COVER STORY • White Paper on International Economy & Trade 2018 • 2

RRoundtable by Long Ke, Muneo Kurauchi, Prof. Kazuyuki Motohashi & Prof. Mariko Watanabe

oundtable Discussion on the
Chinese Economy —Opportunities & Challenges

By Japan SPOTLIGHT
METI’s White Paper on International Economy & Trade 2018 highlighted the Chinese economy as a key
to global economic development and Japanese economic prosperity against the background of thegrowing digital economy in which the Chinese digital industry is playing a pivotal role.
Japan SPOTLIGHT, in highlighting this White Paper 2018 in the cover story of the Sept./Oct. 2018 issue,
organized a roundtable discussion on the current state and future of the Chinese economy by
distinguished experts.
Prof. Kazuyuki Motohashi, professor at the University of Tokyo’s School of Engineering, is an expert on
econometrics who is working on an econometric analysis on Chinese innovation capacity. Muneo
Kurauchi, advisor to MUFG Bank, Ltd, has been chairman of the Policy Sub-Committee of the Committee
on China of Keidanren (Japan Business Federation) for the past five years. Since 1995 he has watcheddevelopments in China as a leading banker responsible for business and strategy there. Prof. Mariko
Watanabe, professor at the Faculty of Economics, Gakushuin University, has been an expert on the
Chinese economy since she started her research on it as a researcher at the Institute of Developing
Economies in Japan, focusing on institutional changes, business strategy and industrial organization. She
studied at the University of Hong Kong (1996-98) and Peking University (2006-2008), and has conducted
research on Chinese firms and industrial organizations to discover the institutional background of China’s
high economic growth. Long Ke, a senior fellow at the Tokyo Foundation for Policy Research, is one of our
editorial committee members and one of the most well-known Chinese economists, and has been working
on Chinese political economy for many years.
(Roundtable on Aug. 2, 2018)
ParticipantsLong Ke

Muneo Kurauchi

Chinese Macroeconomy in 2018
JS: First of all, we are all interested in the issue of theChinese economy in 2018. Mr. Ke, could you pleasepresent your view on it?
Ke: Yes. What is notable about the Chinese economy in 2018 is how it
underwent structural reform. The Chinese business model that took
advantage of cheap labor costs does not work anymore, as labor costs
16 Japan SPOTLIGHT • September / October 2018

Prof. Kazuyuki Motohashi

Prof. Mariko Watanabe

keeps rising. While China’s digital economy, which is the so-called new
economy, has been doing well, one of the key questions about the
Chinese economy is how it can restore the old economy suffering fromrising labor costs. But as for new economy, looking at theconsequences of the US ban on transactions by the government,
industry and military for national security reasons involving the
products of ZTE, this Chinese high-tech company has been forced tostop production because of this policy, and thus their technologicalbase is not well consolidated. Technology seems to be a bottleneck inhttps://www.jef.or.jp/journal/

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enhancing the value-added of the Chinese industrial structure. Anotherconcern is the gap in science capacity between China and developed
nations. It would be easier to catch up with the advanced technologies
in developed nations, but it will be difficult to fill in the science capacity
gap. In China, the ability to create new technology is limited due to thislack of science capacity and the weakness of incentives to developscience.
Looking at the Chinese macroeconomy in 2018, consumption
growth is not expected to be high but will not be too disappointing. A
key structural problem for Chinese consumption growth will be thewidening income inequality and the lack of a well-established social
security system, such as insurance for caregiving in a rapidly aging
society. This is because Chinese consumption growth is not explosive.
Business firms’ investment cannot be expected to be high, sincebusiness firms in particular in the old economy are suffering fromexcess capacity in production facilities. The Chinese government has
thus recently announced new business cycle countermeasures tostimulate the economy, consisting mainly of an active fiscal policy
oriented towards public infrastructure investment. However, their highspeed railways and highways are already well established, as are theirport and airport facilities. So there does not seem to be any significant
need for public infrastructures at this moment.
Another growth engine, trade, is to be seen as rather negative. Even
before the trade war between the United States and China started,
Chinese export growth had been negative in 2015 and 2016 due torising labor costs. President Donald Trump’s protectionist trade policy
initiative further accelerated this downtrend in trade. In the light of thisnegative prospect for trade, China announced an active fiscal policy to
avoid a possible recession in the second half of 2018 and 2019. From
all this, I have a rather pessimistic view on the Chinese economy in
2018.
Watanabe: The Chinese government clearly recognized the existenceof excess production capacity in the following five industrial sectors —steel, cement, aluminum, oil refinery and paper & pulp. In particular, inthe steel sector the government has been actively enforcing the
reduction of excess capacity as it announced and committed to at the
Global Forum on Steel Excess Capacity Ministerial meeting, aninternational surveillance mechanism for excess capacity. It is also
reported that growth of investment by state-owned enterprises shrankdrastically in 2018 and investment growth in total is lower than GDP asa whole. This has happened for the first time in the era of reform. It is
uncertain whether the supply side reform will definitely lead to an
economic slowdown, now that consumption has become a substantial
part of the macro economy. The new economy in urban areas is robust
and the expanded middle class will support the stable growth of
consumption more strongly than one or two decades ago. Thus, theChinese economy could grow steadily even without investment
growth.
JS: Is there any possibility of excess production

capacity rising in any other industrial sector?

Watanabe: Yes. The excess production capacity issue could rise in the
sectors where a policy framework exists to preserve firms in thebusiness, even though they are losing competitiveness and there is no
economic rationale for them to be kept in the market. This could cause
a serious impediment to the economy. Another issue is that it is often
pointed out today that the semiconductor industry in China has been
too greatly subsidized and is thus suffering from excess production
capacity. Insofar as the Chinese government invests into state-owned
enterprises in the semiconductor industry, that industry’s production
will be controlled by the government and there would not be excess
production, even though part of its production capacity could be
wasteful.
On my first point, I think whether fair competition based on a levelplaying field is to be implemented or not would be an importantcriterion to judge if this subsidizing can be justified. However, whether
there is excess capacity or not will also depend on whether China canbeat the international competition. As Chinese companies become
more competitive, it will be difficult to define those capacities as
excessive.
JS: What about Mr. Ke’s view on Chinese exports
today? In his view, the US-China trade war could
worsen the declining trend in Chinese exports and2019 will be a year when the Chinese economy falls
into serious difficulty. Do you all agree with him?
Kurauchi: Depending on the outcome of the trade war between China
and the US, it is certainly true that the Chinese economy could beseriously damaged. I guess Trump will maintain his aggressive policy
against China until the US mid-term elections in November to boost
the Republicans’ chances of winning. But after the elections, I think
there will be a change of policy, since neither China nor the US will
really want to continue the trade war seriously. I am not so pessimistic
about the prospects. On behalf of the Japanese business world, I hopefor stable economic policy management in China, as more than 30,000
Japanese business bases are active there now. The businessperformances of the headquarters in Japan will be seriously affectedby their arms in China. I believe that the Chinese government iscapable of managing the economy well for its stabilization and thus thetrade war will find a way for a soft landing.

Innovation in China
JS: China’s political stability must be a key toachieving such good governance of the economy.
The capacity for innovation is another important
issue in thinking about the long-term prospects for
the Chinese economy. Let’s talk about Chinese
technology.

Ke: It is surprising to see that 67% of Chinese exports ofsemiconductors in business-to-business (B2B) transactions are fromnon-Chinese affiliated companies in China, according to trade
statistics. In the light of this reality, I guess Chinese firms are nottechnologically competitive enough, though sales of semiconductors
in business-to-customer (B2C) transactions are enormous due to thefact that in China there are 800 million Internet users.
Japan SPOTLIGHT • September / October 201817

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JS: Prof. Watanabe, what do you think are the main

characteristics of Chinese innovation? In what sector
is innovation rising? What do you think are theadvantages and disadvantages of the Chinese
economic and industrial system in starting
innovation compared with other nations? How doyou think Chinese innovation will evolve in the
future?

Watanabe: Wherever you may be, today you will find that data is a key
asset for innovation. The firms with affluent data are overwhelminglycompetitive and can lead innovation. In this regard, Google andFacebook are the frontrunners but Alibaba and Tencent, both Chinesecompanies, are competing with them and have overwhelmed them insome particular fields. For example, Tencent is very successful inoperating Internet banking for consumers. It has controlled bad or
irrecoverable debt at surprisingly low levels and made profits due tothis efficiency. It computed the risks of borrowers more accurately
based on rich data from QQ or WeChat. Thus, it is so important tomanage data well to achieve innovation today, not only in China but
anywhere else.
Open networks of transaction, product and innovation are the key
organizational characteristics of China. This openness offers extensive
access to the new disruptive technology. The more open, the moreusers and suppliers are coming in, and this has accelerated new
encounters and innovation. This is a good environment for “disruptive
innovation” as defined by Clayton Christensen. This organizational
competence has accelerated innovation in Shenzhen and elsewhere.
The openness means the rapid spread of technology and homogenous
competition; the players are forced to innovate new benefits so as tosurvive.
In the future, China must get into a stage to implement another typeof innovation also mentioned by Christensen: “sustainable innovation”
where it is accumulating competencies and raising the level of its
technologies by itself. It has already appeared in China. For example,
Huawei, an information technology company which has already started
to design and produce semiconductor chips, has already reached thisstage. The quality of its chips is already next to the top runner in the
US.
In the domain of AI, Chinese researchers are literally thefrontrunners. Their papers outnumber Japanese researchers’ ones.
Meanwhile, open innovation-based industrial organization in China
survives and by taking advantage of it China will have good potential to
begin further innovations. Shenzhen and Hangzhou are the places
where you can find such open innovations.
China certainly seems to be rather behind Japan in the domain of
fine-tuning technology in which the Japanese excel. However, I think
China will catch up with Japan soon in this domain as well. There will
be very little the Japanese do that the Chinese will be unable to do. As
the Chinese population outnumbers the Japanese, theircompetitiveness is expanding in every domain.
JS: What do you think about science in China? Do you
agree with Mr. Ke?

18 Japan SPOTLIGHT • September / October 2018

Watanabe: It depends on the domain. AI, for example, I believe is thedomain of science where researchers and business are collaborating,and in this domain Chinese scientists have a strong presence in theworld. I am not quite sure, in this light, whether you can say that
Chinese science is not competent.
Kurauchi: They may be weak in science but they are very competent inturning the seeds of technology into business and winning money.
Chinese Internet facilities like Tencent or WeChat have achieved great
business success by using Big Data. Such Chinese companies are also
facing serious competition in the market, but this may enhance theircompetitiveness further.
Motohashi: I have a different view on Chinese science from Mr. Ke.
Chinese universities’ science research papers not only outnumber
Japanese ones but are also higher in quality, in that they outnumber
Japanese papers among the top 1% of the Highly Cited Papers
worldwide. The background of this outstanding academic performanceby Chinese scientists is, in my view, their internationalization at asignificant speed. In Chinese universities, many Chinese-speaking
American researchers are visiting their Chinese colleagues and talking
with them in Chinese. The Chinese government also encourages
Chinese academics educated overseas to mediate between Americanor European academics and Chinese academics. The Chinese
Education Ministry is also spending a large amount of its budget on
raising the academic level of science.
On technology, although 10 years ago many Chinese patentapplications were not necessarily well qualified, their scale of businessand human resources has been instrumental in raising the quality.
With the significant internationalization of business as well, theirperformance is outstanding and clearly Chinese technology is catching
up with Japanese and others. In sectors like telecommunications
equipment or electronics, their research costs are rather high and nonChinese firms’ subsidiaries in China are the main exporters of theseproducts to the overseas market, but today the percentage of those
non-Chinese exporters is decreasing. In contrast to this, in theautomobiles sector, this percentage is still high. Thus I see the Chinese
auto industry’s competitiveness as not so strong, and probably not sostrong either in sectors like materials and robots.
It is certainly true that Chinese Internet business companies like
Baidu, Alibaba and Tencent are showing outstanding performances. For
example, Google and Baidu are the only companies in the world with theLevel 4 technology for driverless cars which would enable a driverless
car to work perfectly in some specific places. You would need a map inorder to enable it. Baidu owns a map of the whole Chinese continent and
so Google cannot do the business of a driverless car in China. Such a
map is devised by data that is the product of engineering rather thanscience. However, the data can be used only in China. This is true ofother business transactions including finance for consumers.
JS: Prof. Motohashi, could you please elaborate on
the cultural and business background to theemergence of those creative digital technology
companies in China, such as Alibaba and Tencent,compared with Japan?

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Motohashi: One striking difference from Japan is that in China there
has been no credit card use for payments. Therefore, for e-commerce
there is no way of paying without using cash but Fintech. Anotherthing is that those digital platforms have created financial instruments
for the management of their clients’ savings. Their offered interest rate
was much higher than the market interest rate. So they have beensuccessful in attracting large sums of money. Another thing to havepushed this platform business is that they adopted a method to
identify individuals by just reading QR codes without using a specific
PC with high security. Now wherever you go, you can use a QR codeas your identity. The digital platform companies like Alibaba have beensuccessful in creating trust on a nationwide scale, having expanded
trust among relatives and family members in their traditional culture toa much wider scope of human relations through this easy way of
personal identification.
Another Chinese tradition that has helped promote the digitalplatform business is one that allows people to be generous about
experimentation. They do not mind so much about details in thebusiness. For example, a QR code is good enough for identifying
individuals and very few worry about the other means to ensure
security, which is significantly different from Japanese culture. I guess
those are the reasons why the digital platform business is prosperous
in China.
JS: Mr. Kurauchi, could you please tell us how ourJapanese companies can become involved in thisChinese digital business or in the digital market
overall?
Kurauchi: The key question on our bankers’ side would be how muchinformation must be protected. In the case of China, even in buying an
express train ticket, personal data would be revealed. Can we Japanese
accept such a disclosure of private information? I am afraid we cannot.
Another concern is that payment by Fintech is almost monopolized
by the two digital payment services, WeChat and Alipay, in China andso there are much fewer alternatives for payment than in Japan. I am
afraid this may prevent Chinese society from being an authentic
affluent society where people can enjoy many alternatives. I do notthink Japanese society would go in the same direction as Chinesesociety, though the latter may be more efficient.
On the other hand, Japanese banks are now studying a variety ofFintech payment and settlement frameworks in order to ride this global
trend.
Motohashi: IT and financial services are today interacting with eachother closely. Financial institutes employ many AI experts. Digitalfinancial services are also employing financial experts from the banks
and thus they are pursuing a mixed industry of IT and finance. This isa supply-side story.
On the demand side of this business, it is necessary to make a
distinction between business in Japan and business in China. In orderto do business in China, you would have to be a Chinese company byacquiring capital in a Chinese company. You would have to observe a
Chinese law prohibiting people from bringing out their acquired datafrom China. Meanwhile in Japan, Japanese banks are not adopting theservices provided by Alipay or WeChat.
Kurauchi: Payment and settlement are core and legacy businesses forJapanese banks. I think there must be a risk in leaving thosebusinesses with Chinese financial IT services. As such, there are
obstacles for Japanese banks in introducing a cashless financial
system like in China. However, we would need to transform ourfinancial system to catch up with the innovation in the digital market.
Ke: On the issue of driverless cars that Prof. Motohashi mentioned,
Baidu bought a map from the Chinese military forces that would be
crucial to national security. It is impossible for any non-Chinesecompany to get this map and they cannot get into the Chinese market
for driverless cars.
On the question of the business and cultural background of Japanbehind its lack of capacity to create a competitive digital platformbusiness model like those created by Alibaba and Tencent, I guess
there are three reasons for this. First, there are so many systemengineers in Japan who know about technology but have no businessmentality. Second, whenever Japanese try to do anything new, they
start thinking about rules first. However, this digital world is a new
economy and there have never been any rules in it. Whereas Alibaba
and Tencent propose possible rules while they are actually engaged in
the business, Japanese wait for rules to be adopted by thegovernment. Third, Japanese firms have a strong sense of businessterritory. So there is no single Japanese company owning the data of
80 million inhabitants out of the total Japanese population of 127
million people. Meanwhile, digital platform companies like Alibaba andTencent in China are creating only business models and not unique
technology. The technology is provided by other nations.
In China, they can introduce a driverless car, but they cannot fully
introduce electric cars. In 2017, 2.9 million cars were produced in
China and the percentage of electric cars to total auto production was
only 2-3%. Even those produced electric cars were for taxis or buses
rather than vehicles for individual use. Why won’t Chinese consumers
buy electric cars for their households? Because the batteries in thecars are weak in terms of durability and safety. This is how, I believe,
Chinese science capacity is truly limited.
If we define science as learning derived from a university’s
Department of Science or Department of Medical Science, such as
Japan SPOTLIGHT • September / October 201819

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studies in biochemistry or cells, there are very few Chinese students
studying these things in US universities among the 300,000 Chinese
studying in US universities in total. We have the largest number ofChinese students in business schools and the second largest incomputer science schools. This is because they believe that studying
science would not be helpful in earning money. So I think it would be amisunderstanding to exaggerate Chinese economic supremacy. They
clearly have a weakness in innovation capacity.
Electric cars produced by BYD, a Chinese automobile company,
cannot run longer than 100 kilometers unless they are equipped withso many batteries. With many batteries, their fuel consumption
efficiency would be significantly worsened. This means in the old
economy like the auto sector, Chinese innovation has not achieved agood performance. There is still a large technology gap between
Chinese automakers and German, Japanese and American ones. Theirlabor force with technology skills is not well developed yet.
In the steel sector, there is the largest generator producer, Dongfang
Electric, in China. Though their generators are of high quality, theirimportant materials, such as special steel, are all imported from Japan,
since all special steel made in China is not qualified. In shipbuilding, itscore part, engines are also all imported from overseas.
It is certainly true that in the new economy where no legacy isnecessary in promoting business, China has strength. This is because
it has 800 million data users controlled by the government with all of
their IDs. But this strength remains all inside the Chinese border.

Trade & Investment Issues
JS: Let’s move to the questions of trade andinvestment. Mr. Ke, could you please give us yourview on the prospects for the US-China trade war?

Ke: Trump has started a trade war with the US mid-term elections in
November 2018 in mind. I have heard from US sources that he wanted
to fight against China exhaustively, bearing in mind that President
Ronald Reagan brought about the collapse of the Soviet Union in the
1990s. He wants to leave a legacy in history like Reagan by causing
Chinese socialism, the last surviving such regime in the world, tocollapse.
On the other hand, in spite of the trade war, there have been no riots
attempting to attack American symbols in China such as Walmart,
Starbucks or GM so far, though in past international conflicts withJapan or European nations their supermarkets or coffee shops or
automobiles were destroyed by Chinese mobs. It can be understoodthat the Chinese government is preventing riots, being afraid of further
US reaction. In this light, I think China will seek a solution for a softlanding from this trade war. Deputy Chairman of the Chinese
Communist Party Wang Qishan will be a key person in achieving this.
He may propose to the US government a menu of Chinese economic
reforms including opening markets or reduction of excess production
facilities. A compromise between the two would depend on how Trumpvalues the menu. I think there would be a further negative impact upon
the Chinese economy at this stage if China sticks to aggressive
retaliation against the US protectionist policy. Of course, this trade war
could work in favor of the Chinese economy, if China starts reforming
20 Japan SPOTLIGHT • September / October 2018

seriously by taking advantage of this pressure from the US as apossible positive development. The Chinese economy could enjoy
higher growth with this, while structural economic reform in China has
been slowing down.
Kurauchi: After the US mid-term elections, if the Americans find thatthey have to buy more expensive goods from China due to higher
tariffs imposed by the US government and that their benefits from tax
cuts would be offset by paying for those higher tariffs, they could havea negative reaction to Trump’s protectionism. This might be anotherpossibility for a soft landing.

China-Japan Business Relations
JS: Mr. Kurauchi, could you give us your thoughts on

the possible opportunities for Japanese businesses
in China and also the challenges for them in the
Chinese market, including the issue of investment
climate? What market do you in particular believe hashigh potential in China?

Kurauchi: The Chinese economy is now as important as the US forJapanese business in terms of scale, growth potential and global
business strategy. In 2017, Japanese exports to China reached around
15 trillion yen, nearly equal to those to the US. Recently, as Chinese
tourists in Japan are increasing, e-commerce beyond borders is also
increasing to reflect the growth in demand for Japanese consumer
goods. The Chinese government is also working on import promotion
today and Japanese companies are trying to take advantage of thisinitiative.
On FDI, according to annual surveys by the Japan Bank forInternational Cooperation (JBIC), the top-ranked destination for FDI by
Japanese companies within the next two to three years had been India
since 2012, though it used to be China before that. However, China
became the top-ranked destination again according to their mostrecent survey published in November 2017. This means that Japanesecompanies have acknowledged again that the size and growth potentialof the Chinese market is still attractive and important in the mediumrun. A JETRO review also clarified that half of their surveyed Japanesecompanies were planning to expand their business in China in one or
two years by reinforcing sales functions or increasing production ofhigh-value added goods.
METI’s White Paper 2018 mentioned that the sales figure of
personal services-related companies from Japan to China was lower
than those of US or European nations. Western big names like
Starbucks, IKEA and ZARA have subsidiaries in China and they are
enjoying their business. In contrast, Japanese service industries’
presence is still limited in China. We understand that there exists
enough space for Japanese companies to go into expanding service/consumer-related business in China. Of course we know that it is notthat easy to win the competition there.
On the question of Chinese firms to invest in, healthcare, caregiving
and medical services were mentioned as a potentially high growth
sector on the occasion of Chinese Prime Minister Li Keqiang’s visit toJapan in May 2018. Those services are the core of the Chinese

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government’s policy to promote national health. Those services arealso ones where Japanese business can be fairly competitive against
US and European firms in terms of providing safety, soundness andtrust. This area could be a potential opportunity for Japanese business,
I believe.
As for the business climate, rising labor costs, tough competition,
non-transparency in implementation of laws, insufficient protection of
intellectual property rights, and regulations on foreign exchanges andremittances are expected to remain the issues as before. The Chinese
government is strengthening its regulations on the environment and it
will be a challenge for Japanese business. The Japanese Chamber ofCommerce in China in its annual white paper published in June 2018
made three requests to the Chinese government for economic
reforms. The first is to correct a commercial system that prevents faircompetition and achieve equality between Chinese and non-Chinesecompanies. The second is further elaboration of administrativereforms such as simplification and speeding up of government
procedures, achieving a common interpretation in implementing laws
and providing private businesses with sufficient time for adjustment tochanged rules and regulations. The third is further modification ofentry regulations for non-Chinese companies into the manufacturing
and service sectors in China.
I believe we should keep requesting the Chinese government andthey may continue to respond to our requests in our favor, such as
lowering social insurance fees and revising the list of non-Chinesecompanies for market entry under administrative surveillance.
JS: A prolonged trade war between the US and China

will seriously harm supply chain networks. Would
this be Japanese business people’s biggest
concern?

Kurauchi: Yes, it is one of our concerns. Stable management of theChinese economy will be most important for Japanese businesses towork in China. The US-China trade war could also affect Japaneseintermediary goods production through supply chains by way ofexports from China to the US. In this regard, we hope trade friction willfind a way for a soft landing soon.
JS: What do you think about the possibility ofcollaboration between Chinese firms and Japanesefirms in third countries, such as Central Asian
countries or African nations?

Kurauchi: While China promotes its “One Belt, One Road” initiative,
Japan is promoting a free and open Indo-Pacific strategy and there
must be some duplication between these two. We will need to pursue
collaboration with transparency, openness, economic efficiency andthe fiscal health of the third country as the basic principles ofcooperation. Based on these principles, two platforms were
established as well for collaboration on the occasion of Premier Li’s
visit to Japan in May. One is the committee for the promotion ofbusiness cooperation between Japan and China in third countries, tobe led by the governments with participation from the private sector,
and the other is the Japan-China Forum on Third Country Business

Cooperation, to be attended by a wide range of companies andrelevant ministers.
Japanese companies are interested in cooperation with Chinesecompanies in Africa, the Middle East and the Commonwealth of
Independent States (CIS). I believe that Japan’s participation in deals will
increase the transparency of the project and it must be welcomed by allconcerned parties. However, there are various types of risks which mightchallenge business viability. Another issue is finance. For collaboration,
we need to adjust and build the framework quickly as there is adifference in the lending policies between the JBIC and Chinese policy
banks, such as the China Development Bank and the Export-Import Bankof China. I hope we find solutions to these issues in theintergovernmental discussions with the private sector’s cooperation.

Final Remarks
Watanabe: The key message from Japan to the world must be
commitment to maintaining a free and fair world trade system. The
White Paper 2018 clearly declares this point. I think the Japanese
government needs to keep on communicating this message. The
government must carry out two tasks. First, it is important to takeadvantage of the existing rules and policy measures to achieve a free
and fair world trade system. For example, we should work on
elaborating a policy recommendation on the competitive neutrality
problem and subsidy issues under the WTO framework. Active
implementation and utilization of institutions under the current WTO/FTA framework is desirable. Particularly in East Asia, although theinvestment agreement clearly provides a scheme of intergovernmental
communication, it is very rare for the member governments to use thisclause for communication, even if any of the member governments’actions allegedly violate the interests of foreign investors, due todiplomatic reasons. For example, the Lotte group of South Korea wasforced to close its supermarket business in China in 2017. The incident
was allegedly related to the placement of the THAAD anti-missile
defense system by the South Korea government, as the group agreed
to sell its real estate for the site in South Korea. Consequently, it wasreported that the Chinese government ordered the closure of 112
supermarket stores in China due to inadequate fire protection facilities.
This issue should have been addressed by the existing investment
treaty among Japan, China and South Korea. In this treaty, private
business can require the government to look into possible cases
where competition between domestic firms and foreign subsidiaries in
the host country could be distorted by politics. But no action was
taken by either South Korea or Japan.
The other task is building new institutions for adapting to this newenvironment — new issues like data protection or the implementationof competition law in which we have not yet had any harmonized rules.
We will need to work on international harmonization of rules for thoseissues.
Motohashi: I agree with Prof. Watanabe. Japan should make clear its
stance of fully supporting the WTO system, and strongly oppose
Trump’s protectionist policies.
Written with the assistance of TapeRewrite Corporation.

Japan SPOTLIGHT • September / October 201821