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Challenges for the Upcoming WTO Negotiations and
Agendas for Future Japanese Trade Policy

Appendix 2
Issues on Trade in Services Negotiation

1. Basic Concept

  1. The negotiations on services liberalization which will begin in 2000 will be the first major liberalization negotiations targeting all service areas since the entry into force of the 1995 General Agreement on Trade in Services (GATS).

    As the services industry assumes an increasingly important position in the Japanese economy, competitive service industries are becoming more interested in expanding their overseas operations. The manufacturing industry too is frequently engaged in the service business outside Japan, establishing a commercial presence such as sales offices, after-sales service centers, etc. However, the liberalization of trade in services lags far behind trade in goods, with Japanese companies currently facing various impediments in conducting service-related business activities abroad. The upcoming negotiations on trade in services will be extremely important to us, Japanese industry, in terms of removing these impediments, and we strongly urge that through these negotiations, countries are brought to (1) eliminate restrictions on the business activities of foreign companies and (2) clarify and increase the transparency of service-related legal and administrative systems.

  2. To this end, the Japanese Government firstly needs to take the opportunity at the upcoming negotiations to seek greater service liberalization commitments by member countries, as well as the full implementation of these. Japanese industry places particular emphasis on liberalization of the establishment of commercial presence, especially in the five areas of telecommunications, distribution, finance, construction and transportation.

    Secondly, to increase the transparency of legal and administrative systems in the various service areas, the Government needs to press for greater transparency in countries' service-related laws and regulations, as well as introduction by developing countries of an administrative procedure law approach which exists in Japan (for example, the obligation of prompt initiation into the examination of a submitted application and specification of standard processing time).

2. Itemized Discussion

As noted above, it will be important to use the upcoming negotiations on trade in services to promote liberalization by individual countries and to develop service-related rules, removing impediments to companies' overseas business activities. Based on a recent survey, Keidanren has designed the following basic approach.

  1. Liberalization Negotiations for Trade in Services
    1. Horizontal Issues

      Impediments faced by us, Japanese companies, in developing service businesses abroad can generally be categorized as follows:

      1. Limitations on foreign capital ratios
      2. Citizenship and residence requirements for company executives and staff
      3. Foreign remittance regulations
      4. Performance requirements (technology transfer requirements, etc.)
      5. Domestic procurement requirements for materials and services
      6. Legal systems undeveloped, lacking in transparency, and subject to arbitrary operation and sudden changes
      7. Lack of transparency and abuse of licensing requirements and procedures (including licensing fees)
      8. Restrictions on real estate acquisition

    2. Sector Specific Issues

      Points of issue in specific sectors are as follows:

      1. Telecommunications
        While we welcome liberalization progress in this area by both developed and developing countries as a result of the basic telecommunications negotiations concluded in February 1997, developing countries need to further reduce their limitations on foreign capital ratios. In addition, those countries which have committed to phased reduction with a long transition period should front-load the implementation of their commitments, while commitments should also be bound by uncommitted countries. In addition, while value-added telecommunications services were not considered in the last negotiations, some developing countries do have barriers to market entry and it will be important to advance liberalization in this area as well.
        The introduction of a Reference Paper has resulted in a certain level of commitment in terms of a framework for competition-promoting rules. The next step must be to further clarify the definition of "major suppliers" and other central concepts in this paper (for example, treatment of mobile telecommunications service suppliers). Moreover, in relation to the "public availability of licensing criteria" included in the Reference Paper, principles should be added to avoid restricting entry by new businesses, such as (a) that licensing requirements and procedures should impose no greater burden than necessary to ensure quality, and (b) that licensing procedures themselves should not limit service supply.
        It will also be important to clarify definitions of the various services. For example, countries have been left to make own decisions on which services to inscribe in their schedules of commitment. Definitions in relation to both basic and value-added telecommunications services will need to be clarified and transparency increased.

      2. Distribution
        Developing countries in particular have numerous regulations on distribution, including prohibition of the establishment of import companies, sales companies and after-sales service businesses by foreign companies and limitations on foreign capital ratios, which are proving to be a major impediment. It will be important to improve such regulations at the upcoming negotiations.
        Restrictions on land acquisition by foreign companies also need to be reduced.

      3. Finance
        We welcome the overall progress of liberalization resulting from the financial services negotiations.
        However, some countries still have the following business impediments, and we hope to see these addressed at the upcoming negotiations.

        1. Limitations on foreign capital ratios
        2. Restrictions on and prohibition of branch establishment by foreign companies
        3. Regulations on license issuance, etc.
        4. Citizenship and residence requirements for company executives
        5. Obligation of reinsurance to state reinsurance companies
        6. Restrictions on foreign remittance
        7. Permanent presence obligation in regard to offshore market participation
        It has also been pointed out that the legal systems of some developing countries are undeveloped in regard to financial services (particularly bankruptcy law and mortgage execution procedures), that the operation of regulations is lacking in transparency and regulations themselves are subject to sudden changes. Along with progress in liberalization commitments, legal system development and increased operational transparency will also be important.

      4. Construction
        Impediments to the expansion of overseas construction services by us, Japanese companies, can be broadly categorized into restrictions on participation in public procurements and restrictions relating to business establishment.
        In terms of participation to public procurements, problems include local company prioritization measures, capital-based limitations (automatic exclusion for all companies with under a certain level of capital), the obligation to procure domestic materials and the obligation to acquire special permission.
        In terms of restrictions relating to business establishment, problems include limitations on foreign capital ratios, citizenship requirements for company executives and staff, technology transfer and on-the-job training obligations placed on employers. Licensing procedures also lack transparency and take too much time, preventing facile business development.

      5. Transportation
        Further liberalization and operational transparency will be important with regards to maritime, air and land transport services.
        While participants agreed to continue negotiations on maritime transport after the Uruguay Round, these wound up inconclusively in June 1996, in effect placing this area outside the multilateral discipline imposed by the GATS. At the upcoming negotiations, it will be important to ensure the full application of GATS rules to maritime transport. In addition, the foreign capital ratio limitations and policies favoring domestic companies instituted by certain countries are impeding the business activities of Japanese companies and need to be improved.
        In terms of air transport, countries should further liberalize those "soft rights" covered under the GATS (aircraft repair and maintenance, the selling and marketing of air transport services, computer reservation systems).

  2. Improvement of Rules on Trade in Services
  3. Safeguards, government procurement, subsidies, anti-dumping and other trade rules which have been established for trade in goods remain undeveloped for trade in services.

    In particular, the government procurement laws and operation in place in some countries are in many cases a major impediment to the development of business activities by Japanese companies, and rules need to be developed toward liberalization in this area. For example, in the area of construction, it will be important to eliminate limitations on foreign participation and domestic procurement obligations placed on main materials, as well as obligations in the transport area to use the services of domestic suppliers.

  4. Improved Access to Schedule
  5. Currently, only countries' schedules of commitment as agreed at the time of the Uruguay Round negotiations are accessible on an electronic basis. The latest versions of schedules should be made available electronically, including changes made in line with later negotiations and amendments to domestic laws.

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