuten, andasthe
tokuyakuten 'sownrebate. Themaintypes ofrebates areafixed-rate rebate, settlement
rebate, andthegoalachievement rebate; cumulative rebates arerare.
Approximately30percentofthewholesalersproviderebatestotheirpurchasers,
which issubstantially lower thanthepercentage [ofwholesalers] whoreceive rebates.
Problems andtheDirection ofCorrective Measures .Ingeneral, therebate
[system] depends ontheseller'sdiscretion. Itiswidely used, therefore, asameans
ofcontrolling thedistribution process. When thisisexcessively done, however, this
practice could beanunfair trade practice under theAntimonopoly Law. Even when
itdoesnotgothatfar,itcanleadtosubstantial control ofadistribution channel, and
make itdifficult fortherecipient oftherebate tomake clear management plans.
Subsequently, thispractice maycause theproblem ofpreventing themerits [ofthe
rebate system] frombeing passed ontothefinalprice. Moreover, therebate system
hasrecently become socomplicated thatnegative aspects such asanincreased
administrative burden havearisen. Itistheprinciple ofthediscount system topass
ontheadvantages gained from large-volume transactions andtheliketoconsumers.
Although werecognize thatrebates haveasupplemental roleinother price policies,
thisshould bekepttoaminimum.
II. Transaction terms forthedelivery ofgoods
(1) Frequency ofdelivery ofgoods
Currentsituation.Thefrequencyofgoodsdeliverytopurchasersbywholesalers
ranges from daily andonceevery twoweeks ormore tonodelivery. Anoteworthy
point isthatasmany as30percent ofallbusinesses make deliveries every daytoall
oftheirpurchasers. Thisisthought tobeduetotheimportance ofdelivery asan
element ofthewholesale function andalsoduetothefactthatorders aretaken and
market information isgathered atthedelivery. Overhalfofthewholesalers expressed
negative opinions about setting regular delivery dates andcharging feesfordeliveries
made ontheother days.
Problems andDirection ofCorrective Measures .Asmentioned above, delivery
frequency ishighly regarded asoneimportant function ofwholesaling, anditsfrequency
isnotreally regarded asaproblem. Itisbelieved, however, thatthechanges inthe
economic environment surrounding thedistribution sector suchaslabour shortages
andtheworsening traffic situation willnotallow thiscustom tocontinue indefinitely.
Therefore, itisrecommended that,inprinciple, wholesalers make deliveries twice
aweek forthetimebeing, andimpose charges forspecial services.
(2) Arrangements forminimum orders perdelivery
Current Situation .Although wholesalers willmake deliveries evenevery day
ifthere'ssufficient quantity, theyarewilling tosetminimum delivery requirements.
Atpresent, however, almost nosucharrangements arebeing made. Approximately
half[ofthewholesalers]wanttoimplementminimumdeliveryrequirementarrangements
andbelieve ittobefeasible.
Problems andtheDirection ofCorrective Measures .Duetothenature ofthe
product, demand islessdiversified compared toother products. Itisnecessary toset
aminimum delivery requirement toreduce distribution costs.WT/DS44/R
Page14
(3) Returned goods
Currentsituation.Generally,therearenotmanyreturns.Inparticular,returned
goods fromwholesalers (tokuyakuten andresalers) arerare. Thenumber ofreturned
goods from retailers towholesalers isalsolow.
III. Transaction terms foraccount settlement
Currentsituation.Thecollectionmethodofwholesalersisgenerally"collection
onaspecific dateaftertheduedate", but"collection ondelivery" isalsorelatively
frequently used.
Collection onaspecific dateincludes bothcollection ofthefullamount and
collection ofthepartial amount; itisdetermined bythesizeoftheretailer anditscash
flow. Cash collection ismore frequent inmost cases compared withthecollection
ofnotes. Themost common sight ofanoteisbetween 61to70days.
Acommon payment method ofthewholesalers is"payment ofthefullamount
onaspecific dateaftertheduedate". Although cashpayment ismore commonly used
thannotes, thepercentage ofnotepayments made bythewholesalers ishigher than
thatofthecollections made from theretailers. Themost common sight [credit] of
anoteisapproximately 60days.
Problems andCorrective Measures .Inbothpayment andcollection mainly
bywholesalers, cashsettlement ispredominant andthesight[credit] notes areshorter
compared withthose ofother products. Thepractice ofpartial payment isparticularly
prevalent among retailers; leaving thebalance oncredit destabilized theterm-end book
closing. Consequently, itmakes theentire transaction uncertain, thus,inhibiting the-
promotion ofreasonable terms oftrade suchasadiscount system. Therefore, the
account should besettled infullwithcashandapromissory note. Also, while still
onlyfewinnumber, there arepromissory notes withunusually longsight. Forsuch
promissory notes, appropriate interest should becharged onthesame principle asthe
cashdiscount system.
IV. Dispatched employees
CurrentSituation.Dispatchedemployeesarerarelyseenatgeneralphotography
materials retailers. There aredispatched employees intheDPEdepartments oflarge
retailers; however, fewaresystematized practices andthedispatch ismade onlyin
special cases".
(d) 1971 Basic PlanoftheDistribution Systemization Promotion Council
2.20 TheUnited States notesthatinitsSeventh Interim Report, theDistribution Committee proposed
thecreation oftheDistribution Systemization Promotion Council inorder to"setthebasic direction
forsystemizing distribution activities". In1970, MITI established theCouncil andin1971, theCouncil
published the"Basic PlanfortheSystemization ofDistribution" (the"Basic Plan").37TheCouncil
described theBasic Planasrepresenting "theresult ofgovernment andtheprivate sector joining forces
toconsider thebasic direction andgoals forthesystemization ofdistribution inJapan, andthemeans
37USEx.71-10 andJapan Ex.B-18.WT/DS44/R
Page15
ofrealizing thesegoals, withtheyear1975setasthetentative target dateforcompletion."38TheCouncil
affirmed the"government andtheprivate sector willmake awholehearted effort torealize thisbasic
plan."39
2.21 According totheUnited States, MITI'sintroduction totheBasic Planstated thatamong the
various problems facing thetrade andindustrial policy inthe1970s, "themodernization ofJapanese
distribution isurgent fromthestandpoint ofachieving balanced development oftheJapanese economy,
aswellasfrom thestandpoint ofconsumer price "(counter)measures" andcapital liberalization
"(counter)measures".40Theintroduction further acknowledged thattheJapanese economy hadgrown
tremendously, andthequestion ofhowbesttosupply consumers withgoods produced inlargequantities
wasstillanissue. Consequently, theBasic Planacknowledged thattheroleofdistribution, which
connects production withconsumption, wasveryimportant. TheBasic Plannoted thatsincedistribution
activity involves numerous enterprises, theclose interconnections between these enterprises mustbe
given careful attention. Asaresult, itwasnecessary toregard theentire distribution process from
production toconsumption asasingle system, andtoeffect acomprehensive increase intheefficiency
ofthissystem. TheCommittee which produced theBasic Planindicated thatwiththisplan, MITI
haddecided tomake every effort toward thefulfilment ofdistribution systemization policies.
2.22 TheUnited States further notes thattheBasic Plandetermined thatthere wasaneed for
standardizing transaction terms tosecure effective andfaircompetition andtoreorganize market
conditions generally, butalsomore specifically inconnection withcapital liberalization to"prevent
disruption ofthe[established] order oftrade byforeign capital-affiliated firms, which haveenormous
strength."41
(e) 1975 Manual oftheDistribution Systemization Development Centre
2.23 TheUnitedStatesnotesthattheDistributionSystemizationDevelopmentCenter42wasestablished
withMITI funding in1972inorder tofacilitate thework oftheDistribution Systemization Promotion
Councilandwasdelegatedthetaskofworkingwithindustrytoproducevarious"SystemizationManuals"
forspecific industries. TheCenter wascreated pursuant totheDistribution Systemization Promotion
Council 's1971 Basic Plan. In1975, itpublished the"Manual forSystemization ofDistribution by
Industry: Camera andFilm" (the1975 "Manual").43
2.24 The1975Manual wasprepared incollaboration withindustry groups, camera manufacturers,
filmmanufacturers,cameraandfilmwholesalers,cameraandfilmretailers,andcameraandfilmindustry
publishers. TheCenter acknowledged thatastheeconomic environment grew worse asaresult of
inflation andliberalization, thesystemization ofdistribution activities hadbecome anissueofcritical
importance.
38Foreword oftheBasic Plan, USEx.71-10. Japan translates thisquote from theforeword asfollows: "theresult
ofaninvestigation ofthepublic andprivate sectors forthepurpose ofrealizing ameans toachieving thegoalofpointing
ournational economy inthedirection ofdistribution systemization bythetarget yearof1975." Foreword oftheBasic Plan,
Japan Ex.B-18.
39Foreword oftheBasic Plan, USEx.71-10. Japan translates thisquote from theforeword asfollows: "public and
private sectors putforth their combined effort torealize thisbasic plan." Foreword oftheBasic Plan, Japan Ex.B-18.
40Basic Plan, Cover Note byEnterprise Bureau Chief, MITI, August 1971. USEx.71-10. Japan translates thisquote
from thecover noteasfollows: "...[were] urgent issues from balanced regional economic development tomeasures todeal
withhighprices forconsumers, tomeasures forcapital liberalization." Basic Plan, Cover Note byBusiness Bureau Chief,
MITI, August 1971, Japan Ex.B-18.
41USEx.71-10, p.10.
42Japan translates thename ofthisinstitute as"Distribution System Research Institute".
43Manual fortheSystemization ofDistribution byIndustry, USEx.75-5. Japan contends thattheInstitute submitted
the1975 Manual toMITI onlyforinternal useofMITI.WT/DS44/R
Page16
"Although Japan hasamonopolistic position inhigh-quality cameras, thefuture camera
andfilmindustries must notbecomplacent withtheirmonopolistic oroligopolistic
position within Japan.
Therefore, strengthening theconstitution ofthecamera andfilmindustry isaserious
issue thatmust beaddressed immediately against thebackground oftoday'schronic
inflation andintensifying conditions ofinternational competition."44
TheCenter indicated thatthedevelopment ofthisManual wasonepartofMITI'spolicy toactively
develop effective policies related tothesystemization ofdistribution activities. TheManual indicated
thatdistribution systemization isnotgrounded intheindependent profit notions ofmanufacturers,
wholesalers andretailers engaged indistribution activities, butmust emphasize theestablishment of
anintegrated system designed toreduce theoverall distribution costrequired forproducts toreach
thefinalconsumer.
2.25 Thereafter,thePhotosensitiveMaterialsCommitteeoftheDistributionSystemPromotionCouncil
wasestablished fortheSystemization ofDistribution byIndustry (Camera-Film). TheCommittee was
charged withtheresponsibility ofpromoting information tiesandphysical integration ofdistribution
facilities. Themembership included representatives fromalllevels ofJapanese photographic filmand
paper distribution (each ofthefourdomestic manufacturers, thephotospecialty wholesalers association,
thephotofinishing laboratory association, andthephotospecialty retailers association), anofficial from
theDistribution System Development Center. Anofficial fromtheMITI Chemical Industry Division
observed theCommittee 'sproceedings. TheCommittee produced the"Distribution Facilities Basic
Plan,"45which wasintended toimprove distribution inresponse to"liberalization" andoutlined measures
topromote jointdistribution facilities between Japanese manufacturers anddistributors.
(f) Large Stores Law
2.26 Aprincipal focus oftheUScomplaint istheLarge Scale Retail Store Law("Large Stores Law")
which waspassed bytheJapanese Dieton1October 1973andentered intoforce on1March 1974.46
TheprovisionsoftheLargeStoresLawanditsevolutionovertimearediscussedindetailinSectionV.B.
Thislawwaspreceded bytheDepartment Stores Law(1956),47which required retailers wanting to
openalarge store withfloor space inexcess of1,500 square meters, andretailers withsuchstores
wanting toopen anewstore regardless offloor size,toobtain apermit from MITI. Because the
Department Store Lawprocess allowed retailers tocircumvent itsrestrictions bycreating legalidentities
forseparate salesfloors thatwerebelow thatlaw'sthreshold, theLarge Stores Lawwasenacted close
theloophole. TheLarge Stores Lawregulates theopening ofalllarge store structures (where more
thanoneretailermayoperate)andtheopeningandoperationofallretailers(e.g.,grocerystores,discount
stores,anddepartmentstores)operatinginsuchstructures,throughanotificationsystem.Whenoriginally
enacted, itonlyregulated stores withfloor space inexcess of1,500 square meters.
2.27 TheLarge Stores Lawwasrevised in1979(amended on15November 1978withaneffective
dateof14May1979).48Through theseamendments, twomainchanges wereeffected: (1)thethreshold
forstores covered bytheLawwaslowered from1,500 square meters to500square meters, and(2)large
stores were divided intotwoclasses: Class Istores (1,500 square meters andabove) under MITI's
jurisdiction, andClass IIstores (500upto1,500 square meters) under thejurisdiction ofprefectural
441975 Manual, pp.27-28, USEx.75-5.
45USEx.76-2.
46USEx.74-4 andJapan C-1.
47USEx.56-2 andJapan Ex.C-3.
48USEx.78-1.WT/DS44/R
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governors. Thisdividing linehasbeenmoved upto3,000 square meters (or6,000 square meters in
designated large cities) since 1992.
2.28 TheLarge Stores Lawcurrently includes thefollowing procedures: parties intending tobuild
oropenalarge scale retail store must submit anotification including theproposed floor areaofthe
storeandplanned opening dateatleast12months before theproposed completion andopening ofthe
newstoreorexpanded retail storetotheappropriate authority (MITI orprefectural governor) (Article
3notification). Theappropriate authority willthenissueanotice astowhether thestorewillbesubject
totheprocedures under theLarge Stores Law. Theretailer maynotcommence business untilseven
months afterthisnotice. Within fourmonths afterfiling thisinitial notification, theplans must be
explained toMITI andprefectural authorities, thelocal Chamber ofCommerce andIndustry, (or
Commerce andIndustry Association) andlocalretailers ortheirassociations andconsumers ("local
explanation"/"public briefing"49).Atleastfivemonths before theopening ofthestore, theretailer
mustsubmitanotification(Article5notification)totheappropriateauthority,whowilldeterminewhether
theproposed store poses aprobability ofasignificant effect onnearby small andmedium business
retail activities, (since 1994, stores withretail space ofnomore than1,000 square meters inprinciple
havebeendeemed tohavenosuchprobability), andmayrecommend thatthestore reduce itssales
floor space, and/or delay itsopening date. Iftheappropriate authority determines thatelements of
theproposed planposeaprobability ofsignificant effect, itrefers theitems tothenational (inthecase
ofClass Istores) orprefectural (inthecaseofClass IIstores) Large Store Council, which isanofficial
advisory bodytoMITI andtheprefectural governors, respectively. TheCouncil mustsubmit theresults
ofitsdeliberations totheappropriate authority. After receiving theLarge Store Council 'sviews, the
appropriateauthoritymaysubmitrecommendationstothepersonsproposingthelargescalestore,among
other things, delay thestore'sopening orreduce itsfloor space. Ifthestore doesnotfollow the
recommendation, MITI ortheprefectural governors mayorder ittodoso.
2.29 In1982MITIinstituted,throughDirectiveNo.36,50a"priorexplanation"requirementtoprecede
thebuilder 'sArticle 3Notification, which obligated thenotifier toprovide local retailers withan
explanation before submitting itsArticle 3Notification. Thisdirective wasrevoked in1992.
(g) Japan Development Bank andtheSmall andMedium-Sized Enterprise Agency
2.30 TheJapan Development Bank(JDB) isaquasi-governmental financial institution, andtheSmall
andMedium-Sized Enterprise Agency (SMEA) isoneoftheagencies ofMITI.51TheJDBandSMEA
provide subsidized financing toindustry.52Forexample, JDBprovided funding forKonica toestablish
jointdistribution facilities withseveral independent wholesalers.
3. JFTC
2.31 TheUSsubmissions alsofocus attention ontheJapan FairTrade Commission (JFTC). The
JFTC isanindependent Japanese Government agency. TheJFTC hasresponsibility forenforcement
oftheAntimonopoly LawandthePremiums Law. Forpurposes ofthisdispute, themostimportant
provisions ofthose lawsandmeasures taken under them arethefollowing:
49Seetranslation issue 14.
50Japan C-16 andUSEx.82-2.
51USEx.67-11, USEx.12,andUSEx.70.
52Takashi Yokokura, Chapter 20Small andMedium Enterprise, Industry Policy ofJapan Edited byRyutaro Komiya,
MasahiroOkuni,andKotaroSuzumura,1988,p.521(USEx.59)andChapter11:TheDevelopmentofNewPolicyMeasures,
MITI History, Volume 15,31May 1991, pp.1-2,USEx.70.WT/DS44/R
Page18
(a) Antimonopoly Law
(i) JFTC Rule No.1under Article 6oftheAntimonopoly Law
2.32 Article 6oftheAntimonopoly Lawof194753provides:
"(1) Noentrepreneur shallenterintoaninternational agreement oraninternational
contract which contains suchmatters asconstitute unreasonable restraint oftrade or
unfair trade practices.
(2) Anentrepreneur whohasentered intoaninternational agreement oran
international contract (limited toonlysuchanagreement orcontract thatbelongs to
thetypes which areprescribed bytherules ofthe[JFTC] astending tocontain such
matters asconstitute unreasonable restraint oftrade orunfair trade practices) shall,
inaccordance withtheRules ofthe[JFTC], fileanotification thereof withthe[JFTC],
accompanied byacopy ofthesaidagreement orcontract (inthecaseofanoral
agreement orcontract, adocument describing thecontents thereof), within thirty days
asfrom theconclusion ofsuchagreement orcontract".
2.33 JFTC RuleNo.154under Antimonopoly LawArticle 6.2requires notification totheJFTC
oftheconclusion ofaninternational agreement oraninternational contract incertain specified areas,
including "comprehensive salesagreements"55or"sole distributorship contracts"56.Abilltorepeal
theinternational contract notification requirement wasintroduced inMarch 1997 totheDiet. Japan
submits thatthebillwasenacted inJune1997, amending Article 6(2)oftheAntimonopoly Law, and
simultaneously abolishing JFTC RuleNo.1.
(ii) JFTC Notification 34of1971 (open lotteries)
2.34 JFTC Notification 34oftheJFTC onUnfair Trade Practices Offering Economic Benefits by
Means ofAdvertising Lotteries, etc.of2July1971 ("JFTC Notification 34of1971"), alsoreferred
toasnotification on"open" prizes.57ThisNotification designates, interalia,thefollowing asunfair
trade practices pursuant toArticle 2,paragraph 7,oftheAntimonopoly Lawwhen offering economic
benefits bymeans ofadvertising lotteries, etc.:
"Activities inwhich businesses whoproduce ...orselltheproducts listed inattached
Table 1...,asameans toattract consumers, select people from among general
consumers through advertisements andofferthem excessive amounts ofcash, goods
orother kinds ofeconomic benefits inlightofnormal business practices ...".58
According totheUnited States ,Table 1attached tothisNotification includes "photosensitive materials".
Photosensitive materials wereamong anumber ofproducts explicitly identified bytheJFTC assubject
tothisnotification.SecretaryGeneralDirectiveNo.5of2July1971providesfor"GuidelinesPertaining
totheDesignation ofUnfair Trade Practices Offering Economic Benefits byMeans ofAdvertising
Lotteries, etc". These guidelines provide, interalia,that:
53TheLawConcerningProhibitionofPrivateMonopolyandMaintenanceofFairTradeLawNo.88of1947,USEx.47-1.
54USEx.71-6.
55UStranslation.
56Japanese translation.
57Antimonopoly Law: related Laws andRegulations, 28June1995, pp.85-88, exhibit submitted bytheUnited States
byletter tothePanel of6August 1997.
58Ibid., provisional translation, p.85.WT/DS44/R
Page19
"Excessive amounts ofcash, goods, orother kinds ofeconomic benefits inlightof
normal business practices '(hereafter referred toas"excessive economic benefits")
stipulated by[JFTC Notification 34of1971] should bedealt withinthefollowing
manner:
...
c. Aneconomic benefit exceeding 1,000,000 yen...isconsidered tobean
excessive benefit".59
Japan submits thatasof1April 1996, thisceiling of1,000,000 yenhasbeenincreased to10,000,000
yenandthatnolimithaseverbeensettothetotalamount ofprizes.
(iii) JFTC Notification 15of1982
2.35 Antimonopoly LawArticle 2.9setsforthcategories of"unfair tradepractices" andauthorizes
theJFTC todesignate impermissible practices under thelaw. In1982, theJFTC issued Notification
No.15,which revised andexpanded thecategories ofunfair trade practices from twelve tosixteen.
Thefollowing isprohibited pursuant totherespective designations:
Unjust LowPrice Sales:
6. Without proper justification, supplying acommodity orservice continuously
ataprice which isexcessively below costincurred inthesaidsupply, orotherwise
unjustly supplying acommodity orservice atalowprice, thereby tending tocause
difficulties tothebusiness activities ofother businesses.
...
Deceptive Customer Inducement:
8. Unjustly inducing customers ofacompetitor todealwithoneself bycausing
themtomisunderstand thatthesubstance ofacommodity orservice supplied byoneself,
orterms ofthetransaction, orothermatters relating tosuchtransaction aremuch better
ormuch more favourable thantheactual oneorthanthose relating tothecompetitor.
Customer Inducement byUnjust Benefits:
9. Inducing customers ofacompetitor todealwithoneself byoffering unjust
benefits inthelightofnormal business practices.
(b) Premiums Law
2.36 Pursuant toArticles 3and4ofthePremiums Law60,theJFTC issues notifications interpreting
thePremiums Lawinrespect ofunlawful premiums andrepresentations. TheUnited States lists
Notifications 5,17and34(open lotteries) asspecific measures thatitischallenging inthisdispute.
Italsorefers initssubmissions toNotifications 3and34(origin). Under Article 10(1) ofthePremiums
Law, theJFTC mayapprove faircompetition codes forspecific industries. The1987Retailers Code,
discussed inSection II.B.4.(b) below, isanexample ofsuchacode.
2.37 TheJFTC hasexplained that,asusedinitsnotifications, "premiums ...refertoproducts, cash,
marketable securities, entertainment, orother economic benefits which aregiven inconnection with
59Ibid., pp.86-87.
60USEx.62-6; Japan Ex.D-1.WT/DS44/R
Page20
atransaction involving acommodity orservice.61Article 3ofthePremiums Lawgives thecriteria
forrestrictions onpremiums. Itprovides:
"The JFTC may, when itfinds thatitisnecessary toprevent unfair inducement of
customers, limiteither themaximum value ofapremium ortheaggregate amount of
premiums, thekindofpremiums ormethods ofoffering ofpremium oranyothermatter
relating thereto, ormayprohibit theoffering ofapremium".
2.38 Article 2ofthePremiums Lawdefines "representations" tomean "advertisements oranyother
representations which abusiness makes orusesasmeans ofinducement ofcustomers, withrespect
tothesubstance ofthecommodity orservice which hesupplies ortheterms ofthesaleoranyother
matter concerning thetransaction, andwhich aredesignated bytheFairTrade Commission assuch".
Article 4ofthePremiums Lawproscribes theuseof
(i) "anyrepresentation bywhich thequality, standard oranyother matter relating
tothesubstance ofacommodity orservice shallleadthegeneral consumer tobelieve
thatitis62much better thantheactual oneorthanthatofother businesses whoare
inacompetitive relationship withthebusiness concerned, andthereby which isfound
likely toinduce customers unjustly andtoimpede faircompetition;" or
(ii) "any representation bywhich price oranyother terms oftransaction ofa
commodity orservice willbemisunderstood byconsumers ingeneral tobemuch more
favourable tothecustomer thantheactual oneorthanthose ofother businesses who
areinacompetitive relationship withthebusiness concerned, andthereby which is
found likely toinduce customers unjustly andtoimpede faircompetition."
2.39 Article 6ofthePremiums Lawauthorizes theJFTC toinstruct violators to"cease anddesist"
orto"take themeasures necessary toprevent therecurrence ofthesaidact." Article 9ofthePremiums
Lawgives theprefectural governments enforcement authority, including thepower toinstruct violators
to"cease anddesist" andtopublish findings ofviolations.
2.40 Article 10ofthePremiums Law, dealing withfaircompetition codes, provides:
"(1) Businesses oratrade association may, uponobtaining authorization fromthe
FairTrade Commission inaccordance withtheRules oftheFairTrade Commission,
withrespect tomatters relating topremiums orrepresentations, conclude orestablish
anagreement oracode, aiming atprevention ofunjust inducement ofcustomers and
maintaining faircompetition. Thesame shallapply intheevent alterations thereto
areattempted.
(2) TheFairTrade Commission, unless itfindsthatanagreement oracodeunder
thepreceding section (hereinafter referred toas"faircompetition code") meets each
ofthefollowingparagraphs,shallnotgrantauthorizationundertheprecedingsubsection:
(i) Thatitisappropriate toprevent unjust inducement ofcustomers and
tomaintain faircompetition;
(ii) Thatitisnotlikely unreasonably toimpede theinterests ofsome
consumers ingeneral ortherelated businesses;
61FTC/Japan, Views: Information andOpinion fromtheFairTrade Commission, No.2, April 1988, USEx.88-3, p.15.
62Japan translates theitalicized words above as"will bemisunderstood byconsumers ingeneral tobe". SeeAnnex
onTranslation Problems, translation issue 16andtheappendix thereto.WT/DS44/R
Page21
(iii) Thatitisnotunjustly discriminatory; and
(iv) Thatitdoesnotrestrict unreasonably theparticipation inorwithdrawal
from thefaircompetition code".
...
(5) Theprovisions ofSection 48[recommendation, recommendation decision] and
Section 49[initiation ofhearing procedures], Section 67(1) [urgent injunction] and
Section 73[accusation] oftheActConcerning Prohibition ofPrivate Monopoly and
Maintenance ofFairTrade shallnotapply tothefaircompetition codethathasbeen
authorized under Subsection (1),andtosuchactsofentrepreneurs oratradeassociation
ashavebeendoneinaccordance therewith".
(i) JFTC Notification of1965
2.41 TheJFTC issued aNotification on15October 1965entitled "Restrictions onPremium Offers
intheCamera Industry." Thenotification provided that"[t]hose whoengage inthemanufacture or
saleofcameras orrelated products cannot offer premiums togeneral consumers" or"tothose who
engage inthesaleofcameras andrelated products."63
(ii) JFTC Notification 17of1967
2.42 JFTC Notification 17onRestriction onPremium Offers toBusinesses of10May1967("JFTC
Notification 17").64ThisNotification wasmade inaccordance withArticle 3ofthePremiums Law.
Itprovides essentially thefollowing:
"Businesses ...whomanufacture (including process, hereinafter thesame) theproducts
listed intheattached tableorbusinesses whosellsuchproducts shallnotofferpremiums
tobusinesses whopurchase andselltheproducts involved insuchmanufacture orsale,
orwhousetheproducts tosupply services togeneral consumers (hereinafter referred
toas"other party business"), asameans ofinducing theother party business tobegin
totransact suchproducts, oronthecondition thattheother party business 'stransaction
amount orsuchother transaction condition satisfy certain criteria which the[first]
business hasestablished. Provided, however, thatthepreceding provisions shallnot
apply tocases ofpremium offers which arewithin theannual limitof100,000 yen
orlessperoneother party business, andwhich arefound reasonable inthelightof
normal business practices".
Thetable attached tothisNotification includes "photographic materials". Theparties agree that
Notification 17wasabolished inApril 1996. However, according totheUnited States ,premiums
from manufacturers towholesalers arestillsubject toJFTC Designation 9ofJFTC Notification 15
of1982.65Thisprovision governs theuseof"unjust inducements" under theAntimonopoly Lawand
prohibits premium offers inexcess of"normal business practice". Japan contends thatDesignation
9hasnotbeenlisted intheUSpanel request andthusisnotproperly before thePanel.
63Otsuka Noritami, Japan FairTrade Commission, Trade Department, Recent Activities Concerning Premiums Law,
Kosei Torihiki, No.182, November 1965, p.15-18, USEx.65-5.
64USEx.67-4, Japan Ex.D-42 (provisional translation).
65USEx.82-6.WT/DS44/R
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(iii) JFTC Notification 34of1973 (origin)
2.43 JFTC Notification 34onMisleading Representations Concerning Country ofOrigin ofGoods
of16October 1973 ("JFTC Notification 34of1973").66ThisNotification wasmade inaccordance
withArticle 4ofthePremiums Law. Itprovides essentially thefollowing:
"Representations provided forinthefollowing sections which, when applied to
domestically made goods, arefound tomake itdifficult forgeneral consumers to
distinguish thegoods asdomestically made:
(i) Representations comprising thename ofaforeign country, thename ofaplace
inaforeign country, theflagorcrestofaforeign country, oranyother similar
representations;
(ii) Representations comprising afullname, title,ortrade mark ofanyforeign
business ordesigner; or
(iii) Representations inwhich alloraprincipal partoftheliteral description ismade
inforeign letters.
Representations provided forinthefollowing sections which, when applied toforeign-
made goods, arefound tomake itdifficult forgeneral consumers todistinguish the
goods asmade intheforeign country inquestion:
(i) Representations comprising thename ofacountry, thename ofaplace ina
country, aflagorcrestofacountry other thanthecountry oforigin ofthe
goods, orother similar representations;
(ii) Representations comprising afullname, title,ortrade mark ofabusiness or
designer inacountry other thanthecountry oforigin ofthegoods;
(iii) Representations inwhich alloraprincipal partoftheliteral description ismade
inJapanese letters".
According totheUnited States ,theJFTC Application Standards for"Misleading Representations
Concerning Country ofOrigin ofGoods" of16October 1973 provide JFTC interpretation ofthe
provisions ofNotification 34onorigin ofgoods.67TheUnited States placed particular emphasis on
thefollowing aspects oftheguidelines: Paragraph twopermits representations referring toforeign
nations orplaces tobemade inconnection withJapanese products ifitis"obviously understood" that
thebusiness involved isaJapanese firm. Paragraph three provides thatdomestic products maybe
identified withaforeign name, e.g.,"French bread," if"clearly nottoimply thatthecountry oforigin
ofthegoods inquestion isaforeign country." Paragraph sixallows domestic products touse:
(i) Representations comprising thename ofortrade mark ofaJapanese business
written inforeign letters (including Romanized Japanese), which arefound
tobeclearly distinguished bygeneral consumers asthose which areapplied
todomestically made goods;
(ii) Representations which areallowed bylawtobeusedasdescriptions forgeneral
consumers instead ofJapanese (e.g., "AllWool," "Stainless Steel," etc.);
(iii) Representations which areaccepted bygeneral consumers asJapanese byvirtue
ofgeneral business practices (e.g., "size," "price," etc.); and
(iv) Representations which comprise foreign letters, butwhere itisobvious that
thesaidletters areusedonlyaspatterns, ornaments andthelike,andwillnot
66USEx.73-5, Japan Ex.D-53 (provisional translation).
67SeeUSEx.73-5.WT/DS44/R
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imply thatthecountry oforigin ofthegoods isaforeign country (e.g., the
c[l]ippings fromEnglish-language magazines usedaspatterns oncarrier bags).
According totheUnited States, paragraph seven provides several ways thatgoods mayindicate that
theywere made inJapan, including simply identifying thename ofthemanufacturer inJapanese or
identifying thename ofthemanufacturer inanother language withthelocation ofproduction.
(iv) JFTC Notification 3of1977
2.44 JFTC Notification 3onRestriction onPremium Offers byPrize Competition of1March 1977
("JFTC Notification 3"),alsoreferred toasnotification on"closed" prizes.68ThisNotification was
made inaccordance withArticle 3ofthePremiums Law. Itprovides essentially thefollowing:
"2. Themaximum value ofpremiums offered byprizecompetition shallnotexceed
thevalue inaccordance witheachcategory provided forinthefollowing paragraphs:
(i) Inthecasewhere thetransaction value involved inthepremium offerbyprize
competition islessthan500yen: 20times ofthetransactions value;
(ii) Inthecasewhere thetransaction value isnotlessthan500yenandbelow
50,000 yen: 10,000 yen;
(iii) Inthecasewhere thetransaction value isnotlessthan50,000 yenandbelow
100,000 yen: 30,000 yen;or
(iv) Inthecasewhere thetransaction value isnotlessthan100,000 yen: 50,000
yen.
3. Theaggregate ofthepremiums offered byprize competition inonescheme
shallnotexceed 2percentoftheestimated totalamount oftransactions involved in
thatscheme.
4. Irrespective ofthepreceding twoClauses, inanyoneofthecases provided
forinthefollowing sections, themaximum value offered byprize competition may
amount to200,000 yenandtheaggregate ofthepremiums offered byprizecompetition
inonescheme mayamount to3percent oftheestimated totalvalue oftransactions
involved inthatscheme. However, these limits willnotbeapplied tothecasewhere
theyunjustly constrain theparticipation ofother businesses:
(i) Inthecasewhere aconsiderable number ofretailers orservice suppliers in
acertain district carry outajointscheme;
(ii) Inthecasewhere aconsiderable number ofretailers orservice suppliers located
inashopping areacarry outpremium offers inajointscheme; However, the
foregoing shallapply onlytocases where thepremium offers arecarried out
during theseasons suchas"chugen" [midyear] andendofyear, three times
ayearatmost andbelow theperiod of70daysintotalayear; or
(iii) Inthecasewhere aconsiderable number ofbusinesses inacertain industry
within acertain district carry outascheme jointly".
On16February 1996, theJFTC amended JFTC Notification 3asfollows:
"Section 2oftheNotification isamended asfollows:
68USEx.77-1, Japan Ex.D-33 (provisional translation).WT/DS44/R
Page24
2. Themaximum amount ofpremiums offered byprizes shallnotexceed twenty
times oftheamount oftransaction towhich thepremium offer isrelated, provided
thatwhen theamount exceeds 100,000 yen,itwillbelimited to100,000 yen.
InSection [4],the"200,000 yen"shallbereplaced by"300,000 yen".69
(v) JFTC Notification 5of1977
2.45 JFTC Notification 5onRestriction onPremium Offers toGeneral Consumers of1March 1977
("JFTC Notification 5").70ThisNotification wasmade inaccordance withArticle 3ofthePremiums
Law. Ithasbeenamended byJFTC Notification 2of16February 1996 (which removed theceiling
of50,000 yenforpremiums toallpurchasers). Itprovides essentially thefollowing:
"1. Thevalue ofapremium offered togeneral consumers, excluding those by
lotteries orprize competition ...,shallbewithin 10percent ofthetransaction value
involved inthepremium offer (provided thatiftheamount islessthan100yen,the
limitshallbe100yen), andwhich isfound reasonable inthelightofnormal business
practices".
(c) JFTC guidance
(i) 1981 JFTC guidance ondispatched employees
2.46 Guidance provided bytheJFTC inrecommending theestablishment ofrules ontheuseof
dispatched employees reflected inanarticle byKosugi Misao (anofficial oftheExecutive Office of
theJFTC) entitled "TheStatus ofDistribution ofCameras" ("JFTC guidance ontheuseofdispatched
employees").71Therelevant partofthearticle byKosugi Misao states thefollowing regarding personnel
dispatched tospecified volume salesstores:
"TheJFTCisissuingguidancetothecamera,photographicaccessories,colourphotolaboratories
andrelated industries toexamine theuseofself-regulating measures withrespect tothe
permanent dispatch ofsalespeople soasnottogotoofarasmanufacturers 'salespromotion
methods orasactsbased onthebuying power ofvolume salesstores".72
(ii) 1983 JFTC guidance onadvertising rules
2.47 Guidance provided bytheJFTC inrecommending theestablishment ofrulesondumping and
loss-leader advertising reflected inanarticle inZenren Tsuho ofMay1983quoting fromaconference
speech given byYamada Akio (Director ofthePremiums andRepresentations Guidance Division of
theJFTC).73Yamaka Akio isstated tohavesaid,interalia,thefollowing:
"Inanycase,itgoeswithout saying thatruleabiding salespractices andfaircompetition
mustbeestablished. Fortunately, thephoto industry hasits"self-regulating standards
fornormalizing trade". Nevertheless, itisofcritical importance todevelop rulesone
byoneagainst dumping andloss-leader advertising. With theregard toloss-leader
69JFTC Notification 1,Kanpo (Official Gazette) of16February 1996, translation, Japan Ex.D-30, p.2.
70Japan Ex.D-32 (provisional translation).
71Kosei Torihiki, March 1982, No.377, p.45-49, translation, USEx.82-3.
72Ibid., p.8.
73Zenren Tsuho, May 1983, pp.14ff,translation, USEx.83-9.WT/DS44/R
Page25
advertising, ifthephoto industry willclarify whattheproblems are,howweshould
apply thelawwillbecome clear".74
4. COUNCILS AND ASSOCIATIONS
(a) FairTrade Promotion Council
2.48 TheFairTrade Promotion Council wasestablished bythenational photographic industry on
23December 1982.75According totheArticles ofAssociation oftheFairTrade Promotion Council,
theCouncil, interalia,establishes fairtransaction order inthephotography industry andpromotes
andenforces the1982 Self-Regulating Measures described below. Italsoenacted the1984 Self-
Regulating Standards, described below.
(i) 1982 Self-Regulation Measures (dispatch ofemployees andpromotional money)
2.49 Self-Regulating Measures Regarding Making Business Dealings withTrading Partners Fair,
enactedbythephotographicindustryandpublishedon22June1982("1982Self-RegulatingMeasures").76
FortheUSclaim, therelevant partsthereof relate toself-regulating standards concerning thedispatch
ofemployees bymanufacturers orwholesalers toretailers forthepurpose ofsalespromotion orother
salesactivities andtheextent towhich suppliers maycontribute toretail marketing campaigns:
[1] Self-regulating standards concerning thedispatch ofemployees:
"(1-1) Itmaybeproper todispatch employees inthefollowing cases which would
directly helptopromote thesalesofthegoods handled bythesupplier andcontribute
tohisorherprofit:
...
Accordingly, thefollowing shallnotoccur:
Causing thedispatched employee tobemainly engaged inthesalespromotion, physical
inventory, orother activities thatpertain togoods other thanthose handled bythe
supplier.
(1-2) Other general retailers shallnotbetreated inadiscriminatory manner.
(1-3) Theemployee shallbedispatched under mutual agreement.
Accordingly, thefollowing things shallnotoccur:
[1] Thesupplier shallnotdispatch hisorheremployees outofthenecessity
ofcontinuing trade withtheretailer.
[2] Retailers shall notcoerce suppliers todispatch theemployees by
recourse towords oractions akintoarefusal todeal.
[3] Retailers shallnotsupplement anemployee shortage withdispatched
employees (permanent dispatch).
...
74Ibid., p.2.Japan contested thecorrectness ofthistranslation. Seetranslation issue 22.
75Articles ofAssociation, 23December 1982, Section 2"Responsibilities", USEx.83-3, pp.2ff.
76Camera Times, 22June 1982, pp.3 ff.,USEx.82-8, seetranslation issue 23.WT/DS44/R
Page26
(1-4) Employees shallbedispatched inthose other cases where approval fromthe
FairTrade Promotion Council hasbeenobtained".77
[2] Self-regulating standards onpromotional money andcontribution:
(2-1) Itmaybeproper tomake acontribution toactivities which directly assist the
salespromotion ofthegoods handled bythesupplier andthatwould contribute
tohisorherprofit.
Accordingly, thefollowing shallnotoccur:
[1] [Theretailer] shallnotdemand acontribution forexpenses thatarenotdirectly
related tothesalespromotion, brand advertisement, etc.ofthegoods handled
bythesupplier.
(2-2) Itmaybeproper tomake acontribution ifother general retailers arenottreated
inadiscriminatory manner.
(2-3) Itmaybeproper tomake acontribution ifmutual agreement isreached.
Accordingly, thefollowing shallnotoccur:
[1] [Retailers] shallnotdemand contribution without prior agreement astothe
basisanduseofthecontribution evenifthecontemplated activity isconsidered
tocontribute totheprofit ofthesupplier.
[2] [Retailers] shallnotchange theamount oruseofthecontribution unilaterally
without theconsent ofthesupplier.
[3] [Retailers] shallnotunilaterally offset thesupplier ’saccount receivable against
thecontribution without theconsent ofthesupplier.78
(ii) 1984 Self-Regulating Standards (developing fees)
2.50 TheSelf-RegulatingStandardsRegardingRepresentationofDevelopingFeesforColourNegative
Film were enacted bytheFairTrade Promotion Council on15May1984 ("1984 Self-Regulating
Standards").79Therepresentation standard isdefined asfollows:
"...businesses should properly listfeessuchasthedeveloping feeofcolour filmand
should notmake representations thatmight mislead thegeneral consumer orpossibly
leadthem tohaveexcessive expectations. Thisstandard should notbeusedtolimit
orrestrain businesses freedom tosetfees".80
The1984Self-RegulatingStandardsalsosetoutthemethodofrepresentationforprintingfees,developing
feesandfinishing time. They alsoprovide thattheFairTrade Promotion Council shall conduct
investigations andprovide guidance ontheoperation ofthestandards ifnecessary.81
77Ibid., translation, USEx.82-8, pp.1-2.
78Camera Times, 22June 1982, pp.3ff.,USEx.82-8, seetranslation issue 23.
79Translation, USEx.84-4.
80Ibid., p.2.
81Ibid., p.3.WT/DS44/R
Page27
(b) Retailers Council and1987 Retailers Code
2.51 On31March 1987, acting pursuant toArticle 10(1) ofthePremiums Law, theJFTC approved
theFairCompetition Code Regarding Representations intheCamera andRelated Products82/Camera
Category83RetailersIndustry("1987RetailersCode")anditsenforcementbodytheCamerasandRelated
Products/Camera Category Retailers Industry FairTrade Council ("Retailers Council").84Theobjective
ofthe1987Retailers Code is"toprotect thegeneral consumers 'appropriate product selection, prevent
theunfair inducement ofcustomers, andthereby tosecure faircompetition".85TheCode, interalia,
provides forrequisite representations forstorefronts andinfliers, including identification ofthecountry
oforigin ofimported goods; itimposes standards fortherepresentation ofdualprices, fortheuse
ofspecial expressions andcomparative representations; andprohibits misleading representation and
loss-leader advertisement. TheCode alsoidentifies thepowers oftheCouncil withrespect to
investigating suspected violations oftheprovisions oftheCode andthepenalties thatmaybeimposed
forsuchviolations.
(c) Chambers ofCommerce andIndustry
2.52 According totheUnited States, Japanese Chambers ofCommerce andIndustry areestablished
pursuant totheChamber ofCommerce andIndustry Law, which allows forthecreation oflocalbodies
under thecontrol andoversight ofMITI. Chambers ofCommerce andIndustry aredelegated the
responsibility to"conduct administrative matters commissioned byadministrative agencies", suchas
MITI.86MITI alsohastheauthority to"investigate" theon-going activities oftheChambers of
Commerce andIndustry.87
82UStranslation of"kamera-rui". Seetranslation issue 17.
83Japan 'stranslation of"kamera-rui". Seetranslation issue 17.
84Kanpo (Official Gazette), 11April 1987, pp.1-3,translation, USEx.87-1, Japan Ex.D-66.
85Id.,p.1.
86Article 9-17 oftheChamber ofCommerce Law, LawNo.143, 1August 1953.
87Theinvestigatory activity isdefined intheChamber ofCommerce Lawtoinclude requiring thesubmission ofanannual
financial statement toMITI (Article 57),andMITI authority toaudit theChambers ofCommerce (Article 58),aswellas
todissolve aChamber ofCommerce (Article 59oftheChamber ofCommerce Law). MITI hastheauthority overChambers
ofCommerce toaccept ordeny thepermit ofanewChamber. Article 5-19oftheMITI Establishment Law, USEx.52-2.WT/DS44/R
Page28
III. SUMMARY OFCLAIMS AND PROCEDURAL OBJECTIONS
A. EVOLUTION OFTHE USCLAIMS
3.1 Thissection details theevolution oftheUSclaims, using where appropriate theshort titles
ofthevarious measures asdefined intheforegoing section. TheUSrequest forconsultations identified
thefollowing Japanese measures asbeing atissue:
a. liberalization countermeasures;88
b. distribution guidelines andrelated measures;
c. theLarge Stores Law;
d. thePremiums Law;
e. measures regarding dispatched employees;
f. theapplication oftheLawtoPromote Business Reform forSpecified Industries;
g. theMinistry ofInternational Trade andIndustry Establishment Law;
h. andrelated legislation, regulations, andadministrative measures.
3.2 TheUSrequest fortheestablishment ofapanel identified thefollowing Japanese measures
asbeing atissue:
a. liberalization countermeasures;
b. distribution measures, suchas,butnotlimited to,thecabinet decision, administrative
guidance, andother measures listed inAttachment A;
c. i. theLarge Stores Law;
ii. Special Measures fortheAdjustment ofRetail Business; No.155of1959
(Shocho Ho);
d. thePremiums Law;
e. measures regarding dispatched employees pursuant totheAntimonopoly Law;
f. theLawConcerning Enterprise Reform forSpecified Industries, No.61of1995;
g. theMinistry ofInternational Trade andIndustry Establishment Law, No.275of1952;
h. andrelated measures.
Attachment Acontained thefollowing listofdistribution measures:
i. MITI, "Administrative Guidance toPromote Rationalization ofDistribution
System", 1966;
ii. 1967 Cabinet Decision;
iii. Distribution Committee Seventh Interim Report;
iv. 1969 Survey;
v. 1970 Guidelines;
vi. MITI, "Business Bureau Report onFilmPrices", 1970;
vii. 1971 Basic Plan;
viii. 1975 Manual;
ix. 1990 Guidelines;
x. MITI andtheSmall andMedium Enterprises Agency, "Distribution Vision forthe
21stCentury", 1995 (andearlier versions forthe1970s, 1980s, and1990s);
xi. Photo Industry Distribution Information Systemization Council [Kyogikai],
"Comprehensive Manual forPhoto Distribution Industry Distribution Information
Systemization", 1996 (and1989, 1990, 1991, and1992 versions);
xii. Other related measures, including guidelines.
88Japan disagrees withthistranslation oftheJapanese word taisaku .Seetranslation issue 1.WT/DS44/R
Page29
3.3 InresponsetoaquestionbythePanelatthefirstsubstantivemeeting,theUnitedStatessubmitted
thefollowing listofspecific "liberalization countermeasures" which aresubject toclaims under
Articles III,X:1andXXIII:1(b) ofGATT. Thelistisdivided intothree categories: distribution
countermeasures; large stores law;andpromotion countermeasures.
3.4 Thefollowing measures were included inthelistofdistribution countermeasures:
(1) 1967 Cabinet Decision
(2)* JFTC Notification 17
(3)* Distribution Committee Sixth Interim Report
(4) Distribution Committee Seventh Interim Report
(5) 1969 Survey onTransaction Terms
(6) 1970 Guidelines forRationalizing Terms ofTrade forPhotographic Film
(7)* International Contract Notification under theAntimonopoly LawandJFTC Rule1
(8) 1971 Basic Plan
(9) 1975 Manual
(10)* 1976 JDBfunding forKonica 'swholesalers
(11)* 1977 SMEA funding forphotoprocessing laboratories.
3.5 Thefollowing measures were included under theheading "Large Stores Law":
(12) Large Stores Lawandrelated regulations andadministrative measures, including related
localmeasures;
(13) 1979 Dietamendment toLarge Stores Law
3.6 Inaddition toitems (1)and(2)above, thefollowing measures wereincluded under theheading
"Premiums Law/promotion countermeasures":
(14)* 1971 JFTC Notification 34
(15)* 1977 JFTC Notification 5
(16) 1981 JFTC guidance ondispatched employees
(17) 1982 Self-Regulating Rules
(18) 1982 Establishment ofFairTrade Promotion Council
(19)* 1983 JFTC guidance onadvertising rules
(20) 1984 Self-Regulating Standards
(21) JFTC approval ofthe1987 Retailers Code anditsenforcement body, theRetailers
FairTrade Council.
3.7 Inresponse toanother Panel question, theUnited States indicated thatinrespect ofitsclaims
under Article III:4, Article X:1andArticle XXIII:1(b) ofGATT:
a. Themeasures alleged tobeinconsistent with Article III:4 arethe"Distribution
Countermeasures" listed inparagraph 3.4.
b. ThemeasuresallegedtobeinconsistentwithArticleX:1are(i)unpublishedenforcement
actions bytheJFTC andfairtradecouncils under thePremiums Lawandrelevant fair
competition codes thatestablish ormodify criteria applicable infuture cases; and(ii)
unpublished guidance through which theJapanese Government makes applicants for
aneworexpanded storeunder theLarge Stores Lawcoordinate theirplans withlocal
competitors before submitting anotification forgovernment review.WT/DS44/R
Page30
c. The measures alleged tonullify orimpair benefits within themeaning of
Article XXIII:1(b) ofGATT arethe"Distribution Countermeasures", "Large Stores
Law," and"Premiums Law/Promotion Countermeasures" listed inparagraphs 3.4-3.6.
3.8 Inresponse tothatPanel question theUnited States alsoindicated theextent towhich itclaimed
thattheindividual measures listed above should beconsidered inconjunction witheachother in
determining whether Articles IIIandXhavebeenviolated andwhether there hasbeenanullification
orimpairment ofbenefits under GATT within themeaning ofArticle XXIII:1(b). According tothe
United States, thedistribution countermeasures work together asanorganic whole toviolate Article III
andnullify orimpair benefits within themeaning ofArticle XXIII:1(b). Inaddition, theUnited States
takestheposition thattheLarge Stores Lawandrelated measures should beconsidered asanimportant
measure inJapan'soverall efforts tocreate andsupport manufacturer-dominated, vertically aligned
distribution inJapan under thedistribution countermeasures. Thus, itclaims thattheLarge Stores
Lawandrelated measures andthedistribution countermeasures incombination nullify orimpair benefits
under Article XXIII:1(b). TheUnited States alsoclaims thatthepromotion countermeasures asaset
bythemselves havenullified orimpaired benefits under Article XXIII:1(b). Finally, theUnited States
claims thatthedistribution countermeasures, theLarge Stores Lawandrelated measures andthe
promotion countermeasures, taken asthree setsofmeasures, havealsooperated incombination so
astonullify orimpair benefits within themeaning ofArticle XXIII:1(b). SeeSection DofPartIV
andSection FofPartVforadetailed discussion ofthecombined effects ofthethree setsofmeasures
acting incombination.
3.9 Japan contends thattheUScaseishighly unusual incommencing itslegalargument with"non-
violation nullification orimpairment" claims because such claims normally would beconsidered
subsidiary toviolation claims. Totheextent thatthesame alleged measure gives risetobothviolation
andnon-violationclaims,panelsnormallydonotconsidernon-violationissuesuntiltheallegedviolations
havebeenaddressed.89TheUSallegations regarding so-called "distribution countermeasures" -i.e.,
alleged measures taken bytheJapanese Government inthe1960s and‘70stoencourage theestablishment
ofanexclusionary market structure thatimpedes market access forimported filmandpaper -form
thecentrepiece oftheUSnon-violation claims. Atthesametime, theUSargues thatthese"distribution
countermeasures" constitute violations ofArticle IIInational treatment obligations.90
3.10 Japan emphasizes thatonlythespecific measures mentioned intheforegoing USresponses
needtobeevaluated bythePanel. InJapan'sview, measures notmentioned intheUSresponses are
outside thescope ofthedispute, andneednotbeconsidered further.
B. PROCEDURAL OBJECTIONS
3.11 Japan requests thepanel todismiss theUSclaims marked withanasterisk inparagraphs 3.4-3.6
abovebecausethese"measures"wereraisedbytheUnitedStatesforthefirsttimeinitsinitialsubmission
tothePanel, andhadnotbeenidentified specifically intherequest fortheestablishment ofthepanel.91
Japan originally objected tonineitems, buttheUnited States didnotinclude twoofthem -certain
89Inprior panel decisions addressing non-violation allegations, thepanels firstaddressed theviolation claims, andthen
addressed non-violation claims. Seee.g., Panel Report onEuropean Economic Community -Payments andSubsidies Paid
toProcessors andProducers ofOilseed, andRelated Animal FeedProducts ("EEC -Oilseeds" ),adopted on25January 1990,
BISD 37S/86, 126,para. 142. Seealso,Working Party Report ontheAustralian Subsidy onAmmonium Sulphate ("Australia -
Ammonium Sulphate" ),GATT/CP.4/39, adopted on3April 1950, BISD II/188, 192, paras. I,12.
90Japan notes thattheUSalsomakes Article Xviolation claims withrespect totheLarge Scale Retail Store Lawand
thePremiums Law.
91Japan pointed outthatithadlisted onlythose items which appeared inthe"legal argument" section ofthefirstUS
submission, although, inJapan 'sview, there were other items which areraised forthefirsttimeinthe"factual background"
section ofthefirstUSsubmission. ItwasJapan 'sunderstanding thatthose items notspecifically mentioned inthe"legal
argument" section arenotpartoftheUSlegal claims intheproceeding.WT/DS44/R
Page31
countermeasuresbythePhotosensitiveMaterialsCommitteeoftheDistributionSystemizationPromotion
Council anddirectives tostrengthen theDepartment Stores Law-initsresponse tothePanel'srequest
thatitspecify themeasures subject toUSclaims. Japan laterobjected toanadditional tenth item-
1983 Guidance onadvertising rules -which theUnited States included initsresponse tothePanel's
request, butwhich Japan contends wasneither specifically identified inthepanel request norraised
intheconsultations. InJapan'sview, theitems thatwere notspecified inthepanel request should
bedismissed asnotbeing properly before thispanel andvague reference to"measures, suchas,but
notlimited to,""related measures," and"other related measures, including guidelines" inthepanel
request areinconsistent withArticle 6.2oftheDSU, which requires thecomplaining party toidentify
the"specific measures atissue." InJapan'sview, theUSrequests forconsultations andtheestablishment
ofapanel insufficiently identified themeasures indispute. Inparticular, theUSpanel request failed
tomeetthespecificity requirements ofArticle 6.2oftheDSU.
1. THE REQUEST FOR CONSULTATIONS AND THE CONSULTATIONS
3.12 Article 4.4oftheDSU reads:
"Any request forconsultations shallbesubmitted inwriting andshallgivethereasons
fortherequest, including identification ofthemeasures atissue andanindication of
thelegalbasis forthecomplaint".
3.13 Japan emphasizes thatitisparticularly important inthiscasefortheUnited States tohave
specifically identified the"measures" initspanel request, because therequest forconsultations was
overly broad andvague, anddidnot"identify" themeasures forthepurposes ofArticle 4.4ofthe
DSU, which requires thecomplaining party toinclude "identification ofthematter atissue". Japan
points outthattheconsultations themselves inthiscasealsodidnotidentify thespecific measures.
According toJapan, proper consultations arefundamental totheoperation oftheWTO dispute settlement
procedures andtheUnited States hasoften stressed theimportance ofmatters being raised inthe
consultation stages priortothepanel request, e.g.,arguments raised bytheUnited States ledthepanel
inNorwegian Salmon toexplain that"foraclaim tobeproperly before thepanel, ithadtobewithin
thePanel'sterms ofreference andithadtohavebeenidentified during prior stages ofthedispute
settlement process".92InUnited States -Measures Affecting Alcoholic andMaltBeverages ("United
States -Alcoholic Beverages") ,theUnited States summarized thepolicy rationale as:
"...consultations provide theparties anopportunity toreach asatisfactory solution
tothedispute before proceeding toapanel. Thepartycomplained against might modify
itspractice or,alternatively, convince thecomplaining party oftheGATT consistency
ofitsmeasure, ineither caseavoiding theneedforapanel. Furthermore, inthose
situations where resolution isnotpossible without recourse toapanel, consultations
provide thedefending party notice ofthemeasure(s) complained ofandtheconsequent
opportunity toprepare adequately fortheissue. Suchbasicdueprocess isafundamental
element ofallequitable adjudicatory systems".93
3.14 TheUnited States submits thatconsultation requests andpanel requests share onecommon
purpose, i.e.,togivenotice. Thenotice given should beincreasingly more specific ateachstage and
thedegree ofspecificity required should beproportional towhatnotice isneeded toensure theparties '
meaningful participation ateachstage. Article 4.4oftheDSUrequires thatrequests forconsultations
include "identification ofthemeasures atissueandanindication ofthelegalbasisforthecomplaint."
92Panel Report onUnited States -Imposition ofAnti-Dumping Duties onImports ofFresh andChilled Atlantic Salmon
from Norway ("United States -Norwegian Salmon"), adopted on26April 1994,ADP/87, 100, para. 338.
93PanelReportonUnitedStates-MeasuresAffectingAlcoholicandMaltBeverages("UnitedStates-AlcoholicBeverages"),
adopted on19June 1992, BISD 39S/206, 226, para. 3.2(summary ofUSargument).WT/DS44/R
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Thespecificity ofthenotice given bythecomplaining party totheresponding party mustbesufficient
fortheresponding party tounderstand thenature ofthematter alleged bythecomplaining party, and
toprepare fortheconsultations sothattheywillbemeaningful.
3.15 TheUnited States argues thattheDSU doesnotprescribe thespecificity withwhich amatter
mustberaised anddiscussed inconsultations. Thecomplaining party'sdescription ofthematter should
include adescription ofhowthemeasures itunderstands toberelated tothematter operate anda
description ofhowthose measures areinconsistent withtherelevant WTO agreements. Itisnotunfair
fortheresponding party tobearresponsibility forknowing about itsowninterpretations orapplications
ofitsmeasures, particularly since those rulings andinterpretations would bemade under itsownlegal
system initsownlanguage. Butthediscussions should bespecific enough toserve thepurpose of
theconsultations, i.e.,togivethecomplaining party anopportunity toexplain thematter complained
of,togivetheresponding party theopportunity toexplain thebasisformaintaining themeasures and
toprovide theopportunity fortheparties toreach asatisfactory adjustment ofthematter before
proceeding toapanel.
3.16 TheUnited States explains asageneral matter, ifaparty complains about theoperation and
effect ofagiven lawormeasure, itshould notberequired todiscover andpresent intheconsultations
every potentially relevant amendment, regulation, directive, notice, administrative action, orjudicial
decision interpreting andapplying thatlawormeasure. Inmany countries, including theUnited States,
thefullpanoply ofregulations, administrative rulings, andjudicial decisions regarding aparticular
lawcould fillanentire wallofbookshelves. Theapproach advocated byJapan would compel a
complaining party toresearch every lastvolume ontheshelves before requesting consultations tobe
surethatitcould identify andmention intheconsultations eachruling andinterpretation thatmight
possibly berelevant inapanel submission. Such anapproach would compel thecomplaining party
tobecomeasknowledgeableaboutthemeasuresastherespondingpartythatpromulgatedandadministers
themeasures before requesting consultations. Placing suchadifficult andunnecessary burden on
complaining parties would discourage Members fromrequesting consultations unless theyhadalready
written theirfirstsubmission tothepanel. Suchaheavy burden isnotreflected intheDSUandwould
impair thesettlement ofdisputes.
3.17 Japan responds thatthefundamental reason behind Japan'srequest forthedismissal ofcertain
USclaims isthatthemeasures werenotevenspecifically mentioned intheUSpanel request. Japan
further explains thattheDSU doesnotrequire thatevery interpretation orapplication ofameasure
beidentified, butthatitrather requires thecomplaining party toidentify thespecific measures atissue.
ItisJapan'sviewthatinthiscasetheUnited States, e.g.,complains against certain specific notifications
under thePremiums Law, suchastheissue ofrepresentations, butdidnotdisclose those specific
notifications untilitsfirstsubmission.
3.18 TheUnited States maintains thateachofthemeasures which aresubject toJapan'sprocedural
objections waswithin thescope ofthemeasures identified anddescribed bytheUnited States inthe
consultations asreflected inthestatement thattheUnited States delivered attheconsultations andthe
USdelegation 'snotes ofthedialogue between theparties. During theconsultations, theUnited States
presented adetailed andcoherent picture ofthemeans andresults ofJapan'sliberalization
countermeasures. Japan wasapprised ingreat detail ofallthemeasures atissue, thefactual basisfor
thedispute, theexact nature oftheUSassertions andthelegal arguments thattheUnited States
considered applicable.
3.19 InJapan ’sview, theUnited States ’argument thatitpresented intheconsultation "adetailed
coherent picture ofthemeans andresults ofJapan’sliberalization countermeasures" doesnotjustify
theUSfailure tomeettherequirement under Article 6.2oftheDSUtoidentify the"specific measures
atissue." Japan argues thattheUnited States appears tomisunderstand thenotice requirement ofWT/DS44/R
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Article 6.2which provides thatthepanel request "shall ...identify thespecific measures atissue" and
thusitrequires greater specificity anddetail intherequest.
3.20 TheUnited States contends thatithasnoobligation to"discover andpresent intheconsultations
every potentially relevant amendment, regulation, directive, notice, administrative action, orjudicial
decision interpreting andapplying thatlawormeasure."
3.21 Japan responds thattheUnited States hasmisunderstood theJapanese argument. First, the
fundamental reason behind Japan’srequest forthedismissal ofcertain USclaims isthatthemeasures
werenotevenspecifically mentioned intheUSpanel request. Second, theDSU doesnotrequire that
every interpretation orapplication ofameasure beidentified; rather, itrequires thecomplaining party
toidentify thespecific measures atissue. Inthiscase,e.g.,theUnited States complains against certain
specific notifications under thePremiums Law, suchastheissueofrepresentations, yetdidnotdisclose
those specific notifications untilitsfirstsubmission.
3.22 More specifically, theUnited States insists thatseven oftheninemeasures referred tobyJapan
underitsproceduralobjectionsformpartofthebroadergroupofgovernmentactionsandpolicyprocesses
thattheUnited States categorizes as"distribution countermeasures":
(1) Distribution Committee Sixth Interim Report;
(2) Japan Development Bank (JDB) financing toKonica;
(3) Small andMedium Enterprise Agency (SMEA) financing tophotofinishing laboratories
(4) Countermeasures bythePhotosensitive Materials Committee oftheDistribution
Systemization Promotion Council;
(5) Directives tostrengthen theDepartment Stores Law;
(6) International Contract Notification under theAntimonopoly LawandJFTC Rule1;
(7) JFTC Notification 17.
Moreover, theUnited States contends thatthree oftheninemeasures referred tobyJapan under its
procedural objections areinterpretations orapplications ofthePremiums Law. Inaddition tothejust-
mentioned Notification 17,these arenamely:
(8) JFTC Notification 34;
(9) JFTC Notification 5.
TheUnited States discusses eachofthese measures inturn.
3.23 (1) Distribution Committee SixthInterim Report :TheUnited States submits thatthisreport
wasoneofaseries ofstudies bytheCouncil thatformed thebasis fordistribution policy inJapan,
reflecting ananalysis andconsensus-building process between government andtheprivate sector. In
theconsultations, theUnited States specifically identified anddescribed thisprocess bytheIndustrial
Structure Council anditsseries ofreports. TheUnited States stated thatMITI charged theDistribution
CommitteeoftheIndustrialStructureCouncilwithdevisingmeasuresforconsolidatingandstrengthening
thedistribution system inanticipation ofmarket liberalization andthatMITI'sinstructions onhow
toconsolidate thedistribution system weresetforth inaseries ofreports andguidelines toindustry
inthelate1960s andearly 1970s. TheUnited States mentioned examples ofDistribution Committee
reports andtherefore, Japan hadsufficient notice oftheUSconcern about alloftheDistribution
Committee reports. TheUnited States maintains thattheSixth Interim Report iswithin thescope of
the"series ofreports andguidelines toindustry inthelate1960s andearly 1970s", and"[actions by
theDistribution Committee oftheIndustrial Structure Council ...forconsolidating andstrengthening
thedistribution system" discussed bytheUnited States intheconsultations.WT/DS44/R
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(2)-(3) JDBandSMEA Financing :Inrespect oftheUSclaims related totheJDBfinancing
given toKonica toestablish common distribution facilities withitswholesalers andtheSMEA financing
given tophotofinishing laboratories tohelpalignthem withdomestic manufacturers, intheUSview,
Japan wasonfullnotice fromtheconsultations thattheUnited States wasconcerned about government
financing toassist theconsolidation ofdistributors under thedomination ofJapanese manufacturers.
Specifically, theUnited States noted thatthe1971 Basic Plansetforth objectives andaprocess for
theJapanese industry toaccomplish those objectives under the"systemization" policy. TheUnited
States pointed outthattheBasic Plandidnotrelyonvoluntary efforts alone, butlooked forfinancial
incentivestoachievekeiretsu-nization[ofdistribution].TheUnitedStatesemphasizedseveralprovisions
oftheBasic Plantosupport thispoint, including thestatement intheBasic Planthat"positive support
andguidance fromthegovernment willbenecessary "tocarry outsystemization. Based onthese
discussions,theUnitedStatesarguesthatJapanhadreasontoexpectthattheUnitedStateswouldcontinue
pursuing thespecific ways inwhich Japan gaveits"positive support" forwholesalers andlaboratories
(whichalsoactaswholesalers)toestablishorstrengthentheirexclusivetieswithJapanesemanufacturers.
(4) "Countermeasures"bythePhotosensitiveMaterialsCommittee:TheUnitedStatesfurther
contends thatactions bythePhotosensitive Materials Committee (Committee) oftheDistribution
SystemizationPromotionCouncil(Council)alsofitwithintheconfinesofthedistributioncountermeasures
discussed bytheUnited States intheconsultations. TheUnited States addressed indetail theactions
oftheCommittee 'sparent, theCouncil, which authored the1971 Basic Plan. TheUnited States
described howtheBasic Plancalled forthe"support andguidance" oftheJapanese Government to
accomplish thesystemization goals. TheUnited States specifically stated thatoverthenextseveral
years following theBasic Plan, theJapanese Government followed upwithfurther studies toseehow
itsplans werebeing implemented andtoaddtoorrefine itsguidance forconsolidating thedistribution
structure. Such follow-up andfurther guidance isexactly whattheCommittee didanditplayed an
important roleinensuring thatKonica received subsidized financing fromtheJapan Development Bank
toestablish ajointdistribution facility withitswholesalers.
(5) Directives under theDepartment Stores Law:TheUnited States doesnotinclude the
MITI directives issued between 1968 and1971 under theDepartment Stores Lawasmeasures that
violate Article IIIorXorthatnullify orimpair benefits under Article XXIII:1(b). However, these
directives formpartofthefactual context inwhich Japan carried outtherestructuring ofitsdistribution
sector forphotographic filmandpaper. The1969 MITI-commissioned survey oftransaction terms
inthephotographic filmsector specifically described thegrowth oflarge stores, along withthe
competitive challenge ofKodak, asthetwogreatest threats tomaintaining theoligopoly ofFujiand
Konica. Intheconsultations, theUnited States mentioned thatJapan sawtheneed torevise the
Department Store Lawandreplace itwiththemore comprehensive Large Stores Lawaspartofthe
overall effort toinsulate thedistribution system fromforeign control following capital liberalization.
(6) International Contract Notification :TheUnited States alleges thattheinternational
contract notification provisions oftheAntimonopoly Lawhaveplayed animportant roleinprotecting
theexclusive distribution system fostered byJapanese Government policy. Theinternational contract
notification provisions require eachcontract between foreign manufacturer andaJapanese wholesaler
tobereported totheJFTC. Once transaction terms arestandardized, theJFTC more easily canfind
thattransaction terms departing fromthestandard areunfair trade practices. Intheconsultations, the
United States discussed Japan'spolicy ofstandardizing transaction terms andtherationale forthispolicy,
including thatstandardized transaction terms would helptoprotect Japanese manufacturers against
foreign competition. TheUnited States referred tothefollowing passage inthe1970 Guidelines: "In
order toprevent foreign corporations withhugeinvestment capacity fromdisrupting thetrade order,WT/DS44/R
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reasonable terms oftrade mustbeclearly stated". TheUnited States alsoquoted apassage94froman
industry journal which explained thepurpose oftheguidelines thatstandardizing transaction terms
would facilitate application oftheAntimonopoly Lawtonon-standard practices. TheUnited States
alsoquoted from areport bytheForeign Investment Council, thecompanion government-industry
committee totheIndustrial Structure Council. Thisreport95emphasized thattheAntimonopoly Law
could beusedtohelpcheck thecompetitive advance offoreign suppliers. TheUnited States underscores
thatJapan hadclearnotice oftheUSconcern withstandardized transaction terms asameans ofblunting
thecompetitive abilities offoreign firms, anditsuseoftheAntimonopoly Lawtosupport thesepolicies.
TheUnited States maintains thatJapan cannot besurprised thatthefirstUSsubmission described more
precisely themechanisms under theAntimonopoly Lawthathelped toforce standardized terms upon
foreign manufacturers.
(7) JFTC Notification 17:TheUnited States asserts thatJFTC Notification 17wasatool
employed byJapan toblunt theability offoreign firms tomake competitive offers toJapanese
distributors. Itessentially ruled outallmanner ofpremiums frommanufacturers towholesalers, except
those oftoken value thatcould beconsidered reasonable inlight ofnormal business practice.
Notification 17reinforced thestandardized transaction terms andthesystemization policies which the
United States discussed atlength withJapan intheconsultations andJapan thuscannot claim surprise
thatthefirstsubmission oftheUnited States discusses Notification 17.Inaddition tobeing within
thescope oftheconsultations on"distribution countermeasures", theUnited States submits that
Notification17isalsoaninterpretationorapplicationofthePremiumsLawwhichitconsidersasforming
partofthe"promotion countermeasures".
(8)-(9) JFTC Notifications 5and34:TheUnited States maintains withrespect totwoother
suchinterpretations orapplications ofthePremiums Lawthatitdiscussed thePremiums Lawatlength
withJapan intheconsultations. Itstressed inparticular theintent andeffect ofthePremiums Law
inblunting theability offoreign manufacturers toapply theircompetitive strengths inJapan. TheUnited
States quoted apassage from areport oftheForeign Investment Council96andemphasized thatthe
limitations oncompetition under thePremiums Lawworked tothedisadvantage ofcompanies who
arenotthedominant suppliers. IntheUSview, Notifications 5,17and34arecornerstone applications
ofthePremiums Lawthatimpose substantial limits ontheability offoreign filmmanufacturers tooffer
meaningful premiums inconnection withproducts soldinJapan. Thesubstantial discussion ofthe
Premiums Lawduring theconsultations gave Japan more thanadequate notice thatitsparticular
interpretations andapplications ofthelawrestricting competition werewithin thescope ofthisdispute.
3.24 Japan reiterates thattherequest forconsultations inthiscasewasoverly broad andvague,
anddidnot"identify" themeasures forthepurposes ofArticle 4.4oftheDSU, which requires the
complaining party toinclude an"identification ofthematter atissue". According toJapan, the
94"Inthecaseofthephotographic sector, ...thereduction intariffs andthecapital liberalization, etc.,makes theinroads
Kodak isgaining aproblem thatit[theindustry] faces. TheMinistry ofInternational Trade andIndustry 'sguidelines for
normalizingtransactionconditionsiswhatmaybecalledan'immunization'....[B]ecauseofthefearofconfusionoftransaction
order duetothedevelopment ofliberalization, it[theGuidelines] embodies theideaof'immunizing 'thedistribution system
asawhole byrationalizing andclarifying thetransaction condition ofrebates anddiscounts ....Theguidelines maybe
described asanattempt toequalize theconditions ofcompetition. Forinstance, standard rebates were adopted sothatthe
useofnon-standard rebates byforeign capital maybechecked bytheapplication oftheAntimonopoly Law." Draft Standard
Contract forFilm withCriteria forStandardization onTransaction Terms, Zenren Tsuho, August 1971, USEx.71-11.
95"FortheapplicationoftheAntimonopolyLaw,whileitmaynotbepossibletospecificallyselectforeigncapitalenterprises
fordifferential treatment, foreign capital enterprises nevertheless have thestrong capital andtechnical background ofthe
parent company andareusually inaneconomically strong position. Consequently, itisbelieved thattheyoften willbecome
theobject oftheregulation oftheAntimonopoly Law." USEx.67-5, pp.76-78.
96When foreign capital isbrought intoJapan, itispossible foraparent company tousevastamounts ofcapital toengage
indumping, offer premiums, andconduct large-scale advertising andpublic relations. Therefore ...itisnecessary tofully
study whether these actions qualify asunfair business practices asdefined inArticle 2oftheAntimonopoly Lawandcan
beregulated pursuant toArticle 19oftheAntimonopoly Laworunder thePremiums Law.WT/DS44/R
Page36
consultations themselves inthiscasealsodidnotidentify thesespecific measures andtheUnited States
admitted asmuch during thefirstmeeting withthepanel. While theUnited States purports to
demonstrate how"measures" werediscussed inthepreceding paragraph, infactthediscussion shows
justtheopposite. InJapan'sview, theUnited States isforced tomake rather strained arguments for
eachmeasure.
2. THE REQUEST FOR THE ESTABLISHMENT OFTHE PANEL
3.25 Article 6.2oftheDSU provides:
"Therequest fortheestablishment ofapanel shallbemade inwriting. Itshallindicate
whether consultations wereheld, identify thespecific measures atissue andprovide
abriefsummary ofthelegalbasis ofthecomplaint sufficient topresent theproblem
clearly".
3.26 Japan submits thatArticle 6.2oftheDSUrequires thecomplaining party toidentify allalleged
measures atissueinitsrequest fortheestablishment ofapanel, aswellasthelegalbasisforitsclaims
relating tothose measures. Given thatArticle 4.4oftheDSUprovides thatarequest forconsultations
includes "identification ofthemeasure atissue", whereas Article 6.2oftheDSUrequires thatthepanel
request "identify thespecific measures atissue", Japan argues thatinthepanel request greater specificity
anddetail isrequired thanintherequest forconsultations. Thisrequirement serves theimportant
purposes ofbothproviding notice totheparties complained against andthird parties, anddefining
preciselywhatthepanelshouldconsider.Withoutaspecificindicationofthemeasuresbeingchallenged,
thepartiescomplainedagainstcannotdefendthemselvesadequatelyandthirdpartiescannotjudgewhether
theyneedtoparticipate inthepanel proceedings.
3.27 TheUnited States explains thatArticle 6.2oftheDSU requires thecomplaining party to
"identify thespecific measures atissueandprovide abriefsummary ofthelegalbasisofthecomplaint
sufficient topresent theproblem clearly". Thepanel request thenbecomes theprimary document
defining thepanel'sterms ofreference which "fulfil animportant dueprocess objective, i.e.,giving
theparties andthirdparties sufficient information concerning theclaims atissueinthedispute inorder
toallow themanopportunity torespond tothecomplainant 'scase".97While theDSUrequires greater
specificity inthepanel request thanintherequest forconsultations, theUnited States argues thatthe
panel request neednotrestate theconsultations norsummarize thecomplaining party'sfirstsubmission.
3.28 Japan further submits thatArticle 6.2oftheDSUreflects pastpanel practice, which consistently
hasinterpreted theterms ofreference narrowly. InCanada -Administration oftheForeign Investment
Review Act,thepanel declined toconsider anymeasures related to"manufacture" ofgoods because
ofitsterms ofreference "which onlyrefertothepurchase ofgoods inCanada and/or theexport of
goods from Canada."98Thepanel inNorwegian Salmon summarized thepolicy rationale forpanels
toconfine themselves totheexamination ofmatters identified intheirterms ofreference:
"[T]erms ofreference served twopurposes: definition ofthescope ofapanel
proceeding, andprovision ofnotice tothedefending Party andother Parties thatcould
beaffected bythepanel decision andtheoutcome ofthedispute. Thenotice function
ofterms ofreference wasparticularly important inproviding thebasisforeachParty
todetermine howitsinterests might beeffected andwhether itwould wishtoexercise
itsrighttoparticipate inadispute asaninterested thirdparty. Thepanel observed
97Appellate Body Report onBrazil -Measures Affecting Desiccated Coconut ("Brazil -Desiccated Coconut "),adopted
on20March 1997, WT/DS22/AB/R, p.22.
98PanelReportonCanada-AdministrationoftheForeignInvestmentReviewAct("Canada-FIRA"),adoptedon7February
1984, BISD 30S/140, 158, para. 5.3.WT/DS44/R
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thatterms ofreference often were standard terms ofreference ...inwhich the
definition ofthematter hadbeensupplied byawritten statement prepared entirely by
thecomplaining party. Inthelightofthese considerations, thePanel concluded that
amatter, including eachclaim composing thatmatter, could notbeexamined byapanel
under theAgreement unless thatsame matter waswithin thescope of,andhadbeen
identified in,thewritten statement orstatements referred toorcontained initsterms
ofreference ..."99.
3.29 According totheUnited States ,onlytwopanel reports haveconsidered thequestion ofwhether
a"measure" should beconsidered within thepanel'sterms ofreference.100Anumber ofprior panel
reports haveconsidered therelated, butdifferent, question ofwhether "matters" or"claims" arewithin
thepanel'sterms ofreference.101IntheUnited States view, these prior decisions demonstrate that
panels haveexcluded onlythose measures, claims, andmatters thatfalloutside theparameters ofthe
dispute asitwasunderstood bytheparties atthetimethepanel'sterms ofreference wereestablished.
3.30 Japan submits thattheouterlimits ofapanel'sjurisdiction aredefined byitsterms ofreference
which inthiscaserefertothematter specified inthepanel request. Panels should thusfocus onthe
exact wording oftheterms ofreference todefine precisely theirmandate. Claims withrespect toitems
raised bytheUnited States initsfirstsubmission thathadnotbeenmentioned initspanel request should
bedismissed attheoutset asoutside thescope ofthePanel'sterms ofreference.
3.31 TheUnited States contends thatitsrequest fortheestablishment ofthisPanel doesnotdiffer
greatly fromother WTO panel requests inthedegree ofdetail provided. Thepanel request inthecase
concerning theEuropean Communities -Regime fortheImportation, SaleandDistribution ofBananas
("EC -Bananas") ofApril 1996 justdescribed thattheregime wasestablished byanECregulation,
andsubsequent legislation, regulations andadministrative measures andthattheregime andrelated
measures appear tobeinconsistent withtheprovisions oftheWTO Agreements. TheUnited States
takesthepositionthatinviewofthenatureofJapan'sdistributionmeasuresintheconsumerphotographic
filmandpaper market, itwasnecessary fortheUnited States todescribe those measures insimilar
terms.
3.32 Japan explains itsposition withregard tothedifferences between theissues forthiscaseand
those fortheEC-Bananas case. Contrary totheUSclaims, inJapan’sview, thepanel request in
thiscasediffers greatly from thepanel request fortheEC-Bananas case. Thepanel request forthe
EC-Bananas casedidapparently identify thebasicECregulation atissuewhich established thebanana
"regime" andreferred to"thesubsequent EClegislation, regulations andadministrative measures that
further define andimplement thebasic regulation." Bycontrast, inthepresent case, thecores ofthe
99UnitedStates-NorwegianSalmon,ADP/87,99,para.336.AlthoughthispanelinvolvedadisputeundertheAntidumping
Code, inJapan 'sview, thepolicy rationale isequally compelling inthepresent case.
100InJapan -Alcoholic Beverages thepanel ruled against theproposed inclusion ofanewmeasure, theTaxation Special
Measures Law, thatwasunrelated tothemeasure thathadbeen discussed inconsultations andnamed inthepanel request,
theJapanLiquorTaxLaw.PanelReportonJapan-TaxesonAlcoholicBeverages,adoptedon1November1996,WT/DS8/R,
para. 6.5.InUnited States -Alcoholic Beverages, thepanel adopted anagreement oftheparties astothescope ofthemeasures
tobeconsidered, butrejected Canada 'srequest toinclude intheterms ofreference "any newmeasure which maycome
intoeffect during thePanel 'sdeliberations." BISD 39S/206, 227, para. 3.5.
101See,e.g., Panel Report onUnited States -Denial ofMost-Favoured-Nation Treatment astoNon-Rubber Footwear
From Brazil,adopted on19June 1992, BISD 39S/128, 148, para6.2(rejecting twonew"issues" under Article Xand
XXIII:1(b)); Panel Report onUnited States -Restrictions onImports ofSugar ,adopted on7November 1990, BISD 37S/228,
237,para. 3.19(rejecting attempt toinclude newArticle XIII"matter"); andUnited States -Norwegian Salmon ,ADP/87,
99,para. 336(rejecting attempt toinclude anewArticle III"claim" where existing claims related totheAntidumping
Agreement). Cf.Panel Report onUnited States -Section 377oftheTariff Actof1930,adopted onBISD 36S/345, 383,
para. 5.5(accepting twonewEEC arguments relating to"legal procedures").WT/DS44/R
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measures inquestion themselves arepresented with such unclear expressions as"liberalization
countermeasures," aphrase created bytheUnited States, andmany ofthealleged measures arenot
thekindofmeasures which "further define andimplement thebasic regulation," butarepresented
withvague andundefined expressions like"butnotlimited to"and"other related measures including
guidelines."
3.33 Japan further argues thatalthough thepanel ontheEC-Bananas casestates that"theDSU
must beinterpreted soastopromote theprompt settlement ofdisputes, without adopting areading
ofDSU provisions thatwould prolong disputes unnecessarily," undue emphasis onthepromptness
ofthesettlement without taking dueaccount ofthedefending party’sburden mayinvite abuse ofthe
dispute settlement system andcould cause serious damage totheproper operation ofthesystem. Japan
submits thattheDSU mustbeinterpreted soastoserve thepurpose ofthefairsettlement ofdisputes.
3.34 TheUnited States urges thePanel toinclude themeasures subject toJapan'sprocedural
objections within itsterms ofreference
(1) because Japan wasonadequate notice ofthemeasures implicated intheUSrequest;
(2) because Japan hasnotcomplained thatanyofthemeasures arenot"related" tomeasures
thatwere discussed attheconsultation andnamed inthepanel request; and
(3) because ofthenature ofthemeasures themselves.
(a) Adequate notice
3.35 From thestandpoint oftheobject andpurpose ofArticle 6.2,theUnited States argues that
itspanel request wasmore thansufficient inviewoftheAppellate Body'sfinding initsreport inthe
Brazil -Desiccated Coconut dispute that"terms ofreference fulfilanimportant dueprocess objective -
theygivetheparties andthirdparties sufficient information concerning theclaims atissueinthedispute
inorder toallow them anopportunity torespond tothecomplainant 'scase".102
3.36 Inthecurrent dispute, theUnited States claims thatJapan wasnotdenied "anopportunity to
respond tothe[US]case". Asitsfirstsubmission demonstrates, Japan didnotlackanunderstanding
oftheproblem theUnited States wascomplaining about. Japan hadsixweeks torespond tothefirst
USsubmission which isdouble themaximum amount oftimeintheDSU'sproposed timetable for
panel work. Ifthere were anyprejudice caused toJapan bytheinclusion infirstUSsubmission of
theninemeasures which aresubject toJapan'sprocedural objections, theUnited States argues that
prejudice hasbeencured bytheextraordinarily longperiod oftimethatJapan hadtoprepare itsfirst
submission.
3.37 Japan responds thatevenifithadmore timetoprepare itsfirstsubmission thatwould not
excusetheviolationofArticle6.2oftheDSU.Moreover,disclosureafterthepanelrequestdoesnothing
toremedy theharm suffered bythirdparties whomight havemade different decisions about whether
ornottoparticipate based onthespecific items raised inthepanel request. Japan further submits the
following fourpoints. First, awritten submission doesnotsubstitute forthenotice function required
byArticle 6.2oftheDSU. Foranother, thelackofspecificity inthepanel request requires extensive
work onthedefending party forthepreparation ofitsdefense, which could beavoided ifthepanel
request were sufficiently specific. Making thedefending party engage inwhatmayeventually turn
outtobeunnecessary work, andinview ofthelimited amount ofresources andtimeavailable,
constraining theirability todefend adequately isprejudicial andunfair. Thirdly, thefirstUSsubmission
included suchmeasures asinternational contract notification, SMEA financing, andJDBloan, the
inclusion ofwhich Japan wasnotabletoforesee evenafterextensive preparation. Finally, theUS
102Brazil -Desiccated Coconut ,WT/DS22/AB/R, p.22.SeealsoUnited States -Norwegian Salmon ,ADP/87, 99,
para. 336.WT/DS44/R
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firstsubmission itself stilldidnotclarify which measures arecomplained against. Even thelistof
the"measures" submitted bytheUnited States inresponse toaquestion bythePanel atthefirst
substantivemeetingincludedvagueexpressions,suchas"relatedregulationsandadministrativemeasures,
including related localmeasures."
3.38 TheUnitedStatescontendsthatallthemeasuresinquestionareelementsofJapan'sliberalization
countermeasuresplan;sixare"distributionmeasures,suchas,butnotlimitedto"themeasuresidentified
inthebodyandAttachment AoftheUSpanel request; andthree arenotifications made bytheJFTC
pursuant tothePremiums LawortheAntimonopoly Lawidentified inthebodyoftheUSpanel request.
According totheUnited States, itspanel request stated explicitly andclearly theproblem thattheUnited
States wasasking thepanel toaddress andgaveJapan andthirdparties sufficient information concerning
theclaims atissue inthedispute forthem torespond fullytotheUnited States.
(b) Related measures
3.39 According totheUnited States, inthecurrent dispute, themeasures thatJapan would have
thePanel exclude fromconsideration areanintegral partofthecorpus ofthedistribution andpremiums
countermeasures, theywere discussed indetail during theconsultations andthusdonotfalloutside
theparameters ofthedispute astheparties understood it.
3.40 Japan requests thePanel toexclude thevague andoverly inclusive expressions usedbythe
United States inthepanel request asinconsistent withArticle 6.2oftheDSU. Only "measures"
specifically mentioned inthepanel request should bedeemed tobebrought properly before thePanel.
AttheDSBmeeting of16October 1996, when thePanel wasestablished, Japan expressed itsserious
concerns about theprocedural problems oftheUSrequest fortheestablishment ofthepanel inlight
oftheDSU, andreserved itsrights torequest thePanel tomake aruling onthematter.103
3.41 Inparticular, inJapan'sview, "liberalization countermeasures", towhich theUnited States
refers initspanel request, arenotasetofconcrete measures, butrather ageneric term, andaretoo
general andambiguous toberegarded as"specific measures" inthesense ofArticle 6.2.Attachment A,
inwhich theUnited States listed whatitbelieves tobe"distribution measures", contains ameasure
which Japan isunable toidentify, namely the"Administrative Guidance toPromote Rationalization
ofDistribution System, 1966".
3.42 TheUnited States submits thatitusedtheterm"distribution measures" initspanel request
torefertotheseries ofmeasures usedtoimplement Japan'spolicy ofrestructuring thedistribution
system forphotographic materials intoexclusionary distribution channels. TheUnited States included
Attachment Ainitspanel request toindicate thetypes ofmeasures thatwere included intheterm
"distribution measures", eventhough, intheUSview, Japan would havefullyunderstood themeaning
ofthattermbased ontheconsultations between theparties.
3.43 Japan claims thatthere areother references inthepanel request which imply thattheUnited
States hasnotyetidentified specific measures atissue, e.g.,expressions suchas,"butnotlimited to",
"other related measures, including guidelines", which appear inAttachment A,aswellas"related
measures" which isfound attheendofthefirstparagraph ofthepanel request.
3.44 TheUnited States responds thatthephrases "measures, suchas,butnotlimited to"inline4
ofthefirstparagraph and"other related measures, including guidelines" attheendofAttachment A
indicate thatAttachment Aisanillustrative, notexhaustive, listofthedistribution measures thatJapan
usedtoclose theprimary Japanese distribution channels toimported filmandpaper. Thephrase "and
103WT/DSB/M/24.WT/DS44/R
Page40
related measures" attheendofthefirstparagraph refers toamendments, regulations, administrative
guidance, notifications, andsurveys, thatJapan implemented withrespect to
(a) theLarge Stores Law;
(b) Special Measures fortheAdjustment ofRetail Business;
(c) thePremiums Law;
(d) measures regarding dispatched employees pursuant totheAntimonopoly Law;
(e) theLawConcerning Enterprise Reform forSpecified Industries;
(f) theMinistry ofInternational Trade andIndustry Establishment Law.
3.45 Japan points outthattheUnited States continues tousevague expressions initsresponse to
thePanel question forclarification ofitsclaims. Theresponse included expressions suchas"including
related actions toimplement recommendations intheGuidelines"; "including actions toimplement
recommendations"; and"related regulations andadministrative measures, including related local
measures". Since theseexpressions hardly indicate "specific measures", Japan criticizes thattheUnited
States continues nottoclarify thescope ofitsclaims andemphasizes thatacomplaining party should
notbeallowed continually toraiseadditional items inapanel proceeding.
3.46 Given that,according totheUnited States ,Japan doesnotdispute thatthemeasures withrespect
towhich itraises procedural objections are"related to"themeasures thattheUnited States specifically
named initspanel request, thePanel should consider these related measures tobewithin itsterms
ofreference.
3.47 Japan contests thatthenineitems identified against which ithasraised procedural objections
aswellasrulesonlossleader advertising, arenot"related" tothose thatareproperly before thePanel.
Withrespect totheUSargument thatJapan hadnotearly enough objected tothe"relatedness", Japan
responds that,since theUnited States firstmade thisargument inthefirstsubstantive meeting ofthe
Panel, Japan could notrespond untilthattime. Japan further argues thattheUnited States should bear
theburden ofestablishing the"relatedness" ofthese measures notspecifically mentioned inthepanel
request. Japan should notbeartheburden ofproving theconverse. While theUnited States hasmade
general claims about these items, Japan takes theposition thattheUnited States hasnotidentified the
measures properly before thePanel towhich these measures are"related".
3.48 Specially, Japan contends thatseveral ofthese measures which aresubject toitsprocedural
objections bearnomeaningful relationship totheUSclaims regarding Japanese policies ondistribution,
large stores, orsalespromotions. Inparticular, Japan submits that:
(2-3) SMEA andJDBFinancing :Japan recalls thattheUSdefense isthatthemere phrase
"positive support" inthe1971 Basic Planshould havebeensufficient toplace Japan onnotice about
theSMEA andJDBfinancing programs. Withrespect totheUSallegation thatduring theconsultations
itpointed outthatthe1971 Basic Planlooked to"financial incentives", Japan notes thataccording
toitsrecord andrecollection, thispoint wasnever raised intheconsultations. Japan declares thatthe
United States islooking forisolated phrases indocuments toexcuse itsfailure tospecify whatmeasures
were tobeatissue inthisdispute. InJapan'sview, thephrase "positive support" istoovague to
constitute anymeaningful notice toJapan ortoestablish anyrelationship between themeasures identified
inthepanel request andthemeasures ultimately attacked bytheUnited States.
(4-5) "Measures"bythePhotosensitiveCommitteeandDirectivesundertheDepartmentStores
Law:Japan notes thattheUnited States itself dropped these items from those itrequests thePanel
toconsider.WT/DS44/R
Page41
(6) International Contract Notification :Japan notes thatintheUSpanel request theonly
itemmentioned withrespect totheAntimonopoly Lawwas"measures regarding dispatched employees",
anissue unrelated totheinternational contract notification requirement under theLaw.
3.49 Japan concludes thatthePanel should exclude vague andoverly inclusive expressions from
thescope oftheterms ofreference andonlythose"measures" specifically mentioned inthepanel request
fortheestablishment ofthePanel should bedeemed properly before thepanel. Otherwise thescope
ofthepanel request andthustheterms ofreference themselves would berendered meaningless. If
theUnited States needed more timetotranslate orevaluate Japanese language materials, itcould simply
havewaited tomake itspanel request. When thecomplaining party reaches thestage ofapanel
proceeding, itmustbeready toidentify specific measures asthebasis ofitsclaim. Japan insists that
USefforts toinclude vague "catch-all" phrases arecontrary tothebasic principles oftheWTO dispute
settlement process.
(c) Nature ofthemeasures
3.50 TheUnited States further submits thatJapan wasaware thattheUnited States iscomplaining
about acollection ofmeasures, notasingle measure, thatresulted inthecreation ofanexclusionary
distributionsystemforconsumerphotographicmaterials.HadJapanimplementeditsdistributionpolicies
through transparent lawsandregulations, theUnited States would nothaveneeded togotosuchgreat
lengths todescribe thedistribution measures initspanel request. Therefore, United States asserts that
themeans selected byittodescribe these measures arenecessitated bythenature ofthemeasures
themselves. Ithadtaken theUnited States years tofullyunderstand Japan'slabyrinth ofliberalization
countermeasures anditcontinues tolearn every day,including thenames andapplications ofother
related measures thatconstitute individual bricks inJapan'sprotectionist wall. IntheUSview, Japan
hasusedanextraordinary array ofmeasures which havebeendifficult toidentify andfitting thepieces
ofthispuzzle together hasbeenanextremely difficult task. Todismiss themeasures inquestion as
being beyond thePanel'sterms ofreference would reward Japan foritsnontransparent approach to
protectionismandwouldgiverespondingpartiesanincentiveforwithholdinginformationinconsultations,
andwould prevent theUnited States from obtaining complete relief from aproblem thatiswell
understood byJapan. TheUnited States submits thatsuchadismissal would notbewithin theletter
orthespirit oftheDSU.
3.51 Japan rebuts thattheUSallegations concerning thenature ofthemeasures areundermined
bythebreadth anddetail oftheUSsubmission given thatinthethousands ofpages intheappendix
toitssubmission, theUnited States hasprovided translated copies ofthereports andother items it
considers relevant toJapan'svarious policies. Thepolicies haveallbeenpublished andarepublicly
available, andthusthese supposedly opaque policies areactually easily accessible tothepublic. Japan
points outthattheUnited States hadnoproblem identifying everything withperfect specificity just
several weeks afterdrafting itspanel request. ThefactthattheUnited States didnotreview these
materials earlier innowaymeans theUnited States could nothavedone so.Japan asserts thatthe
UScomplaint essentially seems tobe"weshould nothavetowaittorequest apanel untilweknow
whatwearecomplaining about". Japan emphasizes thatArticle 6.2oftheDSU requires theUnited
States towaituntilitcanprecisely identify thespecific measures involved inadispute.WT/DS44/R
Page42
IV. SUMMARY OFARGUMENTS
4.1 Theclaims raised bytheUnited States concern three broad categories ofmeasures:
(1)distribution measures, which allegedly encouraged andfacilitated thecreation ofmarket structures
forfilmandpaper inwhich imports areexcluded fromtraditional distribution channels; (2)theLarge
Stores Law, which allegedly restricts thegrowth ofanalternative distribution channel forfilm; and
(3)restrictions onpremiums andmisleading representations under thePremiums Law, which allegedly
disadvantage imports byrestricting salespromotions.
A. DISTRIBUTION "COUNTERMEASURES"
4.2 TheUnitedStatesarguesessentiallythatatthebeginningoftheKennedyRoundin1963,foreign
anddomesticmanufacturersdistributedphotographicfilmandpaperthroughJapan'sprimarywholesalers
who, inturn, soldtoother wholesalers orretailers. Photographic material manufacturers competed
against oneanother tomarket theirproducts tothesame wholesalers. Foreign aswellasJapanese
manufacturers didbusiness withmany ofJapan'sdistributors. Bythemid-1970 's,however, when
manyformalmarketbarriershadfallen,theJapaneseGovernmenthadfundamentallyalteredrelationships
between manufacturers andwholesalers. Bythen, alloftheleading wholesalers inJapan exclusively
handled Japanese products. TheUnited States claims thatsofarnoforeign firmhassucceeded in
penetrating these closed distribution channels.
4.3 AccordingtotheUnitedStates,whentheliberalizationofinternationaltradingconditionsbecame
imminent, MITI andJapanese manufacturing interests recognized thatforeign firms inmany instances
were notonlypositioned tooffer competitive products, butalsotodeploy superior resources and
managerial expertise indistribution andmarketing. MITI foresaw thattheseforeign advantages could
create serious competition forJapanese manufacturers andtheirproducts andthatforeign enterprises
would beabletodisplace domestic manufacturers atthewholesale andretail levels. MITI officials
andJapanese manufacturers therefore jointly devised aplantostreamline Japan'sdistribution system
while atthesame timebringing itunder thecontrol ofdomestic producers. Under thispolicy, which
wasreferred toasthe"systemization ofdistribution", MITI sought tostrengthen vertical distribution
channels from manufacturer towholesaler toretailer inorder toestablish distribution chains of
wholesalers andretailers thatwould exclusively handle theproducts ofaparticular domestic
manufacturer.
4.4 TheUnited States alleges thatMITI targeted three ways totiedistributors more closely to
domestic manufacturers:
First, MITI promoted theuseoftransaction terms thatwould result inadistributor selling
theproducts ofjustonedomestic manufacturer: volume discounts, rebates andstandardized
andshortenedpaymentterms.Discountsandrebatesencouragedwholesalerstopurchasegreater
volume from fewer suppliers. Thestandardized andshortened payment terms limited the
opportunities forwholesalers toseekbetter credit rates from other suppliers. Thisleft
wholesalers more dependent onandvulnerable tothecredit terms offered bythemanufacturer
withwhom theyprimarily didbusiness.
Second, MITI urged thephotographic materials industry torelyupon shared facilities and
operations, suchasjointwarehouses anddistribution routes. Thegovernment offered subsidies,
expertise, andother benefits toinduce businesses toenterintomore cooperative arrangements.
Third, MITI determined thatcommon information andcomputer links would forge closer
relationships among aparticular Japanese manufacturer anditsdownline wholesalers and
retailers. MITI therefore guided manufacturers andwholesalers tousestandardized databases,
commercial orders andfinancial information.WT/DS44/R
Page43
4.5 TheUnited States further claims thatatthesametimeMITI sought totighten thebonds among
horizontal elements ofthedistribution system. MITI attempted tojoinretailers into"voluntary chains"
thatwould dobusiness withaffiliated Japanese manufacturers. Theprincipal result would bethe
consolidation ofpreviously independent photo finishing laboratories within newly-formed groups of
Japanese retailers orwholesalers, orinaconsortium doing business withasingle Japanese manufacturer.
4.6 Japan responds thattheaimofMITI’sdistribution policies wasnottoblock imports butto
modernize theJapanese distribution industry andhelpittomeettheforeign competitive challenge that
would beunleashed byliberalization. Nothing inMITI’sdistribution policies oranyother so-called
"liberalization countermeasures" didanything toencourage orfacilitate thecreation ofanexclusionary
market structure thatdiscriminates against imported filmorpaper. Since theMITI policies inquestion
actually saynothing about encouraging single-brand distribution offilm, theUnited States struggles
toestablish some connection between MITI’spolicies andthemarket structure thatisthemain target
ofitscomplaints. Japan asserts thatwhen confronted withtheactual factsofthismarket, however,
theUSarguments about "distribution countermeasures" collapse.
4.7 Japan further responds thatMITI'sconcern withmodernizing theJapanese distribution sector
hasexisted continuously forover30years, including theperiods before andaftercapital liberalization.
AccordingtoJapan,MITIhaddiverserationalesforencouragingdistributionmodernization.Originally,
MITI sought toimprove therelatively lowproductivity ofthedistribution sector, thereby alleviating
agrowing labour shortage andthecontinuing increase inconsumer prices inthelate1960s. Tothe
extent thatMITI'sdistribution modernization policies werearesponse tocapital liberalization, MITI's
concern wastoimprove theefficiency andcompetitiveness ofarelatively backward distribution sector.
Theobjective wastocompete more effectively withnewforeign entrants. MITI wasnottrying to
prevent imports from enjoying theallegedly unique advantages oftraditional distribution channels.
Tothecontrary,MITIviewedtraditionaldistributionchannelsascompetitivelydisadvantagedandsought
toremedy theirdefects.
4.8 Japan explains more specifically thatMITI'sdistribution policies inthe1960s and'70spursued
modernization through bothrationalization andsystemization policies. Astotherationalization policies,
theobjective wastoeliminate traditional outmoded business practices considered tobeeconomically
irrational. Inthefilmsector, MITI'sissued the1970 Guidelines forRationalization ofTransaction
Terms which explicitly discouraged theuseofrebates anddidnotcallforshorter payment terms.
Thus, inJapan'sview, theywereunrelated andinimical totheestablishment ofsingle-brand distribution.
4.9 Moreover, Japan argues thattheUStheory hasintractable timing problems. Three ofFuji’s
fourmajor primary wholesalers werealready single-brand distributors by1968, twoyears before the
guidelineswereissued.WhileFuji’sfourthprimarywholesalerdidnotbecomeasingle-branddistributor
untilaftertheissuanceoftheGuidelines,itonlymadethisprivatebusinessdecisionafterKodakexplicitly
refused todealwiththeprimary wholesalers directly. Astotheother domestic manufacturer, Konica,
allofitsprimary wholesalers hadbeensingle-brand distributors by1955. There wasthusnocausal
connection between the1970 Guidelines andthedevelopment ofsingle-brand wholesale distribution
inthefilmsector.
4.10 Japan further explains thatthesecond objective ofMITI'sdistribution modernization policies
wassystemization.104These policies encouraged theadoption ofstandardized forms andprocedures,
andtheincreased useofcomputer technology. Inthefilmsector, astudy group inaMITI-commissioned
public corporation issued amanual along these linesin1975. According toJapan, systemization of
distribution wasbelieved tofacilitate, notexclude ordiscourage, entrance offoreign companies, because
104Asdiscussed below, Japan argues thatMITI distinguished between rationalization andsystemization policies. The
United States usesthesingle term "systemization" tocover bothconcepts.WT/DS44/R
Page44
standardization would alleviate theburden ofhaving toadjust tohundreds orthousands ofindividualized
ways ofdoing business.
4.11 Japan points outthattheUSallegations ignore thetiming ofthealleged measures andwhat
actually happened inthemarket. According toJapan, single-brand distribution occurred asanindustry
trend before thealleged measures were implemented. Also Fujididnotestablish itsfirston-line
connection withaprimary wholesaler until1989, 14years afterthealleged government action was
taken. There wassimply nocausal connection between MITI'ssystemization policies, andthedecisions
byprimary wholesalers about which filmbrands tocarry.
4.12 Japan further contends thatthereisnothing atallunusual about theJapanese market structures
forfilmandpaper. Single-brand wholesale distribution offilmisacommon business practice which
prevails inevery major market intheworld. Likewise, affiliations between photosensitive materials
manufacturers andphotofinishing laboratories prevail worldwide. Theconsistent prevalence ofthese
market structures around theworld isduetomarket factors, notgovernment measures.
4.13 Japan notes MITI’sefforts topromote distribution organization continue tothisday. Tothis
end,in1990MITI issued distribution guidelines thatonceagain addressed thesamekinds of"irrational"
distribution practices thathadbeentargeted bythe1970Guidelines, e.g.,unclear rebates, liberal returns,
anddispatched employees tocustomers. Now, however, encouraging imports wasoneoftheguiding
purposes fortargeting these practices. Foritspart,theUnited States hasstrongly endorsed the1990
Guidelines. Asrecently asNovember 1996, during thependency ofthisproceeding, theUnited States
specifically urged MITI to"maintain andreport anadherence bytheJapanese business community"
totheseGuidelines. InJapan’sview, theinternal inconsistency oftheUSposition isremarkable because
theUnitedStatesissimultaneouslyurgingJapanesebusinesstofollowthecurrentadministrativeguidance
onrationalizing distribution practices andarguing before thisPanel thatsimilar guidance 20yearsearlier
waspartofananti-import conspiracy.
B. LARGE STORES LAW
4.14 TheUnited States argues thatlarge retail stores remain onepotentially significant alternative
distribution channel despite theJapanese Government 'sreorganization ofwholesale operations inthe
photographic materials sector. Inthelate1960's,thenumber ofsupermarkets andother "self-service
stores" wasgrowing rapidly and,intheUSview, suchlarge retailers offered foreign manufacturers,
foreclosed from theprimary distribution network, apartial alternative towholesalers. TheUnited
States claims thatlarge stores havecarried imported products, including film, more frequently than
small stores andhavebeenlesssusceptible topressure bydomestic manufacturers. Ifsuchstores were
permitted toproliferate across Japan, wholesalers would become lesssignificant andforeign
manufacturers could circumvent thebottle-necked distribution system. Inresponse tothisthreat, the
United States submits, in1967 and1968 Japan began toimpose controls ontheexpansion oflarge
stores andfinally enacted theLarge Stores Lawin1973. Thislawimposed aburdensome process
ontheopening andexpansion oflarge retail stores.
4.15 Japan explains thattheLarge Stores Lawreflects longstanding Japanese policy--dating back
totheenactment oftheDepartment Store Lawin1956--of regulating largestores topreserve adiversity
ofsmall, medium andlarge retailing competitors, apolicy found inother countries aswell. Japan
contends thatthelawdoesnotconcern products generally, orfilminparticular. Thelawdoesnot
regulate which products largeretailers cancarry, nordoesittakeintoaccount which products aretailer
sellswhen determining whether andwhatadjustments arenecessary. Accordingly, inJapan'sview,
theLarge Scale Retail Store Lawisincapable ofadversely modifying competitive conditions forany
imported products, including film. AstotheUSargument thatlarge stores aremore likely tocarry
imports, inJapan'sview, retailers, whether large orsmall, choose thebrands theycarry tomaximize
profit; there isnoreason tobelieve thatthesizeofstores inanywaychanges theprofitability ofaWT/DS44/R
Page45
particular product. Thus, there isnodifference between them inchoosing theproducts theycarry.
Further, there isinfactnocorrelation between astore'ssizeanditslikelihood ofcarrying foreign
filmbrands, although acompetitive relationship cannot bededuced frommarket survey results. Japan
alsonotesthatthelawhasbeensignificantly liberalized inrecent years andismorefavourable toimports
nowthanatthetimeofanyoftherelevant tariff concessions.
C. PROMOTION "COUNTERMEASURES"
4.16 TheUnited States argues thatJapan hasreinforced thedistribution countermeasures notonly
throughlegalrestrictionsonretailstoresbutalsothroughasystemofmeasureslimitinghowphotographic
material manufacturers, wholesalers andretailers maypromote theirproducts inorder toexpand their
salesofphotographic filmandpaper intheJapanese market bymeans ofeconomic inducements and
aggressive advertising. TheUnited States claims that"promotion countermeasures" havedisadvantaged
foreign manufacturers offilmandpaper byconstraining theirability tousecertain discounts, gifts,
coupons, andother inducements, ortorelyuponinnovative advertising campaigns, particularly where
price orpricecomparisons arediscussed. TheUnited States argues thatJapan hasimplemented these
promotion countermeasures through thePremiums Lawandcertain regulations issued bytheJFTC
undertheAntimonopolyLaw.Althoughthesemeasuresalsoapplytodomesticfilmandpaperproducers,
theUnited States contends thatJapan hasimposed themwiththeintention ofstriking against twoaspects
ofinternational competition byforeign imports following trade liberalization, i.e.,(i)thestrong
capitalization andcostcompetitiveness offoreign manufacturers and(ii)theirability toconvert these
resources intopotent marketing strategies andaggressive promotional competition.
4.17 Japan responds thatthePremiums Lawimposes restrictions onlyonexcessive premiums and
regulates onlymisleading representations. Intheinterest ofconsumer protection, thePremiums Law
isdesigned toeffectively dealwithunfair trade practices andencourage manufacturers tocompete
principally onthebasis ofprice andquality, notunfair inducements ordeceptive andmisleading
representations. Japan emphasizes thatthelawmakes nodistinctions between imported ordomestic
products. Japan further argues thatthePremiums Lawdoesnothinder vigorous priceandpromotional
competition. Lowprice offers arenotonlypermitted, butare,inJapan'sview, facilitated bythelaw
andabroad range ofpromotional practices areconsistent withthelaw.Allcompanies, bothdomestic
andforeign, havebeenandcontinue tobefreetospend asmuch money astheywantonadvertising.
Companies arefreetouseanyexpressions theywish, solongastheydonotdeceive ormislead
consumers. Japan alsosubmits thatnobusinesses haveeverbeenrestricted fromoffering promotional
giftsorprizes bylotteries andcompetition, solongastheyareinlinewiththestandards setinaccordance
withthelawtoprotect consumers. InJapan'sview, these standards arenomore rigidthanthose set
bysimilar lawsinmany other countries. Japan alsocontends thatinsome respects, thestandards are
actually lessrigidthanthoseoftheUnited States because certain types oflotteries andprizecompetitions
prohibited intheUnited States havebeenallowed inJapan.
4.18 TheUnited States points outthatenforcement actions under thePremiums Lawmaybetaken
bytheJFTC andthe47prefectural governments. Inaddition, theJFTC hasgiven itsofficial sanction
toso-called "faircompetition codes" promulgated byprivate sector "fairtrade councils". TheUnited
States alsoargues thatthe"fairtrade councils" haveauthority todiscipline members whoviolate the
codes, oftenemploying methods ofcoercion andmonetary penalties. TheUnited States further claims
thatthestandards established bythecouncils intheircodes typically areadopted bytheJFTC, which
thenapplies thesamerulesto"outsiders". According totheUnited States, thePremiums Lawexpressly
exempts thecartel-like practices ofthecouncils from antitrust enforcement.
4.19 Japan responds thatprivate "faircompetition codes", andthe"fairtrade councils" arenot
relevant tothiscasebecause no"code" or"council" covers photographic filmandpaper. TheRetailers
Council ismerely responsible fortheobservance ofthecodeagainst misleading representations and
hasnoauthority toenforce thePremiums Lawnormayitrestrict lowprice offers inanyway.WT/DS44/R
Page46
D. THE COMBINED EFFECT OFTHE THREE SETS OFMEASURES
4.20 Distribution countermeasures: TheUnited States claims thatthedistribution countermeasures
operate asaset,i.e.,thedistribution countermeasures acting incombination, ontheonehand, violate
Article III:4and,ontheother, nullify orimpair benefits under theGATT within themeaning of
Article XXIII:1(b).
4.21 Distribution countermeasures incombination withtheLarge Stores Law: TheUnited States
further claims thattheLarge Stores Lawandrelated measures andthedistribution countermeasures
incombination nullify orimpair benefits under theGeneral Agreement within themeaning of
Article XXIII:1(b).
4.22 Restrictions onlargestores :TheUnited States alsoclaims thattheLarge Stores Lawandrelated
measures bythemselves ,inthecontext ofaclosed distribution system, nullify orimpair benefits under
theGeneral Agreement within themeaning ofArticle XXIII:1(b), inaddition totheposition stated
above regarding theLarge Stores Lawacting incombination withthedistribution countermeasures.
4.23 Promotion countermeasures: Afurther USclaim isthatthepromotion countermeasures as
asetbythemselves havenullified orimpaired benefits under Article XXIII:1(b), given thatinthecurrent
market structure inJapan foreign manufacturers effectively hadnoaccess totheprimary wholesaler
channels.
4.24 Promotion measures, distribution measures andrestrictions onlarge stores: TheUnited States
further claims thatthepromotion countermeasures asasethaveoperated incombination withJapanese
Government efforts torestructure thedistribution system through thedistribution countermeasures and
restrictions onlarge stores tonullify orimpair benefits under theGATT within themeaning of
Article XXIII:1(b).
4.25 JapancontendsthattheUSclaimsagainstthethreecategoriesofmeasuresactingincombination
witheachother arefactually andlogically flawed. According toJapan, theUnited States didnotsubmit
credible evidence thatthemeasures wereintended toandinfactacted incombination. InJapan'sview,
thedistribution policies, theLarge Stores Lawandthepromotion measures pursue verydifferent policy
objectives, andwere notintended towork together.
4.26 Insummary ,theUnited States alleges:
a. Thedistributioncountermeasures,LargeStoresLawandrelatedmeasures,andpromotion
countermeasures incombination nullify orimpair benefits within themeaning of
Article XXIII:1(b).
b. Thedistribution countermeasures, asaset,also
i. violate Article III:4and
ii. nullify orimpair benefits within themeaning ofArticle XXIII:1(b).
c. TheLarge Stores Lawandrelated measures alsonullify orimpair benefits within the
meaning ofArticle XXIII:1(b), inthecontext oftherestrictive distribution structure inJapan.
d. Thepromotions countermeasures, asaset,nullify orimpair benefits within themeaning
ofArticle XXIII:1(b), inthecontext oftherestrictive distribution structure inJapan.
e. Thespecific failures topublish thefairtrade councils 'andJFTC enforcement actions
aswellasguidance byMITI, prefectural andlocal authorities under theLarge Stores LawWT/DS44/R
Page47
orrelated localregulations, thatestablish ormodify criteria applicable infuture cases, each
constitute aviolation ofArticle X:1.
4.27 Japan rejects allthese USclaims withrespect tothevarious individual allegations since, in
itsview, none ofthealleged measures individually adversely affect imported products oralterthe
conditions ofcompetition facing imported products. Japan emphasizes thatevenwhen thedistribution
policies,largestorelawsandthepromotionmeasuresareconsideredas"setsofmeasures"withcombined
effects, theydonotinanywaydisadvantage imports because combining nothing withnothing still
produces nothing.
4.28 Foradetailed discussion oftheparties 'arguments withrespect totheallegations concerning
thethree setsofmeasures acting incombination, seeSection VI.F. below.WT/DS44/R
Page48
V. FACTUAL ARGUMENTS OFTHE PARTIES
A. DISTRIBUTION "COUNTERMEASURES"
1. OVERVIEW
5.1 TheUnited States argues thatatthebeginning oftheKennedy Round in1963, foreign and
domestic manufacturers distributed photographic filmandpaper through Japan'sprimary wholesalers
who, inturn, soldtoother wholesalers orretailers. Photographic material manufacturers competed
against oneanother tomarket theirproducts tothesame wholesalers. LikeJapanese manufacturers,
foreign manufacturers didbusiness withmany ofJapan'sdistributors. Bythemid-1970 's,however,
when many formal market barriers hadfallen, theJapanese Government hadfundamentally altered
relationships between manufacturers andwholesalers. Bythen, alloftheleading wholesalers inJapan
exclusively handled Japanese products. TheUSconclusion isthattothisday,noforeign firmhas
succeeded inpenetrating these closed distribution channels.
5.2 TheUnitedStatesclaimsthat,startingwiththeKennedyRoundtariffconcessions,Japanimposed
laws, regulations andadministrative actions tostrengthen thedominant position ofdomestic consumer
photographic materials manufactures andcurtail opportunities forimports thatwould otherwise be
available. While many ofthese measures donotbearthetypical characteristics ofprotection, i.e.the
measures arenotfacially discriminatory against imports, when theyareseenintheirtotality theyreflect
aunique system ofdistribution andmarketing management thathaspervasively disadvantaged imported
photographic materials.
5.3 Inparticular, theUnited States argues thatastrade andinvestment liberalization approached
inthelate1960's,theJapaneseGovernmentandindustrybegantoworktogethertocreatethedistribution
structure thatremains inplacetoday. TheUSargument isthatthissituation intheJapanese photographic
materials market isnotasaresult ofmarket forces, butbydeliberate manipulation bytheJapanese
government. Thiswasdonetooffset thepossible effects ofliberalization andtheresultant competition
fromforeign firms withbetter expertise indistribution andmarketing. Asaresult, MITI andJapanese
manufacturers jointly began streamlining Japan'sdistribution system andatthesame timebringing
itunder thecontrol ofdomestic producers -apolicy which became known as"systemization of
distribution". Japan accomplished thisinthree ways -
(i) MITI promoted theuseoftransaction terms thatwould result inadistributor selling
productsofjustonedomesticmanufacturer-volumediscounts,rebates,andstandardized
shortened payment terms. Discounts andrebates encouraged wholesalers topurchase
greatervolumefromfewersuppliers.Standardizedandshortenedpaymenttermslimited
theopportunity forwholesalers toseekbetter credit ratesfrom other suppliers.
(ii) MITI urged thephotographic materials industry torelyuponshared facilities, andthe
government offered subsidies, expertise, andother benefits toinduce businesses to
enter intomore cooperative arrangements.
(iii) MITI determined thatcommon information andcomputer links would forge closer
relationshipsamongaparticularJapanesemanufactureranditsowndownlinewholesalers
andretailers.
5.4 Japan responds thattheaimofMITI'sdistribution policies wasnottoblock imports butto
modernize theJapanese distribution industry andhelpittomeettheforeign competitive challenge that
would beunleashed byliberalization. Nothing inMITI'sdistribution policies oranyother so-called
"liberalization countermeasures" didanything toencourage orfacilitate thecreation ofanexclusionaryWT/DS44/R
Page49
market structure thatdiscriminates against imported filmorpaper. Since theMITI policies inquestion
actually saynothing about encouraging single-brand distribution offilm, theUnited States struggles
toestablish some connection between MITI'spolicies andthemarket structure thatisthemaintarget
ofitscomplaints. Japan asserts thatwhen confronted withtheactual factsofthismarket, however,
theUSarguments about "distribution countermeasures" collapse.
5.5 Japan notes thatMITI'sconcern withmodernizing theJapanese distribution sector hasexisted
continuously forover30years, including theperiods before andaftercapital liberalization. Throughout
thisperiod, MITI hashaddiverse rationales forencouraging distribution modernization. Originally,
MITI sought toimprove therelatively lowproductivity ofthedistribution sector, thereby alleviating
agrowing labour shortage andthecontinuing increase inconsumer prices. These policy goals had
nothing todowithalleged efforts toblock imports.
5.6 Japan argues thatconcerns withcapital liberalization weresimply added tothebroader setof
preexisting policy concerns about theneedformodernization inthelate1960's.Totheextent that
MITI'sdistribution modernization policies werearesponse tocapital liberalization, MITI'sconcern
wastoimprove theefficiency andcompetitiveness ofarelatively backward distribution sector, not
tohinder imports 'access tothissector. Theobjective wastocompete moreeffectively withnewforeign
entrants. MITI wasnottrying toprevent imports from enjoying theallegedly unique advantages of
traditional distribution channels. Tothecontrary, MITI viewed traditional distribution channels as
competitively disadvantaged andsought toremedy theirdefects. Japan further argues thatMITI's
distribution policies inthe1960'sand1970'spursued modernization through bothrationalization and
systemization policies. Astotherationalization policies, theobjective wastoeliminate traditional
outmoded business practices considered tobeeconomically irrational.
5.7 TheUnitedStatesprovidesthreerebuttalstoJapan’sargumentthatthepurposeofthedistribution
countermeasures wasnottoblock imports butrather tomodernize thedistribution sector. First, the
MITI measures atissue clearly andrepeatedly distinguish between thegoalofefficiency andthegoal
ofrespondingtoliberalization.Indeed,theSeventhInterimReportemphasizedthattotheextentfostering
efficiency became inconsistent withprotection against foreign competition, thelatter goalshould win
out:"theJapanese Government should instead emphasize preventing theimmense impact thatwould
befeltifforeign capital tooktheleadinsystemizing Japan’sdistribution activities, andquickly develop
asystem sufficiently capable ofresisting therational systems introduced byforeign capital."105Second,
these same MITI documents repeatedly notethethreat thatforeign access todistribution would have
onJapanese producers .Thepolicy concern wasnot,therefore, purely theeffect offoreign competition
onthedistributors themselves butincluded concerns overtheeffect onthedomestic producers ’market
share.106Third, theUnited States notes thatJapan itselfacknowledges thatJapan wasconcerned about
Kodak ’scompetitive strength andtherefore implemented policies toensure thatJapan’sdomestic
manufacturers were notexposed tofullcompetition from Kodak.
2. DEVELOPMENT OFTHE JAPANESE FILM MARKET
5.8 According totheUnited States, intheearly1960's,Japanese filmmanufacturers operated under
protection from foreign competition. Japan imposed quantitative restrictions and40percent tariffs
onfilmimports. TheJapanese Government alsotightly restricted investment through the1949Foreign
Exchange andForeign Trade Control Law, which allowed theMinistry ofFinance tocontrol virtually
allforeign exchange transactions, andthe1950 Foreign Investment Law, which gavetheJapanese
Government authority toregulate allequity investment andtechnology transfer. Asaresult ofthese
105Seventh Interim Report, p.7,USEx.69-4.
106Seethe1967 Cabinet Decision, p.6(para 2.9above; USEx.67-6), theSixth Interim Report (para. 2.14above; US
Ex.68-8), theSeventh Interim Report (para. 2.15above; USEx.69-4), theBasic Plan, p.10(para. 2.20-2.22 above; US
Ex.71-10), the1975 Manual, pp.121-122 (para. 2.23-2.25 above; USEx.75-5).WT/DS44/R
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laws, theGovernment ofJapan substantially limited foreign investment inmanufacturing, distribution,
andretail facilities inJapan.
5.9 TheUnited States argues that,using theseinvestment laws, theGovernment ofJapan pressured
Kodak intoabandoning itscorporate charter inJapan in1957, forcing Kodak toabandon itsown
distribution facilities. Afterwards, Kodak shifted torelying on15Japanese wholesalers toimport and
distribute itsproducts inJapan. In1960, toeaseimplementation ofitsfilmimport quantitative
restrictions, theJapanese Government required Kodak toselect oneJapanese firmtoserve asitssole
import agent. Kodak selected Nagase Industries, animport-export trading company thatspecialized
inchemical products, withwhich Kodak hadtiesdating backto1923. Asaresult oftheJapanese
requirement, allwholesalers distributing Kodak products hadtopurchase themfromNagase, andKodak
hadtorelyonNagase toestablish andmaintain itscommercial network inJapan.
5.10 TheUnited States further argues that,afterjoining theOrganization ofEconomic Cooperation
andDevelopment (OECD) in1964, Japan slowly liberalized itsinvestment restrictions. Foreign
photographic materials manufacturers were prohibited from forming alimited orequal partnership
(50-50) joint venture until 1971. However, alike-industry clause adopted in1971 limited such
investments except inventures between direct competitors (e.g.Kodak orAgfainvestment inFujior
Konica). Photographic materials manufacturers were notpermitted toown100percent ofanew
enterpriseuntil1976.Notuntil1979wereforeignphotographicmaterialsmanufacturersfinallypermitted
toacquire acontrolling interest inexisting Japanese enterprises. However, foreign firms inthe
photographic materials sector continued tobesubject toMITI andMinistry ofFinance notification
requirements forinvestments inexisting Japanese enterprises untilJuly1,1985. Inshort, although
investment restrictions inthephotographic materials sector havebeenlifted, foreign filmproducers
continue tosuffer theafter-effects oftheirhitherto existence. Delays incapital liberalization inthe
filmsector prevented foreign firms from making investments untilitwastoolate.
5.11 Japan counters byarguing thatitisnotcorrect thatcapital restrictions prevented allinvestment
insecuring better distribution channels forimported products. According toJapan, during theperiod
before capital liberalization, ifKodak hadwanted touseinvestments toestablish andbuildrelationships
withanysingle-brandprimarywholesalersitcouldhavedoneso.Moreover,Kodak’sexclusiveimporter
Nagase could anddidinvest indistribution bybuying twoprimary wholesalers; itcould legally have
made equity investments inFujifilm ’sprimary wholesalers ifithadwanted to.ThefactthatKodak
didnotexercise allitslegaloptions --indeed, Kodak itselfexercised virtually noneofitslegaloptions
--demonstrates thatthepresence ofcapital restrictions wasnotinterfering withanyKodak business
plans atthetime. Secondly, forJapan theUSargument makes nosense inlightoftheactual record
offoreign investments intheJapanese market aftercapital investments werelifted. According toJapan,
Kodak instead ofinvesting didnothing butusethefearofdirect investment tocreate pressure to
accelerate cutsintariff rates. InJapan'sview, Kodak opted totreatJapan asanexport market rather
thanasatarget forinvestment.
5.12 Further, Japan argues thattheUSargument isatoddswithassessment byindustry experts,
including Kodak officials, tomove faster inestablishing itsowndistribution channels. Even Kodak
executives recognized theirerror. Ina1988interview, thethenPresident ofKodak Japan, Mr.Albert
Sieg, stated:
"The glaring mistake waswaiting solongtotakeaggressive action inthismarket.
Weshould havebeenherewiththisapproach tenyears ago. Clearly, themomentum
ofourlocalcompetitors gotastrong forward thrust, andourtaskwillbemuch, much
more difficult."107
107Taking onJapan (Look Japan Ltd., ed.)(1988), p.38,Japan Ex.B-45.WT/DS44/R
Page51
Japan concludes, therefore, thatthetiming ofcapital liberalization forphotographic materials had
absolutely noimpact onKodak 'sinvestment plans during the1970'sforthesimple reason thatKodak
hadnoinvestment plans.108
5.13 TheUnited States responds thatKodak could nothavehadinvestment plans prior to1976,
because investment wasbarred bystatute. Lessthanayearafterthesestatutory restrictions werelifted,
Kodak established asalessubsidiary.
5.14 According toJapan ,theso-called "likeindustries" clause didnotprevent jointventures between
manufacturers anddistributors. Thisclause simply required thatjointventure partners inJapan were
inthesameindustry asthejointventure itself. Thisrequirement wasnotapplied toforeign companies
which formed suchajointventure. Thus, a50-50 jointventure suchasKodak Nagase in1986could
havebeenestablished asearly as1971. Moreover, a100percent wholly-owned subsidiary inthe
wholesaling sector could havebeenestablished after1973. Forwhatever reason, Kodak made adecision
nottotakeadvantage ofthese options, andhadnointention ofexploiting theopportunities ithadto
develop newdistribution channels. Moreover, from1976until1979, aforeign enterprise could purchase
existing enterprises outright withtheconsent oftheenterprise being purchased. Suchapurchase could
occur inthewholesaling sector beginning in1973andthephotographic materials manufacturing sector
beginning in1976.
5.15 According totheUnited States ,Fuji, under theguidance andsupport ofMITI, developed
exclusiverelationshipswithitsfourprimaryphotospecialtywholesalersby1975andpresseditsexclusive
control further down thedistribution chain. Fuji, which currently holds a68-percent market share
inJapan,alsoundertookasuccessfulprogram,supportedbytheJapaneseGovernment,tobuildexclusive
relationships withavastnetwork ofphotofinishing laboratories. Theother Japanese manufacturer,
Konica, hadexclusive relationships withfourlong- established primary wholesalers since1967. Konica
"internalized" these wholesalers through acquisition completed in1987. Konica currently holds a
19-percent market share inJapan.
5.16 TheUnited States argues that,before 1975, Kodak relied heavily ontheprimary photospecialty
wholesalers todistribute itsproducts. In1975, however, Kodak lostthelastofitsrelationships with
aprimary wholesaler, leaving Kodak tofindother channels intothemarket outside those usedbythe
Japanese photographic goods manufacturers. Asaresult, Kodak, which currently holds a10-percent
marketshare,sellsnearlytwo-thirdsofitsfilminJapandirectlytoretailers,one-quarterthroughaffiliated
photofinishing laboratories, andtheresttosecondary wholesalers. Agfare-entered theJapanese film
market in1990, afteranabsence of15years. TheUnited States alleges thatAgfahadlefttheJapanese
market in1975 inlarge partbecause ofitsinability torecover from itslossofaccess totheprimary
wholesale channels in1968. Unable tousetheprimary wholesalers when itre-entered theJapanese
market, Agfa adopted astrategy ofselling directly toretailers, inparticular large-scale retailers, in
some cases allowing theretailers tomarket thefilmunder theretailer 'sbrand name (so-called "private
brand"). Agfa resorted toprivate brand salesinanattempt toincrease itssalestoalimited segment
ofthemarket. Because retailers assume thecostofsalespromotion forprivate brand film,Agfaalso
hoped tolower itsdistribution costs. Agfa, which currently holds a3-percent market share -down
108Japan citesProfessor Scherer whonoted: "What isstriking tothisobserver, butnotpointed outexplicitly, isthatthe
eventsof1973-75reflectedacolossalfailureofintelligence(inthemilitarysense)ofKodak.Kodakapparentlyhadnoemployee
inJapan atthetimewhocould readcontemporary Japanese trade press accounts oftheNagase-Asanuma dispute, understand
theimportance ofsecuring Asanuma asaprimary Kodak wholesaler, andintervene tooverride Nagase 'sself-serving actions.
Notuntil1977 didKodak open aliaison office inJapan staffed byKodak employees tooversee, interalia,theactivities
ofNagase. Insharp contrast werethemarket opening efforts ofVolkswagen andToyota, whosenttheirownEnglish-speaking
personnel totheUnited States, firsttoassess market opportunities andthentoimplement theirentry decisions." F.M. Scherer,
Retail Distribution Channel Barriers toInternational Trade, October 1995, (working paper presented ataColumbia University
Conference entitled "The Multilateral Trading System ofthe21stCentury"), Japan Ex.A-19.WT/DS44/R
Page52
fromits1995peakof4percent -sells90percent ofitsfilmdirectly toseveral large retailers andthe
remainder through secondary wholesalers.
5.17 Japan notes theUnited States citesnosupport foritsclaim thatAgfa hadlefttheJapanese
market in1975largely because ofitsinability torecover fromitslossofaccess totheprimary wholesale
channel in1968. Kodak hadintroduced anewcolour negative process technology, andsince Kodak
hashistorically setindustry standards, allrivals hadtomake achoice. Soonthereafter, thetwoJapanese
manufacturers Fujifilm andKonica hadmatched Kodak ’sdeveloping standard. Agfa, incontrast, chose
tocontinue withitsownstandard. Withthreeofthefourmajor manufacturers operating offacompatible
standard, Agfa’smarket position quickly became untenable. Thisstory iswellknown intheindustry.
AtthetimeAgfa reentered themarket in1987, thestory wasreported inthebusiness press.109
5.18 According totheUnited States ,theJapanese market structure wastheresult ofactions by
theGovernment ofJapan. Following the1967Cabinet Decision discussed below, MITI concentrated
itsefforts,renewingitscallforuseofstandardizedtradingterms,promotingtheuseofshareddistribution
facilities andcomputer tiesamong Japanese producers anddistributors, andfacilitating thesystemization
ofphotofinishing laboratories under domestic manufacturers. Japan'sleading photographic material
producers, FujiandKonica, soonadopted suchstandardized terms withwholesalers. Asintended by
MITI, theresulting lackofcompetition among Japan'sleading filmandpaper suppliers resulted in
thefinancial deterioration ofthephotospecialty wholesalers. Eventually, alloftheprimary wholesalers
agreed tohandle products ofdomestic manufacturers onanexclusive basis.
5.19 TheUnited States argues thatbefore MITI'sintervention, foreign manufacturers, though
encumbered byquotas andhightariffs, hadaccess tonearly allofJapan'sphotospecialty wholesalers.
Under MITI'sdirection wholesale operators inthephotographic materials sector wereconsolidated,
creating narrow distribution channels under thecontrol ofdomestic manufacturers. Asaresult, by
themid-1970 'stheleading photospecialty wholesalers handled onlydomestic filmandpaper, effectively
excluding imports fromthedistribution system. Thus, byearly1975, however, thecompetitive situation
inJapan'sconsumer photographic materials market hadbeencompletely transformed. Asofthattime,
notonemajor distributor carried imported products. Inthespanoflittlemore thanadecade, foreign
filmandpaper manufacturers hadbeenexcluded from theprimary avenues ofdistribution.
5.20 TheUnited States concludes thattheresult ofthismanipulation ofthemarket isthattoday,
Japan'smaterials market issupplied byfourmanufactures, twodomestic andtwoforeign. Thetwo
domestic manufacturers, FujiandKonica sellalmost alltheirfilmthrough "primary" photospecialty
wholesalers, which arespread throughout Japan. Theprimary wholesalers inturndistribute filmdirectly
toretail outlets, orthrough affiliated "secondary" wholesalers, which aresmaller andregionally based.
Unlike theirdomestic competitors, thetwoforeign manufacturers, Kodak andAgfasellmostoftheir
filmdirectly toretailoutlets. Forthelasttwenty-two years noprimary wholesaler hasdistributed Kodak
orAgfa film.
5.21 Japanrespondsthatintheseproceedingsallthatmattersiswhethertherearegovernment-imposed
barriers thatprevent thatmarket penetration fromimproving. Japan maintains thatthere arenosuch
barriers inJapan.
5.22 Japan emphasizes thattheaimofMITI’sdistribution policies wasnottoblock imports, but
tomodernize theJapanese distribution industry andhelpittomeettheforeign competitive challenge
thatwould beunleashed byliberalization. Nothing inMITI’sdistribution policies oranyotherso-called
"liberalization countermeasures" didanything toencourage orfacilitate thecreation ofanexclusionary
109See,Japan Agfa Gevaert, Advances IntoTheJapanese Market After AnInterval of15Years, Takes TheOffensive
Against Oligopolistic FilmMarket With ItsLowPrice, Nikkei Business, 5December 1988; TopThree FilmMakers Move
toCutPrices, Japan Economic Journal, April 16,1988, p.21,Japan Ex.B-33.WT/DS44/R
Page53
market structure thatdiscriminates against imported filmorpaper. Since theMITI policies inquestion
actually saynothing about encouraging single-brand distribution offilm, theUnited States struggles
toestablish some connection between MITI’spolicies andthemarket structure thatisthemaintarget
ofitscomplaints. When confronted withtheactual factsofthismarket, however, theUSarguments
about "distribution countermeasures" collapse.
5.23 Japan argues thatintheend,theUSclaim boilsdown toanassertion thatthecurrent Japanese
market structure forconsumer photographic filmandpaper isexclusionary andclosed, andthatthis
abnormal situation mustsomehow betheresult ofgovernment intervention. Thefundamental premise
ofthisargument issimply wrong. AttherootoftheUScomplaints isthefactthatthevarious primary
wholesalers inJapan eachcarry onlyasingle brand offilm. Butsingle-brand wholesale distribution
isanormal business practice; forfilm, thisbusiness practice isthenorm inevery major market in
theworld, including theUnited States. TheJapanese market forconsumer photographic filmandpaper
reflects theoutcome ofnormal market forces.
5.24 Furthermore, Japan asserts thatthepremise oftheUSargument thatthere arebarriers, the
so-called "distribution bottleneck," intheJapanese filmmarket iswrong. Japan argues thatasurvey
oftheprimary wholesalers ’customers reveals thatimports havealready thoroughly penetrated these
keyaccounts. Thus, customers accounting for87.3percent oftheprimary wholesalers ’combined
surveyed salesvolume either already carryKodak orelsehaveready access toKodak through established
business relationships.110Inparticular, theprimary wholesalers ’survey highlights imports ’ability
todistribute through multibrand secondary wholesalers inJapan. Ofthe278resellers included inthe
survey, 52.2percent --accounting for66.4percent oftotalsurveyed salesvolume tothose customers
--already carry Kodak film.111Thusforeign brands ofcolour filmarealready present atthekeylevels
ofthedistribution system. TheUS"distribution bottleneck" argument thusfailsthemostbasicthreshold
empirical test. Since mostoftheprimary wholesalers ’customers already purchase Kodak filmfrom
other sources, the"distribution bottleneck" clearly doesnotexist.
5.25 Japan notes thatifthePanel adopts theviewthatakeyfactor isthedegree ofimports ’market
penetration, foreign market share infactincreased aftertheintroduction ofthealleged measures that
created theso-called bottleneck. According toJapan, itisclearthatsubsequent to1975, when according
totheUnited States thecompetitive situation intheJapanese filmmarket hadbeen completely
transformed, themarket share offoreign colour filmactually continued toincrease toarecord 20.0
percentin1981. Themarket share forforeign black andwhite filmincreased evenmore dramatically,
peaking atarecord 41.4percentin1985. Thistrend inforeign filmmarket share directly undermines
theUS"bottleneck" theory.
5.26 OnJapan’sargument concerning market shares forblack andwhite film, theUnited States
responds thatJapan’sliberalization countermeasures wereandaredirected atconsumer photographic
filmandpaper, whether black andwhite, orcolour. Until 1970-1972, black andwhite wasthe
predominant consumer film(andpaper) usedinJapan, thereafter itwascolour.112Accordingly, Japan’s
focus onrecent market share dataonblack andwhite products isnotrelevant. Given thatblack and
white film(andpaper) wasthedominant product atthetimetheGovernment ofJapan began pursuing
liberalization countermeasures, andthattheGovernment recognized thatcolour would surpass black
andwhite atsome timeinthenearfuture, theGovernment directed theliberalization countermeasures
atobstructing thedistribution andsaleofconsumer photographic filmandpaper, whether black and
white, orcolour.
110Fujifilm ’sRebuttal Regarding theAlleged "Distribution Bottleneck," 21December 1995, p.5,7,Japan Ex.A-16.
111Ibid., p.25,Japan Ex.A-16.
112Until 1970-72, black andwhite filmandpaper were thepredominant products usedinJapan. Thereafter, thedominant
productswerecolourfilmandpaper.Today,colourfilmandpaperaccountfor97percentofJapan'stotalmarketforconsumer
photographic materials, withblack andwhite filmandpaper accounting foronly3percent.WT/DS44/R
Page54
5.27 Japan asserts thatevenatthecurrent market share level ofroughly 15percentforcolour
film, there isnothing unusual about theforeign market share forthisindustry. Japan notes thatin
markets outside theUnited States andJapan, Kodak andFujihavecomparable market shares buteach
hasanalmost equal andlarge share ofitshome market. Initsview, ultimately, market shares reflect
consumer preferences. Fuji'ssurvey show thatconsumers perceive Fujibrand filmtobeofahigher
quality, ranking ithigher thanKodak onmostqualitative measures.113Consequently, Fujifilmenjoys
verystrong brand loyalty among Japanese consumers. Among American consumers thesame general
perceptions apply toKodak film. Inother words, theresulting market situation isnotaresult ofany
Japanese government policies. Finally, Japan notes thatthedomestic brands overwhelmingly outspend
foreign brands inadvertising expenditures intheJapanese market, another factor which hasasignificant
impact onconsumer andretailer preferences.
5.28 TheUnitedStatesrespondsthatJapan'sargumentthatJapanesedomesticbrandsoverwhelmingly
outspend foreign brands inadvertising expenses isflawed inthree respects: (a)Japan addsFuji’sand
Konica ’sexpenditures, suggesting thatKodak should haveoutspent twocompanies combined; (b)Japan
bases itscalculations ontotaladvertising figures, notweighted bysales, suggesting thatacompany
with10percentofthemarketshouldmatch,yen-for-yen,thecombinedexpendituresoftwofirmsholding
87percent ofthemarket; and(c)Japan compares theadvertising expenditures made byFujiandKonica
forallproducts toKodak ’sadvertising expenditures forfilmonly. TheEconomist magazine estimates
thatKodak ’sadvertising expenditures weretriple those oftheJapanese manufacturers during theperiod
citedbyJapan.
5.29 Japan points outthattheUnited States failstotakenoteofkeydistinctions between black and
white andcolour products. According toJapan, theforeign share ofblack andwhite filmhasbeen
quite high, andhasbeengrowing overtime. Over thepasttenyears, onavolume basis theforeign
market share ofblack andwhite filmhasaveraged 24percent, ranging from19percent to37percent.
Japan further contends thattheforeign market share forblack andwhite paper hasalsobeenquitehigh,
ranging between 31and55percent. Japan, therefore, argues thatitishardtoreconcile thismarket
reality withtheUnited States 'allegations. According toJapan, Japanese manufacturers selltheircolour
filmandblack andwhite filmthrough thesame primary wholesalers thatcomprise thesupposed
"bottleneck" facility forcolour film. Thealleged "bottleneck" apparently hasnotaffected theability
offoreign brands toselltheirblack andwhite film,afactor which Japan contends fundamentally calls
intoquestion whether there isreally any"bottleneck" atall.
5.30 TheUnited States contends thattheneteffect oftheliberalization countermeasures hasbeen,
aswasintended, thecreation ofamarket structure thatimpedes thesaleofimports. Thestructure
remains inplace today. TheUnited States further asserts thatdespite theelimination ofquotas, tariffs,
andinvestment restrictions, aswellassignificant efforts byforeign enterprises tocompete inJapan,
themarket share forimported filmandpaper hasbeenstagnant forthepastdecade. Asuccession
oftechnological innovations andmajor investments byforeign manufacturers hasyielded limited results.
Forexample, Kodak hasreduced itsprices intheJapanese market by56percent since 1986 andhas
substantially undercut domestic wholesale prices, withvirtually noeffect onthemarket.
5.31 According toJapan ,ifKodak infactdropped itswholesale pricebysuchlargemargins, with
noappreciable effect onitsmarket share, Kodak obviously hassevere brand image problems inJapan.
Japan asserts thatretailers mustbelieve thatJapanese consumers arecompletely indifferent toKodak;
otherwise, suchahugegapinwholesale prices would giveretailers anenormous incentive tocutthe
priceofKodak tostimulate demand, andincrease thevolume theywould sellofthemuch moreprofitable
product. Inaddition, Japan asserts thattheUnited States mustbelieve thatJapanese consumers are
completely irrational. Inaddition, forJapan itisnoteworthy thatforthepastseveral years, Kodak 's
113Annual Report onConsumer Image Survey, Japan Marketing Research, Japan Ex.A-3.WT/DS44/R
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manufacturer 'ssuggested retailprices forISO100andISO400consumers havegenerally beenidentical
toFuji's(onoccasion theyhavebeenhigher). Thus, forthepastseveral years Kodak hasbeentelling
retailers thatitwould likeKodak filmtohave exactly thesame price asFujifilm. Thisfactis
inconsistent withtheUnited States claim thatKodak hasbeenstymied initsattempts tounderprice
Fujifilm. Indeed, according toJapan, Kodak haspublicly stated inthelate1980'sandearly 1990's
thatitdoesnotwanttocompete onprices inJapan.
5.32 TheUnited States counters thatKodak andretailers carrying Kodak products havebeenunder
pressure from theJFTC andJFTC-sanctioned councils tomaintain stable retail prices. Discount
initiatives havebeensuppressed.
3. NEED FOR PRIMARY WHOLESALERS INTHE JAPANESE FILM MARKET
(a) TheUSallegations about themarket situation inthefilmdistribution sector
5.33 According totheUnited States, thereare280,000 retailers selling photographic materials across
Japan. Thislarge number ofretail outlets thatsellfilmmakes itdifficult foranymanufacturer to
distribute filmwithout access totheprimary wholesalers. Direct salestoretailers canprovide only
limited access toasmall portion ofthemarket.
5.34 TheUnited States asserts thatone-half ofallretailfilmsalesbyvolume arethrough some 30,000
traditional photospecialty stores, whose primary, ifnotonly, lineofbusiness isthesaleoffilm,cameras,
andaccessories. Most ofthese photospecialty stores, which range fromsmall "mom andpop"stores
tosomewhat larger stores withmultiple outlets, donotcarry imported film. Thesame primary
wholesalers thatdistribute filmtothese specialty stores alsosupply them withcameras andother
photographic products. Photospecialty retailers haveclose andlongstanding relationships withthe
photospecialty wholesalers. Because these primary wholesalers donotcarry imported film, the
photospecialty stores cannot purchase imported filmfrom these traditional suppliers. Norarethe
photospecialty stores inclined topurchase imported filmfrom analternative source. Photospecialty
retailers relyontheprimary wholesalers fortimely delivery ofvirtually allthestore'sproducts and
arenotlikely tojeopardize thatrelationship bypurchasing imported filmfrom another distributor.
TheUnited States accordingly concludes thataccess totheprimary wholesalers iscritical forselling
imported filmtothephotospecialty retailers.
5.35 TheUnited States indicates thatanother third offilmsales arethrough 70,000 general
merchandise stores, including supermarkets anddiscount, department, drug, andconvenience stores.
ItistheUSviewthatthelarger types ofthesestores aremore likely thansmall stores tocarry competing
brands offilm. Some ofthelargest ofthese retail outlets havetheirowndistribution facilities, which
reduces theirdependence onwholesalers andallows them todealdirectly withmanufacturers.
5.36 TheUnited States alsonotes thatthere areapproximately 180,000 other retail outlets forfilm
inJapan,includingkiosks,touristresorts,parks,andothersmalloutlets.Theirsmallsizeandgeographic
dispersion makes ithighly inefficient toattempt toreach themexcept through thewholesalers currently
serving them.
5.37 TheUnited States argues thatonlythephotospecialty wholesalers havethegeographic presence,
distribution infrastructure, sales networks, andpersonnel toreach andprovide service toJapan's
numerous retailoutlets. Inaddition, because primary wholesalers carry awiderange ofcomplementary
products, theyhavehigheconomies ofscaleinmarketing anddelivery functions. These wholesalers
perform more thanalogistical distribution function formanufacturers. TheUnited States concludes
thatFuji'sexclusive access toJapan'slargest primary photospecialty wholesalers provides itwithan
unfair edgeoveritsforeign competitors.WT/DS44/R
Page56
5.38 TheUnited States further argues thatJapan's"secondary" photospecialty wholesalers aremuch
smaller thantheprimary wholesalers andoperate onalocalorregional scale, andcan,therefore, only
provide limited geographic reach. Even ifsuchwholesalers represented viable alternative distribution
channels forfilm, many arenotcommercially independent from domestic photographic materials
manufacturers. Several ofthetopsecondary wholesalers havejointphysical distribution andaffiliated
photofinishing laboratory operations withJapanese manufacturers ormanufacturer-dominated primary
wholesalers.Thesetieshaveimpededforeignmanufacturersfromgainingaccesstosecondary-wholesaler
channels asanalternative toprimary wholesale channels.
5.39 According totheUnited States, photofinishing laboratories provide onlyalimited alternative
totheprimary wholesalers. Laboratories are,inthefirstinstance, theprimary market forphotographic
paper andphotofinishing chemicals. However, theyalsocanactaswholesalers forfilmandother
products because theyfrequently andregularly make rounds toretailers inorder topickupexposed
filmanddeliver processed prints. Intheprocess ofmaking these regular stops, thephotoprocessing
laboratories candistribute filmandother photographic supplies totheretailers. InJapan, however,
84percent114ofthe1,700 photoprocessing laboratories dealexclusively inthefilmandpaper ofa
Japanese producer.115
5.40 TheUnited States alleges thatexperts ondistribution andcompetition policy inJapan agree
ontheimportance ofaccess tothewholesale system foraccess tothemarket.116Theleading history
ofFujialsoemphasizes thatFujiseesitsfourprimary wholesalers notsimply asavehicle fordelivering
products tomarket, butas"amechanism thatwould maintain highmarket shares".117
(b) Nogovernment obstacles touseorcreation ofprimary wholesalers
5.41 Japan 'sresponse isthatinthefirstplace, ifaforeign manufacturer isdissatisfied withthe
quality ofitsdistribution system forfilmandpaper inJapan, there isnothing thatwould prevent it
fromtaking stepstoimprove matters. There arenocurrent government measures preventing theforeign
manufacturer fromhiring more salespeople, offering lower prices, orspending more onadvertising.
Further, therearenocurrent government measures preventing aforeign manufacturer fromacquiring
other distributors orphotofinishing laboratories iftheywereforsale. Andfurther, therearenocurrent
government measures ofanykindthatwould inanywaystopaforeign manufacturer fromexpanding
orimproving itsdistribution network.
5.42 Japan emphasizes that,inparticular, there arenogovernment measures thatprevent foreign
manufacturers from attempting toestablish relationships withindependent primary wholesalers that
currently choose tocarry onlyasingle brand. According toJapan, theUnited States hasnoteven
attempted toidentify anysuchgovernment measures. Infact,there isnolegalobstacle blocking such
relationships. Japan asserts thatFuji'scontracts withitsprimary wholesalers donotcontain any
provisions thatprohibit ordiscourage thecarrying ofother brands.118Japan further asserts thatsome
114Japan challenges theconclusion that84percent oflaboratories inJapan fallunder theumbrella ofaJapanese producer.
According tothedatagiven inPhoto Market 1996, ofthe753amateur laboratories intheJapanese market, 292laboratories
(38.8 percent) areaffiliated withFuji,124laboratories (16.5 percent) areaffiliated withKodak, 216laboratories (28.7 percent)
areaffiliated withKonica, and121laboratories (16.1 percent) have other affiliations.
115Photo Market 1996, USEx.96-1.
116Tajima Yoshihiro, Japan 'sMarket andDistribution System: Japanese Distribution Channels, edited byKikuchi Takeshi,
(London: Hawath Press, 1994), p.3,USEx.94-3.
117AraiToru, Shisi NoHonryo: FujiFilm(Characteristics ofaLion: FujiFilm), (Tokyo: BNT Books, Nikkan Kogyo
Co., 27January 1995), USEx.95-8.
118According toJapan, thecontracts between Fujianditsprimary wholesalers previously contained provisions requiring
thewholesalers toseekFuji'spermission before carrying other brands. In1981, Fujivoluntarily removed these provisions.
Affidavit ofTanaka Takeshi, p.3,Japan Ex.A-10.WT/DS44/R
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ofFuji'sprimary wholesalers docurrently sellKodak products.119Those wholesalers decide tocarry
onlyFujifilmnotbecause theyareforced todosobytheGovernment ofJapan, orevenbyFuji,but
because theybelieve asingle-brand strategy serves theirbusiness interest. OneofFuji'sfourprimary
wholesalers, Asanuma, became asingle-brand distributor afterKodak explicitly refused todealwith
itdirectly.
5.43 Inresponse, theUnited States explains thatJapan hastaken several recent steps toreinforce
itsdistribution countermeasures. Some ofthese steps include "administrative guidance," andsome
include more formal measures. Moreover, theadministrative guidance issued inthepastremains in
effect because Japan hasnotrevoked orcounteracted it,andJapanese industry continues toactin
accordance withit.Specifically, Japan hasnotrevoked orattempted tocounteract itsadministrative
guidanceinfavourofshortpaymentterms,standardizedtransactionterms,rebatesandvolumediscounts,
andvertical information links between manufacturers, wholesalers, andretailers. Tothecontrary,
Japan hasissued recent administrative guidance making clearthatitspolicies remain inplace regarding
eachofthese. Japan alsohascontinued toapply formal measures tosupport theoligopolistic distribution
system inthephotographic filmandpaper industry.
5.44 InJapan ’sview, Kodak hasnever seriously approached thesingle-brand primary wholesalers
withaserious business proposal. Japan submitted affidavits from eachofthefourmajor primary
wholesalers attesting thatKodak hasnotmade serious business proposals.120
5.45 TheUnited States argues thatonseveral occasions in1987-1991, 1995, and1997(inaddition
toearlier decades), Kodak approached thefourprimary wholesalers toseekadistribution arrangement,
andwasrebuffed. TheUnited States understands thatAgfa approached these wholesalers inrecent
years andwasrebuffed aswell. Japan'sdistribution countermeasures havelimited thewholesalers '
incentives andfreedom todealinforeign products. Inaddition, Kodak hasalsorepeatedly approached
secondary wholesalers todealinitsproducts, butfrequently hasbeen rebuffed. Thesecondary
wholesalers donothavethescale ormarket coverage oftheprimary wholesalers, butfullaccess to
oneormore ofthem would stillincrease theaccess toretail ofimported filmandreduce therelative
costofdistributing it.However, thecountermeasures haveincreased control orinfluence overthe
secondary wholesalers bythemanufacturers/primary wholesalers andhelped prevent thedevelopment
ofasignificant relationship withKodak orAgfa. Kodak hasaggressively sought toexpand filmsales
through thephotofinishing laboratory channel, butisabletosellonlyabout one-quarter ofitsfilm
through thischannel. Kodak faces constraints infurther expanding itssalesofpaper tolaboratories
anddistribution offilmthrough laboratories because many laboratories haveexclusive relationships
withJapanese manufacturers.121
5.46 Inconsidering Japan’srecent formal andinformal actions, theUnited States points outthat
itisimportant torecognize thatthedistribution structure setupbythemeasures beginning inthe1960s
and1970s is,toalarge extent, self-sustaining. Once Japanese manufacturers achieved domination
overthedistribution system through implementation ofshort payment terms, rebates anddiscounts,
vertical information links, andothermeasures advocated andimplemented bytheJapanese Government,
themanufacturers ’power allows themtomaintain suchdomination, through thecontinuing useofthese
transaction terms andother mechanisms, withlessneedforsupport from theJapanese Government.
Areduced needforsupport doesnotmean thattheGovernment reversed itspolicy. Tothecontrary,
119Japan asserts thatbothAsanuma andKashimura carry Kodak slideproducts. Inaddition, Japan asserts thatAsanuma
hasaretail subsidiary inTokyo thatsellsKodak film. Affidavit ofTakenosuke Katsuoka, p.4,Japan Ex.A-11; Affidavit
ofTomihiko Asada, p.3,Japan Ex.A-12.
120SeeAffidavit ofTakenosuke Katsuoka, Japan Ex.A-11; Affidavit ofTomihiko Asada, Japan Ex.A-12; Affidavit
ofYukiyoshi Noro, Japan Ex.A-14; Affidavit ofKaoru Konno, Japan Ex.A-15. Japan alsonotes thatKodak filmhas
actual access tosecondary wholesalers andretailers. SeeSection V.A.3.(d), paras. 5.57-5.59.
121SeeAffidavits ofSumi Hiromichi, USEx.96-10, andWilliam Jack, USEx.97-2.WT/DS44/R
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Japan hascontinued toadvocate short payment terms, rebates anddiscounts, andvertical information
links, andJapanese manufacturers andwholesalers havecontinued toapply thesepractices tomaintain
theoligopolistic distribution system. Moreover, theGovernment ofJapan hascontinued tosuppress
alternative channels andpotential challenges tothissystem, suchaslarge stores andindependent
photoprocessing laboratory networks, thereby shielding theoligopolistic distribution system from
competitive pressures thatcould undermine it.
5.47 Withthiscontextinmind,theUnitedStatesnotescontinuingactionsbytheJapaneseGovernment
toimplement itstransaction terms andvertical information linkspolicies. Forexample, inthe1980's,
Japan,interalia:developednewbusinessassistanceprogramstobolsterthesystemizationoflaboratories
andexclude imports ofbothfilmandpaper from thisalternative channel; pressed forward with
strengthening theinformational tiesbetween manufacturers andwholesalers; andcontinued torelyupon
chambers ofcommerce inongoing application ofstandard transaction terms. More recently, MITI's
1990Guidelines affirmatively advocated theuseofrebates: "[w]hen thereareclearpayment standards
onrebates, thispractice ofrebate payment hasitsmerit. ..."122Similarly, in1993, MITI'sSmall and
Medium Enterprise Agency (SMEA) andaconfederation ofwholesalers trade associations, including
thephotospecialty wholesalers association, jointly conducted astudy andpublished areport addressing
issues raised inMITI's1990 Distribution Guidelines.123Based onthereport, SMEA drafted amodel
wholesaler'scontract.124The1993SMEAReportnotesthatsuchpractices"havebeenformedtofacilitate
thetransaction relationship between businesses ...andarethought togoonforacertain economic
reason among thetransacting parties andtheindustry thattheybelong to."125Nowhere doesthereport
orthemodel contract mention anyelimination oftheuseofrebates, orprovide anyinstruction tofollow
uporimplement the1990Guidelines ’caution against theuseofrebates for"maintaining akeiretsu-based
relationship." Instead, onlythe1990 Guidelines ’favourable mention ofrebates isreflected in1993
SMEA Report andcontract.
5.48 Inaddition, theUnited States points outthatthe1993 SMEA Report andmodel contract
demonstrate thatJapan continues tosupport thestandardization oftransaction terms among photographic
materials wholesalers which helpmaintain exclusive vertical relationships inthedistribution system,
established asaresult oftheliberalization countermeasures program. Thereport noted withapproval
that"retail industry associations andallindustries areworking invarious ways tostandardize business
practices."126Thereport admonished, however, that"problems stillremain unchanged" and"[t]he
needforimprovement isbecoming stronger."127Later thereport again stressed, "ways toclarify and
122Guidelines forImproving Business Practices, p.2,USEx.90-5.
123MITI,SmallandMediumEnterpriseAgency,WholesaleIndustry-CurrentStatusandFutureIssues1993,20September
1993 (1993 SMEA Report). Second Panel Questions andUSAnswers, USEx.1.TheConfederation ofSmall- andMedium-
Sized Wholesale Industry Related Trade Associations (SMEA Wholesalers 'Confederation) wasestablished inAugust 1990
asaninformal advisory body totheDirector-General oftheGuidance Department ofSMEA. Ibid., p.6.TheFederation
ofPhoto Wholesalers (Shashoren) isamember oftheconfederation. Ibid., p.8,seeTab1.Thisprocess followed MITI’s
classic public-private sector cooperation method (Kanmin kyocho taisei) inwhich thegovernment andindustry jointly develop
measuresbasedontheconcertedadjustmentprocess.TheUnitedStatespointsoutthatthegovernment-privatesectorcooperation
method establishes incentives anddisincentives toensure industry compliance withMITI’spolicy.
124Themodel contract callsforcashpayment onamonthly basis. Article 8oftheSMEA Model Contract, reprinted
in1993 SMEA Report, p.78.Second Panel Questions andUSAnswers, USEx.1.Themodel contract provides thatin
those cases where cashpayment isnotpossible, notes should have alimited termandinterest should becharged forlate
payment. Thismodel contract demonstrates thatMITI'spolicies andguidance remain unchanged regarding payment terms.
SMEA drafted themodel contract working withtheInstitute ofDistribution Research (which drafted theMarch 1969 Survey
oftransaction terms, which provided thebasisforthe1970MITI Guidelines) andtheDistribution System Development Center
(which hasplayed acritical roleintheimplementation ofMITI'ssystemization policy). 1993 SMEA Report, p.75.Second
Panel Questions andUSAnswers, USEx.1.
1251993 SMEA Report, p.4.Second Panel Questions andUSAnswers, USEx.1.
126Ibid., p.5.
127Ibid.WT/DS44/R
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standardize transaction terms should bestudied. ..."128Inaddition tothese callsforstandardization,
theactofpreparing andpublishing astandard contract wasinitselfanactpromoting standardization.
5.49 TheUnited States alsopresents evidence todocument thatMITI, throughout thelate1970s
andtheentire 1980s, hascontinued topromote andresolve technological issues related tovertical
information links. When Japan overcame theremaining technical hurdles in1989, Fujiimmediately
created technical linksupwithitsdistributors. Japan hasnever revoked orworked tocounteract its
administrative guidance infavour ofvertical information links between manufacturers, wholesalers,
andretailers.Moreover,since1989,Japanhascontinuedtomakeclearthatverticalelectronicintegration
ofdistribution isofficial policy. Forexample, MITI's1990Guidelines advocated vertical information
linksbetween manufacturers, wholesalers, andretailers.129Fujicontinues tobeelectronically linked
todistributors, giving Fujiawidevariety ofinformation overthedistributors’activities andincreasing
Fuji'sefficiency anditscontrol ofdistribution. None ofFuji'scompetitors hasaccess totheinformation
network among thesupposedly independent distributors inthischain.
5.50 AccordingtotheUnitedStates,inadditiontomaintainingitsadministrativeguidanceconcerning
transaction terms andinformation linkpolicies, Japan alsohascontinued tosupport theoligopolistic
distribution structure inthephotographic materials industry withformal measures. Themostimportant
ofthese istheLarge Stores Law. Similarly, Japanese manufacturers continue tobetheprincipal
beneficiaries ofSMEA subsidy programs forphotoprocessing laboratories, because thebulkofsuch
subsidiesareprovidedtophotoprocessinglaboratoriesaffiliatedwithdomesticmanufacturers.130Finally,
the1995Business Reform Lawopened thedoorforcontinued active government assistance tobuttress
theoligopolistic distribution structure inthephotographic materials industry byproviding Japan with
abroad legalframework toassist "domestic production activities" andtoimplement MITI distribution
policy.131
(c) TheroleofNagase andKodak Japan
5.51 JapanfurtherassertsthattheUSargumentignorestheexistenceofKodak'sprimarywholesaler,
Kodak Japan (formerly Nagase andthenKodak-Nagase). Japan argues thatbycollapsing Kodak, the
manufacturer, withitswholesaler subsidiary, theUnited States creates theimpression thatthedomestic
manufacturers haveaccess toadistribution channel (i.e.,primary wholesalers) thatimports lack. This
impression, however, isnotsupported bythefacts. Long agoNagase, thenKodak 'sexclusive importer,
soldfilmtosome ofthedomestic manufacturers 'primary wholesalers. However, Nagase alsoacted
asaprimary wholesaler itself, thereby competing withitsowncustomers. Thisconflict intensified
in1967, when Nagase acquired amultibrand primary wholesaler, Kuwada, andtransformed itinto
asingle-brand Kodak distributor.
5.52 TheUnited States responds thatKodak doesbusiness through itswholly-owned subsidiary,
KodakJapan,Ltd.,whichperformstechnicalsupport,productdevelopmentandmarketingtasks.Lacking
access towholesale channels, Kodak Japan necessarily sellsKodak filmdirectly toretail outlets. That
factdoesnotrender ita"wholesaler"; werethatthecase,arguably anysubsidiary ofaforeign company
inJapan could betransformed intoa"wholesaler" merely byexcluding itfromdistribution channels.
128Ibid., p.73.
129Guidelines forImproving Business Practices, p.9,USEx.90-5.
130MITI Industrial Structure Division, Special Measures LawtoPromote Business Reform forSpecified Industrialists,
LawNo.61of1995, Article 2,USEx.95-1.
131Ibid., Article 1,USEx.95-1.WT/DS44/R
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5.53 Japan responds thatKodak itselfhaspointed outinother contexts132thatKodak Japan performs
essentially thesame functions astheprimary wholesalers. Indeed, Kodak Japan sellstothesame
customers asFujifilm ’sprimary wholesalers andperforms thesame services forthese customers as
dotheprimary wholesalers. Thehistory ofKodak ’sdistribution inJapan alsodemonstrates Kodak
Japan’sroleasaprimary wholesaler. From the1960s until1977, Kodak relied exclusively onitsimport
agent Nagase fordistribution functions. Kodak clearly believed thatNagase, particularly afterits
acquisition ofaprimary wholesaler, Kuwada, wasitswholesaler inJapan, andthatNagase wasfully
capable ofperforming thewholesaling function.133
(d) Single brand distribution doesnotimpede access ofimports
5.54 According toJapan, theUScaserestscritically onafalseassumption about thedistribution
structureinJapan,i.e.,thatdomesticmanufacturers'relationshipswithprimarywholesalershavecreated
a"distribution bottleneck" thathinders imports 'access toJapanese retailers. Japan argues thatthe
United States assumes thatbecause there arenearly 280,000 retail outlets thatsellfilminJapan, then
itnecessarily follows thatdirect distribution toallofthese retailers isimpractical andthataccess to
these primary wholesalers 'comprehensive distribution networks is,therefore, allegedly essential if
imported filmistopenetrate theJapanese market fully. Japan retorts thattheUSargument completely
misunderstandshowfilmisdistributedinJapan,particularlytheroleofprimarywholesalers.Moreover,
theUnited States incorrectly calculates theavailability ofimported filmatJapanese retailers.
5.55 Japannotesthatsinceeachofthethreebrandsissoldbythemanufacturertosingle-brandprimary
wholesalers, itfollows ofnecessity thatthebrands donotshare primary wholesalers. Thisdoesnot
mean thatimports lackaccess totheprimary wholesaler distribution channel. Rather, thedifferent
brands simply utilize different primary wholesalers. Japan further asserts thatinaddition toignoring
import 'saccess totheprimary wholesale channel, theUnited States exaggerates theroleofprimary
wholesalers. Although itistruethatthere are280,000 retail outlets thatsellfilminJapan, allbut
13,445 oftheoutlets buytheirFujibrand filmnotfromtheprimary wholesalers, butfromsecondary
wholesalers orlaboratories. Fewer than5,000 accounts collectively cover virtually theentire Japanese
market. TheUnited States offers noreason whyKodak 'ssingle-brand primary wholesaler, Kodak
Japan, would beincapable ofservicing these 5,000 keyaccounts.
5.56 TheUnited States replies thatevenifthisnumber werecorrect, Fujineeds fourlargeprimary
wholesalers toservice these 5,000 accounts. Because theforeign manufacturers havenoaccess to
theprimary photospecialty wholesalers ortomany ofthesecondary wholesalers thatservice these
accounts forFuji,theyhavetoservice these accounts directly. Direct distribution orother alternative
channels created byforeign firms provide them withaccess toonlyalimited segment ofthemarket,
specifically incentral neighbourhoods orlargecities -areas where photospecialty outlets arerelatively
large anddensely located.
5.57 Japanalsonotesthatthesamesurveyoftheprimarywholesalers'customersrevealsthatimports
havealready thoroughly penetrated these keyaccounts. Ofalltheaccounts surveyed, 62.0percent
--accounting for77.3percent oftheprimary wholesalers ’combined surveyed salesvolume --currently
carry Kodak brand film. Another 16percent --accounting for10.0percent ofsurveyed volume --
either buyother non-film products from Kodak orelseconduct regular business withsecondary
wholesalers orphotofinishers thatsellKodak products. Thus, customers accounting for87.3percent
oftheprimary wholesalers 'combined surveyed salesvolume either already carry Kodak orelsehave
132SeeExhibit 1ofJapan ’sJune1997 Presentation Materials forthesecond substantive meeting withthePanel (providing
chart from Dewey Ballantine forEastman Kodak Company, "Privatizing Protection," May 1995.)
133Japan notes theUnited States confuses Kodak Japan andEastman Kodak Japan. Eastman Kodak Japan wasoriginally
establishedas"KodakJapan"in1977,butwaslaterrenamedin1989.AlthoughEastmanKodakJapanperformsbothmarketing
andtechnical services, andisnotawholesaler, Kodak Japan functions asaprimary wholesaler intheJapanese market.WT/DS44/R
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ready access toKodak through established business relationships. According toJapan, theUnited States
concedes thatFujianditsprimary wholesalers havemore salespeople thanKodak Japan. IfKodak
wants toimprove itsdistribution, however, there isnolegal obstacle tohiring more sales people.
Therelative strength ofKodak 'ssaleseffort isentirely uptoKodak. Furthermore, Japan asserts that
theUnited States hasoverstated thenumber ofsales people atFuji'sprimary wholesalers by
approximately 50percent.
5.58 Japan asserts thatKodak 'sowndataprove thepoint. Japan points outthataccording toasurvey
ofJapanese retailers commissioned byKodak fortheUSSection 301investigation, approximately 50
percent ofphoto shops surveyed carry Kodak.134Japan'sposition isthatphoto shops, which presently
account foralmost halfoftotalfilmsalesinJapan,135arethe"traditional distribution channel" supposedly
dominated bydomestic manufacturers 'primary wholesalers.
5.59 Japan therefore argues thattheUS"distribution bottleneck" argument thusfailsthemostbasic
threshold empirical test-ifmost oftheretailers andsecondary wholesalers thatpurchase filmfrom
Fujifilm 'sprimary wholesalers didnotcarry imported film, thenthere would atleastbeanargument
thatthelackofarelationship between foreign manufacturers andthose primary wholesalers wascausing
imports tolosesales. Butsince mostoftheprimary wholesalers 'customers already purchase Kodak
filmfrom other sources, the"distribution bottleneck" clearly doesnotexist. Kodak 'sownprimary
wholesaler, Kodak Japan, cananddoessellfilmdirectly tothelargest retail accounts. Kodak Japan
cananddoessellfilmtosecondary wholesalers -nottomention itsownaffiliated photofinishing
laboratories -which thendistribute tosmaller retailers. Therefore, thereisnomarket barrier preventing
imports 'access toretailers.
5.60 TheUnited States responds thatananalysis ofthesurvey from which the90percent figure
isallegedly derived shows discrepancies between theactual survey results andthefigures reported
inJapan'ssubmission. Inspection ofthesurvey alsoreveals thatitusedbiased survey andsampling
techniques. Therefore, theUnited States urges thePanel toaccept theKodak survey, which shows
thatKodak filmisactually available inabout 40percent ofthestores inJapan.
5.61 TheUnited States argues thatJapan’ssurvey isflawed because thedetermination ofwhether
aretailer carries foreign filmisbased onasking Fuji’sfourprimary wholesalers toasktheircustomers
whether theyhadaccess toforeign film. TheUnited States points outthatabout one-third percent
oftheprimary wholesalers ’filmsalesaretoother secondary wholesalers. Some ofthese wholesalers
dealwithaverylarge number ofretail customers. According totheUnited States, Japan’sown
submissions tothePanel report that278ofthesecondary wholesalers selltotensofthousands ofretail
customers. Accordingly, under Japan’ssurvey, ifoneofthose secondary wholesalers hadpurchased
onerollofforeign filmtoselltojustoneofthose tensofthousands ofretailers, Japan would conclude
thatforeign filmhadaccess toallofthose tensofthousands ofretailers. TheUnited States argues
thatthismethodology severely distorts theviewofthemarket access situation.
5.62 TheUnited States further points outthattheabove example oftoken dealings bywholesalers
inJapan should notbeconsidered anexaggeration. TheGATT itselffound, initsTrade Policy Review
ofJapan, thatkeiretsu manufacturers tendtodiscourage, butnotalways prevent, theirwholesalers
fromdealing inacompetitor ’sproducts.136Consistent withthisfinding, thefourprimary wholesalers
havebeenknown tooccasionally engage intoken dealings offoreign film. Forexample, in1995,
thefourprimary wholesalers together sold295rollsofKodak film. Thetotalsalesofthesefourprimary
wholesalers thatyearwere approximately 25million rolls. Applying Japan’ssurvey methodology,
134Japan Market Access Survey forPhotographic Film, 20March 1996, p.2,Japan Ex.A-20. Thesame conclusion
canbefound intheHester affidavit provided bytheUnited States inthisproceeding. USEx.97-9.
135Photo Market 1996, p.130, Japan Ex.A-1.
136C/RM/S/57 p.93.WT/DS44/R
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itcould beconcluded thatforeign filmhadaccess to100percent ofJapan’sretailers in1995 because
thefourprimary wholesalers reach 100percent oftheretail customers inJapan. Clearly, however,
295rollsoutof25million doesnotconstitute access tothedistribution system.
5.63 IntheUSview, theimportant question ishowmany retailers inJapan infactcarry foreign
film,sinceitistheretailers whoultimately selltotheendusers. According totheUnited States, Japan,
however, didnotanalyze access totheretail market forthePanel. Responding toaquestion from
theUnited States atthefirstPanel hearing, Japan didprovide therawdataforoneofitsmarket access
surveys. These datareveal thatforeign filmisavailable in43percent oftheretail outlets inJapan.
TheUnited States believes thisfigure ishigh, sincethesample ofthesurvey wasbiased heavily toward
major cities, where foreign filmismore prevalent, andthestudy wasotherwise infected withother
sampling andmethodological errors. Still,the43percent figure reveals substantially lessmarket access
thanJapan claimed, andisclose tothe40percent figure found intheUSstudy.
5.64 Japan responds thattheUnited States attacks thesurvey sampling methodology, yetapparently
forgets thatthesurvey ofwholesaler customers wasnotasampling atall.Rather, over95percent
ofthecustomers, virtually theentire customer base, weresurveyed. There canbenoissueof"sampling
bias" when theentire universe issurveyed.
(e) Themarket forpaper
5.65 AccordingtoJapan,theUnitedStatesclaimsthatMITI'sdistributionpoliciesservedtoencourage
andfacilitateprimarywholesalers'switchfrommultibrandtosingle-brandwholesaledistributors,thereby
supposedly creating adistribution bottleneck andexcluding imported filmandphotographic paper from
access tothehundreds ofthousands ofJapanese filmretailers. Japan asserts thatthistheory doesnot
evenaddress photographic paper. Japan maintains thatalthough theUScomplaint supposedly pertains
tophotographic filmandpaper, theUStheory hasnothing todowithconsumer photographic paper.
5.66 Japan further argues, thatinaddition, photographic paper isdistributed through verydifferent
channels fromthose usedforfilm. Inparticular, thedomestic filmmanufacturers 'primary wholesalers
arenotsignificantdealersofphotographicpaper.137Domesticmanufacturersdistributetheirphotographic
paper through salessubsidiaries orother affiliated companies; thesesubsidiaries oraffiliated companies
inturnsellthephotographic paper either directly or,inlimited amounts, through secondary wholesalers,
tothephotofinishing laboratories andminilaboratories thatusephotographic paper tomake prints.
Accordingly, Japan concludes that,theUStheory thatthedomestic manufacturers 'primary film
wholesalers create a"distribution bottleneck" isinapplicable topaper.
5.67 Japan further notes that,since the"distribution bottleneck" theory isinapplicable, theonly
United States argument withrespect topaper isthatdomestic manufacturers 'affiliations (through
contracts orequity investments) withphotofinishing laboratories havecreated acaptive market that
foreign paper producers areunable topenetrate. Japan points outthat,however, Kodak operates through
thesame kinds ofdistribution channels asthose usedbydomestic manufacturers. Japan'sposition
isthatthedomestic paper manufacturers -Fujifilm, Konica, Mitsubishi, andOriental -havelongstanding
networks ofaffiliated photofinishers thatbegan back intheearly 1960's,while Kodak hashada
photofinishing presence inJapan forover40years: Toyo Genzosyo, anaffiliate ofNagase, firstbegan
developing Kodak consumer photographic filminJapan in1952. Until the1980's,Kodak relied on
Toyo's(later renamed Imagica) network oflaboratories byestablishing ajointventure company, Kodak-
Imagica, withImagica in1987. According toJapan, today Kodak hasaffiliations with124amateur
laboratories,138located alloverJapan. Japan explains thatinaddition toaffiliated laboratories, there
137Japan 'sassertion isthatFuji'sprimary wholesalers account forlessthan10percent ofFuji'stotalcolour photographic
paper sales. Affidavit ofTanaka Takeshi, p.2,Japan Ex.A-10.
138Photo Market 1996, p.198, Japan Ex.A-1.WT/DS44/R
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areanumber ofnon-affiliated minilaboratories. Theminilaboratory sector occupies alarge portion
ofthepaper market: approximately 60percent oftotalpaper salesinJapan aretominilaboratories.139
Asisthecasewithfilm,Kodak sellspaper through exactly thesame distribution channels asdomestic
manufacturers. There isno"distribution bottleneck" forpaper, either.
5.68 TheUnited States responds thatMITI recognized thatforeign manufacturers could circumvent
thedistribution bottleneck forphotographic materials through photoprocessing laboratories. The1969
MITI-commissioned survey oftransaction terms inthephotographic sector notes aspotential threats
"iftheoligopoly ofthetwodomestic manufacturers isbroken upbyaforeign company," and"ifa
new[distribution] route emerges tocompete against theroute ofphotographic material dealers, which
isthecoreexisting route inthedistribution market."140Thesurvey further warned that"foreign
companies havealready provided financial assistance totheprocessing industry" andadvocated taking
steps "tominimize theanticipated disorder inthedistribution market."
5.69 TheUnited States further notes thatamong therecommended measures were, "subsidize the
processing industry."141Subsidies would helptiethelaboratories intoexclusive relationships withthe
domestic Japanese photographic filmandpaper manufacturers andconsequently impede thesaleof
imported paper.142Alaboratory withonecompany ’sphotoprocessing equipment islikely topurchase
photoprocessingpaperandchemicalsfromthatsamecompany,aswellasitsfilm,toensurecompatibility
andtomeetconsumerexpectationsforconsistencybetweenthebrandoffilmandpaperused.Therefore,
alaboratory thatusesFujiequipment oftenwilluseFujipaper andchemicals, andifitdistributes film,
itlikely willbeFuji, which inturnimpeded thesaleofimported paper.
5.70 AccordingtotheUnitedStates,inthelate1960sandearly1970s,SMEAprovidedapproximately
160million yentoassist Japanese filmmanufacturers inconverting black andwhite tocolour photo
processing laboratories.143InJuly1967, SMEA approved "colour filmdevelopment andprinting
laboratories" asoneoffoursectors deemed eligible thatyearforsubsidized loans. TheChairman of
theAllJapan Federation ofColour Laboratories Association, whoalsowasthepresident ofFujiColour
Service,144stated that"themainpurposes ofthelaboratory industry becoming designated industry are
...ascapital liberalization countermeasures, tomodernize facilities andthereby solidify thefoundations
ofbusinesses."145In1968thedirector ofMITI’sSmall andMedium Enterprise Agency (SMEA) called
forapplying SMEA programs toimprove thestructure ofmedium andsmall businesses inlightof
"advancing capital liberalization" andas"protective countermeasures against theselling ofoneself to
foreigncapital."146WhenthelaboratoriesweredesignatedaseligibleforanotherSMEAsubsidyprogram
in1973, thechairman ofthelaboratories association again stressed theneed torespond totrade
liberalization.147
139Ibid., p.173.
140Institute ofDistribution Research, Fact-Finding Survey Report Pertaining toTransaction Terms: Actual Conditions
ofTransaction Practices intheWholesale Industry, March 1969, pp.1-21, 287-319, USEx.15.
141Ibid.
142Ibid.
143SMEA played aleading roleinproviding company-specific financing, consulting, guidance, andmonitoring insupport
ofIndustrial Structure Council Distribution Committee 'sliberalization countermeasures. White Paper onSmall andMedium
Enterprises bytheSMEA 1967, USEx.67-1.
144TheUnited States notes thatallchairmen oftheAllJapan Federation ofColour LabAssociation (Lab Association)
havebeenFujiemployees:MurakamiEiji(1965-1978),KosekiYasuo(1978-1988),TakeuchiHiroshi(1988-1992),andMiyata
Hidenobu (1992-present).
145Murakami Eiji,TheDecision onJoseiho [Assistant] Designated Industry, JCFA News, Special Issue, 1967, p.4,US
Ex.9.
146Otsutake Kenzo, Main Points ofFiscal 1968 MITI Policy; NewPolicy Dealing With Capital Liberalization; Approach
toPolicy onSmall andMedium Enterprises, Tsusan Journal, December 1967, Vol.2No.2,pp.10-15, USEx.12.
147Murakami Eiji,AYear ofTrial, JCFA News, 1January 1973, No.34,p.2,USEx.27.WT/DS44/R
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(f) Other filmmarkets
5.71 Japan argues thatinother specialty filmproducts, Kodak itself hasexperienced significant
market success inspiteofitsreliance onsingle-brand distribution. InX-ray film,forexample, Kodak
hasanapproximately 20percent share ofthemarket, yetalmost allitsmajor wholesalers areexclusively
single-brand distributors (theexception, Suzuken, willhandle other brands uponrequest).148Fujisells
through FujiMedical Systems toseveral distributors, intwoofwhich Fujihasequity stakes. Allof
Fuji'smajor wholesalers arebasically single-brand distributors, though theywilloccasionally sellother
brands upon customer request. Konica sellsthrough itsaffiliate, Konica Medical. Astotheother
major suppliers, Agfa'sandDuPont 'smajor wholesalers carry primarily theAgfaandDuPont brands.
There isthusnosignificant sharing ofdistributors among themajor producers.
5.72 Japan alsoargues thatKodak hasaverystrong position intheJapanese motion picture film
market. Innegative film, Kodak hasanapproximately 70percent share, andFujihastheremaining
30percent.149Inpositive film, thesituation isbasically reversed: Fujihasa60percent share, and
Kodak hasaround 40percent. Agfarounds outthemarket asamarginal supplier. Kodak hasachieved
itssuccess byselling directly tousers; Fujiemploys independent single-brand distributors. Agfa,
meanwhile, usesasingle-brand wholesaler. Thus, themarket realities forotherfilmproducts aresharply
atoddswiththeUStheory ofadistribution bottleneck inconsumer film.
5.73 TheUnited States explains thattheUScomplaint specifically excludes various specialized
filmsusedbyprofessional photographers forresale andvarious otherspecialty films(x-film, microfilm).
4. THE RESTRUCTURING OFTHE JAPANESE FILM DISTRIBUTION SECTOR
(a) Theorigin ofMITI 'sdistribution policies intheearly 1960s
5.74 According toJapan ,MITI hadmany reasons tobeencouraging greater efficiency inthe
distribution system during the1960'sand1970's.Theconcern withdistribution modernization arose
initially from theproductivity lagoftheJapanese distribution sector relative toother sectors ofthe
Japanese economy, andtheimplications ofthisinefficiency. Historically, thedistribution sector in
Japan wascharacterized bysmall "mom andpop" enterprises andtraditional, personalized business
practices. Theservice sector wasviewed largely asaplace toemploy those people whocould not
findemploymentinthemanufacturingsector.150Accordingly,whileJapanesemanufacturershadrecorded
greatsuccesses inrecent years, thedistribution sector lagged behind inproductivity andcompetitiveness.
InJapan’sview, theUnited States thuscompletely mischaracterizes theorigin ofMITI distribution
policies. Theobjective wasnothelping Japanese manufacturers, astheUnited States claims. Rather,
thefoundation wascoping withdistribution inefficiency itself, andtheinterrelated problems ofinflation
andlabour shortages.
5.75 TheUnitedStatesargues thatthetransformation oftheopenandcompetitive distribution system
oftheearly 1960'sintothevertically-integrated, domestic manufacturer dominated system wasnot
accidental. Itwastheresult ofthedirect intervention inthemarket bytheGovernment ofJapan.
TheGovernment ofJapan discerned thatreorganizing distribution along vertically-integrated lineswould
protect domestic manufacturers fromforeign competition afterliberalization. TheUnited States alleges
thatMITI wasthenerve center forformulating andimplementing distribution countermeasures policy.
148Affidavit ofTanaka Takeshi, p.5,Japan Ex.A-10.
149Ibid.
150See,Fumitake Kishida, TheDirection ofCommercial Structure Improvement inTheNewDevelopment OfDistribution
Policy, International Trade andIndustry Study No.142(December 1966), p.32,Japan Ex.B-8;seealso,Shintaro Hayashi,
ThinkingandDealingwithDistributionIssuesinTheNewDevelopmentofDistributionPolicy,InternationalTradeandIndustry
Study No.142(December 1966), p.4,Japan Ex.B-9.WT/DS44/R
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TothisendMITI formed aDistribution Committee thatpublished 12"interim reports" from1964-1977,
covering every aspect ofthedistribution system. Eachinterim report reflected aprogressively deeper
recognition oftheinefficiencies oftheJapanese distribution system, itsvulnerabilities toforeign
investment, andtheimpact thatforeign penetration ofthedistribution system would haveonJapanese
manufacturers.
5.76 According totheUnited States, theFirstInterim Report identified acentral theme thatwould
underlieMITI'sdistributionpolicy:theneedtolimitcompetitionindistributioninordertocreatestability
andhighprices forthebenefit ofdomestic manufacturers.151TheReport described theJapanese
distribution system as"extremely fractionalized" andcharacterized by"excess" competition, weak
financial conditions, andinadequate management capability. TheReport noted atrend toward vertical
integration ofdistributors under thecontrol ofmanufacturers, andobserved thatwhere therewasvertical
integration, ithadimproved thedistribution structure andserved to"secure andexpand the[market]
share ofindividual manufacturers."152Later reports andgovernment policies would continue tostress
thebenefits todomestic manufacturers ofvertical alignment ofdistribution.
5.77 TheUnited States further notes thattheThird andFifthInterim Reports153developed another
theme thatwould become important forreorganizing thedistribution system: horizontal business
cooperation. TheThird Interim Report specifically advocated providing financing andtaxincentives
forretailers tostrengthen theirtieswitheachother andwithwholesalers through thedevelopment of
jointphysicaldistributionfacilities.154TheFifthInterimReportadvocatedgreaterhorizontalcooperation
among wholesalers andretailers through theformation of,forexample, jointwholesale centres, as
wellasgreater vertical cooperation between manufacturers, thewholesalers, andretailers.
5.78 TheUnited States argues thattheSecond andFifth Interim Reports sowed stillanother seed
thatwould become instrumental inreorganizing distribution: revising transaction practices between
manufacturers andwholesalers inawaythatwould facilitate "rational" business relations between
manufacturers andwholesalers.155Such "rational" transaction terms became ameans toencourage
thealignment ofdistributors intoexclusive, long-term relationships withasingle domestic manufacturer
andameans tohelpresist foreign penetration ofthedistribution sector.
5.79 TheUnited States further argues thatalong withexamining thedistribution structure generally
intheDistribution Committee, MITI worked closely withindividual sectors tobegin discussing their
specificstructuralissues.Inthephotographicsectorin1963,MITIurgedthefourdomesticphotographic
filmandpaper manufacturers tobandtogether todiscuss waystomeetforeign competition. Inresponse,
thecompanies formed theNatural Colour Photography Promotion Council (NCPPC). MITI officials,
includingtheofficialresponsibleforthephotosensitivematerialssector,attendedtheCouncil'smeetings,
andMITIofficialsrecommendedspecificpoliciestohelptheCouncilachieveitsobjectives.Theprimary
focus oftheNCPPC wasonthesteps thephotosensitive materials sector needed totaketoprepare
tomeetforeign competition, concentrating particularly ondistribution andsalesnetwork.
151Japan disagrees withthisUSinterpretation oftheFirst Interim Report. Seetranslation issue 2.
152Industrial Structure Council Distribution Committee, Current Status andProblems ofDistribution Mechanisms (First
Interim Report), December 1964, reprinted inTsubansho Koho, 8January 1965. Japan disagrees withtheUStranslation
ofkeiretsuka intheUStranslation oftheFirst Interim Report, USEx.64-6. Seetranslation issue 4.
153Industrial Structure Council Distribution Committee, Concerning Improvement inMaterial Distribution (Fifth Interim
Report), 19October 1966, USEx.66-3.
154Industrial Structure Council Distribution Committee, ThePromotion ofChain Stores -Industrial Structure Council
(Third Interim Report), reprinted inTsusansho Koho, 14September 1965, USEx.65-4.
155Industrial Structure Council Distribution Committee, TheBasic Direction ofPolicies onDistribution (Second Interim
Report), reprinted inTsusansho Koho, 24April 1965. Japan disagrees withthetranslation ofkeiretsuka intheUStranslation
oftheSecond Interim Report, USEx.65-2. Seetranslation issue 4.Fifth Interim Report, USEx.66-3.WT/DS44/R
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5.80 Japan admits thatmodernization ofthedistribution system hasbeenanongoing concern of
theGovernment formore thanthree decades, including theperiods bothbefore andafterthedebate
overcapital liberalization. Itnotes, however, thattheinterim reports oftheDistribution Committee
arenotofficial statements oftheGovernment ofJapan, andtheir issuance does notconstitute
"administrative guidance." LiketheUnited States andother countries, theGovernment ofJapan
frequently organizes advisory bodies withmembers drawn fromindustry, academia, consumers, and
themedia, andcharges them tostudy issues ofpublic concern andissue recommendations forthe
Ministers.
5.81 Japan argues, however, thattheaimofMITI'sdistribution policies wasnottoblock imports
buttomodernize theJapanese distribution industry andhelpittomeettheforeign competitive challenge
thatwould beunleashed byliberalization. Nothing inMITI'sdistribution policies oranyotherso-called
"liberalization countermeasures" didanything toencourage orfacilitate thecreation ofanexclusionary
market structure thatdiscriminates against imported filmorpaper. Japan'sposition isthatsince the
MITI policies inquestion actually saynothing about encouraging single-brand distribution offilm,
theUnitedStatesstrugglestoestablishsomeconnectionbetweenMITI'spoliciesandthemarketstructure
thatisthemaintarget ofitscomplaints. When confronted withtheactual factsofthismarket, however,
theUnited States 'arguments about "distribution countermeasures" collapse.
5.82 Japan further argues that,intheend,theUSclaim boilsdown toanassertion thatthecurrent
Japanese market structure forconsumer photographic filmandpaper isexclusionary andclosed, and
thatthisabnormal situation mustsomehow betheresult ofgovernment intervention. InJapan'sview,
thefundamental premise ofthisargument -thatthere issomething abnormal about thedistribution
offilmandpaper inJapan -issimply wrong. AttherootoftheUnited States 'complaints, Japan argues,
isthefactthatthevarious primary wholesalers inJapan eachcarry onlyasingle brand offilm.
However,single-brandwholesaledistributionisanormalbusinesspractice.Infactforfilm,thisbusiness
practice isthenorm inevery major market intheworld, including theUnited States. Consequently,
theJapanese market forconsumer photographic filmandpaper reflects theoutcome ofnormal market
forces.
5.83 Japan recalls theUSargument thatMITI'sdistribution policies during the1960'sand1970's,
i.e.,theso-called "systemization" policies, formed thecentrepiece ofitsalleged strategy toblock imports
ofconsumer photographic filmandpaper andtoassist Japanese filmmanufacturers ingaining exclusive
control overthe"traditional" distribution channels forfilm, leaving imports without access tothose
channels. Japan argues thattheUStheory hasnothing todowiththeactual record ofMITI'spast
orpresent distribution policies. MITI'spolicies sought more generally torationalize andsystemize
Japan'swholesaling andretailing sectors, which werebeset bylowproductivity. Inparticular, MITI
encouraged theelimination oftraditional outmoded business practices, theadoption ofstandardized
forms andprocedures, andtheincreased useofcomputer technology. Drawing onmodels fromWestern
businesspractice,thosebusinessreformswererecommendedacrosstheboardthroughoutthedistribution
sector, andwere bynomeans specific tophotographic filmandpaper.
5.84 TheUnited States responds thatcontrary toJapan’sassertions, thecontents oftheinterim
reports wereimplemented asadministrative guidance. TheUnited States recalls thatinmany instances,
theGovernment ofJapan directs thequasi-governmental policy entities such astheDistribution
Committee oftheIndustrial Structure Council toundertake aninvestigation orsurvey, andtheentity
inresponse would complete thattaskandreturn areport totheJapanese Government. Thatreport
inturnisadopted, affirmed, orutilized bytheJapanese Government asadministrative guidance to
direct theindustry toalteritsbehaviour, thereby converting the"report" tomeasures.
5.85 TheUnited States alsocontends thatsingle-brand wholesaling offilmisnotcommon worldwide.
Most photospecialty wholesalers inEurope andNorth America carry multiple brands offilmaswell
asawide range ofother photographic products. Japan isconfusing "single brand distribution" byWT/DS44/R
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wholesalers withthecommon practices inEurope andNorth America of"direct-to-retail" sales by
manufacturers.
5.86 IntheUSview, Japan’sargument thatitsobjective wasonlytomodernize distribution channels,
notblock foreign entry, isundercut byitsownsubmission tothePanel, which suggests thatitheld
offforeign investment inthedistribution sector inorder toensure thatforeign manufacturers could
notestablish theirowndistribution networks inJapan untilJapanese manufacturers hadrestructured
theirowndistribution networks andmade them more efficient. Moreover, ifJapan intended onlyto
promote distribution efficiency andnotprotect domestic manufacturers, itshould havewelcomed foreign
investment inthedistribution sector, because foreign distributors werefourtoseven times moreefficient
thandomestic distributors.
(b) The1967 Cabinet Decision
5.87 TheUnited States notes thatin1966, MITI completed asurvey thatexamined various problems
domestic industries werelikely tofacebecause ofliberalization. MITI identified Kodak andAgfaas
foreign companies thatwerelikely toentertheJapanese market forcamera andphotosensitive materials
aftercapital liberalization. Asaresult ofitssurvey, theUnited States asserts thatMITI issued apolicy
statement on17April 1967, indicating that"liberalization countermeasures" wereneeded todefend
thedomestic firms from competition.156
5.88 TheUnited States asserts thatthe1967 Cabinet Decision wasawatershed intheGovernment
ofJapan'sefforts torestructure Japanese industry toresist imminent foreign competition.157This
Decision formally endorsed theuseofcountermeasures tooffset theeffects ofliberalization, making
theprotection ofJapanese markets fromforeign acompetition ahighnational priority. TheDecision
emphasized thatthedistribution sector wasakeyareaforrenovation andimprovement tosupport the
production sector, using theconcerted industry-government approach:
"Modernizationlagsbehindmostinthedistributionsector.Herethepowerofresistance
against theinroad offoreign capital isweak, andtheimpact offoreign capital advancing
intothissector willalsopose significant impact ontheproduction sector. Itis
necessary, therefore, toimplement countermeasures insupport oftheefforts ofindustry
withtheobjectivesofmodernizingthedistributionstructure,fundamentallystrengthening
theenterprises inthissector, andestablishing amass salessystem."158
TheUnited States argues thatthelanguage oftheCabinet Decision established aclearnational priority
topursue distribution policies aimed atprotecting domestic manufacturers fromforeign competition.
5.89 Japan counters thatasitbegan todismantle trade andinvestment barriers inthe1960's,it
wasconcerned generally about theability ofdomestic industries tocompete withforeign rivals inthe
new,lessregulated business environment. TheCabinet Decision, which implemented thefirststage
ofcapital liberalization, wasquitedirect inexpressing thisconcern. TheUnited States, however, quotes
selectively fromthisdocument tocreate adistorted impression oftheCabinet Decision. Contrary to
USarguments, Japan sought topromote theefficiency andcompetitiveness ofdomestic industries,
notblock imports. Inurging modernization ofthedistribution sector inanticipation ofcapital
liberalization, theCabinet Decision wassimply applying toonesector abasicgeneral policy forcoping
withliberalization:
156MITI, Regarding Capital Liberalization, 17April 1967, reprinted inYoshido Fujio, Capital Liberalization andForeign
Investment Law, 30October 1967, USEx.67-3.
157USEx.67-6.
1581967 Cabinet Decision, p.6,USEx.67-6.WT/DS44/R
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"toguide andcomplement efforts bytheprivate sector forexample, bolstering future
technological development, increasing owned capital andlowering interest rates,
especially long-term interest rates, inorder tocreate thebasisonwhich ourenterprises
cancompete against foreign capital onequal terms."159
Japan argues thatdistribution modernization, which initially served topromote efficiency andtocope
withinflationary pressures would alsohelptheJapanese distribution sector compete withforeign capital.
Thepurpose wastosecure effective competition inthedomestic market through improving theefficiency
ofthedomestic distribution sector.
5.90 According toJapan, thesweeping USassertion about a"clear national priority" ofachieving
protection fromforeign competition hasnosupport inthetextoftheCabinet Decision. TheCabinet
Decision notes onlythatforeign capital inthedistribution sector willhavea"significant impact" on
themanufacturing sector, butthatstatement simply recognizes theobvious relationship between
distribution andmanufacturing intheeconomy, which would beaffected bycapital liberalization.160
Japan argues thatsolongasforeign producers werecompeting inJapan byexporting, thebackwardness
ofthedistribution system wasnotaproblem. Tariff reductions might make imported products more
price-competitive, buttheywould provide noother marketing advantage. Ontheother hand, once
foreign producers were allowed toestablish their ownsales subsidiaries inJapan, therelative
backwardness ofthedistribution systems uponwhich thedomestic producers hadbeenrelying would
become apotentially acute disadvantage.
5.91 InJapan'sview, there isnodiscussion intheCabinet Decision ofprotecting domestic
manufacturers fromforeign competition atall,letalone adiscussion ofusing distribution policies to
protect manufacturing companies. TheCabinet Decision refers onlytowaysinwhich thegovernment
canhelpJapanese companies --inboththedistribution andmanufacturing sectors --prepare forthe
intensified competition thatcapital liberalization willbring.
(c) The1968 Sixth Interim Report
5.92 TheUnited States argues thatitwastheDistribution Committee thatwascharged withthe
taskofdetermining howtoconvert theCabinet 'sgeneral decision intospecific policies. TheDistribution
Committee came upwithapolicy toachieve thetwingoals ofenhancing efficiency andprotecting
againstforeigncompetition-"systemization"ofdistribution.161Thepremiseofdistributionsystemization
wasthateventhough foreign investment indistribution might enhance efficiency inthedistribution
sector, itwould threaten Japanese manufacturers. TheSixth Interim Report analyzed waysthatforeign
manufacturers might gaincontrol ofJapan'sdistribution system,162andhighlighted theconcerns of
suchcontrol:
"1. There isariskthatgrowth sectors willfallunder themonopolistic control of
foreign capital, resulting from thedifference incapital resources andthelike.
2. There isariskthattheprocess ofsalesexpansion byforeign capital affiliated
distribution enterprises willaggravate excessive competition andhinder thesmooth
implementation ofdistribution modernization plans, andthe[established] order oftrade
willbedisrupted.
159Ibid., p.4,USEx.67-6.
160Ibid., p.6,USEx.67-6.
161Japan notes thatMITI distinguishes rationalization andsystemization policies. TheUnited States usesthesingle term,
"systemization" tocover bothconcepts.
162Sixth Interim Report, p.6,USEx.68-8.WT/DS44/R
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3. There isariskthatthemanufacturing sector willbedominated bycontrolling
thesalesroutes,bringingabouttheinternationalsubcontractingofJapaneseindustry."163
5.93 According toJapan ,inlightofthe1967 Cabinet Decision, MITI andthevarious advisory
committees renewed theirfocus ondistribution modernization. TheSixth Interim Report indicated:
"Today, thedelay inmodernizing distribution activities isoften seentoprevent the
effectiveness ofeconomy andimprovement ofpeople 'sliving. Thenecessity of
improving thestructure ofthedistribution industry isgradually increasing. Inaddition,
themodernization ofdistribution activities ispressed bythefollowing twoviewpoints.
First, liberalization ofdirect investment byforeign capital isdrawing near. Itis
necessary toquickly establish [market] conditions inwhich domestic capital could
compete withforeign capital. Second, improving productivity ofdistribution activities
isconsidered aneffective waytosolve theconsumer price issue."164
5.94 Japan further argues thatthebasic needfordistribution modernization arose from theneed
forefficiency toimprove thestandard ofliving. Afurther rationale fordistribution modernization
continued tobeconcern about inflation. Coping withcapital liberalization wasadded tothese other
rationales, butthereport isclearinstating thatcoping meant competing more effectively withthenew
foreign entrants. Thisgoalwastobeachieved bypromoting efficiency inthedistribution sector.
5.95 InJapan'sview, theUSclaims areuntenable. MITI hardly regarded theexisting distribution
system assome sortofstrategic "crown jewels" thatimports must notbeallowed touse. Onthe
contrary, MITI sawthebackwardness ofthedistribution system asan"Achilles 'heel" thatwould render
domestic manufacturers unable tocompete withforeign producers. Theconcern wasthatdomestic
manufacturers would bestuck withexisting distribution channels while foreign producers, freed from
capital restrictions, would beabletoconstruct theirownmodern (andexclusive) distribution channels.
Japan citesthe1968 Sixth Interim Report which stated:
"Inthecaseofpenetration forthepurpose ofselling theforeign manufacturers 'own
brand ofproducts ...(including cases inwhich foreigner producers actually control
distribution), when thegoods aresuperior, [themanufacturer] hashighly developed
salestechniques orlargemarketing funds, thereprobably willbeaconsiderable impact
onrivalJapanese producers andthebusinesses thatserve asdistribution channels for
domestic products."165
5.96 Japan'sposition isthatwhile foreign producers would beabletochoose between using existing
Japanese distribution channels orimporting theirownsystems, Japanese producers would havetosink
orswim withtheirdomestic distributors. Consequently, thepurpose ofMITI'sdistribution policies
wastoencourage themodernization ofJapanese distribution practices, andthereby serve various policy
goals including improving thecompetitiveness ofJapanese industry.
(d) The1969Seventh Interim Report andtheDistribution Systemization Promotion Council
5.97 TheUnited States argues thattheJapanese preoccupation withprotection isfurther evidenced
bytheSeventh Interim Report oftheDistribution Committee166,which itasserts states thattotheextent
163Ibid., p.8.
164Sixth Interim Report, Japan Ex.B-7.
165Ibid., p.22.
166Industrial Structure Council Distribution Committee, Systemization ofDistribution Activities (Seventh Interim Report),
22July1969, p.6,USEx.69-4.WT/DS44/R
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thatfostering efficiency became inconsistent withprotection against foreign competition, thelatter goal
should prevail. Therelevant language intheSeventh Interim Report reads:
"Today, amidst callsfortheactive promotion ofcapital liberalization inthedistribution
sector, wethinkthatefforts tosystemize distribution haveavitalimportance instrategic
significance. ...[T]he systems gap[between Japan andAmerica] isexpected tohave
adecisive effect ondistribution activities inparticular, theconcerted efforts ofthe
government andtheprivate sector must bedirected atsystemization from thepoint
ofviewofacapital liberalization countermeasure.
[I]tistruethatoneeffect ofsystemizing Japan'sdistribution system isthesimplification
ofentry [intoJapan'smarket] byforeign capital, [enterprises] which aremore adept
atsystemsmethodology.[But]tomakeinroads,weshouldinsteademphasizepreventing
theimmense impact thatwould befeltifforeign capital tooktheleadinsystemizing
Japan'sdistribution activities, andquickly develop asystem sufficiently capable of
countering therational systems introduced byforeign capital."167
5.98 TheUnited States further argues thatthepremise ofdistribution systemization wastoreorganize
theJapanese distribution system along vertical andhorizontal linesby-
(i) theformation andstrengthening ofproduct-specific vertical distribution tiesbetween
aJapanese manufacturer andvarious wholesalers, andbetween these wholesalers and
retailers;
(ii) thecreation oflinkages among horizontal elements ofthedistribution system, which
could bebrought more easily intothe"systemized" vertical arrangement.
5.99 According totheUnited States, under theGovernment ofJapan'ssystemization plan,thenature
ofthelinksbetween companies ina"system" would include commercial transaction ties,physical ties,
andinformational ties.Eachofthesetieswould become essential toensuring thatthesystem operated
asasingle andexclusive whole. Horizontal business cooperation among small retailers andother small
scaleentities inthedistribution system would be"themostefficient waytorealize profit fromeconomies
ofscale."168Horizontal cooperation alsowould make thesystem more difficult forforeign firms to
penetrate because many oftheindividual actors inthesystem would bebound together inacommon
distribution channel tiedtoanddominated bydomestic manufacturers.
5.100 Japan responds thattheSeventh Interim Report169outlined thebasic direction ofdesirable
systemization inallaspects ofdistribution, from management planning tobusiness transactions to
managing merchandise tofinance:
(i) Management Planning: thereport encouraged theuseofcomputers totracksalestrends
toshare information withsuppliers andcustomers.
(ii) Business Transactions: thereport encouraged theautomation ofmaterials handling,
scheduled deliveries along setroutes, andtheestablishment ofdistribution centers for
jointuse.
167Seventh Interim Report, p.4,USEx.69-4.
168Sixth Interim Report, p.11,USEx.68-8.
169Seventh Interim Report, USEx.69-4.WT/DS44/R
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(iii) Managing Merchandise: thereport encouraged theuseofcomputers tomaintain
inventory atappropriate levels, thetaking oforders bytelephone using order books,
andtheuseofautomated ordering systems.
(iv) Finance: thereport encouraged theuseofcomputers tomanage accounts receivable
andaccounts payable, automated invoicing andbanksettlements, andcomputerized
credit research.
5.101 TheUnited States points toarecent book ondistribution byaJapanese academic that
summarized theobjectives oftheJapanese government 'sdistribution systemization policies as
liberalization approached. Commenting specifically ontheSeventh Interim Report, hewrote thatits
basic purpose wastocreate vertically integrated systems:
"Itsintent wastobuild ahugepipeconnecting production withconsumption andto
improve theeffectiveness andefficiency ofdistribution byachieving effectiveness and
efficiency invertical operations. ...[T]he distribution systemization ultimately
encouraged vertical integration ofdistribution andcaused giant enterprises 'control
overdistribution tobecome evenstronger."170
Heemphasized thattheSeventh Interim Report represented atransformation intheGovernment 'spolicy
from merely improving efficiency toensuring manufacturer control ofthemarket:
"Wemustkeepinmind that[Japan 's]national distribution policy, aimed atbuilding
amass distribution system sought bygiant enterprises tobecompatible withamass
production system, hadbeentransformed intoareinforcement ofmarketing activities
bygiantenterprises whose goals weretocontrol distribution andthemarket ....This
characteristic ofthedistribution policy wasfurther strengthened bythepromotion of
distribution systemization policy."171
Another Japanese academic expert, writing in1974, alsocharacterized theMITI-led distribution reforms
oftheperiod asaiming atexcluding foreign companies:
"[T]he major reasons whythistypeofdistribution systemization hasbeenparticularly
emphasized during theShowa 40's[1965-1974], especially thelatter partofShowa
40's,[1970-1974] arebecause ofthefollowing:
...while coping with capital liberalization andpushing forward thedelayed
rationalization ofJapan'sdistribution industry, atthesametime,thenation asone[will]
build barriers toentry intothedistribution system; which leave nomargin forforeign
companies topenetrate Japan'seconomy."172
5.102 TheUnited States argues thattheSeventh Interim Report called forjointgovernment-industry
cooperation toimplement systemization, along withtaxandfinancial incentives forprojects thatwould
promote systemization. Tofoster coordination between government andindustry, theReport proposed
theformation ofanother government-industry body, theDistribution Systemization Promotion Council,
topromote andbuild consensus forsystemization. TheReport alsocitedtheneedforresearch and
guidance forspecific industries tocarry outsystemization according totheir specific needs and
circumstances.
170Sasaki Yasuyuki, Distribution Policies inJapan andtheWest, 16June 1995, USEx.95-12.
171Ibid.
172Shirahige Takeshi, Chapter 1,Development ofDistribution Policies, Current Distribution Issues inModern Japan
[Gendai Nihon noRyutsu], Ooya Junichiro (Publisher), Tokyo, 26February 1974, p.9,USEx.74-1.WT/DS44/R
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5.103 TheUnited States indicates thatMITI formed theDistribution Systemization Promotion Council
in1970. TheheadoftheCouncil described itsefforts asuniting government andtheprivate sector
inacommon purpose:
"TheDistribution Systemization Promotion Council wasestablished ...asaforum for
promoting thesystemization ofdistribution through thejointefforts ofgovernment
andtheprivate sector. ...[O]ver aperiod oftenmonths, over100people fromindustry,
academia andgovernment haveworked literally asoneunited body."173
(e) The1971 Basic Plan
5.104 TheUnited States further indicates thatin1971, theCouncil published its"Basic Planfor
Distribution Systemization." Upon itspublication, thechief ofMITI'sBusiness Bureau stated that
thePlanwas"urgent fromthestandpoint of...capital liberalization countermeasures," andthat"[w]ith
thisplan, theMinistry ofInternational Trade andIndustry hasdecided tomake every effort toward
thefulfilment ofdistribution systemization policies."174TheUnited States further indicates thatthe
plan'sauthors expressed theintention that"government andprivate sector, working asone,willpursue
concrete implementation [from now] until1975, based onthispolicy"175andreiterated theview of
systemization asvertical andhorizontal integration:
"The decisive approach hereistoregard theentire process ofdistribution from
production toconsumption asasingle system. ...Inparticular, suchsystemization
ofdistribution mustberealized through various stages: vertically fromtheintra-firm
leveltotheinter-firm level, horizontally ontheinter-firm leveltothenational economic
level...."176
5.105 TheUnited States notes thatindividing responsibility between government andindustry for
implementing systemization, thePlanstated thatthemanufacturers should assume primary responsibility
foraccomplishing vertical integration, with"positive support andguidance" from thegovernment.
Intheareaofhorizontal cooperation, thegovernment would "take positive action."177
5.106 Japanassertsthatthe1971Systemizationreportalsodeterminedthatbroad-basedstandardization
wasnecessary forsuchgoals tobeachieved. Specifically, thereport encouraged standardization of
merchandise andtrade codes, ofinvoice forms andaccounting records, andofshipping containers.
According toJapan, noneoftheseideaswereparticularly novel. Indeed, Japanese academics introduced
ideasofsystemization borrowed fromthewest, andthevarious interim reports noted thefactthatforeign
companies were already aggressively pursuing systemization toimprove efficiency.
(f) Vertical integration
5.107 TheUnited States argues thatJapan'sintent topromote vertical keiretsu initssystemization
policy comes outclearly intheSeventh Interim Report178,aswellasintheBasic Planforthe
173Distribution Systemization Promotion Council, TheBasic PlanforDistribution Systemization ,28July1971, p.3,
USEx.71-10. Japan disagrees withthetranslation ofkeiretsuka intheUStranslation ofthe1971 Basic Plan, Japan Ex.
B-18.
174Ibid., Introduction, USEx.71-10.
175Ibid., Preface.
176Ibid., Foreword.
177Ibid., p.9.
178Seventh Interim Report, p.7,USEx.69-4.WT/DS44/R
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Systemization ofDistribution179inwhich itallegedly admitted theneedtoregard theentire process
ofdistribution from production toconsumption asasingle system.
5.108 With respect totheUSargument thatboththerationalization polices andthesystemization
polices were intended toencourage vertical integration, Japan contends thattheUnited States is
compelled tomake thisargument because otherwise theactual terms ofthevarious distribution policies
arecompletely unexceptional, andhavenothing todowiththeUStheory about agovernment-created
"distribution bottleneck." According toJapan, vertical integration isthemissing linkintheUS
"bottleneck" theory.
5.109 InJapan'sview, theUSattempt todevelop alogical linkbetween MITI distribution policies
andincentives tovertically integrate stems from asimple reason -thedocuments themselves donot
talkdirectly about anyintent toencourage vertical integration. According toJapan, there areno
statements -either byMITI orbythevarious advisory councils -directly calling forvertical integration.
Tothecontrary, totheextent thereisanydiscussion ofvertical integration atall,onefindsinthevarious
advisory council reports ambivalence atbestandoftenhostility towards excessive vertical integration.
5.110 Japan contends thatasmass manufacturing hademerged inJapan more swiftly thanmass
distribution, some manufacturers wereintegrating forward intodistribution tofacilitate themarketing
oftheirproducts. Although thisprocess mayhavebeeneconomically rational formanufacturing, those
studying thedistribution sector regarded itwithconcern. Japan concludes thatthisambivalence about
vertical integration goesbacktotheverybeginning ofsystematic thinking about distribution policies.
Thisexplicit concern about theproblem ofvertical integration intodistribution started before thedebate
overcapital liberalization andcontinued afterthedebate began. Asanexample, Japan citestheSixth
Interim Report in1968, which sawvertical integration asaproblem.180
(g) Single-brand distribution
5.111 JapansuggeststhatineffecttheUnitedStatesisaskingthePaneltoinfergovernmentinvolvement
intheJapanese photographic materials market because themarket structure inthissector issoabnormal
thatitcould notpossibly betheresult ofprivate business decisions andmarket forces. However,
according toJapan, single-brand distribution occurred asanindustry trend before thealleged measures
wereimplemented.Single-brandwholesaledistributionisacommonbusinesspracticeanditsadvantages
arequite familiar toeconomists andbusiness people. Likewise, affiliations between photographic
materials manufacturers andphotofinishing laboratories alsoprevail worldwide. Theconsistent
prevalence ofthese market structures around theworld isduetomarket factors, notgovernment
measures. Japan argues thatthere arestrong economic incentives thatleadtovertical integration in
thisindustry.
5.112 According toJapan, theeconomic efficiencies ofintegrating manufacturing anddistribution -
whether through outright ownership orcontractual relationships -arewellknown. Integration issaid
tofacilitate greater flexibility inresponding tochanging market conditions; itreduces incentives for
opportunistic behaviour between manufacturer anddistributor; itallows forbetter information flows
through thedistribution pipeline; anditgenerally ensures greater focus andeffort onbehalf ofthe
manufacturer 'sbrand. InJapan'sview, itwasarecognition ofthese advantages thatledtothestrong
criticism ofKodak 'slongdelay inestablishing directly controlled distributors intheJapanese market.
Therefore,therewassimplynocausalconnectionbetweenMITI'ssystemizationpoliciesandthedecisions
bytheprimary wholesalers about which filmbrands tocarry. Japan asserts that,there isnothing at
allunusual about theJapanese market structures forfilmandpaper. Single-brand wholesale distribution
isacommon business practice. According toJapan, single-brand wholesale distribution offilmprevails
1791971 Basic Plan, p.6,USEx.71-10.
180Sixth Interim Report, p.10-11, Japan Ex.B-7.WT/DS44/R
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ineverymajormarketintheworld.Likewise,affiliationsbetweenphotosensitivematerialsmanufacturers
andphotofinishing laboratories prevail worldwide. Thus, concludes Japan, theconsistent prevalence
ofthese market structures around theworld isduetomarket factors, notgovernment measures.
5.113 Japan further shows thatintheJapanese market, vertical integration bymanufacturers into
distribution resulted naturally fromthefactthattheproduction sector developed andmodernized faster
thanthedistribution sector. Inlightofthis,itwasanatural reaction bymanufacturers tointegrate
forward intodistribution toapply theirsuperior resources tomarketing theirproducts.
5.114 Consequently, Japan isoftheviewthatdecisions byFuji'swholesalers tobecome single-brand
filmdistributors occurred inthecontext ofalarger industry trend towards single-brand wholesale
distribution. Thistrend wasguided bymarket forces notgovernment policy. Japan asserts thatthe
United States triestoavoid thisunavoidable conclusion byelevating deliberations oftheIndustrial
Structure Council 'sDistribution Committee tothelevelofJapanese Government policy. Inreality,
Japan maintains thattheUnited States hadnothing tolinkactions taken byFujiandKonica, regarding
either single-brand distribution ortransaction terms, togovernment action.
5.115 According toJapan, theUSinterpretation ofevents isatoddswiththetiming ofFujifilm ’s
andKonica ’sevolving relationships withtheir primary wholesalers. Ofthefourmajor primary
wholesalers thatcurrently aresingle brand Fujifilm wholesalers, twoofthem, i.e.,Kashimura and
Ohmiya, havenever carried Kodak filmproducts since World WarII.Both oncecarried Konica
products; Kashimura terminated thatrelationship in1963, andOhmiya didthesamethefollowing year.
Thus, thesetwodistributors havebeensingle-brand Fujifilm wholesalers foroverthreedecades --well
beforecapitalliberalizationevenbegan,andbeforeMITIbegantoformulateandarticulateitsdistribution
modernization policies.
5.116 Japannotesthatathirdprimarywholesaler,Misuzu,carriedmultiplebrands,includingFujifilm,
Kodak, Konica, Agfa, andtheEnglish brand Ilford, until1968, when itbecame asingle-brand Fujifilm
distributor andwithdrew fromallother filmbrands. Actually, Misuzu terminated dealings withKodak
inApril 1967, evenearlier thanitsfinaldecision tobecome asingle-brand distributor. Here again,
themove tosingle-brand wholesale distribution occurred before MITI issued its1970 Guidelines for
filmandthetermination ofKodak preceded boththe1967Cabinet Decision andthe1970Guidelines.
5.117 Japan further notesthatonlyoneofthemajor primary wholesalers, Asanuma, made thedecision
tocarry onlyFujibrand filmafterMITI’sdistribution policies hadbeendeveloped andarticulated.
In1973, Asanuma travelled toRochester, NewYork tomeet withtopKodak officials. Asanuma,
which prior to1960 hadimported directly from Kodak, requested aresumption ofdirect dealings.
Kodak refused, saying thatitwassatisfied withthejobbeing donebyNagase, itsexclusive importer
andprimary wholesaler.181IfAsanuma wanted tocarry Kodak film, itwould havetocontinue togo
through Nagase.182Twoyears later, Asanuma gaveuponaproduct lineinwhich itwasforced to
buyfromacompetingdistributor,andannouncedthatitwouldcarryonlyFujibrandfilm.183Government
measures played noroleinpressuring Asanuma intodropping Kodak. Japan argues thattheUSclaims
about thealleged effects ofgovernmental policies aresimply notcredible.
5.118 According toJapan, evenKodak hasbuilthighly effective single-brand distribution networks
allovertheworld. Japan argues thatKodak 'smarketing strategy inJapan during the1960'sand1970's
181Japan notes thattheUnited States provided affidavits fromAlbert SiegandWilliam Jacktorespond tothisinconvenient
history. Japan argues thataclose reading oftheaffidavits, however, reveals thatneither person denies theclaims made
byAsanuma. SeeUSEx.97-1 andUSEx.97-2.
182Affidavit ofTakenosuke Katsuoka, p.2-4,Japan Ex.A-11.
183According toJapan, although Asanuma doesnotcarry Kodak film,itdoescarry Kodak slideprojectors, CCD cameras
anddigital labtools. SeeAffidavit ofTakenosuke Katsuoka, p.4,Japan Ex.A-11.WT/DS44/R
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becameincreasinglyorientedtowardsingle-brandwholesaledistribution.Priorto1960,Kodakexported
directly toseveral Japanese importers, including Asanuma. In1960, however, Kodak made Nagase
itsexclusive importer. Nagase thenresold filmtomultibrand wholesalers, whointurndistributed
Kodak products directly tobothretailers andthrough secondary wholesalers. Japan alsoalleges that
inthe1960'sNagase began tobuild upitsowndirect distribution capacity through acquisition. Thus,
according toJapan, Kodak based itsmarketing strategy inJapan during the1960'sand1970'sonits
exclusive relationship withNagase. Nagase inturnbegan toacquire primary wholesalers todevelop
itsownsingle-brand wholesale distribution system forKodak products.
5.119 JapanallegesthatKodak'sexclusiverelianceonNagaseanditssingle-brandwholesaledistribution
network continued inthe1980's,when Kodak afterlongdelay decided toincrease itscommitment
totheJapanese market. In1986, Nagase 'sKodak products division wasspunoffintoa50-50 joint
venture between Kodak andNagase. Afewyears laterKodak increased itsstake to70percent, and
in1996 finally bought outNagase 'sremaining interest. Infact,Japan argues thatKodak ismore
vertically integrated intodistribution thanFuji,inthesense thatKodak owns itsprimary wholesaler.
5.120 TheUnited States argues thattheJapanese filmandphotographic paper market isnotidentical
toother markets around theworld, butiscompletely unique. Nowhere elsehasthegovernment
engineered thedistribution system tothwart foreign competitors. Inaddition, theUnited States disputes
Japan’sassertion thatsingle-brand wholesale distribution offilm"prevails inevery major market in
theworld." Infact,mostwholesalers inNorth America andEurope carry multiple filmbrands. Japan
appears tobeconfusing manufacturers ’"direct-to-retail" filmdistribution, which iscommon outside
Japan, withJapanese wholesalers ’exclusive dealing relationships withthedomestic manufacturers.
Prior to1960, Kodak exported directly toseveral Japanese importers, including Asanuma, butin1960
itmade Nagase itsexclusive importer. Thisaction wasundertaken notasastrategic decision butbecause
in1960, attherequest oftheJapanese Government, Kodak wasrequired toselect oneimport firm
asitssoleimport agent, thusfacilitating theimplementation ofJapan’squantitative import restrictions.184
Kodak Japan, awholly-owned subsidiary ofEastman Kodak, isnotawholesaler. Itdistributes directly
toJapanese retailers because ofitsinability togainaccess tothemain Japanese distribution channels
forphotographic products.
5.121 TheUnited States notes thattheEuropean Communities alsodisputes Japan’sposition with
respect tosingle-brand distribution. Itstates thatitisstandard practice allover theworld for
photographic producers tohaveonesubsidiary percountry representing theirinterests inselling their
products towholesalers, retailers, dealers orconsumers. Theextraordinary situation inJapan, which
hasnoknown parallel anywhere else,istheexistence offourtokuyakuten distributing exclusively the
sameproducts ofonlyonecompany, themajor domestic producer. Asubsidiary ofaEuropean company
inJapan isinthesame situation astheJapanese producers themselves. Itmustfindmeans toenter
themarket, which includes thefourtokuyakuten, already serving thelarge majority ofretailers. As
longasthese fourrefuse topurchase anyfilmother thanthatproduced byFuji, market access for
imported filmwillbeimpaired.
5. THE STANDARDIZATION OFTRANSACTION TERMS
(a) Introduction
5.122 IntheviewoftheUnited States, theimplementation ofrational transaction terms wasacentral
focus oftheplantowards vertical integration. Thetransaction terms requiring rationalization included
such terms asdiscounts, rebates, delivery conditions, price, anddispatched employees. The
rationalization oftransaction terms wasdesigned to-
184Ueno Akira, TheStory ofKodak (Kodakku Monogatari), 1989, p.152,USEx.89-2, andAffidavit ofAlbert Sieg,
USEx.97-1.WT/DS44/R
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(i) fosterthecommercialalignmentofwholesalerswithaparticulardomesticmanufacturer,
andofretailers withaparticular wholesaler;
(ii) limittheability offoreign firms tousetheircompetitive strength toattract distributors
away from domestic suppliers.
5.123 TheUnitedStatesarguesthattothisendMITIestablishedtheTransactionTermsStandardization
Committee todetermine onasector-by-sector basis, thetransaction terms among manufacturers and
distributors thatwereneeded to"systemize" distribution andprevent foreign penetration ofthemarket.
Thecommittee specifically called fortheuseofcumulative rebates andtightened payment terms, which
would make retailers moredependent ondomestic manufacturers, totheexclusion offoreign enterprises:
"The standards forstandardizing transaction terms considered desirable byMITI are
asfollows:
2) Inorder topromote high-volume sales, volume discounts andcash
discounts should begiven. Inaddition, rebates should beprogressive rebates.
3) Toreduce finance costs, thefollowing principles should beapplied:
5percent discount forcashsettlement, nodiscount provided ifpaidwith60-day
notes, andappropriate interest charged fornotes over60-days."185
5.124 TheUnited States notes thattheTransaction Terms Standardization Committee correctly
recognized thatthesetransaction terms would tendtoexclude foreign companies inindustries likefilm
andphotographic paper where domestic firms already enjoyed dominant market shares andforeign
firms'access wasstrictly limited bytariffs andquotas. Using volume discounts andcumulative rebates
would promote systemization byencouraging exclusive relationships between amanufacturer andits
distributors andretailers. Volume discounts andcumulative rebates reduce theaverage price ofa
manufacturer 'sproduct tothedistributor ifthedistributor purchases acertain quantity ofthatproduct.
These savings encourage thedistributor topurchase asmuch ofthatproduct aspossible fromasingle
manufacturer. Thesame holds truewithrespect torebates from thewholesaler totheretailer.
5.125 According totheUnited States, agovernment-coordinated effort toshorten thepayment terms
wouldsuccessfullyshiftthefinancingburdenfrommanufacturerstodistributorsorretailers.Wholesalers
throughout thefilmsector typically carried largecashbalances andpaidfortheirgoods overextended
periods. Therefore, shortening payment terms meant thatwholesalers would nolonger benefit from
whatamounted toeasycredit from themanufacturers, achange thatwould substantially erode their
bottom lines and,byweakening them, open them togreater control from thedominant domestic
manufacturers. Among other things, inaweakened financial state, thewholesaler orretailer became
more dependent upon obtaining therebate tomake thedifference between profit andloss.
5.126 IntheUSview, prior tostandardization, wholesalers were ableto"shop around" different
manufacturers forthebesttransaction terms, andextended credits wereacommon business practice.
MITI reduced suchcompetition inthedistribution sector bylimiting opportunities forthewholesalers
to"shop around". Theresult wastooffer stable, long-term relationships among theplayers inthe
distribution system.
5.127 Japan responds that,MITI hasconsistently beenconcerned withrationalization oftrading terms
inthedistribution sector sincethe1960's.InJapan'sview, concerns inthelate1960'sinitiated aprocess
ofencouraging ongoing rationalization toimprove theefficiency ofthedistribution sector. Japan points
185Film Purchases from Manufacturers: Supermarket andChain Store Trade Terms, Zenren Tsuho, November 1969,
USEx.69-5.WT/DS44/R
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outthatalthough theinitial efforts were inthe1960'sand1970's,thispushforrationalization later
received anewimpetus inthe1990'saspartoftheUnited States-Japan Structural Impediments Initiative
("SII") talks.
5.128 InJapan'sview, thisconcern with"irrational" traditional business practices goesbacktoat
least1965 andtheSecond Interim Report, more thantwoyears prior tothe1967 Cabinet Decision
announcing thefirststage ofcapital liberalization. Thecommon problem underlying these various
traditional business practices isthattheyallinterfere withtheswift andtransparent transmission of
market information upanddown thedistribution chain. Thus, withlongpayment terms andliberal
return policies, there neednotbetightcoordination between whataretailer isbuying andwhatitis
actually selling; amanufacturer might think ithadsold100units, onlytofindattheendofaperiod
that25unitswerebeing returned. Unclear discounts andrebates make itimpossible foraretailer to
know itstruecosts andwhether particular retail prices areactually profitable.
5.129 According toJapan, theSixth Interim Report concluded thatsuchbusiness practices are
"economically irrational" andthatthey"harm thestability ofenterprise management, increase[s]
distribution cost,andleadtotheshifting oftheburden toconsumers."186Accordingly, Japan argues,
thereport concluded that"itisnecessary toestablish standard transactions terms inthedirection that
willcontribute totheimprovement ofdistribution functions, andtostrive fortheir widespread
adoption."187Byrecommending theadoption ofnewstandard practices toreplace traditional terms
oftrade, thereport sought torationalize thedistribution sector 'scoordination ofsupply anddemand
byimproving information flows.
5.130 Japan notes thatasafollow-up totheSixth Interim Report, MITI commissioned surveys of
theactual trading conditions inanumber ofdifferent industries, including oneonphotographic film.
These surveys, conducted bytheInstitute ofDistribution Research, sought tounderstand howthese
general problems affected specific industries. Thesurveys examined business practices inthefollowing
areas:(1)salescontracts,includingdiscountandrebatepolicies;(2)deliveriesandreturns;(3)settlement
ofaccounts; and(4)promotional practices, including dispatched employees andrebates.
5.131 Japan argues that,having identified problems invarious industrial sectors, MITI began the
process ofissuing guidelines toaddress these problems. Over the1970 to1972 period, MITI issued
rationalization guidelines to15different industries thathadbeensurveyed earlier: cotton andchemical
textiles,stationeryandpaperproducts,glassware,umbrellas,rubberfootwear,photographicfilm,instant
coffee,householdcleaners,smalltools,publications,kimonofabrics,pharmaceuticals,knittedunderwear,
cameras, andceramics. Theguidelines issued byMITI toeachofthe15industries addressed thesame
issues andmade basically thesame suggestions.188According toJapan, forindustry afterindustry,189
MITI:
(i) suggested greater useofcashdiscounts;
(ii) suggested greater useofvolume discounts;
186Sixth Interim Report, p.17,Japan Ex.B-7.
187Ibid., p.17.
188Japan argues thatthese guidelines were offered tosome industries forwhich import competition wasirrelevant and
wastherefore noteven mentioned intheunderlying survey, suchaskimono fabrics andpublications. Thisfact,together
withthesimilarity ofthesuggestions intheguidelines, confirms thatthepurpose oftherationalization guidelines --forfilm
aswellasother guidelines --wasinfactmodernization, notimport protection.
189Torihiki Jouken noTekiseika Shishin (Guidelines forRationalizing Terms ofTrade), Tsusansho Kouhou, June14,
1972, Section 2,pp.11-30, Japan Ex.B-21.WT/DS44/R
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(iii) suggestedthedisclosureofthebasisorconditionsuponwhichcashandvolumediscounts
were granted;
(iv) suggested theuseofrebates tobeminimized;
(v) suggested thatthefrequency ofdeliveries bereduced toimprove efficiency;
(vi) suggested theadoption ofminimum orders;
(vii) suggested thatthemerchandise bereturned onlyifitwasdefective ordamaged
(viii) suggested thataccounts besettled infulleither bycashorbypromissory noteandthat
interest becharged onnotes withexceedingly longperiods;
(ix) suggested theelimination ofthepractice ofdispatching employees withtheexception
ofwhen thesaleofaproduct requires specialized knowledge.
InJapan'sview, noneofthemeasures above indicate anyanti-foreign bias.
5.132 According totheUnited States ,itwasalsoacentral focus ofthe1971Basic Plantoimplement
rational transaction terms inthedistribution sector "inorder toprevent disruption ofthe[established]
order byforeign capital-affiliated firms, which haveenormous capital strength."190
5.133 Japan responds thattheUnited States takes asingle sentence fromthisreport andthenjumps
totheconclusion that"acentral focus" oftheplanwastoprevent foreign firms from disrupting the
"order oftrade." Thissentence isbutoneoffourreasons forrationalizing suchtraditional trade
practices. More importantly, Japan notesthattheUnited States takesthissentence outofproper context.
Thissentence refers backtotheintroductory paragraph ofthissection, which identifies traditional
"irrational" practices. There isnothing atallimproper about aconcern thatdominant firms --whether
theyaredomestic orforeign firms expected toenter themarket --notabuse theirmarket power. The
Foreword makes clear thattheoverall thrust ofthereport was:
"anurgent needtoimprove distribution functions inresponse totheshifttoward an
information society andaconsumer-oriented economy, andalsotosavelabour and
improve productivity inresponse totheworsening labour shortages."191
ForJapan, itisclear thatthepushforsystemization served anumber ofpolicy objectives. Infact,
thevastbulkofthereport focuses onabroad range ofissues completely unrelated tothisquotation
citedbytheUnited States outofcontext.
(b) 1970 Guidelines
5.134 TheUnited States argues thatin1970, theJapanese Government cemented itsefforts on
transaction terms byissuing the"Guidelines forStandardization ofTransaction Terms forPhotographic
Film".192TheGuidelines strengthened thetransaction terms, andtheneteffect wastoshiftthefinancial
burden fromwholesalers toretailers, making thelatter vulnerable tocontrol fromdominant suppliers.
TheGuidelines noted potential concerns withrebates under theAntimonopoly Lawbutatthesame
timerecognized theirvalue. TheGuidelines reiterated thecallfortoughened transaction terms. They
noted thatwholesalers generally hadbeenrepaying outstanding balances infullwithin 60days(whereas
1901971 Basic Plan, p.10,USEx.71-10.
1911971 Basic Plan, p.4,Japan Ex.B-18.
192USEx.70-4.WT/DS44/R
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previously payment terms hadbeen 210days), butthatproblems stillexisted withtheretailers.
Specifically, retailers continued torelyheavily oncredit andenjoyed unusually longpayment terms.
TheUnited States asserts thattheGuidelines called forstrict tightening ofthese terms, stating that
accounts should besettled infullincashorpromissory notes withappropriate interest. Thistightening
oftransaction terms amounted toagain shifting thefinancial burden, thistimefromwholesalers onto
retailers, making thelatter vulnerable tocontrol from dominant supplies through suchmeans asthe
useofrebates.
5.135 AccordingtotheUnitedStates,thedomesticphotographicindustryunderstoodthatMITIviewed
theuseofrebates asameans tosystemize distribution inthefaceofforeign competition. TheUnited
States points toanarticle onliberalization inaleading photo industry journal, which stated that"MITI 's
guidelines forstandardizing transaction terms arewhatmight becalled an‘immunization '."Thearticle
noted thatitwasimportant to"clarify andrationalize transaction terms ...outofconcern that,as
liberalization moves forward, thetrading system would bedisrupted." Thearticle elaborated that"the
Guidelines themselves maybedescribed asanattempt toequalize theconditions ofcompetition." For
instance, rebates wereadopted sothatoncetheybecome common practice intheindustry, "theinflux
offoreign capital maybechecked bytheapplication oftheAntimonopoly Law."193
5.136 Japan argues thatthe1970 Guidelines weresimply general suggestions andlacked anylegal
force. Japan maintains thattherecommendations contained intheGuidelines were completely
unremarkable. Significantly, Japan points outthattherecommendations inthe1970 Guidelines did
notinanywaydistinguish between imported anddomestic products. Japan argues thatthereisnothing
intheGuidelines thatcanbeconstrued asencouraging thecreation ofanexclusionary market structure.
Further, therelationship between manufacturers andwholesalers wasnoteventhefocus ofthe1970
Guidelines. InJapan'sview, therecommendations inthe1970Guidelines concentrated ontransaction
terms between wholesalers andretailers.
5.137 Inresponse toJapan'sassertion thatitsonlymeasure regarding transaction terms wasthe1970
MITI Guidelines which inJapan'sviewweremerely suggestions, theUnited States alleges thatMITI
made itclearthatitexpected thatthephotographic filmindustry would implement theGuidelines with
veiledthreatsofpossiblelegislativeactionifindustrydidnotrespond,alongwiththedemandforindustry
tofollow upwithareport toMITI onprogress onimplementing thetransaction terms. TheUnited
States notes thatMITI published thefinalGuidelines inMarch 1970inanindustry journal andrequested
industryassociationstoformulateandimplementmorespecifictransactiontermsbasedontheGuidelines.
Inresponse toMITI'sdemand, thephotospecialty wholesalers association inNovember 1970promptly
published a"Transaction Outline" toimplement theassociations owntransaction terms, andthe
association reported theoutline toMITI.
5.138 TheUnited States argues thatthe1970 Guidelines were preceded andfollowed bya"near
continuous series ofmeasures", andthemonitoring byMITI oftheimplementation ofitsGuidelines.
Thisextended interaction between government andtheprivate sector regarding transaction terms
demonstrates theextent towhich theGovernment ofJapan wenttoensure thatitspolicies werefollowed
bytheindustry. Repeated advocacy andmonitoring builtpeerpressure andserved toasaconstant
reminder thattheGovernment wasconstantly watching. TheUnited States alsoasserts thatMITI applied
pressure through theChamber ofCommerce. TheChamber hasatitsdisposal agreatdealofauthority
toinfluence thedispensing orwithholding ofgovernment benefits, andalsoactsasaninformation
gathering armforMITI. Consequently, medium andsmall scaleenterprises would havesecond thoughts
before ignoring theChamber 'sguidance ontransaction terms.
193Draft aStandard Contract forFilmandCriteria forStandardization ofTransaction Terms, Zenren Tsuho, August 1971,
USEx.71-11. Japan disagrees withtheUStranslation ofthisquote fromthe1971Standard Contract. Seetranslation issue 8.WT/DS44/R
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5.139 TheUnited States further argues thattofurther promote standardization oftransaction terms,
MITI in1971commissioned theJapan Chamber ofCommerce todraftstandard contracts for14different
products, including photographic film. Thiswasfollowed bythepublication bytheChamber in1972
ofthestandard transaction contract forphotographic film. TheUnited States concedes thattheChamber
standardcontractdidnotmentionstandardizationoftransactiontermsbutassertsthattheverypublication
ofastandard contract byJapanese industry amounts toanexercise instandardization. Moreover, MITI
continued itsefforts tounderlie theimportance ofstandardized transaction terms. In1973, MITI
compiled andpublished under itsname materials bythequasi-governmental Transaction Terms
Stabilization Committee. ThisCommittee 'sfindings emphasized theimportance ofstandardization
oftransaction terms asessential forsystemization ofdistribution activities aswellasbeing a
countermeasure against foreign capital.
(i) Impact oftheGuidelines
5.140 TheUnited States further argues thatinresponse tothedirection given byMITI, Fujiand
Konica implemented tough newtransaction terms thatincreased theircontrol overwholesalers and
retailers.TheJapanesephotographicmaterialsindustryinstitutedanaggressiveprogramofvolume-based
rebates andtightened payment terms fortheirdistributors.
5.141 According totheUnited States, thenewstandardized trade terms hadprecisely theeffect the
Japanese Government intended. Volume rebates encouraged wholesalers topurchase from asingle
source (toachieve therebate target) rather thanfrommultiple sources, thereby promoting exclusivity.
According tophoto industry press andstudies, thenewtransaction terms wereinstrumental inturning
thewholesalers intoexclusive agents oftheJapanese manufacturers andinvertically integrating
distributors.194TheUnited States citesasanexample, aJapanese study ofthecompetition between
FujiandKonica published in1980 which examined thefactors behind distributors becoming Fuji's
exclusive agents --andpointed toprogressive volume rebates asthemainfactor.195TheUnited States
further argues thatthemanufacturers 'coordinated policy oftightening payment terms (payment rebates)
strengthened themanufacturers, often attheexpense ofwholesalers.196
5.142 TheUnited States further asserts thatthesmaller wholesalers andretailers atfirstresisted these
standardized terms, butwereeventually pressured intosubmission. Another turning point, intheUS
view, wasthe1968 bankruptcy ofChuo Shashin, arelatively large photo industry wholesaler.
Consequently, wholesalers andretailers considered howbesttoavoid asimilar fateandconcluded that
making independent business decisions entailed greater riskthanfollowing thedictates oftheindustry.
TheUnited States citesthefollowing passage insupport oftheircontention:
Tokuyakuten [primary wholesalers orspecial contract agents] realized theneedtocorrect their
salespostures afterthe[financial] failure ofChuo Shashin. Ifcertain tokuyakuten takeadvantage
ofthisopportunity andofferlower prices orlongterm, sightcredit, customers willprobably
leantowards those withlooser transaction terms. However, suchtokuyakuten willhavethe
same problem thatChuo Shashin had. Thatiswhyprimary wholesalers should havetougher
collection standards.197
5.143 Japan responds thatthebankruptcy ofChuo represented adramatic example oftheunderlying
business rationality ofhaving reasonable payment terms. Thus, observers inthisindustry hada
194Wholesale:So-calledKeiretsu-kaProblem--CourseUnclear,NihonShashinTsushin,1November1967,USEx.67-14.
195Niizu Sgigeyuki, FujiPhoto Film vs.Konishiroku, 1980, USEx.80-1.
196FujiFilm'sResult ofStricter Policy onReceivables, Zenren Tsuho, March 1968, USEx.68-2. Japan disagrees with
certain UStranslations contained inEx.68-2. Seetranslation issue 9.
197Getready forBreakthrough; Trade Normalization Further Advanced; Proposed toIncrease Profit; Concern About
Impact onRetailers, Camera Times, 19March, USEx.68-3.WT/DS44/R
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compelling business lesson oftheimportance ofrational payment terms, alesson thatpredated both
the1969Survey inthisindustry andthe1970Guidelines thatformalized MITI guidance onthisissue.
Thisindustry hadnoneedtowaitforMITI guidance before considering andtaking action inaccordance
withindividual economic self-interest. Indeed, theUnited States itself goesontoexplain, thatthe
Fujifilmprimarywholesalersbegantighteningtheirpaymenttermstoretailers,aftertheChuobankruptcy
butbefore the1970 Guidelines.
5.144 TheUnitedStatesarguesthatthepressureputontheprimarywholesalersbythenewtransaction
terms turned intoanimmediate lossforforeign manufacturers because onceprogressive rebates were
introduced, thewholesalers hadastrong incentive todealonlywiththeleading manufacturers -the
Japanese producers. Inaddition, FujiandKonica pressed their systemization efforts beyond the
wholesalers down totheretailers. Despite initial resistance fromretailers, MITI pressed forward with
theGuidelines because oftheirimportance asaliberalization countermeasure. Thiswasstrengthened
further bytheformulation ofthe1971 Basic Plan.
5.145 JapanarguesthattheUSallegationscompletelymischaracterizethe1970Guidelines.According
toJapan, the1970 Guidelines explicitly discouraged theuseofrebates anddidnotcallforshorter
payment terms. Itisquiteclear, inJapan'sview, fromwhatwasactually written inthe1970Guidelines,
thattheywere unrelated andeveninimical totheestablishment ofsingle-brand distribution.
5.146 Japan further argues thiseffort bytheUnited States toavoid thetextofthe1970 Guidelines
overlooks several keypoints. First, the1970Guidelines saynothing about "progressive" rebates, and
infactdiscourage rebates generally. Second, although the1970 Guidelines doencourage volume
discounts, thestated rationale isforgreater efficiency, notencouraging "channel exclusiveness." Third,
evenifoneoftheconsequences ofvolume discounts issome tendency toward larger volume purchases
from fewer suppliers, thatbusiness decision rests withthewholesaler. Regardless oftheMITI
recommendations, alloftheactions --either manufacturers deciding toofferdiscounts orwholesalers
deciding toaccept them --arepurely private business decisions.
5.147 According toJapan, astopayment terms, MITI’srecommendations were alsocompletely
unexceptional. The1970 Guidelines didnotcallforshorter payment terms.198MITI wasmerely
stating that,afteracertain period, suppliers should charge theircustomers interest forlatepayment.
Latepayment charges arenotnovel orunusual; rather theyareacompletely normal termofcredit
arrangement. Itissimply notcredible tocontend thattheinstitution oflatepayment charges isa
draconian assertion ofcontrol bysuppliers overtheircustomers.
5.148 According toJapan, theUnited States argues that"wholesalers would nolonger benefit from
whatamounted toeasycredit fromthemanufacturers." Japan believes theUSposition would require
thePanel tobelieve thataMITI statement simply that"[forpromissory notes withunusually longsight],
appropriate interest should becharged ..."setinmotion thefollowing chain ofevents: (1)all
manufacturers willinfactchange theirpolicy; (2)thepolicy change willbesodramatic astomaterially
affect thewholesaler; (3)thewholesaler willbedriven tofinancial desperation; (4)allsuppliers but
onewillignore itsfinancial plight andinsist ontighter terms; (5)asingle supplier willcraftily offer
more flexible terms, andfinally, (6)thatwholesaler thenwillhavenochoice buttoabandon allother
suppliers ’brands andinstead reluctantly become dependent onasingle supplier.
198According toJapan, itshould alsobenoted that,contrary toUSassertions, the1970 Guidelines donotcallforuniform
orrigidstandard payment terms. Infact,the1969 Survey, which ledtothe1970 Guidelines, notes "Many wholesalers point
totheperiod ofpayment collection, especially theperiod ofdraft siteasanimportant issue ofterms oftrade. However,
thedraftsitehighlydependsonthefinancialcircumstancesandthepoliciesofindividualenterprisesatthetimeofeachpayment.
Therefore, itisnotappropriate toestablish standards indicating that90daysor120daysareappropriate." 1969 Survey,
p.14,Japan Ex.B-1.WT/DS44/R
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5.149 TheUnited States requests thePanel nottoplace undue emphasis onasingle phrase inthe
1970Guidelines thatrebates "should bekepttoaminimum". Instead, theGuidelines 'recommendations
should beconsidered intheirentirety:
"Rebates aregenerally awarded atthediscretion ofthesellers. Therefore, rebates
arewidely usedasameans ofcontrolling thedistribution process. However, their
excessive usemayconstitute anunfair trade practice under theAntimonopoly Law.
Evenwhen itdoesnotconstitute aviolation oflaw,thedistribution process canineffect
becontrolled. Also, itmaymake itdifficult forrecipients [oftherebates] toformulate
aclearmanagement plan, andthefinalprice maynotfullyreflect themerits derived
from rebates. Inaddition, therebate system hasbecome verycomplicated inrecent
years, andtheadministrative burden ofrebates hasincreased. Inprinciple, discounts
should beusedasameans toreward consumers forthebenefits oflarge quantity
transactions. Theuseofrebates willbeallowed asasupplementary means toachieve
other price policies. However, theuseofrebates should bekepttoaminimum."199
5.150 According toJapan ,relationships between manufacturers andwholesalers werenoteventhe
focus ofthe1970Guidelines. MITI's1969Survey, which ledtotheissuance ofthe1970Guidelines,
stated clearly thatitsanalysis andrecommendations wereconcentrating ontransaction terms between
wholesalers andretailers. Japan further asserts thattheimposition ofunfavourable terms byany
manufacturer would havecreated incentives toswitch suppliers, oratleastaddother suppliers soas
toplaythem offagainst eachother andthereby secure more favourable arrangements. Thus even
acceptingtheUnitedStates'characterizationofthe1970Guidelines,inJapan'sview,theireffectlogically
would havebeentheopposite ofwhattheUnited States contends.
5.151 Japan believes thestarting point foranalysis should betheGuidelines themselves, andwhat
theysaidanddidnotsay.Specifically, theGuidelines didnoteither mandate uniform transaction terms
orprovide specific transaction terms tobefollowed bymanufacturers, wholesalers, secondary dealers,
andretailers. TheGuidelines didnothing morethanmake general suggestions related topayment terms,
volume discounts andrebates. TheUnited States hasmade noeffort toestablish thatthese payment
terms areatallremarkable. Infact,thepayment terms citedbytheUnited States arecommon inmany
industries throughout theworld. Moreover, payment terms arenotthereason thatthedistributors
chose tobecome single-brand orremain single-brand. Payment terms, eventheunremarkable ones
atissue here, aresimply oneelement ofthecosttothebuyer.
5.152 JapanrejectstheUSargumentthatthewholesalersbecamemoredependentonthemanufacturers
and,inparticular, onvolume discounts andrebates. First, itshould benoted thatthe1970Guidelines
didnotencourage theuseofvolume discounts without reservation, anddiditnever encouraged rebates.
TheGuidelines encouraged transparency ifvolume discounts weregiven, anddiscouraged theuseof
rebates. Obviously, themore transparent thevolume discount, theeasier itwould beforacompetitor
toprovide thebuyer anoffsetting incentive (e.g., lower price) topurchase itsproduct rather thanthe
product ofthemanufacturer offering thevolume discount. Thus, ifanything, theencouragement of
transparency ingranting volume discounts improved theposition ofcompetitors withacustomer.
5.153 TheUnited States responds thattheJapanese Government effectively ensured thatwholesalers
could notturntoalternative suppliers formore competitive transaction terms. TheJapanese
Government ’sadvocacy andmonitoring ofstandardized transaction terms --bothbetween manufacturers
andwholesalers andbetween wholesalers andsecondary wholesalers andretailers --helped create the
discipline toachieve standardization.
199USEx.70-4.WT/DS44/R
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(ii) Timing
5.154 Japan argues that,according totheUnited States, MITI'sdistribution policies during the1960's
and1970's,i.e.,theso-called "systemization" policies, formed thecentrepiece ofitsalleged strategy
toblock imports ofconsumer photographic filmandpaper. Japan recalls thattheUnited States argues
thatMITI encouraged andfacilitated thecreation ofaclosed andexclusionary market structure for
consumer photographic filmandpaper. InJapan'sview, however, thereisnocausal connection between
thepolicies thatwerebeing followed bytheGovernment ofJapan andtheresultant market structure.
5.155 Japan argues thattheUStheory hasintractable timing problems. According toJapan, domestic
manufacturers hadbegun toreform theirpayment andrebate policies intheearly 1960's,longbefore
the1970Guidelines. Fujifilm revised itsexisting volume rebate policy overayearearlier on21October
1966. Thispolicy remained unchanged from 1966 until1974.200Fujifilm ’svolume discount policy
therefore precedes boththe1970 Guidelines andthe1967 Cabinet Decision.201Inaddition, Fujifilm
made nochange initspolicy inresponse tothe1967Cabinet Decision. Fujifilm hadalready tightened
payment terms inApril 1966.202Infact,theaverage number ofdaysrequired forFujifilm toreceive
payment from itsprimary wholesalers hadalready dropped during thefirsthalfoffiscal year1966,
which began on21October 1965.203Indeed, Konica began tightening itspayment terms asearly as
1962.204Inaddition, three ofFuji'sfourmajor primary wholesalers were already single-brand
distributors by1968, twoyears before theguidelines were issued. While Fuji'sfourth primary
wholesaler,Asanuma,didnotbecomeasingle-branddistributoruntilaftertheissuanceoftheGuidelines,
itonlymade thisprivate business decision afterKodak explicitly refused todealwithitdirectly. Japan
goesontostatethat,astotheother domestic manufacturer, Konica, allofitsprimary wholesalers
hadbeen single-brand distributors by1955. According toJapan, therefore, there wasnocausal
connection between the1970 Guidelines andthedevelopment ofsingle-brand wholesale distribution
inthefilmsector. InJapan'sview, theJapanese manufacturers hadperfectly rational business incentives
fortaking these actions.
5.156 TheUnited States responds thattheJapanese photographic materials manufacturers instituted
anaggressive program ofvolume-based rebates andtightened payment terms fortheirdistributors in
October andNovember of1967, justafewmonths aftertheJune1967 Cabinet Decision 'scallfor
theindustry tomodernize distribution toresist foreign competition. Their move toimplement these
transaction terms wasalsoconsistent withtheSecond andFifth Interim Reports 'callforthegreater
useof"volume discounts" andamove away from longpayment terms.205Thenewterms included
volume based rebates, inwhich wholesalers received rebates forreaching target salesvolumes. They
alsoincluded "payment rebates," inwhich thewholesalers received arebate iftheymade prompt
payment, buttheamount oftherebate wasreduced foreachadditional timeperiod thatpayment was
200SeeAffidavit ofTanaka Takeshi, p.3,Japan Ex.A-10.
201AccordingtoJapan,whiletheUnitedStatesclaimsthatJapanesefilmmanufacturerstightenedpaymenttermsinNovember
1967, ithasmisunderstood thearticle itcitestosupport thisassertion. Manufacturers infacttightened payment terms much
earlier. Fujifilm, forexample, tightened payment terms inApril 1966. SeeFujifilm ’sResult ofStricter Policy onReceivables,
Zenren Tsuho, March 1968, USEx.68-2; Affidavit ofTanaka Takeshi, p.3,Japan Ex.A-10. Japan argues thateven if
thedatecited bytheUnited States were correct, however, thefactremains thatpayment terms were tightened prior tothe
1970 Guidelines.
202SeeFujiFilm’sResult ofStricter Policy onReceivables, Zenren Tsuho, March 1968, USEx.68-2.
203Based onthese average statistics, Japan notes thatFujifilm estimates thatpayment terms were tightened around 20
October 1965 Affidavit ofTanaka Takeshi, p.3,Japan Ex.A-10. Anarticle appearing intheZenren Tsuho supports this
assertion. Fujifilm ’sResult ofStricter Policy onReceivables, Zenren Tsuho, March 1968, p.5-7,USEx.68-2. ("Itis
nowclear thatitwastwoyears back, justbefore 20April 1966 ...thatFujifilm started totrytoimprove itsreceivables
andrelated shipments.")
204Affidavit ofHaruyoshi Okuyama, p.3,Japan Ex.A-18.
205Second Interim Report, USEx.65-2; Fifth Interim Report, USEx.66-3.WT/DS44/R
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delayed, andafterthepotential payment rebate reached zero,thevolume rebate wasreduced aspayment
delays continued. According totheUS,these rebates weretantamount totightened payment terms.
5.157 TheUnited States continues thatJapan actively pressed forstandardized transaction terms in
the1968-75 timeframe precisely asJapan waslowering itstariffs andmoving toward thisfirstsignificant
liberalizationofcapitalinvestment.MITI'srepeatedandactiveeffortstostandardizetheterms(including
through publicizing theparticular terms applied byindividual wholesalers) served tostandardize those
terms atthistimewhen standardization wasmost needed toresist theimminent threat offoreign
competition. Japan'stiming wasrightonthemarkregarding thesecond goalaswell. Although Japanese
manufacturers hadimplemented rebates, volume discounts, andshortened payment terms before the
1970 Guidelines, the1969survey andthe1970 Guidelines themselves noted thatrebates andvolume
discounts werelesswidely usedbetween primary wholesalers andsecondary wholesalers andretailers.
5.158 According totheUnited States, Japan admits itheldoffforeign investment inthedistribution
sector inorder toensure thatforeign manufacturers could notestablish theirowndistribution networks
inJapan untilJapanese manufacturers hadrestructured theirowndistribution networks andmade them
more efficient. Thepressure putontheprimary wholesalers bythenewtransaction terms turned into
animmediate lossforforeign manufacturers. Prior totheinstitution oftheGovernment-directed new
transaction terms, twoprimary wholesalers served asmajor marketing anddistribution channels for
imported film: Asanuma, Japan'sdominant photospecialty wholesaler, andMisuzu, another large
nationwide wholesaler. However, oncetheprogressive rebates wereimplemented, these wholesalers
hadastrong incentive todealwithonlytheleading manufacturers --theJapanese producers. The
shortened payment terms alsoweakened thewholesalers 'financial condition, making them more
vulnerable tocontrol from theJapanese manufacturers.
(c) 1990 Guidelines
5.159 Japan points outthatefforts towards distribution rationalization didnotendinthe1970s.
In1990, MITI issued the"Guidelines forImproving Trade Practices".206Notsurprisingly, these
Guidelines addressed many ofthesame traditional irrational business practices targeted bythevarious
industry-specific traderationalization guidelines 20years earlier. Thisisproof thatJapan didnotchange
itsbasic policies. Theobjective ofreforming traditional butoutmoded distribution practices made
sense in1970 anditstillmade sense in1990. Japan stresses thatinrecent years theUnited States
haspressured Japan tobemore aggressive inencouraging itsindustries tofollow these policies.
5.160 Japan notes thatthe1990Guidelines emerged fromaninquiry bytheMinister ofInternational
Trade andIndustry, whorequested theDistribution Committee oftheIndustrial Structure Council to
revisit theissue ofdistribution rationalization during theUS-Japan Structural Impediments Initiative
("SII") talks. Japan indicates thatafterreceiving theDistribution Committee 'sinterim report, MITI
sentthe1990 Guidelines, which constituted onepartoftheinterim report, to141different industrial
associations.
5.161 TheUnited States concedes thatthe1990 Guidelines arose outofinternational pressure on
Japan toincrease market access, including theSIItalksbetween Japan andtheUnited States. Inresponse
tothatpressure, Japan introduced guidelines indicating that"international harmony isrequired" and
businesses "must giveconsideration soasnottohavetheirbusiness practices become obstacles toothers
[includingforeignsuppliers]."207Thisstatementcontrastswiththerepeatedcallstotakecountermeasures
206Shoukankou Kaizen NoKihonteki Houkou NiTsuite (Basic Direction fortheImprovement ofCommercial Practices),
20June 1990, [hereinafter "1990 Guidelines"], USEx.90-5, Japan Ex.B-22.
2071990 Guidelines, p.2,USEx.90-5.WT/DS44/R
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"inorder toprevent disorder arising from"208theincursion offoreign capital enterprises, stated inmany
ofthekeydocuments from thelate1960'sandearly 1970's.
5.162 TheUnited States contends thatbased onthese positive statements, invarious exchanges with
theGovernment ofJapan, ithastaken theview thatthe1990 Guidelines havethepotential tohelp
improve market access inthedistribution sector (asJapan promised), ifJapan infactimplements the
policies indicated inthese positive statements. According totheUnited States, however, Japan has
notimplemented these policies inthephotographic materials sector (orindeed anyother sector, as
farastheUnited States isaware). Japan'sfailure toimplement these policies ledtheUnited States
tostate, initsNovember 1996 submission totheGovernment ofJapan onderegulation matters, that
Japan should implement whatthese Guidelines provide for.Moreover, thisfailure ofimplementation
ledtheUnited States toconclude thatJapan infacthasnotchanged itsbasic policies ondistribution,
andinfacthasnotimplemented thepositions stated inthe1990 Guidelines tocorrect therestrictive
structures inthedistribution system forphotographic filmandpaper.
5.163 TheUnited States emphasizes thatinconsidering theimplementation ofthe1990Guidelines,
itisimportant tobearinmind thatJapan implemented itsdistribution policies, beginning inthe1960's
and1970's,notbyamereannouncement ofGuidelines in1970, butbased ontheback-and-forth process
of"concerted adjustment" between government andindustry. Thatprocess spanned years andinvolved
near-constant government surveying andconsulting withthedomestic industry, building consensus,
issuing reports andguidelines, following upwithmore surveys andguidance toindustry. Itwasthe
combination ofthese actions --theleadership, monitoring, andclose follow-up bytheGovernment -
--thatmade effective theJapan'spolicies tolimitforeign access totheitsdistribution system. Thus,
itwould takeevengreater efforts byMITI toundowhatithasdone, particularly because theformation
ofthissystem inthefirstinstance wasintheinterest ofJapanese manufacturers, whereas itsdismantling
would poseadirect challenge tothetwo-company oligopoly ofFujiandKonica.
5.164 TheUnited States argues thatasfarasitisaware, Japan hasundertaken noactions inthe
photographic filmandpaper sector tofollow-up onthe1990 Guidelines. Specifically, MITI hasnot
pursued anymeaningful actions toreverse itspolicies ontransaction terms ortoaddress therestricted
structureofthedistributionsystemforphotographicfilmandpaperinJapan.Moreover,theexclusionary
distribution system remains inforce intheformitexisted in1990, andanelaborate system ofrebates
anddiscounts continues atvarious levels ofthedistribution system inthissector.
5.165 TheUnited States further argues thatinaddition, nothing inthe1990Guidelines indicates that
MITI nolonger favours standardized transaction terms asameans toblunt competition from foreign
manufacturers. Japan'sinterpretation oftheAntimonopoly Lawcontinues toprovide thattheuseof
transaction terms departing from standard industry terms canbeanunfair trade practice, andthe
Antimonopoly Lawcontinues torequire reporting ofallcontracts between foreign manufacturers and
Japanese distributors.
5.166 AccordingtoJapan,the1990Guidelinesaddressmanyofthesametraditionalirrationalbusiness
practices targeted bythevarious industry-specific trade rationalization guidelines 20years earlier.
Forexample, the1990Guidelines notethatmany oftherebates paidbywholesalers andmanufacturers
arebased oncomplex orunclear criteria, thatunsold merchandise isoftenreturned, thatfrequent small
deliveries arerequired atthesuppliers 'expense, andthatsuppliers oftendispatch employees toexpand
thesalesforce ofretailers.209Justasinthevarious industry specific guidelines ofthe1970's,the1990
Guidelines suggest as"directions forimprovement" thatrebate conditions beclarified andthattheuse
ofrebates bekepttoaminimum, thatreturns should notbeallowed except incases where the
merchandise hasbeendamaged orisdefective, thatthecostburden fordeliveries beshared equitably
2081970 Guidelines, USEx.70-4.
2091990 Guidelines, pp.2-4,5,8-9,Japan Ex.B-22.WT/DS44/R
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between suppliers andretailers, andthatthepractice ofdispatching employees belimited tocases in
which thesupplier hassomething togainandisnotbeing coerced bytheretailer.
5.167 Japan argues thattheclose similarities ofthe1970 Guidelines andthe1990 Guidelines are
notatallsurprising fromitsperspective, buttheypossess aserious problem fortheUSclaims. From
aJapanese perspective, bothsetsofguidelines pursue thesame basic policy agenda, i.e.,eliminating
"irrational"businesspracticestomodernizetheJapanesedistributionindustry.FromtheUSperspective,
theremustbesome reason whythe1970Guidelines areaproblem while the1990Guidelines aresound
policy thatshould beencouraged. Japan argues thatasrecently asinNovember 1996 theofficial US
position wasthatMITI should "monitor andreport" ontheJapanese industry 'scompliance withthe
1990 Guidelines "inorder topromote afree,transparent, andcompetitive distribution system."210
ThisUSGovernment request iscompletely consistent withtheJapanese Government 'sview ofits
distribution modernization policies, butitisatoddswiththetheories presented bytheUStothisPanel.
5.168 TheUnited States counters, however, thatwithrespect torebates, the1990Guidelines depart
inanimportant respect fromthemany policy documents ofthelate1970'saddressing transaction terms.
Specifically, regarding rebates, theUnited States stresses thatthe1990 Guidelines emphasize that:
Itisdesirable formanufacturers tovoluntarily refrain fromoffering rebates aimed atmaintaining
akeiretsu-based relationship inorder toprevent manufacturers from exercising excessive
influence overthebusiness ofretailers.211
5.169 InJapan 'sview, themajor difference between the1990 Guidelines andtheearlier onesis
thatnowmodernizationisspecificallyidentifiedasnecessaryfor(amongotherthings)improvingimports'
access totheJapanese market.212Therefore, opaque rebates werecriticized because newforeign entrants
would havetrouble knowing whatterms theywould havetooffertobecompetitive.213Requirements
forfrequent small deliveries werealsocharacterized ashindering theentry ofimported products into
themarketplace.214
6. OTHER DISTRIBUTION "COUNTERMEASURES"
5.170 According totheUnited States ,Japan tookadditional stepstoensure thatforeign firms could
notutilize theircapital strength toattract wholesalers byproviding more favourable transaction terms
thanthose offered bydomestic firms. Twomechanisms foraccomplishing thiswere(1)toseverely
limitforeign firms'ability tooffer financial inducements todistributors, and(2)tosubject foreign
firms toanti-monopoly scrutiny iftheydeparted fromthestandard transaction terms thatthegovernment
hadmandated.
(a) JFTC Notification 17
5.171 TheUnited States notes thaton20May1967, theJFTC issued Notification 17,"Restrictions
onPremium Offers toBusinesses."215Notification 17essentially prohibits aconsumer goods
manufacturer from offering cashorother "premiums" towholesalers orretailers asaninducement
forthewholesaler orretailer tobegin handling themanufacturer 'sproducts, ortoreach acertain level
210Submission bytheGovernment oftheUnited States totheGovernment ofJapan Regarding Deregulation, Administrative
Reform andCompetition Policy inJapan, 15November 1996, p.7,Japan Ex.B-23.
2111990 Guidelines p.8,USEx.90-5.
2121990 Guidelines, p.2,Japan Ex.B-22.
213Ibid., p.2.
214Ibid., p.8.
215USEx.67-4.WT/DS44/R
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ofsales ofamanufacturer 'sproduct. Notification 17tookaway animportant means aforeign
manufacturer could otherwise haveusedtoattract customers.
5.172 TheUnitedStatesassertsthatItem2-4ofNotification17containedanexceptiontoitsprohibition
oninducementstodistributorsthatallowedamanufacturertoofferpremiumstoemployeesofdistributors
andretailers whowereinexclusive, vertically-integrated relationships withthemanufacturers. The
Japanese manufacturers whohadachieved exclusive dealing arrangements withwholesalers orretailers,
couldofferunlimitedpremiums(includingcash)totheemployeesofthosewholesalersandmanufacturers.
Foreign manufacturers, which hadnodirect relationships withJapanese wholesalers because ofJapan's
requirement thattheydealwithasoleimport agent, wereprohibited fromoffering suchinducements.
TheUnited States further asserts thattheJFTC described thisNotification as"abreakwater before
liberalization."216
5.173 Japan responds thatlowprice offers, rebates andoffers ofgoods toassist theother parties '
promotional activities wereoutside thescope oftheNotification. Although theUnited States would
liketogivetheimpression that"photographic materials" were expressly singled outasoneofthe
industries covered bytheNotification, almost alltheindustries producing goods consumed orused
inevery daylife-more than100industries ranging fromautomobiles tosoap-werecovered. Inany
event, theregulation restricted onlyexcessive premium offers -notnormal promotional activities -
todistributors. Therationale wasthatsuchoffers could impair fairandfreeprice competition inthe
distribution andcould increase thedistribution costtothedetriment ofconsumer interests.
5.174 Japan further argues thattheUSargument concerning Item2-4oftheNotification contains
afundamental misunderstanding. Premiums offered toemployees ofcompanies which wereinaspecial
relationship (share holdings orsending executives) withthemanufacturer werenotconsidered premiums
under theregulation, because theywerenodifferent frompremium offers toitsownemployees. This
exception applied onlytotransactions which werevirtually identical tooperations within asingle entity.
Fujianditsprimary wholesalers werenoteligible fortheexception because theywerenotinaspecial
relationship.
5.175 Japan indicates thatasprice competition intensified atthedistribution level duetochanges
intheJapanese economy since 1967, distributors tendtodemand lower prices, rather thanpremiums,
from themanufacturers. Theneedfortheregulation declined, commensurate withthetrend. For
thesereasons, theNotification wasabolished inApril 1996inthecourse ofthereview ofthePremiums
Law. InJapan'sview, itshould falloutside thescope ofthepresent proceedings.
5.176 While theUnited States concedes thatNotification 17hasbeenrepealed, itmaintains thatthere
areother provisions thatmake thatrepeal meaningless. According totheUnited States, premiums
from manufacturers towholesalers arestillsubject toJFTC Designation 9ofJFTC Notification 15
of1982. Thisprovision governs theuseof"unjust inducements" under theAntimonopoly Lawand
prohibits premium offers inexcess of"normal business practice".
5.177 Japan responds thatJFTC Designation 9ofJFTC Notification 15of1982 doesnotviolate
theWTO Agreements. Moreover, Japan emphasizes thatDesignation 9hasnotbeenspecifically
identified intheUSpanel request andthusisoutside thePanel'sterms ofreference.
(b) International contract notification
5.178 TheUnited States argues thatthrough theTransaction Terms Standardization Committee report
andthe1970Guidelines, MITI worked todevelop standard transaction terms andtoensure thatdomestic
216Severe Restrictions Placed onBusiness forPremium Offers: Shatokuren Hears JFTC Explanation atJyosui Kaikan
onthe12th. Nihon Shashin Kogyo Tsushin, 20June 1967, USEx.67-8.WT/DS44/R
Page88
industry would follow them. Japan found aneffective tooltoachieve thisobjective through theuse
oftheinternational contract notification provision oftheAntimonopoly Law. Article 6ofthisLaw
requires parties entering intoan"international agreement" or"international contract" tosubmit acopy
ofthecontract totheJFTC. Contracts between domestic firms arenotsubject tosimilar notification
requirements.Thediscriminatoryreportingrequirement,coupledwiththeuseofadministrativeguidance,
formed aneffective combination oftoolsfordiscovering andpreventing theuseoftransaction terms
thatwere notinaccord withthesystemization policy.
5.179 According totheUnited States, therefore, although domestic manufacturers werefreetoexecute
distribution agreements without thenotification toanexamination bytheJFTC, contracts involving
foreign manufacturers weresubject totheinternational contract notification to,andexamination by,
theJFTC. Inaddition, theresponsibility tonotify rested withthedomestic distributors. Theresult
isthatifaforeign producer hadoffered awholesaler more favourable terms thanthose called forby
theJapanese Government, thewholesaler would havehadtosubmit acopyofaninternational contract
thatblatantly revealed thatthecompany waschallenging Japanese Government policy andmeasures.
FortheUnited States itfollows, therefore, thatifforeign manufacturers offered wholesalers more
favourable terms thandomestic manufacturers, those contracts would bebrought totheattention of
theJapanese Government.
5.180 Japan responds thattheprovision oftheAntimonopoly Lawconcerning international contracts
hasitsbasisintheprohibition ofparticipation inanyinternational cartel under the1947Imperial Decree
issued during theAllied Occupation. Thenotification requirement serves toensure compliance with
theprohibition, andhasexisted since 1947. InJapan'sview, itisveryobvious thatthemechanism
wasnotdesigned aspartof"countermeasures" forrationalization ofthedistribution against foreign
investments. Thereview bytheJFTC isconcerned onlywithcompetition policy, anddoesnotexamine
whether ornottheconditions were favourable toJapanese distributors nordoesitserve asaguide
forapplicants tomodify contracts infavour ofJapanese distributors.
5.181 TheUnited States points outthattheJFTC ’s1971 annual report shows thattheinternational
contracts offoreign manufacturers werescrutinized bytheJFTC.217According tothereport, theJFTC
tookactiontoensurethatimportagentscompliedwiththeinternationalcontractnotificationrequirement,
received 484notifications fromimport agents, andgaveparticular attention tofilmimport agents.218
Thisscrutinyinhibitedforeignfirmsfromofferingattractivetermstowholesalerswhilethesystemization
program wasbeing putinplace. TheJFTC ’sreport indicates thattheJFTC ’spurpose wastosolve
"problems resulting fromliberalization oftheJapanese economy involving international transactions,"
andthatRuleNo.1of1971 wasa"first step" toward addressing these "problems."
5.182 TheUnited States notes thatJapan argued thatUSmanufacturers 'activities inJapan were
notsubject tothisinternational contract notification provision. Infact,RuleNo.1made clear that
internationalcontractnotificationappliestocontracts"betweenadomesticbusinessandaforeignbusiness
...forthepurpose ofconducting continuous sales...inwhich thepurchaser is[re]selling toathird
party."219Thus, sales from Kodak toitsimport agent, Nagase, were covered bythisprovision.
Moreover, anyrelationship between Kodak andJapanese wholesalers would besubject tothisprovision
aswell. Equally important, theUnited States pointed outthattheJFTC hasrelied extensively on
informal guidance intaking action under theinternational contract notification provision. TheUnited
States referred totheexplanation ofaJapanese scholar thattheJFTC maylegally apply guidance under
thecontract notification provision eveniftheJFTC doesnothaveenough evidence toconclude that
anAntimonopoly Lawviolation exists. Theexpert noted that"inJapan, corrective (administrative)
guidance, inthecontext ofthenotification system, hasensured theeffectiveness ofrestrictions on
217JFTC Annual Report 1971, USEx.71-4.
218Ibid.
219Ibid.WT/DS44/R
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international contracts."220Thisuseofinformal guidance, combined withtheneedtoreport international
contracts, haschilled theability offoreign manufacturers tooffer more competitive terms.
5.183 Japan responds thattheJFTC Annual Report of1971merely notes thattheJFTC urged various
industries (e.g., western liquor, lemon, fountain pens) tonotify international contracts, andthatitdid
notexercise anyguidance withrespect tofilmproducts. Only 13cases ofguidance were given to
allindustries andnoguidance wasgiven tothephotographic industry. Moreover, notallinternational
contracts hadbeenrequired tobenotified, andthecontracts between Kodak Japan Limited andJapanese
distributors were notrequired tobenotified under theAntimonopoly Law.
5.184 Japanemphasizesthat,whiletherequirementforinternationalcontractnotificationwastechnically
stillineffect attheinitiation ofthisPanel proceeding, abilltorepeal theinternational contract
notification requirement waspassed bytheJapanese DietinJune1997 which amended Article 6(2)
oftheAntimonopoly Lawandsimultaneously abolished JFTC RuleNo.1.
7. SYSTEMIZATION: PHYSICAL AND INFORMATION LINKS
5.185 TheUnited States argues thatsimultaneously withMITI'spolicy tostandardize transaction
terms, MITI promoted twoothertypes oflinkages between manufacturers anddistributors. First, MITI
provided financial andmanagerial support toencourage "physical" ties,particularly jointdistribution
centers, forwhich Japanese manufacturers anddistributors would share control, operations, andoften
ownership. Second, MITI provided support forthedevelopment ofinter-company computer tiesto
specific sectors attempting tosystemize distribution channels. IntheUSview, such"informational"
tiesbinddistributors together under thedominance ofmanufacturers.
(a) Physical links andthe1975 Manual
5.186 TheUnited States alleges thatanimportant element ofthesystemization program wasthe
regulation ofthephysical movement ofgoods through thedistribution system insuchawayasto
encourage thevertical alignment ofwholesalers andretailers under individual Japanese manufacturers.
Japan usedguidance andfinancial incentives topersuade manufacturers, wholesalers andretailers to
cooperate intheestablishment anduseofcentralized joint delivery andprocessing centers. A
government-coordinated effort assured thatthisinterweaving ofaJapanese manufacturer withmultiple
wholesalers andretailers would tighten thebonds between thefirms inavertically integrated system,
enhancingthemanufacturers'controloveritsdistributors.ItisallegedthattheSixthandSeventhInterim
Reports oftheDistribution Committee introduced thispolicy.
5.187 According totheUnited States, theSeventh Interim Report called fordistribution "toprogress
fromabasisofcentralizedprocessingofphysicaldistributioncontrolatdistributioncenters...established
jointly bymultiple companies ortheentire industry".221Itindicated thataspartoftheprocess of
physically integrating distribution operations, themanufacturers, wholesalers andretailers would need
to(i)unify product codes ortransaction codes, (ii)standardize business forms and(iii)standardize
packingtypes.TheUnitedStatesarguesthatthesestepswouldtieparticipatingcompaniesclosertogether
andmake itmore cumbersome totransact business withcompanies thatdidnotoperate inaccordance
withthese standards.
5.188 InJapan 'sview, astheIndustrial Structure Council 'sDistribution Committee itselfrecognized,
standardization ofdistribution practices should make theJapanese market more permeable byimports,
notless. Specifically, itsSeventh Interim Report in1969 recognized that"oneeffect ofsystemizing
Japan'sdistribution system isthesimplification ofentry [intoJapan'smarket] byforeign capital, which
220Murakami Masahiro, Dokusenkinshiho [Antimonopoly Law], 15March 1996, p.19,USEx.96-4.
221Seventh Interim Report, p.7,USEx.69-4.WT/DS44/R
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aremore adept atsystems methodology."222Standardization would alleviate theburden ofhaving to
adjust tohundreds orthousands ofindividualized ways ofdoing business, andthusshould facilitate
market penetration byoutsiders.
5.189 TheUnited States notes thatJapan selectively quotes onlythefirsthalfofasentence inthe
Seventh Interim Report. Thesecond halfofthesentence makes clearthatallowing foreign enterprises
toleadsystemization wasthelastthing Japan wanted:
"While itistruethatoneeffect ofsystematizing Japan’sdistribution system isthe
simplification ofentry [intoJapan’smarket] byforeign capital, ...weshould instead
emphasize preventing theimmense impact thatwould befeltifforeign capital took
theleadinsystematizing Japan’sdistribution activities, andquickly develop asystem
sufficiently capable ofresisting therational systems introduced byforeign capital."223
5.190 TheUnited States further submits thatJapan continued todirect physical linkages among
manufacturers, wholesalers, andretailers inthe1971Basic PlanfortheSystemization ofDistribution
andthe1975 Manual fortheSystemization ofDistribution byIndustry (Camera andFilm). The
Photosensitive Materials Committee, which wasestablished following arecommendation intheManual,
produced theDistribution Center Facilities Basic Plan. ThePlandescribed asitspurpose, according
totheUnited States, toimprove distribution inresponse to"liberalization" inthephotographic film
andpaper sector. ThePlansetforth ablueprint forestablishing jointdistribution facilities between
manufacturers anddistributors. TheUnited States alsoalleges thattheGovernment ofJapan provided
financing tohelpKonica formajointdistribution center withthefourlargephotospecialty wholesalers
through which ithadbeenmarketing anddistributing itsproducts. ThePhotosensitive Materials
Committee recommended toMITI thattheproject befunded bytheJapan Development Bank.
5.191 TheUnited States further asserts thatin1975, theDistribution System Development Center
(DSDC), another MITI creation, andaphotography industry "working group" produced adetailed
Manual224forthesystemization ofdistribution inthefilmandcamera industries. According tothe
United States, theManual made clearthatitwasprepared aspartofMITI'spolicy onsystemization.
TheManual emphasized thatsystemization meant integration among firms. TheManual allegedly noted
thatJapan hadlifted quotas onfilmimports in1971 andreduced tariffs. Asaresult, theManual
indicated thatKodak hadbeenabletolower itsprices towithin afewyenofdomestic producers 'prices
andthatimports ofKodak filmandpaper were rising. TheManual stressed theneed"toimprove
thestructure ofmanufacturers toacapacity thatwillresist foreign-capital affiliated firms".225The
Center expressed hopes forwidespread adoption oftheManual bytheindustry.
5.192 TheUnited States further argues thattoensure continued government-industry cooperation
toadvance systemization, theManual called fortheestablishment ofanother government-industry body,
theDistributionSystemizationPromotionConferenceintheCameraandFilmIndustry.Thisorganization
wassupposedtopromotesystemizationofdistributionthroughsurveys,informationprocessingactivities,
research anddevelopment, andstandardization activities.
5.193 Japan responds thattheinformation andrecommendations contained inthe1975Manual were
directed toward MITI forinternal use,notprivate industry. According toJapan, therefore, the1975
Manual caninnowaybeconsidered tohavehadabinding effect onprivate industry. The1975Manual
does, however, contain afewsuggested recommendations initsfinalsixpages including that:
222Ibid., p.4.
223Seventh Interim Report, p.4,USEx.69-4.
224Distribution System Development Center, Manual fortheSystemization ofDistribution byIndustry (Camera andFilm),
March 1975, [hereinafter "Manual"], USEx.75-5.
225Ibid., pp.27and122.WT/DS44/R
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(i) transaction terms (such aspayment terms, rebates, ordering practices) beimproved
andstandardized;
(ii) thevarious document forms andcodes usedinthecamera andfilmindustries be
standardized andunified;
(iii) theefficiency ofthedistribution ofcameras andfilmbeimproved (through measures
suchasthestandardization ofunits, thestandardization ofpallet sizes, andareduction
inthefrequency ofdeliveries); and
(iv) thequality ofinformation management beimproved through theintroduction of
computers.
5.194 Japan emphasizes thattheManual wassubmitted toMITI bytheDistribution Systems Research
Institute fortheinternal useofMITI andnottheotherwayaround. The1975Manual wasnever released
outside thegovernment.
5.195 According toJapan, thereisnobasisforassuming thatMITI'ssystemization policies hadany
exclusionary impact. MITI'spolicies recognized andaddressed alldistribution channels forfilm,
including distribution channels usedbyimports. Nagase 'ssubsidiary Kuwada, asingle-brand primary
wholesaler forKodak, wasamember ofthewholesalers 'trade association ("Shashoren") atthetime
MITI's1975Manual wasprepared,226andKodak wasthusinaposition toaccess information contained
intheManual. Imports werenotleftoutoftheprocess. There isthusnoreason tothink thatimports
wouldhaveencountereddifficultiesbecausetheydidnotsharethesamestandardizedformsandpractices.
5.196 Japan'sposition isthattheobjective ofthese policies wastofoster computerization and
standardizationofbusinessformsandpracticessoastoimproveinformationflowthroughthedistribution
system. Accordingly, thesubject matter ofthese policies wasoften verydense andtechnical: e.g.,
uniform invoice forms, standard pallet sizes, andother veryspecific recommendations. There was
notahintofanti-import conspiracy.
5.197 TheUnited States responds thathowever innocent thesepolicies mayseem, theyhadanindirect
effectoffosteringverticalintegrationbyencouragingclosercoordination,greatersharingofinformation,
andstandardization offorms andpractices between manufacturers andwholesalers. According tothe
United States, systemization made itharder forforeign producers toconvince domestic distributors
tocarry theirproducts, since theywere already soclosely linked withdomestic manufacturers.
5.198 Japan further asserts thattheUnited States presents noevidence ofanybusiness changes
implemented pursuant toMITI recommendations thatactually hadtheeffect ofmaking wholesalers
lesslikely tocarry imported brands offilm. InJapan'sview, theUnited States hastheburden ofproving
itsallegation thatthese facially neutral policies serving validdomestic policy objectives hadtheeffect
ofhindering imports; itisnotuptoJapan toprove thenegative.
(b) Information links
5.199 TheUnited States argues thatrelated tothephysical integration ofdistribution, Japan's
systemization policy alsoencouraged computer linkages among Japanese manufacturers andtheir
wholesalers. Itwasenvisaged bytheJapanese Government thatinformation links would enhance
efficiency indistribution, andwould alsoallow themanufacturer toknow ifanyofthe"systemized"
wholesalers dealt insignificant quantities ofacompetitors 'products. Japan recognized thatsuch
2261975 Manual, atthelistof"Collaborators inStudy," USEx.75-5.WT/DS44/R
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computer tieswould foster tiesbetween aJapanese photographic materials producer anditsdistributors
byraising thetransaction costsofdealing withoutsiders. Inaddition, Japanese manufacturers commonly
usesuchsystems to"stabilize" orcontrol distribution channels through themonitoring ofdistribution
systems. TheUnited States indicates thata1996 JFTC227study concluded thatsuchmanufacturer-
distributor computer tiesincreased efficiency andalsogaverisetothree significant challenges for
competition:
(i) preventing competitors 'entry intodistribution;
(ii) maintaining prices; and
(iii) stabilizing transaction relationships between manufacturers anddistributors.
5.200 TheUnited States argues thatMITI sawthedevelopment ofinformation linksasanintegral
partofitsdistribution systemization efforts and,therefore, advocated computer linkages tocement
thevertical distribution system. After identifying theimportance ofinformation links, MITI created
beginninginthemid-1970's,aseriesofgovernment-industryentitiestofacilitatethecreationofcomputer
networks between Japanese manufacturers andJapanese distributor. TheUnited States asserts that
theJapanese Government alsoworked closely together withprivate companies todevelop computer
tiesandaddress thevariety ofobstacles theyfaced inachieving thisgoal,including through low-interest
financing.
5.201 According totheUnited States, Japan waswellaware thatcreating information linksbetween
manufacturers andtheirdistributors entails theriskofenforcing oligopolistic distribution structures
andlimiting competition. TheUnited States points toaJFTC study asevidence ofthis.228Inaddition,
itcitestheDistribution Committee 'sNinth Interim Report229,which italleges reiterates theimportance
ofstrengthening information tiesnecessary tostrengthen horizontal andvertical linkages:
"The basic planforthemethod ofadvancing information ofthedistribution sector is
asfollows. ...Second, istooffer guideposts ontheways individual ormultiple
companies through cooperation canengage ininformation activities. Onecanthink
ofmany situations withrespect tothelatter, inparticular, suchasacooperative type
thatworks horizontally among thebusinesses; atypethatclusters client retailers around
apowerful wholesaler thatserves asitsnucleus; atypewhere thefulcrum isan
organized system ofintegrated wholesale centers andthewholesale business districts,
etc.Guidelines should beestablished foreachofthese ...."230
5.202 TheUnited States further argues thatthe1971 Basic PlanforDistribution Systemization231
called forthestrengthening ofinformation tiesasakeyelement ofdistribution systemization. The
United States asserts thattheplanspecifically called forthecreation atthenational economic level
ofdistribution information networks, theimplementation ofjointinformation activities, andthecreation
ofspecial organizations topromote theprovision ofdistribution information. Theplanstated "such
systemization ofdistribution must berealized through various stages: vertically from theintra-firm
level, horizontally ontheinter-firm leveltothenational economic level. Furthermore, inseeking to
implement this,sufficient attention mustbepaidtotheintroduction ofcomputers asaneffective means
ofachieving [such systemization]."232
227JFTC Investigation Division Information Management Office (Yamamoto Takeshi, Distribution 3Problems andthe
Antimonopoly Law, 2June 1996), USEx.96-6.
228USEx.65-5.
229Industrial Structure Council Distribution Committee, Distribution forthe1970's(Ninth Interim Report), 22July1971,
USEx.71-9.
230Ibid. pp.80-81 (emphasis added).
2311971 Basic Plan, USEx.71-10.
232Ibid., p.4.WT/DS44/R
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5.203 JapanrespondsthattheUnitedStatespresentsnocausalconnectionbetweentheallegedguidance
andsupport oftheDistribution Systemization Development Center asgiven inthe1975 Manual, and
theestablishment byJapanese filmmanufacturers ofon-line computer links with their primary
wholesalers. Infact,according toJapan, Fuji, theleading domestic manufacturer, didnotestablish
itsfirston-line connection withaprimary wholesaler until1989.233Thus, Japan contends that,the
alleged systemization guidance thattheUnited States claims wassoeffective increating anexclusionary
market structure wasinreality ignored foratleastfourteen years.
5.204 TheUnited States responds byciting aseries ofMITI actions toimplement theintegration
ofdistributors ’anddomestic manufacturers ’computer systems thatbegan withthe1975Manual. The
keydevelopments inMITI’sassistance tothissector occurred in1975, 1976, 1985, 1986, 1987, 1988,
and1989 (theyearthatJapan claims Fuji’ssystem wascompleted). TheUSarguments concerning
theassistance bytheJapanese Governments increating electronic information linksduring theperiod
between thepublication ofthe1975Manual andtheestablishment ofon-line connections between Fuji
andprimary wholesalers in1989 aredescribed inmore detail insection VI.D.3.(f) on"Electronic
information links".
(c) MITI/SMEA support forsystemization
5.205 TheUnited States alleges thatwiththegrowth ofcolour photography inthelate1960'sand
1970's,theimportance ofphotoprocessing laboratories grew. However, thetechnology andcapital
equipment necessary toprocess colour filmwerebeyond thereach ofmostsmall photo retailers. With
theJapanese Government 'sfinancial support, themanufacturers stepped in,establishing colour
laboratoriesandprovidingphotographicpaperanddevelopingandprocessingservices.Theselaboratories
were animportant distribution channel forfilmbecause ofthelaboratories 'strong tiestoitsretail
customers anditsdaily deliveries tothem.
5.206 TheUnited States further argues thattheJapanese Government 'ssupport todomestic
manufacturers solidified theircontrol ofthisdistribution channel. Japan provided funding under MITI's
Small andMedium-Sized Enterprises Act(SMEA). During the1967-70 period, SMEA provided at
least160million yentotheeffort oflaboratory conversion. Aided bythisgovernment funding tothe
laboratories, FujiandKonica allegedly rapidly developed strong networks ofaffiliated laboratories,
which usedtheirphotoprocessing equipment, chemicals, andpaper. Accordingly, foreign firms were
putatastrong disadvantage sincetheywereunable toobtain thisassistance. Approximately 84percent
ofthenearly 1,700 laboratories fallunder theumbrella ofoneoftheJapanese manufacturers andare
commonly affiliated withretail outlets.
5.207 TheUnited States submits thatin1973 thephotoprocessing laboratories were designated as
eligible foranother SMEA subsidy program. TheUnited States notes thatthelaboratories areaservice
business. Consequently, lowered tariffs onphotoprocessing equipment andastrengthened yenwould
decrease thecostofimported photoprocessing equipment andmaterials, andtherefore improve the
laboratories 'bottom line. Liberalization would beathreat tothelaboratories onlyiftheyweretied
inrelationships withFujiorKonica anddidnotfeelfreetopurchase cheaper imported equipment and
materials. Inthissituation, concessionary government financing could helpreduce thecomparative
costofpurchasing domestic equipment andmaterials, andtherefore helpformorcontinue thebonds
between laboratories anddomestic filmandpaper manufacturers.
5.208 TheUnited States asserts thattheadministration oftheSMEA financing programs helps ensure
thatloansaredispensedinconformitywithMITIindustrialpolicy.Loansareapprovedonacase-by-case
basis, atthediscretion ofaMITI certified management consultant. These policies havecontributed
233Affidavit ofTanaka Takeshi, pp.3-4,Japan Ex.A-10.WT/DS44/R
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toFuji'sstrong andexcessive tieswithphotoprocessing laboratories inJapan, anditisthese tiesthat
havereinforcedFuji'sdominantpositioninthemarket.Kodakhasextendedsubstantialeffortstodevelop
alaboratory network inJapan, andhasbeendisadvantaged bytheextensive tiesbetween Fujiandthe
laboratories fostered byJapanese Government subsidies.
5.209 Japan disagrees withtheconclusion that84percent ofthelaboratories inJapan fallunder the
umbrella ofFuji. According tothedatagiven inPhoto Market 1996, ofthe753amateur laboratories
intheJapanese market, 292laboratories (38.8 percent) areaffiliated withFuji,124laboratories (16.5
percent) areaffiliated withKodak, 216laboratories (28.7 percent) areaffiliated withKonica, and121
laboratories (16.1 percent) haveother affiliations.
5.210 Japan further contends thattheUSarguments areunpersuasive foranumber ofreasons. Firstly,
thefinancing wasdesigned tohelpsmall laboratories, notthemajor manufacturers. Laboratories
receiving thefinancing werefreetochoose thetypeandbrand ofalltheequipment theyacquired with
thehelpofthese loans. Once thelaboratories obtained thenewequipment, theywere available as
customers toanyone whocould supply themthecolour paper theywould needtousethenewtechnology.
Therefore, thisindependent source offinancing actually reduced anydependence thelaboratories would
haveonthemanufacturers. Japan points outthattheUnited States doesnotevenofferanyargument
astowhySMEA financing would favour Japanese manufacturers rather thananyother supplier with
acompetitive product. Japan alsopoints outthatSMEA loans continue tobemade andareavailable
tolaboratories affiliated withbothforeign anddomestic manufacturers. According toJapan, thetrend
toward affiliation withmanufacturers actually began longbefore anyofthealleged government efforts
tointegrate thephotofinishing laboratories came intoeffect. BothFujiandKonica were beginning
todevelop affiliations withitslaboratories bytheearly 1960's.234
5.211 Japan points outthattheUSargument implies thataffiliations between photosensitive materials
manufacturers andphotofinishing laboratories intheJapanese market aresomewhat unusual and
exclusionary. InJapan'sview, suchaffiliations arecommon throughout theworld. Strong market
incentivesfavourforwardintegrationbymanufacturersintophotofinishing.Thedemandforphotographic
paper isultimately afunction ofthedemand forphotographic prints. Consequently, manufacturers
haveastrong incentive toparticipate inthedownstream photofinishing market. Thus, thestructure
oftheJapanese paper market isareflection ofrational business decisions, notgovernment measures.
5.212 Withrespect toUSallegations about MITI'sfinancial support forsystemization, Japan responds
thattheUnited States citesonlyasingle example where Konica wasabletoreceive funding fromthe
Japan Development Bank (JDB) todevelop adistribution facility. ThisJDBloancame toolateto
encourage vertical integration asKonica anditswholesalers werealready affiliated.235Therefore, for
Japan, itismisleading tosuggest thatcooperation between Konica anditsprimary wholesalers and
theirjointdevelopment ofadistribution facility istheresult ofsome government plantostrengthen
therelationship between these primary wholesalers andKonica. Japan further emphasizes thatinany
event JDBdoesnotevaluate applications fromforeign enterprises orfromenterprises thatcarry foreign
products anydifferently thanitevaluates applications fromenterprises thatcarry domestic products.
Infact,since 1984, JDBhasbeen promoting imports byproviding loans fortheconstruction of
distribution facilities andservices forimported products.236
5.213 TheUnited States contends thatwhile Japan argues theJDBwould provide thesame type
ofloanforestablishing jointdistribution facilities toaforeign manufacturer, thefactremains thatthe
onlymanufacturer whoreceived suchaloanwasJapanese.
234Affidavit ofTanaka Takeshi, p.5,Japan Ex.A-10.
235SeeAffidavit ofHaruyoshi Okuyama, p.1,Japan Ex.A-18.
236JDBAnnual Report 1995, pp.26-27, Japan Ex.B-36.WT/DS44/R
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8. POST-1975 DEVELOPMENTS
5.214 TheUnited States argues thatwiththevertically integrated, exclusive distribution system in
place, theGovernment ofJapan turned itsattention tomeasures thathavehelped maintain thestructure.
Initsefforts tosuppress theclearest challenge tothevertically integrated system, Japan hasfocused
onneworstrengthened measures toensure thatforeign manufacturers could notusetheirfinancial
ormarketing strengths toincrease theirfoothold intheJapanese market.
5.215 TheUnited States asserts thattheGovernment ofJapan hascontinued itsclose coordination
withJapanese industry toimplement industrial policy favouring Japanese manufacturers. Itcitesas
anexample, the1990 MITI issued Guidance forImproving Business Practices, which itcontends
indirectly affirmed thecontinued useofrebates. ItalsocitesJapan's1995 enactment oftheSpecial
Measures LawtoPromote Business Reform forSpecified Industrialists (Business Reform Law), which
allegedlyestablishesabroadlegalframeworkforMITI'scontinuedinterventiontostrengthenandprotect
domestic industries. Thislawallows forthedesignation ofspecified industries, andbyministerial
order, MITI hasdesignated "camera andrelated products manufacturers" and"camera andphotographic
materialsindustry"asspecifiedindustries.237TheUnitedStatesfurtherreferstoa1994Japaneseindustry
journal article thatnoted changes intheJapanese filmdistribution system, suchasarevision ofthe
rebate schemes andtheopening ofmore discount stores, butconcluded that"alimittotheexpansion
ofsaleschannels seems tobeappearing" andthat"theactual network hasnotchanged much."238Other
Japanese analysts haveconcluded thatdistributors remain highly dependent onmanufacturers.239
5.216 Japan denies anycoordination withindustry designed tofavour Japanese manufactures. Japan
specifically notes thatthe1990 Guidelines suggest thatrebate conditions beclarified andthattheuse
ofrebates bekepttoaminimum. Japan alsorebuts thattheUSdescription ofthe"Business Innovation
Law"240ismisleading, noting thatthelawtreats foreign-affiliated firms anddomestic onesonanequal
basis. Japan asserts thatthegovernment hasdiscouraged exclusionary practices inthephotographic
filmindustry. Japan claims thatdistribution practices inthefilmindustry havebeenclosely scrutinized
bytheJFTC toguard against possible anti-competitive practices.
5.217 Japancitesasanexamplesituationswhen"parallelpriceincrease"havebeenreviewed.Although
these industry widesurveys -which haveincluded Fuji, Konica, andKodak -found noviolation of
theAntimonopoly Law, thefactthatthesurveys were conducted confirms thattheJFTC hasbeen
particularly vigilant inmonitoring developments inthisindustry. Japan, therefore, concludes thatthe
UStheory ofagovernment conspiracy tocreate anexclusionary market structure isnotsupported by
thefacts.
5.218 TheUnited States emphasizes, thatinconsidering Japan'srecent formal andinformal actions,
itisimportant torecognize thatthedistribution structure setupbythemeasures beginning inthe1960's
and1970'sis,toalarge extent, self-sustaining. Once Japanese manufacturers achieved domination
overthedistribution system through implementation ofshort payment terms, rebates anddiscounts,
vertical information links, andothermeasures advocated andimplemented bytheJapanese Government,
themanufacturers 'power allows themtomaintain suchdomination, through thecontinuing useofthese
transaction terms andother mechanisms, withlessneedforsupport fromtheGovernment. However,
237MITI Ministerial Ordinance No.31of1995, Items 123and164, USEx.95-5.
238Distributors inTough Environment; TheDistribution Structures Continue toChange, Nihon Shashin Kogyo Tsushin,
1May1994, USEx.94-10. Japan disagrees withtheUStranslation ofthequote from theabove-mentioned article. See
translation issue 3.
239FourFuji-Group Distributors Reported Unimpressive Results inSpite ofLowInterest Rates, Shukan Shashin Sokuho,
24June 1994, USEx.94-11. Japan disagrees withtheUSinterpretation ofthisarticle. Seetranslation issue 10.
240Japan notes thattheproper translation should bethe"Business Innovation Law" rather thanthe"Business Reform
Law". Japan ’sfurther explanation about thislawisdiscussed below insection VI.D.3.(h)(ii).WT/DS44/R
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areduced needforsupport doesnotmean thattheJapanese Government reversed itspolicy. Tothe
contrary, theUnited States asserts, Japan hascontinued toadvocate short payment terms, rebates and
discounts, andvertical information links, andJapanese manufacturers andwholesalers havecontinued
toapply these practices tomaintain theoligopolistic distribution system. TheUnited States concludes
that,moreover, Japan hascontinued tosuppress alternative channels andpotential challenges tothis
system, suchaslarge stores andindependent photoprocessing laboratory networks, thereby shielding
theoligopolistic distribution system from competitive pressures thatcould undermine it.