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Japan-US Telecommunications Negotiations in A New Phase: States and Markets
Final Report by the Study Group on US Foreign Economic Policy Making Process –Dr. Toru NAKAKITA, Professor, Toyo University and Adjunct Research
Fellow, the Japan Institute of International Affairs (JIIA)
Dr. Hajime YAMADA , Professor, Toyo University
Dr. Yuko SUDA, Adjunct Professor, Toyo University

Introduction
For more than two decades, Japan and the United States have negotiated over trade in
telecommunications equipment and services.

Under the changing circumstances, however, Japan-US

telecommunications negotiations entered upon a new phase in the late 1990s.
telecommunications equipment is no longer on the table.

The issue ofInstead, the issue of telecommunications

services has become a major point of contention, further internationalizing domestic regulatory
politics.

Last but not least, the World Trade Organizations (WTO) Telecom Pact of 1997 provided

the parties with new opportunities and constraints, possibly altering the course of interactions amongthem.
In this paper, we examine the new phase of Japan-US telecommunications negotiations by analyzing
the cases of procurement and interconnection charges of Nippon Telegraph and Telephone (NTT).
Our argument is that the bilateral telecommunications talks between Japan and the United States are
now conducted within the purview of multilateral institutions, but are characterized by “bilateral
twists” to multilateralism.
1. NTT Procurement Negotiations
The negotiations on the procurement of the (then) NTT Public Corporation were the cornerstone ofJapan-US telecommunications talks.

The NTT procurement talks were derived from the Tokyo

Round negotiations (1973-1979) held under the auspices of the General Agreement on Tariffs andTrade (GATT).

The Tokyo Round addressed the issue of non-tariff barriers (NTBs) for the first timein the history of multilateral trade negotiations and hammered out a set of codes on NTBs, including acode on government procurement.
Along with other NTB codes, Japan committed to the government procurement code, but it exempted
public telecommunications equipment from the commitment.
negotiators.

This disappointed the US trade

Claiming that Japan had not offered sufficient amount, the United States eventually

requested that Japan add NTT Public Corporation to the list of government agencies to be covered by
the procurement code.

So began the first Japan-US telecommunications negotiations.
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The NTT procurement talks focused on procedures, rather than the amount, of NTT Public
Corporation’s procurement.

At that time, the state-owned NTT Public Corporation was the soleprovider of telecommunications services in Japan.

It also was a national research and development(R&D) institution dedicated to promote advances in Japan’s telecommunications technologies througha process of procurement based on “voluntary contracts” with manufacturers.

Such cooperation intechnology and management resulted in close relations between NTT Public Corporation and thecontracting equipment suppliers, which was dubbed “the NTT family”.

Yet the strong tie between

NTT Public Corporation and the suppliers was maintained at the expense of foreign as well as
domestic manufacturers that did not have contracts with NTT.

To open the telecommunicationequipment market in Japan, the bidding system of NTT Public Corporation had to be transparent.
After three years of pulling and hauling, the governments of Japan and the United States reached anagreement in December 1980.

The NTT Procurement Agreement provided that, in accordance with

the nondiscrimination principle of the government procurement code, NTT should ensure transparency
in procurement procedures and purchase equipment without regard to the national background of
manufacturers.

The agreement entered into force in 1981, and promoted foreign participation in NTT

Public Corporation’s bids for equipment procurement.

Over the years, NTT’s procurement

procedures became open and competitive.
2. Expiration of the NTT Procurement Agreement
NTT Public Corporation was privatized and reorganized into NTT Corporation in 1985, but the NTT
Procurement Agreement remained intact and in force.

The agreement was extended six times in total,

spanning the period before and after the privatization of NTT.

During that period of time, the amountof foreign products purchased by NTT increased dramatically in terms of value as well as ratio.

The

total amount of international procurement was 173 billion yen in FY 1996, which is a 40-fold increase
from the 4.4 billion yen in FY 1981.

The US government and industry complained less often andeven began to appreciate NTT’s international procurement activities.

It thus can be argued that the

NTT Procurement Agreement substantially improved foreign access to Japan’s telecommunications
equipment market.
The continued existence of the agreement was called into question in 1999, however, when thedecision was made to split the mammoth carrier into two regional companies, NTT East and NTT
West, and a long-distance services provider, NTT Communications, under a holding company.
Should the NTT Procurement Agreement be extended after the restructuring the NTT or should it beallowed to expire?

To find an answer to this question, the Japanese and US governments in May

1999 resumed negotiations to discuss the fate of the NTT Procurement Agreement.
At the meetings, the US government insisted that the NTT Procurement Agreement be extended tocover the restructured NTT companies.

The Japanese government, on the other hand, insisted that2the restructured NTT companies not be subject to inter-governmental agreements.

In spite of thedifferences in views, however, the negotiators managed to strike a deal in July 1999.

It was agreed

that the NTT procurement agreement would be laid to rest after a grace period of two years.

It wasalso agreed that, after the restructuring, the holding company, NTT East and NTT West would makeprocurement rules publicly available and continue efforts to purchase foreign products. Finally, it
was agreed that, during the grace period, issues concerning the procurement ofNTT companies

would be addressed at governmental meetings.
As agreed, the NTT Procurement Agreement expired in July 2001.

The expiration meant that thefirst agreement made at the telecommunications negotiations between Japan and the United States
became a thing of the past.
3. The WTO Basic Telecom Pact
While the Japan-US negotiations on telecommunications equipment evolved in connection with the
GATT, what few negotiations Japan and the United States had on telecommunications services used tobe confined within the bilateral framework.

Multilateral institutions simply did not exist. This was

the case with the talks over the international value-added network (VAN) in 1990 and the talk over theinternational leased lines in 1991.

The WTO Basic Telecommunications Talks then produced

multilateral agreements and changed the framework of reference in the bilateral negotiations.
The WTO Basic Telecommunications Talks is a follow-up of the Uruguay Round negotiations(1986-1994).

The Uruguay Round succeeded in crafting an agreement on value-added orcomputer-enhanced telecommunications services and included it into the General Agreement on Tradein Services (GATS).

However, basic telecommunications services such as telephones and facsimiles

were carried over to the post-Uruguay Round negotiations.
The WTO negotiations on basic telecommunications began in April 1994 and concluded in February
1997.

The purpose of the negotiations was to further the liberalization of telecommunications

services trade by improving market access.

In other words, the negotiations aimed at removing thebarriers against foreign entry to the telecommunications service market, including regulations that
restricted opportunities for new entrants.

To attain this purpose, the participating countries

exchanged offers and requests for commitments on the scope and conditions of liberalization.

The

commitments were then annexed to the Fourth Protocol of GATS as the Schedule of SpecificCommitments.
Another important achievement of the basic telecommunications talks was the Reference Paper, which
provides a framework of pro-competitive regulatory policies.
safeguard for the market access commitments.

The Reference Paper essentially was a

Because the commitments could be negated byanti-competitive activities of incumbents or inadequate access to the networks of major suppliers, it
3was necessary to establish a set of common regulatory principles that countries would follow topromote liberalization.

With regard to interconnection charges, the Reference Paper stipulates thatinterconnection be provided “at cost-oriented rates that are transparent, reasonably, having regard to
economic feasibility, and sufficiently unbundled”.

The Reference Paper itself is not legally binding,but it becomes so with additional commitments by the parties.
took the initiative in drafting the Reference Paper.

Interestingly enough, it was Japan that

The paper became a pride of the Japanesenegotiators in Geneva.
The WTO telecom deal had different implication for US officials, particularly for the United States
Trade Representative (USTR).

In effect, the WTO Basic Telecom Pact gave the USTR new clout topursue the policy objective of opening foreign telecommunications markets.

Furthermore, it gave the

USTR an additional mandate to fulfill under the Omnibus Trade and Competitiveness Act of 1988.
Section 1377 of the 1988 Act mandates that the USTR annually review foreign compliance with
telecommunications trade agreements between the United States and its trading partners and submit areport to Congress.

If a trading partner is found to have failed to implement an agreement, the USTR

may initiate procedures to retaliate against that country by invoking Section 301 of the Trade Act of1974.

Since the enforcement of the 1988 Act, Section 1377 reviews essentially have set the agenda

for Japan-US telecommunications negotiations.

In other words, the governments of Japan and theUnited States have discussed issues or “concerns” identified in the Section 1377 review report.
It should be noted that the USTR is required to review existing international agreements.

The USTR

began the Section 1377 review with bilateral agreements, including the NTT Procurement Agreements
and other agreements with Japan.

With the entry into force of the WTO Basic Telecom Pact, WTO

agreements were also included among the international agreements under the scrutiny of the USTR.
In this sense, the conclusion of the WTO Basic Telecom Pact expanded the range of agreements the
USTR is to review in pursuance to the US trade law.
However, the incorporation of the WTO Basic Telecom Pact into the Section 1377 review created atwisted situation from the viewpoint of multilateralism.

Under Section 1377, the USTR may evaluate

foreign compliance and decide to take retaliatory measures outside the multilateral framework of theWTO.

In other words, it is the USTR, not the WTO, that decides whether the trading partners of theUnited States have appropriately implemented multilateral agreements and punish them in case ofnoncompliance.

This unilateral nature of Section 1377 has given a twist to Japan-US

telecommunications talks.

It may even be argued that Section 1377, in effect, has provided the

USTR with the opportunity to use the multilateral agreements as a means of pursuing its policy
objectives through unilateral actions or bilateral negotiations.
4. NTT’s Interconnection Rates
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The issue of NTT’s interconnection charges came into the spotlight in the Section 1377 review and thesubsequent Japan-US telecommunications negotiations in 1998, when the WTO Basic Telecom Pact
went into force.

Interconnection charges are the fee telecommunications carriers pay for accessing to

the networks of a major supplier.

Since the 1985 reform, many New Common Carriers (NCC) haveentered the various segments of the telecommunications market --- including long distance andinternational services --- but the local telephone networks have still been dominated by NTT (NTTEast and NTT West after 1999).

As a result, NCCs have to link their networks to the networks of

NTT at a high cost in order to allow their users to communicate with each other and with the users ofNTT.
NCCs had long claimed that NTT charged them unreasonably high rates for interconnection.
they had to spend approximately 40% of their revenue on interconnection charges.

In fact,

US carriers

operating in Japan, such as AT&T and WorldCom, were no exception to this financial burden.
Accordingly, the US carriers urged the USTR to negotiate with the Japanese government for the
reduction of interconnection charges.

They often did so through industry associations, as is evident

from the comments of the Competitive Telecommunications Carriers Association (Comptel) and theUnited States Council for International Business (USCIB) submitted to the USTR at the time ofreviews.

The industry and the government of the United States shared the belief that lower

interconnection charges would facilitate foreign entry and promote the liberalization of the Japanese
telecommunications market.
As mentioned above, the Section 1377 review covered the issue of the interconnection charges of NTT
for the first time in 1998.

The Section 1377 review of 1998 maintained that the United States had“serious concerns “ with the pace of telecommunications liberalization in Japan and suggested thatJapan make efforts to ensure cost-oriented interconnection in accordance with the WTO obligations.
However, the review did not reveal any specific violation by Japan.
Then, in the review of 1999, the USTR claimed that “over-priced interconnection rates” effectively
prevented competition in Japan’s local telecommunications market.

The USTR urged Japan to takesteps to ensure interconnection at cost-based rates within three months, and threatened that it would“consider appropriate options, including initiation of WTO dispute resolution proceedings.”

The US

overture prompt4ed negotiations between the governments of Japan and the United States.

The

governments eventually agreed that NTT would make maximum efforts to cut interconnection charges
and the (then) Ministry of Posts and Telecommunications (MPT) would encourage NTT to do so.
The political tension over the NTT’s interconnection charges reached a peak in 2000.

The Section

1377 review of 2000 claimed that Japan failed to ensure cost-oriented interconnection in violation of
its WTO obligations, allowing NTT to charge the interconnection rates higher than those of any otherdeveloped countries.

On releasing the review report, the USTR indicated that, depending on the

results of the meetings with the Japanese, it might be necessary to take “additional action, including in5the WTO” to ensure Japan’s compliance with its WTO commitments.
review in 1999, the USTR set a deadline for the negotiations.

As was the case with theIt suggested that the decision onwhether to take “additional measures” would be made by the end of June, when the summit meetings
were scheduled to be held in Okinawa.

The negotiations in the next three months were intense, but

the two governments managed to reach an agreement before the deadline.

It was agreed that NTT

would reduce interconnection rates by 22.5% for a nominal period of three years and a substantial
period of two years.

It was also agreed that the governments would review the implementation

cost-oriented methodology in 2002.
The Japan-US negotiations on interconnection charges revolved around the USTR’s claim that Japan
had violated WTO agreements because it failed to ensure cost-oriented interconnection rates.

More

specifically, the USTR claimed that NTT’s interconnection charges were in violation of the Reference
Paper, as they had not been properly calculated by the long run incremental costing (LRIC) model.
The US government pressed Japan to adopt the LRIC model as early as 1996.

Partly as a response to

the US pressure, and partly out of the efforts to be a “policy agency”, the MPT decided to adopt the
LRIC model by 1998.

The governments of Japan and the United States confirmed the MPT’s

intention of adopting the LRIC model in a joint report on deregulation talks (“Enhanced Initiative on
Deregulation and Competition Policy”), which was issued on the occasion of the Japan-U.S. summit
meeting in May 1998.

Therefore, the issue at the interconnection rate talks was not the adoption of

the LRIC model per se, but the details of the model.

The USTR argued that the Japanese version of

the LRIC included non-traffic-sensitive costs and were against the principles of cost-orientation
provided by the Reference Paper.
However, the Reference Paper merely calls for cost-oriented methodologies of rate calculation anddoes not require the participating countries to adopt any specific calculation model.
was not intended to be specific or precise.

In fact, the paper

It is a commonly negotiated text that every participant

could agree, and its interpretation is wide and open.
Oddly, the Japanese government raised little question about the propriety of the US government tomonitor and evaluate Japan’s compliance with the WTO agreements.

The Japanese furiously

countered the US argument that Japan had violated the commitment to the Reference Paper, but they
somehow shied away from questioning the unilateral basis of the claim, not to mention accusing theUnited States of unilateralism.
Multilateral institutions are intertwined with the Japan-US telecommunications negotiations in anotherway.

The USTR has repeatedly referred to the possibility of filing the case to the WTO, but it nevercarried out this threat.

Indeed, given the rather weak grounds for the claim, it is not certain whether

Washington in actuality had the intention to file the case to the WTO.

Whether the USTR bluffed ornot, it seems that the US trade warriors have ingeniously incorporated the WTO telecom deal into their
6negotiations strategy.

This probably accounts for the observation that the negotiations overinterconnection charges were haunted by the traditional features of the Japan-US trade talks: theUnited States pressuring for changes and Japan making concessions in the end.

Unfortunately, it isdoubtful that the acquisition of new leverage on the part of the United States has made the negotiations
more productive.
Oddly enough, the Japanese government again gave little consideration to the possibility of redressing
the bilateral twists by bringing the case to the WTO, even though it was resentful of the U.S. pressure.
Rather than resorting to the WTO dispute settlement procedures, Japan sought to resolve the disputewithin the bilateral framework.

This negotiation strategy was advocated by top-level policy makers,

i.e., senior officials of the Liberal Democratic Party (LDP).

With the Okinawa summit meetings

approaching, the senior policy makers hastily made compromises to settle economic disputes with theUnited States for the sake of a “friendly relationship”.
A shortage of time available for consideration tends to result in poor decisions.

It turned out that thecommitment to adopt the LRIC model and the commitment to lower interconnection charges are notnecessarily compatible with each other.

Experts in telecommunications now point out that

calculation by the agreed-upon LRIC model will actually lead to an increase, not reduction, in the
charges.

Bound by its own words, the Japanese government has had to pay the price for rushing to asolution and accepting a flawed model that did not fit the reality.

The lesson here is not to decide inhaste and repent at leisure.
Conclusion
Japan-US telecommunications negotiations in the new phase can be viewed as a set of Chinese boxes.
The bilateral negotiations between Japan and the United States are held within a larger framework ofmultilateral institutions, and are often driven by actual or potential unilateral behavior by the US
government.

A narrow focus on bilateral negotiations will never lead to a comprehensive

understanding of the interconnection rate dispute.
Recent experiences suggest that the United States barely resists the temptation to use multilateral
instruments to pursue its own policy objectives unilaterally or bilaterally.

While diplomaticmaneuver is a fact of life in international political arena, such use of multilateral agreements by thecountry with the world’s largest telecommunications market could undermine the credibility of the
WTO regime on telecommunications services.

Now that there exist multilateral institutions thatgovern telecommunications services trade, it is no longer appropriate or possible to confine
telecommunications negotiations within the Japan-US bilateral framework.

It should be recognizedthat the WTO has the ultimate responsibility to monitor compliance of signatory countries with the
WTO agreements and that such monitoring does not fall in the jurisdiction of any specific national
governments.
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Japan, of course, is obliged to comply with its commitments in the WTO telecommunications deal.
At present, it is fair to say that Japan has not yet completely implemented all of the principles provided
in the Reference Paper.

The real problem with Japan’s telecommunications policy is not the level ofinterconnection charges but the lack of an independent regulatory agency.

The MPT was reorganized

into the Ministry of Public Management, Home Affairs, Posts and Telecommunications (MPHPT) in
2001 as a result of administrative reform, but the MPHPT still performs both regulatory and industrial
policy functions.

For better governance, the time has come for the MPHPT to vest the regulatory

authority in an independent agency.
Compliance with the WTO telecom package is important not only for stable Japan-US economic
relations but also for the international regime on telecommunications services that the WTO Basic
Telecommunications

Talks

brought

intoexistence.

With

the

world’ssecondlargesttelecommunications market, Japan can make a substantial contribution to the development of themultilateral telecommunications regime by proactively enforcing the internationally negotiated rules
and principles.

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