Docket No. 301-93

Submitted by Japan Automobile Manufacturers Association

To United Stated Trade Representative Section 301 Committee

Introduction
These comments set forth the position of the Japan Automobile Manufacturers Association ("JAMA") on the threatened imposition of 100 percent punitive duties on certain automobiles from Japan under Section 301 of the Trade Act of 1974, as amended ("Section 301"). They are submitted pursuant to the U.S. Trade Representative's ("USTR") request for public comment.

As explained below, JAMA believes that the imposition of punitive duties, in any amount, will violate United States obligations under the World Trade Organization ("WTO") Agreement. Moreover, JAMA believes that such duties are inappropriate because the USTR's determination, upon which such punitive duties are premised, is unjustified and indefensible. In addition to these points, JAMA provides below its comments on the adverse effects of an increase in duties on U.S. consumers.

I. The Imposition of Punitive Duties on Japanese Automobile Imports Will Violate U.S. Government Obligations Under the WTO Agreement.
It was the United States, along with Japan and other nations, that struggled so hard and so long in the Uruguay Round negotiations to give the new dispute resolution procedures and rules real "teeth," precisely so that WTO members would not feel free to pursue protectionist actions without any real limits. It was recognized that binding dispute resolution was absolutely necessary to the integrity of the new international trading system. According to the Statement of Administrative Action ("SAA") accompanying the United States' WTO-implementing legislation, in fact, "to ensure that the United States enjoyed the full benefits it had bargained for in the Uruguay Round, U.S. negotiators insisted on the inclusion of a fair and effective WTO dispute settlement system." Having recognized the relevance and applicability of such dispute resolution procedures, the U.S. Government cannot now ignore the limitations set forth in those procedures without serious repercussions.

As a matter of GATT law, the proposed punitive duties are simply illegal. The unilateral, retroactive imposition of punitive tariffs clearly violates United States obligations under Articles I and II of the GATT, and Article 23 of the Dispute Settlement Understanding.

A. The Proposed Punitive Duties Violate Articles I and II of the GATT
Article I of the GATT imposes an obligation on member countries to apply duties on a "Most Favored Nation" basis. The U.S. imposition of punitive duties against Japan alone violates this principle. Article II of the GATT requires countries to abide by the schedule of bound tariffs negotiated under GATT. The imposition of 100 percent duties on Japanese automobiles violates this provision because the U.S. schedule of bound tariffs under Article II provides for maximum duties in the amount of 2.5 percent ad valorem. The GATT provides a limited number of exceptions under which such a violation can be justified. However, the proposed imposition of punitive duties cannot be justified under any of these exceptions.

JAMA is unaware of any reputable scholar of international law, in the United States or elsewhere, who would contradict this thesis. In fact, eminent American international legal scholars have affirmed this conclusion in no uncertain terms. Professor John Jackson of the University of Michigan has explicitly condemned these proposed duty increases, stating in a recent opinion piece that:

Similarly, Robert E. Hudec, another eminent scholar with extensive publications on the law of the GATT has stated, in a book published in 1990, that:

Thus, while the Committee has asked for comments on the level at which duties should be set, the answer here is clear: It is illegal under international law for the United States to single out Japanese automobiles for the imposition of any duties above 2.5 percent on the basis of the USTR's determination in this investigation.

B. The Proposed Duties Violate Article 23 of the DSU
The proposed duties ignore the dispute settlement mechanisms established under the WTO. Under Article 23 of the WTO Agreement entitled "Understanding on Rules and Procedures Governing The Settlement of Disputes" ("Dispute Settlement Understanding" or "DSU"), trade disputes between signatories must be submitted to review. Only after such mandatory dispute resolution, and a determination by the WTO that there has been a violation, can one nation take "legal" retaliatory action against the trading partner that is in violation.

The May 10, 1995 USTR announcement to the press stated the intention of the United States of pursuing both unilateral sanctions on Japanese automobiles and dispute settlement under WTO procedures. The U.S. two-track approach is internally inconsistent. In one proceeding, the U.S. follows the WTO procedures and implicitly acknowledges the importance of multilateral solutions to disputes. At the same time, in the other proceeding the United States blatantly ignores the WTO procedures and acts unilaterally. The USTR has tried to rationalize this inconsistency, claiming that the U.S. is using the WTO for all matters within the scope of the WTO and Section 301 only for matters outside the scope of the WTO. This rationale cannot cure the illegality of the unilateral actions under Section 301.

First, the distinction between matters within the scope, and matters outside the scope of the WTO is contradicted by the USTR's own notice of its intentions. The Notice of Determination ("Notice") in this investigation cites Japan's "complex system" that "channels most repair work to government-certified garages that use very few foreign parts" and "restricts the development of other garages more likely to carry and use foreign parts." However, the United States also cites the "certification system for garages and mechanics" in its letter to the WTO notifying the U.S. intention to invoke the dispute settlement mechanism of the WTO.

Thus, if the complaint by the United States is that Japanese regulations are discriminatory, these regulations are covered by the national treatment obligation of Article III of the GATT. If the U.S. complaint is that regulations are somehow excessive but not discriminatory, such regulations are covered by the Technical Barriers to Trade Agreement ("TBT Agreement"). Finally, if the U.S. complaint is that the measures are not violations of specific provisions but somehow impair U.S. benefits, the United States may complain only under Article XXIII:1(b) of the GATT covering disputes on "non-violation nullification and impairment." Thus if the practices complained of are covered by WTO agreements, the proposed unilateral retaliation violates the DSU Article 23 requirement that such disputes be pursued under DSU procedures.

As noted above, it is JAMA's position that the actions and practices complained of are not properly "trade disputes" in that the practices complained of do not violate any GATT obligation nor "nullify or impair" any such obligations. However, even in the event the matters complained of are not covered by the WTO, that fact cannot justify WTO-inconsistent retaliation.

That "cross-retaliation" is inconsistent with the U.S. obligations under the WTO is recognized in statements by the United States itself. In particular, the SAA recognizes the impermissibility of "cross retaliation." Cross retaliation is defined as retaliation against a country's exports of goods on the basis of foreign practices not covered by the GATT. The U.S. noted in the SAA that cross retaliation "would have run afoul of U.S. obligations under GATT and could have engendered counter-retaliation." The U.S. has also noted, in connection with the European Union ("EU") banana dispute, that countries may not impose sanctions which are WTO-illegal in connection with a trade dispute which originates outside the confines of the WTO. That is, the U.S. may not target WTO-covered products under the justification that the sanctions stem from a dispute outside the WTO.

C. The Unilateral Imposition of Punitive Duties Threatens The Entire WTO System
As noted above, the bases for the proposed sanctions are Japan's domestic automobile safety inspection regulations. However, such regulations are not unique to Japan. In fact, all developed countries regulate automobile operations for the protection of public safety and the environment. The matter is properly a domestic regulatory matter and not a trade issue. Thus, unilateral action in the form of 100 percent duties is especially inappropriate in this context. The U.S. position, if generally accepted and similarly pursued by other countries, would completely undermine the GATT system.

This is precisely the conclusion reached by a GATT panel that considered a similar unilateral trade measure imposed by the United States. In "United States - Restrictions on Imports of Tuna," the Panel was considering import restrictive measures applied under a U.S. law (the Marine Mammal Protection Act) that prescribed standards for extraterritorial application. The United States sought to justify the measures as "necessary to protect human, animal or plant life or health," under Article XX(b). The panel concluded that:

This same analysis clearly applies to the United States' use of Section 301 in this case. Any interpretation of GATT, permitting one contracting party to unilaterally apply standards extraterritorially would entirely undermine the GATT system.

As the Panel suggests, this U.S. challenge to the Japanese safety and inspection system inevitably renders the entire U.S. vehicle inspection and repair system and the U.S. after-market open to the scrutiny of other countries. In judging the appropriateness of the U.S. action, the USTR should consider the effects if these other countries decide to follow the U.S. lead and unilaterally judge whether the U.S. system is discriminatory or anticompetitive, and to retaliate based on a unilateral determination.

In this context, JAMA notes that, in fact, practices of suppliers to the U.S. after-market clearly raise competitive questions. For example, U.S. parts companies engage in "stock lifting," in which they purchase all the inventory of their competitors from a distributor, replace it with their own product, and arrange for the resale of competitors' products, often knowingly dumping them overseas. Stock lifting is not only market-disruptive, but it also makes it very hard for new domestic or foreign competitors to break into the U.S. after-market. Stock lifting is just one example of numerous, pernicious practices in the U.S. after-market.

It is JAMA's strong belief that the unilateral approach adopted by the United States is inappropriate. The proper avenue for addressing the U.S. concerns, if not through the WTO under the standards set forth in the TBT Agreement, is the normal administrative process and routine agency review. This is the approach adopted by companies with respect to fuel economy, auto labeling, air bags, crash protection, and dozens of other issues. This is also the approach being adopted now regarding the controversy in the United States over how stringent local emissions inspections will be and how they will be conducted. This is a local and national matter, and should not be subject to international threats of trade sanctions.

JAMA believes that a cooperative approach is effective. Earlier this month, JAMA held its "one-on-one" conference in which 200 Japanese auto company personnel and 275 U.S. supplier representatives met to explore parts sales opportunities. It is this business-to-business cooperation that has increased U.S.-made parts purchases so dramatically, from $2.5 billion in 1986 to $15.5 billion in 1993.

It is this industry-to-industry approach which has brought the successful relationships and business we see today. JAMA and its member companies are trying to maintain those successful relationships in the face of truly unprecedented U.S. Government and private efforts to undermine them. That cooperation is the only way that this successful relationship can continue. What a shame that our tremendous accomplishments to date stand to be undermined by short-sighted economic isolationism. Even in the face of an almost overwhelming economic threat, JAMA member companies cannot willingly participate in undermining the rule of law in international trade to serve narrow political and commercial interests.

II.The Imposition of Punitive Duties on Japanese Automobile Imports is Unsupported and Unjustified by Any Substantive Findings.

A. The Determination Is Not Supported By The Evidence.
The duty increases are also inappropriate because they are unjustified by any substantive findings. Section 301 contemplates an investigation into the acts or practices which are subject to review. In this case, the "Reasons for Determination" in the Notice set out only conclusory statements that are not supported by the record of the Section 301 investigation. The "Reasons" cite Japan's "complex system" that "channels most repair work to government-certified garages that use very few foreign parts" and "restricts the development of other garages more likely to carry and use foreign parts." In addition, the Notice cites the fact that "even minor additions of accessories to motor vehicles require a full vehicle inspection and tax payment." Yet the statement offers no support for these conclusions, not even a single example of a U.S. auto part that cannot be marketed in Japan because of these "practices."

The facts are that U.S. after-market parts are not sold in high volumes in Japan because most cars operating in Japan are Japanese, and U.S. parts manufacturers are not making replacement parts for Japanese cars built in Japan. In fact, a recent survey undertaken in Japan showed that less than a handful of U.S. after-market suppliers offer catalogs and application data for Japanese nameplate vehicles sold in Japan. Lastly, a recent U.S. survey determined that over two-thirds of the U.S. after-market suppliers have little, if any, interest in exporting to Japan.

The record does contain allegations that the U.S. market for replacement parts is "open" but the Japanese market is "closed." One of the anecdotal situations included in the record of the investigation involves shock absorbers. According to this account, shock absorbers from the United States are hampered in their access to the Japanese market, while the access of Japanese shock absorbers to the United States is entirely unhampered. This "anecdotal evidence" cannot withstand scrutiny. Contrary to the suggestions of this anecdote, the share of foreign brand shocks and struts sold for Big 3 cars and light trucks in the U.S. independent after-market is under 1.5 percent. By contrast, Tenneco reports that its shock absorbers have a three percent share of Japan's aftermarket.

Finally, the United States has offered no evidence of any kind that the Japanese inspection and repair system has any other primary basis than safety. This Committee well knows how fatal this weakness is to the claim that the Japanese system is a discriminatory trade barrier, since it was the United States that won the 1994 GATT case involving the so-called "gas guzzler" tax. In a finding welcomed by Ambassador Kantor, the GATT Panel determined that so long as regulations are primarily intended to and have the primary effect of protecting safety or the environment, they are GATT-legal even though they may have an adverse effect on imports. The applicability of this precedent to the present situation is absolutely decisive. U.S. trade sanctions based on the Japanese inspection and repair system cannot possibly be justified on the basis of an arbitrary and unproven claim that it is not grounded in safety.

B. The Determination Is Unjustified Given Commitments By Japan Regarding the Practices Complained Of.
These duties are inappropriate because the Government of Japan has in fact stated that while its inspection and repair system is without question nondiscriminatory, Japan is taking steps to address differences over both what parts are subject to inspection and how garages are certified. These steps were part of a comprehensive, substantive Japanese proposal made in the framework negotiations. Japan has in essence removed the basis for even the allegations that the U.S. is making. The United States has ignored this proposal. Its attempt to argue now that Japan has failed to address U.S. concerns about after-market regulation is both incorrect and disingenuous.

In the absence of a substantive basis for the imposition of punitive tariffs, it is clear that the U.S. sanctions are, in fact, a disguised punishment of JAMA members and the Government of Japan for not agreeing to U.S. demands to establish new so-called "voluntary plans" for purchasing U.S.-made parts at levels that meet U.S. Government expectations. As JAMA has stated publicly, this coercion will not work. JAMA members purchase the best and most competitive products and services from global suppliers and will continue to do so.

C. The USTR Has Provided No Basis For Its Quantification Of The Damages From The Acts Or Practices Involved.
USTR has failed to justify in any way its quantification of the alleged damages from the unspecified acts or practices involved. Although USTR refuses to release the basis for its damage calculations, the $5.9 billion figure it cites appears to be based on comparing import shares of the total parts market in Japan to the markets in the U.S., Canada and Mexico. Such a comparison is clearly distorted because the U.S., Canadian and Mexican markets comprise the NAFTA free-trade area, where parts flow freely across borders to supply manufacturing facilities.

Out of $37.1 billion in auto parts exported by the U.S. in 1994, $20.1 billion were U.S. exports to Canada, and almost $8 billion were U.S. exports to Mexico. Those two countries have 75 percent of total U.S. auto parts exports. U.S. auto parts comprise over 77 percent of the Canadian market, which is a reflection of the fact that the Big 3 are and have been the Canadian industry. The cross-border shipment and sale of finished vehicles and parts among the Big 3 and their suppliers in the NAFTA market result in large import market shares. This intra-Big 3 trade should not be used to determine an "expected" import share of the Japanese after-market.

III. The Proposed Duties Violate the Friendship, Commerce and Navigation Treaty Between the United States and Japan

Beyond the illegality of the sanctions, and their lack of any substantive basis, JAMA also objects to the retroactive application of the proposed 100 percent punitive duties. It is highly unusual for one nation to impose previously unannounced trade restrictions on another nation without at least permitting goods already ordered from production and "on the water" to be entered into the United States free of restrictions. Japanese auto companies "locked in" their current production schedules months ago, so the manufacturers simply are not in a position to inflate their inventories artificially between May 10 and June 28. It is therefore wholly inequitable and unjustified to raise duty rates on vehicles ordered and produced long before there was any notice of the duty increase.

Most importantly, however, such an action also violates the provisions of the U.S.-Japan Treaty of Friendship, Commerce and Navigation ("FCN"), which requires at least 30 days' notice of tariff changes or exemption of goods in transit. Paragraph 1 of Article XV provides:

According to the terms of the FCN, the punitive duties may become effective as of June 17, 1995 (30 days after the May 18, 1995 publication of notice in the Federal Register) or alternatively, the duties must not be applied to products which were "en route" as of May 18, 1995. The USTR's decision to impose punitive tariffs as of May 20, 1995, only two days after publication of its determination, violates Article XV of the FCN.

IV. The Imposition of Punitive Duties on Japanese Automobiles Will Have Serious Adverse Effects on U.S. Consumers.

The history of protectionist trade actions in the United States is marked by one consistent set of effects -- consumers always suffer. The proposed duty increases will inevitably produce higher prices for automobiles. In short, as history has shown, American consumers will pay, and pay dearly, for the Administration's effort to protect the Big 3 from further competition.

The economic costs to consumers will not be the only price to be paid. Even Ambassador Kantor has admitted that Japanese competition has been a major factor in the improvement of the U.S. auto industry over the last two decades. This is clearly true for the auto parts industry as well. Shutting out imports of Japanese luxury cars will restrict consumer access to many technological developments, engine and operation improvements, and the constant drive to achieve the highest standards of quality. With consumer surveys repeatedly showing that the very cars being restricted are the U.S. leaders in quality and reliability, the Administration is in effect relieving the Big 3 from this pressure to compete and improve their products.

This Committee cannot ignore the fact that the proposed duties will cost American jobs, as Ambassador Kantor has admitted. These workers at dealers, suppliers, and other facilities are also consumers, thousands of them, and they will suffer the greatest adverse effect of all -- losing their jobs and in some cases their businesses. That the United States Government should be purposefully putting Americans out of business and out of jobs to lash out at Japan for no substantive reason simply cannot be rationalized or justified as being beneficial to the United States or Japan.

Procedurally, legally, and substantively, USTR's proposal to place punitive tariffs on $5.9 billion in auto exports based on a few sentences of unspecified claims of regulatory practices is simply unjustifiable, arbitrary and capricious.

Attachment 1

Comparisons of U.S. Requests and Japanese Responses

Deregulation of Spare Parts
The U.S. demand basically concerned the following three points: (1) reduction of the number of critical parts to be inspected by disassembly inspections; (2) reduction of modification inspection requirements; and (3) relaxing of the requirements for garage certification.

However, in late March, at the final stage of negotiations, the U.S. added two additional demands: (4) authorization of specialized garages for certain critical parts (e.g., brakes); and (5) separation of inspection from repair services.

The Japanese side made a bold proposal: acceptance of U.S. requests from (1) to (4) in principle. Request (5) was rejected because it is clear from the experience in the U.S. that separating inspection from repair compromises the inspection process and threatens auto safety. The U.S. cannot appropriately ask Japan to compromise safety simply to provide potential U.S. parts sales.

Attachment 2

Why Japanese Manufacturers Cannot and Will Not Announce Expanded Voluntary Plans
Much of the argument about voluntary plans focuses on the theoretical concepts of what is sound trade policy and what is permissible under international law. From a more practical perspective, however, Japanese manufacturers could not significantly expand their parts purchasing, even if they wanted to do so:

• With stagnant or falling production forecasts, the Japanese manufacturers will be consuming fewer parts overall, on both a volume and value basis. In the U.S. market, motor vehicle demand has already peaked. Overall auto production levels were down in the initial months of 1995, with further moderate declines anticipated.
• The yen's rapid appreciation has forced Japanese manufacturers to cut costs drastically. The traditional five percent annual cost reduction has become a 10 percent average annual cost reduction. This situation means that manufacturers would have to increase their foreign parts purchasing by approximately 30 percent over the next three years just to maintain a stable level in terms of value. Achieving a net increase in value would be even harder.
• There are sound business reasons why the most U.S. parts have been bought by the transplant operations. The demands of just-in-time-delivery make it difficult to supply auto factories in Japan from foreign sources without maintaining substantial warehouse space in Japan, significant investment that many U.S. parts companies seem to be unwilling to make.
• After having achieved significant increases in foreign parts purchases over the past few years, manufacturer's ability to maintain the same rate of increase in the future will diminish. As the base expands each year, further increases of the same magnitude clearly become impractical. In fact, the five largest manufacturers are still operating under the 1994 voluntary plan forecasts, which project an average increase of seven to eight percent per year. The USG demanded percentage increases at the same levels, which is simply not realistic. Such an impossible demand simply reinforces the manufacturers' resolve never again to be trapped by apparently insatiable USG expectations.

This reasoning explains why Japanese auto executives have been quoted in the press as saying that, if they were to make any changes at all the current voluntary plan levels, it would be to reduce them. Increases are just not possible under the current circumstances.