WORLD TRADE
ORGANIZATIONWT/WGTI/W/59
20 October 1998
(98-4626)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 1 October 1998, has been received from the Permanent
Mission of Japan with the request that it be circulated to Members.
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Relationship between Investment and Competition
1. Introduction
For some time now, it has been pointed out that discussions and debates on issues of the
liberalization of trade and investment should devote more attention to competition policy. That is to
say, in striving for liberalization, it is not enough to merely remove the customs-related barriers to
trade that may exist at national borders or ports of en try.  Countries will be able to enjoy the benefits
of free trade once they establish suitable domestic climates for competition and will ensure that their
distribution systems regarding imports do not pose unfair barriers to market entry after the customs
clearance stage. Not only do the same conditions apply to investment, but, additionally, having a
competitive market climate will be an even more important factor as investment moves the centre of
business operations into a host country. While business practices of monopolistic corporations which
unfairly exclude competitors should be controlled by competition laws, it is to be noted that some host
countries do not have competition laws and that there are discrepancies in competition law standardsin other countries.  It has been pointed out that these factors are undermining the predictability for
corporations.  On the other hand,  it has long been said that the promotion of investment promotes
competition in the market, which in turn enhances the competitiveness of the market itself.  In this
regard, it would be meaningful to reconsider the relationship between investment and competition and
review the role of competition in investment.
(1) Effects of investment on competition
(a) Merits
The prime benefits that investment provides in terms of competition have already been
underlined in the Secretariat's paper (WT/WGTI/W/38) for the WTO Working Group on theRelationship between Trade and Investment: namely, that the liberalization of investment encourages
market participation by new entrants, helps intensify competition in the market-place by actively
encouraging participation by domestic corporations, and ultimately contributes to the strengthened
competitiveness of the market as a whole, including its domestic players.  Furthermore, it has been
reported that market entry by multinational corpora tions with advanced technologies is an effective
way of boosting the efficiency of indigenous companies through technology transfers (UNCTAD
World Investment Report 1997).WT/WGTI/W/59
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To give some examples relevant to recent developments in Japan, the Government approved
the establishment of bank subsidiaries by foreign securities firms in 1991, relaxed restrictions on entry
into the securities business by securities subsidiaries of foreign banks in 1994, and in November 1996
embarked on a series of liberalization-oriented financial reforms that would become known as the
Japanese version of the Big Bang (Figure 1). These actions have facilitated entry by a series offoreign-capitalized banking and securities institutions  into the Japanese market.  This in turn has
fostered heightened competition in the domestic financial market-place and, as a result, many
Japanese financial service institutions have begun pursuing joint ventures and tie-ups with powerful
foreign-affiliated financial institutions, particul arly in the areas of asset allocation and in the
development of new financial products (Figure 2). On some accounts, many domestic financial
institutions have been able to effectively translate these collaborative undertakings into a more
diversified and qualitatively improved set of financial products and services (Figure 3), while in themeantime they have been able to work to improve the series towards their clientele.
FIGURE 1
Chronology of Japanese Steps in Financial Liberalization
June 1985: Foreign banks allowed to participate in the trust banking business.  Universal
Bank-affiliated securities houses allowed to set up branches in Japan.
June 1987: Foreign investment advisory companies allowed to operate as investment
brokerages in Japan.
February 1990: Foreign securities houses allowed to operate as securities and investment trust
brokerages.
February 1991: Foreign securities houses allowed to establish subsidiary bank branches in Japan.
April 1993: Reciprocal, subsidiary-based participation in banking, securities and investment
trust industries allowed.
April 1994: Foreign banks offered a wider range of options for participation in securities
subsidiaries.
January 1995: Licensing requirements relaxed for foreign businesses striving to enter the
securities, investment trust and brokerage business sectors.
(Data source:  1998 JETRO White Paper)
FIGURE 2
Steps to Restructure the Financial Industry in Japan
February 1998: Joint venture established by Toho Seimei and GE Capital
May 1998: Business tie-up by the Industrial Bank of Japan and Nomura Securities
June 1998: Broad-based tie-up by Nikko Securities and the Travellers Group
FIGURE 3
Examples of Expanded Service Offering s by Domestic Financial Institutions
- Telephone banking and Internet banking services
- 24-hour ATM operation by banking institutions
- Issuance of money cards that allow bank depositors overseas to withdraw funds in
local currency
- Lower fund transfer service fees as a result of steps to liberalize service fees for
foreign currency transactionsWT/WGTI/W/59
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(b) Demerits
Progress in the liberalization of investment and steps to encourage the participation of foreign
capital in the domestic market-place can pave the way for entry by large multinational corporations
that are overwhelmingly competitive.  This state of affairs can lead to a dominance by multilateral
corporations in the market. It is relatively easy for such conditions to materialize in industrial fields
marked by high initial costs or by progressive cost declines, and particularly in those fields where
multinationals have a competitive advantage in business resources.
However, should this occur in a country that already has an effective set of competition laws
in place, the harm will be transient in nature because the liberalized investment environment and a
level playing field can be expected to encourage other multinationals, as well as indigenous start-ups,
to compete with the dominant multinational.
Attention has also been drawn to the danger whereby multinationals with monopoly control
over a given market may enlist their unique cross-border networks to exclude competitors, pursue
restrictive business practices and engage in other forms of anti-competitive behaviour. Should this
happen, it would conceivably give rise to a variet y of monopoly-based damages, including declines in
market efficiency and economic welfare.  Such monopolistic abuses of power should be banned by aneffective implementation of competition laws. Indeed, to maximize the benefits of investment, it
seems vital that host countries have an effective set of competition laws in place (1997 UNCTAD
Annual Report on Trade and Competition).  Needless to say, competition laws should be enforced
without impartiality, both at domestic and foreign firms.
Additionally, in view of the potential impact on the market competition of mergers between
domestic companies, as well as with foreign comp anies, it will be necessary to implement those
competition laws that regulate mergers and acquisitions. To give an example, the Japan Fair Trade
Commission has pointed out a potential problem unde r the Anti-Monopoly Law in the case of a joint
venture between Anheuser-Busch, the US brewer of Budweiser beer, and Kirin, a major Japanese
brewer, whereby the former sought to set up in Japa n a joint-venture subsidiary arrangement with the
latter. The JFTC has pointed out the problem of the strengthening of the market position of Kirin,
which has already enjoyed a dominant position in the rather oligopolistic Japanese beer market. In
response, Anheuser-Busch and Kirin reformed their plan significantly to make the joint-venture
project temporary and limited in scope.
(2) Effects of competition on investment
In considering the effects of competition on investment, it is necessary to examine the effects
of competition in both the host country and the home country of investment.  In the case of the home
country, increased competition may prompt corporations to pursue efficient management in order to
survive in the market. Overseas investment, particularly by transferring inefficient domestic plants to
foreign countries as part of an effort to rationalize corporate activities, may be opted for.  For
example, the Ministry of International Trade and Industry (MITI) reported in the Survey Report onOverseas Business Strategies (November 1996) that 79 per cent of all corporations increased
production in Asia in order to cut personnel costs, while 42 per cent did so in order to reduce costs of
raw materials and components (Figure 4).  The accelerati on of such overseas investment will lead to a
further promotion of competition in the home market, in particular through re-importing products
manufactured overseas.
In the case of the home country for investment, on the other hand, the effects on investment in
the development of competitive markets should be examined.  From this perspective, the impact of
competition on investment can be similar to that  of competition on trade.  Market entry through
investment can be blocked, not only by government actions, but also by corporate actions.  As in theWT/WGTI/W/59
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case of import restrictions, existing companies in the host country ("existing companies" include not
only domestic companies, but also foreign companies which have entered the market by making
investment there) will block new entry by abusing their monopolistic position, or by means of cartels
comprising several companies.  For instance, if a monopolistic telecommunications' company refuses
to allow foreign companies to interconnect to its co mmunications circuit, it would be difficult for such
foreign companies to offer telecommunications serv ices.  Ordinarily, such anti-competitive behaviour
is controlled by competition laws.  As such, it has been pointed out that the establishment of
competition laws in the host country market and the securing of appropriate competitive conditions
will increase the predictability for investing companies and promote investment.
FIGURE 4
Reasons for Increased Production in Asia (Manufacturing Sector)
- Expansion of sales channels in local markets 82.2%
- Personnel costs are lower than in Japan 78.8%
- Hedging of foreign exchange risk 50.0%
- Expansion of sales channels in a third country 49.2%
- Cost of raw materials and components are low 42.4%
(Data source: 1997 JETRO White Paper)
(3) Regulation of corporate behaviour in existing investment-related agreements
As discussed above, in order to maximize the effectiveness of investment, it is crucial that
competition laws be established in the host country.  Nevertheless, there are only about 70 countries
in the world with competition laws;  the majority not having established such laws (1997 WTO Trade
and Competition annual report).  And even when such laws are in place, their levels vary significantlyfrom country to country.  For this reason, in establishing international investment rules, it may be
desirable to incorporate some elements related to  the forming of a competitive business environment.
Competition rules in existing investment agreements are examined below.
GATS, TRIMs Agreement and TRIPS Agreement
These three Agreements refer to the restriction of competition as a result of corporate
behaviour. The GATS and TRIMs Agreement have provisions on competition as corporate behaviour
can block entry through service trade and direct in vestment.  The TRIPS Agreement has provisions on
competition as companies may restrict competition in licensing intellectual property rights.  In
particular, the provisions of the GATS set forth measures to be taken by the state with respect to
corporate behaviour restricting competition.  However, the regulations on corporate behaviour arelimited in scope and do not obligate signatory countries to conform to specific rules.
(a) The GATS (Article VIII) requires that each Member country ensures that any
monopoly supplier of a service in its territory does not, in the supply of the monopoly
service in a relevant market, act in a manner inconsistent with that Member's
obligations under GATS or abuse its monopoly position.
(b) The GATS (Article IX, paragraph 2) stipulates that, when a signatory country
requests consultations on business practices that restrains competition and thereby
restricts trade in services, the Member country addressed shall accord full and
sympathetic consideration to such a request and shall corporate through the supply of
publicly available non-confidential information.  However, this does not obligate theWT/WGTI/W/59
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Member country to agree to such consultations and to provide information.
Moreover, this provision does not specify such business practices.
(c) The TRIMs Agreement (Article 9) stipulates that the Council on Trade in Goods shall
review the operation of this Agreement not later than five years after the date of entry
into force of the WTO Agreement to verify whether the Agreement should becomplemented with provisions on competition policy, with a view to regulating
corporate behaviour restricting investment.
(d) The TRIPS Agreement (Article 40) provides that member countries be allowed to
control actions and conditions pertaining to the anti-competitive licensing of
intellectual property rights which have an adverse effect on the transfer of technology
and the promotion of trade.
MAI Scheme
The present MAI draft provides roles for go vernment actions.  As such, the MAI does not
allow the application of competition laws by a member country to an investment, or for the
investment of another member country to be less favorable than its application to an investor or to an
investment of its own or a third country.  However, there are no provisions on competition lawsthemselves.
Some forms of regulations are likely to be introduced on the activities of monopoly
companies where a monopoly is maintained or designated by the government.  Options for such
regulations would include ensuring the provisions of a non-discriminatory status to investors and to
the investment of other member countries.  The attachment to the MAI of the OECD multinationalcorporation guidelines is being considered.  The guidelines recommend multinational corporations
operating within the territory of OECD countries to comply with the competition laws of the country
where they are operating, and to refrain from restraining competition in a related market by abusing
their dominant market power.
"Reference paper" of the WTO Basic Telecommunications Agreement
This document, agreed upon in February 1997, contains the most detailed competition law
standards that have been included in multilateral agreements.  The following provisions form the core
of this document:
(1) Appropriate measures shall be maintained to prevent major suppliers from engaging
in anti-competitive practices.
(2) Interconnection should be ensured under non-discriminatory and reasonable
conditions.
(3) Measures to maintain universal services  will not be regarded an anti-competitive
per se .
(4) The regulatory body must be separate from any supplier of basic telecommunication
services and maintain impartiality.
Although this document is separate from the agreement, more than 50 countries have
accepted the obligations in this document by making additional commitments under Article XV III of
the GATS.WT/WGTI/W/59
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(4) Conclusion
As shown above, there are mutually complementary effects between investment and
competition.  That is to say, the promotion of inve stment leads to the creation of competitive markets
and the development of competitive markets increa ses the predictability for investors, thereby
invigorating investment.  Some hold the view that as a result of the liberalization of investment,
multinational corporations will likely enter the market and engage in behaviour that restricts
competition.  However, it is possible to cope with such behaviour by enforcing appropriate
competition laws.
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