life one that those who want to sell in the profitable Japanese market. must struggle to deal with, either themselves, through Japanese partnerships, etc.10

Basically, Japan is a nation of small shopkeepers-and wholesalers. There is often at least one more wholesaler in the distribution system than exists in the U.S. system. In Japan, with a population about half that of the United States, there were 340,000 wholesalers in 1976 compared with 370,000 in the United States in 1972. Further, there are more retail establishments in Japan than in the United States (1.61 million as opposed to 1.55 million)." Inventories are kept small because of space problems-deliveries must be frequent-special services must be offered-mark-ups multiply.

Occasionally, there are signs that the system is modernizing,12 but for every two steps forward, there seems to be at least one step backward. The process of change is very slow, often resisted by the small shopkeepers who fear the spread of supermarkets and department stores. Following is an exchange of correspondence between Chairman Vanik and the U.S. Tokyo Embassy discussing the situation :

Recently, I had the opportunity to review a paper prepared by the Commercial section of the Tokyo Embassy entitled, "The Japanese Distribution System" (Unclassified A-1065). The paper, which contains a number of excellent descriptions, states in part, "On the balance, however, the improvements being effected will work to the benefit of U.S. exporters as well as to Japanese businessmen and consumers. In the future, American exporters' complaints that the Japanese distribution system itself prevents or retards the sale of their products will be increasingly less valid."

While this is an encouraging statement, it is discouraging to note that the paper was written in October 1972. What has gone wrong? Have the expected improvements in the distribution system not occurred? Have they been insufficient? Or have Americans simply failed to use the changes?

The Embassy replied (Oct. 9, 1979):

The distribution system continues to change consistent with the trends described in the Embassy's 1972 report which you cited. But the changes are coming slowly.

The 1972 report anticipated that a growth in the number and the sales volume of department stores and self-service stores would provide more streamlined channels to market for consumer goods. This in fact has occurred. From 1972 to 1976 department stores increased in number from 855 to 1,547. The sales of Japanese department stores rose 151 percent in that same period and were ¥77,573 billion in 1976. The number of self-service stores rose from 10,634 in 1972 to 14,543 in 1976. Due in part to the expansion of department and self-service stores, U.S. exports of nonfood consumer goods (excluding autos) to Japan increased from $355.9 million in 1972 to $802.4 million in 1978. U.S. consumer goods exports to Japan have continued to rise during 1979, up 50 percent during the first seven months of 1979 over the same period last year.

There is no doubt that large parts of the Japanese distribution system remain complex, and by our standards, antiquated. Japanese officials are aware of this and before the 1973 oil shock planned to encourage the rationalization of the sector. The unemployment in the 1974-1976 recession and popular resistance have hindered them from doing so. Such cultural and historical factors as the

10 There are a number of private and government articles describing the Japanese system and options for dealing with it. 11 Weil and Glick, op. cit. (p. 894).

12 It is not totally clear, however, that the movement to large department stores and shopping centers will actually result in more imports. Many of these large, more modern stores are closely tied to certain manufacturers who have little interest in selling imported goods in their retailing subsidiaries. See, for example, Clifford Elliott and Jang H. Yoo, "Innovations in the Japanese Distributive System: Are the Barriers to Entry Being Lifted?" Akron Business and Economic Review, Spring, 1980, (p. 28-33).

Japanese desire to shop in small neighborhood stores and the close loyalty of manufacturer to wholesaler to retailer do not change quickly. For these reasons, I do not believe the distribution system will be rationalized soon. I do, however, expect department stores and self-service stores to continue to increase in number. This should result in some increase in the amounts of U.S. consumer goods in the retail market.

The increase in U.S. exports of consumer goods to Japan, and particularly the jump in the last year, suggests to me that while the distribution system here is complex, it is not impenetrable. My conversations with American businessmen here have tended to bear this out. Indeed, I have been struck by their willingness and ability to work with, rather than against, the Japanese distribution system. Most do not put the distribution system high on their lists of the difficulties in doing business in Japan.

Failure to develop a costly distribution and service system in Japan can mean that companies which are initially successful in Japan will later wilt. The problem of competing with Japanese companies, who have a natural advantage in marketing in Japan, can be seen by the following recent article from Nihon Keizai:

U.S. PERSONAL COMPUTER MAKERS START ROLLBACK ON JAPAN MARKET Three major U.S. personal computer makers have started a rollback to regain their shares of the Japanese market.

They are Tandy Corp., Commodore Corp., and Apple Computer Inc., which until last year had been holding an overwhelming market share.

It was only in 1978 that the market assumed an appreciably large scale. During that year, Japanese electric-electronic machinery makers, such as Nippon Electric Co. and Sharp Corp., started entering the market, but the Americans still commanded a 90 per cent of the annual sales.

But the Japanese have so rapidly built up their sales since around the middle of 1979 as to turn the tables against the Americans.

Monthly sales in Japan are believed to have already attained between 6,000 and 7,000 units, of which NEC and Sharp each accounts for 2,000 to 3,000. This is said to have reduced the U.S. firms' combined share to only a few hundred. The Japanese success, though partly due to technological sophistication, can be attributed to their stronger and wider sales and maintenance service networks.

Sharp has more than 100 service subsidiaries throughout Japan, while the American trio each has only two sales and maintenance footholds, one in Tokyo and the other in Osaka.

The Americans thus have started spreading their maintenance services.

Apple Computer last July joined hands with Toray Industries, Inc. to offer joint sales and maintenance services on a Japan-wide basis. It also has disclosed plans to create a new local affiliate to intensify such services and to start marketing during autumn new models, including a Japanese syllabary-using one.

Tandy Radio Shack, besides marketing new quality models for businessmen last May, will also intensify its maintenance services this month in tie-up with Nisshin Electronic Service Co. of Tokyo.

Commodore, now seeking a similar tie-up with a local company, plans to start a joint maintenance service in some localities by September. (Emphasis added) Nihon Keizai, August 19, 1980.

While Japanese progress in improving the distribution system is very slow, we note that MITI's "Vision" for the 1980s discusses again the need for improvement: "measures must be implemented in such a way that modernization and advancement of distribution is induced and reinforced." 13 American firms will not be able to take advantage of these evolutions unless they enter the Japanese economy and fight for market share.

13 MITI, Mar. 17, 1980, NR-226 (80-7), (p. 25).

CARTELS

We believe that cartels may play an important role in keeping certain Japanese industries producing, and thus blocking increased imports which would, under conditions of free trade, displace those industries. Contrary to popular opinion, Japan's "industrial policy" has been frequently used to shore up or provide for the very slow decline of inefficient industries. These actions have helped either slow the rise of imports and/or maintain a level of exports. The literature and examples on this point are not clear, but the following news accounts (unconfirmed) are interesting. They clearly indicate we are dealing with an economy and way of thought about competition different from our own.1 14

PAPER MAKERS MOVE TO CUT PRODUCTION IN SUMMER TIME

Major manufacturers of papers seemed likely to curtail production in the summer in an attempt to maintain firm markets for their products. Paper prices were raised in April on the grounds of increased costs for raw materials, including woodchip imports.

To maintain the prices, leading paper producers consider it desirable to cut production by giving a longer-than-normal summer vacation to employees.

The idea of curtailment by vacation was raised by Daishowa Paper Mfg. Co. The firm notified the Ministry of International Trade & Industry of its plan to give a week-long vacation to plant workers. That will cause output to drop by 30 percent on the average in July-August, the company said.

Daishowa noted that its plan will be implemented if others in the industry follow suit. Oji Paper Co., the top paper maker, revealed that it was studying a similar plan.

Isekichi Igawa, president of Daio Paper Co. agreed with Oji and Daishowa, saying, "It is necessary to stabilize the market by voluntarily curbing production in the next two or three months."

As of May, clouds hung over the paperboard situation. But paper demand was a delicate question, with no clear signs of a downtrend appearing.

The producers' inventories, whose proper levels are considered 70-75 percent of shipments, were 65.7 percent and 68.5 percent in May and June, respectively. Source: Nihon Keizai, July 15, 1980

(Emphasis added.)

Japan's high tariffs on certain papers allow this type of activity. At the same time, MITI has been asking the paper companies to resist high American wood chip prices!

Gov'T ASKS PAPER PRODUCERS TO HOLD BACK FROM CHIP IMPORTS The Ministry of International Trade & Industry has urged the paper industry here to refrain from importing woodchips from Weyerhaeuser Co. in the second quarter.

14 In our Jan. 2, 1979 report, we referred to the operation of an aluminum cartel. We asked the Japanese Embassy for comments on that previous analysis and they have supplied us with the following data: "a. At present, the appropriate capacity for the production of aluminum is determined to be 1.1 million metric tons in accordance with the "Interim Measures To Stabilize Specific Depressed Industries" law which was adopted in 1978. The Government of Japan expects that the present level of production will continue although present capacity is 1.64 million metric tons. Thus, excess capacity of 530,000 metric tons per year in existing facilities is frozen.

"b. The aluminum cartel was formulated in accordance with the antimonopoly law for the period from September 1978 to March 1979 in order to adjust the inventories built up by the economic recession. The economic conditions have improved, so the cartel has not been in existence since March 1979.

"c. A system of tariffs/quotas was instituted in accordance with the results of consultations of the Aluminum Committee of the Industrial Structure Council. The tariffs and quotas were in effect in 1978 and 1979, but were entirely eliminated by March 1980.

"d. In order to meet the increasing demand for aluminum, the Government of Japan intends to promote overseas investment projects in aluminum, and to import aluminum produced by the overseas investment projects.

"e. The United States is now the largest supplier of aluminum to Japan, having increased its share from 5.9 percent of total Japanese aluminum imports in 1978, to 15.1 percent in 1979 and 30.9 percent in the first 6 months of 1980."

The U.S. firm, the single largest source of imported chips for the industry, earlier notified the Japanese users of big price hikes, e.g., 41.3 per cent increase for Douglas fir over the first quarter (JEJ, April 8 issue).

MITI fears that acceptance of the Weyerhaeuser price proposal may lead to similar hikes for chips imported from, among others, Canada and Australia. The Ministry is also concerned about production cost increases for papers. Source: Nihon Keizai, April 15, 1980.

If the news accounts are accurate, this would be an example of keeping raw material prices low and domestic production protected. If widespread, this practice could have a heavy impact on trade.

CULTURAL BARRIERS TO IMPORTS

Besides NTB's which may be attributed to action or nonaction by the Japanese Government, there are private sector quasi-NTB'sessentially Japanese buyer preference for goods produced in Japan. This preference is based largely on multi-generation buyer-supplier relationships which may involve equity or other financial interests of a buying firm in a supplying firm, or vice versa. As some experts have noted:

Concentration of the import trade among a few large trading companies that have ties with domestic manufacturers may limit the extent to which a foreign firm can gain representation in Japan, because business ethics prevents a trading company from marketing competing imported products. The foreign supplier thus must maneuver within a market that developed (originally) through government/private sector cooperation, and in which strong informal buyer/supplier relationships between companies in a Keiretsu, reinforced by shared equity interests, limit market accessibility to foreign importers of potentially competing products.15

In many other cases, groups that would be competitive in the United States have been united in a web of marriages and family ties that would confound a C. Wright Mills. Enthusiasm for importing is not likely to occur soon under these conditions. These private barriers to trade are very serious and may account for billions of dollars in lost U.S. export opportunity. The American private sector must work hard to overcome the traditionally strong buyer-supplier relationship and business ties to succeed in the Japanese market.

That Japan still is not particularly "used to importing" may, perhaps, be seen in some statistical anomalies. In recent years, the Republic of Korea has shipped about a million tons of steel across the Pacific to the United States at prices generally below Japanese prices. Yet Korea has only been able to ship about half a million tons of steel product across the narrow Straits of Korea and into Japan. Why? The Subcommittee recently requested comparable United States/Japanese data on imports from Korea, Taiwan, and Singapore. Following are examples of cases where the same product at a similar price was shipped to both Japan and the United States, and yet the relative quantity per person shipped to nearby Japan was much lower than that shipped across the Pacific to America. Why? Again, we have no concrete answers. We do not believe that there are official, government tariff or nontariff reasons for "failing to import.' The answer may lie in the fact that Japanese buyers and shippers would prefer to "Buy Japanese" whenever possible.

Following are some of these comparative figures:

15 Weil and Glick, op. cit., (p. 854).