Toward for the Creation of International Investment Rules
and Improvement of the Japanese Investment Environment

1. Introduction

In June 2001, Keidanren (now Nippon Keidanren; same below) created a set of recommendations entitled "Towards the Implementation of Strategic Trade Policies: A Grand Design of Japan's Policy as a Nation Built on Trade", arguing that as a nation built on trade, one which has sustained and developed itself through trade and investment, Japan should formulate and implement trade policies which will contribute to strengthening corporate global competitiveness as a long-term strategy based on national interest.

The growing pace of globalization, which is defined as integration of world markets, has positioned cross-border investment alongside trade in goods and services as a critical element in the international business of Japanese companies. In particular, investment is the vehicle through which Japanese companies are expanding and deepening the formation of international networks of specialization centered on East Asia (the ASEAN nations ^#1, China, the Republic of Korea (ROK), Taiwan and Hong Kong).

No investment rules have yet been formed which have a truly comprehensive multilateral scope. To remedy this shortfall, discussions are underway, based on the decision of the Fourth session of the Ministerial Conference in November 2001, in the World Trade Organization (WTO) toward launching negotiations, on the basis of explicit consensus, on the creation of international investment rules following the Fifth Session of the Ministerial Conference, which will be held in Cancun, Mexico, in September 2003 ^#2.

Bilateral investment treaties (BITs) have also mushroomed in recent years, with 1941 such agreements in place around the world as at the end of 2000 ^#3. Particularly in the 1990s, too, the North American Free Trade Agreement (NAFTA) spurred a string of investment-inclusive ^#4 free trade agreements (FTAs). Japan, on the other hand, has formed only 10 BITs, and in terms of FTAs, concluded its first economic partnership agreement (EPA) this year with Singapore ^#5.

As a result, Japanese companies are being disadvantaged over the companies of other nations ^#6 in terms of investment protection and liberalization in host countries. Japanese business strongly urges that investment rules be developed during the new round of WTO negotiations. In addition to these negotiations, the Japanese Government should move swiftly to create frameworks for the protection and liberalization of investment with the ASEAN nations and China ^#7 as key hosts for Japanese investment.

Meanwhile, the developed European nations and the United States have been refining their business conditions to promote investment, gearing themselves to globalization by actively soliciting foreign investment as a means of stimulating their domestic economies. Here too Japan has been slow to act. The Japanese Government urgently needs to improve the domestic investment environment through, for example, the promotion of regulatory reform. Investment in Japan should be used as a means of absorbing new business models and nurturing advanced industry, promoting greater efficiency across the entire domestic economy.

2. Building strategy on a multi-faceted approach

To lock in the predictability, stability and transparency needed to promote the offshore business operations of Japanese companies, it is imperative that international investment rules are created as an institutional framework securing investment protection, liberalization and dispute settlement procedures ^#8.

In working toward the architecture of international investment rules, it will be essential to ensure the multi-faceted and strategic utilization of all available channels in line with the needs and priorities of the business community. These channels include: (1) the multilateral (WTO); (2) the plurilateral (WTO plurilateral treaties, OECD ^#9); (3) the regional (Japan-ASEAN Comprehensive Economic Partnership, ASEAN+3 (Japan, China, ROK), the "East Asian community" ^#10); (4) the bilateral (ASEAN nations, China, the Newly Industrialized Economies (NIEs), etc.); and (5) the sectoral (for example, pursuing further liberalization and rule development through the creation of particular chapters on these issues within FTAs ^#11).

3. Creation of WTO investment rules in the new round

Japanese business believes that negotiations must be launched on the basis of explicit consensus toward the creation of investment rules following the Fifth Session of the WTO Ministerial Conference in September 2003. These negotiations should be a pivotal element of the new round and concluded by the deadline stated in the Doha Ministerial Declaration (1 January 2005).

All WTO members, developing countries included, should participate in the investment rules. A realistic approach would therefore be to focus considerations on transparency and liberalization, both of which are priority issues for Japanese companies, the latter to the extent acceptable to developing countries, while also taking due account of the development policies of the developing countries.

Investment is already covered to some extent in the General Agreement on Trade in Services (GATS), with "commercial presence in the territory of any other Member" (mode 3) in Article I.2 (c), effectively referring to direct investment by the service industry. In the upcoming negotiations, careful consideration should be given to the relation with the service industry areas covered under GATS in establishing a standard industry classification, based on which members will then need to consider the possibility of introducing GATS liberalization modalities ^#12 into non-service areas.

More specifically, Japanese business believes that WTO investment rules should include: (1) definition of investment and scope of application; (2) transparency; (3) investment protection (expropriation, compensation and unrestricted remittance); (4) liberalization ^#13 (most-favored-nation (MFN) treatment, national treatment, market access); (5) exceptions; (6) development provisions; (7) dispute settlement procedures; and (8) the relation to BITs (see Annex 1) ^#14.

The WTO Working Group on the Relationship between Trade and Investment is currently engaged in concrete considerations. However, given the limited amount of time between the Fifth Session in September 2003 and the deadline for round conclusion, the Working Group should be given effective status as a forum for preparatory negotiations and substantive discussions launched.

Japanese business will appeal to its counterparts in the US, Europe ^#15 and around the world, the Japanese Government, other governments (particularly those of investment host nations) and the WTO itself toward the fulfilment of these goals. In addition, promoting the participation of the developing countries, which comprise 80 percent of WTO membership, will mean pursuing capacity-building to boost the negotiating capacity of these countries, as well as their understanding of and ability to fulfil agreement provisions. Japan should actively assist developing countries in terms of both capital and human resources ^#16 as a means also of encouraging the development of investment rules.

4. Active formation of bilateral and regional accords

Japanese business strongly urges the Japanese Government to give the ASEAN nations ^#17 and China priority status, building an institutional framework which includes investment protection, liberalization and dispute settlement with these countries in parallel with the WTO negotiations. It will be critical that this framework serves as an effective tool in facilitating and expanding the business of Japanese companies.

The NAFTA nations (the United States, Canada and Mexico) ^#18 and the ROK ^#19 are also of strong interest ^#20 to Japanese business, and effective frameworks also need to be created with these nations.

Japanese business specifically seeks frameworks which address: (1) definition of investment and scope of application; (2) transparency; (3) investment protection (expropriation, compensation and unrestricted remittance); (4) MFN treatment; (5) national treatment (6) performance requirements; (7) key personnel; and (8) dispute settlement procedures (see Annex 2).

(1) ASEAN nations

Japan must move quickly to conclude BITs with all the ASEAN nations. We hope to see conclusion by the end of this year of the agreement under negotiation with Vietnam, which has yet to accede to the WTO, with the level of content matching the United States-Vietnam Bilateral Trade Agreement ^#21. Over the medium-term, Japan should also pursue the formation of investment-inclusive EPAs with the ASEAN countries which provide for wide-ranging liberalization. In negotiating these BITs and EPAs, Japan should respond flexibly to the particular circumstances of each nation.

The ASEAN nations have long been Japan's most important investment hosts ^#22, with Japanese companies building up close ties through active community relations activities ^#23. At the same time, these companies are still facing a number of issues in doing business locally, including employment of nationals, technology transfer and other performance requirements, restrictions on land ownership, a lack of transparency in administrative procedures, foreign currency remittance regulations, and limitations on the participation of foreign capital in terms of maximum percentage limit ^#24.

If the BITs and EPAs provide for investment protection, liberalization and dispute settlement procedures in accordance with the principles of international law, the according facilitation of business with ASEAN, a region to which Japanese companies are deeply committed, can be expected to further expand economic ties utilizing the merits of industrial agglomeration and economies of scale.

In negotiating EPAs with the ASEAN nations, satisfying both parties will require broad-ranging and balanced agreement content ^#25. Among areas related to the promotion of investment, it will be important to include legal system establishment, such as bankruptcy law, competition law and law and due process of civil execution, for example, and the fostering of supporting industries as part of upgrading the business environment.

Among the ASEAN nations, agreement has already been reached with Thailand and the Philippines on the establishment of task forces toward EPA conclusion, and considerations are about to launched. Japanese business will push to ensure that corporate needs are reflected in these agreements.

Japan also needs to provide full support for the ASEAN members toward the expeditious completion of AFTA (ASEAN Free Trade Area).

(2) China

Japan needs to revamp the existing BIT with China, an agreement, which went into force in 1989, into a higher-level instrument. Over the medium- to long-term, we should consider aiming for the conclusion of a wide-ranging FTA within the ASEAN+3 framework, integrating the various BITs into this.

The existing BIT with China has not proved particularly useful to Japanese companies. Exemptions are annexed to the agreement protocol, performance requirements are not prohibited, and the focus is not on investment liberalization. As a result, no case has ever been taken to the dispute settlement procedures ^#26. When China acceded to the WTO in December 2001, the Chinese government committed itself to the progressive reduction of limitations on the participation of foreign capital and the elimination of performance requirements especially for services and a number of other industries ^#27.

However, while Japanese companies have again expanded their investment in China in recent years, they are experiencing problems with the lack of administrative transparency in regard to investment-related laws, regulations, permissions and licences, performance requirements including technology transfer and merger requirements, and limitations on the participation of foreign capital ^#28. Revision of the BIT and the future conclusion of an FTA are strongly requested as means of resolving these issues within institutional frameworks. Japan must also cooperate with other WTO members in monitoring China's compliance with its commitments, and, in the case of non-compliance, press for rectification of the situation.

(3) Other regions

Japan should actively conclude FTAs with an investment component with a wide range of countries and regions ^#29. We are particularly interested in the early formation of broad-ranging FTAs with Mexico ^#30 and the ROK ^#31, both of which are currently being studied by government, academia and business representatives from both sides. There are also expectations of forming an FTA with Chile. Moreover, consideration will need to be given to a range of cooperative arrangements, FTAs included, with the United States, Canada, Australia, New Zealand and other APEC members, as well as with the EU.

5. Upgrading the domestic investment environment to revitalize the economy

The Japanese Government must improve the domestic investment environment to secure the freedom of corporate business activities. This will boost the attractiveness of the Japanese market, in turn promoting investment in Japan by foreign companies.

In many cases, investment in Japan entails the cross-border shift of not only capital, but also valuable corporate management resources such as new business models, new technology and materials, and new management know-how. Such investment also creates jobs here in Japan and stimulates intra-company cross-border transactions which expand economic ties between Japan and the home country. Investment in Japan will also help to prevent the feared hollowing-out of industry, as well as stimulating domestic competition, increasing economic efficiency and advancement of industry. The resulting virtuous cycle created in Japan as an investment host will boost the domestic economy ^#32.

Falling stock and land prices and progress with deregulation in recent years have lifted the level of inward foreign investment, but at 1.2 percent of GDP (end of 2000), direct investment in Japan is still extremely limited compared to the United States and European countries ^#33, leaving plenty of room for further inward investment promotion.

More specifically, the following steps need to be taken: (1) improving the efficiency and reducing the cost of energy, logistics, physical distribution, telecommunications, and social capital formation; (2) lowering the effective corporate tax rate and reforming tax systems ^#34, including tax breaks for investment; (3) creating more flexible corporate laws; (4) simplifying and speeding up administrative procedures while eliminating arbitrary decisions; (5) assisting creative efforts by local municipal governments such as special regulatory reform zones; (6) simplifying, rationalizing and speeding up customs clearance procedures at ports and customs; (7) promoting the outsourcing of state-run programs to the private sector ^#35; (8) developing capital markets and other institutions; (9) bringing Japan's technical regulations and standards and its conformity assessment procedures into line with international standards; and, toward promotion of investment in Japan, (10) expanding and improving central and local government external PR efforts; and (11) establishing a system for the one-stop provision of investment-related information ^#36.

Implementation of these policies will not only see Japanese companies boost their plant and equipment investment and create new business, but will also promote mergers and acquisitions (M&As) with Japanese companies and other foreign investment in Japan.

Cross-border investment is accompanied by the movement of investors, executive officers, and other staff-a key corporate management resource. Japan needs to establish the mechanisms to facilitate temporary personnel movement, including transfers within companies, looking to actively attract outstanding human resources regardless of nationality. More specifically, the domestic environment needs to be improved by, for example, simplifying and accelerating procedures for visas, work permits and other entry- and stay-related procedures, as well as relaxing requirements for technical and other visas ^#37.

The formation of investment rules and commitments to liberalization brought about by EPAs and other agreements should be used as a locomotive force behind domestic institutional reform. Taking domestic regulatory transparency as an example, the GATT Uruguay Round agreement led Japan to introduce a public comment system (March 1993), create an Administrative Procedures Law (October 1994) and formulate the Information Disclosure Law (May 1999) ^#38. Domestic institutional reform spurred by international rules of this kind will also promote the structural reform of the Japanese economy, as well as administrative reform.

This promotion of investment in Japan will inevitably provoke resistance from the affected parts of the domestic economy, requiring strong political leadership to tide the country through ^#39.

6. Conclusion

The synergy effect of trade and investment expansion will open the way for further world economic growth. Advances in information communications technology and the accelerated pace of international distribution in recent years have promoted the growth of foreign investment which divides the various processes of R&D, procurement, production, manufacturing and sales, etc., across a number of countries.

In the absence of comprehensive multilateral investment rules, the Japanese Government should continue to persuade developing countries, aiming to launch negotiations on investment rules with explicit consensus at the Fifth Session of Ministerial Conference. At the same time, Japan should exert its leadership, tabling concrete negotiating elements to the Working Group. Over the medium- to long-term, free capital movement will also be critical in achieving ASEAN+3 market integration ^#40.

Investment policy is only one plank in trade policy (external economic policy). As Japanese business requested last year, the Japanese Government must first urgently present a "grand design" for external economic policy which casts ahead over the next 10 to 20 years and recognizes Japan's status as a nation built on trade.

Amid the rapid redrawing of the world trade map, we strongly urge the Japanese Government to promptly implement an external economic policy geared to business needs and based on a new grand design.

That grand design should go beyond the liberalization and facilitation of trade in goods and services and the development of rules to embrace a broad range of elements. To move briefly beyond the scope of this policy paper, such elements should include: (1) strategic use of ODA ^#41; (2) promotion of regional and multilateral cooperation, including the creation of a common stockpiling system for food and energy; (3) active conclusion ^#42 with key trading partners of agreements on tax ^#43, social security ^#44 (totalization of pensions and avoidance of double payments), anti-trust cooperation, mutual recognition, currency swaps and customs cooperation.

Notes

1. The Association of South-East Asian Nations (ASEAN) comprises ten nations: Indonesia, Malaysia, the Philippines, Singapore, Thailand (all as of 1967), Brunei (as of 1984), Vietnam (1995), Laos, Myanmar (both as of 1997), and Cambodia (1999).
2. The Doha Ministerial Declaration calls for negotiations on the "Singapore issues" of investment, competition policy, transparency in government procurement and trade facilitation, the four areas which have been under consideration since the Singapore Ministerial in 1996, to begin following the Ministerial Conference in 2003 on the basis of explicit consensus. Investment is currently being considered by the Working Group on the Relation Between Trade and Investment.
3. The Relationship Between Regional Trade Agreements and the Multilateral Trading System: Investment, OECD Trade Committee, April 2002. At the end of 1989, only 385 BITs had been concluded.
4. Extra-continental FTAs have been prominent lately, including those between the EU and Mexico (effective in 2000), the EU and Chile (concluded in 2002), Singapore and Chile (under negotiation), and the US and Australia (under consideration).
5. Japan's BITs have been formed with Egypt (1977), Sri Lanka (1982), China (1988), Turkey (1992), Hong Kong (1997), Pakistan (1998), Bangladesh (1998), Russia (1998), Mongolia (2000) and the Republic of Korea (2002). Years in brackets indicate the year in which the BIT was signed. The EPA with Singapore includes investment protection and liberalization.
6. As at the end of June 2001, for example, Germany had concluded 125 BITs, the UK 96, France 92, the US 44, China 99, and the ROK 65.
7. Japan signed an investment protection treaty with China in 1988 which came into effect in 1989.
8. In forming investment rules, it must be remembered that the modes of international business of Japanese companies are diversifying at various stages of the business process, including human resource development, research, design and development, procurement of raw and other materials, parts production and procurement, assembly and manufacture, logistics and distribution, sales and marketing, collection and settlement of payments, and after-service. In an increasing number of cases, therefore, even in the absence of an asset relationship, Japanese companies are selling particular technologies (intellectual property rights) to foreign companies and then commissioning production, or acquiring intellectual property rights or drilling rights, etc., from foreign companies.
9. The OECD addresses investment liberalization in its Code of Liberalization of Capital Movements (1961) and Declaration on International Investment and Multinational Enterprises (1976). The OECD was also developing a Multilateral Agreement on Investment (MAI), but negotiations effectively broke down in 1998. Non-OECD members, namely Argentina, Brazil, and Chile also participated in the negotiations as observers.
10. In a policy address ("Japan and ASEAN in East Asia: A Sincere and Open Partnership") during his visit to the ASEAN nations in January this year, Prime Minister Koizumi identified ASEAN, China, the ROK, Australia and New Zealand as central members of an East Asian community.
11. For example, NAFTA has separate chapters on financial services, energy, and telecommunications.
12. Article II of the GATS requires members to accord other members most-favored-nation treatment unless granted an exemption which shall not in principle extend beyond 10 years. A positive-list modality has also been adopted for market access (Article XVI) and national treatment (Article XVII) whereby member countries only liberalize those areas in which they have made commitments.
13. As regards national treatment and market access, a positive list modality should be adopted as in Annex 1.
14. In creating WTO investment rules, consideration will have to be given to the relation to the Agreement on Trade-Related Investment Measures (TRIMs), which is part of the existing WTO Agreement. No WTO member should be granted another extension of the transition period for the elimination of TRIMs without conditions. A meeting of the WTO Council on Goods, held in November 2001, granted extension with conditions to Romania (up to May 2003), the Philippines (up to June 2003), Argentina, Columbia, Malaysia, Mexico, Pakistan and Thailand (all up to the end of 2003).
15. UNICE (Union of Industrial and Employers' Confederations of Europe) has identified the creation of investment rules as one of the four priority subjects of negotiation in the new WTO round, putting together recommendations in June 2000.
16. In this context, Japan contributed 1.5 million Swiss francs to the Doha Development Agenda Global Trust Fund, established within the WTO in March 2002 for the purpose of capacity-building in developing countries. This contribution was the third largest following the US and the EU.
17. As ASEAN does not have a common external economic policy, FTAs and BITs will need to be concluded with individual ASEAN members.
18. Like ASEAN, because NAFTA has no common external economic policy, FTAs and BITs will need to be concluded with individual NAFTA members.
19. Prime Minister Koizumi and President Kim Dae Jung signed a BIT in March 2002, which was subsequently ratified at the 154th regular Diet session. It is scheduled to enter into force before the end of this year. The Agreement between Japan and the Republic of Korea for the Liberalization, Promotion and Protection of Investment achieves MAI-level liberalization, but doubts have been expressed as to its effectiveness for business in that the stipulated liberalization does not stretch as far as amendment of domestic law.
20. See "Annex 3: Outline of results of investment questionnaire".
21. Concluded in 2001, this agreement comprises seven chapters-trade in goods, including tariff reductions; protection of intellectual property rights; trade in services; investment liberalization and protection; business facilitation; transparency provisions and the right to appeal; and general provisions. In terms of substance, it includes the content of the GATS, TRIMs and the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), as well as a BIT.
22. As noted in Basic View to Strengthening Economic Ties with the ASEAN Nations: Interim Report by Sub-Committee Committee on Asia and Oceania, Keidanren (March 2002), investment in ASEAN accounted for 6 trillion and 569 billion yen of the cumulative total for FY1989-2000, while 2 trillion and 79 billion yen went to China.
23. The Council for Better Corporate Citizenship (CBCC) also created a set of recommendations in March 2001 entitled "How Japanese-Affiliated Companies Can Be Corporate Citizens in Asia".
24. Keidanren Questionnaire Survey on Investment (April 2002), etc.
25. As such EPAs will be modeled on the Japan-Singapore EPA, going beyond investment to also embrace tariff elimination and liberalization of trade in services, etc., the relation with GATT Article XXIV (Territorial Application, Frontier Traffic, Customs Unions and Free-trade Areas) and GATS Article V (Economic Integration) will have to be considered. In particular, where Japan seeks a high standard of content for investment, the other country may well request further access to Japanese markets, agricultural products included. The Japanese Government should take a forward-looking approach to such issues. In its June 2001 paper Towards the Implementation of Strategic Trade Policies: A Grand Design of Japan's Policy as a Nation Built on Trade, Keidanren argued that promoting agricultural reform would open the way for the reduction and elimination of tariffs on agricultural products over the medium- to long-term.
26. A joint committee for consultation on investment issues did meet once in 1991 and again in 1992 pursuant to Article 14 of the BIT.
27. As part of the accession negotiations, China also committed to ensuring unified administration between central and local government, public announcement of laws, ordinances and other measures, establishment of enquiry points, and independent judicial review, etc.
28. Other problems indicated include infringements of intellectual property rights, complicated customs clearance procedures, unrecoverable sales credit, and disparities in the operation of laws and regulations between the central and local governments. See Keidanren's April 2002 questionnaire survey, View of Japanese Business of the Chinese Economy in the Wake of WTO Accession: Interim Report by Sub-Committee, Committee on China, Keidanren (March 2002), etc.
29. In addition to the countries and regions discussed in this paper, Nippon Keidanren (JBF) is also pursuing considerations on a Japan-Taiwan FTA based on discussion at the East Asia Businessmen's Conference in December 2001.
30. Agreement at the June 2001 Japan-Mexico Summit led to the establishment of a joint study group which met six times. It will release a report at the end of July 2002, recognizing the importance of an FTA.
31. In response to agreement at the March and July 2002 Japan-ROK Summits, a joint committee comprising government, academia and business representatives was established in July and is now engaged in FTA-related discussion.
32. The Benefits and Costs of FDI for Development, OECD Committee on International Investment and Multinational Enterprises, March 2002.
33. Looking at inward investment as a ratio of GDP at the end of 2000 in these countries, the US recorded 27.7 percent, the United Kingdom 33.7 percent, Germany 22.5 percent, France 54.2 percent, Canada 27.3 percent, and Australia 29.5 percent.
34. See Keidanren's February 2002 recommendations, Fundamental Reform of the Tax System, on the direction of comprehensive tax reform.
35. For example, consideration should be given to the introduction of contracting out to the private sector the facility maintenance, operation and management components of local government business, such as water supply and sewerage, public transport, waste collection and division, and hospitals and welfare centers.
36. JETRO's June 2000 Survey on Actual Conditions Regarding Access to Japan noted the following problems in regard to investing in Japan: (1) lack of information provision mechanisms on the part of public institutions; (2) limited availability of land for rent in industrial parks; (3) complicated land regulations; (4) expensive legal and accounting services; (5) stringent visa requirements; and (6) seal-based identification and guarantee systems peculiar to Japan. In a questionnaire survey conducted by METI (FY1999 Survey on Foreign Companies Operating in Japan), the top three responses in regard to problems faced by foreign companies in their business activities in Japan were "high business costs" (65.5 percent), "high taxes" (60.3 percent) and "stringent quality requirements "(49.0 percent).
37. Nippon Keidanren (JBF) dealt with this issue in the context of the WTO trade in services negotiations in its June 2002 paper, Trade in Services Negotiations on WTO: Proposal Concerning the Movement of Natural Persons.
38. Communication from Japan to the Working Group on the Relationship Between Trade and Investment, 12 April 2002.
39. One possibility could be to revive the Japan Investment Council, which was established in 1994 under the leadership of the Prime Minister.
40. In its June 2001 recommendations entitled Towards the Implementation of Strategic Trade Policies: A Grand Design of Japan's Policy as a Nation Built on Trade, Keidanren argued for pursuing ASEAN+3 market integration over the medium- to long-term.
41. In its October 2001 recommendations, Recommendations on ODA Reform, Keidanren called on the Japanese government to clarify its philosophy on ODA policy, eliminate inefficiencies, and boost transparency, undertaking sweeping reforms in order to win the understanding and sympathy of the public.
42. As the content of each agreement will obviously differ, priority nations and regions for Japan will also differ according to the particular agreement.
43. We strongly urge the early conclusion of the revision negotiations on the Japan-US tax treaty which began in 2001. Negotiations should follow the OECD model tax treaty and look to promote the smooth business activities of Japanese companies in the United States through, for example, reductions in withholding tax, and to expand investment in Japan.
44. The social security agreement currently being negotiated with the United States should be concluded as soon as possible.