TELEPHONE TERMINAL AND SWITCHING EQUIPMENT: U.S. IMPORTS, EXPORTS, AND BALANCE OF TRADE WITH Telecommunications is clearly one of the industries of the future, and Japanese efforts to restrict our sales while building theirs are unacceptable. Not only has it been next to impossible to sell anything to NTT and its mainline network, but selling to its off-network and to the so-called interconnect market (NTT customers) has been difficult. As Abraham Katz, Assistant Secretary of Commerce for International Economic Policy, testified before the Senate Select Committee on Small Business (June 25, 1980): Aside from the Buy-Japan procurement policy of NTT, U.S. firms encounter difficulties in attempting to sell equipment to non-NTT users the so-called interconnect market. One of these difficulties is in obtaining information regarding NTT standards, which are applicable to equipment for the interconnect market. Another problem is the length of time involved in obtaining product approval through NTT. There is no time frame established for the approval process, and U.S. firms report lengthy delays in obtaining approvals as a result of frequent requests by NTT for supplementary technical data. In addition, if a product is disapproved, U.S. firms report difficulty in obtaining information on the technical basis for the disapproval. Of course, selling to a nation's telecommunications network does require a quality product and a willingness to engineer one's products for that market. Such sales can require an enormous amount of careful, time-consuming work. At least one U.S. electronics firm has been negotiating with NTT to be eligible to sell a pocket pager type device compatible with the NTT telephone system. That company has found the Japanese willing to work and cooperate with them in long technical engineering work-and while the company has not yet made any major sales, this is an encouraging sign that if one takes time and makes the commitment, progress appears possible. GOVERNMENT PROCUREMENT CODE The major remaining Tokyo Round MTN trade issues between the United States and Japan are the negotiations this year designed to spell out exactly what commercial opportunities will be available to the United States by extending the benefits of the Government Procurement Code to Japan. The Tokyo Round MTN Government Procurement Code Agreement provides that signatory countries will apply uniform and open procedures to purchases by covered national government agencies. In return for elimination of foreign procedures that often preclude U.S. competition, the President is authorized to waive application of discriminatory government procurement laws (such as the Buy American Act) with respect to approximately 15 percent of U.Š. Government purchases. The benefits of open U.S. procurement are only to be extended to countries which provide reciprocity of opportunity to the U.S. As we noted in our Committee report describing the Trade Agreements Act of 1979 (H. Rept. 96-317), Japan's offer to include portions of NTT purchases within the Government Procurement Code presented the United States with major new sales opportunities, but the details of the Agreement were to be worked out during subsequent talks: The current Japanese offer which is valued at $6.9 billion goes considerably beyond the offers of our other trading partners in quantity, if not quality. In addition to including all central government entities, Japan has offered portions of the quasi-public Nippon Telephone and Telegraph (NTT), Japanese National Railroads (JNR), and Tobacco and Salt Monopoly. In regard to NTT, Japan has agreed to a work program aimed at providing coverage, particularly in the important telecommunications area, aimed at mutual reciprocity in market access. As part of this understanding Japan has offered to go beyond the obligations of the Agreement in regard to NTT by allowing foreign firms to participate in the R&D process and facilitating foreign access to the market for privately owned equipment. Telecommunications negotiations are to be concluded by the end of 1980, in advance of the January 1, 1981 effective date of the Procurement Agreement. Japan's offer is expected to provide major benefits to U.S. exporters. At the present time, public tendering is essentially unheard of in Japan and procedures are unintelligible to all but selected Japanese firms. The agreement with Japan will open new and large markets to U.S. exports of computers and business machines, telecommunications equipment, scientific and controlling instruments, and medical supplies and equipment. Japan has followed a strong buy national policy in the computer area. It is estimated that in 1975, 98.4 percent of computers used by the government were the products of Japanese manufacturers. Also, if negotiations on NTT are successful, a large new market in telecommunications equipment will open. Total purchases by NTT amount to $3.3 billion annually, of which about 87 percent is telecommunications equipment. Now, Japan has had second thoughts about the extent of NTT coverage under the Code. The slow pace of negotiations and the lack of spirit being shown-bode poorly for true reciprocity under the Code. Since reciprocity must be provided, U.S.-Japanese bilateral participation in the Code may not materialize. Because of the diffuse and informal nature of Japanese Government procurement, it is most important that the details of Japanese participation in the Code be spelled out and that U.S. rights to question and correct violations of the agreement be assured. As we have pointed out in two separate meetings with top NTT officials in the past 2 years, NTT is the single biggest opportunity for increased U.S. sales to a Japanese Government agency, and the failure to achieve progress in the NTT negotiations stands as the symbol of remaining Japanese industrial trade protectionism and her unfair approach to trade in high technology products. Therefore, defining NTT's commitment under the Code is essential. The Japanese may propose during the remainder of this year's negotiations that some informal understandings be developed. In light of the type of problems American businessmen will have in selling in the old-tie network of Japanese agencies (as demonstrated by the NTT and JNR cases), it may be that an acceptable agreement simply will not be possible and that the United States will not enter into an agreement with Japan under the Government Procurement Code. Failure to reach an agreement may be better than an Agreement which offers no real commercial opportunities for the United States. Failure to reach an agreement may be better than an agreement filled with conflict and charges of noncompliance and bad faith. We in the Congress will be watching these negotiations most carefully. We do not support indeed we oppose-an agreement which does not clearly provide reciprocity. PROGRESS IN BANKING The Task Force's earlier report contained a discussion of numerous examples of Japanese discrimination against foreign banks. The problem of foreign nations treating U.S. banks differently from their "national banks," resulted in an amendment to the International Banking Act of 1978, calling on the Secretary of the Treasury to conduct a year-long study on ways in which U.S. banks are denied national treatment abroad, and what steps can be taken to eliminate such discrimination. On September 17, 1979, the Treasury issued its study entitled, "Report to Congress on Foreign Government Treatment of U.S. Commercial Banking Organizations." The report summarized the history of foreign banks in Japan and the progress made in the last several years by providing "national treatment to foreign banks": U.S. and other foreign banks were basically expected to occupy a special role in the Japanese financial system of the past-that of importing external financing and of providing international banking expertise. The interaction of Japanese banking laws, regulations, and administrative guidance, coupled with the historically closed Japanese domestic economic system, was felt to have effectively limited opportunities to compete in the domestic market. The Japanese economy and its importance in the world economy has changed dramatically in the past decade. The financial system is becoming one of the world's most sophisticated. Japanese banks have modernized aggressively and are strong competitors in international markets. Liberalization of the treatment accorded U.S. and other foreign banks did not keep pace with those developments. The ability of U.S. and foreign banks to successfully compete eroded, and their market share dropped. The United States Government has approached the Ministry of Finance and the Bank of Japan about the treatment of U.S. and other foreign banks operating in Japan. The Japanese authorities have responded in a positive way to the issues raised. However, the situation is in transition and some time will have to pass before the effectiveness of the measures adopted can be evaluated. Some of those measures include fairly fundamental modifications of the internal Japanese financial structure and involve questions of competitive balance among different types of Japanese financial institutions. Accordingly, the Japanese authorities have moved cautiously in this area. The steps include encouraging foreign banks to apply for the establishment of additional branch banks, granting permission to solicit local deposits, and other measures making it easier for foreign banks to operate in the Yen market.5 As the report notes, "Recent measures instituted by the Japanese Government would appear to remedy substantially the previous inequities although it is too early to reach any definitive conclusion."6 This view of significant progress has been supported publicly by a number of foreign bankers in Japan." STANDARDS The brightest star in United States-Japan trade relations in the past year has been the great progress made in dealing with many of Japan's standards, previously a major impediment to numerous U.S. exports. The TFC and TSG have served as an excellent forum for dealing with standards problems when they were brought to the groups' attention. Nevertheless, some industrial standards problems remain and others will inevitably crop up. Uncertainty about standards or the failure to meet a standard can destroy a businessman's dreams of profit. A classic example is the delivery to Japan of 12,000 cans of spray disinfectant. The Japanese informed the importer that the pressure within the cans was too strong for Japanese standards. The importer, to avoid a complete loss, took each one of the 12,000 cans and held down the nozzle for three seconds so as to meet Japanese pressurized container standards. There was little profit on that import! Cosmetics and medical equipment are two areas where Japanese standards continue to impede U.S. manufacturers' sales in the Japanese market. First, because foreign test data in these areas remain unacceptable to the Japanese, U.S. products must be retested in Japan, which is expensive and time-consuming. An American applicant to the approval authority must have products tested by an agent a Japanese "legal" person, foreign subsidiary in Japan, or import agent. If problems arise between manufacturers and their agents, it can result in both a great financial cost to the applicant and a marketing drawback due to lost time, since the manufacturer must begin the whole approval process again through another agent, because the first agent holds proprietary rights over the test data originally obtained. The approval process also is unacceptably slow-6 months or more is too long a delay for a manufacturer anxious to market a new product and may allow time for Japanese companies to prepare their own, similar products. Finally, cosmetic and medical 5 It is interesting to note that foreign banks have been saved from some of the burdens which are placed on Japanese banks. "Unlike domestic banks, foreign banks in Japan are not required or encouraged to purchase government securities or to participate in bailout loans to local Japanese companies." It is not clear that U.S. banks would want or desire to be treated as completely "national" banks. 6 A surprising result of the Treasury study is the doubt it throws on the importance of U.S. bank operations abroad to U.S. exports. The Subcommittee is interested in the bank issue, because it assumes that there is a connection between U.S. banks and U.S. exports. The Treasury study, if valid, would indicate that this link is extremely tenuous (see Treasury Report, p. 125). 7 Nihon Keizai, November 20, 1979 (p. 23) (supplement). equipment manufacturers face obstacles due to the Japanese "positive list" of substances permitted in products-substances not included on the list result in the rejection of products containing those substances. Some firms have complained of difficulty in obtaining access to the list. (See page 63 for further discussion of the "positive list".) We want to express our appreciation for the remarkable progress made in the field of standards, and we hope that continuing TSG/TFC work will soon resolve remaining problem areas. Finally, we note that the Executive Branch has used a great deal of political capital to obtain an easier system of Japanese testing and certification. There are reports in some cases that American businessmen have not been particularly ready to move in to utilize these new procedures. This is regrettable, and in some cases raises questions as to whether the U.S. businessmen really have a product to sell. JAPANESE CUSTOMS SERVICE While any nation's customs officers, including our own, can on occasion be officious and arbitrary, there is some feeling that the Japanese Customs Service is particularly formidable. Many initial, unpleasant contacts with Japanese customs have contributed to the belief that Japan is a closed economy.8 For example, there was a famous case where an item, potato chips made from dehydrated potatoes, entered for market testing purposes and the importer was told that the product would qualify for a tariff of 16 percent. Later, when he presented a large order of the item for the purpose of filling sales orders, he was confronted with a different classification ruling, resulting in a profit-destroying 35 percent rate of duty. Greater specificity of Japanese customs classifications, and a willingness to give letter rulings on how an item will be classified, would be a major help to those seeking to sell in Japan. There is an appeals process in the Japanese Customs Service, but it is apparently little known or used by importers. According to some, importers are afraid to bring appeals, since they suspect it will result in harassment on future orders from the customs officers whose behavior or rulings have been challenged. We have not studied this issue in depth, but it appears that an improved appeals process, with easy access to the judicial system, would be helpful. We hope that the Executive Branch will explore this issue with the Government of Japan. There is good news, nonetheless, in the customs area. Japan's adherence to the Customs Valuation Code of the MTN should help make trade easier. Further, Japan is planning to speed-up her customs processing and procedures at the beginning of the year. DISTRIBUTION SYSTEM The Japanese distribution system has often been cited as a nontariff barrier. It certainly is part of the difficulty of selling in Japan and helps account for the general high price of consumer goods, but it applies to both Japanese and foreigners alike. While it is undoubtedly much harder for foreigners to get used to, it is probably just a fact of 8 See Frank A. Weil and Norman D. Glick, "Japan-Is the Market Open? A View of the Japanese Market Drawn From U.S. Corporate Experience." Law and Policy in International Business, vol. II, No. 3, 1979, (p. 862-865). 9 The TFC was successful in later getting the rate back to 16 percent. |