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(Provisional Translation)

Proposals for Japan's Trade Strategy

April 19, 2011

Nippon Keidanren
( Japan Business Federation )


Recovery from the immense damage caused by the Great East Japan Earthquake is currently Japan's greatest domestic challenge. Japan must marshal all the forces of the nation to provide aid to the disaster-stricken area, rehabilitate people's lives and the economy, and bring economic activities back to normal. To rehabilitate the disaster area as quickly as possible, Keidanren will provide the maximum support in coordination with the national government, local governments, and other entities involved. Furthermore, the disruption of supply chains of certain companies has caused great impediments to both domestic and global supply systems, and the rapid resolution of these issues is an urgent task.

To promote post-disaster global business development by building an even stronger national economy and industrial infrastructure, as well as to build smooth supply chains, the conclusion of the WTO Doha Round within this year and early participation in the TPP negotiations remain important policy issues for Japan.

Amid the concentration of national resources in response to this unprecedented disaster, this will be an arduous process. Keidanren wishes to convey the message both in Japan and overseas that Japan should maintain its stance as a nation built on trade and investment and pursue a proactive and strategic trade policy.

These proposals have been under consideration since before the occurrence of the Great East Japan Earthquake, but for Japanese companies that must now undertake the rebuilding of the national economy and industrial infrastructure, there is an increasing need to seek sources for growth overseas from their bases in Japan and to develop global business operations.

Based on this fundamental understanding, we make the following proposals for Japan's trade strategy.

1. Basic Approach to Trade Strategy

(1) Current Situation and Challenges: The Urgent Need to Reformulate Japan's Trade Strategy

In its 2007 proposal "A Call for the Development and Promotion of Proactive External Economic Strategies?Toward A Nation Built on Trade and Investment, Pursuing Progress with Asia" (October 16), Keidanren called upon Japan to abandon its passive reactive trade policy stance of responding to requirements and pressure from partner countries and to switch to a stance of taking leadership and strategic initiative. The background to this proposal was the increasing conclusion of Free Trade Agreements (FTAs) between various countries, the building of supply chains by Japanese corporations mainly in East Asia, and the overseas expansion of Japanese service industries.

However, no great shift has been observed in Japan's trade strategy since then, while other countries have been tackling trade issues strategically in pursuit of sources of growth and employment. For example, South Korea has signed FTAs with the United States and the EU, and the United States has been leading the economic integration of the Asia-Pacific region based on the Trans-Pacific Partnership (TPP). On the other hand, there are concerns in Japan about the widening gap with South Korea in conditions of competition. In addition, Japan has fallen into a situation of being unable to take the lead in economic integration of the Asia-Pacific region due to its slowness in deciding to join the accelerating TPP negotiations. It has become an urgent task for Japan to redefine clearly the foundations of its trade policy and implement it proactively and strategically with all due speed.

(2) The Focus of Trade Policy: Creation of Smooth Global Supply Chains

With the increasing globalization of supply chains, companies require a trade and investment environment where the same rules are applied in as many countries and regions as possible. Once the supply chains disrupted by the earthquake disaster have been restored, in order to ensure Japan's sustainable growth, it will be essential for Japanese companies to strengthen global supply chains while keeping core bases for production and development in Japan to maintain their domestic technologies and employment.

To this end, it is necessary to establish a business environment that places Japan on an equal footing with other countries when conducting business through global supply chains that include domestic bases. From this perspective, Japan's trade strategy must promote the creation of such smooth global supply chains.

(3) The Trade Strategy Japan Should Promote

In view of the above, Japan should promote the following trade strategy.

First, within the framework of the multilateral free trade system of the World Trade Organization (WTO), Japan should pursue the expansion of various rules, incorporate the disciplines of diverse FTAs and regional agreements, and aim to harmonize and integrate them. In this way, Japan should strive to avoid as much as possible the problems arising from the coexistence of different rules and expand the scope for application of higher level disciplines.

At the same time, regarding the promotion of Japan's Economic Partnership Agreements (EPAs) and regional economic integration, it is important to take the initiative in introducing rules tailored to new products, services, and business models, and to promote the application of rules stipulated in agreements over a wider area. In doing so, it will be necessary to ensure conformity with existing WTO disciplines and to strive to expand and improve WTO rules to contribute to the formulation of new global rules under the WTO.#1

In response to the accident at the nuclear power plant following the Great East Japan Earthquake, some countries and regions have strengthened restrictions on imports from Japan. There have also been refusals to accept imports in the private sector. It is necessary for Japan to request that people do not overreact and to continue to call for a response in accordance with international rules.

2. Expansion and Improvement of WTO Rules

The best way of building smooth global supply chains is to expand and improve the WTO rules that are applied in all its member countries, which total more than 150.

The most important task for the WTO is to maintain confidence in its ability to function as an organization that establishes global rules by realizing the conclusion of the Doha Round within this year, now in its 10th year since the beginning of negotiations. It is also necessary to work to expand and improve these rules through the WTO. In doing so, it is important to incorporate rules in each FTA that provide for liberalization or disciplines that go further than existing WTO agreements or rules in sectors not covered by these agreements.#2 This is required so that, where rapidly increasing FTAs and regional economic integration coexist, global rules under the WTO can function effectively and their feasibility can be ensured.

At the same time, the quasi-judicial function of the WTO's dispute settlement process and the administrative function of mutual monitoring of agreement observance, such as deterrence of protectionism, will continue to be important and their maintenance and strengthening will be necessary. It will also be important to refer matters to the dispute settlement procedures regarding actions to be taken against countries that contravene these rules and to swiftly resolve the problem. In addition, Japan should review the decision-making system#3 of the WTO, such as the consensus principle, to enable the rapid establishment of rules.

Based on this understanding of the situation, Japan should take a proactive approach to the following issues.

(1) Conclusion of the Doha Round Within This Year

In response to the message from the G20 Summit and the APEC Economic Leaders' Meeting in November 2010 that 2011 would be "an important window of opportunity," energetic negotiations have been underway since the beginning of the year towards a substantive agreement in July. To maintain trust in the WTO organization, conclusion must be reached by the end of the year based on the results of negotiations so far, including the tariff reduction formula.

Taking full advantage of its high level of liberalization, Japan has great leeway to take the initiative in promoting negotiations by making proposals to other countries, for instance, for the improvement of access to markets and the strengthening of rules. In sectoral negotiations on non-agricultural market access, Japan is already promoting solutions including a proposal for bridging the gap in opinions between the United States and developing countries. If Japan participates in the TPP negotiations and agreement can be reached on the start of negotiations on a Japan-EU Economic Integration Agreement (EIA) with the EU, we can expect Japan's mediatory and negotiating power to be further enhanced.

(2) Expansion and Improvement of Rules (Post-Doha Round Issues)

Looking beyond the conclusion of the Doha Round, Japan must call for the establishment of global rules under the WTO in the following sectors. At that time, it will be necessary to avoid as far as possible impediments arising from the co-existence of different rules by adopting rules, etc. for sectors not covered by the regulations of FTAs or disciplines in WTO agreements, as well as to expand the scope of application of high-level disciplines. If it is difficult to secure the immediate agreement of all member countries, Japan could consider the method of first concluding a multilateral agreement as in the cases of the Agreement on Government Procurement and the Information Technology Agreement, and then gradually expanding the number of member countries.

1) Disciplines concerning export restrictions on resources and foods

It is necessary to strengthen disciplines against restrictive measures concerning exports of foods and scarce materials such as rare earths. Under the current WTO agreements, quantitative restrictions on exports have in principle been prohibited and, certain additional disciplines have been incorporated in the Protocol of Accession of new member countries, which apply to these countries. However, many exceptions have been recognized regarding the prohibition of quantitative restrictions, such as the exclusion of temporary measures necessary to avoid critical shortages of foods or other essential products in member countries. There are also no clear regulations concerning the prohibition of export duty. Furthermore, based on the "general exceptions" in the WTO's General Agreement on Tariffs and Trade (GATT), scope remains for the justification of export restrictions as a measure to protect human, animal or plant life or health, or to conserve exhaustible natural resources.

The first necessary step is to promote the strengthening and clarification of the application of existing WTO disciplines concerning export restriction or export duty by referring the matter to the dispute settlement procedure.#4 There are also hopes for the early establishment of a reporting mechanism to ensure the transparency of administration of export regulations concerning scarce materials such as rare earths. In addition, stricter conditions should be imposed regarding measures recognized as "general exceptions" #5 mentioned above.

As far as agricultural products are concerned, the current WTO Agreement on Agriculture includes a system for notifying the Agriculture Committee when establishing new measures prohibiting or restricting exports, but there are no restrictions on the introduction of measures itself. In the Doha Round, reflecting a proposal by Japan among others, positive steps have been taken in this direction including the requirement for consultation between countries introducing measures and the countries concerned, and discussions on the strengthening of the supervisory functions of the Agriculture Committee. However, amid concerns about the tightening of global food supply and demand, export restrictions imposed by exporting countries in a food crisis represent a great threat to food security in importing countries. Accordingly, Japan should strive to further strengthen disciplines, for example by establishing rules on export restrictions. It is also necessary to ensure the stability and security of agricultural production through cooperation regarding the fostering and exchange of human resources, establishment of production infrastructure, and improvement of production technologies. In addition, it is important to promote the securing of a stable food supply through measures such as the creation of a framework for the joint stockpiling of food.

2) Investment

No new efforts for the establishment of investment rules under the WTO have been made since investment was dropped from the Doha Round negotiations in the Framework Agreement of August 2004.#6 However, Japan has so far concluded only 24 investment agreements including EPAs with investment chapters. Since Japan lags far behind western countries in this respect, it is subordinate to these countries regarding the protection and liberalization of investment. The best way of eradicating this gap and improving the investment environment based on global supply chains including domestic bases is to establish multilateral investment rules under the WTO. Now that investment is being made not only in companies in advanced countries but also in those of emerging nations, global investment rules are becoming increasingly necessary for emerging nations too.

Regarding the establishment of multilateral investment rules, it is imperative to establish rules for all the assets directly or indirectly owned or controlled by investors and to establish a system that not only protects but also liberalizes investments and includes procedures for settlement of disputes (stipulations for the settlement of disputes between investors and governments). As far as the protection of investment is concerned, it is necessary to ensure that there are disciplines concerning post-investment most-favored-nation treatment, national treatment and fair and equitable treatment obligations, restrictions on expropriation and appropriate compensation, freedom of remittance, governments' observance of promises made to foreign companies, and transparency through the publication of laws and regulations. Regarding the liberalization of investment, it is important to ensure pre-investment national treatment, most-favored-nation treatment, and the prohibition of performance requirements.

To enhance the effectiveness of agreements, it is important to give due consideration to the development policies of developing countries and their capacity to observe agreements. From this viewpoint, one option would be to first reach a plurilateral agreement and then gradually increase the number of member countries. While it is important to ensure high standards regarding the protection of investment, the positive list system of implementing liberalization only in sectors promised by the country concerned can be considered as a way of promoting liberalization of investment. This would be a realistic method of steadily raising the level of standards from those that are initially acceptable to investors and investees.

3) Electronic commerce

In view of the rapid development of technologies for advanced use of information and communication technology (ICT) and the creation of new business models, it is necessary to establish rules from the viewpoints of service providers and users or consumers in anticipation of the expansion of electronic commerce via the Internet as a new growth sector. For example, Japan should formulate more concrete regulations concerning the following commitments included in the chapter on electronic commerce in Japan's EPA with Switzerland: (1) cooperate to make the customs duties moratorium on electronic transmissions permanent and binding; (2) ensure non-discriminatory treatment (national treatment, most-favored-nation treatment) of digital products; (3) not adopt or maintain measures that unfairly prohibit or restrict electronic commerce; (4) recognize the importance of protecting online consumers; and (5) cooperate to promote the acceptance of electronic versions of trade administration documents. In so doing, it will be necessary to guarantee that domestic systems are established in all the countries concerned, including Japan, in line with the international discussions of organizations such as the World Intellectual Property Organization (WIPO), Organisation for Economic Co-operation and Development (OECD), and the Asia-Pacific Economic Cooperation (APEC).

4) Others

It is necessary to examine the formulation of rules regarding (1) ensuring fair conditions of competition with overseas investment by government-run or government-owned companies, including matters not covered by the current Agreement on Subsidies and Countervailing Measures; and (2) curbing the distorting effect of trade and investment through measures based on international rules regarding elimination of greenhouse gas emissions and ensuring biological diversity.

(3) Promoting Membership of the Agreement on Government Procurement

Since measures contrary to the spirit of the Agreement on Government Procurement have been introduced in recent years in China#7 and other countries that are not members of the Agreement, it is necessary to respond swiftly to this problem.

Japan must continue to call for early membership of the Agreement based on a high commitment level regarding subject organizations, products and services, and standard procurement amounts. If China becomes a member of the Agreement, this can be expected to encourage the membership of other emerging nations that are currently observers and contribute significantly to the liberalization of the government procurement market.

(4) Promotion of WTO Membership

In order to expand the application scope of WTO rules, it is necessary to promote new membership in the WTO. Now that the bilateral negotiations with each member country concerning Russia's membership have been completed, all that remains is the verification of its domestic legal provisions. This procedure should be steadily implemented so that Russia's membership can be realized within this year. Once Russia is a member of the WTO, in addition to the prevention of arbitrary increases in tariffs (on automobiles, flat panel TVs, etc.), benefits can be expected in other areas, such as the curbing of independent complex customs procedures, prevention of distribution of counterfeit and pirated goods, and restriction of establishment of independent technological standards.

Regarding new membership of the WTO, negotiations are taking place between the current member countries and new member countries, but in order to make specific requests based on the actual business situation, opportunities should also be created for Japanese companies to conduct hearings as part of the membership process.

3. Extending the Reach of EPA Rules

Establishing a business environment that places Japan on an equal footing with other countries is the minimum requirement for Japanese companies when conducting business through global supply chains including domestic bases. Now that countries are striving to expand their networks of FTAs, Japan's most pressing need is to further promote EPAs, not only to ensure that its position in international competition does not become more disadvantageous, but also to establish a suitable business environment for Japanese companies.#8 Japan must now promote the conclusion of EPAs with the United States, China, and the EU, which account for the highest percentages of Japan's total trade, through the frameworks of the TPP, ASEAN+6, and Japan-EU EIA, respectively.

When doing so, as indicated in 1. (3) above, Japan must strive to ensure conformity with current WTO disciplines with regard to extending EPA rules over a wider area and taking the initiative in introducing new rules. It will also be necessary to link this with efforts to expand and improve WTO rules in order to contribute to the establishment of new global rules under the WTO. Furthermore, Japan must promote cooperation on regulations so that the domestic regulations concerning the frameworks of the TPP, ASEAN+6, and Japan-EU EIA conform as far as possible with WTO rules.

Japan must also promote the conclusion of EPAs with other countries and regions where there are considerable barriers to exports or investment from Japan and EPAs can therefore be expected to expand and facilitate trade and investment, particularly with countries or regions that have many industrial sectors in competition with Japan and have already signed or are negotiating to conclude FTAs.

At the same time, it is important to promote the active use of EPAs, provide EPA databases through customs, and strive to harmonize rules of origin.

(1) Participation in the TPP

At the APEC Economic Leaders' Meeting held in Yokohama in November 2010, the leaders agreed to pursue the Free Trade Area of the Asia-Pacific (FTAAP) as a comprehensive free trade agreement by developing and building on regional undertakings such as ASEAN+3 (Japan, China, and South Korea), ASEAN+6 (ASEAN+3 with India, Australia, and New Zealand), and the TPP. Of these, only the TPP, of which the USA is a member, is at the negotiation stage and considered to be close to conclusion.

The TPP thus has the potential to develop into the FTAAP covering the whole Asia-Pacific region and currently accounts for 25% of Japan's total trade and 41% of its direct investment balance. If Japan fails to join the TPP or is slow in doing so, the resulting competitive disadvantage would not only lead to a decline in Japanese companies' sales in TPP member countries, but might also necessitate the transfer to TPP member countries of production bases for finished products and essential components that embody Japan's advanced technologies. This would be a grave situation for Japan both as a nation built on trade and investment and as a nation built on technology, and might even shake the foundations of the Japanese economy.

On the other hand, the potential for expansion of business opportunities would be great if Japan's point of view were reflected in the creation of new rules for the 21st century envisaged by the TPP and, with the participation of major countries of the Asia-Pacific region such as China and India, these rules were to become the business rules of the Asia-Pacific region in the future through the FTAAP and even the global rules of the WTO. However, even if it joins the TPP, Japan will have no choice but to accept rules once they have been created. It is therefore essential that Japan not only avoids this situation but also actively contributes to economic growth and employment in the Asia-Pacific region by taking the initiative in the creation of rules in the region.

Based on the above approach, Japan should take an active part through the TPP in liberalizing trade and investment and creating rules.

(2) Promotion of ASEAN+6

Together with the TPP mentioned above, ASEAN+6 will also be important as a road to the FTAAP. During Keidanren's ASEAN Mission in February this year, government leaders of the ASEAN countries expressed the hope that Japan would take the lead in promoting ASEAN+6 and the TPP as mutually necessary approaches towards realization of the FTAAP. They indicated that they wanted Japan, as a member of ASEAN+6, to play the important role of serving as a bridge between China and the United States by joining the TPP as well. To respond to these expectations, Japan should participate in the TPP negotiations as soon as possible, take part in the creation of rules for the TPP taking account of the three-way FTA with China and South Korea and ASEAN+6 discussions, and contribute to the realization of the FTAAP by promoting smooth integration between ASEAN+6 and the TPP in the future by incorporating TPP discussions in the Japan-China-South Korea FTA negotiations and ASEAN+6 discussions.

Based on this awareness, to fill the EPA vacuum in Asia, Japan should immediately commence negotiations regarding this three-way FTA without waiting for the conclusion of the Joint Study in 2012 and conclude an agreement as early as possible with China and South Korea which, together with Japan, account for 70% of the total GDP of the ASEAN+6 countries.

At the same time, by reaching an agreement as quickly as possible in the EPA negotiations with Australia following the recent signing the Japan-India EPA, Japan should open up a route towards the ASEAN+6 and realize it at the very latest by 2015, when import duties will be eliminated in the ASEAN Free Trade Area (AFTA). This can be expected to lead to the vitalization of trade and investment throughout the entire region by incorporating such countries in the AFTA as Japan, China, and South Korea, which together account for 70% of the region's GDP, rapidly-growing India, Australia with its abundant natural resources and food, and New Zealand, which is positively promoting the liberalization of services.

(3) Conclusion of an EIA with the EU

Since last year, the Government of Japan and the European Commission have been conducting a joint examination into ways to comprehensively strengthen and integrate their economic relations. Based on this, "appropriate next steps" are to be decided at the forthcoming regular Summit Meeting in May. Since the EU-South Korea FTA is expected to take effect provisionally in July, it will be essential as a next step to agree to launch negotiations for a Japan-EU EIA at the Summit.

Japan is the EU's sixth largest trade partner, while South Korea is ranked eighth. Japan is also the third largest investor in the EU, with investments amounting to 15 times those of South Korea. There are currently some 3,300 Japanese-affiliated companies active in the EU, creating jobs for more than 400,000 people. The EU-South Korea FTA, which will place Japanese companies in a disadvantageous position in the EU market, may have a negative effect on the close trade and investment relationship between Japan and the EU and Japan's contribution to employment in Europe. If a pathway cannot be opened to the conclusion of an EIA at the coming regular Summit Meeting, Japanese-affiliated companies in Europe may further shift their bases to the Asia-Pacific region in order to survive. On the other hand, if a level playing field is secured through an EIA, industrial cooperation would be further expanded and deepened, such as through additional investments and R&D collaboration. Considering that Japan has many shared values with the EU, there is potential for the EU to offer us greater business opportunities through the deepening and broadening of its integration, and Japanese businesses would be able to pursue the economy of scale by regarding the EU as a market identical to Japan for their products, utilizing its own outstanding technologies.

In official EIA negotiations, in addition to the elimination or reduction of tariffs, services trade and investment liberalization, and improvement of access to government procurement markets, Japan should address the issue of non-tariff measures, which is of particular concern to the EU. According to a survey commissioned by the EU, the majority of these measures are related to technical regulations, standards, and conformity assessment procedures. Accordingly, regarding those of concern to the EU, Japan should verify sequentially the possibilities of (1) harmonization of technical regulations and standards, (2) mutual recognition of technical regulations and standards (acceptance of other countries' measures as equivalent to its own measures), (3) mutual recognition of conformity assessment results, and (4) improvement of the transparency of technical regulations, standards, and conformity assessment procedures, in order to realize as seamless a business environment as possible. When doing so, with the TPP negotiations in mind, it will also be necessary to consider whether to pursue the possibilities mentioned above in a trilateral framework including the United States, or in a bilateral one such as Japan-EU or Japan-US.

4. Improvement of the Systemic Framework to Supplement the WTO and EPAs

In addition to widening the area of application and enhancing WTO and EPA rules, Japan should strive to develop the following organizational frameworks supporting smooth global supply chains for companies.

(1) Improvement of Legal Framework for Investment

1) Expansion and enhancement of investment treaties

Japan has so far concluded only 24 investment treaties including EPAs with investment chapters, lagging far behind western and other countries in this respect. Furthermore, the levels of protection and liberalization of investment in these investment treaties or EPAs with investment chapters are not necessarily sufficient. For example, some of them do not include investment arbitration clauses, place limits on the scope of investment, contain no provisions for fair and equitable treatment?a frequent point of dispute in arbitration judgments, limit the scope of prohibition of performance requirements to the WTO Agreement on Trade-Related Investment Measures (TRIMs), or provide for a level of liberalization that goes no further than maintaining the current situation. Others do not include export restrictions regarding resources and energy, systems for the early notification of regulations, or provisions for the observance of individual investment contracts.

In view of the above, as well as ensuring that EPAs or other investment treaties currently under negotiation are concluded as quickly as possible, Japan should without delay commence negotiations with important countries and regions that have not yet provided a legal framework for investment from Japan (investment agreement or EPA with investment chapters).#9 In order to make timely and appropriate revisions of systems and rules in response to the daily changing business environment and needs of companies, it will also be necessary to incorporate a framework allowing for continuous requests for improvement from the private sector across the entire business environment, including issues not covered by agreements. Furthermore, reviews should be conducted continuously to raise the level of investment protection and liberalization in existing treaties.#10

Since Japanese companies face many challenges relating to overseas investment, not all problems can be resolved only by concluding investment agreements or EPAs with investment chapters. As part of the process of improving the legal framework for investment, it will also be necessary to conclude tax treaties and social security agreements, as outlined in 2) and 3) below.

2) Expansion of the tax treaty network and improvement of existing tax treaties

The tax treaty network is an important framework for eliminating international double taxation to ensure that Japanese companies can securely and steadily develop their business overseas. In addition to revising existing tax treaties when necessary, Japan must expand this network through negotiations for the conclusion of tax treaties with countries that are not currently treaty partners, such as Argentina, Colombia, Venezuela, Chile, and Nigeria. In particular, it is important to incorporate in tax treaties withholding tax exemption provisions relating to parent-subsidiary dividends and interest on loans, provisions for reducing or exempting withholding tax on royalties, provisions for corresponding adjustment in response to transfer pricing taxation, and an arbitration provision.

3) Promotion of conclusion of social security agreements

Up to the present, social security agreements have been concluded mainly with Western countries. Since public pension systems are expected to be developed in Asian countries along with their economic development and the need to facilitate the movement of people in the Asian region is going to increase, the conclusion of social security agreements with Asian countries is now an important challenge. Japan has already concluded an agreement with South Korea and preliminary work is underway with the Philippines. It will be particularly important to conclude agreements with China, which has the second largest number of long-term Japanese residents after the United States, and India, with which Japan's economic relationship is expected to be further deepened under the bilateral EPA that has been already signed.

As far as China is concerned, the Social Insurance Law, which provides for application to foreigners working in China as well, will come into effect in July this year. Although it remains to be seen what kind of specific regulations will be implemented under this law, it is highly likely that this will result in a new social security burden for the Japanese employees of Japanese-affiliated companies in China. The Government of Japan should call upon China to take sufficient interim measures such as a deferment of application, and begin talks aimed at the conclusion of a social security agreement.

With regard to India, since the social security system will be expanded in its application and Japanese-affiliated companies in India have requested the conclusion of a social security agreement, the Government of Japan should promote consultations and negotiations for concluding an agreement as stated in the Japan-India EPA, paying due attention to the situation of the system for implementing the agreement in India.

(2) Expansion of International Rules and Cooperation on Measures Against Counterfeit and Pirated Goods

The prevalence of counterfeit and pirated goods in developing countries, particularly in Asia, is an impediment to the recovery of profits from investment. In view of this situation, appropriate protection should be promoted in every country and region by establishing and improving legal systems related to intellectual property and strengthening enforcement through stricter penalties, etc. to prevent repeat offenses.

Specifically, it is important to expand the member countries of the Anti-Counterfeiting Trade Agreement (ACTA).#11

It will also be beneficial both to promote cross-border cooperation among customs authorities that expose and prevent counterfeit and pirated goods, determine the extent of damages, and respond effectively, and to establish a platform for public-private sector cooperation for the prevention of counterfeiting and pirating.

Together with these efforts, it will be necessary to conduct educational activities to raise awareness of the need for protection and respect for intellectual property rights in every country and region.

(3) Restructuring the Export Control System

Japan's export control under the present system tends to deviate from its original purpose of preventing its exports from being diverted to purposes such as use for weapons of mass destruction or transfer to countries which have a strong potential to cause security concerns. It costs considerable human resources and time to identify whether a certain item to be exported falls under the list of goods and technologies subject to controls. If Japan were to maintain unnecessary restrictions amid the increasingly active flow of people, goods, and technologies across borders as economic activities are further globalized, this would weaken companies' international competiveness, erode its industrial base, and even undermine its technological edge. It would rather have negative consequences on Japan's national security.

Now that the United States, the EU, and South Korea are reviewing their export control systems#12, Japan should make its system return to its original purpose and revise the current legal system and its application to establish a system that stands comparison with or even exceeds the level of other countries in order to maintain adequate control of items to be exported according to the use and the user of the items in question. To this end, it will be essential to (1) prioritize regulations to focus limited resources on items that absolutely must be controlled, based on an appropriate division of roles between the government and companies, and (2) restructure the legal system so that it is simple and easily comprehensible to all parties. Accordingly, Japan will have to tackle the five tasks outlined below. 1) and 2) should be implemented speedily, and 3) should be started immediately. At the same time, the Government of Japan should call for the implementation of 4) and 5) in cooperation with other countries participating in the international regimes for export control (referred to below as "the international regimes").

1) Internationalization of the numbering system for controlled items

Japan's unique numbering system for controlled items, which is different from that of other countries, has caused impediments to control at overseas subsidiaries and affiliates, transactions with overseas clients, and procurement from overseas. Japan should therefore adapt its numbering system to the EU's system, which is in conformity with the international regimes.

2) Elimination of licensing requirements for exports to overseas subsidiaries and affiliates of companies which have complied with the law and regulations and to "white countries"#13

With regard to exports to overseas subsidiaries and affiliates of companies which conduct thorough internal control and have complied with the laws and regulations, or to "white countries," licensing requirements should be eliminated, since risks such as diversion, circumvention, and re-export are very low. "White countries" should also be expanded to countries whose export control systems are improved to a certain level.

3) Reorganization and simplification of the legal system

The defects in the current export control system include the following: (1) it is difficult to identify exactly what (items and destinations) is controlled without going through complex systems that are multi-layered and contain many exceptions; (2) it is not easy to understand the patchwork of additions and amendments in cabinet orders, ministerial ordinances and notifications; and (3) application and interpretation of the law and regulations are not always consistent. To resolve these problems, the legal system for export controls should be carved out from the Foreign Exchange and Foreign Trade Law, and should then be reorganized and simplified.

4) Constant review of controlled items of the international regimes

The Government of Japan should call upon the other participating countries to work on removing from the control lists items that are already manufactured in many countries or can easily be obtained.

5) Change to an export control system based on end-use and end-user assessments

As part of reforming the current system, which is mainly based on exporters' judgment as to whether a certain item to be exported falls under the controlled list, the government should identify transactions (end-use or end-user) with a high potential for causing security concerns, and exporters can then apply for export licenses on the basis of the information the government provides. In order to change to such a public-private cooperative system based on end-use and end-user assessments, the government should work on the international regimes while strengthening the systems and functions for identifying transactions with the potential for causing security concerns.

The government should also contribute to the realization of a seamless business environment by (1) examining the possibility of including EPA partners in the "white countries" list, and (2) assisting in improving EPA partners' export control systems with a view to eliminating licensing requirements for exporting items on which tariffs have been eliminated or reduced and technical regulations and standards have been harmonized in EPAs, in order not to limit the positive effect that EPAs have. It should also consider introducing another bulk export license system specially designed for a certain project as a whole to promote the export of social and economic infrastructure as systems.

(4) Reconciling Facilitation of Trade with Security

To facilitate distribution beyond borders, it is imperative to improve supply chain connectivity in response to the development of companies' global supply chains. At the same time, ensuring the security of trade is an important present-day requirement. To reconcile facilitation of trade with security, Japan should abolish the principle of bonded shipment (Hozei) and promote mutual approval based on diffusion of the Authorized Economic Operators (AEO) system, and then aim to realize international integration in the future. It should also promote the use of electronic documents (elimination of paper documents) and the highly convenient "single window" system in import-export and harbor-related procedures, as well as simpler and more efficient procedures and the sharing of data.

(5) Compatibility of Corporate Social Responsibility with Smooth Supply Chains

With the global spread of companies' supply chains, it has become necessary for companies to make the utmost efforts to fulfill their corporate social responsibility across the whole supply chain. However, in cases where it is necessary to ensure these corporate efforts by means of regulations, the contents of these regulations should be made flexible in accordance with the actual situations of the various supply chains.

For example, we fully respect the aims of the requirement stipulated in the US Financial Reform Act for reports, etc. on supply chains for mineral resources from conflict-affected and high-risk areas and understand that this applies to companies listed on the US stock exchange and that companies selling parts or raw materials to these companies are not required to submit direct reports. However, since the need arises to investigate back along the supply chain and submit the results to a listed company, these regulations in effect have an impact on all companies in the supply chain and the burden of implementing them is considerable. It is not unusual for the mines at the top of the supply chain to be fourth-, fifth-, or sixth-tier suppliers, in which case it is very difficult to conduct a follow-up investigation. Since there is no direct trading relationship with these suppliers, it is also difficult to exert influence on them. Furthermore, there are cases where information on suppliers is classified as confidential or impossible to disclose due to the obligation of confidentiality.

5. Promotion of Domestic Reforms to Withstand Growing Global Competition

To take the initiative in creating global rules and respond to the increasingly fierce global competition resulting from the liberalization of trade and investment, Japan must rapidly implement radical domestic reforms. These include vigorous efforts to realize a strong agricultural sector, the development and securing of wide-ranging human resources to strengthen competitiveness, and the establishment of a business environment equal to that of other countries through reforms of regulations and systems.

In particular, agriculture provides food for the Japanese people and plays an important role in maintaining local communities as a key regional industry. However, as stated in the Basic Policy on Comprehensive Economic Partnerships (Cabinet Decision of November 9, 2010), "... considering Japan's aging farming population and the difficulty farmers have in finding people to take over their farms when they are ready to retire, there is a risk that sustainable agriculture will not be possible in the future. Hence it is imperative to institute bold policies that will realize the full potential of Japan's agriculture, for example, by improving their competitiveness and exploring new demand overseas." In view of this, while securing high-quality domestic farmland, Japan should also ensure that it has diverse farmers with strong business awareness by encouraging the entry of new farmers and companies into the agricultural industry. It should also aim to give these farmers substantial land through regional consensus-building and to strengthen competitiveness of agriculture by increasing the scale of operation and improving productivity. Japan should also advance agriculture as a growth industry by promoting sixth-sector industrialization and cooperation among agriculture, commerce, and industry, and by encouraging exports of agricultural products. To achieve these aims, it must speedily and vigorously implement reforms through wide-ranging policy instruments.#14

While Japanese companies aim at the optimal allocation of management resources by choosing overseas bases for their business activities based on global management strategies, they also require their domestic bases to function as "monozukuri bases" that are necessary for the accumulation of advanced technologies and knowledge, such as leading-edge R&D and know-how regarding the development and manufacture of high value-added products and essential components. If progress is made in improving rules in response to the development of companies' global supply chains, it will be essential to ensure a more attractive business environment, what one might call "location competitiveness," so that companies will choose to maintain these functions in Japan. To this end, Japan must marshal all its forces to develop systems and a suitable environment#15 for accepting more diverse foreign human resources in order to foster and secure talented people regardless of nationality, who hold the key to greater competitiveness through innovation, and reform regulations and systems#16 in wide-ranging fields to establish a free and smooth business environment.


To overcome the hardships of this unprecedented earthquake disaster and build a sustainable economy as a foundation for recovery, we must work together to establish a business environment that can maintain bases in Japan for production and development in combination with technologies and employment in Japanese companies, including small and medium-sized businesses. From this perspective, it is more important than ever that Japan should promote its trade strategy proactively and strategically.

To achieve this, Japan must make the wide application of uniform rules the basis of its trade policy and implement this policy without delay in order to pursue the smooth development of Japanese companies' global supply chains including domestic bases and to establish a business environment that places it on an equal footing with other countries.

Keidanren will actively present its views for the creation of new rules to facilitate the global supply chains required for this purpose and strive to improve the domestic and overseas business environment.

  1. For instance, efforts toward regional economic integration can be used to promote the expansion and improvement of WTO rules. Specifically, in the same way that APEC contributed to the formulation of the Information Technology Agreement (ITA) under the WTO, APEC should be used as a forum for the formation of WTO and other multilateral agreements, for example, in the liberalization of environmental goods and services and establishment of rules for ICT services through cloud computing networks.
    ("Toward Sustainable Growth in the Asia-Pacific Region--Japan's Responsibilities as Host Country for APEC 2010," Keidanren Policy Proposal, June 15, 2010)
    In the current situation where disciplines in the same sectors overlap in regional trade agreements and WTO agreements, there is a concern that conflicting decisions will be made regarding the same dispute. To avoid this, when disputes arise regarding FTA obligations that are substantively the same as in WTO agreements, it has been pointed out that it would be worth considering introducing regulations which require settlement under the WTO into Japan's EPAs. (RIETI Discussion Paper Series 07-J-050)
  2. The new trade strategy formulated by the EU last fall advocated setting up a group of eminent persons to discuss the post-Doha WTO. Japan should also swiftly begin considering the elimination or reduction of tariffs and disciplines on tariffs in the post-Doha WTO, as well as the expansion of rules in other sectors.
  3. The report "The Future of the WTO" (2005) by the consultative board to the then Director-General of WTO Supachai Panitchpakdi proposed that a member wanting to block a measure that had very broad support could only block the consensus if it declared in writing (with reasons) that the matter was of vital national interest to it.
  4. The United States, EU, and Mexico have referred complaints about China to the WTO dispute settlement process regarding its restrictions on exports of raw materials such as mineral resources.
  5. For example, in Article 20 (b) of GATT, the measures recognized as general exceptions to the agreements are measures defined as "necessary" to protect human, animal or plant life or health. Here "necessary" can be interpreted as meaning that there are no other means that are reasonably available and less trade-restrictive ("necessary" test). In contrast to this, in Article 20 (g) of GATT, the measures recognized as general exceptions are those defined as "relating to" the conservation of exhaustible natural resources. In the former case, there has merely been a requirement to indicate an appropriate relationship between the measure in question and the result of conserving exhaustible natural resources (WT/DS58/AB/R). It has been pointed out that, regarding cases where measures can be justified on the grounds of conserving exhaustible natural resources, it is not appropriate that this should be a looser regulation than measures to protect human, animal or plant life or health. Accordingly, making Article 20 (g) stricter so that measures must at least meet the condition of being "necessary," as in Article 20 (b), can be considered.
  6. According to the Framework Agreement of August 1, 2004, "no work towards negotiations" in the WTO will take place during the Doha Round.
  7. Although China made its initial offer to join the Agreement on Government Procurement in December 2007, the Administrative Measures for Government Procurement of Imported Products gives priority to the procurement of products made in China, making it very difficult to sell imported products to the Chinese government. Since the Draft Administrative Measures on Government Procurement of Domestic Products issued in May 2010 stipulates that China must conduct government procurement of domestic products unless there is a valid reason for not doing so, imported products and even domestic products containing a high proportion of imported parts are subject to discriminatory treatment. Furthermore, the National Indigenous Innovation Products Accreditation Program, promulgated in November 2009, is a system for preferential treatment in government procurement which, in line with the 11th Five Year Plan, lays emphasis on "indigenous innovation." It accredits the products of six high-tech sectors, including computers and application equipment, communications products, and high energy-efficient products, as "national indigenous innovation products" based on ownership of intellectual property rights or trademarks in China.
  8. Japan's trade with the partners of the 12 EPAs it has signed and concluded amounts to only 17.4% of its total trade, far behind that of other countries. In key industries such as automobiles and electronics, trade with FTAs accounts for 35.6% of the total trade of South Korea, which is competing fiercely with Japanese companies--a big difference of about 20%. This is because South Korea has already signed FTAs with the United States and the EU, and it may also commence negotiations with China in the near future. Japan must conclude agreements as soon as possible with the United States (13.5%), China (20.5%), and the EU (11.6%), which together account for almost half of its total trade.
  9. The Keidanren proposal "On the Improvement of Japan's Global Investment Environment" (April 15, 2008) outlines concrete ways to achieve this. The proposal points out that it will be essential to explore the possibility of improving the legal framework by concluding EPAs with investment chapters with strategically important countries that have deep trade and investment relationships with Japan, and that, in cases where legal guarantees are urgently required for investment protection and liberalization, the investment treaty could be positioned at the stage before the EPA and negotiations conducted in advance.
    Since the publication of this proposal, as of April 2011, Japan has signed an EPA with India, completed negotiations for an EPA with Peru, and concluded a substantive agreement for an investment agreement with Saudi Arabia. It has also begun negotiations for investment treaties with Colombia, Kazakhstan, Angola, and Kuwait, is making preparations for negotiations with Algeria and Qatar, and has agreement to begin negotiations this year for an investment treaty with Ukraine. Keidanren evaluates this progress highly and hopes for the early conclusion of negotiations with these countries.
    On the other hand, Brazil, South Africa, and Turkey are countries that have deep-rooted trade and investment relationships with Japan but which have not yet reached the preparation stage for investment agreements or EPAs. South Korea has already started negotiations for an FTA with Turkey and is preparing to negotiate FTAs with Mercosur, which includes Brazil, and the Southern African Customs Union, which includes South Africa. In view of this situation and from the perspective of establishing an investment environment to put Japanese companies on an equal footing with those of other countries, Japan should make an immediate start in establishing a legal framework for investment. Japan should also speed up its consideration of the commencement of negotiations with the other countries listed in the above-mentioned proposal as countries with which a legal framework for investment should be established.
  10. Regarding the protection of investment, it is necessary to ensure revised agreements include provisions for post-investment most-favored-nation treatment, national treatment and fair and equitable treatment obligations, restrictions on expropriation and appropriate compensation, freedom of remittance, governments' observance of promises made to foreign companies, and transparency through the publication of laws and regulations. Regarding the liberalization of investment, national treatment and most-favored-nation treatment and prohibition of performance requirements prior to investment should be incorporated in the agreement.
  11. The negotiations were completed in 2010 and procedures are now underway for signing and concluding the agreement by the 11 participating countries and regions.
  12. In the United States, under the Obama administration a thorough review of the export control system is underway to strengthen national security by focusing on controlling the most critical products and technologies and by enhancing the competitiveness of key manufacturing and technology sectors.
    (For example, see the following web page: http://www.bis.doc.gov/news/2010/white_house_fact_sheet.htm)
    In its new trade strategy published last fall, the EU, following the trend of reform in the United States and other countries, aims to revise its export control system to enhance export competitiveness while maintaining a balance with security.
    Furthermore, South Korea, which seemed to be lagging behind Japan in this respect, has implemented top-down reforms aimed at converting in a short period to a system that is very convenient for its companies so that it can survive as a nation built on trade. (For example, see: Ryozo Hata, "Yuza furendori-na Kankoku no yushutsukanriseido" (South Korea's user-friendly export control system), CISTEC Journal, November 2010)
  13. The 26 countries in Attachment List No.3 to Export Trade Control Order (Argentina, Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherland, New Zealand, Norway, Poland, Portugal, Republic of Korea, Spain, Sweden, Switzerland, United Kingdom and the United States of America). These countries are recognized as conducting the same strict controls as Japan.
  14. Keidanren's "Proposal for the Realization of a Strong Agricultural Sector" (February 10, 2011)
    (http://www.keidanren.or.jp/japanese/policy/2011/010/index.html [Japanese])
    states that Japan should determine the treatment of border measures based on its national situation while aiming at high-level economic partnerships by joining negotiations for EPAs including the TPP. It should also aim to combine the promotion of economic partnerships with the strengthening of domestic agriculture by comprehensively implementing national measures of true necessity in line with the progress of domestic reforms and international negotiations.
  15. The Keidanren report "Toward Fostering and Securing Competitive Human Resources" (April 14, 2009)
    (http://www.keidanren.or.jp/japanese/policy/2009/036/index.html [Japanese])
    calls for the fostering and securing of human resources regardless of nationality who can make wide-ranging innovations from R&D to production and sales sites. In particular, to ensure that diverse values, experience and know-how, and new concepts are adopted in Japan's economic society, it advocates that, in addition to positively accepting human resources in specialist and technological fields, Japan should also promote the acceptance of diverse human resources from overseas, focusing on those who have certain qualifications and skills.
  16. Every fiscal year, Keidanren has formulated requests for regulatory reform calling upon the government to implement reform of regulations and systems as one of Japan's most important challenges for the development of basic frameworks that support innovations through originality and ingenuity in the private sector and free and smooth business activities. The most recent of these was the "Fiscal 2010 Nippon Keidanren Request for Regulatory Reform" (October 14, 2010) consisting of 210 proposals in 13 sectors.
    (http://www.keidanren.or.jp/japanese/policy/2010/088/index.html [Japanese])

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