up the Japanese ports of entrv to .\merican productivity
... [and] eliminate discriminatorv- practices which the
Japanese practice against US. products." In addition,
there are many other free-traders in Congress who would
support such a proposal given a strong show of leader-
ship from the president
Enormous Market to Tap
A free-trade agreement would give the United Slates
access to a largely untapped market of over 124 million
Japanese consumers. Despite having the second-largest
market economy in the world, Japanese private consumf>-
tion ranks near the bottom in ihe industrialized world.
In fact, according to a 1991 Organization for Economic
Cooperation and Development (OECD) survey, Japan
spends only 8 percent of its total gross national product
on imports, far below ihe 19 percent average among
major OECD countries. For years, the Japanese have
artificially suppressed their market with stringent restric-
America and Japan are headed toward a trade »"ar that would not serve the interests of either economy.
tions on imports The resuhing high prices have hurt
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Japanese consumers and dampened demand for im-
ported products. These import restrictions would be a
prime target of a US -Japan free-trade agreement.
For example. Japan's Food and Conttol ,^ct was
created during a period of wartime scarcity and con-
tinues to monopolize all aspects of agncultural produc-
tion, marketing, and trade Japan's Food .Agencv buys
imported products ai market pnces and then resells
them at much higher domestic prices Lifung these
controls would be a boon for .\merican agricultural
exporters, not to mention Japanese consumers, who pav
notoriousiv high prices for their food
Such a change would also benefit an important con-
stituency for Bill Clinion Arkansas rice farmers. Japan
maintains an almost total prohibition on rice imports,
and Japanese rice farmers receive extremely high price
supports from the government. If the Japanese nce
regulations are as tough or
tougher than those in the
market were liberalized, L' S. industrv experts estimate
that U.S. rice exports could increase to as mtich as $6.50
million a year. Thei e also is evidence that public opinion
in Japan is more open to rice liberali/ation than one
might assume. A 1990 survey in a Japanese business
newspaper indicated that 70 percent of the Japanese
public favored opening their rice market to imports.
T)Taniiy of the Status Quota
Opponents argue that free trade will not increase
market access for the L'niicd Stales since, on paper at
least, Japan alread\ has some of the lowest trade barriers
in the world Indeed, a L'S. -Japan free-trade agreement
should be imlike most traditional trade agreements.
i\hich focus primarih on tariff reductions. Japan now
has the lowest tariff level of all the OECD countries —
Japan's a\crage tariff rate on industrial products is only
However, high tariffs remain on manv products im-
portant to L'S. producers, including petrochemical
products. aliMninum products, paper, and agricultural
products. In .addition, Japanese import quot.is continue
to limit .American agricultural products, including wheat,
rice, barley, and peanuts. U.S. leather products and
foor\\ear also continue to face stibsiantial barriers,
despite Japanese efforts to modiS their import quotas
and restrictions. Established exporters lend to receive
the lion's share of import quotas, making it extremely
difficult for American comp<inies to obtain import quota
shares on new products. Import quouis and remaining
tariffs arc significant barriers that would be lifted under
a free-trade agreement.
Others argtie that a free-trade agreement is unneces-
sary given the presence of the General .\greemeni on
Tariffs and Trade (C.\TT) and the Structural Impedi-
ments Initiative (SII) A free-trade agreement with Japan
would not override these agreements, but would con-
tribute to the overall goal of liberalizing world trade and
opening markets to U.S. products. Unlike C.\TT. a free-
trade agreement would address specific concerns that
the United Slates has vMih Japan, and our unique
relationship with that country. A free-trade agreement
would address Japan's opaque and informal decision-
making process, labyrinihine distribution system,
regulatory requirements, patent infringement, and lax
American farmers, such as these rice growers in Texas, would benefit enormously from
a lifting of Japanese import restrictions.
anlitrusl enforcement, all banicrs to US. evporls
Free-trade ncgoiiaiions also can give higher public
usibilily lo non-urifT barriers to trade. L'nlike the SII.
which has become mired in technical details, such as
how much public investment and how man\ sidewalks
Japan should ha\e. a free-trade agrcenieni offers a more
comprehensive formal that would attract more altention
from the general public. .\s a result, both countries
would feci more piessure from the public to negotiate
a successful agiecment, and both couiurics would have
the opponunitv to resolve their most pressing trade
problems. Olhcnvise. the United Stales is left with only
pimiti\e action, which will not further our interests.
Are Keiretsu a Barrier?
Some opponents argue that cultural differences are
insurmountable barriers lo free trade with Japan. There
is no doubt that cviliural and langviage differences make
it more difficult for L'.S companies to do business in
Japan However, cultural barriers to trade are not insur-
mountable For example, keiretsu arrangements, consist-
ing of interlocking industrial, financial, and trading
companies, exclude outsiders and stifie competition.
Kriteisu have often been ciied as one of the impenetrable
cultural barriers to US investment and trade in Japan.
A recent survevof senior executives of U.S. companies
in Japan was conducted bv the \T. Kearney Company
for the ,\merican Chamber of Commerce in Japan
(.-KCCJ). it found that, while 47 percent said that ketrelsu
restricted their ability to do business in Japan, 32 percent
said that lu^relsu h.id a positive effect on their business
with Japan. With a little hard work, American businesses
can break into these closed relationships. IBM, Coca-
Cola, .\mway, Hewlett-Packard, and dozens of other
.\merican companies have succeeded in Japan, despite
the many cultural barriers blocking their path. A free-
trade agreement would require Japan to hold knretsu
members accountable for anti<ompetitive activities that
violate Japan's antitrust laws. Japan h.is been under fire
for \ears for not enforcing its antitrust laws, and this
would be a major focus of a free-trade agreement.
There also are manv tangible, non<ultural barriers
that can be identified and addressed successfully in a
free-trade format. For example, a free-trade agreeineni
would focus on the many building restrictions in Japan
that keep new businesses from entering the market in
major cities like Tokyo. The ACCJ-Kearney study found
that 55 percent of American businesses in Japan said that
the high cost of doing business in Japan is the greatest
impediment to market access. Only 22 percent cited
non-tariff barriers such as knrelsu. The high price of land
is by far the biggest factor incre.ising costs to new busi-
nesses. Although land costs have peaked since their
height in the late 1980s, the average cost of land in Japan
is still the highest among OECD countries. A recent
survey cited in an upcoming House Wednesday Group
report found that the average cost for a square meter of
land in downtown Tokyo is $6,000, while a comparable
plot of land in Los Angeles costs an average of $108.
Restrictions on Retailers
While the continuing depreciation of the dollar con-
tributes lo ihe high cost of land for Americans, Japanese
governmenl restrictions are a major factor. The Japanese
government encourages individuals lo hold on to their
land with low property taxes and relatively high capital
NVTialever ihe cultural differences between the t>%o
countries, Japanese consumers love
American goods and services.
gains taxes on the sale of land In addition, with \irtiiallv
no proper5 taxes on farmland and high agricultural
subsidies, many gentleman farmers prefer to keep their
land instead of selling it for development.
The Japanese government's taxation and zoning
policies have stunted the growth of business in Japan.
The average buildljig height in Tokyo is only 2 7 stories
tall, much lovser than in most of the vvorld's metropolitan
areas Earthquakes arc not the reason for the lack of tall
buildings — tall buildings frequentlv offer more structural
support than sinall buildings during an earthquake.
Rather, local "sunshine laws" and other zoning restric-
tions limit the height of buildings. A free-trade agree-
ment could work to remove these restrictions so that
American firms have room to set up business in Japan.
The "think-smair mentalit) In Japan also affects the
distribution system, which needs a major overhaul
Japan's l^rge Scale Retail Store Law has restricted the
establishment of large retail stores in favor of small
mom-and-pop stores that are limited in their selection
of goods In order to set up a large retail store, or to
expand the floor space of existing stores, owners must
obtain approval from a local council. Small store owners
on the council often Impede competition by blocking
large stores from moving into the area.
Large ,\merican stores, such as Toys "R" L's. have had
considerable difTiculty setting up shop in Jap.tn. Japan
recently shortened the large-store application process to
no more than one year, a considerable improvement
considering that many applications were stalled for 10
vears or more. After much efTort, To>^ "R" L's rinally
opened Its doors outside Tokyo, and plans to open more
stores acrossjapan A free-trade agreement could reduce
the waiting time for large store applications even more,
and pursue any additional steps necessary to make large
retail stores more accessible. If allowed into Japan. U.S.
retailers would stock many L' S.-made products that they
stock In their stores at home.
Free-trade negotiations should also focus on the many
unwritten niles that shape Japan's trading svstcm. They
include: unnecessai-\ testing standards, licensing proce-
dures, and ccrllficalion requirements; restrictions on
direct foreign Investment; and government subsidies Ip
mduslries that give Japanese products an unfair ad-
vantage Japan's trade bureaucracy operates largely be-
hind closed doors, and procedures and standards are
seldom publicized. This leads to an Informal nile-making
process, which often gives Japanese bureaucrats enor-
mous control over whether to allow an .\jiierican product
Into the country. These are all complex Issues that will
not be solved overnight, but In the context of a free-trade
negotiations, significant progress can be made.
Critics also argue that a free-trade agreement with
Japan would be eniirclv one-sided, because the United
States has nothing to concede. Vet. despite our liberal
Investment laws and relatively open market, the United
States maintains a number of protectionist policies that
impede free trade, .\merica does not have an unfettered
market bv any means, .\reas of concern for the Japanese
include U.S. dumping laws, "volunlarv" restraint agree-
ments, agriculture subsidies, arcane and duplicative
banking regulations. Import quotas and tariffs, punitive
trade measures, and the number of government agencies
with overlapping junsdiction over trade negotiations.
A free-trade agreement undoubtedly would require
the United States to reduce tariffs on Japanese products
significantly, or perhaps eliminate them altogether.
During recent C.^TT negotiations, the United States
agreed to reduce Its current 5.5 average tariff on mining
and industrial items to 3.5 percent However, U.S. tariffs
on a number of Items remain extremely high. Including
wool fabric (42 percent maximum), footwear (48 percent
maximum), and glassware (38 percent m.xximum).
Also of significant concern for the Japanese are U.S.
anti-dumping measures, which place the burden of proof
on the accused corporation and ensure that once in
place, dumping orders are viriuallv impossible to
eliminate. There is no "sunset clause" for dumping or-
ders. Congress origlnallv required that the Department
of Commerce review each dumping order annually, but
this requirement was later repealed. Some dumping
orders have been in place for a decade or more. A large
proportion of dumping cases were determined on a "best
Information available" basis If the accused firm does not
respond In time to the charge of dumping, the informa-
tion provided by the petitioner Is usuallv used. This
happens all too frequcnUv when language barriers get
in the way, or when a foreign firm does not wish to make
its Irndcst-crels public Ariii-diiinpiiig l.i\\sappl\ .iibiii.in
sl.iiulards in dciitiiiminn ilu- 'f.iir' putt- for a pn>diiri.
and ofun fail lo lousidii fluciiiaiioiis in exchange raus.
dilTcTciiccs Ml AiiuTHjii and fi)jei^;ii prodiicLs. or ihc
impact dumping ordcis mil ha\e on consumers.
New Ways lo Handle Disputes
One of (he L' S. trade policies niosl objeciionable lo
the Japanese is Section 301 aclion authorized b\ the
Trade Act of 1974 Section 301 allows the U.S. Tiadc
Representative (L STR) to determine whether to pursue
aciion against foreign governments that practice "unfair"
trade The L'STR mav inciease duties or other restnc-
lions on imports of goods and services froin the offend-
ing couniiT. Thejapanese believe that Section 301 action
violates the General Agreement on Tariffs and Trade
(GATT), which prohibits unilateral retaliation against
The Trade Expansion .\ct, passed bv the House in
1992. would have reauthorized the expired provisions of
"Super" 301 action. But the bill would have gone a step
further than Section 301 bv requinng the LSTR to
develop a hit list of unfair traders and pursue harsh,
reuliatorv measures, including steep tariff hikes on im-
ports from those countries. Measures such as this onlv
serve to increase tensions between the rivo countries, and
should be used onlv as a last resort. With a free-trade
agreement, such action vvould be unnecessarv because
all disputes would be handled under the aegis of the
n.ide aguement. or through an agreed-upon dispute
\t)lunt.iix Restraint .\giecmenis (Mi-Xs) are another
ban lei to trade that thejapanese would like lo eliminate.
N'RXs currentiv restrict exports of Jap.inesc passenger
cars to I 65 million a vear. In addition. Japan placed
\'R.\s on machine tools and steel after much insistence
bv the Lulled States. Big-Thrce automakers .and union
officials h.ive alreadv met with President Clinton and
\'ice President M Gore to urge them to lower the "volun-
tarv" quotas for antes even further. Like other protec-
tionist measures, X'R.^s distort the market and increase
costs for consumers in order to prop up weak and
mcfllcient industries. These industries become weaker
as a result, and demand even more government protec-
tion, spawning a vicious and unproductive cycle.
Forging a bipartisan consensus for free trade with
Japan would be one of the most remarkable accomplish-
ments of anv 20th-centurv president. .\ free-trade agiee-
ment would provide a format lo negotiate a
comprehensive solution to our trade disputes with Japan,
and it would create jobs for .\mericans. .\s the engine of
modern economic growth, exports are crucial lo creating
jobs and improving the economy. .•\ free-trade agreement
with Japan would also fit in well vvith Mr. Clinton's
campaign theme. "It's the economy, stiipidl" Let's hope
thai Mr Clinton listens to that clarion call. Z
THE HOUSE WEDNESDAY GROUP
CONGRESS OF THE UNITED STATES
386 Ford House Office Bunding. Washington, D.C. 20515 Office: 202-226-3236
Towards a New US-Japan Policy for the Post-Cold War Era
A PAPER FROM THE WEDNESDAY GROUP SERIES ON US-JAPAN RELATIONS
In Beyond Revisionism, we present a new framework for assessing US-Japan relations
and outline a trade strategy that, if implemented, could dramatically improve prospects
for American business \n Japan. Our findings and policy recommendations are based
on over two and a half years of research on American companies operating in Japan.
Under the supervision of the non-partisan Congressional Research Service, in 1991-92
we formally surveyed over 280 large American firms with Japanese operations.
Furthermore, we did extensive background research, using Japanese as well as English
language materials, and conducted a multitude of interviews with businessmen and
government officials in America and Japan. Our goal was to understand what prevents
so many internationally competitive American companies from penetrating the Japanese
market to the extent they have elsewhere. Particularly, we wished to test the so-called
"revisionist explanation" of the Japanese economic system that has gained a great deal
of support in academia, industry and government over the last few years.
Proponents of revisionism assert that, in contrast to the open-market capitalism of the US
and other Western nations, the Japanese practice "insider capitalism" in which the "visible
hands" of personal-relationships between business executives and government officials
determine who wins or loses, not the invisible hand of the free market. In order to
succeed in Japan, a company has to be an insider. However, as the revisionists tell it,
foreigners are systematically barred from gaining such status. Thus, even in the face of
apparent market liberalization, the Japanese can fall back on their unique system of
collusive relationships (embodied most obviously by the keiretsu corporate groups) to
exclude foreigners. The net effect is a radical imbalance in economic relations between
the US and Japan. Although Japanese companies receive free trade access in the US,
American firms are covertly prevented from getting their fair share of the lucrative
Japanese domestic market. To remedy the perceived situation, revisionists propose that
the US government "contain" the activities of Japanese companies in the US and
"strategically manage" American industry into succeeding in Japan by creating
overarching market share agreements.
OUR RESEARCH FINDINGS
The Revisionists are Right: Japanese Capitalism is Different
• Our research indicates that the Japanese capitalist system differs significantly from
that of the US and most other OECD nations - ideologically, structurally and
behaviorally. The insider relationships - between companies within industry and
between industry and the government ~ that characterize the system can make
it very difficult for "outsider" firms to succeed, even if these outsiders are Japanese.
In this regard, over 77% of executives surveyed by the Wednesday Group
identified culture as "more of a barrier to competing successfully in Japan than in
other advanced industrialized nations."
The Revisionists are Wrong: Foreign Hmns Can "Deal with Difference:"
• Contrary to revisionist thinking, "insider capitalism" is a game that non-Japanese
can and do play. Over 30% of the companies surveyed by the Wednesday Group
do what the "conventional wisdom" says is impossible ~ they actively and
successfully operate in Japan as insiders. For example: they lobby and influence
the Japanese government on policy-making and implementation; they routinely
exchange information with the bureaucracy on business developments; they
participate actively in Japanese trade associations; and they build long-term
supplier relationships and strategic alliances with their /ce/refsu-affiliated
• Nevertheless, many other American and other foreign corporations continue to do
poorly in Japan or have chosen simply to stay away from the market. We find that
to some degree this lack of success is due to their failure to face up to the
exigencies of the business environment. For example, far too many US companies
in Japan have little or no contact with the business and political establishments.
This hampers their efforts to position their products effectively within the
Extraordinarily High Costs Hold Back Foreign Business in Japan:
• For a foreign company to address the Japanese "insider network." it must maintain
a large operational platform in Japan. A distant arms-length approach to trading
rarely suffices in the arm-in-arm Japanese economic system. However, even for
the largest, most financially endowed American companies, extremely high costs
make the investments needed to establish and maintain import facilitating
infrastructure in Japan very hard to rationalize.
• Rapidly escalating costs - magnified by the marked increase in the valuation of
the Yen versus the dollar - have obviated many of the expected benefits that
liberalization in the 1980s was supposed to provide for American companies
operating in Japan. In a 1991 American Chamber of Commerce in Japan (ACCJ)
survey of the environment for trade and investment, 65% of executives identified
the high cost of fixed and operational investment as the greatest impediment to
market access in Japan. OECD statistics similarly show that in almost all regards,
Japan is the most expensive country in which a foreign company can do business.
• While costs increased in other major US markets in the 1980s, American
companies have long been able to invest freely in these markets and could
therefore develop their operations when the dollar was strong and local costs
relatively cheap. In Japan, a mix of high tariffs, overt capital controls, bureaucratic
interference and cross-shareholding among companies made foreign investment
extremely difficult ~ if not impossible - for most companies until the early 1 980s.
Then in the middle of the decade, when liberalization finally began to take effect,
the costs of investment in Japan '^went through the roof." This was the age of the
so called "bubble economy." Ironically, the bubble served to protect the home
market from foreign infiltration almost as effectively as the previous regime of
The costs of real estate investment in Japan tripled in the 1980s. By 1989,
the total value of land in Japan exceeded the net worth of the United States
by 4.5 times, despite Japan being only 1/20th as large as the US!
The Nikkei stock market index more than tripled between 1 985 and 1 989.
• Because of high costs and a long history of formal protectionism, Japan has the
lowest level of per capita foreian direct investment and foreian corporate
participation in the industrialized world, despite having the world's second largest
A few statistics illustrate the impact of high costs in Japan on normal
corporate investment behavior. Direct investment by foreign interests (FDI)
in Japan as of 1991 (the most recent complete statistics) was by far the
lowest among OECD nations: $97 per capita - by comparison, Germany
has almost $1700 of FDI per capita; the US over $1600; and England, more
than $4,000. Moreover, given the exaggerated costs of doing business in
Japan, $97 represents even less than it appears. Foreigners control less
than 1% of corporate assets in Japan and foreign affiliated companies
account for only 1 .2% of all sales in the economy.
The Japanese Practice De Facto •Cost Protectionism:"
• Even though the "bubble economy" has burst, Japan remains an extraordinarily
expensive nation in which to invest, operate or live. Today, a "bubble within the
bubble" continues to keep foreign investment and trade minimal. The main reason
that costs remain so high is that the Japanese government continues to regulate
land and financial markets in a pervasive manner. Until these policies are
changed, we believe that we are justified in our concerns that Japan practices
- Regulation in property markets is so extreme that despite being in scarce
supply, land in Japan's urban areas is amazingly under-utilized. In fact, the
average height of buildings in Tokyo is less than three stories tall.
The Japanese Trade Surplus and Cost Protectionism:
Japan's massive trade surplus is also connected to its cost protectionist policies.
Because of the artificially created shortage of available affordable property, the