to trade and to the elimination of discriminatory treatment in international commerce ..."

The United States contends that a review of the Japanese measures supports the conclusion that the Government of Japan has established a pattern of discrimination against imports of tobacco products from the United States. Moreoever, the protection which these restrictions afforded to domestic production was immune from negotiation because it did not take the form of a tariff but rather was reflected in a complex and sophisticated system of restrictions the effect of which was to exclude imported products from an opportunity to compete.

The United States believes that a finding along these lines would serve an important purpose in this case because it would lay the basis for a recommendation of the CONTRACTING PARTIES that Japan, not only, eliminate the GATT illegal measures, but also, agree to negotiate away any protection which persists. Such a finding and recommendation would serve the objectives of the GATT and help to remedy to damage to U.S. export interests caused by the measures which

have been challenged in this dispute.

Senator LEVIN. We also received a letter from the persons who represent the pipe tobacco industry. That letter will not be read but it will be made part of the record.

[The information referred to follows:]

In an

In connection with the Small Business Committee hearing, scheduled for June 25, on the Impact of Nontariff Barriers on the Ability of American Small Business to Export to Japan, you and your fellow members on the Committee will be interested in a particularly egregious situation involving Japanese nontariff barriers on imports of American pipe tobacco. effort to obtain fair access to the Japanese market we filed a complaint under section 301, Trade Act of 1974, on behalf of the Associated Tobacco Manufacturers, which represents a number of small pipe tobacco producers in the United States. A copy of our October, 1979 complaint is attached.

All commercial imports of pipe tobacco in Japan are made by the Japan Tobacco and Salt Public Corporation (JTS), a government agency. JTS also produces pipe tobacco in Japan. JTS has restricted access to the Japanese market for imported pipe tobacco through a variety of devices, including a

prohibition on point-of-purchase and media advertising except English-language media.

Typically,

The most damaging of these restrictions, however, is the pricing policy under which JTS sets exorbitantly high and discriminatory retail prices for imported pipe tobaccos. American pipe tobaccos are marked up to over 500 percent of their c.i.f. cost to JTS, whereas equivalent Japanese pipe tobaccos are marked up by about 200 percent. In a U. S. Government background paper, dated December 26, 1979, and prepared for use in the section 301 proceeding, this restriction was described as follows:

"The current pricing system of monopoly payments is
clearly designed to prevent imported tobacco products
from fairly competing with JTS domestic tobacco
products on the basis of cost. The monopoly pay-
ment on imports (containing an "implicit duty" of
indeterminate amount) was set at a level which would
ensure that the retail price of imported tobacco
products would exceed that of comparable domestic
products. In the case of
pipe tobaccos, the
cost advantage of imports was so substantial that
even enormous markups based on much higher monopoly
payments resulted in only somewhat higher retail
prices (as compared to high-cost domestic brands),
allowing significant import penetration in spite of
the high degree of protection".

....

In April of this year, after the Tokyo Round of tariff negotiations was concluded, Japan imposed a confiscatory duty of 110 percent on pipe tobacco imports. Since JTS is a government agency, which traditionally and logically is exempt from import duties, we regard this as a sham to try to justify the unreasonable JTS markups.

One of the most disturbing things about this state of affairs is that the imposition of the 110 percent duty has resulted in a further increase in the price of American pipe tobaccos in Japan, at the same time that Japan is ostensibly negotiating in good faith to eliminate the unreasonable and unjustifiable barriers to imports of American pipe tobaccos. Attached is a copy of our June 23, 1980 letter to the Office of the United States Trade Representative on this point. Our trade negotiators are apparently unable to obtain redress of our grievances. In fact the situation has grown worse since the negotiations were initiated under section 301.

Sincerely yours,

Peter Buck Felle

Peter Buck Feller

On Behalf of the Associated
Tobacco Manufacturers

PBF: aj

Attachments

Senator LEVIN. I think we have to take much stronger measures to let the Japanese know we will not tolerate these practices. I think we have the cards in our hands for a change here and we should use them. It is long overdue.

I come from a State which manufactures automobiles. I know what the problem is there. I hope more and more of Congress learns what the problems are with cigars, cosmetics, and a few other things we will hear about this morning, including soap products. They are getting more and more familiar with cars but this is a broad-ranging problem. Small business people in particular are devastated needlessly when foreign markets are closed to them.

It is difficult enough to export in terms of redtape, but when markets abroad are closed to them because of the kinds of barriers you describe, it is an absolute and needless affront as well as business loss to our small business people.

We appreciate your statement. Thank you.

Our next witness will be Donald Lehrman, vice president, international planning, General DataComm Industries, Inc.

Senator Weicker wanted to be here when you testified because you are from Connecticut. Perhaps he might be back. We welcome

you.

STATEMENT OF DONALD LEHRMAN, VICE PRESIDENT, INTERNATIONAL PLANNING, GENERAL DATACOMM INDUSTRIES, INC.

Mr. LEHRMAN. Thank you, Senator.

I appreciate this opportunity to appear before this committee. Senator Levin, beginning with the Carterphone decision of the FCC in 1968 that effectively opened the U.S. telephone network to interconnection of customer-owned equipment, a multimillion-dollar market has been developed that is essentially open to all, and I do mean all-not just U.S. manufacturers, but to anyone who can produce equipment acceptable to the customer which meets agreed upon technical standards.

The industrious Japanese were quick to see this burgeoning market and have since made major inroads, especially in the private branch exchange field. The major beneficiaries of this market capture were those companies which had a totally captive market in Japan: Nippon Electric Co., Fujitsu, Hitachi, Oki, Toshiba.

Such is not the case with the Japanese market. Until 1973, Japan was closed as far as United States or other non-Japanese communication manufacturers were concerned. In 1973 Japan agreed to open the door to limited imports of non-Japanese manufactured computer and communication hardware.

At that time, the U.S. manufacturer had a clear technological lead, not only in computers but also in the field of data communications needed to support the growth of industrial, financial, and technical computer networks.

The leading U.S. modem manufacturers quickly seized the opportunity and soon had begun developing a significant market consisting of sales directly to the end user, even though such sales were limited to modems to be connected to private or leased lines.

By the beginning of 1978, in spite of the many impediments to these sales, such as ill-defined type approval requirements, limita