Text: Commerce's Aaron at American Chamber of Commerce of Japan
("Japan needs to do more to assume its responsibilities.")

America's trade policy with Japan is built on three simple facts: Japan is the world's second-largest economy; Japan is America's second-largest trade partner; and Japan lacks a genuinely open market, according to Under Secretary of Commerce for International Trade David Aaron. "On these three facts rests a highly complex and unsatisfactory trade relationship -- one in which the United States has not had a surplus since 1965," Aaron said in July 29 remarks in Tokyo before the American Chamber of Commerce of Japan. "We recognize Japan as a global economic leader. But we also believe that with leadership comes responsibility. And Japan needs to do more to assume its responsibilities."

According to Aaron, the United States would like Japan to be more active in pursuing increased openness in the world trading system, assume a leadership role appropriate to its economic size in the Asia-Pacific Economic Cooperation (APEC) forum and the World Trade Organization (WTO), and to exert leadership in the area of electronic commerce.

"If electronic commerce is to flourish, the efforts to finding the solution to problems like consumer protection, privacy, authentication, and harmful content should be industry led and market driven. The hand of government regulators should be as light as possible. We must allow industry to develop and implement these critical technologies," Aaron said.

Aaron expressed concern about the growing trade imbalance between the United States and Japan.

"The growth of the trade imbalance since 1997 is reminiscent of past strategies to get well by intensifying efforts to export to the U.S.," he said. "But I can assure you that the long-term effects -- both political and economic -- will be unfortunate for our relationship."

Aaron said that the United States wants to see greater deregulation of Japan's markets in several areas -- medical and pharmaceutical products, retail stores, telecommunications and foods -- and wants to see Japan more fully comply with and promptly renew its bilateral trade agreements.

"The high road of openness is best -- for Japan and the world," Aaron said.

Following is the text of Aaron's remarks, as prepared for delivery:

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REMARKS OF AMBASSADOR DAVID L. AARON
UNDER SECRETARY OF COMMERCE FOR INTERNATIONAL TRADE
BEFORE THE AMERICAN CHAMBER OF COMMERCE OF JAPAN
TOKYO AMERICAN CLUB

TOKYO, JAPAN
JULY 29, 1999

Good afternoon. I am happy to be with you today. As many of you may know, my specific reason for visiting Japan at this time is to lead Bilateral Construction Review Talks. But as many of you may suspect, my agenda is broader. Not only does the U.S. want Japan to open its markets -- from construction to pharmaceuticals to flat glass -- for the sake of its bilateral trade relations. We want it to open its markets for the sake of strong growth in Japan and throughout Asia and for the economic health of the world. U.S. trade policy regarding Japan is built on three simple facts: First, Japan is the world's second-largest economy. Second, Japan is our second-largest trade partner. Third, Japan does not have a genuinely open market. On these three facts rests a highly complex and unsatisfactory trade relationship -- one in which the United States has not had a surplus since 1965. We recognize Japan as a global economic leader. But we also believe that with leadership comes responsibility. And Japan needs to do more to assume its responsibilities. Our negotiating agenda with Japan reflects the importance and breadth of our trade relationship. Our two governments are now holding -- or have recently engaged -- in wide-ranging discussions concerning a number of topics;

-- the Asian financial crisis and Japan's economic growth;

-- monitoring and enforcement of our existing bilateral trade agreements -- of which the construction talks are a subset;

-- promoting market opening and deregulation in Japan;

-- dispute settlement proceedings at the WTO;

-- the upcoming WTO trade round;

-- and regional trade liberalization through APEC, Asia-Pacific Economic Cooperation.

But diverse as these issues are, the themes of leadership and responsibility run through all of them. Japan's recovery is critical to Asia's future prosperity and Asia's health is in turn critical to global economic stability. In the current situation, Japan should be acting as the engine of Asian economic recovery by offering a healthy, open market to its neighbors' exporters. Perhaps, because of its own continued weakness, Japan has not assumed that role.

What should Japan be doing? First and foremost, we would like to see Japan exert more leadership in pursuit of increased openness in the world trading system. Insular thinking in an economic powerhouse such as Japan can have negative effects worldwide.

Japan needs to assume a leadership role appropriate to its economic size in two important forums -- APEC and the WTO. Japanese officials often warn against protectionism in the U.S. and urge that America set the example. Japan needs to do so as well, by itself offering broad market access for foreign goods and services. We are moving into a new WTO round. The WTO is taking up a number of initiatives that originated in APEC, seeking measures to open up trade in 24 major areas -- including energy, automobiles, environment and fish. Japan should seize this opportunity to lead the world toward more open markets.

Another area where we very much want and need Japan to exert leadership is in the new area of electronic commerce.

We are at the very beginning of a world of promise -- all we have to do is remain on the right track. The guiding first principle should be the free flow of information and electronic commerce transactions. As of now, not one member of the WTO imposes customs duties on electronic transmission imports. We must keep it that way. We secured a temporary hold on application of tariffs to internet communications at the WTO last year, and we seek consensus on extending the tariff-free treatment this year.

If electronic commerce is to flourish, the efforts to finding the solution to problems like consumer protection, privacy, authentication, and harmful content should be industry led and market driven. The hand of government regulators should be as light as possible. We must allow industry to develop and implement these critical technologies. We are grateful that Japan shares this view. But the European Union favors a regulatory approach as reflected in the principles it recently proposed to the WTO.

If we are to prevent the EU regulatory umbrella from shading the globe and possibly stunting the growth of electronic commerce, Japan and the U.S. must continue to work together in favor of freedom and flexibility.

A second aim of our discussions is Asia's continued recovery. Here the benefits of economic statesmanship are even more direct. I have frequently said that Japan and China are the two keys to regional recovery. And of the two, Japan is the more important, because it represents realized, rather than potential, economic strength.

With two-thirds of the regional GDP Japan can virtually ensure Asian growth just by doing the right things to achieve its own recovery and vigorous long term growth. The right things, we are emphasizing in our discussions, are first, effective and sustained implementation of fiscal stimulus -- to restore robust demand-led domestic growth; second, strengthening the financial system; and third, comprehensive deregulation and market opening. Unfortunately in a publication by MJTT on plans for the deregulation of the economy, the only place the word trade appeared was in the name of the Ministry that wrote it.

Yet another aim of our ongoing dialogue with Japan is ensuring that it lives up to the responsibilities of its bilateral trade agreements with the United States. Our rising trade imbalance with Japan is putting our bilateral commercial relationship under increasing pressure. We are heading toward another record deficit this year.

Frankly, the growth of the trade imbalance since 1997 is reminiscent of past strategies to get well by intensifying efforts to export to the U.S. But I can assure you that the long-term effects -- both political and economic -- will be unfortunate for our relationship.

The high road of openness is best -- for Japan and the world. The U.S. has pursued that road all during this decade, advocating open markets and practicing what we have preached, even as other countries have tried to work their way out of their economic doldrums by keeping their markets closed and taking full advantage of our open one. We are confident that this is the right path. I would note that despite the increased trade deficits of the past few years, the U.S. is virtually the only developed country in the world whose economy has stayed strong.

Let me briefly examine a few selected sectors where we are urging Japan to open markets more fully.

-- Medical/Pharmaceutical Deregulation

First, the Department of Commerce leads the U.S. Government's market access efforts to deregulate Japan's medical device, pharmaceutical, and nutritional supplements markets. U.S. companies are world leaders in developing innovative medical products.

In the context of our discussions under the Enhanced Initiative on Deregulation we have made important progress. We recently secured agreement from the Ministry of Health and Welfare to "recognize the role of the market" as it continues to study pharmaceutical pricing reforms. Equally important, we have also come to agreement on the medical devise issue. MHW will implement procedures for developing new 'by-function' categories which will facilitate the sell of U.S. medical devises by providing incentives for our firms to bring the latest technology to the Japanese market.

Highlighting our recent successes, we are continuing to emphasize to the Government of Japan that innovation is a key element to the solution to Japan's health care concerns. In particular, we argue that innovative drugs and devices dramatically reduce overall health care costs, while improving care.

We have also pointed out that slow regulatory approvals and bureaucratic reimbursement systems have kept innovative treatments from Japanese patients. For example, since 1981 only 20 percent of new global pharmaceuticals -- those available in six or more nations -- are available in Japan. Many of the latest medical devices are also unavailable, affecting human life, not just the trade statistics. One drug alone -- available in the U.S. but not in Japan -- saves nearly $9,000 per patient in the cost of treating congestive heart failure. That's $2 billion a year in the U.S.

And yet Japan is pursuing a plan to change its pricing system in a way that would further impede or prevent the introduction of such innovative products in Japan. Not only would this fail to address the underlying problems of inefficiency, it would only worsen the problems of health service delivery.

We will continue working to ensure that Japan's health insurance reimbursement and regulatory reform plans encourage and reward -- rather than discourage -- the introduction of innovative pharmaceuticals and medical devices into Japanese markets.

Retail Deregulation

Another area of concern is retail deregulation. The new Large-Scale Retail Store Location Law goes into effect on June 1, 2000, allowing local governments to regulate large-scale store openings or expansions. It replaces the Large-Scale Retail Stores Law, which has long been an obstacle to foreign investors and exporters.

The new law provides that regulation of large stores will no longer be based on supply/demand considerations...but on the degree to which a large store opening or expansion affects the local environment, particularly traffic, noise, parking, and garbage removal.

We welcomed the abolition of the Large-Scale Retail Store Law, but we continue to have reservations about the new legislation -- as do the biggest Japanese retailers. The letter of the new law is unclear. Only the way in which the law is implemented will determine its impact. It may mean greater market access for large stores, and for imports, or it may become cumbersome and potentially more restrictive than before. Time will tell.

Telecommunications

We are also pressing for accelerated deregulation of Japan's telecommunications market. Barriers to newcomers and inadequate regulation of dominant carriers has stunted competition and slowed growth in this sector. While investment in telecommunications is booming around the world, it has shrunk in Japan over the past two years. The Ministry of Posts and Telecommunications is now working on new interconnection rules. It is vital that these rules lead to more competition in the marketplace.

GMO

Another regulatory issue of concern is the possibility of new labeling requirements for foods containing products of biotechnology. We fully expect Japan's labeling guidelines will be based on sound science and consistent with its obligations under the WTO. Since the U.S. supplies over 30 percent of Japan's food imports -- with sales totaling over $9 billion in 1998 -- we are concerned that possible GOJ action will significantly disrupt trade.

Compliance with Bilateral Trade Agreements

The Department of Commerce plays a major role in ensuring Japanese compliance with our existing bilateral trade agreements or renewal of those that are about to expire. Two agreements -- semiconductors and NTT -- have been renewed. We are very disappointed with the lack of success under the 1995 Glass Agreement, which will expire at the end of this year. After an initial increase in market share during the first year of the agreement, progress has stalled. U.S. glassmaking firms say their market share is 2 to 3 percent in Japan, compared to 10 to 30 percent in other glass markets. That market share has remained remarkably constant from year to year. Moreover, the individual market shares of Japanese firms have also stayed constant over the years. Indeed it has stayed constant for more than 30 years. That is a further indication of a carefully managed overall market for flat glass. This is a breach of faith with our bilateral agreement, if not a violation of the terms.

Unfortunately this is not unusual. It has not escaped our notice that the U.S. share of Japan's public computer procurement market has increased only one percent since the signing of the 1992 agreement.

Construction

And then there is the case of construction.

U.S. construction firms also continue to experience problems, even though our major projects agreement remains in force. I am here -- in part - to conduct the annual construction review because of these concerns.

U.S. firms have made very limited progress in Japan's $250 billion public works sector. In 1998, U.S. firms were awarded only $50 million in contracts, half of what they won the previous year. This year's data shows that U.S. firms again are headed for the $50 million mark.

On the positive side, U.S.-Japanese partnerships have won three contracts for Central Japan International Airport over the past year. U.S. firms also have been making a bit of progress in Japan's private sector market.

In my current discussions and in the near future, we will continue to press Japan for significant improvements in the public works area. And if we have to, we will do more than talk. We had Japan in mind when the President achieved renewal of Title 7 recently. And we have watch-listed Japan under Title 7.

Autos/Auto Parts

Finally, another major and continuing area of concern is autos and auto parts. In 1998, autos and auto parts accounted for the more than half of our total trade deficit with Japan. Improving access for U.S. companies to this market has been a high priority for this Administration.

The Japanese Government must do more to ensure that the 1995 U.S.-Japan Automotive Agreement succeeds. After the Agreement was signed we experienced two years of very positive trends. But in 1998 sales of vehicles made in North America fell by more than one-third, and they're dawn another 18.2 percent in the first quarter of this year. Market share of the big three U.S. auto makers is only one-half-of-one-percent.

We have let the Japanese Government know that, despite its weak economy, we fully expect Japan to take steps to deregulate and open the market in this sector both to accelerate progress under the Agreement and to help revitalize the economy. This is important to us, and we will continue to press Japan on all levels to make progress.

From the areas I have just described, you might get the idea that the U.S. believes there are areas where Japanese companies are engaging in anti-competitive practices. You would be correct. We would prefer to believe further that these areas are simply remaining vestiges of past practices, and that when brought to the attention of the government, they will be corrected. Certainly, their continuation is increasingly harmful not only to Japan's economy, but to its international stature. And it is not acceptable to the United States.

Steel

Finally, let me say a few words about steel. No subject has consumed more time and attention of Washington's economic agencies over the last year. The surge in unfairly priced Japanese steel -- along with imports from Russia -- did enormous damage to our steel industry from which it has yet to recover. This unleashed protectionist forces in the U.S. that we still have not yet fully contained. It is essential therefore that Japan continues to move toward steel export levels that existed in 1997 -- before the surge.

In closing, let me observe that having also just been to Korea and China, I think we can expect a spate of reporting on the coming Asian recovery. Part of that, of course, is that once the media gets tired of writing "Asia in Turmoil" stories, they turn to writing "Asia on the Rise." But there is a basis in fact for the recovery stories. The Asian economy is increasingly strong.

But how far the recovery goes, and how quickly it occurs, ultimately depends on Japan. Japan can revitalize Asia by strengthening itself through the kinds of actions and reforms I have outlined. Failure to do so will encourage firms to invest in other areas of Asia that are undergoing reform and are opening up.

For example, we estimate that China's accession to the WTO will lead to an immediate increase in world exports of goods and services to China of $21.3 billion. The U.S. share should be more than $3 billion. Where will traders and investors want to go -- a stagnant Japan which continues to close its markets to the world or an opening giant like China?

This is an increasingly competitive world. Japan is a leader, and so it has the responsibility to make its choices. The U.S. wants and needs Japan by its side, working in tandem to restore economic health in some areas that have temporarily lost it, and to extend prosperity to those areas that have never had it. This can be our great work together in the 21st century. It can begin in the waning days of the 20th.

Thank you.

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