59

Chairman CRANE. Thank you, Sandy.

Has that agreement of last year improved the ability of American
auto companies to get dealerships in Japan?

Mr. Levin. The answer is yes, not enough, but yes. There are 25
more. It is only part way toward the target. And I do not see—and
some of this is, in a sense, Japanese deregulation—it will not hay
pen unless there is more pressure from us. So it is a partial break-
through.

Chairman CRANE. Immediately after that agreement, Ambas-
sador Kantor indicated that the United States estimated that
private-sector plans would lead to a $9 billion increase in Amer-
ican-made parts in 3 years. In your estimation, are the U.S. auto
parts manufacturers beginning to realize that target that Mickey
referred to?

Mr. LevIN. Yes; Mr. Houghton and I and others have been in
regular contact, I think, with the industry, and the parts industry
feels that the agreement has helped to open the doors. There is
much more to be done. The deregulation is too small. As I men-
tioned, only one critical part has been deregulated; and you know
what that means: These critical parts are so listed and so con-
trolled that foreign suppliers—I used to carry around my universal
joint that I picked up at Joe’s Auto Parts on Main Street for
$11.46, and it costs 10 times that in Japan. So the answer is I
think there has been some progress, but there is going to be a re-
port, Mr. Chairman, to you and to other Members of this Sub-
committee and to the American people, I believe, within the first
2 weeks of April, a specific report on specific progress under this
agreement. And we will see. I think your conclusion and mine will
be that it opened the door that was very much shut for auto parts
producers, at least most of them, but there is a long way to go for
the door to be as open there as it is here.

Chairman CRANE. Thank you.

Mr. Rangel.

Mr. RANGEL. Well, let me thank you, Sandy, and I look forward
to working with you now and in the next session on sensitive is-
sues.

Mr. Levin. Thank you.

Chairman CRANE. Mr. Houghton.

Mr. HouGuHTon. Thank you, Mr. Chairman.

Sandy, it is good to see you, and of course you know you and I
have worked lockstep on many of these different issues. I think the
question that I keep asking myself is why are we not going faster?
When you take a look at the global deficit with Japan, it hovers
between $40 and $60 billion every single year, and it may get a lit-
tle bigger on auto parts, a little worse on flat glass. Something else
comes in here. We just do not seem to be able to make any head-
way. So on a scale of 1 to 10, 1 being jawboning, 10 being cut off
everything, what do you think we ought to do? Where in the middle
should we be in order to signal that we really are serious here? Be-
cause it is not just Japan, but it is Korea, and it is China, and it
is others who have to understand that we have a set of rules that
if they want to play in our market—which is our most precious
asset—they have to abide by, as we would in theirs. What do we

lo?


123

U.S.-JAPAN TRADE: THE BROADER CONTEXT

Dr, Ellen L. Frost
Senior Fellow, Institute for International Economics

Testimony Before the Subcommittee on Trade
Committee on Ways and Means
U.S. House of Representatives

March 28, 1996

Mr. Chairman, and members of the Subcommittee, my name is
Ellen Frost. Roughly half of my 24-year career in Washington has
been spent in the private sector, and half in the U.S. Government
Until last June I served as Counselor to U.S. Trade Representative
Mickey Kantor, a non-legal position roughly analogous to Director
of Policy Planning. I am currently a Senior Fellow at the
Institute for International Economics, headed by C. Fred Bergsten
The Institute is a private, non-profit, non-partisan research
institution devoted to the study of international economic policy.

I will not attempt to evaluate the specific conflicts that
dominate much of today’s hearing. Instead, I will try to sketch
the broader context of these disputes. My “bottom line” is that
changes in the pattern of global business dictate a shift in
priorities vis-a-vis Japan, and that new regional and global
stitutions give us ap opportunity to pursue those priorities mor
effectively. These are the areas the Subcommittee should focus on,
not bilateral statistics or overheated rhetoric

1, CHANGES IN THE PATTERN OF GLOBAL BUSINESS

A.___The Importance of Investment, Servic and_Intellectual
Property Protection

Changes in the way companies do business around the world have
specific implications for U.S. trade policy toward Japan.

The twin revolution in information and transportation
enable companies to engage in flexible manufacturing and customized
production for local markets. Mass production in a single location

is disappearing. In globally traded sectors, companies are
dispersing different phases of the industrial life cycle among
different countries: research and development, production of
components, system integration, final assembly, marketing, and
after-market sales and service. Dispersing these various phases

means moving a company’s knowledge around the world.

Taken together, these changes have at least three major

implications for U.S. trade policy, First, tr has _beco
inseparable from investment. More than 40% of U.S. exports go to
U.S. subsidiaries abroad. Second, merchandise t has

a Sm in services. U.S. service exports are now
equivalent to about 40% of merchandise exports, and they are
catching up rapidly. World trade in services are expanding at

roughly 12% a year, leading some observers to believe that trade in
services will exceed trade in goods within a decade or so. Third,
the diffusion of knowledge requires adequate prot!
intellectual property.

These trends suggest that the main focus of U.S. trade policy
vis-a-vis Japan should be on investment, services, and th
rotection of intellectu: ty. = Spe utes
should be pursued as_ui th wn out of
proportion.

In the area of investment in particular, Japan is an
“outlier." In the United States, foreign direct investment is
equivalent to over 7% of GNP, but in Japan that figure is less than
half of one percent. In 1994 U.S. investment in Japan amounted to
only $37 billion, while Japanese investment in the United States


25

This is unprecedented behavior and reflects, in my mind, an unac-
ceptable denial of legitimate American interests. It also has broad
ramifications that will go well beyond this particular film case.
Failure to come to positive resolution on a case documented as
thoroughly as this one sends a negative signal to every American
company trying to compete in Japan today, not to mention that
Japan would then be successful in unilaterally redefining our bilat-
eral trading relationship.

The simple fact is this case is not about film; this case is about
fairness and true market access. If a company like Kodak, whose
brand name is recognized throughout the world and associated
with quality and value, cannot compete in Japan on an equal foot-
ing, what American company can when faced with the same inhibi-
tors in the marketplace? The administration and Congress clearly
made it known during the Uruguay round that the WTO agree-
ments, with minor exceptions, do not address foreign measures
that encourage or tolerate private anticompetitive practices. Rath-
er, in such cases, 301 was to and is to remain a fully available tool.
Indeed, the continuing need for bilateral approaches in such cases
was broadly recognized by all countries in those GATT negotia-
tions.

While certain discrete actions of Japan’s Government could be
presented to the WTO panel for adjudication, its toleration of sys-
tematic anticompetitive activities that block market access is not
covered by WTO rules. Any retreat from the commitments made in
the Uruguay round to bilateral approaches would be disastrous and
not in keeping with the commitments made during those negotia-
tions. This Subcommittee should not consider retreat as a viable
option. I continue to hope that Prime Minister Hashimoto will de-
termine that Japan’s interests are truly best served through de-
regulation and enhancement of competition. During a recent press
briefing with President Clinton, he acknowledged exactly that.

That would be in the long-term best interests of both of our coun-
tries. After all, when you consider that both of these countries have
about 40 percent of the world’s GNP, failure to deal with the legiti-
mate trade concerns that we are facing will only frustrate both
economies and both nations in general and subsequently increase
tensions and leave consumers with fewer choices and higher prices
and Americans with fewer jobs.

Thank you.

[The prepared statement follows:]


154

Chairman CRANE. Thank you.
Dr. Hilty.

STATEMENT OF DONALD P. HILTY, SENIOR FELLOW,
ECONOMIC STRATEGY INSTITUTE

Mr. Hiuty. Thank you, Chairman Crane, I will briefly summarize
my written comments.

Air transport is a leading global industry. Some People comment
that telecommunications is the nerve system of the global economy.
If that is true, air transport is the bloodstream. It transports nutri-
ents to the global community, that is, documents, people and goods.
It is a very large industry in the United States. The direct output
of the airline industry is $54 billion. That is 1 percent of private
sector GDP. It employs 1 million people. It ranks just behind motor
vehicles and is ahead of the petroleum and textile industries in
slze.

U.S. carriers have become the lowest cost operators in the world,
mainly because of deregulation in the United States in 1978. The
average cost structure of U.S. airlines now is one-fourth the cost
of the Japanese airlines, one-half the cost of the Europeans and
two-thirds the cost of other Asian airlines. So it is not surprising
that U.S. airlines are the number one carrier in the world. They
have a 20-percent share of the international air traffic business;
this is double the share of second-ranked Britain, which in turn,
is double the share of third-ranked Japan.

So airlines have become one of the United States’ most competi-
tive international industries. The potential, therefore, is enormous.

In this context, the new round of aviation negotiations between
the United States and Japan are very important. As Mr. Murph’
mentioned, Asia-Pacific is the fastest-growing market in the world.
Forecasters in the industry expect United States-Japan traffic to
double in 15 years and the intra-Asian market to triple during that
time. One big problem is that Japan is one of the world’s great bot-
tlenecks. It is the number two economy in the world and the only
practical hub for air service between the United States and the rest
of Asia. Yet its major business center, Tokyo, has only one runway
for international traffic. The Japanese people have fewer inter-
national flights available per million people than any of the devel-
oped nations and fewer than most of the developing nations in
Asia. Recently, Japan has been giving very bureaucratic interpreta-
tion to the bilateral 1952 civil air agreement that the United States
has with Japan. So with inefficient carriers but a crucial hub loca-
tion, Japan is using regulations to protect its airlines by giving
them the immense leverage entailed in the control of this key hub.

To assist U.S. negotiators, the Economic Strategy Institute stud-
ied the economic impact on overall U.S. welfare of various potential
settlements. We studied three main scenarios. The open chies sce-
nario is by far the most favorable. I will not go through the num-
bers; our results are in my written comments, and I have given
copies of our complete report to your staff members. An extension
of the 1952 agreement is second best; that is, if all our carriers are
allowed to grow with the market, as it is now structured.

Some have suggested that we should trade the ability to fly be-
yond Japan for more flights between the United States and Japan.


149

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COMMITTEE ON WAYS AND MEANS:
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida

BILL THOMAS, California CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, Jr., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee
AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey GERALD D. KLEC2KA, Wisconsin
JIM NUSSLE, lowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas L.F. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts
MAC COLLINS, Georgia MICHAEL R. MCNULTY, New York

ROB PORTMAN, Ohio

JIMMY HAYES, Louisiana

GREG LAUGHLIN, Texas

PHILIP S, ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska
PHILLIP D. MoseLty, Chief of Staff
JANICE Mays, Minority Chief Counsel

SUBCOMMITTEE ON TRADE
PHILIP M. CRANE, Illinois, Chairman

BILL THOMAS, California CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida SAM M. GIBBONS, Florida

AMO HOUGHTON, New York ROBERT T. MATSUI, California
MEL HANCOCK, Missouri WILLIAM J. COYNE, Pennsylvania
DAVE CAMP, Michigan LF. PAYNE, Virginia

JIM RAMSTAD, Minnesota RICHARD E. NEAL, Massachusetts

DICK ZIMMER, New Jersey
JENNIFER DUNN, Washington

aD


119
Dr. Frost.

STATEMENT OF ELLEN L. FROST, SENIOR FELLOW, INSTITUTE
FOR INTERNATIONAL ECONOMICS

Ms. Frost. Thank you very much, Mr. Chairman.

Although I spent 10 years working for two multinational corpora-
tions that were seeking to expand business in Japan, I am not
going to comment specifically on the business conflicts that have
dominated this hearing. What I will try to do instead is to sketch
the broader context in which these disputes are unfolding. My bot-
tom line is twofold: First, changes in the global pattern of business
dictate a shift in priorities with respect to our trade policy toward
Japan; and, second, that new regional and global institutions give
us an opportunity to pursue those priorities more effectively. With
respect, I submit that these are the areas that the Subcommittee
should be focusing on, and not bilateral statistics or empty rhetoric.

My first category is changes in the pattern of global business.
The first change that I single out in my written testimony is the
importance of investment, services and intellectual property. This
stems directly from changes in the way companies are beginning to
do business around the world. The much touted word globalization
has very specific meaning, as I observed in the private sector. It
means first and foremost that thanks to the revolution in transpor-
tation, information and communication, companies can engage in
flexible manufacturing and customized production in local markets
around the world. It means that they can disperse different phases
of the industrial life cycle throughout different countries, from re-
search and development through production of components, system
integration, final assembly, marketing, and aftermarket sales and
services, And to do all of this, they have to move knowledge around
the world. In a nutshell, that is my sketch of globalization.

Taken together, these changes have three major implications for
U.S. trade policy. The first is that trade has become inseparable
from investment. The second is that merchandise trade has become
inseparable from trade in services. The third is that this diffusion
of knowledge requires the protection of intellectual property.

So to begin with, I would say that the main focus of U.S. trade
policy vis-a-vis Japan in the first instance ought to be investment,
services and the protection of intellectual property. Of these areas,
Japan is something of an outlier in investment as other witnesses
have noted. In the United States, foreign direct investment is on
the order of 7 percent of GDP, but in Japan, it is well under 1 per-
cent. This is certainly a problem that impedes the opening of the
market.

The key role of investment leads directly to another feature of
the changing global business environment, and that is the impor-
tance of deregulation and competition. As companies become active
in more and more countries, it matters more and more how they
are treated in those domestic markets. In other words, how they
are treated in domestic markets affects their international competi-
tive position around the world. This is why the scope of trade rules
has been expanding steadily to encompass practices hitherto con-
sidered domestic.


68

FIGURE 1
Most of the Tokuyakuten's Customers Already Carry Kodak

Portion of Tokuyakuten’s Customers with Kodak

16.0% Have Existing
Kodak Supplier

22.0% Have No
Existing

178% Carry Kodak or Have Existing Kodak Supplier

Portion of Tokuyakuten Sales Volume

Going 10 Customers With Kodak

4100 % have Existing
codak Supper

1274 Have No
Esta
‘Koash
Supplier

87.3% of Sales go to Tokuyakuten Customers Who Carry
Kodak or Have Existing Kodak Supplier

Source Survey of Tokuyakuten Customers

* Where the answer was unknown. we classified the customer as not having a Kodak
supplier. These numbers are therefore conservative.


152

Frequency measures for selected 1- and 2-digit tervice industries for 16 APEC economies

—

Source Cominuste tom the CATS tchedles.


719

The Cuxrent Situation

The high expectations of the October, 1994 Agreement are
reflected in a press statement issued by the International
Insurance Council at the time:

“This agreement offers meaningful possibilities for all
our members, and we expect it to increase their
business significantly. Those already active in Japan,
seven at present, can be confident that progress to
date will not be wiped out by radical change in the
Japanese regulatory approach to niche markets, and
those seeking expansion or new entry will benefit
greatly from a commitment to clearer administrative
processes and to rate and form flexibility that will
serve both insurance companies and their customers.
Effectively implemented, we would expect that the
agreement will result in foreign insurance providers
earning upwards of $1 billion additional in premium in
their Japanese operations over the next several years

Regretfully, despite vigorous, concerted efforts by che
Administration, those high expectations have not been realized
Beginning in mid-1995, the U.S. industry and USTR developed
serious concerns when it became evident that the MOF was
preparing draft ordinances to implement the newly-passed
Insvrance Business Law which failed to take into account core
provisions in the Agreement

In a recent letter to Congress, Ambassador Kantor noted
that, during USTR’s November 1995 consultations with the
Ministry, the MOF had "for the first time set out an
understanding of key provisions of the Agreement which we view to
be clearly at odds with the commitments Japan made under the
Agreement.”

The new law is scheduled to begin taking effect next week
If the MOF does not alter its plans, the U.S.-Japan Agreement
will be grossly violated.

There is strong evidence that the Congress and the
Administration justifiably share this view. Several bilateral
consultations have been held at the highest levels over the past
several months, but these concerns have not abated. Ambassador
Ira Shapiro stated in a February 28 speech before the American
Chamber of Commerce in Japan

Japan has failed to implement important provisions
of the insurance agreement concluded in October, 1994.
We have made it clear to the Japanese Government that
we view this issue as the most important implementation
problem facing our two governments.”

During a March 14 speech at the Foreign Correspondents’
in Tokyo, U.S. Ambassador Walter Mondale said:

“We are pressing Japan to honor their commitments under
the 1994 agreement... there's a real chance that Japan
will simply open the Third Sector and ignore what we
think are the clear terms of the insurance agreement

So that is very worrisome."

In a March 14 letter to Japanese Ambassador Saito, Chairman
Bill Archer of the House Ways and Means Committee wrote about the
Agreement:

"Only full and prompt compliance with all its terms
will remove the cloud of uncertainty now surrounding
implementation."


15

concerns about the Ministry of Finance’s apparent plans to implement the insurance agreement
reached between our countries in 1994 in a way that would violate the agreement, Our concerns
have only intensitied in recent weeks. as the Ministry of Finance hiss moved loser to the point
when it would have to isste ordinances to implement its new insurance law

The core of the dispute with Japan centers on the linkage between deregulation of Japan's
primary life and non-life insurance matkets and the entry of Japanese insurance firms inte the so
called “third seetor.” a segment of the market consisting of such products as personal aceidkent
and cancer insurance. Curreatly protected by overregulation and anti-competitive corporate
practices, the primary life and non-life sectors combined make up 95 percent of Japan's total
insurance market, the world’s second largest at over $380 billion in total premiums in HY 1994.

nsurers has

The Ministey of Finanee’s imposition of exces
prevented foreign firms from competing in the primary life and non-life sectors based on their
strengths of product innovation, pricing and marketing. As such, foreign firms were fared to
concentrate their efforts in building presence in the remaining 5 percent of Japan's market
consisting of third sector products. Foreign firms currently rely on the third sector market for
more than half of their total premium income generated in Japan

ive uniformity among

In hight of the dependence of foreiyn firms on the third sector market. the U.S, sought
during the negotiations uf the insurance agreement to prevent MOF from eng! n immediate,
discriminatory and selective deregulation of the thied sector. while retaining protections for
Japanese insurance firms in the primary life and nan-life sectors. We believed that MOF shoul
first focus its deregulatory efforts on the 95 pervent of the market dominated by large
insurers, rather than the 5 percent of thy market critical to forcign and small and mediwn-size
Japanese firms,

That 1s what the agreement establishes. H comains a elyar linkage henween deregulation
of the primary ile and non-life sectors and new or expanded activities by Japanese companies in
the third sector. Belore Japanese companies ~ including the new subsidiaries to be formed later
this year -- can undertake sipnificamt new or expanded activities in the thied sector. the
1 be substantial dere:

e must

ation in the primary sectors

Precisely put, the key provision of insurance agreement currently under dispute states
that, “with respect to new or expanded introduction of produets in the third sector. 1 iy
appropriate to avoid any radical change 1n the busin
change should depend on medium to small and foreign insurance providers first having sufficient
opportunities (i.c.. a reasonable period) to compete on equal terms in major product categories in
the Lite and non-life sector through the flexibility lo differentiate, on the busts of the risk iesured,
the rates. forms and distribution of products,

ss environment, recognizing that such

As far back as last spring. USTR began to hear growing concems trem US, firms about
the MOF-led retorm process. in particular with regard to the third sector pre isions. Contrary to
the agreement, MOF "s interest in deregulation appeared targeted solely on the third sector, where
iL is prepared to allow new non-life subsidiaries of life insurance companies to murket insurance.
We raised this issue repeatedly with MOF and at all levels of the Administration Yet despite
several months of discussions, Japan continues to adhere to a position inconsistent with this basic
linkage

jation in the

In fact, MOF appears determined to resist timely and rseaningful dereg
primary sectors. For example, a February 29 Kampo announcement sets larth a threshold of 30
billion yen insured risk for commercial fire insurance ahove whieh Firms will be allowed 10
innovate based on price. Unfortunately. this “market opening” on the part of MOF applies to
less than 2 percent of this important market sey ment

Our officials have put forward proposals for longer-term substantial Jerevulatinn of
Japan's insurance market. Unfortunately, MOF has rejected our proposal on Teng-term

slation, The U.S. position is pro-deregulation and pro-consumer. It would

substantial dereg



128

Chairman CRANE. Thank you, Dr. Frost.

Mr. Anderson, what are the time constraints for your opening re-
marks?

Mr. ANDERSON. My constraints?

Chairman CRANE. The reason I asked is, as you know, we have
two votes back to back coming up right now, and we might recess
if it is all right with you——

Mr. ANDERSON. Sure.

Chairman CRANE [continuing]. And come back here right after
these two votes.

The Subcommittee stands in recess.

[Recess.]

Chairman CRANE. Everyone back? All right.

Mr. Anderson.

STATEMENT OF STANTON D. ANDERSON, COUNSEL,
ELECTRONIC INDUSTRIES ASSOCIATION OF JAPAN

Mr, ANDERSON. Thank you, Mr. Chairman, for the opportunity to
testify here this afternoon on the United States-Japan semiconduc-
tor arrangement. I am here on behalf of the Electronic Industries
Association of Japan or EIAJ. ELAJ is a trade association made up
of approximately 600 members, representing both Japan’s semi-
conductor manufacturing industry as well as companies that use
semiconductor chips.

Mr. Chairman, the message I would like to convey here today is
that the mission of the semiconductor arrangement has been ac-
complished. Its objectives have been achieved in full. And because
the objectives have been achieved, we believe the arrangement
should expire as scheduled at the end of July. The arrangement
was intended to be temporary. It was not intended to be a perma-
nent, government-sponsored affirmative action program for the
U.S. semiconductor industry.

The arrangement had two basic objectives. The first was to in-
crease market access opportunities in Japan for foreign semi-
conducior companies. The second was to prevent dumping of semi-
conductors. Since there have been no allegations of dumping in
many years, I would like to focus on the market access side of the
arrangement.

The record of foreign success in the Japanese chip market over
the past decade is remarkable. Foreign market share has exceeded
the U.S. industry’s 20 percent expectation for the past 2 years. The
figures released earlier this month for the fourth quarter of 1995
show that foreign share in the Japanese market now is up to near-
ly 30 percent. Foreign sales have increased more than tenfold over
the past decade, from about $900 million in 1986 to more than $9.5
billion in 1995. Design-ins have gone up in a similar fashion, rising
nearly 900 percent between 1986 and 1995. Close business rela-
tionships have been forged between United States and Japanese
semiconductor companies.

As you know, there was some dispute as to how much of this dra-
matic change is attributable to market forces and how much is due
to the arrangement itself. U.S. observers tend to credit the ar-
rangement; frankly, we do not. We believe market forces have been


134

Chairman CRANE. Thank you, Mr. Anderson.
Mr. Murphy.

STATEMENT OF CYRIL D. MURPHY, VICE PRESIDENT,
INTERNATIONAL AFFAIRS, UNITED AIR LINES, INC.

Mr. Murpuy. Perfect timing; did you notice the light went out
just as he said the last word? [Laughter.]

T do not know if I can promise that kind of brevity.

Thank you, Chairman Crane, for allowing us to be here today.
I wanted to commend the Subcommittee first of all for expanding
its focus on United States-Japan trade relations this afternoon to
include international aviation issues. I would like to take a few
minutes to explain to you why it is critical for this Nation’s policy-
makers to examine aviation in the broader context of our overall
trade policies.

We believe that a review of the role of aviation in our inter-
national economy is both timely and necessary. There are a num-
ber of reasons for this. First, aviation is an integral part of the
travel and tourism sector of the economy. It has become too impor-
tant to ignore in determining overall trade policy. For example, the
Economic Strategy Institute, in its recent study entitled “Turbu-
lence over the Pacific,” reported that the aviation industry’s direct
and indirect impact had reached nearly 6 percent of U.S. GDP, sup-
porting 8.8 million jobs. Dr. Hilty here is one of the authors of that
report, and I am sure he will be expanding upon it.

But second, the aviation industry is itself becoming increasingly
globalized as air carriers set up international networks of hub-and-
spoke services similar to those which have proven so successful for
carriers in the United States since domestic deregulation. An iso-
lated system of bilateral agreements can no longer serve the needs
of this industry.

Third, the importance of aviation to the world economy is gaining
recognition in international trade organizations such as the Asia-
Pacific Economic Cooperation Forum, APEC. APEC represents the
first multilateral trade forum to include air transport as an inte-
pral part of its trade liberalization agenda. We recognize there are

oth opportunities and risks involved in dealing with aviation trade
issues in a multilateral forum such as APEC. The bilateral focus
of our aviation relationships, however, is now too constraining.
Only by placing aviation in a broader multilateral context along
with other trade issues can we expect to achieve the progress to-
ward our goal of becoming a truly global industry. Just as one can
today send one’s voice to any part of the world, send a fax to vir-
tually any destination or even find parcel services with global
scope, the air transport industry needs to develop the same seam-
less system of services integrated into a global network. Inter-
national multilateral trade forums such as APEC can provide the
opportunity that the straitjacket of our present bilateral system
cannot.

On the other hand, there is a risk that aviation issues may con-
tinue to be isolated, even in a broader trade negotiation. At the
APEC meeting last November in Osaka, the members reached an
agreement to liberalize trade, including aviation services, by 2010,
and in the interim, they adopted an immediate standstill on the en-


178

competition and openness. Japan's Ministry of Construction promptly staged a trade fair to
promote the use of foreign building materials, including flat glass, Also. Japan's Ministry of
Trade and Industry promptly began designing its survey questionnaire, Finally, there are signs
that the JFTC is becoming more active in the fight against anticompetitive practices. In January
of this year, the JFTC began studying the records of 18 large glazier on suspicion that prices
were being tixed in the industry, The U S. government should encourage this JFTC initiative

However. other implementation steps have been taken more slowly or not at all. Some areas
where actions have fallen short of commitments are indicated below.

+ The government of Japan has been slow in compiling the results of the first annual
survey, The survey was to have been completed in January, but was only finished in
March,

+ Japan’s Ministry of Construction has been slow to provide access to publicly financed

large-scale building projects, and only one foreign bid was accepted on any such project
since the agreement was signed

+ In the private construction market, the MOC has not yet clearly designated “contact
points” among local general contractors, glaziers, and architectural design firms, as it
committed to do in the agreement

+ The Government of Japan has yet to adopt measures to promote increased use of safety
and energy-saving glass. despite substantial technical suppon from both the U.S and
Japanese glass industries.

+ Plans are still in their infancy to build publicly funded “model projects” to showcase the
benefits of advanced glass products -- most of which are commonplace in the U.S. and
European markets, but are little known in Japan.

The status of implementation is to be reviewed by U.S. and Japanese government officials in a
meeting later this month in Tokyo, on April 22nd and 23rd

Private Sector Efforts

‘The U.S. and Japanese private sectors have worked together in an effort to make the flat glass
agreement a success. Even before agreement was reached, the U.S.-Japan Business Council and
its counterpart, the Japan-U $. Business Council. created a Joint Subgroup on Flat Glass. The
two Councils, which meet together annually, consist of top executives of some 150 leading US
and Japanese companies.

the members of the Flat Glass Subgroup include representatives of all companies involved in
implementing the agreement: Asahi Glass, Nippon Sheet Glass, and Central Glass on the
Japanese side; and Guardian, PPG Industries, Inc . and Monsanto Company for the U.S, side. .\
representative of Weyerhaeuser Japan also participates for the United States because experience
eained in the flat glass issue may be helpful in opening the wood products market, which is also
dominated by canel-like keiretsu relationships. The Subgroup is co-chaired for the Japanese sie
by Yasuhiko Furukawa, Executive Vice President of Asahi Glass Company. { serve as co-chair
for the US, side

The Flat Glass Subgroup has served as a useful forum for communication on implementation +t
the agreement. Since the results of the MIT! survey of the first year's implementation will soot
he made available, | expect that the Subgroup will become even more valuable in identifvi
helping to resolve problems that may emerge. The Subgroup has been especially active over the
past year in pressing the government of Japan to act promptly to strengthen regulations on the
use of insulating and safety glass. Japan is far behind North America and Europe in both areus



74

Chairman CRANE. Thank you very much.
Mr. Johnson.

STATEMENT OF OAKLEY JOHNSON, VICE PRESIDENT, COR-
PORATE AFFAIRS, AMERICAN INTERNATIONAL GROUP, INC.;
AND INTERNATIONAL INSURANCE COUNCIL

Mr. JOHNSON. Mr. Chairman, thank you for the opportunity to
testify today. In addition to representing American International
Group, it is my privilege also to appear with the support of the
International Insurance Council, whose insurance and reinsurance
member companies represent the overwhelming majority of U.S.
firms operating worldwide.

is been in Japan since the end of World War II. Through
mech hard work, perseverance and innovation, we have become the
largest foreign insurer in Japan. Due to a wide variety of formal
and. informal barriers, however, we and other U.S. insurers have
never been able to successfully penetrate major areas of the Japa-
nese market.

Historically, the insurance business in Japan has been tightly
regulated by the Ministry of Finance. The market is dominated by
a few giant domestic companies which maintain a powerful pres-
ence from keiretsu and/or cross-shareholding relationships, often to
the exclusion of newcomers. Japanese companies today control 97
percent of the market. All foreign firms combined have 3 5 percent.

Pursuant to the United States-Japan Framework for a New Eco-
nomic Partnership mentioned by Ambassador Shapiro, the respec-
tive governments began negotiating in 1993 to open Japan’s insur-
ance market on a priority basis. Negotiations lasted over 15
months. Throughout that period and up to the present, the U.S. in-
surance industry consulted closely and regularly with the USTR.
Let me state here for the record, Mr. Chairman, that our industry
has been entirely satisfied with the vigorous and persistent efforts
of the administration, and we fully support the comments made
earlier today by Ambassador Shapiro.

The agreement itself is unprecedented. It is the first bilateral in-
surance agreement in which such detailed obligations are under-
taken by two countries. By signing, the Ministry of Finance agreed
to enact laws and regulations in conformity with that agreement.

The most important and certainly the most controversial provi-
sion in the agreement deals with the linkage between the so-called
primary sectors—all major types of life and nonlife insurance—and
the so-called third sector: Niche products, such as personal acci-
dent, cancer, travel accident and hospitalization insurance.

The primary sectors, dominated by the large Japanese companies
represent over 95 percent of the market. The third sector, rep-
resented by the remaining less than 5 percent, is critical, however,
because it is the only area in which foreign firms have been able
to establish a meaningful presence.

Several years ago, the Japanese Ministry of Finance authorized
a handful of foreign companies to begin developing what today rep-
resents the third sector. After much hard work, top-quality service,
and considerable investment, this market has grown from nothing.
It was only recently that the jarge Japanese companies took notice
and sought to target the sector for entry.


32

Chairman CRANE, Thank you.
Mr. Deline.

STATEMENT OF KEN DELINE, FOUNDER, DELINE BOX AND
DISPLAY; ON BEHALF OF EASTMAN KODAK CO.

Mr. DELINE. Mr. Chairman, thank you for the opportunity to tes-
tify today on United States-Japan trade relations. My name is Ken
Deline; I am the founder of Deline Box and Display in Windsor,
Colorado. I would like to speak briefly in support of Eastman
Kodak Co.’s effort to gain access to the Japanese market. The suc-
cess of this case, and the continuing ability of the United States to
address market access barriers abroad, is important not just to the
large domestic manufacturers like Kodak but to their suppliers as
well.

Deline Box and Display produces packaging for Kodak products,
many of them destined for Japan. These products fall into three
broad categories: Medical x-ray film products, graphic art film
products and photographic paper products.

There are two primary points I would like to make today. The
first is that it is not only Kodak that has a stake in better access
to Japan’s photographic film and paper market. We and other sup-
pliers are affected as well.

Our facility in Colorado was originally dedicated 100 percent to
Eastman Kodak. Anything impacting Kodak’s sales volume posi-
tively or negatively translated directly into an impact on Deline’s
volume as well. Although we have diversified, Kodak still accounts
for about 50 percent of our business.

So, our fortunes rise and fall with Kodak’s. Sales by Kodak into
foreign markets translate into sales and jobs for us. So, you can un-
derstand the impact on us when, as market surveys conducted dur-
ing this case have documented, Kodak film is available and able to
compete on price in only 10 percent of the Japanese market. The
second point is that Kodak has been extremely proactive and ener-
getic in its efforts to crack into Japan—more so, in fact, than any
other customer Deline deals with.

This applies particularly to packaging design. It may surprise
you, but. Thave seen many instances in which Kodak’s product and
packaging design have been based not on European or even U.S.
market factors but on factors specific to Japan. There have been in-
stances when we have changed the packaging used domestically in
the United States just to achieve economies of scale, to cater to the
Japanese needs.

It is incredible to me that there have been allegations that
Kodak has been unwilling to do what is necessary to succeed in
Japan. From my perspective, I assure you those charges are not
true.

Mr. Chairman, we at Deline Box and Display appreciate your ef-
forts and those of this Subcommittee to facilitate a successful out-
come in this case. It is important that we continue to be able to
address issues like this bilaterally with Japan in a businesslike
manner. I hope the forceful but constructive message being sent
today will find its target and contribute to a solution that is in both
countries’ best interests.

Thank you, Mr. Chairman.


103

POSITION PAPER OF FUJI PHOTO FILM CO., LTD.
AND FUJI PHOTO FILM U.S.A., INC.

wae
s and Rationales for Mechanti to Address the Legal and
ctual Disputes in the Section 301 Investigation of

the Consumer Photographic Color Film and Color Negative
Paper Markets in Japan

November 15, 1995

Introduction

In the context of the current Section 301 investigation, the
statute places two formidable burdens on USTR. First, USTR must
determine whether Fujifilm is engaged in practices in ‘Japan that
violate the Japanese antimonopoly law or other norms of
competition policy. Absent a determination that Fujifilm has
engaged in anticompetitive practices, there can be no government
toleration of such practices and no action is justified under
Section 301.

Second, even assuming that it is determined that Fujifilm is
engaged in anticompetitive practices in Japan and the Government
of Japan has tolerated those practices, USTR still must
determine, as required by Section 301(d) (3) (D), whether Kodak‘s
exclusionary practices have denied "reciprocal opportunities" to
Fujifilm in the U.S. market. Specifically, as stated in the

House Report accompanying the enactment of this provision, the


39

Japan demonstrates that a significant gap remains, By contrast, there is only a small difference
between the 23 percent share Japanese firms have in the US. market and the 28 percent share
they have in world markets outside both the United States and Japan

EIAJ has argued that the importance of the domestic Japanese market is decreasing,
reducing the need for a bilateral agreement, They claim this is due to the shift offshore of much
Japanese consumer electronics manufacturing, along with the exponential growth in electronics
manufacturing in Pacific Rim countries outside of Japan. such as Malaysia, Thailand, Taiwan and
Singapore. However, this argument does not take into account the fact that although the domestic
Japanese market is decteasing in terms of its relative size with respect to overseas markets, it
remains the center of high value-added, custom design-ins. Most Japanese electronics producers
design products in Japan for manufacture at their facilities throughout Southeast Asia. In order
to make sales to these Japanese affiliates, it is necessary to win design-ins that are awarded in
Japan.

In addition, the majority of products being produced in other Asian nations by large
Japanese multinationals are mass volume, relatively less sophisticated products. Japan, despite
its decline in size relative to the rapidly expanding markets of Asia, is still the second largest
semiconductor market in the world and the center of highly advanced, high value-added
production.

Moreover, the movement of low foreign content consumer electronics production from
Japan offshore in part explains the why total foreign share in the Japanese market has increased
in recent years. even though no additional solid opportunities have been created from this
movement, For example, according to EVAJ data, foreign share in Japan increased from 22.2%
in 1993 to 23% in 1994, but this was largely due to the fact that consumer semiconductors
represented only 32% of the Japan market in 1994, compared to 37.6% in 1993. In fact,
according to E1AJ data, foreign share in all products outside of consumer goods actually declined
during this period.

Similarly, an analysis of one particular market segment -- Gate Arrays/Standard Cells/Full
Custom circuits -- demonstrates the need for continued progress in improving foreign market
access in Japan, Both the U.S. and Japan have strong, competitive companies producing these
chips, and the close relationship between suppliers and users required to design in these semicon-
ductors make them a good indicator of whether U.S. suppliers have become firmly entrenched
in the Japanese market. Yet in this category, foreign suppliers’ share increased from 8.4% in
1990 to 17.5% in 1993, and actually declined to 17.0% in 1994 -- according to a Nomura
Research Institute study sponsored by EIAJ. This is far below the share that U.S. suppliers are
capable of, based on their demonstrated competitiveness in world markets

Continuation of an arrangement between the United States and Japanese governments is
needed to maintain a framework for cooperation which will allow further market opening to take
place. The existing framework has allowed both the two governments and the two industries to
prevent a return to the litigiousness and friction that once characterized this sector, while
facilitating market opening progress.

The way to continue building on the results that SIA and EIAJ have worked so hard to
achieve over the last few years is to renew the Semiconductor Agreement prior to its expiration
in July 1996, thereby avoiding a return of bilateral friction in the semiconductor sector and allow
‘work to continue toward narrowing the gap between competitive outcomes in the world outside
Japan and those which take place within the Japanese market. In short, the Japanese market must
become fully contestable to all competitive producers regardless of nationality.

‘The Threat of Renewed Dumping

During the mid-1980s, Japanese dumping of semiconductor products in foreign markets
drove nine of eleven American makers of commodity memory chips (DRAMS) out of the DRAM
business (and one company -- Mostek -- out of business altogether). This dumping also had a
severe impact on the financial health of U.S, makers of other memory chips (EPROMs). Trade
in semiconductor products became a source of tremendous friction between the United States and
Japan. To deter renewed dumping of semiconductors, Japanese firms are required under the
current Agreement to collect and maintain certain cost and price data that would be necessary (0


164

Above all else, the situation calls for a significant change in mindset and
priorities. The United States should be aggressive about seeking free trade in
airline services, even if that means ruffling the feathers of trading partners

The Economic Strategy Institute therefore recommends the following strategy for
US. negotiators:

Recommendation 1: Insist on open skies for both cargo and
passenger carriers. A transitional arrangement like those with
Canada and Germany should be possible.

As noted earlier, U.S. carriers now enjoy a strong, comparative advantage in
airline services as a result of having a large domestic airline-services market and
having faced the competitive pressures created by airline deregulation.’ Two
other sectors where the United States enjoys a substantial comparative
advantage ~ agriculture and intellectual property — have been made priorities of
the U.S. government in international trade negotiations. It was sensible to do so.
Similarly, it is also sensible to make open skies for the U.S. airline industry a top
priority in US. trade negotiations. If necessary, the United States can make
transitional arrangements, as it did in the case of Canada and Germany, but
there should be an agreement on open skies by a time certain.

Recommendation 2: At a minimum, insist that the access and
expansion of third, fourth, and fifth freedom rights for both
cargo and passenger operations be guaranteed as set forth in
the 1952 Agreement and that additional frequencies,
gateways, and code-share opportunities be added for both
1952 and MOU Carriers, including All Nippon Airways and
Nippon Cargo Airlines.

The United States must make it clear that current rights under the 1952
Agreement are not subject to negotiation. It is important that an agenda be
established prior to any negotiations, making clear what is to be discussed and
what is off the table. At the same time, it is entirely understandable that the
MOU Carriers are anxious to play a larger role in the market and it is imperative
that they do so. The United States cannot fully capitalize on its competitiveness
in aviation without obtaining greater access for its airlines. Trading beyond
rights to gain increased access for MOU Carriers is not in the interest of the
United States, but there is no reason why additional access for MOU Carriers
cannot be negotiated,

There is no good, economic rationale for the United States to agree with Japan's
MOT and accept the position that the only way to add new services is to trade
beyond-rights. When the United States seeks market access for semiconductors
or auto parts in Japan, it does not do so by offering to give away its market
access in grain, Why shouldn’t the United States act in aviation precisely as it
does in other areas and demand open markets without some quid pro quo?

Recommendation 3: U.S. officials should make it clear that
Japan’s sixth freedom operations to the United States will be
restricted if the Japanese MOT attempts to restrict the fifth
freedom rights of U.S. carriers.

" See also Clyde V. Prestowitz, Ir, Scott C. Gibson, Paul Willen, and Saul Goldstein, The Future of
the Airline industry (Washington, D.C. Economic Strategy Institute, 1992).


64

STATEMENT OF JOHN PATRICK
GENERAL COUNSEL
FUJI PHOTO FILM, INC.

Mr Chairman and Members of the Subcommittee

My name 1s John Patrick and { am General Counsel and Secretary 10 Fuji Photo Film, Inc ,
the Greenwood, South Carolina manufacturing subsidiary of the Japanese photographic materials
company Fuji Photo Co., Ltd. 1 am joined today by Paul Hudak from our sales and marketing
headquarters in Elmsford, New York, and by one of our attorneys, Jim Durling, from the law firm
of Willkie Farr & Gallagher

On behalf of all of us, | want to thank you for the opportunity to appear before this
subcommittee te discuss L$ -Japan trade relations as they affect the photographic materials
industry

Let me beyin by saving that one reason we are here today is 10 discuss a dispuite berween
evo companies, One of those companies has 70% of its home market, controls and excludes
competitors trom its distribution nenwork. and pays premiums to retailers not to do business with
its competitors. 1am not talkiny about Fujifilm in Japan 1am talking about the Eastman Kodak
Company in the US

This case is not about an American company trying 10 level the play
Japanese company. I's about one company -- K
gain a competitive edge ever another company -- Fujifilm

field with a
to use the LS Government to

Fujifilm got its start in the LS. in 1958 with a haisen office of only une person Fusitilm’s
sponsorship of the 1984 Los Angeles Olympics provided a significant boost to our US. presence
By the early 1990s, our US. sales exceeded $1 billion annually and personnel increased to nearly
2000 employees

ce then our operations have grown rapidly with the establishment of Fuji Trucolor,
Inc our US photofinishing operation, and the investment of hundreds of millions of dollars in
‘our presensitized printing piate, videotape, film packaging, photographic paper, and Quicksnap
ayle use camera plants in Greenwood. South Carolina

Indeed. in the last 10 years Fujifitm's total US. investmer.s were more than $1.5 billion.
Meanwhile, we have increased our US. personnel to 5,000 employees; our US. sales have grown
te now exceed $f § billion per year, and our exports out of the United States this year will exceed
$100 million By 1997, our facilis in Greenwood alone will employ more than |,200 workers
and total investntents there will exceed $700 millien. Already. our Greenwood facilities
manufacture videotapes for export 10 Japan and Quicksnap cameras to Europe. Overall. we
export to more than 40 countries feom our Greenwood facilities. We are an American company
vith American workers making American products

Despite this enornious commitment in the United States, our share of the US
consumer photographic film market continues to hover around 0 percent Meanwhile,
excluding the US. and Japanese markets, we have about one third of the world matket
Indeed. rivht here in North America. Fupfiim's share of the Canadian market 1s 35 percent

We were therefore amazed when Kedak -- complaining of its 10 percent share of
the Japanese market - filed a Section 301 petition with USTR claiming that Fujfilin, with
the assistance of the Japanese Government. has engazed in anticompetitive activities that
restrict Kodak's access to Fapanese markets

Kodak's claims are groundless We have spent the last eight months disproving
Kodak's case with thousands of pages of rebuttal and we are absolutely confident that the
facts are on our side

With this case we think Kodak has truly crossed the line Kodak now seeks 10 use
xyovernment intervention ay a substizute for hard-fousht competition to increase its sales in


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35

STATEMENT OF THOMAS W. ARMSTRONG
PRESIDENT, SEMICONDUCTOR INDUSTRY ASSOCIATION

HEARING ON U.S.-JAPAN TRADE RELATIONS,
BEFORE THE SUBCOMMITTEE ON TRADE
COMMITTFE ON WAYS AND MEANS

MARCH 28, 1996

1 appreciate this opportunity to appear before the Subcommittee on Frade of the
Committee on Ways and Means to present the views of the Semiconductor Industry Association
USIA’) on US-Japan trade relations

The central issue for the SIA in terms of trade with Japan is renewal of the 1991 US.-
Japan Semiconductor Trade Agreement, which is scheduled to expire this July 31, As 1 will
explain in greater detail below, SIA believes that the Agreement has been exiracrdinarity
successful in promoting cooperation between the U.S. and Japanese industries, has increased
foreign market access in Japan. and has reduced trade frictions in this sector. Therefore. SIA
strongly believes it is in the best interests of both the United States and Japan, as well as both
U.S. and Japanese industry, to cnisure that continued progress is made through a new government-
to-government agreement with Japan.

Before going into greater detail on the Agreement. | would like to take a minute to give
the Subcommittee a sense of the dynamic and growing U.S. semiconductor industry

‘The U.S. Semiconductor Industry

‘Semiconductors are an increasingly pervasive aspect of everyday fife, enabling the creation
of the information superhighway and the functioning of everything from automobiles to advanced
medical equipment. Semiconductors are afso the linchpin underlying this nation's advanced
military weapons systems. A growing proportion of the value of these systems is dependent upon
electronics products -- up to 40 percent in some cases, The current design of the F-16 Fighter.
for example, includes 17,000 electronics components. ‘They are also intrinsically important in
radars, weapons guidance and control systems.

U.S. semiconductor makers employ 240,000 people nationwide. Their products are the
enabling technology behind the nearly $400 billion U.S. electronics industry. which provides
employment for 2.5 million Americans.

The U.S, semiconductor industry is currently the world market share leader, with 1995
world sales reaching $59 billion, representing almost 41 percent of the $144 billion world market.
Moreover, the world semiconductor market is expected to double by the year 2000, with projected
sales of over $300 billion

U.S. semiconductor producers are highly committed to maintaining their lead in both
semiconductor manufacturing and technology. The U.S. semiconductor industry devotes on
average 20 percent of its revenues to capital spending and another II percent to research and
development -- among the highest of any U.S. industry

This commitment to product quality and innovation has paid off. U.S. semiconductor
manufacturers remain on the cutting edge of technological development, and are often the first
to bring to market advanced new products

While investing heavily in the industry’s future competitiveness and technological
capabilities. SLA members also have always actively sought to secure forcign market access for
US. products. Because the semiconductor industry is so global in nature -- roughly half of the
US. industry's revenues are derived from overseas sales - SLA has been dedicated since its
inception to promoting free trade and opening world markets.

For example. the U.S. industry has been in the forefront of efforts to eliminate tariffs on
semiconductors and related products worldwide. At SIA’s urging, both the United States and
Japan eliminated their semiconductor tariffs in the mid-1980s. During the Uruguay Round, the


67

Until December 1995, Kodak had a VIP rebate program that ensured retaulers a four
percent rebate even if they didn't reach a target quantity of sales~as tong as they agreed not to
carry Fuitt

Finally, since termination of the consent decrees, which prohibited Kodak from vertical
integration into photofinishing, Kodak has bought numerous photofinishing labs, thus capturing
for itself a significant portion of that market. Ironically, when Kodak has made these acquisitions,
all of which have resulted in significant job losses, Fujifilm has been the one to pick up the pieces
and provide jobs to those people Kodak has fired

AAs you can see, this case is fact-intensive, and very complex. Although we believe the
facts demonstrate Kodak's case 1s just wrong, Kodak continues to dispute these facts This 1s in
essence an antitrust case, which would take years to resolve in the U.S courts Yet there is
‘enormous pressure here 10 decide in Kodak's favor with litle or no fact-finding

These factual disputes need to be sorted out - carefully and objectively. To that end, we
have suggested alternative neutral fact-finding mechanisms to USTR. These melude use of a
special panel of experts, appointing a U.S. administrative law judge, as well as multilateral
mechanisms USTR 1s currently considering a mechanism under the auspices of the WTO.
Unsurprisingly, however, Kodak objects to this approach. It appears that Kodak 1s the only party
10 the dispute that maintains such a position In Kodak's perfect world. USTR would simply take
Kodak's facts at face value and insist that Japan negotiate But, as our submissions prove, itis not
yet established that there is any problem to negotiate

What is the bottom line in this case” If you cut through all the rhetoric and the groundless
claims and the threats, i's very simple. Fupfilm’s biggest competitor in Japan and the US. 1s
irying to use the US Government to increase its market share in both countries.

If Fuji's conduct in Japan were the real issue here, then Kodak would have filed a case
with the Japan Fair Trade Commission. if for no other reason than to prove its complaint that the
JFTC would not do anything, Kodak did not file a claim because Kodak knows that the JFTC
watches this sector closely, and that the facts are not on its side

{ want to close by emphasizing that all we want in this case is an outcome based on the
facis Ifthe facts control, they will prove that the Japanese film market is open, and that Fujifilm
is fair competitor

This is not a fight we sought and we don't enjoy it, Fujifilm makes the finest photographic
products in the world We are ready to get back to the business of competing with Kodak,
company-to-company. It is time to stop the fiery rhetoric, get the facts, settle the issues, and
return to the marketplace that has made Fujifilm and Kodak great companies and competitors

We are looking forward to that day

This completes my statement. 1am happy to answer any questions you may have


104

foreign practice being examined must be compared to existing U.S.
practice. Thus, complex factual investigations of the practices
in both markets must be examined to provide a basis to determine
whether dny action under Section 301 is justified.

Before reaching these factual issues, however, USTR must
determine what legal standards should be applied in thie
investigation. Kodak has not addressed satisfactorily the
threshold issue of market power and would likely have its
complaint summarily dismissed in a U.S. court or administrative
agency. Since non-price vertical restraints such as alleged by
Kodak to exist in Japan are in fact procompetitive unless
exercised by a company with market power, USTR must decide what
standard should be applied to determine the existence or absence
of market power. If Kodak has no market power in the U.S, market
as it has argued successfully in U.S. courts, then Kodak is
arguably legally estopped from asserting a different definition
of market power with respect to Fujifilm in Japan. USTR must.
determine whether it is appropriate under Section 301 to impose a
different or more exacting standard on foreign companies than is
imposed on U.S. companies under U.S. antitrust law.

These issues, and others, need to be thoroughly analyzed,
briefed, and decided before beginning the factual investigations.
These threshold questions significantly affect the scope of the
factual investigation that will be necessary. After considering
these threshold issues, we believe a neutral fact finder would

deem many of the factual allegations raised by Kodak can be


167

Mr. RaMstTabD. Just a followup question: What would be the effect
of losing these rights for passengers to Asia or for U.S. exporters
who rely on the Asian market and for U.S. carriers as well?

Mr. Murpny. That is a very good question, because I think peo-
ple tend to lose sight of the fact that when we talk about these
things, we talk about them in terms of carrier rights. But a beyond
right for a United Airlines is also a beyond right for the city from
which we operate. And if we lose access beyond Japan to the rest
of Asia, so do the cities from which we operate. So we had Booz,
Allen & Hamilton last fall do an analysis of what it would cost the
U.S. economy over the next 20 years if we were to lose beyond
rights. The result was a $100 billion loss for the U.S. economy,
most of which would transfer to the Japanese economy.

Mr. RamsTaD. Just a final question, Mr. Murphy. In terms of the
almost $5 billion trade surplus that air transportation currently
generates with Japan, how deleterious would it be on that surplus?

Mr. Murpuy. We also looked at that issue. In 20 years, it would
virtually eliminate that surplus. And this is, I think, the second-
largest surplus area that we have in our trade with Japan.

Mr. RamstaD. It is indeed. Thank you very much. That is very
helpful, Mr. Murphy.

ank you, Mr. Chairman. I yield back.

Chairman CRANE. Let me again apologize to all of the panelists
for the interruptions and the delays. This has been a long and try-
ing day I am sure for you folks, too. And we appreciate your input
profoundly, and all of your written statements will be made a part
of the permanent record.

With that, the Subcommittee stands adjourned.

[Whereupon, at 6:48 p.m., the hearing was adjourned.]

[Submissions for the record follow:]


126

thus to enhance the stability of the region. It is probably
healthy for both countries to stop loading so much onto the
bilateral relationship alone

WrO_D. 2 Settlem rocedur:

Another change in the institutional environment is the
enormous improvement in dispute settlement procedures in the World
Trade Organization. with the active encouragement of the Congress,
U.S. negotiators fought for and won strong and disciplined language
on dispute settlement in the Uruguay Round. This was an important
victory. Because its interests are global, the United States
historically brings more complaints against other countries than
they do against the United States. The new procedures will prevent
Japan from stonewalling a U.S. complaint

As my colleague Jeffrey J. Schott testified before this
Subcommittee on March 13, the new WTO dispute settlement mechanism
has handled about 30 requests for consultations. The United States
has directly challenged foreign practices in eight cases and has
joined plaintiffs in other disputes as an interested third party.
Three cases have been brought concerning U.S. practices.

Some Japanese have recently claimed that the existence of
these new procedures means that the United States and Japan have
outgrown the era of bilateral trade negotiations. Such statements
reflect misunderstanding of the way dispute settlement works. The
WIO process encourages bilateral resolution of disputes and
provides a positive framework within which bilateral discussions
can be pursued

JIL, SUBSTANCE AND STYLE IN U,S.-JAPAN TRADE RELATIONS

A. "Damned Lies and Statistics"

Whenever the Commerce Department releases U.S. trade
statistics, both the Japanese government and the U.S. Executive
Branch scramble to prove that the bilateral imbalance is improving.
Much of this showmanship is aimed at the Congress

The truth is that bilateral trade statistics are being blow!

way out of proportion. In terms of changes in global business
patterns, they are becoming irrelevant. They disguise rather than
illuminate the trends in global competition that I have just

described In purely economic terms, they have always been
irrelevant. What counts is a country's global current account
position, which includes returns on investment. From this

perspective, the news is good: Japan current account surplus has
fallen from 3.2% of GDP in 1992 to 2.2% in the third quarter of
1995

Another weakness of bilateral trade statistics is that they
often omit trade in services. Last year, the U.S. ran a surplus in
services that offset more than a third of our deficit in goods.

Emphasizing bilateral trade balances reinforces the wrong-
headed idea that trade policy determines the size of the trade
balance, which is not the case. Trade policy has a lot to do with
the distribution of trade and the composition of jobs, but trade
balances are primarily determined by macroeconomic policy, and
specifically by the size of the gap between what a country saves
and what it spends. Growth rates and exchange rates also play a
part. As long as we spend more than we save, we are going to have
a trade deficit with someone. As long as Japan is experiencing
such flat growth, the demand for imports will remain sluggish, It
is precisely because our economy is so healthy that our appetite
for imports is so vigorous. Members of the Subcommittee should not
be msled by the "spin" placed on bilateral trade statistics

B._ Style Matters


45

If we can go in, and we have the opportunity to show our wares,
to offer our products, we feel that we can compete very well head
to head. But absent that approval and absent that network, we feel
that we will start regressing and going back to the bad old ways.

Chairman CRANE. We have time. Mr. Houghton, do you have any
questions of these witnesses?

Mr. HouGHTon. Well, I do not know whether we will have any
time; great to see you; thank you very much for coming down.

I guess I just have one question: George, you talk about the focus
of this case must be in Japan and not in Washington, and I do not
know whether I agree with that, because in the final analysis, it
is our problem, and somehow, we must do something about it. I can
remember going over to Japan on this television issue many times,
and they kept saying why are you coming here? Why do you not
solve it yourself?

Suppose they do not do what you want. Suppose Mr. Hashimoto
does not come to the table the way that you want. What do we do
as a country?

Mr. FISHER. Well, I think Mickey Kantor and the administration
and Congress have certain tools they can use. From all my experi-
ence in United States-Japan relationships, I think it would be a
failure on all our parts if this comes to the United States having
to retaliate in some way. But that is a tool that is left at the end
of the day, and it is probably a tool of failure on all of our parts.
Every experience I have had in the past with the Japanese Govern-
ment says that once the Japanese Government gets engaged—
whether it was the semiconductor issue, cellular telephones,
pagers, two-way police radios, all of which I have been involved in,
once the government gets engaged and understands that the U.S.
Government is really serious—that is important—once they under-
stand that, they are very creative, and solutions do exist to these
problems, and we will find them.

Mr. HouGHTON. So you are optimistic?

Mr. FISHER. If the U.S. Government shows the resolve and does
not let somebody like Vice-Minister Sakamoto unilaterally declare
that Japan is going to talk to us on only those issues it wants to
talk to us. That is ridiculous.

Mr. Houcuton. Thank you.

Chairman CRANE. Well, let me congratulate George Fisher for
the excellent job he did in getting the cellular telephones into the
Japanese market when he was at Motorola. As many of you as can
stay, please do, and we will recess to answer this vote and be back
promptly.

[Recess.]

Chairman CRANE. Because of the chaotic conditions on the floor,
I would like to get underway. We know that our colleague, David
Dreier, has a commitment to make that he is already running late
to, so I will recognize David first and then our colleague on the
Subcommittee, Sandy Levin. So, you may proceed. But let me sug-
gest if you can to try to keep your remarks within 5 minutes, and
then, we will put any other submission into the record.


87

Japan's Health Care System

As some of you may know, Japan has a national health insurance system, under which all health
care is directly or indirectly controlled by the national government. The goal of MHW is to offer

quality health care to everyone at an affordable price.

As the leading manufacturers of new life-saving medical technology, we also have a keen
interest in helping to provide high-quality, affordable health care, However, we do have a few
specific concerns with how MHW tries to achieve this shared goal Japan is one of the few
countries in the world that maintains a system of centralized technology assessment where a
handful of mid-level MHW officials decide when a new technology will be allowed on the
market and at what price the new technology will be reimbursed Under arcane rules in Japan,
new medical technology may only be introduced on April | of every even numbered year. These
types of bureaucratic barriers disadvantage both patient and companies alike because they slow
the introduction of new medical breakthroughs even when those medical breakthroughs are cost-

effective compared to existing treatments

Furthermore, MHW sets the price for a new medical technology based on a straight-forward cost
accounting estimate of the price of the new technology multiplied by its expected usage in the
future Because decision-making in MHW is compartmentalized, these mid-level MHW

officials have no responsibility to consider whether the new medical technology is, for example,
cost-effective in shortening a patient's hospital stay or replaces an existing more invasive and
‘expensive form of treatment. This self-imposed, narrow view of new medical technology creates
structural de facto discrimination, especially against U.S. firms, as we lead the world in
breakthrough medical advances. Working with MHW to overcome some of these inherent
inefficiencies in their health care system will help to reduce the de facto discrimination that

efficient, high-tech companies face in that country

The most prominent example of inefficiency in the Japanese health care system is the handling

of long-term care for the elderly In Japan, the average length of stay in a hospital is over 30


8

came into play at the same time, including our agreements and the
Uruguay round in its first year. And we are seeing export growth
in all major categories, from autos and auto parts, capital goods,
agricultural products, and we have seen impressive growth in the
sectors that are covered by our trade agreements.

I want to make it clear that we do not attribute what is going
on entirely to trade agreements or even to trade efforts on our part.
U.S. companies and workers have dramatically increased their
competitiveness and expanded resources that they are putting forth
to crack the tough Japanese market. Macroeconomic factors also
enter into it, but nothing in our standpoint—these things come to-
gether—nothing the government does to open the Japanese market
will work if our companies and workers are not ready to take ad-
vantage of opportunities. But at the same time, their efforts need
to be reinforced by continuing government effort in this regard.
And I think from our standpoint, the auto agreement that we
reached with Japan and developments in the automobile area rein-
force the message that government, industry, workers have to com-
bine their efforts and tie into the forces at work in Japan as well.
What we have seen since we reached the agreement is significant
deregulation, beginning in Japan in the so-called aftermarket; more
opportunities for U.S. partsmakers that have been shut out of
Japan for 20 years—immediate opportunities, in fact, in certain of
the areas; greater commitment of resources and new product offer-
ings from the Big Three, knowing that we are determined to back
up their efforts by opening the market.

So we are seeing progress on a number of fronts. There are cer-
tain areas where the progress has been less promising, and we re-
main concerned about certain dealership issues and remain talking
to Japan about those. But overall, we are seeing growth of U.S.
autos to Japan; growth of sales and auto parts; increasing use of
U.S. parts in production that is done here; increasing amounts of
automobiles produced here instead of in Japan. And so, overall, we
are seeing progress for a number of reasons.

Let me say that when we say we have seen progress, it does not
mean that the work is done by any means. We have a lot more to
do; we are pledging constant, sustained effort; we have got a full
agenda to carry forward from here. We intend to work vigorously
on our existing trade agreements and to resolve other outstanding
issues. Let me just comment briefly on several of the major issues:
The first is we are pleased that earlier this week, the State Depart-
ment and the Transportation Department negotiators were able to
reach an agreement on cargo in their negotiations with Japan, and
that is an agreement that expands opportunities for U.S. cargo pro-
ducers, builds upon what was already there and goes beyond it for
a number of our cargo carriers and at the same time extends in-
creased reciprocal opportunities to the Japanese and resolves an
important issue between us.

With respect to semiconductors, as you all know, the current
United States-Japan semiconductor agreement is due to expire on
July 31. We believe that the semiconductor agreement has been an
important agreement; that we have achieved a great deal under
that agreement; and that it has contributed to harmony between
U.S. companies and Japanese companies; relationships have been


UNITED STATES-JAPAN TRADE RELATIONS

THURSDAY, MARCH 28, 1996

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON TRADE,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:30 p.m., in room
B-318, Rayburn House Office Building, Hon. Philip én ne (Chair-
man of the Subcommittee) presiding.
(The advisory announcing the hearing follows:}

qd)


150

Asian Open Skies Carriers Expanding More

Rapidly than Japanese Carriers
All Global Markets

70

60

60 59

50

40

30

(Cities Served)

20

10

1978 1996 1978 1996
{Korea “



42

industry cooperation that exists today will not be continued. Without regular government-to-
government consultations and joint calculation of foreign market share data. independent
publication by the United States of market share information would undoubtedly lead 10
immediate disagreement with both the Japanese government and the Japanese industry, In
addition, continuing sales to small and medium sized Japanese companies, which tend to be more
insulated from foreign suppliers. would be difficult absent a continuation of the Agreement. The
potential for bilateral (rade friction evolving around trade in semiconductors is thus very real

The existing Agreement structure has been instrumental in helping build the progress
which has been achieved to date and the members of SIA are committed to continuing this
progress. Maintenance of the current arrangement, by which the U.S. and Japanese governments
and their respective industries work together in a cooperative effort to promote greater sales
opportunities for foreign producers in Japan, will continue to benefit both the US. and Japanese
industries

Mr. Chairman, [ would like to thank the Subcommittee for this opportunity to present the
views of the SIA on this important issue in U.S.-Japan trade relations. 1 would be happy to
answer any questions from the Subcommittee


161

spending and total employment in the United States, for several scenarios that,
in one form or another, are being considered in the negotiating process. These
scenarios are (a) completely open skies, in which all airlines are free to establish
whatever frequencies, routes, and prices they wish, in response to market forces;
(b) an extension of the 1952 Agreement; (c) a capped beyond rights scenario in
which the 1952 Carriers continue to fly the same number of beyond flights as
they do now, and MOU frequencies to and from Japan are increased; and (d) a
capped beyond rights scenario in which substantial attrition of current beyond
flights is assumed.

Summary Impact of the Scenarios: All U.S. Carriers
In 1995 Dollars

[mmpact in the United States

evenue of Fconomic Us. Trade
Scenatios US.Caries Activity Employment Receipts
(SBI) SP) (Thos) TH)
‘TOTAL IMPACT
Impact in 1995 83 5D S76
Impact in 2010
‘Open Skies sau e782
1952 Extension rr
Capped Beyonds 66 ta
Capped Beyouls with Attesion MMe SYM
DIFFERENCE FROM 1952 EXTENSION
Impact in 2010
Open Skies ee
Capps Beyorats 32 ei 29
Cappest Beyonals will Ateition Sa a5 23 SI

Summary Impact of the Scenarios: Passenger Carriers
1h 1995 Dollars

Impact in the United States

Revenue of Economic US Trade
Scenarios US. Cari i

ity Employment Receipts
(Soi) (SBI) (Thus) (S Bil)

‘TOTAL IMPACT

Impact in 1995 sre 273 on 568
577, smu SIS

1952 Extension 170 22 V30 i)
Capped Beyonds 149 59K 1201 130
Capped Beyond with Attrition m1 588 1.201 nz

DIFFERENCE FROM 1952 EXTENSION

Impact in 2010
Open Skies 07 sus eit S06
Capped Beyonds 21 od m8

Capped Beyoneis with Attrition a9 “64 168



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82

INTERNATIONAL
INSURANCE

COUNCIL

1212 New York Avenue, N.W. * Suite 250
Washingion, D.C 20005 (202) 682-2345

February 14, 1996

By Hand Delivery and Facsimile

‘The Honorable Michael Kantor
United States Trade Representative
Office of U.S. Trade Representative
600 17th Street, NW

Washington, DC 20506

Dear Mr. Ambassador:

The U.S, international insurance and reinsurance industry has strongly
supported USTR efforts to ensure faithful implementation of the U.S.-Japan
Insurance Agreement. Over the last several months, we have met regularly
with USTR officials in connection with the several consultations that have been
held between USTR and the Japanese Ministry of Finance (MOF). We express
our gratitude and offer our continuing support for USTR's vigilant effors 0
ensure that all the Agreement’s objectives are met.

Icis widely known that the U.S. international insurance industry
supports liberalization of Japan's insurance market because it will lead to
increased benefits for Japanese consumers and new opportunities for foreign
insurers. In this context, we believe that the following points are crucial to
achieving those benefits and acting on those opportunities, and we urge USTR
to emphasize chem in its upcoming meetings with officials from the Minist
Finance:

+ Iris critical that the de-regulation process result in genuine de-
regulation, and not re-regulation;

‘Substantial liberalization of rate, form, and distribution, particularly in
the First and Second Areas, must be achieved so that both foreign and
Japanese firms may soon bring new products to market:


UNITED STATES- JAPAN TRADE RELATIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON TRADE

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

MARCH 28, 1996

Serial 104-60

Printed for the use of the Committee on Ways and Means

ee

U.S. GOVERNMENT PRINTING OFFICE
36-625 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402

ISBN 0-16-054133-6
a



108

in all likelihood, a hearing commenting on the report, whether té
take further action and, if so, the nature of any such action.

For Fujifilm, the prerequisites for such an approach are:
(1) the fact finding is undertaken by someone neutral that is
mutually acceptable to Fujifilm and Kodak, (2) the fact finding
also focuses on reciprocal access in the U.S. market, ae required
by the statute, (3) the process is transparent, and (4) there is
a full opportunity to address fully the applicable legal
standards in the process. In other words, the process has to be
fair and comprehensive, and insulated completely from "political"
pressures.

If USTR is to avoid stalemate and confrontation in this
case, it must devise a mechanism for resolving this dispute that
has credibility with the international community. In this
regard, USTR must recognize that a business-as-usual Section 301
investigation lacks such credibility. First, USTR is regarded
internationally as a negotiator and an advocate, not a neutral
fact finder. Second, the unilateralism inherent in Section 301
renders its legitimacy suspect in the eyes of the international
community. In light of these unavoidable political realities, a
constructive outcome to this dispute is possible only if USTR
pursues a fact finding process that addresses these international

concerns.


182

new technology, or to indemnify the worldwide customers of the US. company, as
the price of market access and a continued customer base.

A. Summary of Structural Barriers

1. No Duty of Disctosure and No Speedy Remedy for Failure to
Disclose True Inventors

In filing an application with the JPO, the applicant has no duty to disclose
prior art relating to the invention or to disclose any defect which could cause it to be
invalidated. For this reason, even if the applicant knows that a technology he secks
to patent was previously invented by another, or is not patentably distinct from a
prior technology disclosure, the applicant has no readily enforceable obligation to
disclose this information to the {PO at the time of filing. As a result, important
issues of prior inventorship or patentability might not even be eligible for
presentation to the JPO until a post-grant opposition proceeding, nullity action, or
trial of invalidity — years after the application was filed, and years after the conduct
became known to other parties

Addressing basic issues of inventorship and patentability so late in the process
will be of little solace to a US. company that was forced to relinquish competitive
advantages related to its breakthrough technology in response to one or more sham
patent applications. The damage to the U.S. company is done long before the }PO is
apprised, in a post-grant opposition, that there is an issue to be adjudicated. The
damage to U.S. companies is done when the Japanese company extracts valuable
business advantage on the basis of flooded patent applications, or even earlier when
the Japanese company “advises” the U.S. company's customers of the existence of
one or more patent applications by the Japanese company

Moreover, under the Japanese system, there is no speedy remedy for an
applicant's failure to name the true inventors of an invention. In the United States,
a failure to name the true inventors on a patent application can result in the
invalidation of any resuiting patent, under 37 CFR. § 1.56. In addition, a
practitioner who attempts to deceive the United States Patent and Trademark Office
(PTO) with regard to inventorship or patentable subject matter could lose his or her
license to practice before the PTO. in Japan, there is virtually no corresponding,
swift, sure, and credible deterrent or punishment — notwithstanding this cleat
abuse of rights and principles of trust. For example, one can always file an
application that fails to identify the true inventors; let it publish as a Kokai
(unexamined) application and remain in that status for several years; and then
never request examination. If examination is never requested, an application is
never examined, a patent is never granted, and the false statement of inventorship
or patentable distinctions on the application will never be addressed. The Japanese
company is still able to “use” the published application as a coercive tool in the
world marketplace without ever requesting examination. Moreover, by failing to
request examination, the Japanese company can actually insulate its sham
application from JPO scrutiny and from any challenge by third parties. Meanwhile,
the market damage for a U.S. inventor or owner of the technology targeted for
patent flooding accumulates, The damage occurs through loss of sales,
requirements for indemnification, and the need to constantly persuade potential
customers to ignore the flood of Kokai applications. Additional damage occurs
when the market perceives that a U.S. company's market advantage has been
diluted, or that the U.S. company lacks resolve by not expending the resources
necessary to directly attack the sham patent applications. Overall cost is clearly
increased in both tangible and intangible ways.

A further twist in the Japanese system is that abandoned patent applications
are destroyed after only four years. This means that information regarding false
claims of inventorship, and sham patent applications is regularly covered up by the
Japanese system. A Japanese company can file a sham patent application; let the
Kokai hang as a threat over the head of U.S. companies for @ number of years; fail to


131

ten years, the situation has changed dramatically. U.S.
companies have made significant efforts and committed large
amounts of financial and human capital towards fulfilling the
needs of the Japanese market. American products have improved
significantly while U.S. companies have established numerous
design centers in Japan to provide customer service.

© The changes in Japanese demand structure, the regained
competitiveness of the U.S. semiconductor industry and the
massive increases in design-in activities (involving foreign
semiconductor manufacturers in the design of a product from the
anitial development stage) have led to skyrocketing foreign sales
in the Japanese’ market. Foreign market share in Japan has
exceeded the U.S. industry's 20 percent expectation for nine
consecutive quarters. In 1990, SIA said that the 20 percent
figure was a threshold, after which market forces should be
allowed to “take over and operate." The latest figures put
foreign market share at nearly 30 percent. Foreign sales
{according to Dataquest) have gone up more than ten fold over the
past decade, from $900 million in 1986 to more than $9.5 billion
in 1995. Design-ins have gone up in similar fashion, rising
nearly 900 percent between 1986 and 1995. Inevitably, close
cooperative ties have been forged at a business level between the
U.S. and Japanese semiconductor industries. Competitive foreign
semiconductors have been firmly established as indispensable
products in the Japanese market

© In addition, new types of assembly operations are becoming
increasingly common in the semiconductor industry. For example
in the computer segment, chips are being sold, not only as
individual components, but also embedded on semi-finished
products such as motherboards. These products are being sold
internationally in increasing numbers, but the chips contained in
these products sold Japan are not counted as semiconductor
imports for purposes of the Semiconductor Arrangement

nc

© Japanese user companies procure semiconductor products from
competitive suppliers irrespective of nationality. The Japanese
market is completely open to foreign semiconductors; no trade
barriers exist. Success in the Japanese market is a function of
meeting users’ needs in terms of QCDS -- quality, cost, delivery
time, and service.

© Cooperative activities among Japanese and foreign
semiconductor companies have increased significantly. These
cooperative activities have served to cement a network of
commercial alliances between Japanese and foreign companies in
this sector. One type of cooperative activity is the design-in
project, which Japanese user companies actively engage in with
foreign suppliers. Design-ins and other cooperative activities
are promoted by EIAJ's Users’ Committee of Foreign Semiconductors
(UCOM), a group of 63 of the major semiconductor user companies
in Japan. The International Semiconductor Cooperation Center
(INSEC), made up of foreign suppliers and Japanese user
companies, also promotes such activities. These organizations
host seminars, dispatch trade missions abroad, receive trade
missions from foreign countries, and arrange one-on-one business
meetings between Japanese companies and foreign suppliers. These
types of cooperative commercial activities have increasingly
flourished, and have assisted in making foreign semiconductor
suppliers a permanent fixture of the Japanese semiconductor
market.

© The world semiconductor industry has experienced dramatic
structural change over the past decade, becoming increasingly
globalized and interdependent. There has been an explosion in
joint ventures and other types of long term alliances between the
major chipmakers in all countries. Driven in part by huge
capital requirements, the biggest names in the semiconductor
industry have joined hands in R&D, production, and marketing in
the latest generations of semiconductor products.


159

As shown below, Japan is by far the largest transpacific air traffic market in the
region. This, in addition to its location as the gateway to Asia, make it the only
practical hub for aviation service between North America and the Asia-Pacific
region.

Transpacific Traffic, 1993

spe
han one

6

re

Source IATA

Just as the hub-and-spoke system of air service has proven to be most efficient
domestically, so it is proving to be internationally, and the world’s carriers ate
racing to establish strong footholds at key hubs around the globe. With
inefficient carriers, but a crucial hub location, Japan’s Ministry of Transportation
has used regulation to protect its airlines and has attempted to give them the
immense leverage entailed in the control of Asia’s key hub. This has led to
significant constriction of traffic through Tokyo. While transpacific service has
been maintained at a level comparable to that over the Atlantic, intra-Asian load
factors and fares are sky high. This constriction, and Japan's manipulation of the
agreement, has led to clashes with U.S. carriers and difficult US-Japan
negotiations.

‘Comparison of Retail Air Fares
Between the United States and International Locations

(Lowest advertined faes, frst calendar qui

yer Mile
Index Tokyo
Round-Trip Fares Nonstop __Fates perMile ___City Pairs = 100,
Taz 1995 Miles 1987 —=«188H SCR
Chicago- Tokyo S825 ss 6273 SOMES ODE = W100
Pans 49) 452 os4] 008132914
Frankfurt 0 S19 A .04S— USAR TB 3P
London 39469, 3.953 USES SRS 133135
Los Angeles - Tokyo $529 55305450 SOON SOUS = 100100
Hongkong 599 S69 7.247 AI}.
Taipei es
Frankfurt 469549 9,805 104 ONT} AY
Paes 459 SA9 Sas UKIS ca 10
London S59 §99 485 OSTZOUHST =O
Seattle: Tokyo 3519 S87 «A7HR_LNH7H SONSIR TO) 100
Taipei 57) 5496078 007700152 BH
Hongkong 579569 GARB OMS MM TFB
London 4694994799049 90570

Tava Tain Avenan Avion EAR ARR ITO US
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109

QECD Committees

The OECD has working groups and staff that could address
this issue. The OECD already has working groups that address
competition law issues. These working groups provide the
necessary expertise to evaluate these complex facts and the
related competition law issues. In a sense, the OECD staff could
function as arbitrators -- reviewing submissions, asking
questions, and preparing a factual report.

Interestingly, U.S. business groups have been advocating the
use of an OECD competition law mechanism to address such
problems. Given the broad-based support for the creation of such
a mechanism, it is appropriate to consider seriously the option
in this case.

The OECD mechanism may not have quite as much credibility as
other alternatives, since there is a somewhat greater potential
for political factors to influence the work of the staff.
Nevertheless, the OECD option has more credibility than USTR’s

undertaking fact finding on its own.

WTO Panel

The WTO provides ah established, multilaterally accepted
mechanism for resolving disputes. A WYO panel would meet the
requirements of neutral} credible fact finding. Depending on the
particular individuals who serve as panelists, the WTO panel
might not have as much expertise as the OECD working groups. But
neutrality and credibility are more important considerations than

technical expertise.


30

Government's Section 301 initiative, but it must not be allowed to
succeed in doing so.

The JFTC has tolerated anticompetitive practices while permitting
industry groups to squelch rather than promote price competition.
To resolve these issues, direct involvement by Japan’s Ministry of
International Trade and Industry and the JFTC will be necessary,
and enforceable international commitments to implement real reforms
not just to carry out studies -- must be included in any
agreement settling the case.

Refusal to Neqotiate and Effort to End

Japan. ateralism"

Notwithstanding the overwhelming evidence, Japan has refused to
discuss this matter. Without providing U.S. negotiators an
opportunity to present their views, the Japanese Government has
publicly refused to address our serious market access problem

This is unprecedented behavior, and it has broad ramifications that
go well beyond this case. Japanese officials are plainly testing
the resolve of the U.S. Government to deal effectively with market
access issues, attempting to redefine the bilateral relationship as
one that focuses solely on non-commercial interests

This attempt cannot be taken lightly. Failure to come to positive
resolution on a case documented as thoroughly as this one would
send a negative signal to every U.S. company attempting to obtain
access to Japan. If this case cannot be resolved satisfactorily,
then no industry can be successful.

Other countries also have reason to be concerned by a Japan that
has closed its home market and then refuses even to discuss the
barriers with an affected exporting country

The Administration and Congress expressly recognized, in the
Uruguay Round Statement of Administrative Action, that the WTO
agreements, with minor exceptions, do not address foreign govera-
ment measures that "encourage or tolerate" private anticompetitive
practices; rather, in such cases, section 301 is to remain "fully
available." Indeed, the continuing need for bilateral approaches
to cases of this type was broadly recognized by all countries
during the Uruguay Round.

Certain discrete actions of the Japanese Government in the photo
sector raise very serious questions under WTO rules and could
perhaps be presented to a WTO panel for adjudication. However, the
Japanese Government's toleration -- over a period of more than 25
years, and continuing to this day -- of systematic anticompetitive
activities that block market access for U.S. and other imported
products simply is not covered by WTO rules.

The Administration pledged to Congress that it would continue te
use Section 301 aggressively in this context and that, notwith-
standing the new WIO dispute settlement rules, the continued
viability of Section 301 as_a bilateral trade tool for addressing
problems falling outside WTO jurisdiction was assured.

These commitments were fundamental to Congress’ decision to ratify
the results of the Uruguay Round, as was the accompanying amendment,
crafted by Congress to clarify the Section 301 provisions on
toleration of anticompetitive activities.

Japan has called into question the resolve of the U.S. Government
to address the many unreasonable trade barriers not eliminated
through the Uruguay Round negotiations. If Japan is successful
with this tactic, it will affect U.S. efforts to open virtually any
market for U.S. exports.

Any retreat from the commitments made in the Uruguay Round
implementing process would be disastrous. This Subcommittee should
not countenance such a retreat.


89

‘While the U.S. medical technology industry sympathizes with the difficulties facing our
Japanese colleagues at the Ministry of Health and Welfare, we are not willing to finance
inefficiencies elsewhere in the health care delivery system through measures to unfairly cut our
prices. Such a measure is apparently now being contemplated, according to statements made by
the Ministry of Health and Welfare at its most recent meeting with the U.S. Commerce
Department under a decade-old trade agreement known as the Medical Pharmaceutical MOSS

(Market-Oriented, Sector-Specific) talks

To help understand the problem a little more clearly, let me explain how most medical
technologies sold by U.S. manufacturers are reimbursed in Japan The government sets
reimbursement prices for most medical device products Unlike pharmaceuticals which are
priced individually by company brand, medical devices that are similar in function and
performance all receive the same reimbursement price in most cases, Products may not be sold
to hospitals at prices above the official reimbursement price, although distributors or other agents
may offer discounts to hospitals. While a product's price may never rise under the price control
system, even for reasons of high inflation or extreme exchange rate shifts, the official price can
be reduced permanently if distributors (whose pricing decisions are not controlled by
manufacturers) discount by an average rate exceeding 1S percent. Because most medical
devices, of a similar type, are priced by function rather than by individual company brand,

medical devices can be more susceptible to price reductions than pharmaceuticals

USS. industry is not always happy with this pricing scheme, but again, the scheme itself is not
why we are here today, Rather, what we are troubled by is the Ministry's stated intention to
change the rules of the system by reducing the allowable discount zone (also known as the
reasonable zone, or "R-zone") from the existing 15 percent Industry just finished a round of
negotiations with MHW under which we had to agree to bring even more of our products under
the overalt price control system. The negotiations, which included agreement on what were fair
initial prices for various products, were conducted with the understanding that the R-zone would
continue to be 1S percent While industry clearly asked MHW during the course of the

negotiations whether the R-zone was to be reduced, MHW never indicated that indeed such a


84

Chairman CRANE. Thank you, Mr. Johnson.
Mr. Rozynski.

STATEMENT OF ED ROZYNSKI, SENIOR VICE PRESIDENT FOR
GLOBAL STRATEGY AND ANALYSIS, HEALTH INDUSTRY
MANUFACTURERS ASSOCIATION

Mr. Rozynsk!. Mr. Chairman, thank you for the opportunity to
testify. My name is Ed Rozynski, and I work for the Health Indus-
try Manufacturers Association. HIMA represents more than 700
member companies that manufacture medical devices, diagnostic
products and health information systems. Our industry is globally
competitive. We account for about half of the world’s sales of medi-
cal technology.

Our industry has never run a trade deficit. In 1995, our trade
surplus measured $5.7 billion. However, our market share in Japan
lags behind our market share in other countries. Outside of the
United States, our average market share is about 40 or 45 percent.
In Japan, it hovers around 20 or 25 percent. However, before iden-
tifying a specific concern that we have in Japan, I would like to
mention that the biggest trade barrier facing this industry is the
way our own FDA regulates medical technology in this country.
FDA policy is pushing U.S. industry, U.S. jobs and patients to Eu-
rope to access American-made medical technology.

1 would urge you to join us and more than 300 patient and doctor
groups to address this growing problem by supporting the biparti-
san FDA reform legislation that is currently working its way
through the Senate and soon the House.

Back to Japan. We enjoy good relations with the Ministry of
Health and Welfare leadership because we share the same basic
goal, and that is to get quality products and care to patients. The
U.S. industry is recognized as the world leader in this area. I
would like to highlight, though, one problem that we do have there.
While it is relatively easy to get your product approved in Japan,
it is very difficult to get your product on the market in Japan, and
that is because a handful of midlevel Ministry of Health officials
tell you what gets on the market, when it gets on the market, and
at what price you will be reimbursed. They call that a market sys-
tem.

You cannot sell an approved product until MHW gives you that
reimbursement price. Moreover, MHW systematically lowers the
price of many products every 2 years. Recently, we negotiated a
deal with the Health Ministry to reduce the chance that products
brought under their price control system would have their prices
unfairly and significantly cut every 2 years. Unfortunately, a few
midlevel officials are now making noises that they may unilaterally
change a key assumption upon which that deal was struck. Two
days ago, Commerce Secretary Ron Brown wrote a letter to the
Japanese Health Minister urging him to not alter key aspects of
this recently concluded agreement. We would urge this Subcommit-
tee to send the same basic message to the Japanese.

Thank you very much.

[The prepared statement follows:]


12

and consumer goods (up 17 percent). These gains are particularly impressive given the slow
growth that the Japanese economy has experienced for the past several years, In those sectors
covered by trade agreements reached by this Administration (from telecommunications to autos
to rice}, exports grew by more than 80 percent through since the President took office -- nearly
2.5 times as fast as overall U.S. exports to Japan.

This growth of U.S. exports benefits our firms and workers, but it also benefits Japanese
consumers. The imported housing initiative recently announced by Prime Minister Hashimoto is
a good example of how market opening initiatives can be mutually beneficial. This initiative
would reduce the cost of housing in Japan. provide greater choice to Japanese consumers, and
provide new opportunities to U.S. firms, which are leaders in housing and building materials.

Obviously, we do not attribute this progress entirely to our trade agreements. U.S.
companies and workers have dramatically increased the competitiveness of U.S. products and
services, and have expended considerable efforts and resources on marketing these products and
services in Japan, Macroeconomic factors also have played an important role, Moreover,
Japanese consumers seem more willing (o buy high quality, reasonably priced foreign products
that they were several years ago. A recent Washington Post story reinforces anecdotally what the
statistics are showing: new opportunities and sales in Japan for everything from U.S. autos and
auto parts to refrigerators to Tumiture to blue jeans to breakfast cereal

However. il is important to recognize the contribution that our trade agreements have
‘macle to the recent progress we have witnessed. Opening Japan's market requires a partnership
between our government and our companies and workers. Nothing the Government does to try
to open the Japanese market will ever be successful unless U.S. companies une workers are
poised to take advantage of the opportunities, But at the same time, all the best efforts by U.S.
companies and workers may fall short without the pressure and sustained efforts by the U.S.
Government to help open the market,

The automotive sector illustrates just how our trade agreements. efforis by U.S.
companies and workers, and changes in Japan are combining to open the Japanese market and
change the imbalance of U.S. trade. For 20 years. world class U.S. auto parts producers have
been closed out of the Japanese market. But because of the trade apreement reached last
summer. which committed Japan's Ministry of Transport (MOT) to major steps to deregulate the
aftermarket for replacement parts. real competitive onportunities for U.S. parts makers. for sales
‘of everything from roof racks to transmissions, began to appear almost immediately in Japan.
Because the agreement required MOT to remove shocks and struts from the “eritical
parts'disassembly repair list.” Monroe shocks will be sold shortly at hundred of yas stations and
Toyota is offering them throughout its distribution system in Japan. Thanks to the changes
required by the auto agreement. real competitors to the certified and designated garage system in
Japan have emerged. opening the door for the first time to high quality, lower cost foreign auto
parts. U.S. firms are beginning to seize these new opportunities. and significant progress should
continue in coming years

Arthe same time, Big 3 vehicle sales to Japan increased 46 percent last year The trade
agreement reinforces the Big 3's intensified commitment to the Japanese market, which was
reflected in the extremely: positive reaction that the Big 3 s new right-hand drive models got at
the Tokyo motor show in November.

However, there remain some areas where progress under the auto agreement has been
somewhat disappointing. In particular, recruitment of new auto dealers in Japan has been slow.
with only 30 new dealers signed up since the agreement was signed. We well understand the
frustration of the Big 3 at the limited progress, especially given their serious cfforts and the
release of new models. We also understand that unless significant progress toward the goal of
200 new dealers is made by the end of 1996, exports of Big 3 vehicles to Japan will continue te
be constrained. The Administration will use every opportunity to raise this issue with the
Japanese Government, and we expect that the dealer recruitment pace will pick up as the
tuttractiveness of the new U.S, models become evident.



54

oriented approach has been applied to a number of sectors, espe-
cially as to Japan, our largest creditor. And particular importance
was placed on the largest single component of that bilateral deficit:
Autos and auto parts. Two-thirds of our deficit, as you know, Mr.
Chairman, has been in autos and auto parts.

This results-oriented approach has brought substantial progress
on the overall bilateral trade deficit with Japan. In 1995, it de-
clined by more than 10 percent, and that trend continues in 1996.
An important part of that results-oriented approach was the agree-
ment last year on autos and auto parts. I thought at the time it
was an important step—not a complete one but an important one
in the right direction—and the data so far show that that is true:
Foreign vehicle sales in Japan are up 30 percent in 1995, and for-
eign auto parts have also risen, and there will be a report in a few
weeks that will summarize the first year.

But much remains to be done. U.S. automakers have made
grudging progress in securing dealerships in Japan, with only 30
new dealerships to date out of an expected 200. So I think that the
reports of the keiretsu system demise are greatly exaggerated, but
there has been progress to date opening the door to the possibility
of market reform and substantial exports. More work has to be
done, clearly, in the auto parts sector, where the Japanese prom-
ised deregulation. But so far, only one critical part has been de-
regulated.

So, it is clear that we have to continue this results-oriented ap-
proach. In this increasingly global economy, we must take steps to
ensure that our businesses and workers are prepared to compete,
and we have to stand up for them to ensure that they have a fair
chance to compete.

Mr. Chairman and my colleagues, I list in my testimony some of
the voices that I think would take us off course, for example, that
of European Union Commissioner Sir Leon Brittan, who said just
a few days ago that there is no longer a place for unilateral action.
What the Europeans have done is to let the United States knock
down doors, and then, they have come in to take advantage of it,
sometimes, though, cutting a deal with the Japanese themselves in
a much more rigid way than we ever did, for example, in autos.

Also, I point out to the briefing memo that talks about a bilateral
trade deficit with Japan—this is the briefing memo prepared by the
majority staff saying that a bilateral trade deficit with Japan does
not affect lost production or lost jobs or lost wages. Whatever may
be the case in macroterms, in terms of specific industries, I think
that is clearly not correct.

Let me just say a word if I might about deregulation, and then,
I will finish. I think this is an example of the unnecessary polariza-
tion and the unwise dichotomies. Mr. Dreier and I have been talk-
ing trade for a long time. I am sorry he had to leave. He said we
should not negotiate trade agreements that protect selected U.S.
industries; do not pick winners and losers; our trade policy should
focus on deregulation and competition rather than look for man-
aged market access for select American exports. We are not picking
winners or losers; we are not looking for managed access for se-
lected American exports. We are not elevating exports to the dero-
gation of imports. Look: Everybody who came here before me was


171

decision of Japan to lengthen its copyright protection for recorded music to the WTO standard
is evidence that the TRIPS agreement is bearing early fruit

In sum, the Uruguay Round agreements make substantial progress on each of the three types
of impediments faced by our firm.

Advancing the Globalization of Professional Services
Although accountancy is probably the most international of the professions, true globalization
has been impeded by the lack of accepted international standards and of cross-border
recognition of national qualifications and credentials. Our Firm has been a leader in addressing
these issues through the International Accounting Standards Committee (IASC) and work at
the regional level through support for the European Union's (EU) mutual recognition directive
and the North American Free Trade Agreement's (NAFTA) professional services provisions.
Weare pursuing further opportunities in the Asia Pacific Economic Cooperation (APEC) forum
and the Free Trade Area of the Americas (FTAA) talks.

Consulting has not traveled the same road to internationalization as accounting, but some
governments already set standards and qualifications for consultants and there are indications
that other countries wish to follow that course.

The GATS agreement provides an opportunity to address the problem of regulation and the
issue of international standards in a truly global initiative with the participation of all WTO
member countries. First, Articles VI and VII establish certain standards in the areas of
domestic regulation and recognition of qualifications and standards. And second, a separate
ministerial-level “Decision on Professional Services” is designed to ensure that those principles
will be applied specifically to the professions.

Domestic Regulation and Recognition: The services agreement contains important new
principles on domestic regulation and recognition of qualifications. Article Vi on domestic
regulation contains three relevant features:

1. governments shall apply regulations to service industries in a reasonable, objective
and impartial manner so that they do not act as arbitrary barriers to trade;

2. qualifications requirements and procedures, technical standards and licensing
requirements in the professions shall be based on objective and transparent criteria
and not be more burdensome than necessary fo ensure the quality of the service;
international standards shall be taken into account in determining compliance with
these principles; and

3. all countries must have adequate procedures to verify the qualifications of
professionals from other countries.


96

Chairman CRANE. Thank you, Ms. Smith.

Mr. Patrick, you accused Kodak of the very thing that Kodak has
accused you of. How can we get an impartial third party to exam-
ine on both sides of the ocean the question of whether there is im-
plicit subsidization or kickbacks or special relationships that pro-
bibit either your access here in our markets or their access over in

japan?

Mr. Patrick. Mr. Chairman, that is an excellent question, and
it is one that we have suggested needs to be addressed by USTR.
All of the factual issues in this case are hotly disputed by Fuji, and
as you point out, we have complained about their practices in the
United States.

We have asked for a neutral fact-finding body. We have sug-
gested, as I said in my statement, any neutral fact-finding body of
USTR’s choice. We have suggested that they could consider conven-
ing a panel of experts; appointing a U.S. administrative law judge
as well as multilateral mechanisms. We are open to any mecha-
nism, so long as it is a neutral fact-finding body that can sort out
the different surveys and the different data that conflict with each
other.

Chairman CRANE. And let me ask a quick question of Mr. John-
son, and that is who is responsible for the delay in beginning the
keiretsu study that was required under the agreement?

Mr. JOHNSON. Well, Mr. Chairman, we have our own views about
that. I would refer to the USTR for an authoritative view.

The study itself, as you probably know, was to have begun in De-
cember 1994, The private sectors in Japan and the United States,
the insurance industry representatives, were called upon under the
terms of the agreement to meet together to fashion the terms of
reference for that study, and select the consultant or consultants
that would conduct the study in keeping with the provisions of the
agreement. Discussions between the private sectors began in the
fall of 1994 with the objective of reaching that December deadline
to begin the study, and as of today, that study has not begun.

The effort to come to agreement on the terms of reference, the
selection of the consultants, took hundreds of hours of discussions
between the two private sectors under the oversight of the Ministry
of Finance and the USTR and only recently reached agreement to
start the study.

But I think it does reflect a broader concern that you have heard
addressed today, namely, how to verify some of the systemic and
shareholding type pressures that exist in Japan that make it very
difficult to penetrate their market. That is something that the Jap-
anese do not want to have explained.

Chairman CRANE. Thank you.

Ms. Smith, does Prime Minister Hashimoto’s imported housing
initiative contain any better news for the U.S. forest products in-
dustry?

Ms. SMITH. We are optimistic. At the moment, it has not been
articulated, and it does not contain very many specifics. But it
would appear to make eminent good sense in that there is a Japa-
nese political mandate to reduce the cost of housing in Japan. How-
ever, for us, the litmus test will be the tariff issue. If the objective
is to lower housing costs in Japan, certainly deregulation will be


185

JAPANESE COMPANIES UNITED STATES COMPANIES
Firm name No. of patent Firm name No. of patent
applications applications
to the JPO to the JPO
Matsushita Electric 195808 IBM 8,684
NEC. 171345 General Electric 5/124
Mitsubishi Electric 116,726 Texas Instruments 2314
Sanyo Electric 36,408 Hewlett Packard 2,627
Yamaha 11825 Intel 325
TOTAL 532,112. TOTAL 19,074

The high volume of patent applications by Japanese companies combined with the
previously noted high number of Japanese applications that do not mature into
patents are a clear indication of extensive “patent flooding.” (The data in this chart
were collected in an online database search by Questel-Orbit in the INPADOC
database for the time period covering 1985-1996.)

Hl. The practice of patent flooding, which is encouraged and supported by the
Government of Japan through its central economic planning and intellectual
property policies and practices, constitutes a discriminatory nontariff trade
barrier that denies fair and equitable market access to U.S. companies that rely
on intellectual property protection.

Patent application flooding is a common practice in Japan in which a Japanese
company surrounds a competitor's breakthrough technology with a flood of sham
patent applications, or applications covering, at best, minor “improvements” to the
breakthrough technology. These “improvements” are often in the nature of
obvious uses of the technology, the actual technology itself, or improvements so
trivial as to constitute clearly non-patentable, insubstantial differences in most other
worldwide jurisdictions. See GAO Report at pp. 49-50. The patent flooder then uses
these flooded applications to exact business or market concessions from the U.S
company. One technique is to offer to license these sham applications in exchange
for a license to the flood victim's breakthrough technology. GAO Report at p. 49.

The net result of the improper structural barriers and processes in the
Japanese system, and the patent flooding that the Japanese government and
Japanese corporations encourage, is that U'S. companies trying to gain access to
Japanese high technology markets, are forced, as the price of market access, to license
their critical technology to their Japanese competitors. A coerced license or other
form of business compensation due to patent flooding in a technology field is
especially damaging to small U.S. companies, whose primary assets are their
technology. When a small company trying to gain and maintain a foothold in the
world market is forced to either license its breakthrough technology, or acquiesce to
coercive business concessions, to larger, more established Japanese competitors, the
small company’s prospects are bleak. (As noted previously, prior negotiations by
Japanese representatives have actually strengthened the position of the Japanese
patent flooders. The existence of an agreement eliminating compulsory cross-
licenses on basic patents, while having merit for other reasons, has no practical
effect on this pre-issuance conduct, and is actually a convenient negotiating red-
herring for the JPO to use relating to patent flooding conduct.)

The procedures at the JPO encourage patent application flooding and are
discriminatory, nontariff barriers that deny fair and equitable market access to U.S.
companies that rely on intellectual property protection. 19 U.S.C. §2242(a)(1)(B).
Because the applicant can begin accruing infringement damages based on Kokai
applications, these published patent applications are a valuable commodity in Japan.


170

‘The TRIPS agreement sets minimum standards of legal protection for intellectual property and
provides for enforcement through domestic and international procedures. All 117 countries
participating in the negotiations agreed to abide by the TRIPS rules, although some receive an
extended grace period for implementing their obligations. In addition, any other nations
seeking to join WTO must accept these rules.

Payments and Transfers: Article X1 of the new services agreement prohibits countries from
applying restrictions to payments and transfers in sectors covered by their schedules of
commitments. This prohibition applies to all current transactions as defined by the
International Monetary Fund (IMP), including virtually every type of payment made by our
worldwide organization.

‘The one exception to this rule is in cases where a country 1s authorized by the IMF to impose
restrictions to safeguard its balance of payments against serious difficulty. However, stricter
rules and international surveillance now apply to balance-of-payments measures to prevent
their abuse.

Movement of Personnel: The services agreement addresses the issue of restrictions on the
transfer of managerial, professional and technical personnel, but not as clearly as it speaks to
the problem of payments and transfers, Once again, the freedom to move personnel is related
to the commitments a country makes in its schedule.

For the most part, these commitments permit the free movement of “intra-company
transferees,” marketing personnel or business visitors in sectors covered by the schedule.
Governments may employ measures necessary to protect the integrity of their immigration
laws and their borders, however, only if these measures do not negate the commitment they
have made to national treatment and market access.

‘The agreement provided for negotiations to further liberalize movement of personnel, but these
talks proved disappointing. This is an area of unfinished business left over from the Uruguay
Round that must be addressed. The U.S. and other nations must recommit themselves to
reaching agreement on additional liberalization, and need not wait for a new overarching
“Round” of talks

Protection of Intellectual Property: The TRIPS agreement requires all GATT member
countries to recognize computer programs and software as literary works and databases as
compilations protected by copyright. The agreement provides two levels of protection against
infringement and piracy. First, countries must give full protection in domestic law as
prescribed by the Berne Convention. They must put into place enforcement measures against
infringement, deterrents to infringement, and criminal penalties for willful piracy

Second, the agreement allows foreigners to challenge ineffective domestic protection through
GATT dispute settlement procedures, and reforms the dispute settlement process to assure
resolution of complaints in a 12 to 18-month period, including all appeals. Developing
countries are permitted a five-year transition to full implementation of the rules. The recent


15

Now, under the guise of “deregulation,” the Ministry of Finance
is taking aim at the tiny fraction of the market where Americans
have been able to establish a position. This is being done despite
the prohibitions in the agreement. As Ambassador Shapiro said
earlier, the very essence of the agreement is intended to make pos-
sible an increase in the foreign insurance presence in Japan. This
is to be done by first liberalizing the primary areas of life and
nonlife to allow foreign insurers to compete on equal terms and to
apply their established strengths for the benefit of the Japanese
consumer. Only after the primary areas have been substantially
liberalized for a reasonable period of at least 3 years may the third
area then be deregulated.

The Ministry’s current deregulation plans threaten to do just the
opposite. It seems that the Ministry is not seriously considering
true deregulation. It does not seem interested in permitting new,
innovative products; competitive pricing; and new distribution
channels, all of which would redound to the benefit of Japanese
businesses and consumers. Instead, the Ministry seems more intent
on maintaining the status quo in the primary sectors while consid-
ering radical change in the third sector.

There are other concerns regarding the Ministry’s intentions as
well.

The new law is scheduled to begin taking effect next week. If the
Ministry does not alter its plans, the United States-Japan agree-
ment will be grossly violated.

There is ample evidence that the administration and the Con-
gress share this view. In this regard, specific references to several
statements and letters are included in my written statement for
the record.

Mr. Chairman, the U.S. insurance industry is not alone in callin;
for Japan’s faithful implementation of the agreement. In fact, all
foreign insurers anxious to expand in Japan are resolute in their
support as well.

erican insurers are among the most innovative and competi-
tive in the world. The United States-Japan insurance agreement is
intended to bring about a more open market. If faithfully imple-
mented, we are confident that we can compete and bring tangible
benefits to the United States and Japan.

I thank you for the opportunity to appear today.

[The prepared statement and attachment follow:]


36

USS, industry succeeded in convincing Korea to eliminate its tariffs on these products. Today,
SIA continues to push more broadly for semiconductor tariff elimination as part of the proposed
Information Technology Agreement

However, the elimination of tariffs and other traditional trade barriers has proven to be
insufficient to ensure full market access in key markets, particularly Japan. the second largest
semiconductor market in the world

History of U.S.-Japan Trade in Semiconductors

USS. efforts to obtain access to the Japanese semiconductor market date back more than
‘oventy years. Until the first U.S.-Japan Semiconductor Agreement was signed in 1986, US. and
other foreign semiconductor suppliers had little success entering the Japanese market, By bring-
ing together both the U.S. and Japanese industries and both the U.S. and Japanese governments,
the Agreement made substantial progress in opening Japan’s market possible.

Before the 1970s, the Japanese semiconductor market was protected by a wide range of
formal and informal barriers, including import restrictions, investment restrictions and local con-
tent requirements for computer equipment. During that period, Japanese semiconductor producers
became internationally competitive, and began challenging the US. industry in world markets.

In 1971, under pressure from the Nixon Administration, Japan agreed to begin liberatizing
its restrictions on semiconductor imports and foreign investment. However. due to the use of
liberalization countermeasures put in place by the Government of Japan (including the issuance
of administrative guidance to discourage purchases of foreign products), the foreign share of the
Japanese market remained virtually static, ranging around 10-11 percent of the Japanese market

In a number of specific cutting-edge product sectors, U.S. semiconductor companies
encountered a recurring phenomenon during the 1970s and early- to mid-1980s: They could
achieve sales in Japan only until Japanese companies developed a competing product, at which
time domestic sourcing replaced foreign supply. By 1982, the U.S. share of the Japanese market
was below what it had been in 1974, the last year the Japanese market was protected by quotas.

In 1982, the U.S. and Japanese governments tried to remedy the problem of inadequate
foreign market access through the formation of the U.S.-Japan Work Group on High Technology
Industries, which issued a set of recommendations aimed at increasing foreign market access in
Japan, After an initial modest increase in share coinciding with a boom in demand for
semiconductor products, U.S. sales in Japan dropped sharply. By mid-1985, U.S. share of the
Japanese market was lower than it had been when the High Tech Work Group's recommendations
were adopted in 1983

The U.S.-Japan Semiconductor Agreement

In 1986, President Reagan sought and concluded a five year agreement with the
Government of Japan to open the Japanese market to foreign semiconductors. Because of the
frustration brought about by the failure of previous agreements to produce market opening results,
the 1986 Agreement included a side letter which stated that the Government of Japan recognized
and welcomed the fact that the U.S. industry expected foreign share of the their market to grow
to and exceed 20 percent by 1991. It also provided for joint efforts to increase the number of
foreign semiconductors that are "designed in" new Japanese electronics products.

Unfortunately, the 1986 Agreement did not immediately lead to any progress in opening
Japan's market. In 1987, the U.S, Government imposed sanctions on Japanese electronics
products in response to breaches of the Agreement. Following the imposition of sanctions, U.S
share of the Japanese semiconductor market began to improve

‘One year before the Agreement was set to expire in 1991, after three years of fairly
steady, gradual progress, foreign share of the Japanese market again began to decline. It was,
apparent to ali parties that the threshold objective of 20 percent foreign share would not be met
by July 1991, and that, despite an increase in design-in activity, further market share progress was
not self-sustaining,


181

the ability of U.S. companies to get patents issued in Japan, not on increasing the
ability of U.S. companies to defend themselves from flooded patent applications. As
part of the bilateral agreements, the ending of pre-grant oppositions in Japan has
actually made it harder for U.S. companies to fight back against patent flooding.
This likely effect was surely not lost on the Japanese negotiators to the talks. Now, a
US. company seeking to challenge validity or inventorship must virtually wait
until the flooded application matures into a patent — a delay of up to ten years or
more; and all the while the U.S. company is subject to threats and harassment based
on the flooded patent applications. Jt is well established that use of a U.S. company’s
patented technology is frequently deferred by potential customers in view of the
existence of a flood of Kokai patent applications by a Japanese corporation. In the
Commenter’s view, the Government of Japan is not entering into good faith
negotiations or making significant progress towards addressing the issues described
in this comment or towards providing adequate and effective protection of
intellectual property rights. See 19 U.S.C. §2242(b)(1)(C).

These structural barriers have a serious detrimental impact on U.S.
companies seeking to protect their breakthrough technologies in Japan. However,
when combined with Japan's publication of patent applications eighteen months
after filing, and with the JPO’s historic tendency to grant multiple, narrow patents
rather than single, broad patents, the detrimental effect is compounded

This pre-issuance conduct affects all U.S. companies but is more pronounced
in its detrimental economic impact on small and medium sized U.S. companies. It
is also these very companies which, in recent years, are the single most important
source of job creation and breakthrough technologies in the United States.

These structural barriers have two general adverse effects on the patent
protection process in Japan. First, they reduce the effectiveness and significance of
the JPO as the grantor of enforceable patent rights and the initial arbiter of
patentability, Due to deferred requests for examination, issues, such as patentability,
which should, in the first instance, be decided by the JPO, are left unaddressed and
unresolved for long periods of time. Without definitive, timely rulings from the
JPO, companies are left to contest, debate and resolve these issues on their own.
This marketplace horse trading is often conducted without the benefit of full
information, and is often influenced by the superior bargaining power of large, well-
funded Japanese companies.

The second effect of these barriers is to clearly encourage “patent application
flooding.” Patent application flooding is the practice by which a Japanese company
files a flood of sham patent applications — or applications covering minor
“improvements” in a U.S. company’s breakthrough technology. Throughout most
other jurisdictions such “improvements,” or obvious uses of the technology, are not
considered patentably distinct over the underlying innovation. A goal of a patent
flooder is to target and surround the U.S. company’s technology with a flood of
trivial or frivolous patent applications, and then to use the Japanese applications as
priority applications for entering foreign jurisdictions — including, the United
States. The Japanese company will then offer to license some of its “flood” of patent
applications in return for a license to use the U.S. company’s breakthrough
technology or in return for another form of substantial business advantage.

As a result of these structural barriers, a U.S. company bringing or selling new
technology to Japan cannot rely for patent protection on the workings of the JPO.
Such practices are even employed by Japanese corporations when the U.S. company
does not sell in Japan but the Japanese corporation intends to use the flooded
patents as market entry tools in foreign jurisdictions — including the United States.
A new USS. corporate entrant to the Japanese market will quickly tind its
breakthrough technology surrounded by a flood of patent applications, from either
Japanese customers or competitors. All too often, in view of the flooded patent
applications, these U.S. companies are forced to surrender exclusive rights to their


48

On the issue of selling the American people on the importance
of maintaining a close relationship with Japan, I am saddened to
say that while we have worked closely with the administration dur-
ing the first couple years of working on their trade policy issues,
they have failed in this area, and f hope very much that it will
change.

Thank you very much, Mr. Chairman.

[The prepared statement follows:]


117

been a lawyer before I was in Congress, and I do have a fairly good
sense of fairness. I have been in a lot of courtrooms where you go
into the courtroom and you wonder “Hmm, I wonder if this crowd
is going to give me a fair trial?” And what I want to speak to here
today is not so much who is right and who is wrong but about a
procedure that I think could take our Nation forward and will help
resolve a potential problem greater than free and fair trade, and
that is the way you arbitrate disputes.

Let me tell you a bit about the Third District of South Carolina.
We have in our district an evolving economy that reflects what is
going on in the world very much so. We have felt directly the im-
pact of industrial change in America and around the world. During
the primary in South Carolina, you had Mr. Buchanan in front of
closed textile mills railing on NAFTA and GATT, and you had Sen-
ator Dole at the BMW plant sitting in a car. And I thought it
brought it all home what is going on in the world and what is going
on in America, and it is going on in my district where you have
one area of the economy that is suffering, and you have a district
in the South where the average income is $13,200. That is the per
capita income in the Third Congressional District of South Caro-
lina, $13,200. We are a poor district but very proud. We are trying
to grow, and we are trying to get good jobs into the district.

‘he textile industry has suffered greatly through trading condi-
tions in the world, and in my opinion, some of them have been un-
fair. You have unfair labor practices in China, government sub-
sidies throughout the world that have hurt the textile industry. We
have lost 9,500 jobs as a result of trying to balance the budget and
downsize the Department of Energy facility in my district, Mr.
Chairman, the Savannah River site, which is the largest site in the
chain.

Some good news has been Fuji. Fuji has chosen South Carolina
for billions of dollars in investments in modern, clean, efficient
plants. These plants have provided high wage employment opportu-
nities to an enormous pool of enthusiastic and committed workers.
I would like to highlight the Fuji story just for 1 minute so the
Subcommittee can understand how this talk impacts a district in
South Carolina with an average income of $13,200. Fuji began in
1989 in Greenwood, South Carolina, in the middle of my district,
producing photographic plates. A second facility for producing VHS
videotape was completed in 1992. It may be of interest to the
Chairman that all of the Fuji one-half inch VHS videotape sold in
Japan is manufactured in Greenwood, South Carolina.

In 1995, Fuji Greenwood completed a third facility that produces
one-time use, quick-shot, quick-snap cameras, and I have a lot of
them in my office. We are trying not to violate the gift ban, but
we will be glad to show you one of them.

Fuji Greenwood will soon bring online a facility for the produc-
tion of color photographic paper. Fuji Greenwood began this year
by announcing plans to build a central distribution and graphic
arts film plant in Greenwood, and less than a month ago, Fuji an-
nounced again that it will soon open a facility that will package
more than 10 million rolls of 35 millimeter Fuji color film every
month in Greenwood, South Carolina. In all, by completion date
1997, employment at the Greenwood manufacturing complex will


53

Mr. Dreier. I am glad you recognize it. I am glad that you recog-
nize it, Charlie.

Mr. RANGEL. So I look forward to working with you, whether in
the minority or the majority. [Laughter.]

Mr. DREIER. Well, let us just keep things as they are. [Laughter.]

Mr. RANGEL. Thank you.

Chairman CRANE. Mr. Houghton.

Mr. HouGHTON. Nothing, thank you.

Chairman CRANE. Mr. Graham, do you have any questions?

Mr. GRAHAM. No.

Chairman CRANE. And do you have any questions?

Mr. Camp. Camp.

Chairman CRANE. Camp, I know; do you have any questions?

Mr. Camp. It is easy; it is a four-letter word.

No, I have no questions, but I want to thank Mr. Dreier for his
very excellent testimony and his leadership on trade issues in gen-
eral in the Congress, and I appreciate the testimony.

Chairman CRANE. Well, thank you for coming, David.

Mr. Dreier. Thank you very much. I am sorry I have to leave.

Chairman CRANE. We will excuse you early, and Sandy can get
in the last word.

Mr. DREIER. No, I will let you do that, Mr. Chairman. [Laughter.]

STATEMENT OF HON. SANDER LEVIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN

Mr. Levin. I do not think David wants me to have the last word,
but let me try.

Mr. Chairman and Mr. Rangel and my colleagues from various
States, including my colleague from Michigan, I will tell you that
this discussion today only underlines my strong feeling as I say in
my testimony that I know you will put in the record that few areas
have been as besieged by rigid theories or by the pitfalls of an ei-
ther-or framework as trade policy. The issue has been cast as a
choice between fair trade and protectionism or unilateralism and
multilateralism, and I think we have just heard kind of another di-
chotomy of exports and imports.

As our trade imbalance with Japan grew in the seventies and
eighties, the dominant voice was that of complacency. Suggestions
to act vigorously were usually dismissed as protectionism. There
were some efforts—MOSS and SII—that a number of us here par-
ticipated in, but they were handicapped either by rigid opposition
or by ambivalent execution. And then, in 1988, a number of us
joined together to enact super 301 and also to strengthen regular
301 with the language making it an unfair trade practice for for-
eign governments or when foreign governments tolerated anti-
competitive practices.

And in the last few years, under the leadership of the Clinton ad-
ministration, there has been an effort to actively work the ground
that lies between the extremes of unreciprocal free trade and rigid
protectionism, and it should be clear that what this effort does is
to look at bottom-line results. It tries to open foreign markets, not
build walls around our own. It starts with the proposition that free
trade is not truly free if one side is rigged. And from there comes
the notion of fair trade as well as free trade, and this results-


138

If telecommunication services are the nerve system of the new
international economy. then aviation services may be called its
bloodstream. Airlines carry the nutrients of the system -- people.
documents. and goods -- (0 its vital organs. Global sourcing, just-in-
time delivery, technical support. technology transfer. multinational
management, and global economies of scale and scope would all be
impossible, or much more difficult, without extensive and efficient air
service. Beyond this. long-distance leisure travel, and the massive
tourism industry it has spawned, which is the driving force of economic
development in many important regions, would have renvained merely a
perk of the wealthy elite without the growth of modern air services

Yet despite its obvious importance to world trade and economic activity, air transport
has historically been eacluded in whole or in part front international trade agreements, such as
GATS. Moreover, international air transport has been subject to significant impediments to
trade and investment from the world’s economies, primarily through restricted market access
and disparate national treatment found in most bilateral aviation agreements or national law
This 1s exemplitied in the 16 APEC economies, where the level of impediments to air
transport services, particularly frenght and passenger transportation, 1s among the highest of
‘any service industry. (See Charts 8 and 9). As Mr. Cheong Choong Kong. Singapore
Airlines managing director. stated recently at a Financial Times conference on commercial
aviation in Asia-Pacific, “The minister who negotiates air service agreements pursues a policy
philosophically opposed to that of the minister of trade. the person responsible for negotiating
everything else.”

Fortunately. it appears that more economies are recognizing the critical importance of
aviation to them and to the world economy. The International Air Transport Association
UATA) estimates the impact of aviation on gross world product in [992 at $1 tnllion,
accounting for 22 million jobs. For every dollar spent by airlines and airports, at least three
additional dollars of economic activity was generated The industry has created 3 million
direct jobs and 7 million indirect jobs. The multiplier effect is another 12 million jobs, The
volume of passengers and freight carried by the world’s airlines has risen at twice the rate of
real GDP over the past ten years.

The importance of aviation to the U.S. economy is equally staggering. A recent
suudy? found that the mdustry accounts for about 1% of private-sector GDP and is ome of the
largest industries in the U.S., ranking yust behind the motor vehicle industry and ahead of
other vital industries such as petroleum and textiles, Moreover, the industry generated nearly
6% of U.S. GDP 1 1993 through the indirect impact of the off-airport activities of passengers
and shippers, and the induced impact of successive rounds of spending by those who receive
direct or indirect payments Finally. (US. air transport accounts for nearly 1 mitlion jobs

‘The travel and tourism sector of the economy, of which air transport is a leading part,
1s also important to Japan According to the World Travel & Tourism Council (WTTC).
travel and tourism accounted for 10.5 percent of Japan’s GDP in 1995, contributing 10.6
percent of its total wages and salaries,

Even individual states, such as California, recognize the importance of efficient air
‘ransport services (0 their economies. In California, foreign trade, together with tourism and
entertainment, are wo of the key pillars of California's economy that rely on air transport
services. In addition, the transportation sector contributes to California's job growth *

The importance of aviation to imertational trade has begun to gain recognition, This
is clearly evident in the U.S. The U.S. government has been advocating and actively seeking

to establish “open skies” aviation agreements with other countries, The U.S. International Air
Transportation Policy Statement noted, “The availability of efficient international air

Economic Straiegy Institute, supre

Report of the Feonomic Auvisory Council of the California Institute (October 11, 1995)



49

Statement of the
Honorable David Dreier

before the
Subcommittee on Trade
Committee on Ways and Means
March 28, 1996

Mr. Chairman, Members of the Committee, thank you for holding this important
hearing on trade, commercial, and economic relations between the United States and Japan,
and for allowing me to make a brief presentation.

Mr. Chairman, nearly three years ago I had the privilege of appearing before this
subcommittee to discuss this same issue. The first half of 1993 was noteworthy in our (wo
countries” bilateral relations. President Clinton had run for office championing an
aggressive trade policy toward Japan, insisting that his predecessors had sacrificed American
economic interests on the alter of foreign policy. Our two governments completed
negotiation of the "Framework Agreements,” which I hoped would become the point of
embarkation for negotiations to create a U.S.-Japan free trade agreement, rather than the
basis for government-managed trade relations. More important than events here at home,
1993 marked Japan’s third year in a recessionary economic downturn, and internal political
reforms resulted in Japan's first non-LDP Government in 38 years.

‘Three years later, I believe that the two most important policy recommendations
regarding our relationship with Japan remain the same. First, do not try to make the
American economy more like the Japanese economy. Our openness is our primary strength.
‘Japan does not benefit from closed or protected markets, it suffers from the closed and
inefficient nature of its economy. If they are to thrive in the 21st Century information age,
the Japanese economy must become more open like the U.S. economy.

Second, do not ignore the U.S-Japan security relationship. A strong U,S.-Japan
alliance is critical to maintaining long-term stability along Asia’s Pacific Rim. Stability is a
prerequisite to continued strong economic development in the region. Given the
unquestionable benefit to the United States of strong economic growth along the Pacific
Rim, we should remain committed to supporting regional security and stability.

Mr. Chairman, Japan enjoyed a remarkable period of consistent growth during the
1970's and 80's. Those who advocate more government interference in the economy used
Japan as a model, advocating Japanese-style industrial and trade policies for the United
States. Looking back, it is clear that Japan enjoyed considerable advantages in their post-
war economic recovery. particularly their highly skilled work force, low crime rate and base
of industrial knowledge. Each will again help Japan grow in the next century.

However, there is no better evidence of the structural weakness of Japan's closed and
inefficient economy than to look at their economic performance in the 1990's, Japan is now
in its sixth year of essentially stagnant economic growth. It is clear that they are suffering
from more than just a bursting real estate or financial bubble. Instead, the Japanese
economy is plagued by significant structural problems, which include the government:
managed industrial and trade policies so often advocated by those who wanted to see the
United States become more like Japan,

Mr. Chairman, one manifestation of the structural problems confronting Japan has
been the difficulty many U.S. firms have exporting to Japan. However, the fundamental
problem in Japan is not a trade problem. Instead, the problems go to the heart of the
Japanese domestic economy. Japan must undertake significant internal reforms to restore
long-term economic growth and remain a leading force in the international economy.

There will be significant long-term benefits to the United States from a Japan that
has corrected its internal problems. A healthy Japanese economy is good for America. A
healthy Japan that has undertaken the necessary reforms to create an open and competitive
domestic market that is navigable by foreign firms will be the type of export market that
U.S. companies have dreamed about for two decades. However, we must recognize that
fundamental reform of the Japanese economy must be driven primarily by forces within
Japan. The primary beneficiaries will be the Japanese people, not U.S. exporters. While a
long-term proposition, this is clearly a situation where we enjoy shared interests with the
Japanese people,


78

the actual foreign presence is 36 percent of the total.

It is important to mention that, several years ago, the MOF
authorized a handful of foreign companies to begin developing
what today represents the Third Sector. After much hard work and
considerable investment, this market niche began to grow from
scratch. Then, just a few years ago, the large domestic
companies began to take notice, and sought to target the sector
for entry.

Foreign companies (and smaller domestic companies) have
brought substantial benefits to Japanese customers in the form of
creative new products, marketing practices and services through
the limited Third Sector. However, through a variety of formal
and informal barriers, we have been denied the opportunity to
provide these same benefits in a wide range of life and non-life
products, including voluntary automobile insurance, which
represents a significant proportion of the market overall

Now, under the guise of "deregulation" and under pressure
from the larger companies, the Ministry of Finance is taking aim
at the tiny fraction of the market where Americans have a
sizeable presence. They are trying to do this despite the
prohibitions in the Agreement, while leaving the overwhelming
bulk of the market virtually untouched

The MOF seems to define deregulation as simply the
introduction of more competitors. They are leaving in place a
highly structured regulatory environment where there is little
if any, differentiation in rates, forms and methods of
distribution. They are not addressing many of the practices
common in Japan, where everyone uses the same rates, same forms
and where consumers can only purchase insurance products through
agents. Automobile drivers, for example, are charged the same
whether they live in Tokyo or rural Hokaido

In essence, the Agreement is intended to set the stage to
make possible an increase in the foreign insurance presence in
Japan. This is to be done by liberalizing the "primary" areas of
life and non-life, to allow foreign insurers to apply their
established strengths of creativity and innovation to benefit the
Japanese consumer. Only after the primary areas have been
substantially liberalized for a reasonable period of at least
three years may the Third Area then be deregulated

The Japanese Government recognized in the Agreement that:

“[the} dependency of small to medium [domestic] and
foreign insurance providers on the Third Sector is
high, and that these medium to small and foreign
insurance providers have made the efforts to serve the
specific needs of consumers in the Third Sector."

The Agreement states further that, based on this dependency

... it as appropriate to avoid any radical change in
the business environment, recognizing that such changes
should depend on medium to small and foreign insurance
providers first having sufficient opportunities (i.e.,
a reasonable period) to compete on equal terms in major
product categories in the life and non-life sectors
through the flexibility to differentiate, on the basis
of the risk insured, the rates, forms and distribution
of products."

MOF’s current deregulation plans threaten to do just the
opposite


88

days, more than five times the average length of a hospital stay in the United States. What
accounts for this difference is that the Japanese have never really developed long-term care
facilities or invested in home care for the elderly, so many elderly patients are confined to the
hospital for extremely long periods of time. The inability to treat these patients in less expensive

settings costs the government billions of dollars per year

Fortunately, there are currently several enlightened government officials at the top of Japan's
health care bureaucracy who genuinely want to implement a more efficient long-term care
program. One such individual is the current Director-General of the Health Insurance Bureau,
Mr Nobuharu Okamitsu, with whom HIMA is working to exchange ideas on effective health
care reform strategies However, as is the case with any major structural reform, making
progress will undoubtedly be extremely difficult, because Japan needs to reduce the number of
hospitals and to redeploy health care personnel into more efficient long-term care facilities or
home cate delivery services Moreover, paying for the proposed long-term health care program

for the elderly will continue to be a significant political issue in Japan.

Another perplexing aspect of Japan's health care delivery system is its complex and
multi-layered distribution system for medical technology and other health care products. With
every layer of distribution comes an additional margin, and higher health care costs. The
Japanese distribution system pushes up the price for medical technology, as it does many
products in Japan, which frustrates MHW and industry alike It also helps to render international
price comparisons meaningless Many of our companies have tried to by-pass the traditional
distribution network and gain a competitive advantage by selling directly to Japanese hospitals,
only to be told by hospitals that they will only buy through established distributors. While
policy issues relating to distribution of health care products fall within the jurisdiction of the
Ministry of Health and Welfare, action to address this age old problem and to enhance hospital
efficiency is slow to materialize, again because this could mean the displacement of Japanese

workers

A Specific Cloud on the Horizon for U.S. Medical Device Firms


43

Chairman CRANE. Thank you, Mr. Armstrong.

T would like at this point—because again, we may be interrupted
by a vote shortly—to yield to Mr. Paxon to welcome his corporate
constituent to the Subcommittee today.

STATEMENT OF HON. BILL PAXON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK

Mr. Paxon. Mr. Chairman, thank you, and I apologize for being
delayed at a leadership meeting. But I wanted to be here and to
welcome George Fisher. On behalf of our community, we are very
proud of the leadership of George Fisher and Kodak Co. for 100
years in the Rochester region..

Let me just make a couple of quick points: First of all, George
Fisher is a recognized leader in opening global markets to Amer-
ican products, whether at Motorola or today at Kodak. He uses
every tool at his disposal to bring barriers down overseas so that
American products like Kodak film can be marketed in those cor-
ners of the world. He believes in free trade.

But today, unfortunately, the playingfield is unfair and unlevel,
and his goal and Kodak’s goal is to not only bring about a level
playingfield but to, as a result, create jobs and economic growth in
this country, and i think that that is to be lauded. I would note
that in addition to his tremendous track record at both Motorola
and today at the Eastman Kodak Co., Mr. Fisher is a recognized
leader in this city in the area of trade policy, serving as an advisor
to two administrations on competitiveness and trade as chair of the
U.S. Council on Competitiveness and currently a member of the
Advisory Council for Trade Policy and Negotiations.

And I would note very clearly that Kodak is and always has been
interested as a corporate entity in helping to promote American
products overseas and create jobs here—54,000 jobs in this country
alone, and Kodak has traditionally been one of the top 10 exporters
nationwide. However, the actions by the Government of Japan are
undermining Mr. Fisher’s ability as well as Kodak’s ability to con-
tinue to produce jobs and economic growth here as well as over-
seas. You employ nearly 100,000 people around the world. And I
think it is important to note that the policies that are being pur-
sued in Japan clearly are harming Kodak’s ability and other com-
panies’ abilities to market these products.

Kodak has made a good faith effort, Mr. Chairman, to establish
a presence in the Japanese market, investing $750 million there
over the past 10 years. Kodak did not just walk in here and say
we want help; they fought and fought and fought to open markets
in that nation. Kodak’s goal is simple and fair: Allow U.S. compa-
nies to compete in Japan as they do all over the world. While Fuji
has access to 100 percent of the American market, Kodak is
blocked from two-thirds of the Japanese market. And most disturb-
ingly, Japan, one of our closest allies, has absolutely refused, cat-
egorically, completely, continually, to respond to American inquir-
ies on this matter. The refusal to respond to requests from U.S. of-
ficials is more than disappointing; I think it should be a cause for
deep concern in this country, especially considering their stated de-
sire to open markets in their nation.


129

the prime mover behind increased foreign sales in the Japanese
market.

The past couple of years have seen a digital revolution in elec-
tronic products, including most consumer products, personal com-
puters and portable telephones. U.S. semiconductor manufacturers
lead the world in digital semiconductor technology. As a result,
Japanese semiconductor users have turned to foreign suppliers,
mostly American, to provide them with cutting-edge devices based
on this new digital technology.

Whatever the answer, the inescapable fact is that foreign chips
are doing extremely well in the Japanese market. Remember the
United States defined its expectation under the arrangement as 20
percent foreign market share. SIA said in 1990 that the 20-percent
figure was a threshold after which market forces should be allowed,

“to take over and operate.” We are now at 30 percent. We do not
believe that there can be any real dispute that the objectives of the
arrangement have been achieved.

While these dramatic increases in foreign chip sales have been
occurring, the structure of the global semiconductor manufacturing
industry has undergone fundamental changes as well. There has
been an explosion in joint ventures and other types of long-term al-
liances between major chipmakers around the world. Driven in
part By huge capital requirements, the biggest names in the semi-
conductor industry have joined hands in R&D, production and mar-
keting in the latest generations of semiconductor products.

Ten years ago, bilateral issues dominated the semiconductor sec-
tor. Over the past decade, a new global semiconductor industry has
emerged, with trade, investment and production focused in many
parts of the world, including Southeast Asia, Korea and Taiwan. In
this new global environment, the challenges facing the semiconduc-
tor industry demand multilateral private sector solutions. The era
in which problems in this sector can be solved bilaterally between
governments of the United States and Japan is over.

In closing, Mr. Chairman, let me repeat that the mission of the
semiconductor arrangement has been accomplished. Its objectives
have been achieved in full. We believe, therefore, it is time now to
get the government out of the semiconductor sector and let the
companies and the market dictate the shape of the future.

Thank you.

(The prepared statement follows:]


113

While reserving the right to discuss and agree upon the
details of any procedure adopted, Fujifilm has no objection to
procedurally fair, neutral fact finding. Fujifilm is not afraid
of the facts. If Kodak continues to resist efforts at neutral
fact finding, USTR should be very skeptical of the underlying

merits of Kodak’s complaint.


122

public posture vis-a-vis Japan helps to explain why Japan won the
public relations contest surrounding managed trade. It is stagger-
ing to think that Japan and the European Union accused Washing-
ton of managed trade when, in fact, they have been engaging in
managed trade for years. The purpose of our trade policies is to
open markets, not to limit trade, but we seemed to lose our case
in the court of public opinion. Now, you might well ask, what does
it matter? Who cares? Foreigners do not vote. We are not in a pop-
ularity contest. But public opinion abroad makes a difference: It in-
fluences the political climate in which a trade official has to oper-
ate when he or she is coming to Washington. I believe that hostile
publicity worsens the situation for U.S. negotiators, because that
official is under domestic pressure not to give in to U.S. bullying.

Finally, I want to comment very briefly on what Congressman
Dreier said about public education and support for open trade. At
my institute, we think a lot about this, and we agree that it is a
serious problem. In fairness, however, I would not limit the failure
to educate the public to the Clinton administration. The explosion
of trade in our economy ever since the late seventies has not been
accompanied by corresponding efforts to educate the public by ad-
ministrations of either party. I encourage the Subcommittee to ad-
dress this problem.

Thank you very much for this opportunity to present my views.

[The prepared statement follows:]


127

The Japanese word ijime means bullying or hectoring. Iiime
among schoolchildren is something of a national problem in Japan.
When Americans appear to be resorting to it in the context of
trade, reactions can be swift and negative. The result strengthens
the hand of precisely those groups least willing to accommodate
U.S. interests. It certainly helped Mr. Hashimoto to become prime
minster.

Lbelieve that an unduly agaressive and self-righteous public
posture vis-a-vis Japanese trading practices helps to explain whi
in_the context of la: c's 2 an_won the
ublic relations cont. ne de." It is staggering to
think that Japan and the European Union accused Washington of
"managed trade" when they have been managing trade between them for
years. The goal of U.S. trade policy is to expand trade, not to
limit it. The use of quantitative indicators is one way of
measuring what the market would have achieved if the market were
free to operate. Yet the United States took a drubbing in the
court of world opinion.

Why does it matter? Well you might ask. We are not in a
popularity context, and foreigners don’t vote. But it does matter,
for a very simple reason. When a country’s newspapers are full of
emotional articles accusing the United States of bullying and
urging politicians not to back down, a trade minister who comes to
Washington to negotiate is not going to have as much flexibility as
he or she would have otherwise. We wi! an if we
top grandstanding, respect the courtesies, and adopt the style of
patient endurance that the Japanese admire.

Thank you for this opportunity to present my views.


151

Set negotiating goals W
first determined by econo:

analysis to be in best interes

Refuse to trade restric .
on existing rights as a way to.set
other opportunities.:

Insist Japan first honor its curren
agreements.



155

We studied that scenario and it comes out a poor third. One of the
fundamentals of beyond air service is that about half of the traffic
on Japan-beyond flights is flowthrough traffic on United States-
Japan flights. Thus, the loss of two direct Japan-beyond flights
causes the loss of one United States-Japan flight. This is a fun-
damental that argues against any capping of beyond flights or any
trading of beyond flights for more United States-Japan frequencies.

So the following strategy for U.S. negotiators is recommended:
One, we feel that they should insist on open skies for both cargo
and passenger carriers. Two, at a minimum, they should insist that
current rights under the 1952 agreement are not subject to negotia-
tion. Three, declare that if Japan restricts fifth freedom rights of
U.S. carriers, the United States will restrict Japan’s sixth freedom
operations. For example, if they will not allow us to fly from the
United States to Japan and beyond to Bangkok, we will restrict
their Bangkok-Japan-United States flights. And four, seek affirma-
tion of the APEC agreement on free trade in aviation services in
the Asia-Pacific area. The Japanese did agree to free trade in the
Asian market; further restrictions do not seem to be the way to
move toward a freer market.

To conclude, Mr. Chairman, the United States, we feel, has not
put air transport services in the appropriate global context or to as-
sign them proper priority. The United States has been the primary
moving force in efforts to expand trade in the world. As a result,
we have lost many jobs in sectors where other countries had the
competitive advantage. We have lost many jobs in consumer elec-
tronics, textiles, apparel manufacturing industries. Yet, the United
States does not aggressively promote airline services where the
United States has a major competitive advantage.

Thank you for this opportunity to present my views.

[The prepared statement follows:]


CONTENTS

Advisory of March 6, 1996, announcing the hearing ....

WITNESSES

Office of the U.S. Trade Representative, Hon. Ira Shapiro, Senior Counsel
and Negotiator

‘American Forest & Paper Association, Maureen R, Smith .
American International Group, Inc., Oakley Johnson
Anderson, Stanton D., Electronic Industries Association of Japan
Armstrong, Thomas W., Semiconductor Industry Association .

Deline, Ken, Deline Box and Display on behalf of Eastman Kodak Co
Dreier, Hon. David, a Representative in Congress from the State of Califor-

Eastman Kodak
George M.C. Fisher
Ken Deline

Electronic Industries Association of Japan, Stanton D. Anderson

Fisher, George M.C., Eastman Kodak Co .

Frost, Ellen L., Institute for International Economics

Fuji Photo Filim, Inc., John Patrick ..

Graham, Hon. ‘Lindsey O., a Representative in Congress from the State

of South Carolina ..

Health Industry Manufacturers Association, Ed Rozyask’

Hilty, Donald P., Economic Strategy Institute

Institute for International Economics, Ellen L. Frost

Johnson, Oakley, American International Group, Inc., and International In-

surance Council .. :

Levin, Hon. Sander, a Representative in Congress from the State of Michigan

Murphy, Cyril D., United Air Lines, Inc

Patrick, John, Fuji Photo Film, Inc

Paxon, Hon. Bill, a Representative in Congress from the State of New York

Rozynski, Ed, Health Industry Manufacturers Association

Semiconductor Industry Association, Thomas W. Armstron

Smith, Maureen R., American Forest & Paper Association

United Air Lines, Inc., Cyril D. Murphy

SUBMISSIONS FOR THE RECORD
Andersen Worldwide, Robert F. Kelley, and Charles P. Heeter, Jr., statement

Guardian International Corp., Auburn Hills, MI, Ralph J. Gerson, statement .
Keough, Steven J., Minneapolis, MN, statement

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145

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106

seriously misrepresented the facts reinforces the Government of
Japan‘s refusal to negotiate.

USTR’s priority at this stage should be to develop a core lof
neutral, credible facts. Kodak‘s allegations cannot serve as the
starting point for negotiations, because the allegations are not
true. Moreover, any unilateral action by the United States on
the basis of Kodak’s allegations would almost inevitably cause a
negative reaction from Japan and the international community.
There can only be issues for negotiation to the extent that
Kodak’s factual allegations are able to withstand neutral,
critical scrutiny. I£ they do not, USTR has no legal or policy
justification to continue the Section 301 investigation or take
further action. Were USTR to take action based on
unsubstantiated allegations, a WTO challenge to USTR actions
would surely result.

Fujifilm devoted approximately eight man years of lawyer,
economist and staff time to develop the facts presented in
"Rewriting History. We assume Kodak has devoted comparable if
not significantly greater resources. Both Fujifilm and Kodak
continue to provide additional information to USTR. At this
point, it should be obvious to USTR that a few casual
conversations between USTR and Embassy officials and the Japanese
Government, Fujifilm, distributors and retailers will not resolve
the factual conflicts present in this investigation.

Furthermore, other than Fujifilm’s efforts, there has been no

effort to develop facts related to the issue of Fujifilm's


66

that for clearly 10 years of good opportunity, we neglected Japan. So you know, we
did it to ourselves."

Kodak has refused for over 10 years to compete on price in Japan, Kodak claims
it has no incentive to cut prices, but the facts show that in the 1980s, when Kodak film
‘was substantially cheaper than Fujifilm, Kodak's market share went up to about 18
percent. Then, as soon as Kodak prices went up, their market share went down. Kodak
has never lowered prices again despite a falling doliar that would have justified cutting
prices

‘The real truth is what an unnamed Kodak official told a Nikkei Business reporter
in 1993 -- "If we would sel film at even cheaper prices than the current price, this cheaper
film would be reverse exported back to the U.S. or other markets and end up destroying
the global price structure of Kodak prices" In other words. Kodak worries that its own
very profitable sales in the U.S. might be threatened by reimports of gray market film from
Japan

Kodak has not been innovative and market sensitive Kodak claims it has "done it right"
in Japan, but the facts show that Kodak has been unresponsive to the preferences of the Japanese
consumer For instance, we have provided USTR with evidence showing that Kodak lagged two
years behind Fujifilm in the most important product innovations to hit the Japanese market in the
past decade -—- high resolution [SO 400 speed film and one-time use cameras

We've also shown that Kodak has failed to demonstrate a full-ledged long-term
commitment to the Japanese market. Unlike Fujifilm in the U S., Kodak has never set up any
manufacturing facilities for consumer products in Japan And on a purely cultural level, Kodak
made perhaps its biggest mistake in 1993 when it canceled job offers to incoming college
graduates -- a gaffe that one observer called "maybe the worst marketing decision ever made by a
foreign company" in Japan

Kodak has just not "done it right” in Japan Kodak talks about its advertising budget in
Japan of 5 3 billion yen between 1986 and 1989. Yet, this is only 10% the amount Fujifilm spent
in Japan during the same period How can a company expect to increase market share without
investing in advertising?

Eact Number Five -- Kodak has tried to exclude Fujifilm from the U.S. market. Kodak
and USTR claim Kodak's U.S. practices are irrelevant, but we have provided USTR with
information that responds to the requirement in Section 301 that USTR consider the extent to
which reciprocal opportunities exist for foreign firms competing in the same industry in the United
States.

As | stated earlier, Kodak's share of its home market mirrors Fujifilm’s. Kodak has 70
percent of the U.S. market and Fujifilm has 10. Kodak claims that the U.S. market is completely
open and that Kodak's share is simply the result of Kodak's well recognized brand and long
standing reputation.

In fact, there 1s an abundance of evidence demonstrating that Kodak engazes in
exclusionary activities in the United States, aimed directly at keeping Fuji brand film off retailers’
shelves We do not bring this up to justify or explain some problem in the Japanese market. We
bring it up because Section 301 cequires USTR to investigate the U market to ensure that the
principle of reciprocity -- the basic principle that underlies Section 301 -- is upheld And, it
provides a useful comparison

Despite Kodak's insistence that the U S. market is open, Kodak has actually stepped up its
efforts to exclude Fuji brand film, particularly since last year's termination of Kodak's decades-old
consent decrees. Kodak has paid premiums to companies like Eckerd Drug, Publix Supermarkets,
Bradlees, and major airport and hotel concessionaires in return for their agreeing not to carry any
brand but Kodak. Walk through Washington National Airport You cannot find any Fuji brand
film. By comparison, you will find Kodak film at Tokyo's Narita and Haneda airports


52

s, Chairman CRANE. Thank you. Let me ask a question first to
andy.

Sandy, are you on a tight time constraint too?

Mr. Levin. No.

Chairman CRANE. Then let me yield to Charlie to direct any
questions to David first.

Mr. RANGEL. Is he leaving before Mr. Levin testifies?

Do you have to leave?

Mr. DREIER. Yes, I have a 4:30 meeting, Charlie.

Mr. RANGEL. Well, since you have to leave, you can put your an-
swer in writing. I see where you are very critical of the internal
policy of the Japanese Government as well as President Clinton,
and you, like everyone else, want free and open trade and less rhet-
oric. It is my understanding that the negotiators are bogged down;
everyone is trying to resolve our differences without sanctions and
without a breakdown completely in negotiations. So, in reading
your testimony, I think everyone wants to reach the same objec-
tives. But what would you have the President to do specifically that
he has not already done?

Mr. DREIER. Well, the one point that I was making already in my
testimony is that we have unfortunately had the entire emphasis
on the issue of exports, not realizing that we have the potential to
benefit from the flow of Japanese products which are sold in this
country, improving the standard of living of the American people.
And by pursuing that goal, it plays into that hand of not trying to
recognize the overall benefits of open markets and free trade for
all. And I think that quite frankly, while we worked long and hard
on the NAFTA and the Uruguay round of the GATT, and I have
traveled with both of you, other Members, and I was privileged to
travel with this Subcommittee to Latin America last year, we have
not seen what I believe is the kind of emphasis that the adminis-
tration should place on the overall benefits of free trade. Because
when they start talking about fair trade, it does, again, play into
the hands of those who would be less than geared toward the goals
that we share.

Mr. RANGEL. Well, I would agree with you that we should not
have broad and general rhetoric, but I cannot buy American-made
anything electronic anywhere in the city of New York because of
the great value of free trade.

Mr. Drerer. But you can buy everything in New York because
of the great values of free trade.

Mr. RANGEL. Yes; I am not knocking it. The Japanese have done
a fantastic job. If you want anything, you have got to buy Japa-
nese. But I have people who manufacture in New York, and they
want to sell a couple of rolls of film, you would agree that they
should be able to get on the Japanese markets as well.

Mr. Dreier. Absolutely.

Mr. RANGEL. Then we are saying the same thing; it is just that
you complain when you are losing jobs from manufacturers against
those that are shipping here but for those who are the creators——

Mr. DREIER. I do not complain about it.

Mr. RANGEL. I do not mean you specifically, but in New York, we
welcome the trade, because if it was not for the imports, we would
be out of business in a lot of areas.


173

While the United States and some other parties have been active in pursuing the WPPS's goals,
the participation of other nations has lagged. It is crucial to the credibility and effectiveness of
the Working Party that its efforts on accountancy not fall by the wayside. For this reason, we
are calling for significant steps to be taken on professional services in anticipation of the WTO
Ministerial Meeting to take place in December 1996 in Singapore. This “Action Program” —
which we have shared with the US. Trade Representative's office — contemplates movement
on several fronts.

Continuing Liberalization of Trade in Accountancy Services
All WTO members that have not yet scheduled the accountancy sector (accounting, auditing,
bookkeeping, at a minimum) under the GATS should agree to do so at Singapore. The content
of the scheduling should be the status quo or better. This would be a significant sign of
confidence in the WTO/GATS and of support for the liberalization of professional services.

All WTO members that require citizenship as a condition for an individual to obtain
professional qualification or licensing within their jurisdictions should agree to eliminate this,
requirement at Singapore. This is a small but highly symbolic initiative in support of
liberalization of professional services.

Initial Conclusions of the Working Party on Professional Services
With respect to arrangements for the mutual recognition of qualifications between WTO
members, ihe Working Party on Professional Services should complete work on disciplines for
uniform, open, transparent and objective procedures for the negotiation of such arrangements.
These disciplines should be endorsed by Ministers at Singapore.

With respect to residency requirements for individual professionals and professional firms, the
WPPS should complete work on disciplines to end such requirements that are more
burdensome than necessary to achieve legitimate policy objectives. These disciplines also
should be endorsed by Ministers at Singapore.

With respect to requirements that owners of professional firms must be locally licensed
professionals, the WPPS should complete work on disciplines that would open ownership to
foreigners ina way which would still protect professional objectivity and independence.
‘Again, these disciplines should be endorsed by Ministers at Singapore.

With respect to encouraging the development and use of international standards, the WPPS
should develop disciplines on appropriate procedures and due process in professional
standards setting at the international level. These disciplines should be endorsed by Ministers
at Singapore.

Finally, Ministers should agree at Singapore that the Working Party on Professional Services
‘will complete work on accountancy, including recommendations on international standards, no
later than December 1997. If concrete first steps on accountancy are made in Singapore, work
on other professions should begin, using the progress made in accountancy as a model.


101

DOWNEY CHANDLER, INC.

1401 [ Stcwet NW, Suice 1210, Washington, 1X2 20005
November 15, 1995

Honorable Michael Kantor
United States Trade Representative
Washington, DC, 20506

Dear Ambassador Kantor:

T appreciate the opportunity to follow up our carlier conversation regarding Fuji Photo
Film's views of Kodal's request for Section 301 action on the consumer color photo film macket
in Japan.

‘The broad United States - Japan strategic relationshlp is at a critical juncture. The
situation in Okinawa and the press reports of CIA intelligence gathering during the recent
automobile negotiations have reinforced tensions significantly. It is important that “next steps"
on United States - Japan issues be directed toward easing thoso teasions. U.S. economic and
strategle ubjectives in the reglon need to go forward with as litle bilateral contflict ax possible.

[believe that there is an opportunity tere for you to deal with our relationship with Jepen
in a way that will do credit to this Administration, move the whole process of resolving our trade
disagreements forward and defuse the situation regarding the pending Scetion 301 petition. The
acoorupanying paper presents an analysis of the situation and explores a number of options for
resolving the factual disputes at the heart ofthe petition. T will briefly suramarize the paper ia
the following paragraphs.

Before, proceeding with this investigation, two issues must be resolved: whether, in fact,
‘Fujifilm engages in practices in Japan which violate Jc panese antimanopoly faw and which are
tolecated by the goverument and whether or not Fujifilm is denied “reciprocal opportunities" in
the United States.

‘The almost total conflict between Kodak and Fujifilm's positions, coupled with Kodak's
failure to use legal avenues open to if in Japan, seriously undermine Kodak's complaint and
explain the Japanese government's unwillingness to negotiate. Kodak's amassing of allegations
ccan in no wey substitute for a rigorous investigation of the facts that these legel processes would
entail, Nor can the issue of Fujifila's reciprocal access to the market here in the United States be
resolved without a rigorous investigation of our domestic consumer film market. There are
options available to resalve the factual basis of the complaint in ‘a manner that should be
acceptable to all partics involved.


26

Testimony Before the Committee on Ways and Means
Subcommittee on Trade
Hearing on U.S.-Japan Trade Relations

George M.C. Fisher
Chairman, President and CEO
Eastman Kodak Company

March 28, 1996

Thank you for the opportunity to testify today on U.S.-Japan trade
relations. This is an important and timely topic. Active
participation by the Congress, and especially this Subcommittee, on
U.S.-Japan trade relations has never been more essential.

As most of you are aware, despite Kodak's reputation as a world-
class company that has long produced quality products which are
competitive in virtually all other world markets, we have been
unable to gain true access to the Japanese market, Before going
anto that specific dispute, T would like to describe to you the
importance of the industry involved

Importance of Imaging to Jobs and the Information Economy

Human communication has traversed many media over the ages, from
pictures drawn on cave walls, to smoke signals, to spoken and then
written language, to the typewriter and printing, to telegraph,
telephone, radio and television. Yet, today there is only one
readily available means for sharing pictures over distances in
real-time: television, which is predominantly a one-way medium for
most of us.

That reality is about to change.

The power of computers (in millions of instructions per second) is
doubling virtually every 18 months, and the cost for that computing
power is decreasing by 20-30% a year. These technological advances
are eliminating physical barriers to real-time transmission and
communication -- not just of sounds, but of documents, still
images, and even moving images. And when it comes to images and
pictures, Kodak sits at center stage.

So the imaging business is not only about photographs of one’s
grandchildren, but much more. It is a constantly evolving
technology-driven industry. And it is important, not just to human
communications, but to U.S. jobs.

Kodak's manufacturing operations mean good U.S. jobs. Kodak
employs nearly 50 thousand workers in several U.S. states. Our
operations also support those of numerous suppliers and distribu-
tors with thousands more employees.

Our contribution to the export picture is equally important. In
New York State, we are not just the leading manufacturer but the
leading exporter as well.

At the same time, one of the key facts I have to consider as
Chairman of Kodak ‘is that half the people in the world have yet to
take their first picture. There is dramatic growth potential in
developing markets such as Russia, India, Indonesia and China. In
China alone, if we could get people on the mainland to take as many
photos as the people in Taiwan, the number of film exposures
worldwide would grow by 50%.

So we have launched special initiatives to improve access to those
markets, to get to know their governments and their people better
-- and to begin selling more of our products.


22

Second, we need no reminders of the importance of the WTO,
and we will take appropriate disputes to the WTO. But the WTO
does not cover all trade issues; it does not cover all trade disputes.
We said throughout the Uruguay round proceedings that we would
take disputes to the WTO where appropriate, and we would pro-
ceed bilaterally with our consultations and our negotiations. We re-
serve the right to do that, and all member States do that. And it
is particularly noted that the WTO, like the GATT before it, does
not address certain kinds of trade barriers, informal barriers, of the
sort found in Japan that have burdened many of our industries. So
the suggestion that we should seek recourse through the WTO on
those matters or wait until some international consensus emerges
is not one we accept.

Mr. Levin. And I assume those comments would apply to the
semiconductor field as well as others.

Mr. SuHapiro. Well, I think that is certainly right. And on semi-
conductors, we believe that the semiconductor agreement has bene-
fited the participants in the agreement, the United States and
Japan, but we also believe that other foreign providers of semi-
conductors have benefited from the opening of the Japanese mar-
ket. It is an MFN agreement, and we do not subscribe to the view
that it needs to be handled in the auspices of the WTO.

Mr. LEVIN. One last question; you referred to deregulation and
to Mr. Dreier’s statements, and he and I are going to be testifying
subsequently. Let me just ask you to comment briefly on the propo-
sition in Mr. Dreier’s testimony: “Our trade policy should focus on
deregulation and competition rather than look for managed market
access for select American exports.”

Mr. SHAPIRO. Well, I endorsed the part about deregulation and
competition. We really do believe that the structural efforts and the
sectoral efforts need to go together. We are trying to open the mar-
kets in many key sectors for U.S. companies and workers and for
other foreign providers to get into Japan, and we think we are hav-
ing success in doing so. To be honest, our sectoral efforts also come
back to deregulation oftentimes, Mr. Chairman. In autos and auto
parts, in insurance, and in many of our agreements, you get de-
regulation of certain sectors because you approach them sectorally
rather than waiting for a broad blueprint. So I think the two go
together.

Mr. Levin. Thank you.

Thank you, Mr. Chairman.

Chairman CRANE. Thank you, and Mr. Shapiro, we want to ex-
press again appreciation and support for all your efforts, and with
that, I want to suggest that we bypass our colleagues, Congress-
man Levin and Congressman Dreier next on the panel, because
there are plane connections, I know, that some of the panelists
would like to make. We would like to bring up next George Fisher,
chief executive officer with Eastman Kodak Co., who is accom-
panied by Ken Deline, founder of Deline Box and Display and
Thomas Armstrong, the president of the Semiconductor Industry
Association.

And in the interim, the Subcommittee will stand in recess to
make this vote. We are down to about 10 minutes, guys, and if you


105

ignored as being legally irrelevant to any discussion of

anticompetitive conduct.

The Current Impasse in the Investigation

Both Fujifilm and the Government of Japan have urged USTR to
dismiss the Kodak Section 301 complaint on the grounds that Kodak
has not even attempted to use the legal mechanisms available in
Japan to address its complaints. Kodak argues that the Japan
Fair Trade Commission (JFTC) is part of the problem, not part of
the solution. Whatever one thinks about the efficacy of JFTC
enforcement, a party with an allegation of a violation of
Japanese competition law should be required at least to try using
the local remedy. Moreover, Kodak appears unaware of the fact
that under Japanese law it could also pursue its complaint in a
private action in the courts in Japan. Nevertheless, USTR does
not appear disposed to require that Kodak, consistent with the
norms of international law, exhaust its local remedies before
bringing the matter to USTR.

Substantively, the Kodak-Fujifilm dispute is at a stalemate.
After two major submissions by each party during the summer,
another large submissior! by Kodak on November 6, and the promise
of more to come, the parties disagree about both the history and
the current situation off the Japanese photographic products
market. Unlike other situations, where some non-Section 301
context provided a basis for a government-to-government dialogue,
there appears to be no existing alternative mechanism for such

discussions in this case. The strong belief that Kodak has


162

Summary Impact of the Scenarios: All-Cargo Carriers
1m 1995 Doltars

Impact in the United States
Revenue of Feonomic US. Trade
Scenarivs US.Camiers Activity Employment Receipts
GBI) Thos) (SB)
TOTAL IMPACT

Impact in 1995 309 S20 4 soa
Impact in 2010
Open Skies saa S78 170 29
1952 Extension 28 61 ne 28
Capped Beyonds 7 46 100 15
Capped Beyonds with Attrition 3 40 88 1

DIFFERENCE FROM 1952 EXTENSION,

Impact in 2010
Open Skies 505 S17 7 904
Capped Beyonds cay 45 2 10
Capped Beyonds with Attrition 18 21 45 4

‘Summary Impact of the Scenarios: Flight Availability

74700 Equant Iomplied Actua
epan Beyond OS apan-eyo
Usctapsa” Duct Code'Share OtherAsia USulapan “Dimes Code Shae Other Ania

1952Cariees
Avaiblem 8516 a 27 2
Availabe 2000
oom 2 aoe x0
Wereverin E216 a6 ays ae
Cappedtoyends 22k wD 6 nts 26
Copped0evends 212 om mw am
wah Ata
MOU Corres
Avsiabh in 19578 1“ 16 »
Avsiable ws 2010
Open shies ne @ a bo
Wren 15 & me »
Capped Bevonss 21 m4 x m ®
Capped Bejonds 172 mw moo oe »
with ait
Tonal ANUS Carson:
Desiablew 19S 2780 % soe »
Avaiabein 2010
‘Open shi on xs wm a
WSR Esau 482 = wows 25
Cappedievends 08 eB? ee tm Bs
Capped Beyond 8 ame ow Bs
wth Attn

As the summary charts make clear, this analysis indicates that the open-skies
scenario is by fac the most favorable for the United States, on all measures of
performance. Such a conclusion is not surprising, because an oper-skies
arrangement would enable US. carriers fully to exploit their competitive
strength in both the U.S.-Japan market and the beyond-fapan market.

The analysis indicates that extension of the 1952 Agreement is the second-best
scenario. By maintaining market share across the board, it allows all US.
carriers to benefit from the rapid growth in Asia-Pacific air traffic while keeping
a US. cartier presence in all segments of the market. Although it does not add
additional U.S. gateways, this scenario actually provides more U.S.Japan
frequencies than all except the Open Skies Scenario.


165

In the event of restrictions on US. beyond rights, the United States, of course,
would also have to study the U.S.-bound operations of other Asian carriers who
might cooperate with MOT's protectionist schemes.

Recommendation 4. The United States should seek clear
reaffirmation of the APEC (Asia Pacific Economic
Cooperation Forum) agreement with regard to achieving free
trade in aviation services in Asia-Pacific skies and should add
no new restrictions on aviation services.


169

The Uruguay Round Agreements
Andersen Worldwide had two main goals that guided our work during the Uruguay Round:

1. to eliminate unnecessary government impediments to marshaling the financial resources,
professional talent and technology of our global organization in order serve the needs of
dlients anywhere in the world; and

2. to.advance the globalization of professional services - through the international recognition
of qualifications and the use of International Accounting Standards ~ to better serve the
modem global marketplace.

When we measure the Uruguay Round agreements against these criteria, we find great strides
have been made, and a mechanism has been created to complete the job.

Removing Impediments to Our Worldwide Operations
There are three principle types of impediments to our international operations:

1. restrictions on payments and financial transfers affecting inter-firm arrangements, the
collection of fees in cross-border transactions, and investments in new operations;

2. restrictions on the movement of professional, managerial and technical personnel for short-
and long-term assignment in other countries; and

3. problems affecting our intellectual capital, including inadequate protection against piracy of
software, training materials and publications, as well as restrictions on transborder data
flows and telecommunications.

‘These issues are addressed in the General Agreement on Trade in Services (GATS) and the
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the two most
significant new agreements to come out of the Uruguay Round.

The GATS sets out a series of rules to discipline government intervention in international trade
and investment transactions affecting service industries and professions. The broad intent of
these rules is twofold: to ensure that foreign service firms or firms with international affiliations
enjoy the same privileges as domestic competitors with respect to government regulation
{national treatment) and to remove obstacles to trade and investment in services (market
access),

For the most part, these rules apply only if individual countries commit to apply them to
specific service industries as indicated in schedules attached to the agreement. More than 62
countries, constituting more than 90 percent of Arthur Andersen’s global market, have agreed
to apply the rules to accounting, audit and tax services. More than 60 countries ~ more than 95
percent of Andersen Consulting’s global market -- have agreed to apply them to information
systems, management consulting and software development. This scheduling is important
even for countries where we do not face problems or where our practices are not heavily
regulated because it prevents governments from imposing new restrictions.


34

work of relationships where outside suppliers and Japanese pur-
chasers can communicate regularly to provide opportunities for de-
sign in and sale of projects. And fourth, it establishes a procedure
under which the Japanese chip producers calculate and maintain
their chip production costs so that they can be quickly produced in
the event of dumping allegations.

These four elements have been highly beneficial to both the Unit-
ed States and to Japan. They have made possible extraordinary co-
operation between the United States and Japanese industry. The
agreement has increased foreign market access, and it has dra-
matically reduced trade frictions. The agreement has made these
positive things happen, and without this agreement, they may not
continue. Without it, in fact, we would not even have an agreement
on what the market share numbers are today.

The United States and Japan need this agreement to build on
the progress of the past 10 years, because there is still more
progress to be made. We are flexible on the specific terms of a new
agreement. We are not seeking a numeric target. We just want con-
tinued and steady progress; we are not seeking a guaranteed mar-
ket share. But we do believe strongly that the job of obtaining full
access to the Japanese market is not yet done.

Mr. Chairman, thank you for this opportunity to present our
views.

[The prepared statement follows:]


175

STATEMENT OF MR. RALPH J. GERSON
T AND CEO, GUARDIAN INTERNATIONAL CORP.
before the
Subcommittee on Trade
Committee on Ways and Means

United States House of Representatives
March 28, 1996

AGREEMENT ON FLAT GLASS

Introduction and Summary

Jam Ralph J. Gerson, President and Chiet Executive Officer of Guardian Intemational Corp . of
Auburn Hills. Michigan. Over the past three decades. Guardian International and its parent
company, Guardian Industries Corp... have buift a worldwide network fir flat glass
manufacturing, distribution, and sales. Today, we manufacture flat glass products in {4 plants in
ight countries in North and South America (the United States, Canada, and Venezuela), Europe
(Luxembourg. Spain and Hungary), and Asia (Thailand and India). Five additional production
facilities are currently under construction. one each in the United States. Germany. Brazil. Saudi
Arabia and Thailand. Operations in several other countries are planned over the next five years
Guardian also has built highly suecessfitl sales and distribution operations in more than 80
countries.

‘Guardian has strongly supported an active U.S. government role in apening Japan's market for
flat glass. After years of effort. we had concluded that official help was required 1o change the
closed, cartel-like structure of that market. For that reuson. we were extremely pleased in
December 1994 when Ambassador Kantor announced that agreement had been reached on steps
to open the flat glass market. Based on experience du
conditions have begun to change. but much more progress must be made for Japan to enjoy sn
‘open and competitive glass market. Imports have increased significantly in percentage terms. bu
tmpon levels remain unusually low in absolute terms, Moreover. there are indications that we
are starting to reach the limits of the willingness of Japanese distributors to handle foreign
products.

st year of the agreement,

ng th

sass

Officials of the US. and Japanese governments will mect in Tokyo on April 22nd and 23rd for
the first annual review of the flat glass agreement. Prior to that meeting, President Clintor will
be traveling to Tokyo. It is essential that President Clinton and other U.S. officials make it clear
to their Japanese counterparts that continued efforts to implement the flat glass
important to the bilateral trade relationship.

sement are

The remainder of my statement reviews the efforts that led to the agreement on flat glass. the
principal terms of the agreement. implementation to date. and the etorts of the U.S. private
sector

tial Efforts in Japan

During she late 1980's. Guardian concluded that, for no key reasons, twas vital to eur global
competitiveness to become a significant player in the Japanese market, First. the $4.5 billios
Japanese market was the second largest country market in the World Second, our Japanese
competitors, whom we faced in virtually every market around the world, were Financing their
worldwide expansion with excess profits earned in the high-priced Japanese market

Our initial market-entry strategy in Japan was one thitt had heen successful throughout North
America, Europe. sind Asia, We set out to win customers by providing

high-quality glass


115

‘The Honorable Thomas J. Downey
Page Two

The amendment provides that in determining the existence of an “unreasonable”
act, policy ot practice, apptopriate consideration could be given to the denial by a
foreign government of access to the market in that country and oppormmities
win that market generally reciprocating those available within the United

$. Rep. 100-71, 100th Cong,, Ist Sess. 87 (1987), and H, Rep. No. 100-40 Part J, 100th Cong,
1st Soss., 69 (1987) (cmphasis added), Neither the plain language of the statute nor its
legislative history support the interpretation thet section 301(d)(3X(D) requires USTR to ensure
“eciprocal opportunities” in the United States. In fact the House Ways & Means legislative
history cited above further provides: -

«even ifthe market opportunities provided in the foreign market equaled or
exceeded those provide in the United States, the particular foreign practice could
be actionable if it were nonetheless unfair and inequitable... .

Id, Nor does the plain language of the statute and its legislative history support the interpretation
that section 301(4)(3)(D) requires USTR to apply a “clean-hands” test to Kodak. Even if that
Interpretation were in accordance with the law, itis difficult to see its relevance in this case given
that the United States Court of Appeals for the Second Circuit affirmed the district court's
holding that Kodak was not engaged in anti-competitive practices in the United States.

‘As you know, your client Fujifilm is invited to submit any information it deems relevant for the
record of the Section 301 tavestigation. My staff bas been, and will continuc to, review all
submissions carefully. In audition, we are avallable to meet with you as needed to discuss both
factual and legal issues.

Sincerely,

Yl

Irving Williamson
Acting General Counsel


136

late individual sectors of trade and manage the outcome where
USS. firms do well. Aviation has a long history of isolation that
makes it particularly vulnerable to these techniques, but given its
strategic importance, particularly in the Asia-Pacific marketplace,
the United States cannot afford to present anything but an inte-
grated, united front. This Subcommittee, we believe, is in a position
to provide leadership to ensure that in this area as in others, the
United States is speaking with one voice.

Thank you.

[The prepared statement and attachments follow:]


177

glass manufacturers. In tum, the Government of Japan praised the industry statements and
undertook to

+ Brief the domestic industry on the contents of the agreement and facilitate contacts
between the US. and Japanese industries;

. Promote wider use of specialty glass for safety and energy conservation purposes:

+ Promote increased competition in large-scale construction projects. both public and
private;

+ Support steps by Japanese glass distributors to diversify their sources of supply: and

+ Conduct an annual survey of the industry to assess implementation of the measures

Finally. the U.S. government agreed to ensure that U.S. manufacturers are appropriately working
to take advantage of the openings created by the agreement.

The key to the agreement, in our view, is the Japanese government's commitment to conduct an
annual survey to collect clearly defined sets of data. In addition to data on imports by country

the surveys will generate data on:

. ‘The extent to which Japanese distributors and glaziers begin using market forces to
determine their glass suppliers, which should lead to substantial quantities of imported
lass;

+ Perceived material differences between foreign and domestic glass:

+ Sales activities by foreign-owned glass tirms: and

+ Participation by foreign-owned firms in publicly financed large-scale construction
projects,

‘The agreement spells out the objective criteria -- both qualitative and quantitative ~- to be used in
assessing implementation of the agreement. The qualitative criteria are based on levels of effort
by the two governments. The quantitative criteria are based on the survey results, In our view.
the most significant quantitative criterion is “the change in the extent to which Japanese
distributors and glaziers deal in or use imported fat glass...” This measures the extent of reat
opening in the distribution system. If distributors and glaziers source their glass trom more than
cone Japanese or foreign suppher, they are much less vulnerable to pressure to maintain
traditional sole-source buying patterns. While the Japanese were careful to include a statement in
the agreement that the criteria do not constitute numerical targets, itis elear that suecess would
be judged in large part by whether imports of flat ulass increased substantially. The Japanese
also understand that it is not sufficient that impon increases oniy occur fom Japanese-owned
glass plants located abroad

The agreement runs for five years. until the end of 1999. and consultations are to be held at leust
annually.

The Clinton Administration made it clear from the outset that successful implementation 1s
crucial, that it did not intend to target about the flat glass issue now that_ agreement had been
reached. Both Ambassador Kantor and Ambassador Mondale have been consistent on this pount

No doubt this clarity had an effect on the Japanese, because several early steps were taken, “The
Japanese government promptly brieted the industry on the contents of the agreement. The
Japanese distributors and manufacturers promptly issued their voluntary statements endorsing


58

action, or the threat of it." Instead, ne 5
exclusively in cooperative dialogue with Japan
mutual respect for the multilatera) system

I've always taken particular except io:
complaints by the Europeans. Trey ave
behind us when we push to open a ~arket while criticizing
our methods in order to curry favor wit crionist
nations. They then will cut a deal with such countries
for a rigid limit on access to the European markets, as
they did on autos as to Japan

-- The briefing memo prepared by the majority staff, which
blithely claims that "(Olur bilateral trade balance with
Japan is largely the result of macro-econom-c imbalances

(Al bilateral trade deficit with Japan does not
refiect ‘lost’ production or ‘lost' jobs or ‘lest
wages."

But in the 1980s jots were Los
of industries were lest. Sure, tecrce
important role. But I remember wien the pundits sai
we could only cut the budget deficit and bring the value
of the dollar down to 200 Yen, the trade deficiz would
disappear. Now the budget deficit has keer salved, and
the Yen is around 100, yet the trade deficic persiscs
Meanwnile, other nations run trade surpluses while
maintaining even larger budget deficits than the United
States. Case in point: Jagan, wicse budget deficit is
larger as a share of GDF than the United States

-- Others are calling for "deregulation" in Japan and other
nations to mirror calls for dereguiation in this country
Deregulation is important, but in Japan it won't happen
without continued outside pressure and is no magic
bullet.

Those who are unwilling to take an aggressive path
between the extremes of unreciproca! trade and no trade only
give aid and comfort to extreme voices

It took us a long time to escape the rhetoric and ghosts
of earlier days and to develop this hard-headed, commonsense
approach. We must remain vigilant. This is no time to return
to the failed policies of the past.


112

schedule and defined timetable for presentation of factual
information. The ALJ option thus would easily allow USTR to have
a credible, expert, neutral party undertake fact finding.

In terms of a sequence of events, we would propose the

following:

e USTR would discuss with Fujifilm and Kodak a
mechanism for comprehensive and neutral fact
finding. All three would agree on the type of

mechanism.

© All three parties would decide on procedures and
tentative timetables for the factual

investigation.

* Although tentative timetables are possible, it
would be a mistake to create artificial deadlines
for fact finding. The goal is accurate facts.
‘Therefore, USTR should suspend the current
Section 301 investigation. The recent USTR
decision on the Section 301 investigation of the
EU banana xegime -- where it terminated one
investigation and started another as part of a WTO
complaint -- shows the great flexibility provided

USTR under Section 301 procedures.


76

STATEMENT OF OAKLEY JOHNSON
AMERICAN INTERNATIONAL GROUP, INC.

Mr. Chairman and members of the Subcommittee, thank you for
the opportunity to testify today on the U.S.-Japan Insurance
Agreement. My name is Oakley Johnson, and I am Vice President
for Corporate Affairs at American International Group, Inc
iAIG). AIG is a leading U.S. based international insurance and
financial services organization, and the largest underwriter of
commercial and industrial insurance in the United States

tt is my privilege also to appear with the support of the
International Insurance Council, whose insurance and reinsurance
member companies represent the overwhelming majority of U.S
companies operating worldwide.

AIG has been in Japan since the end of World war TI
Through much hard work, perseverance, and innovation, we have
become the largest foreign insurer in Japan. However, despite
these efforts, we and other U.S. insurers have never been able to
successfully penetrate the major life and non-life insurance
sectors of the Japanese market. ‘This is in contrast to the fact
that we have had success in doing so in virtually every other
significant market in the world.

This lack of fair market access was the prime reason the
Clinton Administration undertook to negotiate the U.S.-capan
Insurance Agreement, which was signed in October, 1994

The Japanese insurance market is the second largest in the
world, with private sector premium volume of aver $350 billion
Japan's life insurance market is the world’s largest, with a
premium volume of nearly $300 billion.

Historically, the insurance business in Japan has been
tightly regulated by the Ministry of Finance (MOF). The market
is dominated by 2 few giant, domestic companies which maintain a
powerful presence from Keiretsu and/or cross shareholding
relationships, often to the exclusion of newcomers. Japanese
companies control more than 97 percent of the market; all foreign
firms combined have 3 percent. By way of contrast, foreign
penetration of the U.S. market and the EU market are in excess of
10 percent and 30 percent, respectively.

In the late 1980’s, Japan developed an awareness of the
fundamental need to modernize the regulation of its insurance
market. The Ministry of Finance initiated a process designed to
develop a consensus On how to bring this about. Following three
years of deliberations, an advisory group to the Ministry (called
the Insurance Council) issued a report in 1992 which contained
early warnings of some troubling recommendations which would
surface later

In June, 1993, several leading American business groups
issued a joint analysis of the Council's report raising serious
concerns about the Insurance Council's recommendations The
report noted that:

vThere is concern on two fronts... First, many industry
experts believe that the MOF will target the Third
Area’ for more rapid and/or more comprehensive
liberalization than the primary areas. Given that the
Third Area is significantly more important to foreign
insurers than to local companies, any deregulation of
the Third Area without first liberalizing the primary
insurance areas would constitute de facto targeting of
foreign companies, seriously damaging them and probably
forcing some of them to leave the market. Second
reform by the Ministry of Finance and the Diet will be
flawed if it does not fully address Keiretsu, cross-

"see next page for definition


28

After carefully researching the barriers confronting Kodak in
Japan, we filed a petition with the U.S. Government in May of 1995
under Section 302. We did not take this action lightly. Looking
at all of our efforts, both past and present, we concluded that no
matter what we did to market our products in Japan, it would never
be enough to succeed unless something was done about the Japanese
Government's active role in keeping us ouc

We were gratified to have our case accepted for investigation by
the USTR. We are also gratified that the leadership in both major
parties and in both houses of Congress, as well as the President,
all seem to recognize the seriousness and strength of our case.

The evidence we have presented is overwhelming -- and it comes
almost entirely from Japanese sources. This is regularly cited as
the best documented market access case in history. No one, with
the predictable exception of Fuji and the Japanese Government, has
challenged its validity

What are the barriers and how do they work? Both the government
and the private sector play a role. As far as government action is
concerned, the most serious current barriers are the Premiums Law,
the Large Scale Retail Store Law, and toleration of illegal
anticompetitive practices.

* Under the Premiums Law, the Japan Fair Trade Commission
("JETC") delegates power to trade associations to create and
self-enforce "fair competition codes" which limit the use of
advertising and marketing strategies to lower prices. Arm-in-
arm with the JFTC, Japan’s domestic suppliers in the photo
film industry maintain high, stable prices while disciplining
independent-minded retailers who may be tempted to offer
promotional or discount incentives to consumers. As a result,
Kodak is effectively prevented from competing on price.

* The Large Scale Retail Store Law also restricts Kodak's sales
by impeding the establishment, expansion and operation of
large discount and photo specialty stores. These are the very
stores where we have best been able to market our products.

* The Japanese Government also knowingly tolerates and encourag-
es anticompetitive practices designed to keep out imports and
maintain artifically high prices.

The private sector's role involves restrictive business practices
designed to keep our products out of the distribution system
entirely or -- in those instances where our products do reach the
retail shelf -- to prevent them from being priced competitively

These practices are real today, and they have been in existence for
a long time. It sounds astonishing, but we have documented that
beginning in the 1970s and with the government's active support all
the way along, Japan’s photographic film and paper industry has
been purposefully reorganized to blunt Kodak's entry.

The Japanese Government has essentially “privatized protection,”
helping private parties to form a complex web of distributors,
financial institutions, wholesalers and retailers. Within this
unusual market structure and through anticompetitive practices
tolerated by the government, Fuji and others (acting as agents of
the Japanese Government) aré able to suppress import penetration.
Examples include:

* Fuji’s control of photo wholesalers through rebates and
massive security deposits;

* Fuji’s threatened supply cutoffs to wholesalers that use or
promote Kodak's products; and

¢ trade associations enforcing high prices to the consumer


94

© A Japanese Government commitment to a joint data collection system would provide both
sides with the ability to monitor the operation of Japan's market for wood products, and to
establish the ultimate credibility of the recently announced Hashimoto initiative,

We are appreciative of the U.S. government's efforts to translate the Hashimoto initiative on
housing costs into meaningful market opportunities for U.S. wood suppliers. We regard this as a
potential "win-win" which could match Japan's need to lower the cost of housing with our long-
standing efforts to gain real access to the Japanese market. With the active engagement of the
US. Government, we are hopeful that the Hashimoto initiative can provide concrete evidence of a
serious commitment to reform Japan's regulatory system in ways which will achieve an open
market in the solid wood building products sector, and assist the Government of Japan in
achieving its priority reform objective of reducing housing costs

Paper.

The U S.-Japan Agreement on Paper Market Access has failed to produce the results anticipated
by cither the U.S. negotiators or our industry. In 1995, the U S. share of the Japanese paper
market stood at 1.8%, only one tenth of one percent higher than in 1991--the year before the
agreement was concluded. Japan’s paper and paperboard imports from all sources accounted for
just 4 2% of the country’s consumption in 1995, the smallest such ratio in the world, and only
slightly higher than 1991's import share of 3.7% In fact, in kraft linerboard, one of the product
categories covered by the 1992 agreement, the U.S. share, as well as the export volume, was
actually well below what it had been in 1991

The U.S. industry believes that the U.S. market share has remained minuscule because of the
continuing existence of an array of business practices intended to deter the entry of new paper
suppliers, particularly imports. Some of these barriers are

© —_Acomplex and largely closed distribution system,

© Imertocking relationships between members of the same keiretsu, or corporate
family, which include manufacturers, agents, wholesalers, tracing companies,
printers, publishers or other end users, and financial institutions,

© A llack of transparency in corporate purchasing practices,
© Inadequate enforcement of Japan's anti-monopoly laws

Other common business practices in the Japanese paper market which have tended to lock out
USS. paper suppliers are the promissory note payments system and after-sale price adjustments
provided by Japanese paper manufacturers to their myajor distributors, While MITT has reported
that these practices have been discontinued, at least among the large manufacturers-distributors,
‘we can not confirm this fact since these financial arrangements were not recorded in written
contracts

The existence of collusive business practices in the Japanese paper market was identified by
surveys conducted by the Japan Fair Trade Commission (JFTC) in 1993 and again in 1994.
However, the JETC surveys concluded that the practices were not in violation of Japan's anti-
monopoly laws At the same time, the JFTC encouraged Japanese companies to desist from these
practices. Nevertheless, Japanese press reports continue to document discussions among
Japanese paper producers regarding prices and other conditions of the Japanese paper market
AU the minimum, these practices should have prompted JFTC inquiries.

Beginning with the 1994 National Trade Estimate Report, USTR identified the failure of the
Government of Japan to live up to its obligation in implementing the agreement as the underlying
cause of the disappoiniing results in achieving greater access to the Japanese paper market
Emphasizing the gravity of Japan’s non-performance, USTR placed the issue on the Super 301
Watch list in October 1994 and again in September 1995 and initiated negotiations to restructure
the agreement in ways which would make the Japanese Government obligations more explicit and


9

stronger than ever before; both countries have benefited from the
semiconductor agreement; and an atmosphere of confrontation that
existed before has given way to more cooperation. In our view, the
record, which I have tried to lay out in our written statement at
length, points to the need and the value of a new semiconductor
agreement, which, based on industry efforts coupled with a
government to rovernment agreement, we believe that it ought to

e possible to fashion an agreement that reflects the changed con-
ditions in the industry, where we are now, but carries forward the
progress that has been made. Japan has indicated thus far a belief
that the agreement should not be renewed or extended, but we be-
lieve that discussions that go on concerning this issue between now
and June and July hopefully will bring about a recognition that
both sides value and benefit from a continuation of the govern-
ment-to-government agreement and the increased industry co-
operation that the semiconductor agreement has had.

Mr. Chairman, if I may, I’d like to say a word about the insur-
ance issue. For some months, we have conveyed to the government
of Japan our concern that their plans to implement the insurance
agreement were not consistent with the agreement as it has been
written, and our concerns have only intensified in recent weeks.
The basic issue here, Mr. Chairman, as the Subcommittee knows,
is the linkage between primary sector deregulation, primary life
and nonlife on the one Sand, and the so-called third sector, the
smaller sector in which foreign providers have been able to carve
out some market share. The agreement is quite clear: Primary sec-
tor liberalization has to proceed before the third sector is subject
to radical change. You open up the primary sector; you have com-
petition; foreign providers have the opportunity to compete. And
only after that, and only after a period of time—several years—has
passed, do you allow the third sector to be opened to radical
change.

The Japanese have, in their interpretation of this agreement, in
my mind seriously departed from that understanding. They have
focused their efforts on the opening of the third sector and have not
moved forward with primary sector deregulation, and we are con-
tinuing to talk with them about it; we continue to want to resolve
this issue in the near future. But we will not stand by for an inter-
pretation of the agreement that departs dramatically from the
agreement as written. This is a fundamental issue, because it is
the implementation of an existing framework agreement.

Last, Mr. Chairman, in terms of current issues—and I am con-
scious of the time—on the film dispute, in response to a petition
filed by Eastman Kodak, we have initiated an extensive investiga-
tion of Japanese barriers in the film and photographic paper sector,
and Kodak’s petition alleges many of the types of problems and
pervasive anticompetitive business practices that we have sought
to deal with in negotiations in the past on autos, glass, paper and
other sectors. Those include direct Japanese Government participa-
tion in the creation of a distribution system that severely limits for-
eign access through interlocking financial relationships and other
practices.

Kodak is a first-rate American competitor which has a strong
presence in markets around the world. But despite decades of ef-


77

shareholding, and other structural barriers which
restrict penetration by foreign insurers into the
primary insurance areas. From the perspective of
insurance consumers and small/foreign insurance
companies, all de facto and de jure barriers to fair
and open competition in the primary areas should be
targeted for reform by the MOF and the Diet
Otherwise, large/Keiretsu insurers will continue to be
protected by structural advantages in large "captive"
markets and use that strength to overwhelm foreign
companies in the Third Area."

[excerpt fron Japan-s Financial Services Marker the
Case for Expanded Access, June, 1993, prepared by the
U.S.-Japan Business Council, american Chamber of
commerce in Japan, and the U.S. Financial Services
Group of the Coalition of Service Industries.)

nificance of the Agreeme,

Shortly after taking office, President Clinton ard then
Japanese Prime Minister Miyazawa launched a new effort to address
trade matters. Called the U.S.-Japan Framework for a New
Economic Partnership, one of its key goals was to "increase
access and sales of competitive foreign goods and services
Insurance was selected as one of the four “priority” sectcrs
{along with autos and auto parts, government procurement, and
flat gless).

Pursuant to the Framework, the respective governments began
negotiations with the objective of opening Japan's insurance
market. The negotiations lasted over fifteen months,

which time the 0.S. insurance industry consulted cl
regularly with the U.S. Trade Representative (UST:

The U.S.-Japan Insurance Agreement is unprecedented. It
the first bilateral insurance agreement in which such detailed
obligations are undertaken. Among its many provisions, th
Agreement provides for:

- A more open regulatory process, where foreign insurers
are to have the same access to information as domes!
insurers;

- Assurance that procedural protections are pro
that administrative guidance will be
legal constraints;

- Vigorous application of anti-monopoiy laws to
insurance, including industry association activities;

+ Liberalization of rate and form in accordance with
three stages of deregulation, and

- Regular monitoring of the Agreement by means
qualitative and quantitative indicators to deternine
whether and how foreign opportunities and market access
are increasing

But perhaps the most important, and certainly most
controversial, provision in the Agreemene deals with the
between the "primary" sectors (all major types of life and
life insurance) and the so-called "Third Sector" (niche pro
such as personal accident, cancer insurance, long term
disability).

The primary sectors represent over 95 percent of the
premiums collected in the market and are dominated by a sma.)
number of large Japanese firms. The less than 5 percent
represented by the Third Sector is critical because it is t
only area where foreign firms have been able to establish a
meaningful market position. Some interests in Japan have aileged
that foreign firms have a “monopoly” in this tiny area, whereas

e



83

The Honorable Michael Kantor
United States Trade Representative
February 14, 1996

Page 2

- Strict compliance with the Agreement’s terms relating to the Third Area
must be obtained. There is a crucial relationship in the Agreement
between the ability of foreign companies to compete on equal terms with
Japanese companies in the First and Second Areas and any authorization
to Japanese companies to increase their presence in the Third Area
Failure co implement the Agreement's terms concerning that relationship
would be extremely harmful to the progress U.S. companies have made
in Japan to date;

- Japan has made important commitments with respect to transparency of
regulation, and those commitments must be respected:

- The Keiretsu Srudy called for by the Agreement is seriously overdue. it
must be completed without further delay. To be worthwhile, it must
deal adequately with case agents and must differentiate in a statistically
valid way among the various types of keiretsus

We pledge our continuing support for the Administration’s efforts to ensure full
and faithful compliance with this important Agreement. We encourage Japanese
and U.S. negotiators to resolve outstanding differences concerning the
Agreement prior to the upcoming April summit meeting between President
Clinton and Prime Minister Hashimoto in Tokyo

Sincerely

Aap, Gee

Gordon J. Cioney
President


5

that was not predicted. I urge Members and witnesses to abbre-
viate their comments where possible and try to stick to the 5-
minute rule. But all statements that you may have prepared will
be inserted in the record, and we will be following a highly com-
pressed schedule, so I would hope that all of our members—when
they get over here—— [Laughter.]

[The opening statement follows:]


M1

knowledgeable experts. These experts could be academics, former
government officials, think tank scholars or recognized
international experts on competition law issues. The panel would
xeceive submissions by both sides, pose questions, and issue a
report. The panel could function in a manner similar to a WTO

panel.

Administrative Law Judge

Dozens of agencies use AlJs for fact finding pursuant to
express statutory authorization. But other agencies also do so
without express authorization. The Social Security
Administration, for example, uses numerous AlJs for fact finding
without express statutory authorization. The Department of
Justice uses Alds to fulfill its statutory responsibilities under
the Newspaper Preservation Act. Interestingly, the DOJ uses ALJs
when there is a factual dispute, and does not use them when there
is no material dispute as to the facts.

ALJs offer two advantages. First, there is a well developed
mechanism for using AlJs for fact finding. The ALJ issues a
factual report, which is then used as a basis for ultimate
decision making by the fesponsible agency. Second, many ALJs
have specific expertise in the field of competition policy and
law. The AlJ would thus have the necessary expertise to evaluate
complex legal and economic facts. While the ALJ option would
undoubtedly have to be adapted to allow prompt fact finding

(ie., limits on discovery agreed to in advance) and avoid

endless motions, this could be accomplished by an agreed upon


81

The voices of opposition we are hearing today are the same
voices that were taken into account during the fifteen months of
negotiation leading up to the October, 1994 Agreement. When it
was concluded, there was no misunderstanding between the
negotiators. Within days after the Agreement was signed, USTR
briefed the U.S. industry to ensure that all interests were
properly informed of the details.

Conclusion

Mr. Chairman, may I leave you and the Committee with this
thought. U.S. insurers are among the most innovative and
competitive Firms in the world. We favor real deregulation and
liberalization of the entire market, not new MOF control of the
market. We make a positive contribution to the U.S. balance of
payments, and we favor open markets where we can compete on an
equal footing

The U.S.-Japan Insurance Agreement is intended to bring
about a more open market. If faithfully implemented, we are
confident that we can bring tangible benefits to Japanese
businesses and consumers alike.

Thank you.

Attachment


wi


107

reciprocal access to the U.S. market. It is simply not
sufficient to assume that the U.S. market is open and the
Japanese market is closed. There must be facts supporting the
conclusions being drawn.

Under Section 301, however, there are no established
procedures for conducting this kind of factual investigation.
Section 301 does not provide for even the most elementary
safeguards to ensure balance and an opportunity for all parties
to address the facts. There is not even a requirement that
parties be served information submitted in the course of the
investigation. There are no provisions for protective orders for
obtaining or validating information necessary to make a
determination. In short, the current Section 301 procedures are
clearly not adequate in investigations where the validity of the
allegations are dependent on fundamentally disputed, highly fact-
specific determinations and where the applicable legal standard

is not clear.

Options

The key concept behind each of the alternatives discussed
below is neutral, expert’, credible fact finding. The objective
is not to limit the authority of USTR under the statute as the
decision-maker and negotiator. Rather, the objective is to
create a fact-finding mechanism that would consider the relevant
practices and result in a detailed factual report responding to
the allegations and counter-allegations involved in the
investigation. USTR could then decide, based on the report and,

cawesnnseuseons


92

The existence of these collusive business practices in the Japa-
nese paper market was confirmed in surveys conducted by the
Japan Fair Trade Commission in 1993 and again in 1994, and Jap-
anese press reports continue to document discussions among Japa-
nese paper producers regarding prices and other market conditions.
I am submitting a representative sampling of these reports for the
record. They include such intriguing headlines as: “Paper manufac-
turers. to set up committee to construct new price structure for
paper.” I would think at a minimum, these practices and these
headlines should have prompted JFTC inquiries, but there were
apparently none.

[The information was not available at the time of printing.]

As a result of these developments, USTR placed the paper agree-
ment on the super 301 watch list in October 1994 and again in
September 1995 and initiated negotiations to improve Japanese
compliance. Since that time, the Government of Japan has var-
iously announced it would not negotiate, or, when discussions did
take place, declined to negotiate seriously. And just last week, the
English language Nikkei reported that MITI will refuse to renew
the Paper Market Access Agreement when it is scheduled to expire
in April 1997. While this may be a trial balloon, it is consistent
with Japan’s continuing refusal to negotiate about improving the
agreement and thus merits a strong policy response.

US. acceptance of Japan’s unilateral withdrawal from the agree-
ment would reward a strategy grounded in a complete disregard of
Japan’s obligations under a trade agreement with the United
States and set an unfortunate precedent for other agreements in
other sectors. From the industry's point of view, the absence of a
government-to-government agreement would mean that the sub-
stantial efforts which our companies have made to develop a Japa-
nese customer base would be deprived of the impetus of U.S. Gov-
ernment pressure, which has been absolutely necessary for even
the modest breakthroughs we have made. As a public policy mat-
ter, acceptance would fatally undermine the credibility of the NTE/
super 301 process and indeed the whole framework approach to en-
forcing Japan’s compliance with trade agreements.

We believe the example of our paper industry argues strongly for
renewed attention to the enforcement of existing agreements, and
we are fully supportive both of the enforcement capability which
has been established at USTR and the complementary monitoring
effort at Commerce. At the same time, we view the current Kodak
case as a unique opportunity to come to grips with the pervasive
market-distorting effects of Japanese business practices as they af-
fect many segments of American industry, and we urge the admin-
istration to develop a negotiating plan which will fully take into ac-
count the broad precedential nature of the issues raised by Kodak.

Finally, we were gratified to hear Ambassador Shapiro’s response
to Vice-Minister Sakamoto and his reaffirmation that the adminis-
tration will continue to make the fullest use of the remedies avail-
able under U.S. trade law to ensure that competitive American in-
dustries such as ours will have access to the Japanese market.

Thank you.

[The prepared statement follows:]


180

COMMENTS IN LIEU OF PERSONAL APPEARANCE
BY STEVEN J. KEOUGH, INTELLECTUAL PROPERTY ATTORNEY
United States-Japan Trade Relations Hearing
Thursday, March 28, 1996

In liu of a personal appearance, Steven J. Keough, intellectual property
attorney, Patterson & Keough, P.A., 1100 Rand Tower, 527 Marquette Ave. S,
Minneapolis, Minnesota 55402 respectfully submits the following written statement
jor the printed record of the United States-Japan Trade Relations hearing held on
Thursday, March 28, 1996 at 230 p.m.

In a technology-driven worldwide marketplace, exclusive rights to its hard-
carned breakthrough technology give a US. company a competitive advantage, The
laponese practice of patent application flooding essentially strips U.S. companies of
this advantage, and deprives them of fair and equitable access to Japanese markets.
‘This anti-competitive conduct, which is supported by the Japanese Government,
results in damage to U.S. companies’ markets worldwide, including in the United
States. This conduct damages the United States economically, and reduces its
competitiveness worldwide

The practice of “patent flooding” in Japan, as detailed below, has injured the
trade relationship between the U.S. and Japan and has significantly contributed to
the trade deficit and the maceo-economic imbalances that have caused deep friction
between the two countries. The ongoing nature of this practice sheds serious doubt
on the degree of good faith with which the Government of Japan has entered into
recent negotiations and TRIPS Agreements with the United States. Critically,
Japan's structural barriers to adequate and effective protection and enforcement of
patent rights deprives U.S. companies of the worldwide competitive value merited
by the breakthrough technology they invent.

The Commenter is a patent attorney who has practiced extensively in the area
of international patent protection. This submission is based on the experience and
knowledge the Commenter has acquired through his private practice, in which he
has represented numerous United States and Japanese companies having
worldwide intellectual property interests, including in Japan. These comments
express the personal views and opinions of the Commenter.

1. The Government of Japan denies U.S. companies adequate and effective
means to secure, exercise and enforce patent rights.

The Government of Japan has structured its patent system to deny U.S.
companies adequate and effective means to secure, exercise, and enforce patent
rights. 19 U.S.C. §2242(a)(1)(A). The Government of Japan has put in place a
number of structural barriers to adequate and effective patent protection for US.
companies in Japan. These structural barriers include: the lack of any duty of
dlisclostire on the part of Japanese applicants; the lack of any speedy remedy for
failure to correctly identify inventors; the ability of applicants to wait seven years
before requesting examination of patent applications; toleration of patent
application flooding; delays in completing examination once requested; severe
under-staffing in the Japan Patent Office (JPO); the differences between the official
fees charged for filing an application and for requesting examination; the differences
between the fees that Japanese patent attorneys (Benrishi) charge their foreign and
their domestic clients.

These structural barriers relate to pre-issuance conduct, and have not,
Apparently, been the focus of negotiations between the United States and Japan. The
discussions and agreements between the United States and Japan have not
addressed the root cause of the problems described herein — pre-issuance conduct,
including patent application flooding, by which the Japanese companies, with the
encouragement and assistance of the Government of Japan, deprive U.S. companies
of rights to breakthrough technology. Prior negotiations have focused on increasing



183

request examination; and then, in due course, the evidence of the Japanese
company’s misconduct will be destroyed

2, Ability to Defer Examination for up to Seven Years

Under the Japanese system, a patent application is not examined until the
applicant requests examination. The applicant has seven years from the date of
filing to request examination. The applicant is not, however, required to request
examination. If, after seven years, there has been no request for examination, the
application will become abandoned,

Patent applications in Japan are automatically published as Kokai publications
eighteen months after filing, whether or not the applicant requests examination
Under Japanese law, an applicant may recover damages for infringement of these
Kokai applications, After the patent is granted, the applicant can Seek fo recover
damages for this “infringement.” This longer period for damages to accrue is one of
the reasons that the mere presence of Kokai applications can be used to threaten and
intimidate competitors. Because damages potentially begin accruing at the time of
Kokai publication, a U.S. company targeted for patent flooding cannot wait to
address the problem until its competitor's (or customer's) flood of applications
mature into issued patents

A wave of Kokai applications directed at a U.S. company's critical technology
is like a wave of incoming torpedoes. The U.S. company does nat know whether
any of the torpedoes will find their mark, but it does know that even a single strike
can be fatal to either the U.S. company or to any of its customers which may also be
targeted.

The US. company has no way of knowing which, if any, of the flooded
applications will be pursued through examination, which of those examined
applications will mature into issued patents, or which of those patents will cover
the U.S. company’s technology. In the face of a wave of threatening Kokai
applications, the U.S company can either buy a measure of peace by giving up
valuable competitive advantages, or else cross its fingers, wait up to ten years or
more to see what the issued patents look like, and hope the Kokai will not, in the
interim, scare away all of its customers.

If the US company is lucky, none of the issued patents from that wave of
Kokai applications will hit its mark, and the U.S. company can hope that it will fare
as well when the next wave comes. If, by some chance, the fapanese company can
obtain a patent covering the U.S company’s critical technology, then the U.S.
company knows that it has taken a direct hit below the water line — ten or more
years of back damages are likely to be astronomical. To take a wait-and-see approach,
a U.S. company must be extremely well-funded, and be run by people who have
nerves of steel and who have a fondness for Russian roulette.

Delays in Examination and Understaffing in the JPO

Even after examination is requested, it may take three years or more for the
JPO to complete examination. This delay is due, at least in part, to severe
understaffing in the examiner ranks at the ]PO. The JPO typically receives about
twice as many applications as the US. Patent and Trademark Office receives. Yet the
JPO has roughly haif as many examiners as the PTO. See Intellectual Property
Rights: U.S. Companies Patent Experiences in Japan, U.S. General Accounting Office
(1993) (“GAO Report’) at p. 45. Previous staffing, increases by the PO have not met
agreed-upon outcomes. Moreover, these increases were, in effect, merely window
dressing to cover the real issue of too many improperly filed patent applications
Once again, this is certainly a tactic that has been clearly understood by previous
Japanese representatives to bi-lateral intellectual property talks with the United
States.


60

Mr. LEVIN. Well, it seems to me we need to have an activism, an
aggressiveness that goes way beyond 1, which is jawboning, and is
not a building the walls around this country; that simply will not
work in this kind of an international economy. And I think what
we really need to do is to actively press Japan in this case to live
up to its agreements. We have section 301 in our artillery. We have
got to make it clear that we will use it as we have in the past.

Mr. HouGHTON. Can I just interrupt 1 minute?

Mr. Levin. Sure.

Mr. HOUGHTON. But, you know, every time, Sandy, we seem to
come up to an agreement, we never have any numerical standards,
no index and no goals, no anything. It is just we want to do this;
we want to do that. It is probably true on both sides. Is it not pos-
sible to, at a minimum, say that if we are going to have a multilat-
eral or a unilateral trade agreement, or if we are going to abide by
the conditions of GATT, then we have got to have some numbers.

Mr. LevIN. Yes, and, of course, in the semiconductor agreement,
there was a number. But also, there have been numbers in the
auto agreements with Japan. There was a number in the agree-
ment or the understanding that was reached by President Bush,
and there are some numbers in the agreement of last year. And
while it is not a goal like the semiconductor agreement, it is an ex-
pectation on our part, for example, 200 dealerships. We also have
an expectation of the deregulation of the auto parts industry by the
Japanese, and there are some numerical values attached to it. And
I think what we have to be sure of is that the Japanese understand
that if they do not take these steps, the United States will take fur-
ther action. It is in their mutual interest, in their interest; it is in
our mutual interest; it is in their specific interest to open up this
market. But as you know, Amo, for the first time, there is a mon-
itoring device that will implement this agreement, and the first re-
port will emanate from that monitoring arrangement.

So we mean business, and what the businesspeople here today
were saying in a nutshell was for us to do business, the private sec-
tor, the government has to mean business in terms of helping the
markets be open. And I think that is the exact right balance.

Chairman CRANE. Mr. Camp.

Mr. Camp. Thank you, Mr. Chairman.

And to my colleague from Michigan, I thank you for your testi-
mony, and I think that the comment that you made that more
work needs to be done is an understatement. When the auto parts
breakthrough occurred, I think there were many who questioned
what it really might mean. And additionally, maybe not as much
as we had hoped, this report will be very helpful. Clearly, we are
still having trouble in the dealership sections, but I agree with you;
we have a lot more to do, and your testimony today, I think, helps
clarify that, and we are all going to be looking very closely at that
April report and try to understand more what that means. So I just
want to thank you for your testimony. Thank you.

Mr. Levin. And let me just comment briefly. There has been a
bipartisan effort in the past, and I hope that will not break down
this year. We will see. I think the auto and auto parts areas are
so serious that we have to continue to work on a bipartisan basis.
Nancy Johnson, Marcy Kaptur and I went on a bipartisan basis to


56

Testimony of the Hon. Sander Levin

On United States-Japan Trade Relations

Before the House Ways and Means Trade Subcommittee

March 28, 1996

Thank you, Mr. Chairman, for giving me this opportunity
to expres. s co United States-Japar trade relations 4
this critical moment

Few areas have been
the pitfalls of an eithe

theories or by
ade policy

cas been cast
cnism, or betwee!
et, while our pers
conomists as eith

ee trade

mbalance w

ta Japan gr
hat of cor
Suggest i: vigorously were usua
protecti ere were some efforts -- MOSS and then STI
- but they were handicapped either by rigid opposition o
ambivalen= execution

Nevertheless, in 1988, several of us sought to legislate
a more vigorous trade policy by enacting Super 301 and by
adding language to regular 301 that attacked a growing and
pernicious form of trade barrier -- fore.gn government
toleration of anticompetitive practices

And in the last few years, under the leadership of che
Clinton Administration, there has been an effort to work the
ground that lies between the extremes of unreciprocal free
trade and rigid protectionism

This effort looks at bottom-line results. i: aims co
open foreign markets, not build walls around our markets. It
starts with the proposition that "free" trade i
if one side is rigged. And it recognizes that trade
imbalances can undermine particular sectors important to the
American economy

This results-oriented approach has been applied to a
number of sectors involving a number of nations. Specias
attention has been given to the country with which we nave had
the largest deficit: Japan. And particular importance was
placed on the largest single component of that bilatera!
deficit: autos and auto parts, which consistently have
accounted for a whopping two-thirds of our bilateral trade
deficit with Japan. In 1998, §35.3 billion of the $59.2
billion bilateral deficit was in this sect
alone made up 2¢ percent of the deficit
sectors include glass, semiconduct.
telecommunications, medical equigment and insurance

The results-criented approach has brought substantial
progress on the overall bilateral trade deficit with dapan
In 1995, the bilateral trade deficit declined by more thar
10%, the first year-co-year decline since 1930. The trend
continues in 19

monthly decline in the merchandise trade deficit. And Japan
remains our second largest trading partner, absorbing $64
billion U.S. goods and services in 1995

't truly free

with February marking the ninth consecutive


18

reached 10 percent in 1994, which is disappointing given the
firms in this sector. In addition, we are extremely concerned about the reluctance of NVs
personal handy phone subsidiary to follow the NTT procurement procedures. We have hope for
progress in the ares of wood products. where Prime Minister |fashimoto has put forth the concept
of an ambitious nnported housing initiative. but remain troubled that Japan has not moved further
te reduce tariffs and to adopt perlormance-based. rather than prescriptive. standards tor building
materials, We remain seriously concerned about the lack of effective implementation by Japan
of our bilateral agreement on paper and paper products. which Jed 46 continued 30) watch fisting
in this seetor. We note the 93 pereent inerease in U.S. exports since the conclusion of the glass
jevthient, bul we are continuing to monitor implementation of this agreement carefully. 10
insure that the current level of imports represents the b owth that the
Competitiveness af our companies” warrant

obal competitiveness of U.S.

Fo complement our sectoral efforts. we have
Govecrament an structural issues. in particular on deregulation, competition poficy. and
rative relorm. Japan is currently revising its deregulation plan and the new final plan is
scheduled to be released tomorrow. In support of these efforts, the ULS. presented w 42-page
lation ancl competition palicy t the Japanese Government last November
mission includes specitie de
and auto parts. construction, ener
tevnsportation, We discussed our submission with Japan in December, and met again in late
Japan to factor our suggestions into its revised plan.

closely with the Japanese

adminis

Submission on dere:

uation prapossils 9 12

Ue sal seas. including agriculture, autos

‘gS. insurance, Financial services, telecommunications and

February in an effort ta encour:

While we have been disappointed with lapanese Government efforts s0 far. we hape that
‘ur support will help advance Japan's deregulation agenda, providing benefits for both Japan and
the US. We intend to stay involved vigilantly in the deregulation effort, and are gratified that
ation is carried out in a way that

the Furopean Union is doing the same, ensure that der
provides seal opportunities andl equitable acvess lor foreign companies

We also hope for strong leadership in this area {rom Prime Minister Hashimoto, He has
skated his view that Japan would Benefit from strengthened competition policy from by the Japan
Fair Trade Commission, He also spoke sweepingly about the importance of deregulation and
economic reform in his recent book, in a speech delivered in Vancouver in May’ 1995. and in his
ira speech to the Diet as Prime Minister, delivered on January 22. In that speech. he
mitted his administration ty weeding out regulations that “have been perverted into citadels
oF protection for vested interests” und to more vigorous enforcement of the Antimonopoly Act by
the IETC

Canelusion

In sum, after three years of sustained work, the Administration believes that we have
made good progress in the long effort to open the market in Japan, but much remains to be done.
We liave benefitted from the bipartisan consensus in Congress and the country that a level
plaving field for trade between the U.S. and Japan 1s Fong past due. We will continue aligning
ur efforts with those in Japan who bel

dircetion of s moze competitive, less regulated. more open economy. We will keep Working to
enforce our wade agteements. resolve outstanding issues, and deal with new issues as they arise -
i expand trade and open the Japanese market for the benefit of both our countries.

jeve that their country should continue moving in the



AT

to deal with Japan is to encourage deregulation and other reforms
that move Japan toward more internal openness. This entails en-
couraging Japan to adopt economic policies that bring about the
kind of healthy competition that is a hallmark of the U.S. economy.
This also means we should not negotiate trade agreements that
make the United States function more like Japan. Do not try to
protect selected U.S. industries. Do not pick winners and losers. Do
not accept the worst aspects of Japan’s governmental interference
in the economy and attempt to manage market access for select
U.S. exporters. This type of government interference runs directly
contrary to our fundamental interests in Japan.

The prolonged Japanese recession is doing what trade nego-
tiators could never do: Forcing slow but steady changes in many
areas of the Japanese economy, including the distribution system,
keiretsu supplier system, and their tradition of lifetime employ-
ment. This is good news for U.S. exporters, as Japan’s distribution
system and keiretsu practices have been major factors inhibiting
U.S. exports. During the past year, American exporters have begun
to make significant gains selling products to Japanese consumers,
products as varied as furniture, refrigerators and computers. How-
ever, this is not the time to be complacent, as the U.S. Government
can play a positive role in encouraging reform in Japan.

The second major aspect of our Japan policy that is being under-
emphasized by the current administration is our security relation-
ship with Japan. It was almost inevitable, following the repeated
criticism of Japan policy leveled by candidate Clinton that security
policy would take a back seat to trade disputes. The critical error
in this policy formulation was the lack of recognition that a stable
regional security environment is absolutely critical to continued
economic development in Asia. This economic development is need-
ed so that Asian countries can develop into the kind of export mar-
kets that can play an important part in our Nation’s economic
growth. Only the United States and Japan, acting in concert but
with America in the lead, can establish a regional security balance
in which market economies can continue to thrive. This reason
more than any other, Mr. Chairman, is why the United States and
Japan have the most important bilateral relationship in the world.
The biggest failure of this administration in our trade policy with
Japan as well as with the administration’s overall trade policy is
the failure to maintain strong public support for open trade.

By failing to stand up for free trade, by hedging and adopting the
“fair trade” rhetoric that protectionists so often use, the President
now faces the most antitrade American public since 1930. The ad-
ministration helped create this problem by basing its support for
trade on the 18th century mercantilist myth that trade is good only
so far as it leads to exports. The administration has the trade story
backward: Imports improve domestic living standards—we know
that—and they improve efficiency and productivity. It is time for
our Japan trade policy to move away from public brinkmanship
over disputes that are both large and small. This tactic strengthens
the misimpression that the United States alone, favors open mar-
kets, and that Japan simply exploits American naivete.


51

Within this environment, the United States offers the only good leadership prospect
coward establishing a stable 21st Century security arrangement for Asia's Pacific Rim. The
countries of Asia clearly see China becoming a major regional power with significant
implications for regional stability. Japan, likewise, carries a regional trust deficit on
security matters which disqualifies it from playing the role of security broker. However,
hhe United States and Japan can together play the vital role of establishing a regional
security balance in which market economies can continue to thrive, This reason, more than
any other, is why the United States and Japan have the most important bilateral relationship
in the world.

Tensions in the U.S.-Japan alliance, revealed for all to see last fall with the incidents
on Okinawa, have been developing for years and could worsen. A top priority of the
Administration must be ensure against deterioration of the security relationship. They can
dest do this by working with the Government of Japan to reestablish what our vital shared
national interests are, and how we can best secure them in the changing regional
environment. In fact, many of the preeminent issues are of a security nature, which if
‘nishandled, will make our economic concerns moot

Mr. Chairman, the biggest failure of the Clinton Administration in our trade policy
with Japan, as well as with the Administration's overall trade policy, is the failure to
‘maintain strong public support for maintaining an open international economy’
Unfortunately, the rhetoric of the President and his leading trade advisors have served to
reaffirm the mislaid fears of many Americans regarding trade. By failing to stand up for
Tree trade, by hedging and adopting the “fair trade” rhetoric of protectionists, this President
ow faces the most anti-trade American public since 1930.

‘The Administration created this problem by basing support for trade on the 18th
zentury mercantalist myth that trade is good only so far as it leads to exports. By stressing
exports and ignoring imports, the Administration gets the trade story backwards: imports
improve domestic living standards and force domestic companies to become more efficient
and productive. In addition, many import products are used as inputs in the manufacture of
high value-added products, helping make American producers competitive and cost-efficient.

Since the 1930's, the Congress and the Administration have had a relationship in
which the President upheld free trade while Congress, regrettably, gave voice to local
protectionist constituencies. The Clinton Administration has failed to uphold their rol
the relationship. The result has been a public that is increasingly inclined to protectionism.
AC this point, the greatest threat to an open international economy at the end of the 20th
Century is not Japan or the European Union, it is public opinion here in the United States.

{1 is time for the our Japan trade policy to move away from public brinkmanship
aver disputes large and small. This tactic strengthens the misimpression that the United
States alone favors open markets and that Japan simply exploits American naivete. It is no
wonder that more Americans believe the protectionist rhetoric of politicians whose policies
would, if practiced, devastate American prosperity in the 21st Century. On the issue of
selling the American people on the importance of maintaining a close relationship with
lapan, this Administration has clearly failed.


80

In a March 13 letter to Ambassador Saito, Senator
am Roth, Chairman of the Senate Finance Committee, said:

"... Japan's good faith in carrying out its obligations
under an important bilateral agreement is in question."

And in a March 19 letter to President Clinton, 20 Republican
and Democratic Congressional leaders said:

".,.should the MOF follow through with plans discussed
with Japan's domestic insurers, U.S. firms would likely
face a reduction in market share. Such MOF actions
would unquestionably violate this agreement. Should
such violations occur, we would support any and all
appropriate action, including the imposition of
sanctions as required under our applicable trade laws.”

The U.S. International Insurance Council is deeply concerned
about the current situation and expressed its views recently in a
letter to Ambassador Kantor, which is attached to this statement

‘The letter strongly supports the Administration's efforts to
ensure faithful implementation of the Agreement prior to the
April 16-18 summit between President Clinton and Prime Minster
Hashimoto in Tokyo. The letter addresses the following items in
particular:

- Deregulation must result in genuine deregulation, not
re-regulation;

- There is a critical need to liberalize the primary
sectors before granting additional access to the Third
Sector;

- Adherence to the important commitments on transparency
of regulation must be honored, and;

- There should be prompt implementation of the joint
study of Keiretsu practices, as specifically called for
in the Agreement.

Mr. Chairman, I would like to emphasize that the United
States is not the only voice calling for faithful implementation
of the Agreement. The leading representatives of all foreign
insurance interests in Japan as represented by the Foreign Non-
Life Insurance Association (FNLIA) are resolute supporters of the
U.S.-Japan Insurance Agreement. In addition, it is our
understanding that the European Union has consistently supported
efforts to gain MOF compliance with the Agreement.

As the terms of the Agreement are accorded on a most favored
nation (MFN) non-discriminatory basis, all foreign insurers have
a direct stake in the MOF acting in accordance with its
obligations under its Agreement with the United States. If Japan
proceeds with its current plans, the total foreign, as well as
American, presence in the market will decline, not increase.

Several Japanese industry leaders and government officials
have argued that U.S. insistence on maintaining the status quo in
the Third Sector "goes against the trend of liberalization.”

Some have even suggested that all the U.S. industry wants is
protection from increased Japanese competition in the Third
Sector area

This is disingenuous, to put it mildly. Government
regulation and restrictive business practices (Keiretsu} have
limited foreign companies to a tiny share of the second largest
market in the world. While providing no meaningful
liberalization of the primary sectors, the MOF now intends to
“deregulate" the Third Sector to benefit the largest Japanese
insurers. Given the resources, market power and extensive sales
forces of these large companies, it will only be a matter of time
before the foreign market presence in Japan is even lower.


142

= Under domestic pressure. Japan agreed with U.S. carriers on a
multi-year schedule of constrained growth at Osaka then reneged on that
agreement only months later by disapproving our Seoul service and
Fedex’s Subic Bay service in early 1995

Japan and the U.S. reached an understanding that Japan would honor
most of the beyond rights of U.S. cargo carriers

~ In March 1996, Japan is again threatening to withdraw those promised U.S.
cargo rights The U.S. passenger rights beyond Japan remain both frozen and
unaddressed.

What we are eft with now iy 2 Bermuda II agreement without a formal document,
The only remaining item outside Japan's formal control is the 1952 carriers” rights to operate
hubs in Japan in order to serve the rest of Asia, And even there, as Fed [y's experience and
our own demonstrate, Japan now has its eyes on that fast regulatory prize. Because of the
rights previously surrendered, Japan can dangle the carrot of allowing some new service in
front of our communities and carriers if in return they will support Japan‘s negotiating efforts
before the US. government. That is where we find ourselves today with Access U.S.-Japan.
and that is why the Japan Times can confidently predict «+ as the excerpts in Chart 2 show «
that Access U.S Japan “is likely to be it strong supporter of Japan." and leading an MOU
official to say that “Tokyo welcomes the efforts of the MOU carriers” Sad to say, Japan has
succeeded in pitting U.S. carriers against each other, and should Japan succeed, the economic
Joss for the U.S economy will far outweigh the incremental gains by one or two U.S
carriers.

Why then is Japan so set on tightly regutating U S. participation?

The answer is that Japan’s Ministry of Transport seeks to salvage a disastrous
regulatory policy that has left JAL and ANA unable to compete effectively with U.S. and
other lower cost carriers. This is illustrated in Chart 4, which plots a comparison of JAL and
United’s costs based on ICAO statistics, As you can see, as late as 1985, JAL’s costs were
below ours. By 1993, however, they were dramatically above ours and were continuing to
trend in the wrong direction

Not surprisingly, it was after 1985 that U.S. carrier share of the transpacifie market
began to exceed that of the Japanese carriers. Clearly the reason is relative costs ~ but to
admit that, Japan's MOT must confess that its regulatory policies are an abject failure. I is
far easier. they believe. to repeat their myth that the underlying 1952 Agreement is somehow
unfair

Japan wants to salvage the reputation of its bureaucrats and carve out a protected
market for its uncompetitive carriers by denying U.S. and foreign carriers the means to
compete effectively. Japan's current objective. therefore, is to eliminate the right of U.S.
carriers to operate hubs in Japan to serve the growing Asian market.

Equally important, we must recognize that no U.S. carrier today operates any nonstop
service to any Asian point (except Japan) unless that carrier also operates a hub in Japan,
These nonstop and hub services are complimentary, giving U.S. carriers a presence in an
Asian city that is competitive with both Japanese and other Asian carriers. If we lose hub
‘access beyond Japan, then all U.S. carriers will be in the same position that a number of U.S
carriers, most recently Delta, have been in when they (ried and failed to maintain a system of
service to other Asian points without a hub in Japan. {t lcaves Japan with the only efficient
carrier networks in the Pacific.

‘Simply pur, Japan intends to gain through regulation an advamage its carriers cannot
win in the marketplace.

What should we do about it?


135

actment of any new restrictions in any trade sector. The ink was
hardly dry on the standstill agreement before the Japanese air
transport officials continued their efforts to impose additional re-
strictions. A mere 2 months later, to blunt any possible adverse re-
action from other Asian APEC members and to enlist the support
of generally supportive Asian Transport Ministers, the Japanese
called a transport meeting in Kyoto of a truncated APEC assembly
from which key countries such as the United States, Canada, Hong
Kong and Mexico were excluded. The Japanese used the gathering
of Transport Ministers as a pretext for making it appear that they
were not alone in effectively abrogating the APEC accord. Aside
from being in violation of its air services agreement with the Unit-
ed States, Japan’s blatant actions fly in the face of the multination
agreement on the APEC action agenda.

The other risk we face in including aviation within a multilateral
trade forum such as APEC is that an effort such as that recently
made by the Japanese Ministry of Transport might succeed and be-
come the model for other sectors seeking to also undercut their
APEC commitment. The Japanese are seeking protection for their
air carriers and may offer concessions to other Asian countries in
other sectors in exchange for protection in the aviation area. Such
“logrolling” could have a cumulative impact, substantially under-
cutting the overall APEC liberalization efforts. We have rec-
ommended to USTR that they prevent aviation from becoming an
isolated issue, dealt with by Transport Ministers alone, and seek
instead to ensure that it is handled at the level of Trade Ministers
along with other trade issues.

United, for its part, will continue to play an active role within
APEC in an effort to achieve progress on air service issues in this
broader trade forum. We will be active participants in the upcom-
ing transport meeting in Vancouver next month. More importantly,
we hope to play an active role in the Trade Ministers’ meeting in
May.

With respect to our immediate aviation issues with Japan, it is
important to understand how we got to where we are now.
Throughout the eighties, aviation negotiations resulted in the trad-
ing of restrictions on the existing U.S. carrier rights in return for
gaining limited access for new carriers. The damage done to
consumer choice, and the competitiveness of the U.S. industry is
more fully explained in my written testimony. In short, in an era
of expanding global airline networks, the U.S. carriers are being
prevented from including in their networks points in Japan and
Asia which are the fastest growing aviation markets in the world.

The United States has recently recognized in its international
aviation policy statement issued last year that it must “adjust its
focus to bargain for the bundles of rights that will permit airlines
to develop global networks.” We have indicated an approach to our
aviation negotiators who we feel is an absolute prerequisite to suc-
cessful aviation negotiations with Japan. Nevertheless, even the
most capable negotiator, using the most successful techniques, may
face defeat unless he is operating in an environment that permits
success and rejects even the possibility of failure.

With a nearly $60 billion trade deficit with Japan, the one thing
that the United States cannot permit Japan to accomplish is to iso-


13

In the United States. Japanese tranyplants are planning inereases in their production,
consistent with their global business plans. Toyota plans to construct at new plant in Indian
employing 1,300 workers. with half the parts like
planning to significantly expand its engine manufacturing complex in Tennessee. Many of the
autos that were until recently being made in Fapan For the U.S. market are now being made in the
U.S. Relianee on U.S. auto parts continues to increase

to come from US, parts suppliers. Nissan is

There is no doubt that the global automotive market will be extraordinarily competitive in
the coming years. But I believe that we are witnessing a situation which has been significantly
transformed by the trade zercement and the events of the past few years, We are looking forward
to release of the semi-annual auto report in mid-April. which will allow ws to filly assess
prouress and closely monitor implementation of this agreement

The Current Trade Agenda

While we are encouraged by the recent progress. opening the market in Japan requires a
constant, sustained effort. Over the nest several months. we intend to work vigorously to enforce
‘our existing trade agreements and to resolve other outstanding issues. tet me highhyht the dhree
issues that are of immediate voncemn’ semiconductors. insurance. and fim. and say a lew words
oon the civil aviation agreement reached earlier this week

‘emiconductors

The current U.S.-Japan Semiconductor Arrangement is due to expire on July 31.1
constitutes an important and successful agreement that we believe should be extended

We have achieved a greut deat under the Semiconductor Arrangement ~ particularly over
the last three years

+ Foreign market share of the Japanese semiconductor market has inereased significantly
and the U.S., which has the largest and most competitive semiconductor industry in the

‘world, has been the major beneficiary of this development

+ The agreement referenced the U.S. industry expectation that foreign market share should
reach 20 percent by the end of 1992 if'adequate market opening measures were
undertaken, The forcign market share now has exceeded 20 percent for nine consecutive
quarters, In 1995, foreign market share averayed 25.4 percent. fully three percentage
points ubove the 1994 average share of 22.4 percent and six percentage points above the
1903 average share of 19.4 percent

+ Relations benween the U.S. industry and the Japanese industry have g
much to the benefit of both parties. Long-term commercial relationships and alliances
between U.S. and Japanese companies have taken hold and are flourishing. By creating
‘an environment in which Japanese user companies and U.S. suppliers were able to take
advantage of the market opportunities and the competitive strengths otfered by each
party. the agreement has resulted in increased sales for foreign suppliers and better
products, better service. lower input costs and a broader array’ of semiconductors tor
Japanese users. The result has been better end products. and more competitive industries
on both sides of the Pacific

cally improved

+ ‘The harsh confrontation which had characterized discussions between the U.S. and Japan
on this issue has heen replaced by aa atmosphere of cooperation.

The conclusion that the Japanese government has drawn from this situation is that the
Arrangement that expires on July 31, 1996 should not be estended, Understandably. we draw a
very different conclusion. We think itis important that the gains made under the agreement be
preserved and that the progress made in recent years be continued ~ and that continuation of
some kind of government-to-government arrangement is needed to achieve these objectives,

The current Arrangement (and the earlier 1986 Arrangement) was negotiated 10 address



187

STATEMENT OF
CYRIL D. MURPHY
VICE PRESIDENT - INTERNATIONAL AFFAIRS

UNITED AIR LINES, INC.

Chairman Crane, Congressman Rangel, Members of the Subcommitiee.
Thank you for allowing me to appear before you today. Testifying before this committee is a
new experience for United Airlines and also for the Committee

Aviation, of course, is not a subject that has often been discussed in an overall trade

context. This is, in itself, rather novel. Imagine for a minute how much international trade

would be impeded if we did not have air transport to carry our business men and women, as
well as our high value products, to the world’s trade centers.

‘A country without transportation integrated into its trade policy is somewhat akin to a
corporation setting up a distribution department and then telling it to go off and do whatever
it wants. On the other hand, many corporation departments function with a great deal of
autonomy -- as long as they continue to meet the corporation's overall business needs

Countries are not much different, In theory. one can isolate each sector of our trade
and allow it to be administered individually -- again, as long as each is contributing to the
overall needs of our international economy.

But whether in a corporation or @ country, there must be periodic reviews of how the
individual departments or sectors are functioning to serve the larger corporate or public
interest.

We believe this is one of those times when just such @ review of the role of aviation in
our international economy is necessary. There are a number of reasons for the need to focus
on aviation from a broader trade perspective at this time:

First: aviation is an integral part of the travel and tourism sector of the economy that
has become too important to ignore in determining overall trade policy

Second: the importance of aviation (0 the world economy is gaining recognition in
international trade organizations such as the Asia Pacific Economic Cooperation (APEC).

Third: the aviation industry is itself becoming increasingly globalized as air carriers set
up international networks of hub-and-spoke services similar to those that have proved so
successful for U.S. carriers since the domestic U.S. market was deregulated,

We would like to address each of these reasons in greater detail before recommending
an approach to resolving the huge issues that face this industry and, in particular, its problem
with Japan in the context of the Asian-Pacific region

The world’s economies are becoming increasingly integrated. The growth of foreign
trade and investment and the development of regional trading blocks reflects a natural
evolution toward more global economic interaction

This increased integration is in part attributable to the development and spread of

international services such as aviation and telecommunications. As one recent report!
observed:

Economic Strategy Institute, Turbulence over the Pai

March 1996, p 5.


55

from a specific industry. Everyone said the American Government
needs to stand up for us. And we on that side sat there congratu-
lating the witnesses here for their activism in trying to open up the
Japanese market, and they had applauded the efforts of the U.S.
Government to help them: Insurance, high technology, film, semi-
conductors, we were not picking winners or losers when the U.S.
Government does that. It is industry that has picked the winners
and losers and says let the winners compete abroad like their win-
ners compete in the United States.
do not understand that. And where it says here: “By fail-

ing’—on page 3—“to stand up for free trade, by hedging and adopt-
ing the fair trade rhetoric of protectionists, this President now
faces the most antitrade American public since 1930,” every one of
the businesspeople who came here in the last few hours talked
about fair trade. And they are all not protectionists; they want the
opposite. But as they said, they do not want foreign protectionists
to keep us out. So I close where I started, and that is: This area
has been beset by this unnecessary polarization, by these dichoto-
mies.

What this government increasingly has tried to do in the last
pears is to say that we want other countries to open their markets
ike we have opened our markets to them. And I think it is about
time that we not use the rhetoric invoking the ghosts of the past
to try to make some progress in the present and in the future. I
have felt that for so long this trade issue has been beset and be-
sieged by this polarization, and it is up to us who are opposed -to
it to speak out. It is when we do not that we give ammunition to
those on the fringes who, indeed, would build or try to build walls
around America.

Thank you very much.

[The prepared statement follows:]


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON TRADE
FOR IMMEDIATE RELEASE. CONTACT: (202) 225-1721
March 6, 1996
No. TR-19

Crane Announces Hearing on
United States-JapanTrade Relations

Congressman Philip M. Crane (R-IL), Chairman of the Subcommittee on Trade of the
‘Comminee on Ways and Means, today announced that the Subcommittee will hold a hearing on
United States-Japan trade relations. The hearing will be the second in a series to be held
throughout 1996 on the status and future direction of U.S. wade policy. It marks the first hearing
of the series to review one of our major bilateral trade relationships as the United States
approaches the 21st century

The hearing will take place on Thursday, March 28, 1996, in Room B-318 of the
Rayburn House Office Building, beginning at 2:00 p.m. Additional hearing days will be
scheduled at a later date.

Oral testimony will be heard from both invited and public witnesses.
BACKGROUND:

One of America’s most important and contentious trading relationships is with Japan. As
our second largest trading partner, Japan absorbed more than $64.3 billion in U.S. exports in
1995. Overall U.S. exports to Japan have increased more than 20 percent over 1994 levels,
reducing the trade deficit with Japan more than 10 percent, the first year-to-year decline since
1990. Yet, the overall size of the bilateral trade deficit with Japan — $59.3 billion in 1995 —
continues to be a source of deep friction between the two countries. A significant cause of the
deficit is macro-economic imbalances between the two countries, primarily the excess of total
spending over total savings in the United States, and the high rate of savings in Japan. In
addition, Japan needs to sustain and expand efforts to open its economy to internationally
competitive U.S. goods and services.

In 1993, the United States concluded the Framework for a New Economic Partnership with
Japan, This umbrella agreement identified macro-economic goals and outlined areas for sector-
specific and structural negotiations, The Administration has negotiated agreements under the
Framework in key sectors such as automobiles and auto parts, financial services, and investment.
In other sectors, such as photographic film, further negotiations are necessary. As well, the
‘Administration is seeking renewal of the United States-Japan Semiconductor Agreement which
expires on July 31, 1996. Many of these issues will be on President Clinton's agenda when he
visits Japan on April 16, 1996.

The focus of the hearing will be to review the overall state of United States-Japan
relations, including U.S. trade policy towards Japan and prospects for increased trade in the
future. In particular, the hearing will evaluate the effectiveness of various sectoral agreements in
increasing U.S. exports to this important trading parmer and progress in resolving ongoing
bilateral trade issues.


174

Any support that the Subcommittee could provide for our Action Program or that otherwise
reinforces and spurs the efforts of the Working Party could be of great value in achieving a
successful completion of the WPPS agenda.

Conclusion
We have been a consistent advocate of freer trade across the board, becouse expanded trade is,
in our enlightened self-interest. The Uniguay Round trade package will encourage world
economic growth, which will be good for our clients and increase the demand for our services.
And, as we have outlined, the agreements contain numerous provisions liberalizing trade and
investment in professional services, creating new opportunities to provide our services. In
addition to the services and intellectual property agreements, the package includes tariff cuts
on thousands of industrial and agricultural products, a reduction of trade-distorting
agricultural subsidies, liberalization of non-tariff barriers such as textile and apparel quotas,
and significant institutional reforms to back up the new rules.

‘That having been said, much work remains to ensure that professional services may enjoy the
full range of benefits promised by the Uruguay Round, and we urge your support for this
work. Our fm will continue to be intimately involved in the process, and we stand ready to
offer assistance to Congress, the Administration, and all other parties interested in promoting
liberalization in trade and investment in professional services


163

Surprisingly, the best case of the Capped Beyonds Plus More MOU Fre
Scenario, comes in only third best. This is striking because the assumptions are
unrealistically favorable for the Capped Beyonds Case. For example, it is most
unlikely that any U.S-Japan agreement would resuit in eight new U.S. gateway
cities. It is also extremely unlikely that the 1952 Carriers would be able to
maintain curcent levels of beyond service in a market in which they were rapidly
losing share. Nor is it probable that the Japanese will code-share as many of
their own flights in the beyond markets as were lost by the 1952 Carriers under
this scenario.

There are several reasons, however, why the best capped beyonds scenario
would not result in a net gain for the United States.

* First, capping beyond-rights for the 1952 carriers not only would cause
their loss of participation in the explosive growth of the intra-Asian market,
but, because almost one-half of beyond passengers and cargo travel to and
from the United States, would also cause a reduction in their US-Japan
service. Furthermore, by sacrificing fifth freedom rights, American carriers
would be prevented from establishing networks in the Asia-Pacific market,
while unimpeded carciers would be free to build strategic route structures.

© Second, future direct service to Japan from even eight new USS. cities would
generate 15 percent net new traffic from these cities, but this is a relatively
small increment for the U.S. system as a whole after substitution is taken
into account. This gain is not enough to offset the impact, on the U.S.
airline industry and the U.S. economy, of the loss of beyond-Japan traffic.

* Third, while code sharing arrangements may prevent some leakage of
beyond passengers from US. carriers on the U.S.-Japan leg of their journey,
this, too, will offset only a small portion of the 1952 carriers’ losses.

That Japan is attempting to constrain US. beyond flights is easily
understandable. A cap on US. rights would transfer more than 200 weekly
high-fare, intra-Asia flights from U.S. to Japanese airlines over the next several
years and, at the same time, divert a large number of beyond passengers from
US. to Japanese carriers in the U.S-Japan leg of their flights. This would be
good for the Japanese carriers, but it would not be good for the United States.
Tronically, it would not be good for Japan either, because it leaves Japan with
less service, higher fares, and lower economic growth.

Capping the current beyond rights for U.S. all-cargo and express-package
carriers would also result in a sizable revenue loss, amounting to $1-1 to $1.5
billion, in 1995 prices, in the year 2010. This would translate into a $1.5 to $2.1
billion loss of total spending in the United States in 2010. Furthermore, it would
jeopardize the very existence of the express-cargo business, an industry first
developed in the United States and not existing anywhere else in its current
form.

Recent US. aviation policy has been marked by some serious shortcomings. The
United States has simply failed to put airline services in their appropriate global
context, or to assign them sufficient priority. Over the last five decades the
United States has been the primary moving force behind global efforts to expand
trade and commerce, and the United States has lost hundreds of thousands of
jobs in sectors where other countries had the comparative advantage, such as the
textile-and-apparel industry. Yet, in airline services, a sector where the United
States has a major competitive advantage, U.S. negotiators have pursued U'S.
interests in a less than aggressive manner.


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The potential is tremendous
But with these opportunities come significant challenges. Some of
our most promising markets remain closed because of unfair trade
practices. That is clearly the case with Japan.

Closure of the Japanese Market

It is somewhat ironic that I am here today with bad news, because
Kodak has participated in Japan's market for over 100 years and has
been cited by both U.S. and Japanese officials as a model of a U.S
company that has "done it right" in Japan. We produce products
geared specifically to Japanese tastes, and we have spent over
three quarter of a billion dollars in the last ten years promoting
them. Our commercial efforts in Japan have led to product design
certificates and marketing awards

We have competed successfully in Japan with a number of our prod-
ucts, such as motion picture film and microfilm This should not
surprise anyone, because Kodak is a world class producer with
tremendous product development and marketing acumen. If we can’t
compete in Japan, no one can

Yet, here we find ourselves engaged in a major struggle over access
to Japan's market for basic consumer photcgraphic supplies.

If I achieve nothing else today, I hope I can at least make you all
aware of the context, so that you can appreciate the importance of
that effort.

It is important not simply because Japan itself is a huge market --
the world’s second largest, worth over $13 billion annually --
where Kodak should be selling much more than it does today. The
problem is that Fuji Film, operating in a profit sanctuary created
for it by the Government of Japan, has amassed a "war chest" of
more than $8 billion using current exchange rates which it can use,
and is using, to attack Kodak’s position world-wide

Revenues derived here and abroad from consumer photographic film
and paper are critical to Kodak's ability to remain on the imaging
industry's cutting edge technologically.

In short, our long-term growth, and many thousands of U.S. jobs in
this important sector of the economy, depend on the success of our
effort to break into the closed Japanese market.

We have been unable to gain significant access for consumer photo
film and paper. Our share of Japan's consumer photo products
market is only 10 percent. Kodak commissioned a survey of Japan's
retail outlets which was conducted in December 1995 and January
1996. The survey sampled 2028 retail outlets in 45 of Japan’s 47
prefectures. The survey found that:

¢ Kodak film was wholly absent from two-thirds of the Japanese
retail market (by volume)

¢ And in the one-third of the market where our product is
available, Kodak film is available and able to compete on
price in only 10 percent of the Japanese market.

These results are far worse than those we have achieved in other
world markets -- even those where we face domestic competitors.

Why? The Japanese Government has helped create a market structure
shielding its domestic photo industry, particularly Fuji, from
meaningful competition for more than 20 years. Kodak and other
foreign suppliers face an exclusionary distribution network that
Genies us full market access. These protective measures have
focused not just on foreign competition generally but on Kodak in
particular. “Japan's government -industry strategy to exclude Kodak
from the market continues today


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63

anese consumers do not buy Kodak film, not that they cannot buy
Kodak film. We are confident that the facts will prove that the Jap-
anese film market is open and that Fuji Film is a fair competitor.
Antitrust cases are fact-intensive and very complex. Yet, there is
enormous pressure here to decide in Kodak’s favor with little fact
finding. We have suggested neutral fact finding mechanisms to
USTR. These include the use of a special panel of experts; appoint-
ing a U.S. administrative law judge as well as multilateral mecha-
nisms.

Kodak objects to this and argues USTR should accept Kodak’s
facts at face value and insist that Japan negotiate. But it has yet
to be established that there is any problem to negotiate. Today, we
again call on Kodak to let the facts decide.

This completes my statement, Mr. Chairman. Thank you for al-
lowing me to testify.

[The prepared statement and attachments follow:}


20

special 301 review, and we are considering the submissions that we
are getting from parties about inadequate IPR protections. And
based on that information, including submissions from companies
like Cyber Optics, we are going to announce the results of our re-
view on April 30. But we continue to push forward on these patent
issues and try to bridge the differences between our systems.

Mr. RamstaD. I have heard a lot of anecdotal evidence about the
effects of patent flooding on U.S. market shares and trade balances,
and I look forward to seeing the results of the research. I under-
stand there is a study being done as to how this affects the com-
petitiveness of our industrial sector.

Mr. SHAPIRO. Well, you also may have spoken to some of our peo-
ple about this.

Mr. RamstaD. Right; I have.

Mr. SHAPIRO. But I want to make sure you are in touch with the
People who are actually negotiating.

r. RAMSTAD. I would like to ask you one final question, Mr.
Shapiro. As far as I am concerned, this is a new low. As I know
you are aware, there is a lawsuit currently pending under Japa-
nese law against Cyber Optics for—can you imagine?—the terrible
offense of contacting the U.S. Embassy for assistance in resolving
its pending legal matters. Is that practice common in Japan or
atypical?

Mr. SHAPIRO. Well, I do not know if I would characterize it as
a new low or not. I have not heard of one quite like that so—

Mr. RamstTaD. That is a first as far as your knowledge?

Mr. SHapiro. I mean, I think we would take quite seriously the
rights of companies to try to seek recourse, and I would like to look
into that problem. I am not aware of that suit.

Mr. RamstaD. I would appreciate if you would do that and get
back to us.

Thank you very much again, Mr. Shapiro.

Mr. Chairman.

Chairman CRANE. Thank you.

Mr. Zimmer.

Mr. ZIMMER. Thank you, Mr. Chairman.

Mr. Shapiro, I appreciate your candid remarks on the issue of in-
surance. What I would like to ask is if the Japanese Government
fails to comply fully with the terms of the insurance agreement,
What (Specific actions or responses would the USTR propose be
taken?

Mr. SHAPIRO. Mr. Zimmer, first, of course, I am first still hoping
that we will successfully resolve the issue, and we are continuing
to discuss it with our counterparts. I am not in a position now to
talk about specific steps that would be taken in response to this
problem if it is not addressed. And I should say that, as you know,
the steps that we are concerned about, the issuance of ordinances
that carry out the new insurance business law contrary to the
agreement, those things have not occurred as of yet, so we are look-
ing at something that we have been worried could occur. But we
are looking at all realistic and all possible and appropriate options
for responding.

But let me say that this is, in our minds, the most serious case
that we have, potentially, of nonimplementation of a framework


37

In July 1991, President Bush sought and concluded a second agreement with the
Government of Japan to continue the market opening process The 20 percent figure was 10 be
reached by December 31, 1992, and with an unprecedented 4 percentage point increase in the
third and fourth quarters of 1992, this objective was achieved,

The Agreement has led to tremendous progress in opening the Japanese market. Foreign
share increased from 8.5 percent in 1985 to 25.4 percent in 1995

SIA's Commitment to Japan

Many in America, who had been pessimistic that investments in Japan would not result
in the increased sales that similar efforts in other markets yielded, gained confidence that due to
the Agreement their efforts in the Japanese market could yield increased purchases by Japanese
firms. Under the 1986 and 1991 U.S.-lapan Semiconductor Agreements, U.S. semiconductor
makers have invested heavily in Japan. In order to meet the needs of their Japanese clients, SIA
members not only maintain sales offices in Japan, but also have factories as well as extensive test
and research and design facilities, as well as a number of joint venture operations in that country

As an exampie of the increased commitment to the Japanese market, the eight largest SIA
member firms report that since 1988 they have doubled the number of technical employees.
including design engineers, they have in Japan, These firms also continue to steadily increase
their sales expenditures in Japan. These extensive efforts -- undertaken in conjunction with the
activities put in place by the Agreement -- have yielded progress in recent years.

SIA's Board of Directors has met annually in Japan every year since the two governments
signed the 1986 Agreement. These meetings not only symbolize the commitment of the U.S.
industry to serving the Japanese market, but also provide an opportunity for the leaders of the
USS. industry to meet with their Japanese counterparts, as well as the Japanese government and
media. SIA is the only U.S. industry association to hold regular high-level meetings of this type
in Japan to demonstrate a sustained commitment to that market

Joint Efforts with Japanese Indust

SIA members participate regularly in the Joim Working Group established under the
Agreement, which brings together representatives from the two industries and the two
governments three times a year to discuss progress under the Agreement. The Joint Working
Group has been an effective forum through which both U.S. and Japanese firms can raise their
concerns and address them in an open manner.

Since the first Agreement went into effect, there have been more trade promotion events
related to semiconductors than any other industry. The events have spanned a broad range,
including seminars on specific sectors of the industry to broad trade missions sponsored by the
Electronic Industries Association of Japan (EIAJ) and the Department of Commerce. Literally
hundreds of small one-on-one meetings have been held, as well as numerous large conferences
sponsored by the Intemational Semiconductor Cooperation Center (INSEC) and the Japanese
Ministry of International Trade and Industry.

SIA and EIAJ have cooperated directly on numerous projects, such an effort last year to
increase personal computer use in Japan. ‘The two industry associations also have worked on
“Chip In" campaigns, originally proposed by EIAJ, aimed at focusing attention on the role and
responsibilities of both suppliers and users in successfully designing foreign semiconductor
devices into Japanese systems, SIA and EIAS also have joint committees which focus on specific
sectors of the Japanese market, including the consumer. telecommunications, and automouve
sectors

While both SIA and EIAJ members benetit trom the results of such joint activities and
increased design-ins, they are not the only winners. The major beneficiaries from these
cooperative ventures are worldwide consumers of Japanese electronics products.

These mutually beneficial activities -- made possible by the U.S.-Japan Semiconductor
Agreement ~ are at the root of increased market access in Japan, and are worth continuing.


157

Estimates of Worldwide Air Transport Benefits, 1992

$1 Trillion Economic 22 Million Jobs
Activity

Dirost 3
Mil

REZ

ci

Even more important than the size of the aviation industry is its growth rate and,
in particular, the location of most of the growth. As shown below, the volume of
passengers and freight carried by the world’s airlines has risen at twice the rate
of real growth in the world economy over the past ten years and is expected to
continue growing at about a six-percent annual rate over the next fifteen years.

Source ATAG IATA

Growth Rate Comparison
PastTen Years

all

World Real GDP World Revenue Ton Miles

Of great significance for the future shape of the industry is the fact that the bulk
of the growth has been, and will continue to be, in international skies,
particularly the skies over the Asia-Pacific region. In the ten years between 1984
and 1994, world scheduled airline traffic shifted from being about half domestic
and half international to being nearly two-thirds international. This trend is
expected to continue, largely because of the explosive growth in Asia-Pacific
skies (see exhibits below).

World Scheduled Airline Traffic

Percent
100

%°

my 1% Domestic am
n
|
so

2 6%
MT six, International

20

0

°

BONS R687 MY

“Sour Tow Mis Pajormed, CAO


An
the agrees.

parts agreene:
important ana the
supports Avital part of ef fo:
today th comprehensive ronicoring
enforceme: ever undertaken by go

dustry. In the past in other Administra
alure to follow thrcugh on agreements.

As a result, there nas been refreshing change in
automotive sector, Foreign vehicle Japan were up 30%
overall ir 1995, 3 Sis.-built Big

3 venacle
Foreign auto parts sa apan were up
st the previous year, while
in the U.S. repo
important
for aute

this results-oriented app:
Japanese for the first tim
real oppe to buy American c
goods anc services. And many U.S. compani
time are reaching levels of production that
investmen:s targeting tre Japanese market

But, of course, more remains to be done, For example
U.S. autovakers have made grudging progress in securing
dealershics in Japan, with enly 30 new dealersnips to dace ou
Of an expected 200 by the end of 1996. Also, a.most 60
percent of vehicles going to Japan from the U.S. are built by
Japanese transplants, which in turn use fewer “actual” U.S.
parts thar the Big 3. Thus, Japan is still trading to a large
degree with itself. Reports of the keiretsu system's demise
are greatly exaggerated, although the progress to date cracks
open the door to the possibility of real market reform and
Substantial exports of Big 3 vehicles and other U.S. goods

remains in the aute parts sector. For

parts on Japan's restrictive
“critical” parts list, only 1, power steering, has bean
deregulated to date, while only 7 of the 42 auto parts on the
“modified” parts list have been deregulated. Pursuant to the
terms of the agreement, Japan is conducting a one-year review
of these carts lists, so that deregulatio: continue to
move speedily in the vight direction

And let us not forget that, overall, continues to
represent our largest current account deficit: $59.3 billion
in 1995 (down from $65.7 bill 9.31 billion
1993)

That's urge that we continue this res
oriented or all nations that do not allow a level
playing field for U.S. businesses and workers. In this
increasingly global econcmy, we must take steps =o ensure that
our businesses and workers are prepared to compece, and we
must stand up for them to ensure they have a fair Chance to
compe

We must reject the voices that attempt to steer us off
course

European Union Commissioner Lecn Brittan, who was in
Washington last week to proclaim that “the days of the
oid £.8. approach surely are numbered." “In our view,”
he said, “there is no longer 2 place for unilateral



23

could rush over and rush right back, 1 would appreciate it. Thank
you.

[Recess.]

Chairman CRANE. We will commence with you, Mr. Fisher, and
again, I would like to ask you all to keep your formal remarks to
under 5 minutes, but any further remarks you have will be made
a matter of permanent record.

Mr. Fisher.

STATEMENT OF GEORGE M.C. FISHER, CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER, EASTMAN KODAK CO.

Mr. FISHER. Thank you, Mr. Chairman. I appreciate this oppor-
tunity to testify on the topic of United States-Japan trade relations.
Given the importance of your time, I will, as usual, simply submit
my formal remarks for the record and highlight some of the key
points and then address your questions.

In the United States, you can literally walk down any street or
through any mall and find a store that sells Japanese film today.
Unfortunately, the converse cannot be said. In most stores in
Japan, Kodak film, the most popular film in the world, is com-
pletely absent. While Kodak produces products geared specifically
to Japanese tastes and has spent over $750 million in the last 10
years promoting them and building a business, while Kodak’s com-
mercial efforts in Japan have led to many product design awards,
including one last year from MITI, and while Kodak has competed
successfully in other markets in Japan with motion picture film, x-
ray film and microfilm, for some set of reasons, we seemingly can
achieve little more than a 10-percent share of the consumer photo
market, thanks to what we believe is anticompetitive behavior that
is currently condoned and facilitated by the Japanese Government.

In what is the most complete survey to date of the Japanese
consumer photo film market, we surveyed more than 2,000 retail
outlets in 45 of Japan’s 47 prefectures this past December and Jan-
uary. For greater accuracy, that study is weighted according to the
sales volume of specific retail outlets. We are releasing that study
today. In summary, it shows that Kodak film is wholly absent from
two-thirds of the Japanese retail market, and in the 34 percent
where Kodak film is available, we are able to compete on price in
only 10 percent of the Japanese market. Why? Quite simply, the
Japanese Government has helped create a market structure that
shields its domestic photo industry, particularly Fuji, from mean-
ingful competition. These barriers are in effect today and include
but are not limited to a complex web of distributors, financial insti-
tutions, wholesalers and retailers that limit our access to retail
shelf space; photo wholesalers who are induced by discriminatory
rebates and promotional payments that Fuji uses to exclude com-
petitors and discourage price competition; a premiums law that al-
lows private trade associations to create fair competition codes,
which limit the use of advertising and market strategies to lower
prices, and a large scale retail store law which restricts Kodak's
sales by impeding the establishment and expansion of large dis-
count and photo specialty retail stores.

These governmental actions not only hurt our ability to compete
on a level playingfield; they are inconsistent with Japan’s obliga-


144

means that undoing the damage of the “80°s must be undertaken so that those carriers that can
still hub in Japan can once again have the ability to integrate those hubs with their domestic
systems. Japan recognizes this need for its carriers. We can do no less for ours.

In addition, as indicated in Chart 7, we should approach negotiations with the
following framework in mind:

= First, insist that Japan honor its current agreements:

= Second, steadfastly refuse to fall into the Japanese trap of accepting restrictions
on existing rights as a way to sceure other opportunities; and

+ Third, set as our negotiating goals objectives which are first determined by
‘economic analysis to be in the best interests of the U.S. as a whole.

Let us first be clear on what we are not recommending. We do not propose to
demand simply the dismantling or wholesale restructuring of the network of agencies,
congressional committees, laws and regulations. and other mechanisms that have generally
served this industry well.

We are, however. strongly recommending that there are times when the larger public
interest is better served by a more comprehensive approach to the issues facing this industry:
Just as the National Economic Council was established by the President to oversee and
coordinate the work of various agencies of the Executive Branch to ensure that they work
together to achieve common and often broader goals then any one agency can handle.
similarly, Congress should be open to working with other committees and agencies when the
need occurs. This, we feel, is one of those times, and Japan is one of those countries where
such a coordinated approach is necessary. The challenge we face is not limited to aviation; it
is a basic challenge to our trade policy with Japan and our presence in the largest market in
the world, Asia-Pacific. If Japan can isolate and effectively control this strategic area of
economic activity where the U.S. has led the world since the days of Kitty Hawk. not only in
operations but manufacturing as well, then Japan will feel emboldened to just say no in all
such areas

We have indicated an approach 10 our aviation negotiations which we feel is an
absolute prerequisite to successful aviation negotiations with Japan. Nevertheless, even the
most capable negotiator. using the most successful techniques. may face defeat unless he is
operating in an environment that permits success and rejects even the possibility of failure.

With a nearly $60 billion trade deficit with Japan, the one thing the U.S. cannot permit
Japan to accomplish is to allow them to isolate individual sectors of trade and manage the
‘outcome in sectors where U.S. firms do well

This pattern of isolating sectors where U.S. firms are competitive is not limited to
aviation, In semi-conductors or photo film the response is similar. Where U.S. firms are
competitive the Japanese adherence to free trade suddenly disappears. It quickly becomes
heads { win, tails you lose, Where Japan has a competitive advantage, they demand and
quickly exploit any freedom, but when the situation is reversed. they resort to a variety of
techniques to prevent the comparative advantage of U.S. firms from being made available in
the Japanese marketplace, If these practices are allowed to continue they will ereate an
insurmountable barrier to ever achieving balanced trade with Japan. Moreover. many of the
other countries in Asia will quickly adopt the same practices.

Aviation has had a long history of isolation that makes it particularly vulnerable 10
these techniques. But given its strategic Importance, particularly in the Asia-Pacific
marketplace. the United States cannot afford to present anything but a united front. This
commitiee, we believe. 1s in a position to provide the leadership to ensure that in this area as
in others. the U.S, is speaking with one voice.


90

plan was in the works for medical devices. No sooner than industry had agreed to new prices for
new products to be brought into the system than did MHW tell the Commerce Department that a

new, lower R-zone would be used to reduce product prices during the next two year cycle

We do not know what the new R-zone would be under MHW's plan However, we can tell you
that during the last price revision, reimbursement prices for products brought under the price
control scheme since 1990 were not reduced when the 15 percent R-zone was applied Under a
smaller R-zone, our prices would be permanently reduced, and for every five percentage point
decrease in price for a product grouping, such as heart pacemakers or orthopedic implants, we
estimate that U.S. industry would lose at least $10 million per product grouping. If the prices of
U.S. products sold in Japan were cut five percent across-the-board as a result of a smaller “R
zone, U S losses would amount to $250 million every two years, and some U S$ product lines

‘would become unprofitable in Japan

The bottom line is that MHW should not seek to unfairly balance the Japanese health care budget
on the backs of U S, manufacturers of advanced medical technology products, and they should
not be allowed to change some key assumptions in a negotiation afier a deaf has been struck As
previously indicated, while we are generally pleased with MHW’s recent actions and leadership,

we want to avoid situations, such as this, that can undermine some of our mutual trust

HIMA and its member companies in the U.S and in Japan are now working closely with the
Department of Commerce to send a signal to the Japanese government that the policy change
being contemplated is inappropriate for a number of reasons, and that MHW's suggestion that the
R-zone for medical device products be reduced should be withdrawn, Along those lines, we

would appreciate the subcommittee's assistanc

sending that same signal.

Thank you.


172

Likewise, Article VII on recognition of qualifications and standards has three relevant features:

1. countries may choose their own approach to recognizing qualifications and standards,
through unilateral recognition, bilateral reciprocal arrangements or international
harmonization;

whatever approach is chosen must be applied in a consistent, objective and fair
manner to all other countnes seeking recognition of their professionals; and

3, countries shall cooperate with intergovernmental and non-governmental international
organizations towards the establishment and adoption of common international
qualifications and standards of practice.

Decision on Professional Services: A separate decision establishes a Working Party on
Professional Services (WPPS) to carry out Articles V1 and VII with respect to the professions
and assigns the first priority to accountancy. In conducting its program, the working party
must involve the profession's international organizations and respect the role of self-regulation
where this is the norm.

‘The decision identifies three specific objectives in accounting:

1. to encourage the use of international standards in the accounting profession through
cooperation with international professional organizations such as the IASC and the
International Federation of Accountants (IFAC);

to establish guidelines for the reciprocal recognition of accounting qualifications across
borders; and

3. to make sure that domestic regulation of the accounting profession serves legitimate public
policy objectives, while not acting as an unnecessary barrier to trade and investment.

The mandate of the WPPS, however, extends beyond accounting to other professions. It is
anticipated that once concrete progress has been made on accountancy, the working party will
begin work on another profession -- perhaps engineering, consultancy, architectural or legal
services.

Continued Work in the WTO
While professional services fared quite well in the Uruguay Round, the work is not complete.
‘The Working Party on Professional Services is the primary forum for the continue effort, but
liberalization in accountancy, consultancy and other services should be advanced wherever
possible.

Working Party on Professional Services
‘The WPPS meets next week for the fourth time. The chair is Ambassador Leonora Saurel of El
Salvador, a dynamic and highly respected figure in Geneva, She has asked participating
governments to make suggestions for priorities within the Working Party’s mandate, and for
proposals for achieving success in those priorities.


44

The President, as it is well known, will be meeting with the Jap-
anese Prime Minister in Tokyo on April 15. The Kodak case must
be discussed at that meeting, and I am very pleased that Congress-
man Houghton and Congressman Levin have circulated a letter to
the President asking him to raise this issue. I have just signed the
letter, Congressman Houghton and I. I am pleased to be part of the
effort to bring about that discussion, and we will do everything we
can to continue to help facilitate it. But I want to particularly tip
my hat to a gentleman who has not only turned Kodak’s fortunes
around but is helping to turn America’s fortunes around in the
global marketplace.

L yield back.

Chairman CRANE. Thank you.

Mr. Fisher, I understand the way you explained it that there are
distributors and retail stores over there selling Kodak who are cre-
ating artificially high prices for Kodak products. How can Fuji
exert that kind of control on a distributor? How do they control the
ones that will not even let you in?

Mr. FISHER. The ones that primarily will not let us in in two-
thirds of the market are basically controlled through this keiretsu
form of distribution system which Fuji owns part of or Mitsui Bank
and Sumitomo Bank own part of. Those banks are the two largest
shareholders of Fuji. So it is a combination of ownership, rebate
systems, security deposits and various horizontal and price-fixing
mechanisms that go on within that distribution system. And they
just simply keep us out, because those people—the distributors and
retailers—even if they wanted to, do not dare step out of line, be-
cause their financial future is at stake.

Chairman CRANE. I am sure you have heard the charge that you
folks have offered rebates to U.S. drugstores and hotel conces-
sionaires and airport concessionaires. Could you respond to that?

Mr. FISHER. Yes; I clearly stand on the ethics, integrity and
record of Eastman Kodak. Also, I must say that whether I like it
or not, the U.S. Justice Department has examined us up one side
and down the other, and I think the persistence of the U.S. Justice
Department to pursue investigations of poor market behavior, that
record stands on its own. And as I pointed out, if only the Japan
Fair Trade Commission were doing nearly one-tenth as good a job,
we would all be better off.

Chairman CRANE. I would like to direct one quick question to
Mr. Armstrong, and then, we are going to have to recess. But what
evidence do you have that if the arrangement expires that your
market access opportunities will diminish in Japan?

Mr. ARMSTRONG. Well, our greatest concern is actually the social
and business structure which Mr. Fisher just referred to in the
sense that Japan has probably been most successful as an insular
nation for years by being very self-reliant. It tends to look toward
itself. The businesses look toward themselves, first in a business
family and then other Japanese businesses for supply of products.
The agreement which we put in place has given us an opportunity
to go into Japan and talk to potential purchasers and show them
our wares, and it has given also an announcement or an edict by
the Japanese Government that it is all right to talk to us.


85

‘House Ways and Means Committee
Subcom: tee on Trade
Hearing on General Oversight of U.S.-Japan Trade
March 28, 1996
2:30 p.m.

Testimony
by
Ed Rozynski
Senior Vice President for Global Strategy and Analysis,
Health Industry Manufacturers Association

Good afternoon, Mr. Chairman My name is Ed Rozynski and I am senior vice president of
global strategy and analysis for the Health Industry Manufacturers Association (HIMA). HIMA
is a Washington, D.C.-based national trade association representing more than 700
manufacturers of medical devices, diagnostic products, and health information systems. HIMA’s
‘member companies comprise one of America's most globally competitive industries, supplying

almost one-half of the $112 billion global market for medical technology.

It is a privilege to be here today to discuss the state of U.S.-Japan trade in our industry. I would
like to briefly share with you our recent successes in Japan and our hopes for the future of our
trading relationship. 1 would also like to bring to your attention one single issue that could
potentially undermine some of our efforts to date to open Japan's market for medical devices and

to positively influence Japan's health care system.

Finally, [ would like to state for the record that the biggest trade barrier facing our industry is not
Japanese trade-related policies, but rather itis the way our own FDA regulates medical
technology in this country In this regard, you can take a major step to promote U.S.
competitiveness and better access to quality health care in this country by supporting the
bipartisan FDA reform legislation that is currently working its way through both the US. Senate

and House of Representatives

yund on U.S. Med:

Japan is the world’s third largest market for medical technology. With a market size estimated at


176

products at very competitive prices. Throughout the world. Guardian has been able to offer
competitive prices that are made possible in part through production efficiencies and in part
through shortening and simplifying the distribution chain

From the outset, Guardian met a stone wall in Japan, With very minor exceptions, neither glass
distributors nor glass fabricators would handle our products. even though we were able to
provide prices at least 30% to 50% below domestic prices. On the surface. two reasons were
most frequently given for our lack of success: low quality and slow delivery time. Both reasons
were demonstrably bogus. Our glass was the same product that competed successfully with
Japanese glass in the U.S.. Europe. and other markets around the world, Moreover. we kept our
delivery time short by developing a network of warehouses in the major Japanese cities. We
soon discovered the real problem: the Japanese flat glass market was a cartel, tightly controlled
by the three domestic manufacturers -- Asahi Glass Company. Ltd.. Nippon Sheet Glass. and
Central Glass Company. Since the 1950's, these three companies had maintained fixed market
shares in a 5/3/2 ratio, Each maintained an exclusive network of distributors and each had
extensive ties throughout the construction sector due to keiretsu relationships. Any distributors
tempted to purchase imported glass were threatened with the cutoff of supply from their domestic
sources. In all other markets in developed countries. glass distributors are free to handle the
products of any manufacturer. In Japan, not only are distributors blocked from the purchase of
slass from foreign producers, but there is no competition between Japanese producers. as
distributors are exclusive to each producer.

ALS. Government Support

Faced with enormous barriers to entry. Guardian turned to the U.S. Government for help. In the
1992 Bush-Miyazawa Action Plan, the Japanese goverment acknowledged the problem in the
flat glass sector, and undertook to “substantially increase market access for competitive foreign
firms.” Unfortunately, there was little follow-up to the Action Plan, and the Japanese
Government failed to implement key elements of the agreement

In June 1993, the Japan Fair Trade Commission JFTC) released a survey’ of the Japanese flat
glass market. The survey is remarkable in two respects. First, it confirmed in great detail the
anticompetitive practices prevalent in the flat glass sector. Second. in the face of substantial
documentation of these practices, it concluded that there is no evidence of violation of law. It
‘was clear that outside pressure was critical if attitudes in Japan were to change.

In July 1993, the Clinton Administration renewed pressure on the Japanese Government to open
the flat glass market. AtU'S. insistence. the flat glass sector was included in the so-called

‘compliance basket” in the Clinton-Hosokawa Agreement on Framework Negotiations. That
triggered 18-months of negotiations that culminated in the U.S Japan Agreement on Flat Glass.
which was signed on January 25. 1995.

‘The US.Japan Agreement on Flat Glass

The U.S.-Japan Agreement on Flat Glass is unusual hecause it was negotiated during a period of
confrontation in U.S.-Japanese trade relations, The most divisive issue at the time concerned
autos and auto parts, Because of failures to implement past agreements. the Clinton
Administration insisted on obtaining measurable indicators of success in new agreements. |»
tum, the Japanese Government accused the U S. of favoring managed trade and vowed to res1~
any steps in that direction. In the flat glass agreement. both sides managed to preserve their \rs
positions while incorporating terms strong enough to reassure the U.S. flat glass industry tht
genuine market-opening could result from the agreement.

Through the extraordinary efforts of Ambassador Michey Kantor and his dedicated team. an
agreement was reached in December 1994 setting ou responsibilities for all involved, For their
par. the Japanese glass manufactuiers and distributors released voluntary public statements
recounizing the need for open and ron-iseriminatory procurement in the flat glass sector, and
acknowledging that distributors are free 1 purchase from any supplier. including foreign flat



62

Let me review the key facts. Fact one: Kodak film is widely avail-
able in Japan. Kodak has made a lot of allegations about how Fuji
controls distributors to create a distribution bottleneck. The facts,
data we would be happy to have this Subcommittee or USTR ver-
ify, show that almost 80 percent of the retailers served by Fuji’s
distributors actually buy or have access to Kodak film. Figure 1 at-
tached to my statement shows these findings. There is no distribu-
tion bottleneck that keeps Kodak film off the store shelves.

Fact two: Price competition is alive and well in Japan. We have
shown that if you compare the same type of film at the same type
of retail outlet, prices throughout Japan are comparable to the
United States. The map of Japan attached to my statement dem-
onstrates how widely available discounted film is in Japan. Fuji
Film cannot and does not control retail film prices. The market is
open to competitively priced film.

Fact three: The Japanese Government does not restrict access to
the film market, nor has it tolerated anticompetitive activities.
Government restrictions were eliminated decades ago. While Kodak
is protected by a 3.7-percent U.S. tariff, there are no Japanese tar-
iffs on consumer photographic products. Furthermore, the Japanese
Fair Trade Commission has monitored our industry carefully, and
Fuji has taken recommended actions to assure full compliance with
Japan’s antimonopoly law.

Fact four: Kodak’s problems in Japan are the result of its own
mistakes. Kodak claims that it has “done it right” in Japan. The
facts are that Kodak has refused to compete on price for over 10
years. Kodak was 2 years behind Fuji Film in the introduction of
high resolution 400 speed film and 2 years behind Fuji Film in the
introduction of one-time use cameras. Today, these two products
account for almost two-thirds of the Japanese consumer film mar-
ket. And Kodak has not advertised aggressively. For the period re-
ported by Kodak, Fuji Film outspent Kodak by a factor of 10 to 1.
Kodak cannot expect to increase its market share against an in-
cumbent entrenched with a home team advantage if it refuses to
compete on price, is behind in product innovation and does not in-
vest heavily in advertising. Clearly, Kodak is not a company that
has done it right.

Fact five: Kodak engages in exclusionary activities in the United
States aimed directly at keeping Fuji film off retailers’ shelves.
This is relevant because it is fair to look at reciprocal opportunities
in the United States and because the practices provide a bench-
mark against which to compare its allegations. The facts are: Until
December 1995, Kodak had a rebate program that ensured retail-
ers a 4-percent rebate even if they did not reach a target quantity
of sales as long as they agreed not to carry Fuji film. Kodak has
paid premiums to companies like Eckerd Drug, Publix Super-
markets, Bradley’s and major airport and hotel concessionaires in
return for them agreeing not to carry any brand but Kodak. If you
walk through Naticnal Airport, you will not find any Fuji film. By
comparison, you will find Kodak film at Tokyo’s Narita and Haneda
Airports. Kodak engages in practices far more exclusionary than
even what they allege against Fuji Film.

In conclusion, Mr. Chairman, we believe the facts demonstrate
that Kodak’s case is just plain wrong. It proves only that most Jap-


86

$20 3 billion, it trails only the United States ($47 7 billion) and Europe ($29.2 billion) in its
importance by value. In recent years, the Japanese market has been an important focus of U S
‘manufacturers not only because ofits sheer size, but because our companies have traditionally
not been as successful there as they have been in other foreign countries Indeed, US. market
share in Japan prior to 1990 had amounted to only about 20 percent, or about one-half of our

average foreign market share of more than 40 percent

Over the past seven years, have seen U S industry take a number of steps that have
successfully resulted in an improvement in our market position in Japan. One such step has been
to work closely with key officials in the Japanese Ministry of Health and Welfare (MHW) and
the U.S. Government. The Commerce Department's Office of Japan, part of the International
Economic Policy Division, has been a key player for the past ten years in helping to create an
environment in Japan that is much more receptive to imports of the innovative, life-saving and
life-enhancing products that this industry produces. Our companies, too, have consistently
increased their investment in their Japan sales efforts I am happy to report that, as a result of a
coordinated US Government - U.S. industry strategy, US. exports to Japan of medical
technology are consistently growing, even while the overall Japanese market for medical
technology products is relatively stagnant This growth is a testimony to U industry's ability
to develop innovative medical products that patients need and that improve the overall quality of
health care HIMA now estimates US. market share in Japan at about 25 percent, representing a
sustained increase in market share since 1990. We hope to be able to further penetrate the

Japanese market until our performance in Japan rivals our performance in other foreign markets

‘As a general matter, we are pleased with the discussions that we have had with MHW regarding
their plans for next week's scheduled price revision and also for their decision 10 reimburse some
important new medical devices starting next month I must say that HIMA’s relations with the
leadership at MHW are very good at this time Moreover, we look forward to working with
them as they contemplate some very critical structural changes to their health care system, such

as a new health care program for the elderly


121

The second category of change that I want to bring to your atten-
tion has to do with the institutional environment. In my testimony,
I single out the Asia-Pacific Economic Cooperation Forum or APEC
and the new dispute settlement mechanism in the World Trade Or-
ganization.

There are several features of APEC that have direct bearing on
United States-Japan trade tensions. The first is that APEC offers
an institutional mechanism in which not only the United States
but other countries can work in a cooperative atmosphere to open
the Japanese market. APEC leaders have committed themselves to
address all barriers to trade and investment, ranging from agri-
culture to competition policy. This is a potentially significant con-
tribution. In Osaka specifically, the APEC leaders beat back chal-
lenges to scale back the comprehensiveness of APEC’s commitment
to free trade.

Moreover, APEC can help depoliticize United States-Japan trade
disputes and offer a larger role to business. Finally, APEC offers
both countries the chance to become more firmly embedded in the
emerging Asia-Pacific community, and I think that enhances the
security and stability of the region. Clearly, APEC offers no short-
term results, but I think a historical process is beginning to oper-
ate.

With respect to the new WTO dispute settlement procedures, the
United States has a tremendous opportunity. Some Japanese have
recently claimed that these procedures mean that bilateral disputes
are now unnecessary because the age of bilateral trade is behind
us. Actually, the WTO dispute settlement procedure encourages bi-
lateral discussions in the first instance. In addition, there will be
disputes that are not yet covered by WTO rules, so I think this pre-
diction is a little bit premature. Nevertheless, there are many more
areas that are covered by WTO rules, and we thus have more op-
portunities to address our concerns in the World Trade Organiza-
tion.

On a different topic, I want to say just a quick word about both
substance and style in United States-Japan relations. On the sub-
stance, I notice that every time the Commerce Department releases
its statistics, there is a great scramble to put a spin on the bilat-
eral trade numbers. But the truth is that bilateral trade statistics
are being blown way out of proportion. For reasons I have already
explained, they are becoming somewhat irrelevant to the real life
of global business. They disguise rather than illuminate the trends
that I have been describing. And, in purely economic terms, of
course, they have always been irrelevant, because what counts is
a country’s global current account surplus. This is the distorting
element in the world trading system: The size of the Japanese sur-
plus. Here, the news is modest but good; the Japanese current ac-
count surplus is coming down noticeably, from 3.2 percent of GDP
in 1992 to 2.2 percent in the third quarter of 1995.

Another weakness of these trade statistics is that they often ex-
clude services, in which the United States is so competitive. As you
know, our service surplus last year offset more than a third of our
deficit in goods.

I also want to comment on the issue of style. This is a delicate
matter, but I believe that an unduly aggressive and self-righteous


124

was $103 billion. By contrast, U.S. investment in Europe exceeded
$300 billion, as did European investment in the United States.
This gap reflects a number of obstacles: structural barriers
associated with the corporate groupings known as keiretsu, the
exorbitant price of land, and excessive regulation, to name a few.
The current economic recession in Japan only makes things worse.

All three of these priorities -- investment, services, and
intellectual property -- are the subject of multilateral agreements
negotiated during the Uruguay Round. Along with Europe, Japan and
the United States share a common interest _in strengthening these
agreements. Scheduled reviews of Uruguay Round agreements and the
December ministerial meeting in Singapore should provide
opportunities for closer U.S,-Japan collaboration

Derequlation and Competition P

As companies become active in more and more countries, it
becomes increasingly important to improve the way they are treated
in domestic markets. It does little good to achieve free trade at
the border if domestic barriers effectively block new entrants to
the market.

This is why the scope of trade rules has expanded over time
from border-based measures such as tariffs and quotas to a variety
of measures hitherto considered "domestic." Examples encompassed
in the Uruguay Round include government procurement, subsidies, and
protection of intellectual property. Since the United States is
already a relatively open economy, with few domestic barriers to
new business, we stand to gain considerably from this trend.

one key area is not covered by Uruguay Round agreements,
however, and that is competition policy. In 1948, the Havana
Charter explicitly recognized that anti-competitive behavior could
act as a barrier to market access. But the Charter never came into
effect, nor was it revived during the Uruguay Round negotiations.
Many U.S.-Japan trade disputes stem from anti-competitive behavior
in Japan, not because Japan lacks adequate laws, but because they
are not enforced. In the absence of WTO rules, the United States
has no choice but to use bilateral or even unilateral measures.

Along with competition policy comes deregulation. The
Japanese government recognizes the need and has firmly committed
itself to deregulation. But like Mark Twain's effort to give up
smoking, officials have done it hundreds of times, with only
limited results. Bureaucratic caution and vested interests impede
the process. More than most other societies, the Japanese tend to
hold the government responsible for safety and order in ways that
would not occur to the average American.

mpetiti re keys to_a more

Ki e er. Deregulating an

industry will not open up opportunities for new entrants to the
market unless an effective competition policy is in place.

c. The Sea-Chan: Dev: ni

To put U.S.-Japan trade disputes in perspective, the biggest
single change in the global environment since the declining years
of the Cold War is the sea-change in policy in developin
countries, especially those in Latin America and the Asia-Pacific
region. As a result of a shift toward market-oriented policies,
many developing countries are exhibiting rates of growth that are
two or even three times higher than growth rates in developed
countries. This sea-change has consequences for both the United
States and Japan.

A major consequence for the United States is that the growth
that is now taking place in developing countries has sparked an
enormous demand for goods and services that Americans excel at


31

In the end, the focus of this case must be on Japan and not on
Washington. Resolution ultimately depends on the same Japanese
Government that created the market barriers in the first place.

And the dynamics within Japan have changed significantly in the
past months with the elevation to power of Prime Minister Hashi-
moto. During a press briefing after his recent meeting with
President Clinton, Mr. Hashimoto noted that deregulation is his
answer to market access problems.

I continue to hope that the Prime Minister will determine that
Japan's interests are best served by finding a way to deal with
this case productively through deregulation and enhancement of
competition. Given the strength of Kodak's case, the case should
lead to negotiations that in the long run will improve the often
acrimonious economic relationship between our two countries.

As Mr. Hashimoto is well aware, our economic destinies are
inextricably linked. Between our two countries, we account for 40
percent of the world’s GNP. And failure to deal with legitimate
trade concerns only frustrates the economies of both nations,
increases tensions, and leaves consumers with fewer choices and
higher prices.


156

‘STATEMENT OF DONALD P. HILTY
SENIOR FELLOW
ECONOMIC STRATEGY INSTITUTE

A new round of aviation negotiations is currently underway between the United
States and Japan. These talks are extremely important because of the large
impact the US. airline industry has on the health and growth of the American
economy, and because aviation has become one of the United States’ most
competitive international industries.

I. Importance of the Aviation Industry
The aviation services industry has become so large and so linked to all other
industries that it must be considered one of the fundamental industries of any
economy. As shown below, its direct output of $54 billion constitutes about one
percent of U.S. GDP and generates one million jobs.

GDP for Selected Industries
In billion dollars

1993
Food and kindred products $106
Motor vehicles and equipment $68

‘Transportation by ai Si
Petroleum and coal products $48
Textile mill products $25

Source US Desariment of Commerce

Beyond the direct impact of its own spending and employment, the aviation
industry also contributes significantly to the creation of earnings and jobs in
virtually all major sectors of the U.S. economy. Through the indirect impact of
the off-airport activities of passengers and shippers (such as spending at hotels,
restaurants, and tourist attractions) and the induced impact of successive rounds
of spending, generated on everything from new cars to groceries, by those who
receive direct or indirect payments (the so-called multiplier effect), the US.
aviation industry, according to one estimate, generated nearly six percent of U.S.
GDP in 1993, as shown below.

Air Transport Contribution to the U.S. Economy
Sumenary

1993

Economic Impact
Aviation spending, plus ripple effect $771 Billion

Earnings of affected industries $230 Billion
Employment effect 88 Million Jobs
Contribution to GDP, 59 Percent

Impact on Trade Balance
Passenger air fares $53 Dillion

“Sharan Wilbur Smth Assets U5. Draven of Gmmcrce

Ona global basis, the industry generates over §1 trillion in economic activity and
more than 22 million jobs.


179

Regarding energy conservation, in August 1995, Guardian and PPG sent a team of technical
experts to Tokyo to present a series of briefings to Japanese government and private sector
officials on the U.S. experience in using energy-saving glass products. and the implications if
similar standards were adopted in Japan. [am attaching for the record a copy of the English
version of the presentation made by that team

With respect to safety glass. on March 21. my Japanese counterpart and I, along with
representatives of all companies on the subgroup. called on and presented a joint letter to several
key officials in MITI and the Ministry of Construction urging that safety glass regulations be
strengthened quickly.

While U.S, companies continue to compete strongly with each other in the Japanese market as
elsewhere, we have also worked together through the U.S.-Japan Business Council to encourage
market-opening in Japan. PPG supports the conclusions and recommendations of this statement

Conclusions and Recommendations

Guardian is cautiously optimistic that the flat glass agreement will produce some genuine and
sustained opening of the Japanese market. We are informed that the MITI survey indicates that
imports of flat glass increased 90 percent by volume in the first six months of 1995 compared
with the same period in 1994, At the same time, there are three reasons why itis far 100 early 10
conclude that the agreement is @ success.

+ First, sales levels that generate impressive year-over-year growth statisties in percentage
terms are still minuscule in absolute terms. Even if Guardian were to double its sales in
1995 over 1994, we still would account for at most only 2 percent of the Japanese market
Based on our performance in comparable markets around the world. we could reasonably
expect a market share in the range of 10 to 15 percent

+ Second, strong keiretsu bonds still exist. making it extremely difficult for us to participate
in privately-funded construction projects.

+ Third, there are strong signs that distributors and glaziers have only set aside a small
token portion of their business to be allocated to imported products. Once that portion
has been filled. foreign suppliers may find it impossible to win increased market share, no
matter how competitive we become

Iis essential, in my view, that the U.S. government continue to assign high priority to the
implementation of the U.S.-Japan Agreement on Flat Glass. For reasons already given, itis far
from clear that the agreement is producing meaningful results. Failure would have repercussions
far beyond the flat glass sector by intensifving the sense of distrust that already exists between
our two countries on trade issues. The only way to dissipate that distrust is to demonstrate one
agreement at a time that each country is as good as its word

The bilateral agreement on flat glass offers a tremendous opportunity to open a Japanese market
that has been tightly closed to American manufacturers, ft deserves praise, as do President
Clinton and Ambassador Kantor for securing the agreement. Yet without effective
implementation, the goal of fair access to Japan's flat glass market will continue 10 elude us.

And if questions are raised about the U.S. commitment to implementation in one sector -- in this
case, flat glass -- every other sector in the U.S -Japan trade relationship will suffer as well. The
effort expended to achieve an agreement with strong terms warrants an equally strong effort 1
ensure Japanese compliance, Prompt disclosure of survey data, regularly scheduled government
to-goverrment meetings. private secior involvement, and close monitoring of designated
quantitative criteria ail are necessary

Attachment retained in Committee files.


7

Chairman CRANE [continuing]. All of our Members would adhere
faithfully to the clock on the table there. And with that, I would
like to introduce Ambassador Shapiro for his opening statements.

STATEMENT OF HON. IRA SHAPIRO, SENIOR COUNSEL AND
NEGOTIATOR, OFFICE OF THE U.S. TRADE REPRESENTATIVE

Mr. Sapiro. Thank you, Mr. Chairman. It is a pleasure to be
here. I welcome the opportunity to speak with the Subcommittee
to discuss the administration’s Japan trade policy, and my com-
prehensive statement, I am glad, will be in the record, and I will
try to abbreviate my remarks.

From the start of this administration, Mr. Chairman, the Presi-
dent has said that we reject what he described as the false choice
between unilateral free trade on the one hand and protectionism on
the other hand. He has affirmed that open and competitive com-
merce enriches us as a Nation, and that we will compete, not re-
treat. But he has also stated that we will welcome foreign products
and services into our market, but we will insist that our products
and services be able to enter other markets on equal terms.

For more than 3 years, the administration has followed this view:
Open trade but with comparable access. We believe American com-
panies benefit from and will support free trade but only if it is fair
trade as well. In our experience, Mr. Chairman, nowhere are those
principles more applicable and nowhere have we worked harder to
apply them than with respect to Japan. We have insisted from the
beginning that our companies and workers needed greater access
to the Japanese market and have tried to redress and rectify the
longstanding imbalance and lack of access to that market.

We have said from the outset that we would work to open Ja-
pan’s market multilaterally where possible; regionally where appro-
priate; and bilaterally where necessary, and we have worked stead-
fastly to do so. Nearly 3 years ago, our two countries signed the
United States-Japan Economic Partnership Framework, which was
a comprehensive approach to macroeconomic, sectoral and struc-
tural issues. We felt that we had to attack these questions to-
gether, that if macroeconomic change occurred, if structural change
of the sort that you referred to had occurred, it would reinforce our
efforts on the sectoral front, but also, our sectoral activities would
reinforce the drive for a deregulated, more open, more competitive
market. And we also said that making progress required not only
concluding trade agreements with Japan but ensuring that they
were implemented and enforced.

We have followed a consistent course, and we are beginning to
see some important progress after negotiating 20 trade agreements
with Japan, including our Uruguay round agreements. As the
Chairman indicated, last year, the trade deficit between our coun-
tries started coming down and according to Japanese figures, fell
to its lowest level in about 12 years. We have seen great progress
on the Japanese current accounts surplus, which went down from
3.5 percent to less than 2.6 percent this year. The United States
exports to Japan—and I looked at the numbers, and I realized that
from 1990 to 1993, they were almost totally flat—at about $48 bil-
lion. But in 1994, we saw an 11-percent increase, and last year, it
was a 20-percent increase as the results of a number of things


139

transportation will yreatly enhance the future expansion of international commerce and the
development of the emerging global marketplace.”

‘On an international level. the APEC organization is also working to remove some of
the impediments to air transport services in its region. APEC was the first multilateral trade
forum to include air transport specifically in its agenda, and has committed to its liberalization
by 2010. APEC has also created a transportation working group to study this issue. At the
APEC ministers meeting at Osaka, Japan in November 1995, an Action Agenda was adopted
which, among other things. specifically addresses the progressive reduction of restrictions on
trade in transportation, and calls for a “standstill” in the creation of new impediments.

‘The APEC initiative is of critical importance to the international aviation industry
According to IATA, the Asia-Pacific market already accounts for more than one-third of
scheduled international passenger traffic. By 2010, according to LATA, this area is expected
to account for over 50 percent of scheduled passenger traffic.

‘The APEC initiative is also vitally important to the U.
Kantor recently stated

As the US.T.R. Mickey

The Asia Pacific region is of growing importance to the United States
Our trade across the Pacific is 50% greater than our trade across the
Allantic -~ our merchandise exports alone to Asia have grown over 50%
in the last four years and support over two million high-paying U.S.
jobs. If the United States maintains its current market share, Asia,
excluding Japan, is estimated to be our largest export market by the year
2010, absorbing approximately $284 billion of our goods. Growing

U.S. services sales to Asia will add many tens of billions of dollars
more to U.S. exports.

The APEC initiative to liberalize air transport services has, however, caused a reaction
in at least one key member country, No sooner had APEC adopted an air transport
liberalization agenda that included an immediate standstill in the spread of additional
festrictions, than Japan violated that standstill agreement by pursuing more restrictive
regulations. Barely 1wo months afier the APEC Osaka meeting, Japan sponsored a partial
gathering in Kyoto, Japan of some APEC members that was designed to circumvent U.S.
initiatives by formulating a more protectionist policy for Asian carriers. The U.S., Canada,
Hong Kong and Mexico, all APEC members, were excluded from the Kyoto meeting. The
Japanese used the gathering of transport ministers at the Kyoto meeting as a pretext for
making it appear that they were not alone in abrogating the APEC accord. Aside from being
in violation of its bilateral treaty with the U.S., Japan’s protective actions fly in the face of
the APEC Action Agenda.

Because of its geography and large local population, Japan is a natural intermediate
point for travel between the U.S. and the fast-growing Asian economies. In an effort to
protect its airlines from their more efficient U.S. competitors, however. Japan has consistently
used regulation to deny U.S. carriers increased access to oth Japan and beyond to Asia,
notwithstanding the existence of U.S. carrier rights under the 1952 U.S.-Japan Air Services
Agreement. Japan’s recent actions in violation of the APEC Action Agenda indicate Japan's
continuing desire to keep competition out of the Asia-Pacific region.

APEC’s recognition of the importance of aviation reflects the increasing globalization
of this industry. There are «wo major events that have contributed to this globalization
process,

USTR Kantor Statement on White House Announcement of Chair and Vice Chair of Commission on
US-Pacific Trade and Investment Policy, March 14, 1996



147

Asia - Pacific Markets

(Millions Passengers)

__ COUNTRY

_ 2010

Japan ~ 1

Hong Kong 2
China 2 62

Singapore
14 Taiwan
13 Thailand
in Australia
" South Korea
6 Indonesia
8 Malaysia
6 Philippines
7 India
4 New Zealand
3 Pakistan 7
By 2010

10 Asian markets will match or surpass the two
largest ‘93 markets — Tokyo and Hong Kong

Source: 1ATA


153

Frequency measures for the air transport industry for 16 APEC economies

CHART 9

_ Frequency 2)

‘Suppor senoes for
RELY a Frequency (1)

‘ar tanspor

Mantenance and
repair of arcrat

Rental of aucrat
with erew

Freight
transportation

Passenger
teansportaton ea Senemenot

° 2» 0 60 o 400
Frequency

Source! Corsriced from the GATS schedule


46

STATEMENT OF HON. DAVID DREIER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA

Mr. DREIER. Great; thank you very much, Mr. Chairman, and I
hope to have it even less than 5 minutes. I have a full statement
which I see Mr. Levin has already perused, that I hope to have in-
serted in the record.

Let me just say that it is a privilege for me to once again testify
before this very important Subcommittee in this hearing on trade,
commercial and economic relations between the United States and
Japan and for allowing me to make this brief presentation. It was
nearly 3 years ago that I had the privilege of appearing with you,
and I believe that the two most important policy recommendations
regarding our relationship with Japan remain the exact same as
they were 3 years ago. And frankly, they have been reinforced over
this 3-year period since I was here.

First, we should not try to make the American economy more
like Japan. That has been one of the things that we have con-
stantly seen in the past: People trying to get us to do that, to emu-
late Japan, and I think that is a real mistake. Our openness, Mr.
Chairman, is our primary strength. Japan does not benefit from
closed or protected markets; it suffers from the closed and ineffec-
tive nature of its own economy. If they are to thrive in the 21st
century information age, the Japanese economy must become more
open like the United States.

And the second point is that we should not ignore the United
States-Japan security relationship. A very strong United States-
Japan alliance is critical to maintaining long-term stability along
Asia’s Pacific rim. Stability is a prerequisite to continued strong
economic development in the region. Given the unquestionable ben-
efit to the United States of strong economic growth along the Pa-
cific rim, we should remain committed to supporting regional secu-
rity and stability, and let me expand on those two points briefly.

There is no better evidence of the structural weakness of Japan’s
closed and inefficient economy than to look at their economic per-
formance in this decade of the nineties. Japan is now in its sixth
year of essentially stagnant economic growth. The Japanese econ-
omy is clearly plagued by significant structural problems, which in-
clude the government-managed industrial and trade policies so
often advocated by those who wanted to see the United States be-
come more like Japan.

One manifestation of the structural problems confronting Japan
has been the difficulty many U.S. firms have exporting to Japan.
However, the fundamental problem in Japan is not a trade prob-
lem; instead, Japan’s problems go to the heart of their domestic
economy. Japan must undertake significant internal reforms to re-
store long-term economic growth and remain a leading force in the
international economy. There will be significant long-term benefits
to the United States from a Japan that has corrected its internal
problems. A healthy Japanese economy is good for the United
States of America. A Japan with an open and competitive domestic
market that is navigable by foreign firms will be the type of export
market that U.S. companies have dreamed about for two decades.

However, we must recognize that the primary beneficiaries will
be the Japanese people, not U.S. taxpayers. The best trade strategy


OPENING STATEMENT.
CONGRESSMAN CHARLES B. RANGEL
SUBCOMMITTEE ON TRADE
HEARING ON U.S.-JAPAN TRADE RELATIONS
MARCH 28, 1996

Mr. Chairman, thank you for holding these hearings today to review U.S. trade policy
towards Japan and to evaluate the effectiveness of our numerous bilateral trade agreements with
Japan. This hearing is particularly timely in view of President Clinton's upcoming visit to Japan
in mid-April, In his meetings with Prime Minister Hashimoto, the President will

undoubtedly discuss a number of ongoing trade problems we have with Japan and ways to
resolve those problems. I hope these hearings can assist the Administration in preparing for the
President's visit. [ welcome Ambassador Shapiro, Congressman Levin, Congressman Dreier, and
our other witnesses to help take us through the issues today

Japan is our second largest trading partner behind Canada. Our merchandise exports to
Japan reached an all-time high of almost $65 billion last year, but our merchandise deficit, while
coming down, is still unacceptably high at almost $60 billion. While our bilateral trade deficit
with Japan can be attributed in part to macroeconomic forces, itis still true that the Japanese
market is less open to U.S. imports than the American market is open to Japanese imports
While progress has been made, Japan over the last two decades has been probably the largest
source of trade policy frustration for the United States

Since 1980, we have negotiated well over 50 bilateral trade or trade-related agreements
with Japan. The Clinton Administration has negotiated some 20 of these agreements. Despite
our success in negotiating these agreements, the success of the agreements themselves in opening
the Japanese market to U.S. exports has been mixed. Some agreements have indeed led to a
demonstrable and impressive increase in U.S. exports. Others have not been fully implemented
or have been less effective.

11 is important to lear from our past negotiating and implementation experiences which
trade agreements with Japan have worked well and why. Itis also important to ensure that the
agreements are being fully complied with and that we are getting the most out of them. In this
connection, the private sector, in addition to the government, has an obligation to monitor
implementation and to take full advantage of the market access opportunities opened up by the
agreements.

Finally, with respect 10 ongoing negotiations, we must do what we can to assist our
negotiators in reaching effective outcomes with Japan. In this regard, I was somewhat
discouraged to read in the paper recently statements made by high-ranking Japanese officials that
the era of trade bilateralism between the United States and Japan is over. Our ability to reach
bilateral trade agreements with Japan has contributed to a modicum of stability in what has been
al times a rocky trade relationship. I would hope that Japan would recognize this and continue to
reach bilateral trade agreements with us to address specific trade problems.

In closing, Mr. Chairman, I would like to publicly acknowledge that USTR has just
issued its 1995 Annual Report on the Trade Agreements Program. In Annex Il of this report,
USTR has compiled and publicly presented for the first time ever a consolidated list of all the
substantive trade agreements entered into by the United States since 1984 to increase foreign
‘market access and reduce barriers and other trade distorting policies and practices. This addition
to USTR’s annual report is in response to an amendment I sponsored to USTR's authorization bill
last year. Although that authorization bill has not been enacted into law, USTR nonetheless saw
fit to implement the substance of the amendment and | wish to thank them publicly for their work
in this regard,

‘Thank you again, Mr. Chairman,


40

determine whether their products were beiny dumped. This data remains in the possession of)
each company and is not provided to any government official - U.S, or Japanese -- unless a
formal antidumping investigation is initiated,

Although there has been no allegation of Japanese dumping under the 1991 Agreement.
this is most likely due to tight world market conditions which have existed through late 1995
The antidumping provisions of the Agreement will not be tested unless and until there is a very
sharp decline in prices for a particular semiconductor product, The semiconductor market is vers
cyclical in nature, as recent sharp downturns in the prices of DRAMS clearly shows. Moreover,
it is an industry where products have very short life cycles and one in which change can be very
rapid. All of this makes renewed dumping a possibility

The world semiconductor industry is currently experiencing a period of explosive growth.
The global chip industry is expected to more than double in size to approximately $300 billion
by the turn of the century. Meeting the demand generated in the next five years will require the
construction of over 100 new production facilities or "fabs," each of which will cost anywhere
from $1 billion to $2 billion -- and 70 percent af which will be obsolete within three years of
their construction due to the short product lite cycles of this dynamic industry. Capital
expenditures deemed necessary to boost competitiveness may lead in fact to overcapacity and
dumping. Several factors contribute to these capacity swings, Most notably, forecasting demand
beyond a few months is highly uncertain, and periods of demand start and end abruptly. As a
result, periods of overcapacity closely follow periods of undercapacity in the semiconductor
industry.

The emergence of Korea and Taiwan as major producers of semiconductors is adding
significantly more capacity, which in turn further increases the risks of dumping should a
downturn take place in any product segment of the world semiconductor market, However, while
Korean and Taiwanese production could help tip the market into overcapacity, the market leaders
in DRAMS remain Japanese producers, who have 39 percent of the world market for semicon-
ductors overall and 49 percent of the world DRAM market.

Given the history of the industry -- and the devastating impact dumping has had in the
last decade and could have again in the future -- it is in the best interests of both the U.S. and
Japanese industries that the minimal level of protection against dumping afforded by the
Agreement be continued.

The Need for Bu

¢ Solutions, Not Trade Li

ess ati

Some critics have argued that with the establishment of the World Trade Organization
(WTO), the bilateral cooperative arrangements of the Agreement are no longer necessary, While
SIA believes that the WTO provides an important forum for enforcing many rules governing
international trade, we disagree strongly with the suggestion that the WTO can replace the
Agreement. This is neither practical nor reasonable; rather, its a litigious, bureaucratic approach
that should be rejected,

Filing complaints at the WTO about market access is not a realistic solution in disputes
in the semiconductor sector. The WTO provides for panels of judges to consider broad issues
through a process that can take well over a year. The only remedy available through the WTO
is trade sanctions.

The U S.-Fapan Semiconductor Agreement, on the other hand, provides for pragmatic
solutions to specific problems through joint industry-to-industry and government-to-government
meetings. At these meetings, the U.S. and Japanese industries and governments discuss such
detailed issues as the need to make available devices for surface mounting, or the need to open
additional design centers. These are not matters for judges in Geneva to resolve.

id Disputes Before they Occur

‘The U.S,-Japan Semiconductor Agreement has served as a mechanism to diffuse concerns
before they develop into major trade disputes. The U.S. and Japan semiconductor industries have
moved from rancor to cooperation in less than a decade. Continuation of a government-to-


120

Unfortunately, one of the domestic practices that is most rel-
evant here is not yet covered by the rules of the World Trade Orga-
nization, and that is competition policy. Clearly, as you have heard
this afternoon, anticompetitive behavior can impede access to mar-
kets. This is a frontier policy area about which considerable think-
ing is going on, but there is as yet no consensus about how to co-
ordinate policies in this area. The United States and Japan are al-
ready cooperating to some extent, but they need to go even further.

But competition policy needs to be accompanied by deregulation.
There is a lot of talk about deregulation in Japan. Just as Mark
Twain used to say about giving up smoking, the Japanese Govern-
ment has announced deregulation packages dozens of times—with
results that are still rather limited. In addition to bureaucratic cau-
tion and vested interests, I think the Japanese tend to hold the
government responsible for safety and order in ways that an Amer-
ican would not understand. I remember that at the time of the Ty-
lenol poisoning case, some Japanese friends of mine said, “Why
didn’t you blame the government?” Frankly, it would not occur to
Americans to blame the government. Some madman got into the
Tylenol and put poison in the bottles; it wasn’t the government’s
fault. This difference feeds a large amount of bureaucratic caution
in japan that makes deregulation even more difficult than it would

ve here.

The fact is, as Congressman Dreier noted, that competition policy
and deregulation are the keys to opening up the Japanese market,
and they must go together.

So to sum up so far, I would emphasize investment, services, in-
tellectual property, competition and deregulation as central targets
of U.S. trade policy toward Japan.

The third change in the global business environment is the sea
change in developing countries. I added this because I want to put
United States-Japan disputes in perspective. The developing world
is where the real growth is going on, particularly Latin America
and East Asia. Growth rates in some regions are two or three times
higher than they are in the United States or Japan. When asked
why he robbed banks, Willie Sutton said, “Because that is where
the money is.” The Clinton administration has looked at these re-
gions and said, “That is where the growth is.” Hence the impor-
tance of regional trade initiatives. If handled correctly, these re-
gional agreements can ratchet up multilateral standards, but that
is a subject for another day.

I think the growth in developing countries has implications for
both Japan and the United States. In my written testimony, I sin-
gle out three real opportunities for the United States: Goods and
services associated with the American lifestyle, ranging from blue
jeans to American films, where there is just no competition from
Japan at all; goods and services associated with productivity; and
goods and services associated with modernizing the infrastructure,
broadly defined to include everything from roads to telecommuni-
cations. We are tremendously competitive in these areas.

The implication of this same sea change for Japan is that Japan
needs to continue to expand manufactured imports from developing
countries, not just from the United States. Along with growing fast-
er, this is the best thing that Japan could do for these regions.


19

Chairman CRANE. Thank you, Mr. Ambassador.

Given his experience as a former trade negotiator, how does
Prime Minister Hashimoto approach bilateral trade disputes with
the United States?

Mr. SHAPIRO. We have had considerable experience with Prime
Minister Hashimoto in both 1994 and 1995. He is obviously a
strong advocate of Japan’s interests and a strong negotiator. He is
also someone who has always valued the United States-Japan rela-
tionship in the broadest sense and recognized the need to resolve
problems and move forward, So I believe that we will be able to
continue making progress. I believe it will never be easy. It has not
been easy in the last 3 years; it will not be easy now. I checked
with my predecessors, Mr. Chairman, they said it was not easy
then. [Laughter.]

So we are going to continue making progress.

Chairman CRANE. Well, given Prime Minister Hashimoto’s com-
mitment to strengthen competition policy, are you optimistic that
the Japanese Fair Trade Commission will become a more vigorous
enforcer of the Japanese antimonopoly act?

Mr. SHapiro. Mr. Chairman, I hope so. We share the view that
Japan would benefit from a vigorous JFTC, and I know that the
Prime Minister does feel that way. So we want to be optimistic
about it. At the same time, the track record over the years has not
been that of a strong antitrust and enforcement agency nor one
that has been a strong policeman of fair competition. I noted in the
Financial Times recently an article which quoted the chairman of
the JFTC as saying that the tradition of antimonopoly enforcement
had never really taken strong root in Japan. So we are hopeful; we
are optimistic; but we want to be realistic about the need to change
things.

Chairman CRANE. Well, we appreciate all you are doing, and I
am also glad that we are not attempting to pursue unduly some of
the disruptive threats of trade retaliation under section 301. But
we wish you Godspeed in the effort, and with that, I would like to
yield to Mr. Ramstad.

Mr. RamstaD. Thank you, Mr. Chairman, and thank you, Mr.
Shapiro, for your testimony and for the work you are doing. As you
know, Mr. Shapiro, I would like to turn our attention to intellectual
property rights, which we have discussed before in the context of
several high-tech companies in my home State of Minnesota. As
you know, one such company, Cyber Optics, is currently experienc-
ing some serious problems with patent application flooding by a
large Japanese motor company. I know that Japan is on the prior-
ity wateh list with respect to the enforcement of intellectual prop-
erty rights or market access for persons relying on intellectual
property. Can you comment on what steps have been taken to push
the Japanese Government to address this problem of patent flood-
ing by Japanese companies?

Mr. SHAPIRO. Mr. Ramstad, we have taken up the issue of pat-
ents, patent scope and patent flooding with Japan over the years.
We have actually made some progress but not enough as yet. The
issue of the difference between their patent system and our system
remains a serious one, and patent flooding is a problem with which
we are familiar. USTR at the moment is in the middle of its annual


4

persistent problems of foreign access to the Japanese semiconductor market. These problems
wore largely the result of the tightly-knit relationships (initially developed behind a walt of
formal trade barriers) between Japanese users and suppliers of semiconductors. For years,
despite the demonstrated world class competitiveness vf U.S. and other forcign semiconductor
producers. their participation in the Japanese market remained extremely limited -- us reflected
by very low tarcign market share. The framework of commitments and activities established by
the bilateral agreement, both by governments and industries. has provided a means of
overcoming these impediments and of achieving. the major strides in market access that we have
seen in recent years, They have been a critical factor in encouraging U.S. industry to make the
sort of major efforts and investments needed to “crack” the notoriously tough Japanese market
Without an arrangement, our companies see the prospects for further progress as uncertain and
the risk of backsliding to be a real concern

Although much progress has been made, we believe there is still plenty of room for
Turther improvement and that a continuation of the sort of efforts called for under the agreement
will yield additional gains in terms of industry cooperation and inereased market access. In
particular, we think improvements can be registered in

+ The automotive, telecommunications, und video game sectors. where foreign share
remains rather low and U.S. and foreign supplivts have vety competitive products to
offer

+ Increased foreign participation in design-ins ~ particularly. so-called heart of the system

big ticket design-in contracts. Foreign participation in the Japanese market is still
disproportionately focused on commodity produets, of products such as microprocessors
where Japanese firms are not competitive.

+ Sales to small and medium-sized Japanese companies which have not yet integrawed
foreiyn products to the point where sales could be espected to be sustained or improved

in the absence of an intergovernmenta} semiconductor agreement

Moreover. this is a highly cyclical industry. Worldwide growth in demand for
semiconductors increased by 40 percent in 1995. the highest level ever. But this is an industry
where growth is characterized by peaks and valleys, As recently as 1990, the world
semiconductor market grew hy only 1.6 percent, and in 1985 there was negative growth, Growth
in 1996 is forecast at approsimately 22 percent. or only about half the yrowth we saw in 1995,
We are now seeing clear signs ofa weakening of demand for semiconductors. particularly tor
DRAMs.

The point is, although the long-term prospects for growth in the semiconductor industry
are very good, we should still expect periodic downturns and. in particular. we should not expect
the rosy economic conditions of recent years to continue without interruption, These downturns
breed disputes and the established consultative mechanisms of the bilateral agreement will
provide a way of constructively dealing with these problems and addressing them effectively.

We believe that a new agreement should reflect the progress made and the improvements,
Industry cooperation that have occurred under the current arrangement. We frankly anticipate
a reduced role for government in a new agreement. Moreover, we have made clear to Japan that
We are prepared to address any of their specific concerns seriously and flexibly, including the
fact that the agreement should not include a new numerical target

We believe that the merits of continuing the progress and the improvements we have
achieved under the current agreement are overwhelming. and we are optimistic that common
sense and pragmatism will eventually lead t0 a mutually beneficial resolution of this matter.

Insurance

For months. the Administeation has conveyed to the Government of Japan our serious


DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

Requests to be heard at the hearing must be made by telephone to Traci Altman or
Bradley Schreiber at (202) 225-1721 no later than the close of business, Wednesday,

March 20, 1996. The telephone request should be followed by a formal written request to Phillip
D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives.
1102 Longworth House Office Building, Washington, D.C. 20515, The staff of the
Subcommittee on Trade will notify by telephone those scheduled to appear as soon as possible
afier the filing deadline. Any questions concerning a scheduled appearance should be directed to
the Subcommittee staff at (202) 225-6649.

In view of the limited time available to hear witnesses, the Subcommittee may not be
able to accommodate all requests to be heard. Those persons and organizations not scheduled
for an oral appearance are encouraged to submit written statements for the record of the hearing.
All persons requesting to be heard, whether they are scheduled for oral testimony or not, will be
notified as soon as possible after the filing deadline.

Witnesses scheduled to present ora! testimony are required to summarize briefly their
written statements in no more than five minutes. The full written statement of each witness will
be included in the printed record.

In order to assure the most productive use of the limited amount of time available to
question witnesses, all witnesses scheduled to appear before the Subcommittee are required to
submit 200 copies of their prepared statements for review by Members prior to the hearing.
‘Testimony should arrive at the Subcommittee on Trade office, room 1104 Longworth House
Office Building, no later than 1:00 p.m., Tuesday, March 26, 1996. Failure to do so may result
in the witness being denied the opportunity to testify in person.

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

‘Any person or organization wishing to submit a written statement for the printed record
of the hearing should submut at least six (6) copies of their statement, with their address and date
of hearing noted, by the close of business, Thursday, April 11, 1996, to Phillip D. Moseley,
Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth
House Office Building, Washington, D.C. 20515. If those filing written statements wish to have
their statements distributed to the press and interested public at the hearing, they may deliver 200
additional copies for this purpose to the Subcommittee on Trade office, room 1104 Longworth
House Office Building. at least one hour before the hearing begins.

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182

The following are examples of major international alliances:

- Hitachi-Texas Instruments. Established a joint venture, called
TwinStar Semiconductor, Inc. with production facilities in

Richardson, Texas, for the production and development of the next
generation of DRAMs.

- Toshiba-Motorola. Established a joint venture company, called
Tohoku Semiconductor Corporation, with production facilities in
northern Japan.

- Fujitsu-AMD. Established a joint venture company, called
Fujitsu-AMD Semiconductor Limited, with production facilities in
Japan, for development and production of flash memory devices.

- NEC-ATT. Engaged in the joint development of CMOS devices

=igM-Motorola-Siemeng. Joint development of the next
generation of DRAMS.

- iba-IBM. Will establish joint production facility in U.s.
*@ The world’s largest semiconductor manufacturers are teaming

with each other on an international basis to develop, produce and
market the latest generations of semiconductor devices. Given
the global character of the industry, with operations being
Conducted on an increasingly borderless basis, the notion that it
made sense to distinguish semiconductors according to nationality
is no longer valid

Indeed, distinguishing semiconductors by nationality leads to
anomalous results under the statistical system used under the
Semiconductor Arrangement. For example:

- Semiconductors manufactured in Japan by TI Japan, Nippon
Motorola and IBM Japan are characterized as "foreign" products
even though they are manufactured in Japan, while semiconductors
manufactured in other countries by Japanese capital-affiliated
companies are considered "Japanese" products, so that their
import into Japan is not treated as a foreign import for purposes
of the Arrangement’s statistical system.

- In the case of semiconductors manufactured by a U.S.-Japan
joint venture company, half of a single product batch can be
judged “foreign* and the other half "Japanese."

- Even more peculiar results can be found in the case of a
factory that is purchased by a Japanese company. Chips that were
classified as "foreign" suddenly become “Japanese” the day after
the purchase, even though they are the same chips made in the
same factory by the same workers

While the statistical system used under the Arrangement is
fundamentally defective, we believe that any system that seeks to
employ numerical benchmarks is bound to be flawed given the
dynamic nature of the global semiconductor industry and the
complex structure of trade in this sector. Moreover,
identification according to nationality leads to unfair treatment
which is inconsistent with WTO principles.

© Worldwide sales of the U.S. semiconductor industry sales are
expected to top $70 billion in 1995, a 27% increase from 1994.
The profits earned by the semiconductor industry as a whole are
also increasing sharply, totaling $9.95 billion in 1995, up 20%
from 1994. Given its current profitability and prospects for
future growth, this is the last industry in America that needs a
permanent government-sponsored affirmative action program in the
form of a continuing bilateral trade agreement with Japan

© With the double-digit demand growth of the past several
years expected to continue through the end of the century


110

Some have questioned whether the Kodak complaint can
properly be brought before the WTO. Decisions about the scope of
WTO rules, however, should be decided by the WTO itself, not
unilaterally by individual member countries. The issue is not
whether the right to invoke national laws is reserved; the issue
is whether multilateral solutions should at least be attempted

before resorting to unilateral measures.

Non-binding Arbitration

Arbitration provides a mechanism for allowing neutral
experts to undertake fact finding. The arbitral forum could be
either U.S.-based (such as the American Arbitration Association)
or international (such as the International Chamber of Commerce) .
Parties would agree on knowledgeable, neutral arbitrators.
Parties would make factual submissions, the arbitrators would
pose questions, request further facts, and the arbitrators could
then issue a report.

Although it is doubtful either party -- Fujifilm or Kodak --
would agree to binding arbitration, non-binding arbitration
should not be a problem. The arbitrators need not actually reach
a decision -- they need ‘only to find facts and make conclusions

of fact and law.

Neutral Panel of Expert
This option would not involve any preexisting mechanism, and
could therefore be tailored in whatever way the parties wished.

Parties would agree on a panel of neutral, credible,


69

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Convenience Store
(Lawson, Family Mart) [ } @--



24

tions under international agreements and in some cases even at
odds with Japan’s own antimonopoly law. The Japanese Govern-
ment’s position not only excludes foreign suppliers; it has created
a profit sanctuary for Fuji and a worldwide competitive threat to
Kodak and the American jobs we provide. Over the last 10 years,
we figure this has cost us about $5.6 billion in sales or, to use a
Commerce Department equivalent in jobs, tens of thousands of U.S.
jobs.

What is it that we seek? Kodak’s goal is truly resolution, not re-
taliation or dictated market shares. We know we have high-quality
products that will sell and do sell all over the world if only consum-
ers have access to them. We simply seek a more open marketplace
and the ability to put Kodak film on more Japanese store shelves.
In fact, where we are allowed to compete in that small fraction of
the Japanese market, we do reasonably well, with market shares
in excess of 20 percent.

Let me summarize our objectives under three headings: Getting
on the shelf, getting off the shelf and getting more shelves. Getting
on the shelf means essentially ending the restrictive distribution
system that I described under which Fuji exercises control over Ja-
pan’s distributors of photographic supplies and prevents even open-
minded, well-intentioned distributors from even dealing with
Kodak products. Getting off the shelf means ending a related prac-
tice under which retailers who are dependent on Fuji financially
are induced to mark up the price of Kodak products so that retail
consumers never see our discounts. Getting more shelves means
lifting government restrictions on distribution at large-scale photo
specialty stores and discount retailers, where our consumer photo
products in Japan have actually fared reasonably well when al-
lowed to compete.

These seem to me to be modest and somewhat reasonable goals,
and they are consistent with Japan’s international obligations as
well as the expressed commitment of Japanese officials to deregula-
tion. But we do not expect to get resolution of this issue without
U.S. Government resolve. After all, in the last 36 years, there have
been only 15 private antitrust cases in Japan. Now, compare that
with the over 26,000 private antitrust cases in the United States
in only the last 24 years.

But we need to remind ourselves that the barriers I speak of are
not old news, something that happened yesterday, they are in place
today, as we speak, and they are sanctioned, condoned and toler-
ated by the Japanese Government. That is why last May, after
having carefully researched the situation, we did file a section 301
petition with the U.S. Government. In July, the USTR agreed to
investigate and proceed with government-to-government negotia-
tions to correct the situation. As incredible as it may seem, to date,
almost 9 months later, the Japanese Government still is refusing
to discuss the matter. In fact, on March 15, just 13 days ago as has
been mentioned twice in this hearing so far, MITI Vice-Minister
Sakamoto made a speech in which he said the era of bilateralism
is over.

In short, this means that the Japanese Government has very
publicly refused to address our market access issue without provid-
ing U.S. negotiators an opportunity even to present their views.


143

Just fast month, Charles Hunnicutt, DOT's Assistant Secretary for Aviation and
International Affairs, stressed the need for US. palicy makers to concentrate on the long-
term: "It is important to underscore that in our dealings with Japan, we ought not settle for
short-term gains at tne cost of sacrificing long-term needs into the nest century." His
comments echoed those of Sceretary Peita in conjunction with his recent extended tip through
Asia” We agree completely. It has been our concern about the future consequences of any
negotiations with Japan that led us to commission Booz Allen and Hamilton to ook at what
the Japanese policies would mean to the U.S. in the coming decades. We believe that no
policy can be relied upon if it is not hased on economic reality. That 1s why we took the lead
in gathering these facts.

The study conducted by Boos Allen and Hamilton conetuded that over the next 60
decades the cumulative reduction in U.S.-Asian trade balance from restrictions on the U.S.
expansion of passenger transportation in Asia through Japan could exceed $100 billion
Japan, the Booz Allen study suggests. would be the primary beneficiary

A subsequent independent study conducted under the supervision of Clyde Prestowitz
‘of the Economic Strategy Institute reached much the sume conclusion. In that analysis, a cap
on US. carrier beyond rights would mean that in the year 2010, U.S. carriers as a group
would earn almost $3.2 billion less in the best case and $5.4 billion Less in the worst, In that
same year. the cap would reduce U.S. employment by between 111,000 and 213,000 jobs and
reduce US. trade receipts by up to $5.1 billion in that yeur alone. Unfortunately, we believe
the worst case is the most probable one

These ure real dollars and real jobs that will be lost to the U.S. economy if Japan has
its way. And, just as it is now easy to criticize the mistake we made in Bermuda II, it will be
easy in 2010 to recognize in retrospect the damage done by concessions to Japan in 1996

The challenge 1s to recognize those downsides in advance, and negotiate accordingly, In this
regard the economic analyses of Booz Allen as well as the Economic Strategy Institute have
armed the U.S. Government with the knowledge it requires, What is needed now is the
political will to act to avoid the dominance of another successful U.S. industey by Japan. In
our view. and we hope in yours. the responsible course requires that the U.S. first eeconeile
its well-crafted International Aviation Policy with its negotiating objectives. That Potiey
states that

carriers wishing to establish global networks require a higher
quality and quantity of supporting route authority than they have
sought in the past, Airlines will become increasingly concerned
with every market that enables them to flow passengers over ans
part of their system network, These airlines will be looking for
broad, flexible authority to operate beyond and behind hub
points, in addition to the hub-to-hub market between two
countries, At present. governments operating in a bilateral
contest naturally focus on opportunities for their respective
carriers to serve the local market between their (vo countries. In
a bilateral context, services destined for or coming from third
countries receive less consideration In the future, governments
will have to adjust their focus to baryain for the bundles of
rights that will permit airlines to develop global networks.
(Emphasis added.)

We cannot continue to proceed by committing the same mistakes in the 90°s as we did
an the “80's, As the International Policy recognizes, adjusting our focus should mean that
integrating domestic and international hubs has to have the highest priority, Specifically, it

‘ Response of Assistant Secretary for Aviation and Intergational AMairs, Charles Hua

Japan Announcemeny, February 21, 1996

11.10 ACCESS US.

. Pena Assents Shift in Focus trom Europe to Asia.” Aviation Daily, November |. 1995, p. 179


10

fort, it has not been able to make more than a small dent in the
Japanese market. We are spending significant time and resources
on this investigation. We have not concluded the investigation, nor
have we reached any conclusions at this time. But I think we are
working fully to understand the makeup of the market, potential
barriers, and the interrelationship of these barriers to anticompeti-
tive practices.

On February 21, the Japanese Government indicated that the
JFTC would conduct a survey in this sector. That survey notwith-
standing, we have indicated to Japan that this issue is best re-
solved through negotiations that would involve MITI because of the
market access questions involved. Thus far, as the Subcommittee
knows, MITI has preferred not to discuss the issue, saying that
this is simply a JFTC matter. In our view, Mr. Chairman, this
issue is best resolved through discussions, but we are going to con-
tinue our investigation and defining the market and move ahead
to resolve this issue after our investigation is finished.

Let me say that some in Japan have argued that Kodak’s treat-
ment in the market has been mirrored by Fuji’s treatment in the
U.S. market, and in my view, that myth needs to be debunked.
Comparing market shares can be illuminating if the circumstances
are the same, but superficial comparisons of different systems do
not work very well if you just look at numbers. As a general mat-
ter, foreign firms have no problem gaining access to the distribu-
tion system in the United States, and Kodak’s activities in the
United States have been carefully scrutinized over the years by our
antitrust authorities. In contrast, the Japanese Government imple-
mented liberalization countermeasures which effectively restricted
foreign producers’ access to the Japanese market.

Mr. Chairman, there are a host of other issues that I would be
happy to respond to questions on. I want to just indicate that we
share your view, and we share the view that I know Congressman
Dreier has, that we all would benefit, and the situation in trade
would be benefited by broad deregulation and structural change in
Japan. We have aligned ourselves with the forces that favor that
kind of change, and we have made comprehensive presentations to
the Japanese Government on that. I have met with the Diet mem-
ber, Mr. Mizeno, who is supervising that effort. I meet with him
whenever I am in Tokyo. But we believe that we will make the
most progress by moving forward on that issue, that set of issues,
as well as pursuing the sectoral issues that remain between us and

japan.

I would say after 3 years of sustained work, we believe that we
have made good progress, but much remains to be done. We have
always benefited from the bipartisan consensus in Congress and
the country that the level playingfield between us and Japan por-
trayed was long past due. We will keep working to enforce our
trade agreements, resolve outstanding issues, and deal with new is-
sues as they arrive.

Thank you, Mr. Chairman.

(The prepared statement follows:]


141

In 1952 the U.S. started out with a liberal, open-entry agreement with Japan. If its
provisions had not been whittled down over the years. there would be no Japan access issues
today The 1952 Agreement guaranteed the U.S. the Fight to designate as many carriers as it
wanted (0 serve Japan with as many frequencies as those carriers felt the market required. and
to continue those Mights beyond Japan to any pomt in Asia, How then did we get from there
to here?

Well, according to a recent article by Mr. Hanyu, the Chairman of Japan's aviation
delegation. the impetus tor change was the British "success" in negotiating the highly
protective Bermuda Il agreement with the US. in 1977. To the Japanese bureaucrat, that
agreement was a regulator's dream come true With a Pacific version of Bermuda il, not only
could Japan control every aspect of competition by U.S. air carriers. but it could structure the
environment to favor Japanese earriers ~~ even when, as is the case today, U.S. carvers are

more competitive

According to Me Hanyu. in 1977 Japan had decided that it too wanted a Bermuda U
style agreement with the U.S. It called for renegotiations

Yo its credit, the U.S. had learned its lesson with the British. We did not jump at this
opportunity to shoot ourselves in the other foot

Then, in a tactic that has served it well over subsequent years, Japan simply ignored its
ments under the agreement. When the U.S. government in the late 1970's designated

a new cartier, United, to operate to Japan from the Pacific Northwest, Japan refused to honor

the designation

comm

What followed was a series of agreements and actions that step-by-step effectively
gutted the liberal provisions of the 1952 Agreement. ‘Those steps are outlined on Chart |

= In 1982, 10 resolve the dispute over United’s new authorization, the US, agreed
that all new designations would be negotiated with Japan and that they would
not have the ability to operate hubs in Japan, This insured that all subsequent
awards would be in the form of point to point authority. with no rights to
operate beyond Japan, The MOM! carrier concept was born

In. 1985, the restrictions were expanded to include the 1952 carriers. U.S,
carrier operations were capped {0 those U.S. points that the CAB had
previously named in the ~ cates at that time. Because of that
the U.S. cannot today integrate its highly efficient domestic hub structure with
its international routes to the Pacific even for the original 1952 carriers. For
instance, United. the biggest 1S. carrer to Asia, can fully integrate 1s Pacifi
routes with only one of its principal domestic hubs, San Francisco.

2 carriers’ cert

-- Tn 1986. Japan designated a second Japanese carrier to perform international
services and it began developing Asian hubs and seeking access trom them to
the US

= In 1989. Japan expanded the number of US. routes and capacity under its
regulatory control by limiting the espansion of new points to those only under
MOU conditions.

In 1994, Japan announced a trecze on both U.S. carrier passenger and cargo
airport operating slots when the new Osaka Airport opened, foreclosing long-
awaited growth in Japan’s second largest city and, with Narita slot-constraint
since 1989, the only potential for growth into and beyond Japan for the
foreseeable future,



184

4, Filing Fees and Benri:

i Fees

The official fee for filing an application is about ¥21,000. Upon requesting
examination, however, the applicant must pay an additional fee of at least ¥87,000.
or more than four times the application fee. In addition to this, the applicant must
pay Japanese patent counsel (Benrishi) fees for preparation of the patent application
and for any subsequent examination or prosecution work. The GAO Report found
that for prosecuting a twenty five page patent application, Japanese Benrishi charged
about three times more than US. patent attorneys. Benrishi generally bill according
to an industry standard fee schedule. Large Japanese companies can, however,
negotiate special arrangements that exempt them from the standard fee schedule
See GAO Report at p. 34. For a US. company, Japan is one of the most expensive
countries in the world in which to seek patent protection.

B. Structural Barriers Have Reduced the Importance of the Japanese
Patent Office (JPO), and Have Permitted Patent Application Flooding.

Japanese patent statistics demonstrate that these structural barriers have
reduced the importance of the JPO. The key to Japanese patent protection has
become, not the issuance of patents by the JPO, but the accumulation of Kokai
applications. The problem is that the JPO is not actively or properly policing pre-
issuance patent rights in Japan. As a result of structural barriers, the JPO has been
turned into a holding cell, into which legitimate and sham patent applications alike
are dumped. Japanese companies use their sham applications to coerce business
concessions from U.S. companies that have filed legitimate applications covering
their critical technology. Patent flooding, delayed examination, coerced cross-
licenses or other business concessions, and the creation of a Kokai application
minefield greatly reduce the practical significance of JPO decisions

In essence, the JPO has stopped policing the pre-issuance patent field, has
stopped granting timely patent protection, and has abandoned the field to the
Japanese corporate decision-makers. The Japanese companies are left to file
whatever sham applications they want, and to use those sham applications to wring
whatever concessions and cross-licenses they can coerce from U.S. companies

Some major Japanese companies have filed 10,000 patent applications in one
year! GAO Report at p. 48. In a high-activity year, a single Japanese company may
file more than 20,000 patent applications. Id. Applicants in Japan often file
applications without intending to request examination. GAO Report at p. 48. In
1989 and 1990 for example, about 40 percent of the applications filed at the JO were
abandoned (i.e., after the full 7-year deferral period had elapsed). Id.

Large Japanese companies demonstrate a very low ratio of requests for
examinations to patent application filings. Indeed, leading Japancse companies
experience patent grant-to atent application ratios of roughly 25% to 32%. Thorson
& Fortkort, {Patent Protection, Journal of the Patent and Trademark
Office Society, Vol. 77, Nod April, 1995, at pp. 314-315 (Figure 2). This means that
two-thirds to three-quarters of these companies’ patent applications do not mature
into patents. Id. During the same time period, however, IBM had a 79% grant-to-
application ratio in the JPO. Id.

Indeed, recent data indicate that by sheer numbers alone, Japanese companies
inundate the JPO with patent applications. Over the past 10 years, the leading
Japanese companies filed more than twenty-five applications for each application
filed by comparable United States companies.


29

The Japanese Government's actions in this sector are inconsistent
with its obligations under international agreements. And the
private actions undertaken by Fuji and other players violate
Japan’s own Anti-Monopoly Law. Yet the government sits idly by.
The intended result -- and the actual result -- is that Kodak has
limited access to the retail shelf and, where we are able to sell,
we are not allowed to price competitively

That‘s the short version, The long version is available in
thousands of pages, in the reading room at USTR

But we must not get so wrapped up in the details of these practices
that we ignore their effect. The Japanese Government's active
involvement in the market place to exclude foreign suppliers has
created a profit sanctuary for one Japanese company and a real,
long-term, world-wide competitive threat to Kodak and the U.S. jobs
we provide

If the Japanese market had been open, Kodak estimates that it would
have made additional sales of $§.6 billion over the last 10 years.
Using the Commerce Department’s figures linking export revenues to
jobs, that’s the equivalent of tens of thousands of U.S. jobs.

What Kodak is Seeking

Kodak's goal in this effort is resolution, not retaliation or
artificial quotas. We know we have high quality products that will
sell, if only consumers have access to them. We simply seek a more
open marketplace and the ability to put Kodak film on more store
shelves in Japan. In fact, in those portions of Japan where
competition exists, we do very well, capturing over 20% of the
market.

Our objectives in the trade case can be summarized under three
basic headings: “getting on the shelf," “getting off the shelf,"
and "getting more shelves.”

* Getting on the shelf means gaining access to retail outlets
for Kodak film, which in turn requires access to the major
wholesalers that supply those outlets.

* Getting off the shelf means ending anticompetitive practices
under which retailers are induced to mark up the price of
Kodak’s products so that, no matter how competitively we price
at the wholesale level, retail consumers seldom see our dis-
counts.

* Getting more shelves means lifting onerous government re-
strictions on distribution such as the regulations that limit
large-scale photo specialty stores and discount retailers --
one type of sales environment in which our consumer photo
products in Japan have fared well.

These are modest and reasonable goals, and they are consistent with
Japan’s international obligations ‘as well as the expressed
commitment of Japanese officials to deregulation Japan's
political leadership for years has stressed the need for deregu-
lation and stronger competition policy. Yet this rhetoric has not
been matched by action.

While our goals are modest and reasonable, the stakes for us as a
company are high. And the case is time-sensitive. We have been
effectively shut out of Japan for many years already, and we are
already feeling the world-wide competitive impact of the profit
sanctuary that exists in Japan. Resolution of this case cannot
simply be delayed for a few years until the Japanese Government
finds it more convenient to address the problem.

The Japanese Government recently announced that the JFTC will
compile a study of competition in the photo supplies market world-
wide. This announcement appears to be intended to deflect the U.S.


166

Chairman CRANE. Thank you. I have a question I would like to
direct it to Mr. Murphy and to you in this regard. Are there any
carrier rights that the United States should be offering in exchange
for expanded opportunities to fly cargo in and passengers in to
Tokyo that could then go on to different Asian destinations?

Mr. Murphy, you might respond first.

Mr. Mureuy. Frankly, we think there are huge opportunities
here for carriers of both sides. We have the fastest growing market
in the world. By 2010, our international trade association predicts
that the Asia-Pacific region will represent over 50 percent of the
world’s scheduled passengers flowing in this marketplace. The Jap-
anese essentially have two carriers in this marketplace; the United
States has two carriers that have network opportunities in the Pa-
cific. There is plenty of traffic in this marketplace for everybody.

Our biggest challenge in the coming years is probably going to
be supplying enough capacity to meet the demand. And yet, in
spite of that, we have this continued resistance from the Japanese
to opening up these markets, and that is primarily because the
Japanese carriers, much like the French carriers, have failed to get
their costs under control and are not competitive. If Japanese costs
were under control, the opportunity for expansion of opportunities
for both sides would be there, and we could do very well in this
market.

Chairman CRANE. Dr. Hilty.

Mr. HILTY. Yes; I agree. Fares in the rest of the world and espe-
cially in Japan are running about 28 percent higher than the de-
regulated domestic fares in the United States. If we had open
skies, we think the rates would drop about 28 percent; traffic
would blossom. There is plenty of room for the growth of Japanese
airlines and U.S. airlines.

Chairman CRANE. Very good.

Mr. Ramstad.

Mr. Ramstab. Thank you, Mr. Chairman. Mr. Chairman, I would
like to direct this question if I may, please, to Mr. Murphy.

Mr. Murphy, I have heard from a number of industry analysts
that there is a group, an industry group, which in an effort to in-
crease access to Japan is willing to surrender the rights of Amer-
ican companies to operate connecting hubs in Japan to serve Unit-
ed States-Asia passengers. To the best of your knowledge, is this
accurate?

Mr. Murpny. There is a group that has been formed by essen-
tially two carriers, American and Delta, and they put together a co-
alition of a number of civic parties essentially from their hub cities,
and they advocated initially surrendering U.S. rights to fly beyond
Japan in return for getting more rights to Japan. In other words,
in our terms, they advocated surrendering Asia to get access to
Japan. And frankly, I think those proposals have met with such re-
sistance that I think they have largely now moved away from those
proposals. I think that the next step, though, that they have to do
is to recognize that it is not the U.S. Government that is the prob-
lem in this area. The U.S. Government is the leading advocate of
open skies and free trade in this area. If we need to lobby anybody
or convince anybody, it is the Japanese bureaucracy, not the U.S.
bureaucrats.


186

Asa result, there are instances in which infringement notices, patent disputes, and
cross-license agreements in Japan revolve around published applications rather
than issued patents. The deferral of examination permits the applicant to maintain
its valuable Kokai for several years at virtually no cost, but to simultaneously
receive disproportionate benefits from the chilling effect on other companies who
may defer use of breakthrough technology due to the existence of this flood of
published applications In effect, those Japanese companies with the largest Kokai
generating capacity (not necessarily the most technically innovative) exert
extraordinary competitive distortions in the world technology marketplace.

Additionally, the large official fees and Benrishi fees associated with the
examination phase actually discourage applicants from seeking examination. The
official fee schedule set by the Government of Japan subsidizes patent flooding. The
Government of Japan benefits from the direct revenues of the patent applications,
and the indirect benefits to the Japanese economy duc to market advantages
obtained by Japanese corporations using these tactics.

The Japanese system is discriminatory in that it encourages Japanese
companies to use patent application flooding, tactics to deprive U.S. companies of
their rights to breakthrough, or other targeted, technology. The Japanese system is
also discriminatory im that if US. companies attempted to engage in patent
application flooding they would incur a much higher cost than would a Japanese
company. The cost of seeking patent protection in Japan is higher for a U.S

>mpany than for a Japanese company. A US. company would need to retain a full-
time Benrishi, in addition to its U.S. patent counsel; the Benrisht would hkely
charge the US. company more than he would charge a Japanese company; the US.
company would need to pay for translations; and the U.S. company would nevd to
pay higher filing fces if its applications were initially filed in English. These are
some of the added costs that the U.S. company would face ona single patent
application; given the number of patent applications that are filed in a campaign of
patent flooding, the added costs incurred by the U.S. company would be quite
substantial.

UL Summary and Recommendations

In a technology-driven worldwide marketplace, exclusive rights to its hard-
earned breakthrough technology give a U.S. company a competitive advantage. The
Japanese practice of patent application flooding essentially strips U.S. companies of
this advantage, and deprives them of fair and equitable access to Japanese markets.
This anti-competitive conduct, which is supported by the Japanese Government,
results in damage to U.S. companies’ markets worldwide, including in the United
States. This conduct damages the United States economically, and reduces its
competitiveness worldwide.

This conduct of patent application flooding is in violation of U.S. patent and
anti-competitive Jaws. Recommended remedies should, at a minimum, include the
following:

a) the Japanese Patent Office should establish a rule of practice having
similar effect to that in the United States Patent and Trademark Office as described
in 37 CPR. § 1.56;

b) the Japanese Patent Office should establish an administrative office
which enforces a new requirement of good faith and candor in all matters before the
Japanese Patent Office:

©) __ the Japanese Patent Office and Courts hearing patent cases should allow
invalidity to be presented by a defendant as a defense to a charge of infringement, in
the same proceeding;


98

Mr. RANGEL. You believe that the facts are so complex that the
U.S. Government will not be able to determine them; is that what
you are saying?

Mr. Patrick. Well, no, sir; I think I would not want MITI to de-
cide this case either.

Mr. RANGEL. You would not want what?

Mr. Patrick. I would not want the Ministry of International
Trade and Industry to decide this case either. Both agencies are
negotiating agencies of their respective governments. The Depart-
ment of Justice in the United States and the FTC in the United
States has jurisdiction over anticompetitive complaints. In Japan,
the Japan Fair Trade Commission has jurisdiction over anti-
competitive complaints. Our position is that this complaint should
have been submitted first to the JFTC in Japan for review and for
investigation.

Mr. RANGEL. And is it your understanding that this matter
should be resolved by the Japanese courts?

Mr. PaTRICK. This matter—I think Kodak would have had a
much stronger argument if they had brought their case before the

Mr. RANGEL. In the Japanese courts?

Mr. PATRICK. Before the JFTC in the first instance, yes, sir.

Mr. RANGEL. And the Japanese Government refuses to discuss
this case, I understand, with the United States Government.

Mr. PATRICK. Well, again, I think what the Japanese Govern-
ment has said—not speaking for them, but as I understand it—
what they have said is that the JFTC has jurisdiction in Japan
over complaints of anticompetitive practices and that Kodak has a
remedy. Kodak has not exhausted its remedy in Japan.

Mr. RANGEL. We went through that. All I am asking, sir-——

I Mr. PATRICK. They have not even begun their first complaint in
japan.

Mr. RANGEL. All I want to know is that when you get to the bot-
tom line—and I know you do not represent the Japanese Govern-
ment, and I do not represent the U.S. Trade Representative. But
it is my understanding that the Japanese Government for whatever
reasons—maybe they have international legal reasons—will not
discuss this matter with the U.S. Government; is that your under-
standing?

Mr. PATRICK. It is my understanding that MITI has refused to
negotiate this case until such time as Kodak refers it to the JFTC.

Mr. RANGEL. Period, OK; I am not saying who is right or wrong.
It just appears so—and I am an advocate for a constituent manu-
facturing company. But the bottom line is that the Japanese Gov-
ernment will not discuss it with the United States Government;
Fuji will not discuss it with the U.S. Trade Representative. All of
the things that I am asking——

Mr. PATRICK. Well, Congressman, we have discussed it with the
USTR. Fuji Film has made a number of submissions rebutting each
factual claim that Kodak has submitted. So we are definitely talk-
ing to USTR and cooperating with their investigation, yes, sir.

Mr. RANGEL. Then it is possible that you are cooperating with
the 301 proceeding.


140

The first took place in 1958 with the establishment of transatlantic jet service. Within
five years more passengers were traveling across the Atlantic by air than by ship, and a trend
was established. The industry had also begun its shift from being a specialty service to
becoming a mass mover of people and products. What the railroads were to the industrial
age, the airlines would be to the century ahead

The second turning point took place in 1978 with the deregulation by the U.S. of its
domestic airline industry. Much has been said and written about the effects of that daring
step -- and of the troubles it inflicted on airline managements, employees, and customers,
History will note, however, that deregulation’s most important contribution to the industry and
to the economy is that it forced the airlines to become competitive, to exercise the judgment
and apply the business standards long required in other sectors.

ILtook a while for the tessons to sink in, but today U.S. airlines are by a significant
» the world’s most cosi-elTective and competitive. By making the huge changes
demanded by competition, U.S. carriers opened air travel to the masses. Low fares and
virlually shuttle service throughout the country revolutionized Americans’ use of planes for
both pleasure and business travel. ‘To cope with the major rise in demand, carriers created the
hub-and-spoke passenger distribution system to enable them t0 serve an ever wider range of
markets efficiently, here and around the world.

Today. travellers expect global air service to be as seamless as global
telecommunications. If you, Mr. Chairman, needed to make @ call to Tokyo this afternoon,
all you would have to do is dial one number The telephone company would do all of the
switching required to actually make the connection. No matter where you live in the world,
you need only one number to reach your party. So it should be in aviation. A traveler who
‘wants to go to Japan should be able to call one number and have all the necessary connections
made behind the scenes to ensure a smooth, uninterrupted joumey

Its for this reason that United has wholeheartedly supported the Administration's
efforts to sign open skies and liberalized agreements. These agreements allow competitive
market forces to develop air service between countries that matches customer demand rather
than supports outdated. protectionist policies

To date. the U.S. has signed open skies agreements with 10 European countries, with
Germany being the most recent example. In Asia, the U.S. has signed liberalized agreements
with Korea, Singapore. and Taiwan. As Chart 6 shows. the impact of these agreements has
been significant. Carriers in these three countries have expanded at almost double the rate of
their Japanese counterparts since 1978. That means that more Koreans, more Singaporeans
and more Taiwanese are spending money around the world.

Looking at it another way. as shown in Chart 5, in U.S.-Asia markets, these carriers
have doubled their marketshare from 13 percent to 27 percent since 1978, while the market
share of Japanese carriers, which are among the world’s most costly and inefficient, has
Groped from 30 percent to 18 percent

These Asian carriers are poised for even greater growth in the next 20 years as Asia's
consumer economy explodes. By 2010, as shown on Chart 3, 10 Asian markets will match or
surpass the (Wo current largest markets -- Tokyo and Hong Kong ~ in the number of air
passengers transported annually. In fact, as previously noted, IATA predicts that Asia-Pacific
International passengers will account for more than half of the world's scheduled air traffic in
the next 14 years.

Japan is trying to constrain U.S. participation in that growth. While the world
economy presses ilentlessly forward, outpacing regulation and demanding the freedom to
move swiftly as demand dictates, Japan is secking to increase restrictions on aviation. Rather
than working with the U.S. to allow a seamless journey for all U.S. travellers who have
interests in Asia not yet served under our existing agreement, Japan is seeking to monopolize
its natural status as a gateway to Asia and protect its high cost carriers.


91

Chairman CRANE. Thank you, Mr. Rozynski.
Ms. Smith.

STATEMENT OF MAUREEN R. SMITH, INTERNATIONAL VICE
PRESIDENT, AMERICAN FOREST & PAPER ASSOCIATION

Ms. SmiTH. Thank you, Mr. Chairman, for this opportunity to
testify on behalf of the American Forest & Paper Association re-
garding the market access problems of the U.S. forest products in-
dustry in Japan. Japan is a priority export market for our industry.
The total Japanese market for paper and allied products is esti-
mated at about $60 billion and ranks second only to the United
States. The Japanese wood products market totals about $30 bil-
lion. The United States and Japanese Governments have concluded
two separate trade agreements in this sector: The Wood Products
super 301 Agreement of 1990 and the Paper Market Access Agree-
ment of 1992. Although there have been some positive develop-
ments since these agreements were concluded, the bottom line is
there has been no meaningful improvement in our ability to pene-
trate these markets.

Turning first to the wood products industry, our industry has
had an aggressive promotion program in Japan for more than 10
years. We have worked with the U.S. Government to negotiate
changes in Japanese standards and building codes to permit the
greater use of wood in construction and interior applications. While
progress has been made on some technical issues, the U.S. share
of the Japanese market for value-added wood products has in-
creased only marginally over this period, and even today probably
averages less than 5 percent.

While there are several important steps which could be taken to
ensure improved market access for U.S. wood products in Japan,
the single most important step would be the elimination of Japa-
nese tariffs. We believe that the central accomplishment of the up-
coming Clinton-Hashimoto summit must be a Japanese commit-
ment to early wood tariff cuts in the APEC process, and we would
hope that the recently announced Hashimoto initiative would lead
to the elimination of tariffs as part of Japanese efforts to reduce
housing costs.

On the paper side, the story is much the same. The United
States-Japan agreement on paper market access has failed to
produce the results anticipated. Last year, the U.S. share of the
Japanese paper market stood at 1.8 percent, only one-tenth of 1
percent higher than in 1991, the year before the agreement was
concluded. Japan’s paper and paperboard imports from all sources
accounted for just about 4.2 percent of the country’s consumption,
the smallest such ratio in the world, and again, only slightly ahead
of the figure for 1991, which was 3.7 percent.

U.S. industry believes that this is due to an array of Japanese
business practices which are amazingly similar to those described
in his testimony by Mr. Fisher and which are intended to deter the
entry of new paper suppliers, particularly foreign suppliers. For a
detailed description of how these practices have excluded foreign
paper suppliers, I am submitting for the record a report which our
industry submitted to USTR in December 1994.

[The report is being held in the Committee’s files.]


11

Testimony of Ambassador Ira Shapiro
Office of the United States Trade Representative
House Ways and Means Trade Subcommittce
March 28, 1996

Mr. Chairman, | appreciate the opportunity to appear before the committee today to
discuss the Administration's Japan trade policy

President Clinton made it clear that our trade policy would not be business as usual
within weeks of taking office On February 26, 1993, at the American University, he rejected the
false choice between unilateral free trade and protectionism, He affirmed the view that “open
and competitive commerce enriches us as a nation,” and that “we would compete, not retreat.”
But he also stated “we will continue to welcome foreign products and services imo our markets
but insist that our products and services he able to enter theirs on equal terms.” For more than
three years, this Administration has followed this view: open trade--but with comparable access.
American workers benefit from, and will suppon. free trade, but only: i is tate trade as well

Nowhere are those principles more applicable, and nowhere have we worked harder to
apply them, than with respect to Japan, When this Administration came to office. we were
determined to obtain for U.S. companies and workers the same level of access to Japan's markets
as Japanese exporters have enjoyed in U.S. markets, We indicated then that we would work to
open Japan’s market: multilaterally where possible, regionally where appropriate and bilaterally
where necessary. and we have worked steadfastly to do so.

Nearly three years ago, our two countries signed the US-Japan Framework for a News
Economie Partnership. This agreement was carefully conceived and is part of the
Administration's broader trade policy. The Framework agreement represents a comprehensive
approach 10 macroeconomic, sectoral, and structural issues Previous Administrations had
focused on one or another of these areas with Japan. this Administration realized that the impact
of our efforts to resolve trade problems in specific sectors would be enhanced significantly if
they were reinforced by macroeconomic and structural changes in the Japanese economy. which
‘would improve the competitive environment

The Framework agreement also is distinctly results oriented, a focus that distinguishes it
from virtually all previous approaches. In each sector we identified major barriers to aveess.
negotiated to resolve them. and agreed to assess the progress through a series af objective
cnitena, The Administration recognized that making progress would require not only conehuding
trade agreements with Japan, but ensuring that they were implemented and enforced. In this
regard, when we have faced problems with regard to implementation of our trade agreements. we
have taken the steps necessary to enforce our rights under these agreements ~ in sectors ranging
from construction to cellular phones to sound recordings.

We have followed a consistent course, and we are beginning to sce some important
progress. Overall, in the past three years. we have negotiated 20 trade agreements with Japan,
Last year, the U.S. trade deficit with Japan fell 9.7 percent. Moreover, Japan's current aveount
surplus declined to 2.2 percent of GDP last year. down trom 3.2 percent in 1994 and 3.5 pervent
in 1993, Given that the Framework calls for a highly-significant reduction in Japan's current
account surplus in the medium term, the declines we have seen over the past (0 years are
gratifying

ULS. exports to Japan have grown to record jevels. rising 20.3 percent last year over 1994
levels, which had been the previous record high. Since the heginning of this Administration
USS. exports to Japan have increased by 34 percent.

This growth has not been limited to just a few sectors. We are sceiny export growth in all
major categories: foods, leeds, and beverages (up 15 percent in 1995); autos, auto parts, and
engines (up 36 percent). other capital yoods (up 22 percent); industrial supplies (up 20 percent)



97

of some assistance, but there is one single step that would imme-
diately substantially reduce the cost of housing, and that is the
elimination of Japanese tariffs on wood products imports. And that
is really going to be our measure of whether this initiative is going
to be successful.

Chairman Crane. And Mr. Rozynski, in the October 1995 agree-
ment, the Japanese Government announced that it would use open
bidding and instruct officials to consider foreign bids and establish
an appeal process for losing bidders. Have these reforms been ade-
quately implemented?

Mr. RozynskI. Yes; we are very pleased that those reforms have
been implemented. We think that the Japanese have been very co-
operative, and we have also been tracking the data fairly closely
using consultants in Japan to go and measure the hospital pur-
chases. So we do not have any complaints about that agreement at
this time.

Chairman CRANE. Very good.

Mr. Rangel.

Mr. RANGEL. Thank you, Mr. Chairman.

I just want to confine my remarks to Mr. Patrick, since Kodak
is a big manufacturing employer in my State. I was pleased to hear
that you said that—is it the Government of Japan or Fuji is open
to independent study of what the facts actually are? That is Fuji?

Mr. Patrick. Well, Congressman, I cannot speak for the Govern-
ment of Japan, of course.

Mr. RANGEL. No, no; I am asking you. You said Fuji is open?

Mr. PATRICK. Yes, Fuji is open to that, yes, sir.

Mr. RANGEL. OK; now, this matter is going before the U.S. Trade
Representative, is it not?

Mr. PATRICK. Yes, sir.

Mr. RANGEL. Do you have any problem with them reviewing this?

Mr. PATRICK. Well, sir, this case, I think, is really an antitrust
case. It is highly complex. It involves application of—.

Mr. RANGEL. The facts on both sides are very difficult and com-
plex, and you and Kodak are diametrically opposed. They say one
thing; you are saying another. I am only asking is there any objec-
tion that the U.S. Trade Representative get involved in order to ad-
judicate it? Is that——

Mr. PaTRICK. Yes, sir.

Mr. RANGEL. There is?

Mr. PATRICK. That is exactly our position.

Mr. RANGEL. You oppose it?

Mr. Patrick. Yes, sir. Mr. Rangel, we believe the USTR is not
equipped to handle this kind of investigation in a complex antitrust
case. The issues are hotly disputed.

Mr. RANGEL. I know; but—you know——

Mr. PATRICK. Kodak submits surveys; we submit surveys.

Mr. RANGEL. I know. But now, you are saying the U.S. Trade
Representative is not competent to understand what Fuji under-
stands, right?

Mr. Patrick. No, sir; not at all. The U.S. Trade Representative
is highly competent to understand these issues. It is the verifica-
tion of the facts that we have a concern with.


187

d) the Japanese Patent Office should increase the period of time after
abandonment or final rejection (including failure to request examination) from four
years to ten (10) years before the files relating to the rejected /abandoned application.
are discarded;

e) the Japanese Fair Trade Commission should be directed and
empowered to investigate corporations in Japan which engage in anti-competitive
business practices defined by abusing the patent system, including by filing of patent
applications having improper inventorship or non-patentable, insubstantial subject
matter “improvements,”

f) __ the Japanese Government should actively discourage filing of sham
patent applications having improper inventorship or non-patentable, insubstantial
subject matter “improvements,”

the Subcommittee on Trade of the Committee on Ways and Means
should encourage establishment of Japan as a Priority Country until the practices
and procedures which allow patent application flooding are ceased, and objective
evidence of a cessation of patent application flooding is well established, and
procedures are in place in Japan to prevent resurgence of this practice;

h) _ the Subcommittee on Trade of the Committee on Ways and Means
should establish patent application flooding as a priority interest agenda item on all
future trade talks with the Japanese Government until the practices and procedures
which allow patent application flooding are ceased, and objective evidence of a
cessation of patent application flooding is well established, and procedures are in
place in Japan to prevent resurgence of this practice;

i) President Clinton and the Subcommittee on Trade of the Committee
on Ways and Means should request a review of prior agreements made with
Japanese intellectual property negotiators to determine, in view of ongoing patent
application flooding practices, whether the negotiations were conducted in good
fait

i) the Subcommittee on Trade of the Committee on Ways and Means
should advise, and seek advice from, other Congressional Committees and agencies
of the United States Government of the past and projected economic impact on U.S.
companies and the loss of U.S. competitiveness in Science and Business due to
patent application flooding by Japanese companies; and

k) the Subcommittee on Trade of the Committee on Ways and Means
should request and/or lead an inter-agency investigation, in close cooperation with
the Federal Trade Commission and the Department of Justice, into the ongoing
violations of U.S. anti-competitive conduct and related consumer/business
protection laws that the Japanese patent flooding practice constitutes.

Absent these actions, which might lead to adverse economic impact on a wide
range of Japanese products and services, the trade distortions caused by abuse of the
intellectual property system in Japan will continue unabated. Under such
circumstances, the main loser is American inventors and consumers and,
consequently, the United States economy.

Respectfully Submitted, >
Dated: 7 A/RIL_ 96 By _ Litto a

Steven J. Keough, [Esq
1100 Rand Tower /
527 Marquette Avenue South
Minneapolis, Minnesota 55402
Telephone: (612) 349-5742
Facsimile: (612) 349-9266



102

Honorable Michael Kantor
November 15, 1995
Page Two

Fujifilm supports a credible fact finding process in which 1) the fact (inding is done by a
neutral party acceptable to both Fujifilm and Kodak, 2) the fact finding also focuses on
reciprocal access Issues, 3) the process is trensparent, and 4) there is an opportunity to address
the applicable legal standards.

‘The first option is to use a warking group of the Organization for Bcanomic Cooperation
and Development (OECD). U.S. business groups hnve advocated the use of an OECD
competition law mechanism to address problems stich as thls, The sccond option would be for
the World Trade Organization to use its already established and mullilaterally accepted
mochsnism for dispute resolution,

‘The use of non-binding arbitration is a third option. The American Arbitration
Association or the International Chamber of Commerce are two potential fora for neutral experts
to find facts and make conclusions of fact and law, As a fourth option, Fujifilm, Kodak and
USTR could agree to sct up a panel of experts to hear submisslons from both sides, pose
questions and issue a report, This option would function in a way similar fo a WTO panel.

‘Asa final option, USTR could employ an Administrative Law Judge to determine the
facts in this case, Agencies regularly use ALJs and thero are many ALJs with the requisite
expertise In competition policy and faw. ‘The Intemational Trade Commission has adopted
procedures in Section 337 cases for ALIs. The ALY's report would then serve as the basis for
USTR's decision.

Lbope thet this summary is helpful to you. The accompanying paper develops these
ideas in greater detail and provides you with a possible sequence to pursue these options. look
forward to discussing this issue with you further.

ial

‘Thomas 1, Downey

Enclosure


118

exceed 1,200 American associates. Factory space will total almost
2 million square feet, and total investment in Greenwood, South
Carolina will be approximately $700 million.

As you saw from the many news reports during the primary,
what is going on in South Carolina and what is being talked about
in the world, I can tell you that Fuji has been a good corporate citi-
zen and that they have been doing good things for the economy of
a district that is poor and needs all of the jobs it can get. It is my
understanding that the situation between Fuji and Kodak is
unique in the sense that the Kodak Co. has chosen to go to the 301
complaint route without following the traditional complaint proc-
ess. Japan has acknowledged problems in the past in other areas
and has sat down at the table. Unfortunately, in this case, we
never got to that step in the process; we have gone directly to the
American Government to say decide this.

Because all of the facts are in question, it is impossible for me
to know who is right. For every chart that they produce at Kodak,
Fuji has a chart. Now, I am not beginning to tell you I know the
answer, but I do know this: That what we need to do is have some
semblance of fairness. And I will say this in answer to Mr. Rangel’s
question that I believe the U.S. Trade Representative has a role to
play, but he should not be the prosecutor, the judge and the jury.
I believe that is an extension of his powers beyond what was in-
tended and will set up a dynamic that will be bad for America, be-
cause if you have multinational corporations located in America,
like they are in my district, it is unfair, I think, for an American
company to make a complaint, bypass traditional complaint meth-
ods and make allegations and ask the person who is negotiating for
American businesses, who can impose sanctions, to be ‘the fact find.

er.

All I am asking—and I do not know what the facts are—is that
some party other than the U.S. Trade Representative, who has too
many hats to wear in this case, decide what the facts are in a neu-
tral, unbiased way, and if the Government of Japan does not co-
operate, that is something that we need to know and we need to
fix. But get a third party in to decide the facts; then, we can act
and act responsibly. ff we go down this road in this case, it is going
to lead to a situation that will not only create the perception of un-
fairness for multinational businesses who want to locate in Amer-
ica but will chill foreign investment; and foreign investment in my
district has been positive.

Thank you.

Chairman CRANE. Mr. Houghton.

Mr. HoucuTon. Yes; I would just like to add on to what my col-
league has said. Kodak is not in my district; it is in Bill Paxon’s
district and others, probably Louise and probably John LaFalce’s.
But I do know the Kodak people, and everything that I have known
about them, they have been decent, forthright, honest people to a
fault. And I think that they would dearly love—and I really cannot
speak for them—but my impression is they would dearly love to be
able to do in Japan—which they are not allowed to do because of
access to the market—what Fuji has been able to do here because
they do have access. Thank you.

Chairman CRANE. Very good.


65

Japan, Kodak is pursuing this case in the face of its own questionable practices here in
the U S. ~ which arguably can be blamed for Fujifilm’s 10 percent share of the U.S
market

It is not enough that Kodak continues to be protected by a 3.7 percent tariff in the
United States, while Japan has no import duties at all on consumer photographic products
Kodak wants more

Let me review the key facts in this case
Fact Number One -- Kodak film is widely available in Japan Kodak claims that

Fujifilm controls its four primary distributors and thereby prevents Kodak from reaching,
the Japanese retail shelf -- the so-called "distribution bottleneck.

We've shown that there is no such control, and more importantly that there is no
bottleneck, The facts -- data that we would be happy to have USTR or this subcommitiee
verify -- show that almost 80% of the and dealers served by Fuj’s distributors actually buy
or have access to Kodak film. Sales to those customers account for almost 90% of the
distributors’ sales volume. Figure | attached to my statement shows these findinus

Again, this data is verifiable Kodak has never offered any evidence showing that
it cannot get on to retail shelves in Japan. Kodak's market share numbers only show that
people won't buy Kodak, not that they can't buy Kodak

Kodak decided to own its Japanese distributor, just as it does in most of ts
markets. Kodak has made a lot of allegations about how Fuji controls its distributors
The facts are that Fuyifilm’s distributors can and, in fact, do carry Kodak products But
why should they want to sell Kodak film, when Kodak owns a distributor that performs:
this function? Perhaps Fujifilm should buy its four primary distributors, and then Kodak's
invented "bottleneck" would be eliminated. The bottom line right now is that Fuji does
not have access to Kodak's distribution network in the US., Japan, or anywhere else

Fact Number Two -- Fuji cannot and does not contrat retail film prices in Japan
Kodak claims that Fujifilm controls prices, thus keeping all prices artificially high We've
shown that if you compare the same film sold at the same type of retail outlet, prices
throuhout Japan are actually comparable to prices in the CS

Kodak's supposed evidence of resale price maintenance is also distorted and
manipulated The map of Japan attached to my statement demonstrates how widely
discounted film is available in Japan Avain, the numbers are verifiable No resale price
maintenance exists in Japan

Fact Number Three -- The Japanese Government has not had any role in the
wholesale film market for a quarter century. Kodak claims that the Government of Japan
has assisted Fujifilm in restricung the market. Ayain, this claim 1 groundless

The Government of Japan removed any restriction on foreign capital. ownership.
prices or other actions decades ago In addition. the Japan Fair Trade Commission has
monitored our industry very closely for years and has recommended that Fupitilm take
certain actions to assure full compliance with Japan's antmonopoly law -- actions Fujifilm
has taken

Fact Number Four - Kodak caused its own problems in Japan Kodak claims
Fujifilm is the problem, but we have provided USTR with evidence showing that Kodak's,
problems in Japan result not from Fuji’s actions but from Kodak's own mistakes

Former Kodak officials ~~ including former Kodak president Kay Whiemore and
former Kodak Japan president Albert Sieg -- have stated that there were no barriers to
competition in Japan's consumer photographic industry. Indeed, Al Sieg said in a revent
interview that "I clearly believe that one of the biggest problems that Kodak has in Japan is


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16

benefit Japanese consumers and companies and would be consistent with the thrust of
deregulation espoused by Prime Minister Hashimoto.

Jam not at all optimistic that we will be able to bridge our differences in the absence of a
reaffirmation by MOF of the basic. long-term linkage between deregulation in the primary
sectors and expansion by Japanese companies in the third sector. Without the assurance of this
basic linkage. our industry faces long term decline in its competitive position in Japan, contrary
to the very premise of the agreement. The U.S. remains willing to continue our bilateral talks if
MOF will positively address this issue. However, we will not stand by if priority sector
Framework agreement is not implemented as intended

Film

Let me now tur to the film sector. In response to a petition filed by Eastman Kodak,
USTR initiated an investigation of Japanese barriers in the film and photographic paper sector.
Kodak's petition alleged many of the types of pervasive anticompetitive business practices that
the U.S, sought to deal with in negotiations on autos. glass. paper, and other sectors. Among
these are direct Japanese government participation in the creation of a distribution system that
severely limits foreign access through interlocking financial relationships. exclusionary rebates.

and other anticompetitive practices

Kodak is a first-rate American competitor. which has a strong presence in markets around
the world. Despite decades of intensive efforts, however. Kodak has made little more than a dent
in the Japanese market

The structure of the Japanese film market, which features a complex and rigid distribution
system, differs significantly from the structure of the market in the U.S. Primary wholesalers or
subsidiaries of film manufacturers deliver most of the film that is distributed to the 279,000
outlets that sell film in Japan. Japan’s four largest film wholesalers have distributed Fuji film
exclusively since 1975, Fuji maintains close ties to these distributors, through a variety of
means.

Because foreign manufacturers have been unable to gain access to this channel they have
attempted 10 develop parallel distribution networks, but with only limited success. Foreign
manufacturers use secondary wholesalers to distribute a small percentage of their film
(approximately 15 percent), but none of these secondary wholesalers have the national coverage
or size of the tokuyakuten, In fact. the largest secondary wholesaler of photographic goods is
bout one-third as large as the smallest tokuyakuten, Forcign manufacturers also have tried to
increase their market share through direct sales to discount stores. Agfa’s use of this distribution
channel has been hailed as evidence that itis possible to enter the Japanese market without going
through the tokuyakuten. Unfortunately. Agta has not been able to obtain more than a token
market share using this channel of distribution,

Without full access to the distribution network. retail sales of foreign film will remain
constrained, About half of all film sales in Japan are made through photospecialty stores (as
compared with about 3 percent in the U.S.). Foreign film is more available in large discount
stores, but these stores are located mainly in major metropolitan areas and their number. size. and
hours of operation are limited by the Large Seale Retail Store Law.

Even without getting into the allegations of anticompetitive practices for the moment --
and we are still investigating these issues ~- these are some of the complex distribution problems
that foreign firms face. There is clear evidence that the Japanese Government played a key role
in setting up this distribution structure. Nonetheless, the Government of Japan has refused to
meet with us to discuss this matter, insisting that i is strictly a company-to-company dispute. In
the Japanese Government's view. Kodak is alleging anticompetitive practices by Fuji. and thus,
should go to the Japan Fair Trade Commission, (JFTC) which has jurisdiction over the
Antimonopoly Act and anticompetitive practices.



160

Comparison of Retail Air Fares
Between Japan and the United States
and Japan and Beyond Locations

(Lowest advertised fares, March 1996)

Round-Trip Nonstop Fares Index
Tare Miles _PerMile Tokyo-Seattle~100
Japan-Us
“Tokyo Chica $550 627) 80.0838 2
Los Angeles 530 545) 0486 a
Seatle san 4768 0.0588 100
Japan-Beyond
“Tokyo= Bangkok sain 2886 8.1386 27
Hong Kong 700 8% aM? aa
Saar Tigd Wel Fad Cog
Load Factor Comparison
Atlantic versus Pacific Operations
Memo: Atlantic
Adantic Pacific vs. Pacific
(In Percent) (Percentage Points)
Northivest 78% 6
United nm 3
American Cn?) 2
Delta a 6 6
UsAir * - na
Continentat 6 0
TWA 6 na
Industry 7% 72% a

“ource BACK Ascites

Current operating authority in the US-Japan market is governed by the U.S.-
Japan Civil Air Services Agreement of 1952, and by numerous memorandums,
consultations, minutes, and amendments negotiated since that time. These
permit the designated, so-called “1952 carriers” to provide service from the
United States to-and-from Tokyo, Osaka, Okinawa, and beyond, and permit the
so-called “MOU carriers” to fly to-and-from Japan, but with more frequency,
capacity and gateway limitations, and with no beyond rights. All traffic moves
within this governing framework, which over the years has become increasingly
ambiguous and subject to the whim of bureaucratic interpretation. Disputes have
multiplied and risen in intensity

IV. Scenarios

To assist U.S. negotiators, the Economic Strategy Institute projected total U.S.
cartier revenues, as well as the impact of the Asia-Pacific operations of U.S.
cartiers on US. trade receipts, frequency and cost of aviation service, and total


99

Mr. PatRICK. We are responding to Kodak’s allegation, yes, sir,
through USTR.

Mr. RANGEL. Well, do you not believe that this will be resolved
in your favor and that this will take care of the whole thing?

Mr. Patrick. Well, at this point, we have seen very little ver-
ification of the data that we have submitted.

Mr. RANGEL. Well, that inures to your benefit, does it not? Since
they are incompetent and have not put it together while you have
got your case together. And in your view, Kodak has not got a case
that is worth anything.

Mr. Patrick. Well, if Fuji Film had a complaint about anti-
competitive practices in the United States and took that complaint
to the Ministry of International Trade and Industry and said nego-
tiate on our behalf, I suspect the first thing USTR would suggest
is that we file suit in the United States. | think what we are sug-
gesting here is that the real threat to 301 here from Kodak is that
they have brought a complaint without going to the JFTC in the
first instance, the organization that has the jurisdiction over the
matter. That fundamental flaw, combined with a weak case on the
facts, is the real threat to 301.

Mr. RANGEL. But that is 301. If Kodak’s case is nearly as bad as
you say it is, then they cannot prevail on the facts, can they?

Mr. Patrick. Well, sir, I do not think USTR is equipped to adju-
dicate, make judicial judgments about factual disputes in the anti-
trust area. These cases would normally take years to resolve in a
U.S. court. They do not have the tools of discovery. They do not
have verification of the data.

Mr. RANGEL. But you are saying that the only group that is com-
petent to handle this is the Japanese Government, are you not?

Mr. Patrick. No, sir; we have suggested a neutral fact finder,
whether it is a U.S. administrative law judge——

Mr. RANGEL. Have you recommended any names of people that
you would like to see on this——

Mr. PaTRICK. We have suggested to the USTR a number of mech-
anisms, Congressman, that could include a panel of experts who
could be chosen through a neutral arbitrator.

Mr. RANGEL. Is that in writing?

Mr. PATRICK. Yes, sir, it is; it has been submitted in writing.

Mr. RANGEL. Do you have this, Mr. Houghton? Do you have a
copy of Fuji offering that? Does staff have what he is talking
about? Would you give it to staff?

Mr. PATRICK. Yes, sir; we would be happy to provide that to the
Subcommittee.

Mr. RANGEL. OK.

(The following was subsequently received:]


21

agreement, and we would have to respond appropriately but
strongly.

Mr. ZIMMER. Without committing yourself to a specific course of
action, could you describe what specific legal recourse is available
under our trade statutes?

Mr. SHAPIRO. Without specifically committing myself to a course
of action, I think we have a number of areas that we would need
to look at in terms of section 301. You know, obviously, one would
look at the whole range of options that are available, including the
services area.

Mr. ZIMMER. I understand that no further talks have been sched-
uled between USTR and your Japanese counterparts between now
and the President’s visit to Tokyo next month. Assuming this issue
is not resolved by then, can we expect these negotiations to drag
on, as we have seen in the case of other trade disputes?

Mr. SuHapiro. I think we have to see what happens. Japan has
to decide how quickly it is going to move ahead and implement the
new insurance business law. So while this is a pressing matter
right now, and our concerns are being registered right now, I think
we will just have to see how it goes. But I do not regard this as
something that is going to play out over a long period of time.

Mr. ZIMMER. At what point do you say that further negotiations
will no longer be productive, and it is time to take other measures?
Can you describe the point at which you would conclude that?

Mr. SHAPIRO. I would rather not prejudge that at the moment,
because as I indicated, a lot depends on actions that are taken that
would put forth ordinances or regulations that were contrary to
what we think the agreement is. And thus far, we are still dealing
with a problem to be anticipated.

Mr. ZimMER. So even in principle, you cannot describe that one?

Mr. SHapiro. It is a pressing matter now.

Mr. ZIMMER. Well, thank you. I appreciate your sense of urgency.

lL yield back my time.

Chairman CRANE. Thank you.

Mr. Levin.

Mr. LEVIN. Thank you, Mr. Chairman. I am going to have a
chance to participate later, so let me just be very brief and ask a
few quick questions. First of all, I would like to congratulate the
Ambassador and Mr. Kantor and the administration for its active
efforts. But let me ask a few questions specifically.

Recently, MITI Vice-Minister Sakamoto said that he thought bi-
lateralism was dead, and all trade issues should be pursued in the
WTO. I wondered if Mr. Shapiro would like to comment on that
comment.

Mr. Sapiro. Well, Congressman, first, I would say that we are
dealing with a lot of issues with Japan right now on a bilateral
basis. With respect to Mr. Sakamoto’s speech, which did seem to
go beyond MITI’s stated position, which is well known, on film and
semiconductors to make a broader point, we fundamentally dis-
agree with that view. And I would subscribe to what Chairman
Crane said. Frankly, we have a United States-Japan bilateral
framework. We are always going to have bilateral issues that need
to be addressed bilaterally.


50

The best trade strategy to deal with Japan is to encourage deregulation and other
reforms that move Japan toward more internal openness. This essentially entails
encouraging Japan to adopt economic policies that bring about the kind of healthy
competition that is a hallmark of the U.S. economy. This also means we should not
negotiate trade agreements that make the United States function more like Japan. Do not try
to protect selected U.S. industries, Do not pick winners and losers. Do not accept the
worst aspects of Japan's governmental interference in the economy and attempt to manage
market access for select U.S. exporters. This type of government interference runs directly
contrary to our fundamental interest in Japan. which is to promote deregulation and reduce
government interference in the economy. These industrial policies will also weaken our
domestic economy,

During the past year, American exporters have begun to make significant gains
selling products to Japanese consumers, products as varied as furniture, refrigerators and
computers. Many U.S. exporters are going afier Japanese consumers that finally appear
willing to abandon high-priced Japanese suppliers for American exporters that are combining
low-price, high quality and strong customer service. A recent report of the Mitsubishi Bank
research division indicates that foreign firms have doing strikingly well in a Japanese
business environment afflicted with prolonged slow growth and uncertainty. In contrast to
Japanese firmis struggling to cope with stagnant economic demand, foreign firms have
“tapidly expanded sales and increased market shares in the face of heightened competition.”

The prolonged Japanese recession is doing what trade negotiators could never do,
forcing slow but steady change in many areas of the Japanese economy, including the
distribution system, keiretsu supplier system, and the tradition of lifetime employment. This
is good news for U.S. exporters, as the distribution system in Japan and the keirersu system
of long-term exclusive suppliers have been major factors inhibiting U.S. exports. However,
this is not the time to be complacent, as the U-S. Government can play a positive role
encouraging reform in Japan.

From a policy perspective, the Administration must not lose sight of long-term
objectives in the mush for short-term gains. Deregulation is more important than any single
market access dispute. While individual industrial sectors might highlight particutr Japanese
practices that have inhibited imports, our trade policy should focus on deregulation and
competition, rathet than look for managed market access for select American exports.

For example, the United States should be advocating deregulation of the Japanese
telecommunications market, including breaking up the corporate monopoly of Nippon
Telephone and Telegraph. “We should also be pushing Japanese political leaders to reduce
the regulatory control of the Ministry of Telecommunications. The Telecommunications
Act of 1996, which I believe will be remembered as one the most important reforms of the
104th Congress, sets up the United States to be the world leader in the 21st Century
information Age economy. {t will result in hundreds of thousands of good American jobs.
and will contribute to maintaining U.S. leadership in numerous related industries. Breaking
the grip of both the corporate and government telecommunications monopolies in Japan will
similarly help reinvigorate the Japanese economy.

Similarly, during the Administration's hard-fought negotiation over market access for
U.S. autos and auto parts last year, the focus should have been on deregulation and the
promotion of fair competition within Japan, rather than negotiating market access to
compensate U.S. firms for past Japanese Government practices. The Administration came
far too close to starting a trade war that would have sacrificed the California economy,
where growth depends on a strong relationship with Japan and the rest of the Pacific Rim,
in order to bring short-term benefits to Midwest auto manufacturers. A Japan policy that
focusses on broad deregulation and promoting competition benefits all U.S. exporters and all
regions equally

The second major aspect of our Japan policy that is being underemphasized by the
current Administration is the critical importance of our security relationship with Japan, It
was almost inevitable, following the repeated criticism of Japan policy leveled by candidate
Clinton, that security policy would take a back seat to trade disputes. The critical mistake
in this policy formulation was the lack of recognition that a stable security environment is
absolutely critical to continued economic development in Asia. This economic development
is essential if Asian countries are ever going to develop into the kind of export markets the
President claims are critical to our own economic growth

The President and many of his trade advisors had claimed that the Cold War caused.
the United States to make security a higher priority in our dealings with Japan than
economic relations. In reality, the post-cold war environment in Asia involves a greater
likelihood of security confrontations. The current Administration has seen its Japan policy
faced with the North Korean nuclear program as well as the recent tensions in the Taiwan
Straight. All the countries of the region are getting wealthier and dedicating greater
resources to modern military equipment. In addition, the rise of China as a major economic
and military power has pushed regional security issues to the fore


95

thus improve results

ince that time, the Government of Japan has variously announced it would not negotiate or,
when discussions did take place, declined to negotiate seriously. And just last week, the English
fanguage Nikkei Weekly reported that MITT will refuse to renew the Paper Market Access
‘Agreement which is scheduled to expire in April, 1997, While this might be a trial balloon,
consistent with Japan's continuing refusal to negotiate U.S. proposed measures that would
strengthen and enhance Japanese government and industry implementation of the 1992 Paper
Agreement

USS. acceptance of Japan's unilateral withdrawal from the agreement would reward a strategy
grounded in a complete disregard of Japan's obligations under a trade agreement with the United
States--and set an unfortunate precedent for agreements in other sectors as well, From the
industey’s point of view, the absence of  government-to-government agreement would mean that
the substantial efforts which our companies have made to develop a Japanese customer base
would be deprived of the impetus of U.S. government pressure which has been necessary for
‘even the modest breakthroughs we have achieved. As a public policy matter, acceptance would
fatally undermine the credibility of the NTE/Super 301 process and indeed, the whole Framework
approach to enforcing Japan's compliance with our trade agreements

We believe the example of our paper industry argues strongly for renewed attention to the
enforcement of existing agreements, and we are fully supportive both of the enforcement
capability which has been established at USTR and a complementary monitoring effort at
Commerce. At the same time, we view the current Kodak case as a unique opportunity to come
to grips with the pervasive market-distorting effects of Japanese business practices as they affect
many segments of American industry and we urge the Administration to develop a negotiating
plan which will fully take into account the broad, precedential nature of the issues raised by
Kodak.

ally, we are geatfied to hear the Administration's unequivocal response to Vice Minister
Sakamoto, and the reaffirmation that the Administration will continue to make the fullest use of
the remedies available under U S. trade law to ensure that competitive Americ in industries will

have access to the Japanese market
agate jepangete


33

Chairman Crane. Thank you, Mr. Deline.
Mr. Armstrong.

STATEMENT OF THOMAS W. ARMSTRONG, PRESIDENT,
SEMICONDUCTOR INDUSTRY ASSOCIATION

Mr. ARMSTRONG. Thank you, Mr. Chairman, for this opportunity
to speak on behalf of the Semiconductor Industry Association. As
president of the SIA, I can assure you of our industry’s deep belief
in and support for open markets. We strongly supported GATT and
NAFTA. To continue the process of opening markets, we strongly
support renewal of the 1991 United States-Japan Semiconductor
Agreement. We would like to do this through cooperation, not
through confrontation.

As you know, semiconductors are a pervasive part of our lives
and are becoming more so. Our industry employs 240,000 people
nationwide, and our products are the enabling technology behind
the nearly $400 billion U.S. electronics industry, which provides
employment for 2.5 million Americans. Yet, our industry is a very
young industry. Next year will mark the 50th anniversary of the
transistor, and this year marks the 25th anniversary of the micro-
processor, the heart of a personal computer.

We have been very successful in having our products accepted
not only in the United States but throughout the world. The reason
for that success is that we have continuously introduced succeeding
generations of state-of-the-art technology at consistently lower
prices, and that, of course, is a formula for success. It has been, ex-
cept in one place. In Japan, despite our technological edge and our
highly competitive prices, we could not sell much product, and this
was because the market was closed to us for many years. Fortu-
nately, primarily through the efforts of the U.S. Government, we
entered into an agreement with the Japanese which gave us access
to the Japanese market.

When we first signed the agreement in 1986, foreign producers
had only 8 percent of the Japanese semiconductor market. In 1995,
foreign market share was 25 percent, with an 18-percent share for
U.S. producers. On its face, it would appear that this agreement
has worked well and that we have made remarkable progress in
the last 10 years, and for the most part, I think the agreement has
worked well, certainly a lot better than the alternative, which
would be no agreement. But there is much left to be done. For ex-
ample, while the United States has an 18-percent market share in
Japan, we have a market share of about 50 percent in the world
outside Japan, and in combined markets which include neither
Japan nor the United States, we have a 40-percent market share.

These numbers indicate quite clearly that Japan’s markets, while
more open now than in the past, still have a long way to go before
they become truly open. It is for that reason that I am here today
to support the government’s efforts to renew the agreement. The
agreement does four very important things: First, it calls for a com-
mitment for continued progress increasing market access for non-
Ja anese—not just United States—semiconductors. Second, it pro-

les a mechanism for measuring market share in such a way that
the numbers are monitored and verified by both nations’ govern-
ments and are not subject to dispute. Third, it establishes a net-


168

‘STATEMENT OF ROBERT F. KELLEY
AND CHARLES P. HEETER, JR.
ANDERSEN WORLDWIDE

‘As partners of Andersen Worldwide, which is the coordinating entity for Arthur Andersen and
‘Andersen Consulting member firms around the world, we appreciate very much the
opportunity to submit a statement to the Subcommittee as it begins its oversight hearings on
the World Trade Organization (WTO) and implementation of the Uruguay Round agreements.
‘Our Firm believes that the Uruguay Round was a great success and that continued work on
professional services in the WTO will provide even further benefits.

Andersen Worldwide

Andersen Worldwide is the world’s largest professional services firm, employing 82,000
persons in more than 360 offices in 76 countries. The Arthur Andersen business unit provides
accounting, audit, tax, business advisory, and specialty consulting services to clients. The
Andersen Consulting business unit provides global management and technology consulting
services.

Last year our revenue topped the $8.0 billion mark, a doubling in the last five years, and we
expect similar strong results in the next five years. Our growth is in part attributable to our
increased involvement in markets overseas, with roughly half of our revenue now coming from
outside the United States. Continued liberalization of trade and investment in professional
serices is vitally important to our continued success, and an effective WTO is vital to that
continued liberalization.

In fact, for a worldwide professional services firm such as ours there is no efficient alternative
toan effective, rules-based global trading system. Our organization transfers capital,
personnel, data, and technology not only between the US. and other countries, but also
between many nations outside the US. Bilateral and multilateral free trade initiatives, while
positive and useful, can never adequately replace a well-functioning multilateral system. In
short, for our firm, the World Trade Organization has been and continues to be the best forum
for securing further liberalization of trade and investment in the services we provide.

Our commitment to the multilateral process is nothing new. We have been involved since the
launch of the Uruguay Round a decade ago. In 1985, we completed the first survey and
analysis of government impediments affecting the operations of international accounting and
consulting organizations. This information was updated in 1990.

Both the 1985 and 1990 results were shared with government negotiators. Based on this
information, we provided detailed comments to U.S. and other countries’ negotiators during
their work on the draft services framework and initial commitments. Andersen Worldwide
partners in over twenty of our largest markets contacted their governments to push for
liberalization in our sectors.

We believe our active involvement had an important impact on the successful conclusion of the
Uruguay Round. Also important to our effort was the openness and professionalism of the
officials with which we worked in the U.S. Trade Representative's office. They are to be
commended.


133

semiconductor manufacturers around the globe are engaged in new
investments intended to keep pace with the direction of the
market. Ten years ago, the U.S. complained that Japanese
companies were engaged in a so-called capacity expansion race
which led to excess capacity and dumping on the U.S. market to
shed excesa inventories when the market turned down. Today, this
is not the case. Japanese investment is being carefully
calibrated to be responsive to forecast demand. Indeed, a
substantial amount of new Japanese investment is being made in
joint ventures with American and other foreign business partners,
who have a mutual interest in accurate forecasts of future demand
and production capacity necessary to meet that demand.

© ‘There are a series of reasons why a further governmental
agreement in the semiconductor sector makes no sense.

- As noted above, Japanese user companies procure
semiconductor products from competitive suppliers irrespective of
nationality. The Japanese market is completely open to foreign
semiconductors; no trade barriers exist. Success in the Japanese
market 1s a function of meeting users’ needs in terms of QCDS --
quality, cost, delivery time, and service.

- Market share is just one of the factors identified by che
Arrangement to evaluate progress in market access. Even the
Arrangement recognizes that market share is affected by
commercial factors such as supply and demand structures
competitiveness of foreign products, sales efforts by suppliers
etc. As such, the rise and fall of the market share figure
which fluctuates based on long and short term commercial factors
bears no discernible relationship to whether the market is open
or closed.

- Moreover, under the Arrangement the 20% market share figure
is specifically stated to be an "expectation" of the U.S.
industry, not a "guarantee, a ceiling nor a floor."
Notwithstanding the clear and plain language of the Arrangement,
the U.S. has unilaterally interpreted the 20% figure, not only as
a numerical target, but as a Japanese promise or commitment.
Moreover, the U.S. has consistently "re-interpreted" the
Arrangement’s call for gradual and steady improvement in foreign
market access as mandating increases in foreign market

The consistent U.S. policy of distorting the plain language of
the Arrangment is clearly inconsistent with WTO principles and is
another reason why any form of continuing agreement in this
sector is unacceptable.

© We are now living in a new era of international trade rules
established at the World Trade Organization (WTO), which became
operational in January, 1995. Trade agreements that are
consistent with WTO principles are necessary under this new
regime

° Given the facts as described above, it is clear that the
objectives of the Arrangement have been achieved in full --
indeed, well beyond the expectations of the U.S. industry. And
because the objectives have been achieved, the Arrangement should
be allowed to expire as originally intended at the end of July
Moreover, since the 1991 Arrangement was concluded there have
been no allegations of dumping by Japanese companies. Each
company has been carefully implementing its own management of
pricing.

In closing, let me repeat: First, the mission of the
Semiconductor Arrangment has been accomplished. The objectives
have been achieved. Second, the Semiconductor Arrangement has
lost its raison d’etre due to the dynamic structural changes in
the semiconductor sector. Finally, the accession of the new WTO
regime requires trade policy to conform with WTO rules. We
believe, therefore, it is time now to get government out of the
semiconductor sector and to let the companies and the market
dictate the shape of the future.

Thank you.


17

On February 21. the Japanese Government announced that the JETC would conduct a
survey of the film and photographic paper markets. This survey notwithstanding, we are
continuing to seek consultations with the Government of Japan given that the JFTC survey
cannot address the full range of issues involved in this case. Among the topics we would like 10
discuss are laws, administrative guidance, and recommendations regarding distribution and the
conduct of competition in the Japanese market issued by the Japanese Government during the
past five years, all of which could be used to improve market access in Japan, These include the
199} Guidelines for Improving Business Practices, 1993 Recommendations on Medium-Small
Wholesale Industry Business Practices, 1995 New Business Reform Law. 1995 Vision for
Distribution in the 21st Century, the 1995 Economic Plan for Structural Reform, the Large Scale
Retail Store Law, and Japanese Government implementation of its commitments under the
Structural Impediments Initiative.

We have made it clear to the Japanese Government that we would prefer to address this,
issue in a cooperative manner. However, if the Japanese Government remains unwilling to
consult with us, we will be left with no choice but to consider what other steps are necessary

Some in Japan have argued that Kodak’s treatment in the market is “mirrored” by Fuji’s
treatment in the U.S. market. This myth needs ta be debunked. Market share comparisons can
be illuminating if supported by evidence of market barriers. but superficial comparisons of
market share are misleading and distort the serious nature of the problems faved by foreign firms
in the Japanese market. First of all, as a general matter, foreign firms have no problem gaining
access to the distribution system in the U.S. Moreover, beginning in the 1920s, the U.S.
Government has taken anti-trust action against Kodak’s practices in the U.S. market. In contrast
the Japanese Government implemented liberalization countermeasures which effectively
restricted foreign producers’ access to the Japanese market.

Civil Aviation

Turing to civil aviation, negotiators from the Departments of State and Transportation
reached agreement with Japan on Wednesday, March 27, on the clements of an air cargo
agreement which creates significant new commercial aviation opportunities for both sides. It is
expected that the parties will meet again in Washington in mid-April to finalize the text of a
Memorandum of Understanding on Air Cargo Services. The agreement, which meets the goals
the U.S. and Japan set out in Los Angeles last year, is a balanced package which liberalizes and
expands our bilateral aviation regime. This successful negotiation illustrates our ability to work
bilaterally and to reach agreement on a difficult and complex commercial issue.

Other Agenda Items

While the Administration considers ita priority to make progress on the issues | have
outlined, we also intend to vigorously monitor and enforce our other bilateral agreements with
Japan in such critical areas as autos and auto parts, telecommunications, supercomputers,
computers, wood, paper, and glass. We are fully committed to ensuring that Japan is living up to
its obligations under the WTO. Moreover. to complement these sectoral efforts. we also are
pursuing structural initiatives.

Let me briefly summarize where we stand on these issues. We have challenged Japan in
the WTO for its failure to protect existing sound recordings ina manner consistent with its
obligations under the TRIPs agreement, and are gratified by indications that Japan has decided to
change its law to provide the 50 years of protection required by TRIPs. We are consulting with
Japan about disturbing evidence that recent supercomputer procurements have not been made in
accordance with the procedures of the Supercomputer agreement. which had produced significant
gains in recent years. While we are pleased about the strong showing made by U.S. personal
computers in the Japanese market, we have brought (o Japan's attention evidence of deep
discounting on computers by Japanese companies which has cost our companies sales in the
public sector market

We are concerned about lack of progress under the NTT agreement. Foreign share


61

talk about auto parts. It is 10 years now. And you and others have
joined in on this. And unless the Japanese and other countries un-
derstand that this country is serious about their opening their mar-
kets, they will not do it. Korea is another case in point. In a sense,
it is like free enterprise in this country. To win, you have to stand
up for yourself. People do not give you much in a free enterprise
system. You have to stand on your own two feet and fight for your-
self. And that is exactly what we ought to be doing within a frame-
work where disputes can be resolved in an amicable way, hopefully.

Mr. Camp. Thank you.

Chairman CRANE. Well, Sandy, thank you so much for your testi-
mony.

Mr. Levin. Thank you.

Chairman CRANE. And I would like to now invite John Patrick,
general counsel for Fuji Inc.; Oakley Johnson, vice president, cor-
porate and international affairs, of the American International
Group, Inc.; Ed Rozynski, senior vice president of the Health In-
dustry Manufacturers Association; and Maureen Smith, vice presi-
dent of international affairs, American Forest & Paper Association
to come forward. And before we commence with your testimony, I
would like to yield to Mr. Graham to welcome Mr. Patrick.

Mr. GRAHAM. Thank you, Mr. Chairman. I appreciate that. John,
I am glad to have you here. John Patrick is general counsel of Fuji
from, of all places, Greenwood, South Carolina. That is right in the
middle of my district. And John is going to talk a little bit about
Fuji North America, and I appreciate the Subcommittee listening
to the other side of the story, and I will have a statement a bit
later. But John, welcome, and I appreciate your being here and
sharing your testimony with the Subcommittee.

Thank you, Mr. Chairman.

Chairman CRANE. And we will start with you, Mr. Patrick.

STATEMENT OF JOHN PATRICK, GENERAL COUNSEL, FUJI
PHOTO FILM, INC.

Mr. Patrick. Thank you, Mr. Chairman and Members of the
Subcommittee. I am here to discuss a dispute involving a company
that has 70 percent of its home market and pays premiums to re-
tailers to exclude competitors from store shelves. I am not talking
about Fuji Film in Japan; I am talking about the Eastman Kodak
Co. in the United States. This case is not about an American indus-
try trying to level the playingfield; it is about one company, Kodak,
trying to use the U.S. Government to gain an advantage over Fuji
Film in a global commercial battle.

In the last 10 years, Fuji Film has invested nearly $1.5 billion
in the United States, and we have 5,000 employees in the United
States. In our U.S. manufacturing plants, we have American work-
ers making American products and exporting them around the
world. To the best of our knowledge, Kodak has no manufacturing
facilities in Japan. Yet despite our enormous commitment to the
U.S. market, our share of the consumer film market in the United
States continues to hover around 10 percent. We were, therefore,
amazed, when Kodak, complaining of its 10-percent share of the
Japanese market, filed a 301 complaint. Kodak’s claims are
groundless.


130

STATEMENT
oF
STANTON D. ANDERSON
COUNSEL, ELECTRONIC INDUSTRIES ASSOCIATION OF JAPAN
BEFORE THE
HOUSE WAYS AND MEANS COMMITTEE
SUBCOMMITTEE ON TRADE
HEARING ON U.S.-JAPAN TRADE RELATIONS
MARCH 28, 1996

Thank you for the opportunity to testify here this afternoon on
the U.S.-Japan Semiconductor Arrangement.

I am here today on behalf of the Electronic Industries
Association of Japan, or "EIAJ". EIAJ is a trade association
made up of approximately 600 members, representing both Japan's
semiconductor manufacturing industry as well as companies that
use semiconductor chips

The U.S.-Japan Semiconductor Arrangement was concluded 10 years
ago as a temporary measure to deal with allegations raised by the
U.S. semiconductor industry of barriers to access to the Japanese
market and injurious dumping of Japanese semiconductors in the
U.S. market. The objectives of the Arrangement were to increase
rket access opportunities in Japan for foreign semiconductor
companies and to prevent dumping of semiconductors.

Today, ten years later, the mission of the Arrangment has been
fully accomplished

Although U.S. observers tend to attribute the change to the
Arrangement, we firmly believe that market forces have been the
prime mover behind this accomplishment.

The demand structure of the Japanese semiconductor market
has changed considerably over the life of the Arrangement,
opening up a wide range of new business opportunities for foreign
semiconductor suppliers. Historically, Japanese demand was
dominated by consumer electronics. American companies are not
highly competitive in this market segment. In the past several
years, however, sales of personal computers and portable
telecommunications equipment have increased rapidly. With the
arrival of the new multimedia era, consumer electronics products
have become more sophisticated due to developments in digital
technology

As a result of these and other advances in technology, the
Japanese market has provided a wide range of new business
opportunities for foreign semiconductor companies.

© The U.S. semiconductor industry has regained its
competitiveness over the course of the Arrangement. American
companies occupy dominant positions in key product areas, from
microprocessors to flash memories, on the strength of their
technological superiority. Many of the problems which the U.S
industry suffered in the 1970's and early 1980’s in the areas of
quality, supply, performance, cost and service have been solved

In the mid-1980's, only a handful of U.S. companies had sales
offices in Japan. Even fewer American companies had support
departments to handle technical problems or design and testing
operations, which were important to Japanese customers.
Moreover, in the early 1980's U.S. chips suffered from high
defect rates and a reputation for inferior quality. In the past


114

EXECULIVE OFFICE OF THE PRESIDENT
OFFICE. OF THE UNITED STATES TRADE REPRESENIATIVE
WASHINGTON. DC. 20806,

OEC 10 605

The Honorable Thomas J. Downey
Downey Chandler, Ino.

Snite 1210

1401 1 Street, N.W.

Washington, D.C. 20005

Dear Mr. Downey:

‘Thank you for your letter of November 15, 1995 concerning the pending Section 301
investigation of color photographic film and paper. As the Chairman of the Section 301
Committee, Ambassador Kantor has asked me to respond on his behalf.

I certainly appreciate your suggestions for ways to resolve the factual disputes between Kodak
and Fujifilm regarding Fuji’s business practices and their impact. However, our section 301
investigation concems market access for foreign color photographic fllm and paper in Japan and
related practices of the Government of Japan. This is an important bilateral trade matter between
the Government of the United States and the Government of Jepan ~ not between Kodak aiid
Fuji -- and we will conduct the investigation accordingly. Therefore, there is no basis for USTR
to delegete investigatory and decision-muking authority to third parties such as the OECD,
arbitrators, a panel of experts, or an administrative law judge.

As your letter points out, section 301 (d{3)(D) does provide that “{f]or purposes of determining
whether any act, policy, or practice is unreasonable, reciprocal opportunities in the United States
for foreign national and firms shall be taken into account, to the extent appropriate." I must
disagree, however, with your position that this provision requires USTR to determine “whether
or not Fujifilm is denied reciprocal opportunities in the United States," and more specifically,
whether “Kodak's exclusionary practices have denied ‘reciprocal opportunities’ to Fujifilm in the
United States.”

Section 301(4)(3)(D) is a discretionary provision intended to facilitate the determination of
whether @ foreign yovernment’s acts, policies, or practices are unreasonable by considering the
lack of reciprocal access afforded U.S. companies in foreign markets relative to foreign
companies’ access to the U.S. market. Congress’ clear objective was to promote greater access
to foreign markets by U.S. firms, not create a procedure for examining whether the U.S. market
was sufficiently competitive. Both the Senate Finance Committee and the House Ways and
Means Committee used identical language lo express this objective:


116

Mr. RANGEL. Thank you, Mr. Chairman.

Chairman CRANE. Thank you.

Mr. Houghton.

Mr. HOUGHTON. No questions.

Chairman CRANE. Mr. Camp.

Mr. Camp. Thank you.

What I understand you are saying, Mr. Patrick, is that you
would like a neutral arbitrator to verify the facts and then take it
before the JFTC or ultimately to MITI after that? Is that what I
understand? Or maybe I misheard that.

Mr. Patrick. I think yes, sir. I think MITI has suggested it be
taken to JFTC first. What Fuji Film has suggested is that there be
some neutral fact-finding body that will review these facts.

Mr. Camp. And establish a factual basis first?

Mr. PaTRICk. Yes, sir.

Mr. Camp. And then go to the appropriate entity ——

Mr. PATRICK. Exactly.

Mr. Camp. Thank you; I appreciate your answer.

No further questions.

Chairman CRANE. Mr. Coyne.

Mr. Coyne. No questions.

Chairman CRANE. Mr. Graham.

Mr. GRAHAM. Thank you, Mr. Chairman.

One brief question, Mr. Patrick. You seemed to get all the ques-
tions here. There was a mention about the Japanese Government’s
role in providing information and cooperating. And your sugges-
tion—this is what I am trying to understand here—is that you
want to pick a neutral independent party, as the gentleman just
said, to arbitrate the facts? And if the Japanese Government re-
fuses to cooperate with that independent body, that is a bridge we
will cross when we get there?

Mr. PATRICK. Yes, sir; I think so. As we understand it, 301 is
supposed to be a tool of last resort rather than first resort.

Mr. GRAHAM. Thank you.

Chairman CRANE. Well, I thank all of you folks for your patience
and endurance, and we will include any printed matter you have
that you did not deliver in testimony in the record.

And I would like to now call our last panel: Dr. Ellen Frost, sen-
ior fellow, Institute for International Economics; Stanton D. Ander-
son, counsel, Electronic Industries Association of Japan on behalf
of the Japanese semiconductor industry; Cyril Murphy, vice presi-
dent, international affairs, United Air Lines; and Dr. Don Hilty,
senior fellow, Economic Strategy Institute.

And Mr. Graham, do you have a unanimous consent request?

Mr. GRaHAM. Yes, Mr. Chairman. I would like to make a 2- or
38-minute statement for the record to give the Subcommittee some
information about my district and how this relates.

Chairman CRANE. Without objection, so ordered.

STATEMENT OF HON. LINDSEY 0. GRAHAM, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF SOUTH CAROLINA

Mr. GRAHAM. Thank you, Mr. Chairman. I have enjoyed being
here, and I have learned a lot. I am obviously not on the Sub-
committee, and I have a lot to learn about trade issues. But I have


4

Chairman CRANE. Will everyone please be seated. Good after-
noon; this is a meeting of the Ways and Means Trade Subcommit-
tee to continue our series of hearings on U.S. trade policy in the
post-Uruguay round environment. We will receive testimony today
on the status and future direction of United States-Japan trade re-
ations.

This hearing is being held in anticipation of the President’s trip
to Tokyo to meet Prime Minister Hashimoto on April 16 where
many of the issues we want to review today will be discussed. Ac-
counting for 40 percent of the world’s GDP, the relationship be-
tween the economies and the United States and Japan is as im-
mense as it is complicated. Overwhelmingly dictated by macro-
economic forces, notably a high budget deficit and low savings rate
in the United States, the large bilateral trade deficit with Japan
continues to fuel protectionist measures in the United States. The
good news is that after years of stubborn resistance to increased
import penetration, the Japanese economy is showing measurable
signs of true structural reform. For example, Japan increased over-
all imports last year by 22.8 percent.

Japan has become a much more hospitable market for high
value-added manufactured imports than in the past. With this
movement, Japan has begun to address its historic status as an
outlier country not participating fully in the give and take of inter-
national trade. The stubborn bilateral trade deficit, which has de-
fied all of our best efforts, shows marked improvement in 1995. As
we evaluate prospects for the United States-Japan relationship in
the 21st century, the need for better communication and coopera-
tion is evident.

In light of China’s military aggression, more should be done to
coordinate bilaterally with Japan on security issues in the region.
General deregulation of the Japanese economy also continues to be
a high priority for solving market access problems on a large scale.
Market-restricting measures identified by the industries rep-
resented here today, while the result of larger systemic problems,
must also be addressed by Japan directly. While I agree we should
use the WTO and APEC wherever possible to consult and negotiate
solutions, recent Japanese resistance to discussing issues which are
the subject of 301 investigations only encourages those in the Unit-
ed States who want to limit trade with Japan.

As the Washington Post recently reported, Japan may be the
vanishing villain of the trade deficit drama. Japan is America’s sec-
ond largest trading partner, buying more than $64 billion of U.S.
products during 1995. Yet, as the world’s greatest exporter, im-
proved living standards for U.S. workers depend on getting a fair
chance to compete across the fast-growing Asian market. The Japa-
nese market remains the key to a successful Asian strategy, and
we must work with Japan to achieve trade liberalization both in
Japan and throughout the Pacific rim. The stakes are high, and
market access problems remain deep in Japan.

I look forward to today’s testimony, which will help us to better
evaluate preparations for the President’s trip in April. As a result
of scheduling conflicts with other Subcommittees, we have begun
later than I would have liked today, and we were also interrupted
on the floor by some head knocking that produced a recorded vote


93

TESTIMONY OF
MAUREEN R. SMITH
INTERNATIONAL VICE PRESIDENT
AMERICAN FOREST&PAPER ASSOCIATION
ON
UNITED STATES-JAPAN TRADE RELATIONS
BEFORE THE
HOUSE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON TRADE

MARCH 28, 1996

‘Thank you, Mr. Chairman, for the opportunity to testify on United States-Japan trade relations,
and specifically on market access problems of the U.S. forest products industry in Japan

1 am testifying today on behalf of the American Forest & Paper Association (AF&PA), the
national trade association of the U.S. wood and paper products industry. America's forest
products industry accounts for seven percent of all U.S. manufacturing output and employs 1.6
million Americans, Our members grow, harvest, and process wood and wood fiber, manufacture
pulp, paper and paperboard products from both virgin and recovered fiber, and produce solid
wood products. The industry's shipments are valued at more than $200 billion,

With 1995 paper and wood exports exceeding $23 billion, our industry makes an important
contribution to the U.S. balance of payments. In recent years, the growth in exports sales has
outpaced the growth in domestic shipments. In order to maintain our strong export growth, our
industry is committed to aggressively developing foreign markets, and supporting initiatives by
our government to remove trade barriers to U.S. products.

Japan is a priority export market for our industry. The total Japanese market for paper and allied
products is estimated at about $60 billion and ranks second only to the U.S. The Japanese wood
products market totals $30 billion

The U.S. and Japanese governments have concluded two individual trade agreements covering
market access for U.S. forest products in Japan: The Wood Products Super 301 Agreement of
1990, and the Paper Market Access Agreement of April 1992. The goal of both agreements was
to improve substantially U.S. access to the Japanese market. Although there have been some
positive developments since the Agreements were concluded, there has been no meaningful
increase in Japanese imports of wood and paper products.

The U.S. wood products industry has been committed to an aggressive promotion program in the
Japanese market for more than 10 years and has worked with the U.S, government to negotiate
‘changes in Japanese standards and building codes to permit greater use of wood in construction
and interior applications. Progress has been made on certain technical issues but the U.S. share of
the Japanese market for value added wood products has increased only marginally over this
period

Several important steps can be taken to ensure improved market access for U.S. wood products,
These include tariff cuts, changes in Japanese building codes and standards, and joint data
collection:

= We believe that the central accomplishment of the upcoming Clinton-Hashimoto Summit
must be a Japanese commitment to early wood tariff cuts in the APEC process and we
would hope that the recently announced Hashimoto initiative would encourage wood tariff
reductions as part of Japanese efforts to reduce housing costs

= A-commitment to a true performance basis in Japanese building codes would allow wood
use in areas currently prohibited. Prescriptive height and area limitations, and regulations
prohibiting wood frame structures in quasi fire protection zones, continue to inhibit the
promotion of high quality, safe, and affordable housing.


38

‘The Case for Renewal of the Agreement

The purpose of the 1991 U.S.-lapan Semiconductor Agreement, like the 1986 Agreement
which preceded it, is to allow foreign manufacturers equitable access to the Japanese semi
conductor market, The goal of the Agreement is te open the Japanese market to the point where
sales generally occur without respect to the nationality of the supplier

Iisa well-known fact and a regular subject of discussion both inside and outside Japan
that there remain structural impediments in the Japanese market and a need for “deregulation.”
The U.S.Japan Semiconductor Agreement was negotiated to overcome market access
impediments. There exist ingrown interrelationships both within keiretsu groups and among other
Japanese firms and a mentality that favors dealing first with those within the same family of
companies or corporate group, and second, with other Japanese companies, before any foreiyn
products will be considered. Overcoming these structural impediments requires Japanese govern-
‘ment action, as provided for under the Agreement.

The Agreement has resulted in a significant amount of progress being made, Japanese
purchasing agents have told U.S. semiconductor sales representatives on numerous occasions that
they are very pleased with the existence of the current Agreement because it provides them with
a degree of flexibility within their companies without which it would be impossible to consider
buying foreign products. That is what the Agreement is all about

The issue of renewal of the Agreement turns on whether the Japanese market is now fully
‘open and, therefore, no further action is needed. No foreign company which sells in the Japanese
market believes that the market is fully open. At the same time, Japanese politicians and
government officials continue to speak out in favor of deregulation. In the semiconductor sector,
the path of deregulation has been established and the method for achieving it exists in the terms
of the U.S.-Japan Semiconductor Agreement. The Agreement must be renewed if the effort at
deregulating the Japanese semiconductor market is to continue.

The Agreement has opened the lines of communication between U.S. semiconductor
suppliers and Japanese end-equipment producers, and between the U.S. and the Japanese
governments. It provides a structure within which both industry-to-industry and government-to-
government cooperation are fostered. An extensive network of inter-industry institutional
arrangements and joint projects have been created under the umbrella of the inter-governmental
U.S.-Iapan Semiconductor Agreement

‘The members of SIA are committed to continuing progress, but the job is not done. A
large gap cemains between the sales of all non-Japanese semiconductor producers outside Japan
and their sales in the Japanese market. U.S, semiconductor makers account for 50 percent of the
‘world semiconductor market outside Japan -- almost three times the market share they have been
able to achieve in Japan. Much work remains to be done in opening the Japanese market.

The Gap

USS, semiconductor manufacturers are extremely competitive in all open markets across
a wide range of applications and a wide range of products. There remains a sharp disparity,
though. between the share U.S. manufacturers account for in the world market outside Japan and
the share they account for inside Japan. In the world, excluding Japan, American manufacturers
accounted for 50 percent of all semiconductor sales in 1995. in Japan, U.S. semiconductor
makers accounted for only 18 percent of sales in the Japanese market that same year

This huge disparity between U.S. sales outside Japan and sales inside Japan is evidence
that sales in that country are, unfortunately, still not always made solely on the basis of market
forces such as technology, price, quality, service and delivery. Moreover, the gap is both
consistent and persistent not only across the full range of applications, but across the full range
of semiconductor products made by U.S. manufacturers.

Furthermore, the wide disparity between U.S. sales outside Japan and inside Japan is not
explained by the argument that the U.S. industry does better in the United States and the Japanese
industry does better in Japan. A comparison of the 40 percent share U.S. firms earn in world
markets outside both the United States and Japan with the 18 percent share U.S, firms have in


158

International Scheduled Passenger Traffic
Annual Rates of Growth,

Actual Estimates
qwss1y93 TSR 2oO NTN

Rest-of World 4% 3%

Asia-Pacivic ay % 7

World Total WM 6% 5%
Sora TATA

Thus, it seems clear that a strong and growing US. aieline industry is necessary
for the USS. economy to grow at an acceptable rate in the future, and anything,
that would hurt the US. airline industry would be a major impediment to
overall US, economic growth.

Il. The United States is Competitive

‘As a result of having a large domestic airline services market, and of having
faced the competitive pressures created by airline deregulation, USS. carriers
now enjoy a strong comparative advantage in airline services, as shown in the
figure below

Relative Cost Structures
Average Operating Expenses per Revenue Ton Mile, 1993

sisem |
| gl © usini nna

The implications of this superior competitiveness are enormous. When the
Japanese consumer-electronics industey gained a similar, competitive superiority
it was able to use that advantage to gain absolute dominance of most world
markets. Indeed, the US. consumer-electronics industry was virtually driven
out of business, U.S. airlines are in a position to do the same thing, in the world’:
aviation markets. Aviation service, even wider today’s restricted conditions, is
one of the few industries in which the United States has a trade surplus. Based
on US. carrier experience in key international markets when restrictions were
relatively few, American carriers could easily achieve two-thirds of total market
share, with a gain of billions of dollars in airline revenue and profits, as well as
thousands of new jobs for U.S. residents

III. Liberalization Efforts

The US. government has been negotiating to liberalize international skies and
has, in fact, concluded “open skies” deals with a number of European countries
including, most recently, Germany, Europe's largest economy. Progress in the
Pacitic has been much slower, largely reflecting, Japan’s reluctance to liberalize



125

producing. First, the population of these countries includes a
very high proportion of young people hungry for products of the
American lifestyle, from blue jeans to American movies. In this
huge and lucrative market, American exporters face virtually no
competition from Japan, Second, there is a growing demand for the
goods and services associated with productivity -- the same goods
and services that have given rise to the revolution in American
manufacturing. Third, there is a pressing need to modernize the
infrastructure of these countries, from ports and roads to modern
telecommunications and environmental products and services. Again,
Americans are world-class competitors in these areas.

A major consequence for Japan is that the Japanese market
needs to more open to manufactured exports from developing
countries in order to sustain their growth. As the world’s second
biggest national economy, Japan has a responsibility to help
promote global growth. By any measure, however, Japan accepts a
far lower proportion of manufactured exports from developing
countries than other industrialized countries. There are definite
signs of improvement, much of which stems from Japanese investment
abroad, but progress is hampered by the sluggish rate of growth in
Japan. The best contributions that Japan could make to developing
countries would be to further open its markets to non-Japanese
affiliated companies and to grow faster.

Hy Tt AL. NT
A._The Role of APEC

The new factor in U.S,-Japan trade relations is the Asia-
Pacific Sconomic Cooperation forum (APEC), whose eighteen members
account for about half of the world’s output. At the 1994 APEC
summit, APEC leaders made a political commitment to achieve "free
and open trade and investment" in the region by 2010 for
industrialized countries (which account for about 85% of APEC’s
trade} and 2020 for the rest. APEC’s Osaka Action Agenda,
announced last November, reaffirmed this commitment and declared
that APEC economies "will take the lead” in strengthening the open
multilateral trading system, possibly including initiatives for the
first WTO Ministerial Meeting in Singapore.

Several features of APEC have bearing on U.S.-Japan trade

tensions. First, APEC offer institutional mechanism in which
many nations, not just the United States, can work to open Japanese
markets. At Osaka, APEC leaders beat back challenges to scale back

the comprehensiveness of their commitment to free trade and
investment, notably from Japan and South Korea on agriculture

Second, APEC’s goal is to identify and remove all barriers to free
trade and investment, including competition policy. Since many
U.S.-Japan trade disputes arise from anti-competitive behavior, and
since competition policy is not yet encompassed by WTO rules, APEC
can make a real contribution here. Third, APEC can help to

politicize U.S. -Japan trade disputes by offering regional mediation
services and allowing a bigger role for business

APEC has other positive effects as well. As nations scramble
to compete for investment, APEC stimulates what C. Fred Bergsten
calls "competitive liberalization" and thus reduces the chances of
mercantilism and protectionism. Moreover, APEC offers
opportunities for leverage. For example, U.S. interest in APEC and
Latin America arguably helped to bring about a conclusion to the
Uruguay Round by sending a signal to European leaders that the
United states had alternatives.

Finally, APEC has geopolitical significance. In the words of
trade expert Geza Feketekuty, Director of the Center for Trade and
Commercial Policy in Monterey, regional free trade agreements have
become "the principal focus for organizing relations among states."
APEC offers both Japan and the United States a chance to become
more firmly embedded in the emerging Asia-Pacific community and


100

Fi

FUYI PHOTO FILM, INC. April 1, 1996

TELEPHONE (4) 258208 66.268
Fax toa 238071
‘The Honorable Philip M. Crane
Chairman, Subcommittee on Trade
‘Committee on Ways and Means
ULS. House of Representatives
1104 Longworth House Office Building
Washington, DC 20515

Dear Mr. Chairman:

On behalf of myself and Fuji Photo Film, Inc. { want to thank you for giving me the opportunity to
testify before the March 28 hearing of the Subcommittee on U.S. - Japan trade relations. I was most
impressed with the wide range of viewpoints that the Subcommitice sought and the interest of the
Members attending

During the hearing, Representative Range! requested that Fujifilm provide the Subcommitice staff
with the correspondence between Fujifilm and USTR with respect to options for neutral fact-finding
in this case, Tam enclosing copies of the cover letter and options paper provided to USTR and
USTR's response. I hope these will be helpful to the Subcommittee. 1 am also sending Mr. Rangel
copies of these materials.

IC you or your staff should have any questions or need any additional information conceming this
case, please do not hesitate to contact me,

We were also happy to welcome you to the Fuyiilm facility in your district, and we invite you to visit
whenever you can, Again, thank you for your interest in Fujifilm’s point of view, and for inviting me
to the March 28 hearing.

Sincerely,

Jatin Patrick
General Counsel and Secretary

JPilae

enclosure


41

government agreement is the best means to maintain and build on the harmonious relations that
have developed and are continuing to grow

Under the Agreement, SIA and E1AJ, and the U.S. and Japanese governments, meet
jointly three times a year. These meetings have allowed SIA to establish very valuable
relationships with our EIAJ counterparts through an extensive series of joint activities. Under
the Agreement. the two governments work together to calculate foreign share of the Japanese
market, and jointly issue quarterly reports. Calculation of foreign market penetration in Japan
by the United States absent any government-to-government consultations on she issue is likely
to lead to disagreements between Washington and Tokyo.

The members of SIA believe it is in the interests of both the U.S and Japanese industries
and the Governments of Japan and the United States, not only to provide a context in which these
relationships are maintained. but also to keep this vital industry free trom the strife that would
likely arise in the absence of an Agreement. Renewal of the Agreement will help ensure not only
that progress continues in opening Japan's markets -- where work remains to be done — but that
{riction does not develop between the U.S. and Japanese governments over trade in semiconduc-
tors.

Conclusion

The American semiconductor industry's consistent commitment to product quality sand
innovation have allowed U.S. producers to regain their technological leadership. Retaining that
leadership is critical to America’s defense capabilities as well as for its commercial interests. In
an era in which multibillion dollar investments are required simply 10 keep up with growing
demand, maintaining technological competitiveness will require not only the industry"s continued
commitment to technological advances, but also attaining full access to markets worldwide --
particularly the world’s second largest market, Japan.

Although the U.S.-Japan Semiconductor Agreement has been tremendously successful in
making progress toward opening the Japanese market and building cooperation between the two
industries and the two governments, much work remains to be done.

+ The gap between U.S. share in Japan and in the rest of the world remains substantial
18 percent in Japan versus 50 percent in the world outside Japan, For a product that is
shipped around the world in a half-day’s time, and given the extensive efforts of the US.
industry in Japan, this gap can only be due to continuing structural barriers in the
Japanese market.

+ U.S. companies still find it difficult to win high-value design-in contracts in Japan.

+ Market access problems in Japan -- the world’s second largest market -- remain real
‘Substantial gaps exist between U.S, and other foreign industry’s performance outside and
inside Japan.

+ Without the structure of cooperative activities between the Japanese and foreign
semiconductor industries, supported directly by the government-to-government efforts
under the Agreement, the future of U.S.-Japan cooperation is in doubt.

. Worldwide investment patterns show a tremendous growth in capacity which could result
in renewed dumping should there be an unexpected market downturn as has happened in
the past. The minimal, non-intrusive antidumping provisions of the Agreement should
therefore be maintained.

+ The World Trade Organization has been established. but its sanctions-based judiciat
approach will not promote cooperative, businesslike solutions in technical, product-specific
market access issues as has the US.-lapan Semiconductor Agreement over the last ten
years.

SIA believes that the only way to continue building on the progress that has been achieved
over the last few years is 1o renew the Agreement prior to its expiration in July 1996, Absent
renewal of the Agreement. itis clear that the level of government-to-government and induste