The Need for the Early Launching of a New Round of Negotiations
The liberal multilateral trading system centering around General Agreements on Tariffs and Trade (GATT)/World Trade Organization (WTO) has made a significant contribution to the robust development of the postwar world economy. Japan has reaped maximum benefits from this.
In our May 1999 policy statement entitled Challenges for the Upcoming WTO Negotiations and Agendas for Future Japanese Trade Policy, Keidanren advocated the launching of a comprehensive new round of negotiations in the year 2000 to strengthen WTO functions, thereby (1) improving market access through further liberalization of trade in goods and services, and (2) establishing and strengthening rules, including the strengthening disciplines of anti-dumping measures by Member Countries and the creation of international investment rules.
It is highly regrettable that at the 3rd WTO Ministerial Conference held last year in Seattle, consensus was not reached as to the launching of a new round of negotiations due to conflicts of opinions among countries over the scope and approach of the upcoming negotiations.
This does not mean, however, that we should yield to protectionist pressures within Member Countries and lose the momentum for liberalization. Rather, governments and industry must take the initiative toward the early realization of a new round of negotiations.
At the same time, we must focus due attention on developing countries and parts of civil society that are voicing anxiety over the rapid acceleration of globalization. It is essential that we provide proper and detailed explanations on the benefits to be gained from trade and investment liberalization, as well as to further focus discussion in such areas as the advancement of liberalization and the modalities for safety nets required to ensure that globalization does not adversely impact national economies and societies. As stated in the Bangkok Declaration adopted at the Tenth Session of the United Nations Conference on Trade and Development held in mid-February, the development aspect should be taken into consideration across all WTO activities.
Consideration Toward Developing Countries
Ensuring developing countries' confidence in the WTO system is of paramount importance in moving forward with the new round of negotiations. It is incumbent upon developed countries in particular to actively promote open markets to enable developing countries to enjoy the benefits of liberalization. From this perspective, the Japanese and European approaches toward non-tariff/non-quota initiatives for Least Developed Country (LDC) products is highly appreciated. Indeed, harmonious implementation not only in Japan and Europe, but also among many other developed countries, is strongly desired.
We must also not allow the effectiveness of open markets to be constrained by protectionist application of anti-dumping measures. Concerns over this issue led many developing countries at the Seattle Ministerial Conference to urge that the Anti-Dumping Agreement be reviewed. We must therefore ensure the fair and proper implementation of anti-dumping measures in all countries by reviewing the Anti-Dumping Agreement and strengthening the functions of the Committee on Anti-Dumping Practices.
We strongly oppose the concept of trade protectionism that advocates restrictions on imports from countries with looser labor standards than developed countries. It would be preferable to continue discussion on labor issues at the International Labour Organization (ILO).
At the same time, we should not simply allow ourselves to approve the extension of transition periods for developing countries in the Trade Related Investment Measures (TRIMs) Agreement and other agreements. Requests for the extension from developing countries should be individually assessed by the relevant Councils, and only in cases where it is recognized in accordance with the implementation of agreements that special difficulties prevail, should extensions be approved.
Decision-making of WTO
Discussion on WTO decision-making approaches should be promoted in a manner that strikes the right balance between efficiency and transparency. However in spending time on extensive organizational reform, we must ensure that we avoid a lengthy delay in launching the new round of negotiations.
Moreover, since the WTO is an inter-governmental organization, governments should take full responsibility in conducting negotiations. Governments are responsible for enhancing dialogue with the interested parties, including industry and non-governmental organizations (NGOs), and reflecting their views appropriately in individual policymaking. Meanwhile, the WTO must do all it can, without hindering negotiations, to actively promote information disclosure and to offer this as reference for the activities of NGOs and others.
The Importance of Service Industries
Service-related industries account for over 70% of Japan's GDP and working population, and are growing in importance as the basic infrastructure for the economic activities of corporations and consumers.
Some 40% of total household consumption expenditure in Japan is accounted for by services, while the ratio of services that account for intermediate input in the manufacturing industry has been increasing annually and currently stands at 28%. Efficient and highly productive service industries are critically important for improving the quality of life of the Japanese people and enhancing manufacturing industry competitiveness.
Such circumstances are by no means limited to developed countries alone. As their economic development advances, developing countries have experienced favorable economic cycles, in which progress in the outsourcing of services by corporations and consumers has stimulated expansion and increased efficiency in the service industry, thereby serving to further accelerate economic development. Indeed, considerable interrelation can be seen in the high levels of per capita GDP and the ratio of service industry to GDP.
Trade in services has rapidly expanded as economic activity becomes increasingly globalized. The General Agreement on Trade in Services (GATS), which entered into force in 1995 and is the first multilateral agreement on trade in services, has played a particularly significant role in stimulating trade in services by enhancing liberalization and creating greater systemic transparency.
As such, approximately 20% of Japan's cross-border trade is now accounted for by trade in services. Furthermore, within GATS, trade in services is taken to cover a wider area than mere cross-border transactions; rather, the setting up of an overseas service-related presence and the movement of service suppliers are also subjects of GATS liberalization. Incidentally, financial/insurance services and commercial and other services accounted for around 70% of Japan's foreign direct investment and nearly 80% of inward direct investment in FY1998.
Integration of Services Negotiations into the New Round of Negotiations
Countries are growing increasingly aware of the importance of trade in services liberalization. Following the Uruguay Round, many developing countries made proactive commitments to liberalization in financial services negotiations and basic telecommunications negotiations. This liberalization has enabled developing countries to both enhance domestic service industry competitiveness and to promote the entry of foreign direct investment.
In such circumstances, we welcome the initiation of the trade in services liberalization negotiations from February as a built-in agenda.
However, there is deep concern that services negotiations will not proceed as we expect due to various conflicts of interest among countries. We believe that the early launching of a comprehensive round of negotiations integrating services negotiations will serve to increase the possibility that all WTO Members will discover the various benefits for negotiations in the WTO, which will stimulate the progress of negotiations. Therefore, we are opposed to limiting the next round of WTO negotiations solely to the built-in agenda, such as trade in services and other few areas.
Expectations for services negotiations
Japanese industry is intensely interested in the trade in services liberalization negotiations. Private companies face a number of obstacles in their services transactions with other countries. We particularly wish to see the upcoming services negotiations eliminate discriminatory regulations imposed on the business activities of foreign corporations and boost the transparency of the various service-related systems.
At the same time, producing a successful conclusion to the negotiations will hinge on securing the proactive participation of developing countries. It is essential to call on countries to share the basic common recognition that the elimination of obstacles to trade in services will play a critical role in the economic development of developing countries. Negotiations should also respond sensitively to the circumstances of each individual developing country, and developed countries should further intensify technical support in terms of the development of legislation and human resources, etc.
The expansion of digital networks is a contributing factor in the continuing development of the service industry. Systemic obstacles that will only serve to widen the "digital divide" should be avoided at all costs. It is therefore necessary to secure liberal systems that will enable the people of the world, including those in developing countries, to make active use of this new resource.
National schedules of specific commitment should be improved through the negotiations in order to eliminate obstacles to business in foreign markets such as (i) foreign ownership restrictions, (ii) nationality and residency requirements for company executives and staffs, (iii) restrictions on foreign remittance, (iv) performance requirements (technology transfer, etc.) and (v) domestic procurement requirements for materials and services.
To ensure the effective implementation of the above, consideration should be given to combining the traditional request-offer approach (whereby the results of bilateral liberalization negotiations are extended multilaterally on most-favored nation (MFN) basis) with a formula approach (whereby an agreement is reached in line with which all countries then make identical or equivalent liberalization commitments).
It would also be worth considering horizontal liberalization for specific modes. For example, when a company is establishing a foreign commercial presence (mode 3), problems sometimes arise in shifting executives, engineers and other key personnel to the country in question. It will be vital to allow the free movement of executives and engineers (mode 4) in service areas where the establishment of a foreign commercial presence is permitted.
In addition, the swift development of electronic commerce is gradually opening the way for many services which could traditionally only be provided under modes 3 (foreign commercial presence) and 4 (movement of natural persons) to be offered under modes 1 (cross border transactions) and 2 (consumption abroad). In many cases, national schedules note that no commitments have been made for these services due to lack of technical feasibility. Countries will now need to make positive liberalization commitments in order to promote the development of electronic commerce. At the same time, the relations between electronic commerce and modes of supply of services should be adequately considered so that sound development of electronic commerce will not be hindered.
MFN exemptions run counter to the fundamental spirit of the GATS. However, many countries have exemptions registered in a range of areas. As stated in the GATS Annex on Article II Exemptions, MFN exemptions should also be subject to liberalization negotiations in the next negotiations, while those countries which have registered exemptions should in principle be required to withdraw these. Their elimination should be realized completely within ten years at the latest from the GATS' entry into force.
Improvement of transparency
Companies face various hurdles in their foreign operations, including (a) undeveloped and ambiguous legal systems subject to arbitrary operation and sudden changes (for example, regulations with no legal bases, oral explanations of new regulations, unfair service permission systems, etc.) and (b) ambiguous and unreasonable licensing requirements and procedures (for example, licensing criteria and fees, etc.). To address these problems, rules to improve transparency must be established through either creation of "Understanding" or "Guidelines" on the transparency provision in GATS Article III.
More specific measures could include the following: (a) encouragement of public comment procedures for formulating/amending domestic laws and regulations; (b) establishment and announcement of official contact point handling complaints concerning the lack of transparency of legal systems and procedures, as well as unfair treatment under these; (c) regular disclosure of the state of progress in implementing national schedules of GATS; (d) more stringent implementation of the notification requirement to the Council for Trade in Services and faster disclosure of results; and (e) encouragement of the introduction of the administrative procedure law approach (for example, announcement of the criteria for each permission and approval request, the obligation to launch examination promptly, announcement of typical process time-frame for permission, and disclosure of the reasons for rejecting an application) which exists in Japan.
Pro-competitive domestic regulations
Rules concerning pro-competitive domestic regulations, as seen in the Reference Paper on the Basic Telecommunications Agreement, have helped to promote liberalization by providing guidelines to those countries seeking to liberalize. However, when these are introduced into other service sectors, detailed considerations will be required based on the specific situation in each particular sector. Further, when such papers are introduced, definitions of terms (for example, the exact scope of "the relevant markets"), as well as where the burden of proof rests (for example, in the context of the Reference Paper, who will determine whether the burden is greater than necessary in securing universal service), must be clarified to the greatest extent possible. Moreover, the attachment of certain exemptions should also be considered where necessary.
GATS rules have yet to be developed to the extent of rules under the GATT (General Agreement on Tariffs and Trade), which covers trade in goods, and it will be vital to deepen discussion on these in the negotiations.
Companies operating in third countries are facing problems such as government procurement participation restrictions and ambiguous procedures, particularly in areas such as construction and transportation. Under GATS, MFN treatment, national treatment and market access provisions are not applicable to government procurement in services. At the same time, most Asian and other developing countries stand outside the plurilateral Agreement on Government Procurement. These issues need to be addressed through the formulation of government procurement rules for services or expanded participation in the existing Government Procurement Agreement.
It will be essential to consider the relation between national treatment and governments' respective subsidy policy regimes.
As developing countries move forward with liberalization, cases could arise whereby safeguard measures need to be applied in order to alleviate the sudden negative impact of such liberalization on domestic industry. General rules therefore need to be formulated which focus on preventing the arbitrary application of safeguards. Safeguard measures should not be applied to services supplied by companies which have already established a commercial presence, nor should they restrict movement of key personnel which are necessary for doing business by established commercial presence.
Furthermore, in order to avoid extensive application of the measures, a provision of duration and review of safeguard measures such as Article 7.4 of Agreement on Safeguards should be included. Room must be left for such restrictive measures to be withdrawn or relaxed reflecting economic/social changes of the country.
Service-related anti-dumping rules need to be discussed in order to avoid a situation whereby countries introduce their own systems and engage in protectionist application of these.
Access to national schedules, the basis of liberalization negotiations, need to be improved, for example by facilitating electronic access to these by users, namely companies. At the same time, it is necessary to make them more comprehensible and more congruent with actual corporate activities. We should avoid, however, substantial change of existing classification which degrades transparency of the current national schedules and leave the users in confusion. As countries are currently operating on the basis of their own definitions, definitions of the various services should be clarified, and harmonized as far as possible.
The sound development of electronic commerce will depend on keeping government regulations to the bare minimum and developing an electronic commerce framework based on the voluntary efforts of private industry.
Since the Seattle Ministerial Conference failed to make a decision on continuation of the moratorium on customs duties of electronic transmissions, the current situation is unstable. It will be important that the Member Countries make a decision on the continuation as soon as possible.
Where services already covered under GATS disciplines are provided through digital means, all such services should be subject to GATS rules regardless of the means of delivery. On the other hand, digital contents, such as music software which to date have been sold together with CDs as an integrated package, should continue to fall within the GATT rules even when sold through an electronic medium.
It is to be commended that the WTO negotiations on basic telecommunications have set in place telecommunications liberalization principles pertaining not only to developed but also to developing countries, advancing worldwide liberalization of basic telecommunications services, lowering rates and diversifying the scope of services available. The Reference Paper has also produced significant results in terms of promoting liberalization, not least through the guidelines it provides for the regulatory regimes of developing countries.
However, private companies still face numerous problems in participating in foreign telecommunications markets, and it is hoped the negotiations will achieve the following objectives. Ensuring free and fair competition and transparent administrative procedures will be particularly important.
In addition, as far as international Internet connection charges are concerned, US providers unilaterally require non-US service providers to pay the full cost of international circuit and interconnection charges, although Internet traffic is bilaterally transmitted through the same bandwidth between a non-US provider and a US provider. From the global viewpoint of securing fair competition, there is an urgent need to procure appropriate improvement measures for compensating Internet-related international interconnection and other charges.
Because the audio-visual industry strongly reflects the social and cultural nature of a country, many countries have in place active protection and development policies.
Only around 20 countries-Japan included-currently have audio-visual commitments under GATS. At the same time, many of them have included in their schedules foreign ownership regulations, restrictions on the length of broadcasting time foreign programs can be shown, national treatment exemptions for domestic subsidies, and exemptions for the provision of services entailing the movement of natural persons.
A lot of Members including EU have made no commitments whatsoever. Many countries have also registered MFN exemptions.
While some consideration needs to be given to the social and cultural issues posed by the audio-visual area, countries must be required to liberalize their markets so that free international trade on the part of the audio-visual industry is not hampered by strongly protectionist national policies. MFN exemptions in particular go against the basic principles of the multilateral trading system and should be eliminated as soon as possible.
Construction services are provided primarily through establishment of a commercial presence or movement of natural person, and measures hampering these two modes are obstructing the foreign business of private companies.
Particular problems are as follows: (a) limitations on foreign ownership; (b) restrictions on forms of business; (c) limitations on the establishment of branches; (d) license monitoring; (e) policies favoring local companies and qualification restrictions in regard to public works (obligation to acquire the designated certification, etc.); (f) the obligation of reinsurance to state reinsurance agencies and the obligation to hold policies with domestic insurance companies; (g) domestic and business regulations which discriminate against foreign businesses; and (h) the undeveloped and opaque nature of legal systems and the operation thereof (particularly tax system operation). These should be addressed in the negotiations.
With regard to engineering licenses such as first-grade architects, mutual recognition should be restricted to those countries with professional standards at the same level.
The negotiations should contribute to further liberalization of countries' distribution sectors. Specifically, limitations on foreign participation in developing countries' import, retail sales and after-sales service industries should be addressed, while restrictions on the establishment of business presence and the regulation on construction and usage of some developed countries (both national and local level) should be relaxed where said restrictions are for the purpose of economic needs.
Foreign markets present the following problems which should be dealt with in the negotiations: (a) restrictions on branch establishment; (b) administrative burdens imposed by the licensing and monitoring reports which must be made to the authorities; (c) restrictions on operating licenses for foreign banks; (d) nationality and residence requirements for executives and staffs; and (e) business restrictions (restrictions on lending ratios to small and medium enterprises, obligation to hold dollar-denominated funds, obligations on borrowing ratios from foreign banks, agriculture-related lending obligations, client restrictions, minimum lending value regulations, etc.).
Consideration needs to be given to the international harmonization of measures for prudential reasons, and particularly disciplines for application of such measures in developing countries.
The evolution of information technology is shifting interest from the conventional delivery of services from a commercial presence to cross-border transactions. It will be particularly important to examine this issue in conjunction with developments in electronic commerce aspects.
The WTO Financial Services Agreement of 1997 has contributed to the steady growth of financial services markets while ensuring stable financial policies and predictable markets for investors in each member country. Further liberalization will benefit both foreign and local companies.
The basic requirement to start a non-life insurance operation is to establish a commercial presence in the market where services are being supplied. Because insurance is a business that must operate in the public interest, it is common practice that an insurer is required to be licensed before it engages in the business. Licensing requirements and procedures must be maintained at a highly objective and transparent level. Licensing requirement as a means for controlling, either officially or unofficially, the number of entries into the market must be abolished.
Some countries place non-life insurance supervision under the control of local autonomous (state) governments rather than the central government. In such cases, inconsistencies arise in the content of each local autonomous (state) government's regulations, creating numerous problems in terms of efficient operation. It is important to promote the harmonization of local autonomous (state) government regulation.
In Japan, deregulation and liberalization measures are proceeding under the Financial Big Bang. The Japanese Government's decision to schedule its commitments under the so-called "Supplementary Measures by the Government of Japan and the Government of the United States Regarding Insurance" as Additional Commitment to the Financial Services Agreement indicate its strong commitment to the WTO.
We expect that the negotiations should achieve the following objectives:
As excessive emphasis on the grandfathering provision that preserves advantages for earlier market participants can adversely affect fair competition, each individual case must be carefully examined.
While paragraph 2 of the GATS Annex on Financial Services stipulates that a Member shall not be prevented from taking measures for prudential reasons, including measures for the protection of policyholders, we believe that discussion regarding such prudential measures should not be included within the scope of the negotiations. Members should instead seek to harmonize the necessary prudential measures they take when participating in international organizations as financial supervisors.
Each Member's regulatory authority should examine whether current prudential measures will function appropriately in the case of insurance sales through electronic commerce from the points of disclosure of important information to the policyholder, protection of privacy, effectiveness of the contract, jurisdiction and so on.
It is essential that the process of liberalization in developing countries takes place with due respect for different levels of development of markets including the regulatory system, the systems in place to protect policyholders, the establishment of consumer accountability. It is also important to examine as thoroughly as possible the economic benefits liberalization brings to the developing countries and encourage their active participation in the negotiations.
Regulations on the services offered by insurance companies need to be shaped to the particular circumstances of this sector (for example, the fact that mortality and sickness rates differ according to the country).
The WTO Financial Services Agreement of 1997 has advanced liberalization, but a number of issues remain, including state-specific supervision regulations in some developed countries, and foreign ownership restrictions and lack of transparency in licensing standards in developing countries.
The negotiations should seek to address the following issues:
We oppose: (a) across-the-board introduction of the grandfathering provision and; (b) unconditional international standardization of insurance supervision regulations.
Foreign markets still contain various business impediments. Through the negotiations, Japan should seek to address the following: (a) restrictions on the establishment of local corporations and branches (requirements regarding the amount of capital injected by the parent company, etc.); (b) ambiguous oral guidance, etc., provided by supervision authorities, and the lack of advance notice when regulations are changed; (c) need to obtain supervision authorities' permission for sales of certain products; (d) the residence requirement in the acquisition of licenses issued by stock exchanges and security business associations.
Despite the importance of developing international rules under the GATS which guarantees MFN and national treatment, the Uruguay Round negotiations on maritime transport did not reach an agreement and the extended negotiations were also suspended, leaving this area outside GATS coverage.
Access to Japan's markets is open, but there are countries reluctant to liberalize maritime transport because of their desire to maintain policies for the protection and development of their own industries. The maritime transport therefore should be subject to negotiations in order to apply of GATS rules to this area.
Following points are expected to be raised in the negotiation: (a) international maritime transport services (liberalization of international shipping); (b) maritime transport auxiliary services (including maritime agency services, freight forwarding services, etc.) ; (c) port services (including pilotage, towing and tug, bunkering fuel and watering, etc.); and (d) international intermodal services with sea-legs.
Improvement should be sought in policies protecting their national shipping industries as well as restrictions on foreign ownership.
Because air transport services are regulated under bilateral agreements, traffic rights and services directly related to such services ("hard rights", the central element in air transport services) stand outside GATS. As a result, the only rules within the GATS relate to "soft rights": (a) the selling and marketing of air transport services with the exception of price-setting; (b) computer reservation system (CRS) services; and (c) aircraft repair and maintenance. Japan has major liberalization commitments in these areas, but the U.S. and many other countries have only partial commitments.
As a review of the Annex on Air Transport Services is scheduled for the negotiations, including liberalization of the three "soft rights" areas, this should undertaken as a first step, after which negotiations on coverage can be addressed.
(a) Review on policies favoring national companies (e.g., "Fly American" in U.S.) and (b) full privatization of carriers are expected.
Any examination of the electricity/gas market must include consideration of their unique nature as commodities, as well as the different circumstances of each country in terms of geographical location and resource limitations.
Liberalization of electricity/gas must be advanced on the basis of a balance between public interest (ensuring security, harmony with the environment, the provision of universal services, high supply credibility) and greater efficiency, bearing in mind countries' different situations.
For this reason, energy services were for the most part excluded from the Uruguay Round negotiations, and do not form a separate category in national schedules. Therefore the negotiations should first clarify the definition of energy services, and then identify the sub-sectors to be negotiated taking public interest into account.
Should a Reference Paper be introduced for the energy sector, it would be important to ensure consistency between this and Japan's energy policies, as well as to avoid the ambiguous language as in the Reference Paper on Basic Telecommunications, seeking clear definitions and also establishing the necessary exemptions.
Considerations should also be given to other service sectors such as tourism and travel related services and environmental services in order to ease the market entry limitations and to promote transparency of the regulations in Member Counties.
Trade in services is becoming more important as economic activities become more and more globalized. Japanese industry, therefore, is intensely interested in the direction the negotiations will take. This is why Keidanren established the Japan Services Network (JSN) in October last year, which consists of representatives from major service industries in Japan. The organization will stimulate exchanges of views and information across various industries and strengthen collaboration with service industry groups in the United States, Europe and other countries.