COVER STORY • 1

Recommendations for theDevelopment of a Rules-Based
International Economic System

By the Research Committee on the Development of a Rules-Based International Economic System

The Concerns of These Recommendations: The
Rules-Based International Economic System thatJapan Should Aim at
As the international trade and investment system weakens, it faces
three challenges: 1) the deterioration of the multilateral free tradesystem, 2) the decoupling between the United States and China andthe convergence of security and trade, and 3) the supply-chain crisis.
The Japanese government has worked to maintain a multilateral
trading system that is based on the rule of law and includes both the
US and China and to develop a multilayered economic order with theaim of constructing a trading system based on our national interests.
Since the turn of the century, as the World Trade Organization (WTO),
the mainstay of the postwar multilateral trading system, struggled tomake progress in the Doha Round, the Japanese government has
achieved progress through regional trade agreements (RTAs),
including bilateral agreements, with a focus on free trade agreements(FTAs). One feature of an RTA is that it facilitates the development of aframework that provides an upgrade over WTO rules. The
Comprehensive and Progressive Agreement for Trans-PacificPartnership (CPTPP), economic partnership agreements (EPAs), theRegional Comprehensive Economic Partnership (RCEP), and otherrecent arrangements to which Japan is a signatory have contributed tothe development of the rules for the 21st century in a wide range ofareas including intellectual property, investment, labor, environment,
state-owned enterprises, and e-commerce.
However, rules-based multilateralism has been under siege latelyfrom the rising tide of populism that features anti-globalism in the US
and elsewhere in the industrialized democracies and the proliferationof unilateralism, in which the US and China as well as others pursue
their national interests by unilaterally imposing trade measures. A
framework is emerging in the Asia-Pacific without the US as it
abandoned the Trans-Pacific Partnership Agreement (TPP) and the
RCEP that entered into force in January 2022. Meanwhile, there is anurgent need to deal with states that adopt market-distorting policies
and measures. And recent years have seen the emergence ofgeopolitical and geoeconomic risks in the Asia-Pacific and IndoPacific, with the result that economic security is gaining importance insuch areas as supply chains, human rights, data governance, andmanaging high technology.
It was against the background of these changes in the international
economic order that the administration of US President Joe Biden in
https://www.jef.or.jp/journal/

October 2021 proposed the Indo-Pacific Economic Framework (IPEF)
and has been demonstrating a new eagerness to construct an
economic order in the Indo-Pacific region. Given its lack of market
access commitments, the IPEF is not an ideal approach for promoting
the creation of economic rules-of-the-road for the Indo-Pacific region.
It remains essential for the US to return to its original TPP initiative,
which has now become the CPTPP, and, ultimately for the regional
perspective, to explore ways to create the “Free Trade Area of the AsiaPacific” (FTAAP) which was proposed by the leaders of the Asia-Pacific
Economic Cooperation (APEC) forum. On the multilateral front, it isimportant to look for ways to reawaken the WTO from its stupor andprompt the development of rules on digital trade, labor, human rights,
and other concerns. To achieve this, Japan must exercise leadership inbuilding and maintaining economic order as a “global standard-bearerof free trade” with the WTO at its core. However, as part of theinternational response to the Russian invasion of Ukraine that began
on Feb. 24, 2022, 14 countries and regions including Japan, the US,
and the EU, who are members of the WTO, decided to revoke Russia’s
most favored nation status, and developed countries opposed Russia’s
participation in the G20 summit. The enormity of the impact ofRussia’s outrageous actions on the international order is obvious. It isnecessary to carefully consider how Russia should be treated ininternational economic forums, taking into consideration the mid- andlong-term impact on the international order.
The Japan Economic Foundation (JEF) brought together eminent
experts from various fields to set up the Research Committee on theDevelopment of a Rules-Based International Economic System. The
Committee reevaluated the rules-based international economic systemfrom the legal, economic, and political perspectives, considered ways
to improve it, and makes the following “Recommendations for theDevelopment of a Rules-Based International Economic System.”

Recommendations① Revitalizing the WTOA) The Question of the Appellate Body
(1) To add to the impasse in the rulemaking negotiations, the Appellate
Body, the core of the dispute settlement system, which some callthe “crown jewels” of the WTO, has been thrown into disarraysince December 2019, when it ceased to have enough members
Japan SPOTLIGHT • July / August 20223

for a quorum to hear appeals. Securing the rule of law by
normalizing the Appellate Body is urgently required, but early
resolution is difficult. In the meantime, in order to keep harm fromcoming to the legitimacy of and trust in the WTO from theaccumulation of appeals into the void, Japan should give serious
consideration to joining the Multiparty Interim Appeal Arbitration
Arrangement (MPIA) led by the EU for the provisional revival of therule of law. Of particular note is the fact that China is a member ofthe MPIA, giving it a role in trade policy vis-à-vis China. The EU has
also adopted enforcement regulations to deal with appeals into thevoid by MPIA non-members and Brazil has followed suit. The time
has come for Japan to consider taking this approach.
Note: “Appeal into the void” means to put a case on ice by filing anappeal with the currently memberless Appellate Body whilerefusing to use the MPIA.
(2) In joining the MPIA, the Japanese government should make it clearthat it is doing so as an emergency measure to maintain temporary
order and that it does not support the EU proposal for WTO
Appellate Body reform. It should exchange views broadly with all
the major WTO parties, not just the members of the MPIA.
(3) In undertaking WTO Appellate Body reform, Japan should also giveheed to US criticism of the Appellate Body and consider specificmeasures to place institutional constraints on the judicial activism
and procedural discretion overreach of the Appellate Body. This
does not mean simply following the US lead; instead, Japan shoulddraw a red line in view of its national interests. In particular, it isdesirable in principle to maintain the two-tier system and thenegative consensus rule, given the benefits that the judicial disputesettlement that the Appellate Body has historically provided Japan.
(4) The WTO should reconfirm its origins as an international systemthat is predicated on a system of rules agreed between market
economies. When interpreting existing agreements as part of the
dispute settlement process, to avoid accusations of overreach fromarising, it should not go beyond the elaboration of the agreementof the WTO members according to the standard method forinterpreting agreements under international law and should
exercise caution in referencing international law other than WTO
agreements and make it clear that judicial discretion is not being
used aggressively when making interpretations.
B) Reviving the Rulemaking Role of the WTO(1) While keeping the WTO from leaning too heavily into its judicial
function as explained in A), it is essential to revitalize its
rulemaking function in order to restore that balance between thetwo functions. The Japanese government should accordingly takethe lead in revitalizing the negotiations for establishing new rules.
Its ongoing efforts in this regard can be seen in such areas asdigital trade, fisheries subsidies, and investment facilitation fordevelopment. To maintain this momentum, it is important to
4 Japan SPOTLIGHT • July / August 2022

produce tangible results and to institutionalize the plurilateral – as
opposed to multilateral – format for negotiating rules.
(2) Regarding (1), it is desirable for the Japanese government to play
an active role in the Joint Statement Initiative on Services Domestic
Regulation of the WTO, the Ottawa Group, and other plurilateral
activities by like-minded countries. It should also work to produce
new agreements by incorporating the outcome of the January
2020 Joint Statement of the Trilateral Meeting of the Trade
Ministers of Japan, the US and the EU such as the reinforcement of
the rules for industrial subsidies, not to mention the negotiations
on e-commerce as part of the JSI (see ④A).
(3) The WTO should reconfirm its original commitment to the systemof rules agreed to between market economies and the mutual
opening of the domestic market on a most-favored-nation (MFN)
basis. Two decades since its WTO accession, China’s influence in
the WTO and the international economy more broadly has grownenormously. The time has come to consider whether it has fully
implemented the reforms that had been expected in the beginningand has complied with the WTO agreements appropriately. This isessential to the development of WTO rules going forward.
② Utilizing RTAs

A) Utilizing the CPTPP(1) For the US administration of President Barack Obama, the TPP wasthe means to draw China into new trade rules by making it
understand that it would be at a disadvantage to stay out of theframework. It is desirable to use China and Taiwan’s bids to join the
CPTPP as an opportunity to conduct firm, rules-based accession
negotiations. In particular, China’s CPTPP accession should be
used as an opportunity to put pressure on China to open its
economy, in coordination with efforts by the US from outside the
CPTPP framework.
(2) As an obvious precondition to its accession to the CPTPP, China
should be required to keep the promises it made when acceding to
the WTO and to immediately eliminate all economic coercion in
violation of WTO agreements.
(3) In the negotiations for China’s accession to the CPTPP, it will benecessary to secure its compliance with the intellectual property,
forced technology transfer, state-owned enterprise, labor,
environment, e-commerce, and other rules of the CPTPP. Where
existing rules are insufficient, the incumbent members of the
CPTPP should consider demanding that China make commitments
over and beyond the existing agreements. In doing so, adding
substantive provisions predicated on China’s singular socioeconomic system (or politico-economic system) should beconsidered, and effective mechanisms to secure compliance withthe agreement (e.g. special provisions for the burden of proof inthe dispute settlement system, periodic inspection system) could
also be explored.
(4) China’s WTO accession negotiations took 15 years. Similarly, theJapanese government should not compromise in the negotiations
on China’s accession to the CPTPP and should be comfortable withtaking as much time as is required. It should also consider
including in the accession protocol provisions to the effect that
China could be expelled or that other member countries could
withdraw concessions if it is determined that China is not incompliance with the provisions of the CPTTP or its accession
protocol.
(5) To construct the implementation surveillance system of the CPTPP,
it is important to strengthen the dispute settlement procedures andimplementation surveillance system, establish a secretariat,
achieve the early accession of the United Kingdom, and strengthen
collaboration with the UK, Canada, Australia, and New Zealand.
(6) Connection and/or collaboration between the EU and CPTPP
should be explored to deal with market-distorting measures by
Chinese governments in the future. Adding the US to this should
enable the CPTPP to function as a stepping stone for the creationof the WTO or other multilateral rules.
(7) As the Yokohama Vision and The Pathway to the FTAAP adopted atthe 2010 APEC summit in Yokohama make clear, there is anagreement on a long-term vision to create the FTAAP through the
expansion of the CPTPP and the RCEP. Efforts towards theachievement of this goal should be continued.
B) Building an Indo-Pacific Order around the US (the US“Return” to the CPTPP and the IPEF)(1) Japan should be an active participant in the IPEF, which the US is
promoting. However, the IPEF is not the best approach for thepromotion of economic rule-making in the Indo-Pacific region,
particularly since it does not include commitments on market
access, a matter on which bipartisan concern has been expressedin the US Congress. Thus, Japan should be persistent in urging the
US to return to what is now the CPTPP.
(2) A hard line on China policy has bipartisan support in the US
Congress. The Japanese government should make a strong appeal
on the strategic importance of the CPTPP to the China hardliners in
the administration and Congress who are responsible for trade
policy including its strategic aspects, as well as the role the CPTPP
has as an effective tool for correcting market-distorting policy
practices.

range of stakeholders including businesses, academia, governors
and other local officials, think-tanks, and the mass media for the
US to return to the CPTPP. The CPTPP’s role in improving
environment protection, labor standards, and, more broadly,
human rights through the framework of a trade agreement should
be used to make a strong appeal to enhance the understating of
the CPTPP among the constituencies that have an interest in theseissues (such as young people).
(4) In the US, the Trade Adjustment Assistance (TAA) Program
currently does not include compensation for the damage resulting
from trade liberalization. It is important for the TAA to beredesigned and implemented to reduce the negative impacts fromthe CPTPP and other trade liberalization initiatives.
C) Analyzing the Economic Impact of RTAs and Their
Expansion(1) Ex-ante forecasts and the analysis of ex-post evaluation are both ofimportance regarding the economic effect of an RTA. Ex-ante
simulation using economic models should be utilized in policy
planning as if it were a social science laboratory. In developing arules-based international economic system, the economic effectshould be considered and a system that is effective from an
economic-benefits perspective should be developed efficiently.
(2) A preliminary calculation of the economic effects of Asia-Pacific
EPAs shows that 1) the CPTPP and the RCEP do not compete
against each other but instead are mutually reinforcing, so it isdesirable to implement both instead of choosing one over theother; and that 2) including non-tariff measures in addition totariffs increases economic benefits. However, if the US joins the
CPTPP or India joins the RCEP, the economic benefits of lower
tariffs is reduced or even turns negative for some incumbent
members. In expanding RTAs, the key is not to just add newmembers but also to deepen measures for liberalizing andfacilitating trade and investment.
(3) Tariff reduction under an RTA is applied on a preferential basis to
the RTA signatories, but many non-tariff measures cannot beapplied exclusively to the products of the signatories generally
speaking, in which case the potential ripple effect of the reduction
through their universal application can be expected. It should be
noted that even where global rules are not developed under the
GATT/WTO system, the global application of an agreement
between certain countries has the potential to generate the kind of
economic benefits that would be generated by a WTO agreement.
③ Dealing with China’s Market-Distorting Government

Support and Regulations(3) The opposition to free trade in the US comes from certain
industries such as steel and automobiles, not the general public.
Thus, the Japanese government should strongly appeal to a wide(1) Government procurement is conducted by central and local
governments. Foreign companies may be subjected to de facto
Japan SPOTLIGHT • July / August 2022

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discrimination due to political reasons in areas that are nominally
opened to the outside world under domestic law. China should beurged to join the WTO Agreement on Government Procurement,
which forbids such exclusive procurement practices. The Japanese
government should also review its own procurement system with aview to ensuring conditions for fair competition including
reciprocity with China and other countries that are not parties to
the Agreement on Government Procurement.
(2) The weaponization of interdependence is emerging as part of theeconomic security landscape. There has been an increase in recent
years of China exercising economic coercion through trade
restriction and other means, against Australia and Lithuania among
others (② A) (2)). It is necessary to persevere in seeking redress
through the dispute settlement procedures of the WTO, multilateralframeworks such as the Council for Trade in Goods, and thenegotiation process for CPTPP accession.
(3) It is possible that market intervention through sovereign funds,
given their high tolerance for risk, could fall under the definition of“unlimited guarantees”, one of the items that should be added tothe unconditionally prohibited subsidies measures under the WTO
Agreement on Subsidies and Countervailing Measures (ASCM)
according to the aforementioned 2020 Joint Statement of the
Trilateral Meeting of the Trade Ministers of Japan, the US and theEU. It is necessary to conduct a theoretical and empiricalinvestigation of the mechanism by which sovereign funds would
be market-distorting.
(4) As the example of the Chinese steel industry shows, subsidies tocover operating losses, debt forgiveness, or bad debt
compensation can lead to excess production capacity. Adding
them to the ASCM list of prohibited subsidies should beconsidered accordingly. As for excess capacity subsidies, it wasagreed at the Trilateral Meeting of the Trade Ministers of Japan, theUS and the EU to strengthen discipline, so discussions within thisframework should go forward as well.
(5) It is possible to demonstrate through economic analysis that theharm caused by the industrial subsidies that are provided in China
constitutes “serious prejudice” under the ASCM. Such economic
analysis, particularly methods used in justifying competition policy,
should be considered favorably.
(6) Japan should engage actively in negotiations over AI ethics rules,
the concept of data as a human right, government access, andother areas where digital rules are yet to be established, especiallywhere China is participating actively in the rule-making.
(7) Cases have been emerging where mergers and acquisitions byforeign companies fall through because of delays in theexamination by the Chinese authorities (e.g. acquisition of Hitachi
Kokusai Electric Inc. by Allied Materials). This has had the effect of
6 Japan SPOTLIGHT • July / August 2022

preventing rivals to Chinese businesses from emerging. In the IT
industry, where product cycles are short and competition is heavy,
it may have had the effect of preventing businesses fromestablishing themselves in the market. There is a gentlemen’s
agreement to conduct examinations expeditiously to prevent thesethings from happening, but there have been repeated cases where
the examination has taken much longer than foreseen in the
gentlemen’s agreement. Arbitrary application of the antimonopoly
law has also been observed. There is a need for rules that deter thearbitrary application of competition law. International coordinationof rules in competition law policy takes the form of creating soft
rules such as recommendations and guidelines in the International
Competition Network (ICN), the OECD, and elsewhere. Since China
is not yet a member of the ICN, consultations between tradeauthorities and between competition policy authorities should beinitiated on this point and China should be urged to participate in
the international coordination of rules.
(8) The Japan-China-Korea Trilateral Investment Agreement and the
RCEP are rules for China related to investment that are available to
Japan but not to the US or Europe and should be used accordingly.
The RCEP recognizes in principle the provision of preexisting
national treatment and most favored nation treatment. As for theprohibition of trade-related performance requirements, it covers
technology transfer demands and royalty restrictions over andabove the WTO’s Agreement on Trade-Related Investment
Measures (TRIMS). It is important to secure compliance with therules through the appropriate use of state-to-state disputesettlement (SSDS) procedures or the investor-to-state disputesettlement (ISDS) in the Japan-China-Korea Trilateral Investment
Agreement.
④ Developing New Rules

A) Developing International Economic Rules in the DigitalSpace(1) Japan should work with Australia and Singapore as co-convenorsof the negotiations on e-commerce under the WTO to work toachieve substantial progress during 2022 with the objective of
reaching agreement at the 13th Ministerial Conference (MC13).
The Covid-19 pandemic in particular has given a new urgency tothe need for global rules to regulate the surging digital trade. It is
desirable to encourage as many countries as possible to join theprospective agreement in addition to developing highly normative
rules under the principle of Data Free Flow with Trust (DFFT),
which Japan proposed at the World Economic Forum Annual
Meeting.in January 2019 and the G20 Osaka Summit in June of thesame year.
(2) The multilayered emergence of regional arrangements is occurring
for rules on digital trade alongside the multilateral negotiations.
There, Japan is securing highly disciplined digital trade rules in thee-commerce chapters of the CPTPP and the Japan-EU Economic
Partnership Agreement (EPA), the US-Japan Digital Trade
Agreement, and the like. It should look for ways to broaden thescope of the regional framework by expanding membership inexisting agreements while maintaining high discipline andincluding similar rules in the negotiations on new EPAs and therevision of existing ones. Meanwhile, the Digital Economy
Partnership Agreement (DEPA) is now attracting much attention in
the Indo-Pacific region. Although it does not match the CPTPP in
the quality of its rules – it does not have source code provisions
and is non-binding, for example – the Japanese government
should consider engaging in this arrangement in coordination with
Australia and the like, now that China has applied for membership.
It should also engage actively in developing rules for digital trade
for the IPEF, which the US proposed in October 2021.
(3) Government access (GA) is an area where the behavior ofgovernments and businesses as well as the views of civil society
have an extraordinary impact on the volume and quality of thecross-border economic space being developed for the digital
economy. It is extremely significant that the G7 has produced aroadmap for achieving DFFT and aims to developed guidelines fortrustworthy GA and that like-minded states are making progress in
the OECD with business support in discussions with input fromcivil society. As Japan holds the G7 presidency in 2023, it should
be expected to use its position between the US and Europe tonarrow the difference between the two sides and lead the way to aconsensus.
Note: Government access (GA) means enforceable access by
public organizations such as governmental organizations to
information in the possession of the private sector.
(4) If the increase in cross-border data transfer generates greater
concern over the effectiveness of law enforcement or createsconcern over unfettered access to domestic data from abroad, it
could lead to greater data localization instead. An internationalarrangement among many countries will be a stable foundation forinternational cooperation in investigations. In that sense, theJapanese government should aim at the early adoption of the draft
additional protocol to the Convention on Cybercrime. At the sametime, in the interests of promptness and feasibility, it is appropriate
for like-minded states to go ahead and steadily establish aframework in the spirit of DFFT. It is useful from this perspective
for the Japanese government to consider the relevant legal issues
for concluding bilateral international agreements that fall under thescope of the US CLOUD Act.
B) Theft of Trade Secrets Through Cyber Espionage andWhat to Do About It(1) Existing rules under international law do not provide effective
discipline over theft of trade secrets through cyber espionage.
Since this is not an easy issue to resolve, the near-term responseby the Japanese government should be to enhance the ability todeal with cyber activities by incorporating and using capacity
building and cooperation for the relevant authorities of signatory
states and other low-key rules in FTAs and other arrangements asin Article 19 of the Japan-US Digital Trade Agreement, Article 19.15of the US-Mexico-Canada Agreement (USMCA), and Article 8.83 of
the Japan-UK Comprehensive Economic Partnership Agreement.
However, it is necessary to remember that there are limits to theextent to which strict rules to regulate cyber espionage can beformed.
(2) Japan deals with theft of trade secrets through cyber espionage ascivil and criminal cases under the Unfair Competition Prevention
Act, but this law is weak as a means of deterrence. The Japanese
government should look to domestic regulation in the US andGermany, which have provisions for heavy penalties, and revise
domestic law, enhance deterrence against cyber espionage, andstrengthen measures.
(3) Directly regulating state behavior is best done through rules asinternational law. For this perspective, over the mid-to-long term,
the Japanese government should spare no efforts in the G7 andother forums where these countries are engaged to develop rules
as international law that will enable us to overcome the challenges
around theft of trade secrets through cyber espionage.
C) Business and Human Rights(1) The Japanese government and Japanese businesses should
promote human rights due diligence (DD) to prevent forced laborand other human rights violations in the supply chain. It isnecessary to develop guidelines as a first step and then consider
legislation as necessary. They should be made easy for businesses
to undertake, using the human rights DD systems already in place
overseas such as the UK’s Modern Slavery Act.
(2) It is essential for the Japanese government to deal with humanrights issues; they should not be left solely to DD by thebusinesses. The appropriate government response should betargeted sanctions against individuals and institutions engaged inhuman rights violations. Article 10, paragraph 1 of the Foreign
Exchange and Foreign Trade Act stipulates that the Japanese
government may restrict foreign currency remittances, capitaltransactions, overseas direct investment, provision of services,
etc., saying “it is particularly necessary in order to maintain peaceand security in Japan”. One option is to amend this to add thatsanctions may also be applied “if it is particularly necessary to
improve the human rights situation overseas”. Whether or not
individuals and institutions are identified and subjected tosanctions, it is important for Japan as a sovereign state to have themeans to impose sanctions against human rights violations.
(3) When considering the introduction of trade restrictions for humanJapan SPOTLIGHT • July / August 2022

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rights purposes, full consideration should be given to the burden
on businesses and compatibility with WTO rules.

manufactured under working conditions above a certain level(wage level).

(4) Japan must also correct its own behavior as appropriate regarding
the human rights issues that have identified by the International
Labour Organization (ILO), the UN Human Rights Committee.
Note: For example, Japan decided to ratify ILO C105 (Abolition ofForced Labour Convention) and was in the process of taking thenecessary domestic procedures when these recommendations
were being finalized. Meanwhile, Japan maintains the death
penalty, which has been criticized by the UN Human Rights
Committee among others, while virtually all other developed
countries have abolished it.

(4) Given the heavy involvement of labor law and labor policy, theinvolvement of labor law practitioners is essential whenintroducing such measures in trade agreements. It will benecessary to expand the collaboration framework for trade experts
and labor experts (regardless of whether a trade agreement winds
up covering labor issues).

D) Trade and Labor(1) The US and the EU have tended to include more extensive labor
provisions in their FTAs, a trend that is likely to continue for theforeseeable future. At the same time, regarding labor issues, it
should be carefully determined whether it is appropriate to include
labor rules in a trade agreement, given the declining significance ofthe connection between labor and trade. It is desirable to develop
rules for substantive discipline regarding labor standards in otherforums such as the ILO.
(2) However, a situation where products become competitive due topoor labor law enforcement and the like in other countries isundesirable from the perspective of protecting the rights ofworkers as well as in terms of international competition. Moreover,
if we are going to seek the return of the US to the CPTPP, Japan
should at a minimum take the lead in introducing a mechanism to
improve working conditions in sectors closely connected to tradein Asia and related areas. In this respect, given the results that the
USMCA’s Facility-Specific Rapid Response Labor Mechanism has
yielded, it is worth considering whether a similar mechanism canbe introduced that goes beyond the bilateral side letters signed
between the US and Vietnam, etc. at the time of the negotiations
over the original TPP. The discussions here will serve as the basisof the discussions for the labor provisions in the IPEF. In all thesecases, the system should be designed as appropriate for the actual
circumstances on such matters as the role of sanctions, if any.
(3) The Labor Value Content (LVC) clause that was introduced in the
USMCA for the automobile sector is not sufficiently justifiable as apolicy so caution should be exercised as to its adoption. In
addition, it is important to keep in mind that the provisions are
criticized for being difficult to apply to complex supply chains,which may be the case for the Asian market. However, given the
power of domestic forces in the US behind the measure, thepossibility cannot be excluded that it will be aggressively promoted
in future trade agreements – a reason for now to keep a close eye
on developments under the USMCA.
Note: The LVC clause requires the use of automobile parts that are
8 Japan SPOTLIGHT • July / August 2022

E) Trade and the Environment: Carbon Border Adjustment(1) The EU’s Carbon Border Adjustment Mechanism (CBAM) is a new
trade-related measure without precedent whose WHO complianceis an issue. Although Japan does not export many products
covered by CBAM to the EU, it must be actively engaged
regardless. The European Commission announced its legislative
proposal for the CBAM in July 2021. Beginning in 2026, a business
importing merchandise that is covered by CBAM must submit a
CBAM certificate. The value of a CBAM certificate is linked to theprice of emission allowances in the EU Emissions Trading System(EU ETS). The importer submits the value of the merchandise
multiplied by its carbon intensity (emissions per ton). The carbon
price in the country of origin will be deducted. The details of thesystem, which will aim at WTO/GATT compliance, are unclear, butthere is potential for GATT violations in most favored nation
treatment (GATT Article I), which requires Members to accord toother Members the most favorable treatment given to the productof any one Member, violation of the schedules of concession(GATT Article II), and so on. The EU will impose the obligation on
imported products, which would be “internal taxes” imposed at theborder” or “other internal charges of any kind”, or measures“affecting … internal sale”, which are covered by GATT Article III
and could be in violation of the national treatment that the article
requires. But even if it is in violation of Article III, there is thepossibility that the invocation of the General Exceptions asprovided for in the main text and items of GATT Article XX forenvironmental purposes could be an issue.
(2) Going forward, surveillance to see if there will be any double
protection such as distribution of free credit to domestic
businesses or arbitrary discrimination, any misuse ofenvironmental protection as a policy objective, any negligence ininternational agreement negotiations, and the like is important.
These proposals will not escape criticism from developing
countries who believe that carbon budgets are not being usedmuch and that they “have low cumulative emissions and thedeveloped countries are to blame for rising temperatures”.
Provisions for exemptions should be given careful if cautious
consideration so that they will not result in the rejection of free
trade or new North-South rifts and divisions. Japan should also
begin considering a cooperative approach.

(3) Meanwhile, the US and the EU through their October 2021
agreement on steel and aluminum tariffs under Section 232 of the
US Trade Expansion Act invited like-minded economies toparticipate in negotiations for a first-of-its-kind global arrangement
to deal with excess production capacity and high carbon-intensity
products (products with high emissions per ton). For the next two
years, there will be an attempt to seek out cooperation on themethod for calculating the amount of emissions, but restricting
market access for non-participants that do not meet standards for
low-carbon intensity is also on the agenda. This goes further thanthe Japan-US and Japan-UK joint statements on steel andaluminum. Japan must participate in these discussions.
(4) 71 countries and regions including Japan participate in the Tradeand Environmental Sustainability Structured Discussions (TESSD)
group, a WTO JSI, and have confirmed that they will cooperate onsuch matters as trade-related climate measures, environmental
regulation and sustainable supply chains (developing countries inparticular), assistance for sustainable trade (“AID for Trade”), theenvironmental impact and related subsidies on trade. The Japanese
government should take an active lead in the discussions.
⑤ The Free Trade System and the Importance of Economic
Security(1) The domestic legal system for economic security will be connectedto the agreements on strengthening supply chains forsemiconductors and other strategic goods and on technology tradethat will be formed in the IPEF and security-oriented cooperative
arrangements such as the Japan-US-Australia-India “Quad”. Keepin mind that they are likely to move to ring-fence technology andgoods among like-minded states, coming into conflict with thenon-discriminatory, multilateral, free trade system. It is necessary
to keep this from causing a turn to protectionism, undermining thefree trade system, keeping in mind the relationship with the
Wassenaar Arrangement on Export Controls for Conventional Arms
and Dual-Use Goods and Technologies and other security-relatedtrade control regimes.
(2) Japan faces a harsh geopolitical environment, with Russian
expansionism evidenced most recently in its invasion of Ukraine
coming on top of Chinese expansion in East Asia and the situationon the Korean Peninsula. It is against this background that theeconomic security legal system is being established. The
importance of economic security cannot be denied, but there is adanger of disturbing the balance between the free trade system if
there is excess emphasis laid on insourcing and government
intervention. Measures taken for economic security purposes must
therefore be implemented in compliance with WTO agreements
and other international economic treaties. The recommendations
issued in February 2022 by the Japanese government’s Panel ofExperts on Economic Security makes this point as well.

(3) It is also important, as the Japanese government’s draft Act for the
Promotion of Economic Security stipulates, to use anti-dumping
tariffs (AD), countervailing duties (CVD), safeguards, and othertrade relief measures permitted under the WTO to protect thesemiconductor and other strategically important industries from
unfair competitive advantages. Japan is extremely parsimonious in
imposing anti-dumping and countervailing duties compared to its
main trading partners, as WTO data on the cumulative number ofcases from its establishment in 1995 to June 2021 in the US (AD828, CVD 296), the EU (AD 538, CVD 91), and China (AD 292, CVD17) show. The Japanese government should work more closelywith the industries with aim of making better use of these traderelief measures.
(4) As the importance of improving supply chain resilience grows inline with the changing international environment, the Japanese
government should consider using trade policy against serious
human rights violations abroad on the basis of international
coordination, which enhances foreseeability for businesses.
⑥ The Potential for Soft Law(1) Japan should utilize the G7, G20, APEC, OECD, the Economic
Research Institute for ASEAN and East Asia (ERIA), and otherinternational economic forums to develop rules and form public
opinion. 2023 in particular, when the US and Japan chair APEC andthe G7 respectively, should be an auspicious opportunity for thispurpose.
(2) In order to promote a free and fair economic order, remedy marketdistorting measures, maintain and strengthen high-level andcomprehensive economic partnerships, and other elements of the
trade and investment agenda, the role of APEC as an “incubator ofideas” should be emphasized. Energy conservation and renewableenergy goals present one example where soft law fully functioned
as targets were agreed and implemented. For example, in 2011,
APEC set an energy conservation goal to reduce energy intensity
by 45% from 2005 levels by 2035. If the current trendline(progress is monitored by the Asia Pacific Energy Research Centre(APERC)) continues, the target will be reached in 2034. In 2014, it
set the target to double the proportion of renewable energy
sources in the energy mix and electricity output from 2010 by
2030. If the current trendline (also monitored by APERC)
continues, the target will be met. It is to be also noted as an
example of soft law having developed into hard law that the APEC
soft-law approach has evolved to become the Institution
Technology Agreement (ITA) in the WTO put into effect in 1997.
The potential for soft law in a variety of areas as a role for APEC
should be explored.
(3) As explained in E)(3), the US and the EU invited like-minded states
through their agreement on steel and aluminum to jointly consider
the methodology for calculating emissions. Since this could
Japan SPOTLIGHT • July / August 20229

become the de facto standard for the market in the future, Japan
should speak up actively in order to make fair and transparent
rules. Meanwhile, German Prime Minister Olaf Scholz, who ischairing the G7 this year, is aiming to include a “climate club” at
the June summit. The details are unclear, but his proposal when he
was finance minister appears to be aimed at determining a(minimum) carbon price and presenting common rules for carbon
border adjustment that can be considered WTO-compliant. In thiscontext, there is the possibility that work may go forward on
explicit carbon pricing, measurement methods for implicit carbon
pricing under regulation and other non-market measures (and theinternational comparative analysis of the two), emissions
measurement methods for industries, and other matters. This
could be the stage for an international cooperative approach incontrast to the CBAM as a measure imposed unilaterally by the EU.
It is desirable for Japan to be engaged here.
(4) The CPTPP has the Labour Council, which is now actively taking up
issues. For now, the talks are centered on the construction of theframework for cooperation, but the Council should be developed asa forum for the active discussion of labor laws that affect trade.
The CPTPP framework does not exclude activities such as setting
guidelines and targets for working conditions according toindustrial categories and economic conditions or enhancing thetransparency of the labor laws of member states in order to urge
their improvement, so there should be no limits to the discussions
there.
(5) It may be difficult to establish strong rules from the onset for the
key points of digital rules such as government access. A soft-law
approach may be useful here, judging from the experience of theOECD, which has been a pioneer on government access,discussing the principles for government access and theirapplication. The lack of clarity in the national regulation of thedigital sphere could reduce predictability and increase costs forbusinesses due to differences between national regulatory
regimes. This makes it important to enhance the transparency ofnational regulation and reduce differences. The expeditious softlaw approach that the OECD is taking can be useful in this respect.
⑦ Cross-Sectoral Rule-Based Perspective

This Committee looked beyond the international economic system
to use Japan’s involvement in disputes regarding its territory andcontinental shelf to conduct a cross-sectoral inspection to see if Japan
has been consistent in its rules-based approach and whether theapproach is effective in resolving disputes.
(1) The Japanese government proposes for the rule of law on theoceans the following: (i) states should make their claims based onlaw, (ii) states should not use force or threats to enforce theirclaims, and (iii) disputes must be settled peacefully. Internationallaw is the foundation of the international order. This is a principle
10 Japan SPOTLIGHT • July / August 2022

that must be maintained at all costs.
(2) In disputes over territories and the continental shelf, it is notenough for a government to set forth the legal justifications for its
claims. It must also appeal to public opinion, both at home andabroad. It is unlikely that Takeshima, the Senkaku Islands, or thecontinental shelf in the East China Sea will be the subject of aninternational trial in the foreseeable future, but Japan should urge
the relevant states to seek resolution based on international law
and to do its best to mobilize public opinion as part of its long-term
diplomatic efforts.
(3) For example, the Japanese government takes the position that
there exists no issue of territorial sovereignty to be resolved
concerning the Senkaku Islands since the Chinese claims have nolegal grounds. However, if the issue is brought to the International
Court of Justice (ICJ), it is likely that it will rule that there is adispute. It is necessary to take this into account and justify its
territorial title to the international community. It should also seek alegal resolution of the dispute around Takeshima based on the
distinction between territorial and historical issues.
(4) To be consistent with a position in favor of a rules-based approachto economic issues, it is also desirable to resolve territorial issues
based on law while enlisting public opinion at home and abroad. It
may be difficult to entrust some territorial issues to international
adjudication since they are entwined with the politics, history, andsocial issues of the contesting states, but as a practical mattermany territorial disputes have been resolved through adjudication.
(5) Japan is unique in having domestic legislation that restricts theapplication of domestic law on competing continental shelves andexclusive economic zones (EEZs) to within the median line.
However, the Japanese position is that it has a 200 nautical-mile
title in the Japan Sea and the East China Sea until the boundaries
are determined under the United Nations Convention on the Law of
the Sea (UNCLOS). It is necessary to raise awareness on this point
since the Japanese position does not appear to be well-recognizedamong experts in other countries.
(6) How Japan responds to Russia’s invasion of Ukraine could affectthe future state of affairs in the East China Sea (Taiwan, Senkaku
Islands). Japan must protect the rule of law in the international
community. It must be clear in protesting territorial change byforce and must not recognize such changes.

Japan Economic Foundation (JEF) initiated the Research Committee on theDevelopment of a Rules-Based International Economic System with prominent
Japanese experts in November 2021, and concluded its role by publishingrecommendations in May 2022.