Docket No. 301-93

Submitted by Japan Automobile Manufacturers Association

To United Stated Trade Representative Section 301 Committee

Introduction
This rebuttal brief is submitted by the Japan Automobile Manufacturers Association ("JAMA") to assert the facts in response to allegations made by recent public witnesses and written comments filed in the proceedings arising from threatened imposition of 100 percent punitive duties on certain automobiles from Japan under Section 301 of the Trade Act of 1974, as amended. It is submitted pursuant to the United State's Trade Representative's ("USTR") Notice of Determination and Request for Public Comment as published in the Federal Register of May 18, 1995 (60 FR 26745).

As set forth below, JAMA addresses each of the principal erroneous allegations, made by various proponents of the punitive duties, with a brief statement of the facts.

• ALLEGATION: U.S. access to Japan's automobile markets is severely limited, despite significant financial investment and the development of appropriate product lines.
• FACT: The share of imported automobiles in Japan is comparable to the share of imported automobiles in the United States and in European countries.

The figures used by those alleging that the Japanese market is closed improperly include Japanese minicars which do not exist in the United States and Europe, and trucks that are rarely traded among countries in the comparison. Excluding these types of automobiles from the comparison shows that the share of imports in the Japanese market was 8.1 percent in 1994.

Moreover, the figures regarding the import share in the United States include imports from Mexico and Canada, which are part of the North American Free Trade Agreement ("NAFTA") area and, therefore, are not reflective of trade that would take place outside the free trade area. These imports are primarily built by Ford, GM and Chrysler. Those who allege closed markets in Japan based on market share, in their figures for Europe, similarly include imports between countries within the EU free trade area. Excluding such intra-company trade within free trade areas, it is clear that Japan's 8.1 percent is at the middle of the range for developed countries. Specifically, the share of imports in the U.S., Germany, U.K., Italy, and France is 16, 16, 14, five and five percent respectively.

• FACT: The Big 3 have not made the necessary corporate effort to sell in Japan nor developed appropriate product lines for the Japanese market.

In considering this issue it is helpful to compare the efforts and results achieved by the Big 3 in Japan to the efforts and results achieved by European automobile manufacturers. The European manufacturers offer 124 compact car models (engines below two liters) in Japan; the Big 3 offer none. The European manufacturers offer over 100 right-hand drive model automobiles built in Europe and exported to Japan; the Big 3 offer only two right-hand drive models exported to Japan from the United States. The European manufacturers have established four pre-delivery inspection centers in Japan; the Big 3 have established none. The European manufacturers have four parts depots in Japan; the Big 3 have one. The results? European manufacturers achieved a 5.4 percent share of the Japanese automobile market in 1994, while the Big 3 achieved only a one percent share of that market in 1994.

• ALLEGATION: Japan's automobile manufacturers, with the acquiescence of the government in Tokyo, restrict the ability of Japanese auto dealers to sell foreign cars.

  FACT: There have been no cases in which dealers have been unable to acquire a foreign car franchise due to pressure from domestic manufacturers.

Automobile dealers in Japan are free to deal with cars of any manufacturers, regardless of their affiliation. The Japan Fair Trade Commission has pointed out that there have been no cases in which dealers have been unable to acquire a foreign car franchise due to pressure from domestic manufacturers. Nonetheless, during the recent negotiations with the U.S., the Government of Japan not only accepted the U.S. demand entirely regarding measures within governmental reach and promised that it will set up a contact point within MITI to help resolve any complaints about Japanese dealers and foreign manufacturers' efforts to establish relationships with Japanese dealers, but it has also proposed preferential financial treatment to improve market access for imported automobiles.

Ultimately, Japanese dealers will handle U.S. automobiles when U.S. manufacturers offer more products suitable to the Japanese market. As with the issue of access to the Japanese market, generally, a comparison with the efforts of European automobile manufacturers is instructive. European manufacturers have extensive exclusive showrooms in Japan (Volvo has 136, and BMW has 166). The Big 3 have not made a similar commitment. Moreover, as described above, the European manufacturers have been more successful in obtaining direct-franchise contracts with existing dealers because they offer suitable models for the Japanese market; the difficulties in this area by the Big 3 arise from their lack of suitable models.

• ALLEGATION: Imports of auto parts comprise only a small percentage of the Japanese market compared to the U.S. and other countries, for both manufactured vehicles and the aftermarket.
• FACT: The share of imports in Japan's auto parts market is comparable to the share of U.S. imports in European countries.

The U.S. allegations regarding the appropriate level of imports into the Japanese market are clearly overstated, as shown below in the discussion regarding the inflated retaliation figures. In addition, however, U.S. exports of all parts, according to the Automotive Parts Advisory Committee's ("APAC") own analysis, have less than four percent of the market in Germany, less than three percent in the U.K., and about two percent in France and Italy. This compares quite favorably to the 4.1 percent share that foreign-made parts have in Japan's aftermarket.

• ALLEGATION: The way to increase the foreign share of Japan's auto parts market is for Japanese automobile manufacturers to voluntarily to set targets for future parts purchases from foreign sources
• FACT: Japanese manufacturers have already dramatically increased their parts purchases from foreign sources; any requirement by the Government of Japan or commitment by manufacturers to the United States would clearly contravene the success of truly "voluntary" industry-to-industry cooperation.

U.S. negotiators have demanded that Japan commit to specific figures for substantially increased U.S. parts purchases which, in reality, is an attempt to set a numerical target, or de facto purchasing quotas, for businesses in Japan, a matter we believe is beyond the scope of government-to-government negotiations within the Framework. For the Government of Japan to agree to such a demand would represent a direct intervention into private business matters, and thus bad public policy inconsistent with the principles of a market economy.

From a practical perspective, Japanese manufacturers are not able to expand their parts purchasing because of stagnant or falling production forecasts, the rapid appreciation of the yen, and the unlikelihood that they could continue to maintain the pace of purchasing increases that has already been underway. Procurement of foreign made/U.S. made parts by Japanese automakers/Japanese transplants in the U.S. has increased six-fold from $2.49 billion in Fiscal Year 1986 to $15.5 billion in FY 1993. While automobile production in Japan has declined, parts imports continued to increase.

Finally, JAMA members will not agree to new "voluntary" plans because of their unfortunate experience under the existing plans which the U.S. has, in fact, interpreted as mandatory levels of parts purchases.

• ALLEGATION: The competitive disadvantages in Japan include regulatory impediments such as extensive inspection requirements and repair shop certification standards.
• FACT: Japan's automobile inspection requirements and repair shop certification standards do not discriminate against foreign parts.

First, it is important to note that Japan's system for inspecting automobiles is consistent with the practices of other countries. Second, Japan's automobile inspection requirements apply to all automobiles regardless of origin. Moreover, only 3.6 percent of the aftermarket consists of components subject to Japanese government regulations related to auto safety. In addition, imports hold a higher share of those parts subject to regulation, compared to those that are not, which further supports the non-discriminatory nature of Japan's vehicle safety inspection system. While 48 percent of aftermarket repairs is handled by designated maintenance and repair facilities, 52 percent of the market is handled by gasoline stations and other agents. Finally, as noted in JAMA's written comments of June 19, 1995, Japan made specific commitments to deregulation in this area despite the non-discriminatory nature of the regulations. In these circumstances it is clear that the regulations are not the problem.

The missing factor is clearly the lack of effort by the Big 3 in the automobiles market. The market for foreign replacement parts reflects the market share of foreign-built cars. This correlation is true in every major country. The lack of suitable products and sales efforts by the Big 3 in the automobiles market, therefore, is the simplest explanation of their low market share in the Japanese auto parts aftermarket.

• ALLEGATION: The U.S. trade deficit with Japan is a structural deficit stemming largely from foreign barriers to free trade rather than from macroeconomic differentials.
• FACT: The trade deficit with Japan stems primarily from macroeconomic forces rather than any trade barriers in Japan

Statements by the U.S. Trade Representative and other parties have focused on the importance of the automotive sector in the bilateral trade imbalance between the United States and Japan.^* These statements implicitly or expressly suggest that the trade deficit arises largely from trade barriers in Japan. In fact, however, government officials and leading economists are nearly unanimous in acknowledging that the trade imbalance between the United States and Japan is primarily a macroeconomic issue. The proper means of addressing the trade deficit is by adjusting macroeconomic policy.

• ALLEGATION: The estimated U.S. market losses underlying the preliminary U.S. sanctions total $5.9 billion.
• FACT: The $5.9 billion alleged "lost sales" damage estimate is a gross distortion of the realistic comparable aftermarket shares that foreign suppliers have in other developed countries.

The $5.9 billion estimate is, by Ambassador Kantor's own admission, and by the submission of Robert Cole of the Auto Parts Advisory Committee, derived from an estimate prepared by counsel to Mr. Cole. This is therefore, not an objective or reliable analysis of the market or of actual or even projected damages. It is advocacy, which manipulates statistics and theories to create a theory of damages that simply does not withstand even the most basic statistical review. The damage estimate, therefore, has no foundation of any kind, and is wholly unjustifiable.

As an initial indication of the wildly excessive nature of the damages estimate, one need only examine the European Union aftermarket. Total exports of all U.S. auto parts to the EU last year, including parts to U.S. subsidiaries and affiliates, as well as replacement parts, reached $2.7 billion. And yet, the European market is twice the size of Japan's.

Although statistics do not separate auto export data by end use, it is generally recognized in the industry that the large portion of these auto parts exports are shipped to subsidiaries or affiliates of the Big 3 and a few large U.S. parts manufacturers. Estimated generously, less than 25 percent of the $2.7 billion, or less than $700 million, would represent replacement parts exports. Instead of measuring U.S. share of the Japanese aftermarket by comparison with U.S. replacement parts exports to the EU, and determining on that basis whether in fact any damages can be estimated, the U.S. is demanding in essence that Japan purchase up to eight times the parts exported to Europe. This is totally irrational and unreasonable.

More specifically, the U.S. is demanding that its suppliers should have 20 percent of the Japanese aftermarket, according to the APAC "study." This is based on the claim that the U.S. has 20 percent of the market in "other OECD countries." But in fact, this is incorrect. As noted above, U.S. aftermarket share in most OECD countries is quite small, even by APAC estimates. In Germany it is less than four percent. In the U.K. it is less than three percent. In France and Italy, it is about two percent.

APAC's counsel was able to calculate a 20 percent figure by including U.S. exports of all auto parts (not just replacement parts) to Mexico and Canada. Despite dramatic but baseless efforts to justify inclusion of Canada and Mexico, the APAC "study" is rendered worthless by this distortion. APAC ignores the fact that Ford, General Motors and Chrysler have nine assembly plants in Canada which supply the Canadian market and ship an extra two million vehicles back across the border to the United States. U.S. auto manufacturers ship about $20 billion in parts to Canada and, in turn, ship about $30 billion in finished vehicles back from Canada to the U.S. It is simply impossible that there could be a rational expectation that U.S. aftermarket parts could achieve this type of market share in any other country in the world.

The truer measure of "OECD market share" in the aftermarket is but a few percentage points--a fraction of a fraction of total parts sales. When the APAC numbers are recalculated to exclude Mexico and Canada, the fact that parts exports follow either car exports or investment becomes absolutely clear.

The distortion of trade damage estimates, in deliberate reliance on a highly prejudiced and unjustifiable document drafted by parties in interest, is consistent with the fact that this proceeding is primarily intended to justify protectionism, not to increase sales opportunities.

In addition, JAMA notes that while the Motor Equipment Manufacturers Association (MEMA) did not appear at the June 8 hearing, MEMA has submitted comments on JAMA's statement made at the hearing.

• ALLEGATION: MEMA disagrees with JAMA's position that U.S. action and proposed actions under Section 301 are inconsistent with U.S. obligations under international law.
• FACT: There is no question that the unilateral sanctions proposed by the United States violate Article I and Article II of the GATT and the dispute mechanisms of the World Trade Organization. This has been supported by prominent U.S. authorities on international trade law. JAMA has well documented this in our submission. The fact that MEMA can offer no evidence or support to the contrary merely confirms the correctness, not the incorrectness, of JAMA's view.
• ALLEGATION: U.S. suppliers are committed to developing aftermarket business in Japan but are limited by government restrictions. MEMA argues that U.S. aftermarket suppliers are trying to sell in Japan. MEMA indicates it is not surprised that in a U.S.-based survey only one-third of U.S. suppliers indicate an interest in selling replacement parts into Japan and that the number would be higher but for vehicle safety inspection regulations.
• FACT: As pointed out in JAMA's statement, only 3.6 percent of all replacement parts in Japan's aftermarket are subject to regulations, the so-called critical parts. The share held by foreign-made auto parts in critical auto parts is 5.8 percent, which is higher than the 4.1 percent share of foreign-made parts in the total value of aftermarket auto parts in Japan's auto repair service business. Japan's vehicle safety regulations do not discriminate against foreign producers.

Last year, JAMA undertook an in-house survey of wholesale distributors, as well as the U.S. Auto Parts Office in Japan, and could find no more than a limited few companies that provided catalogues and application charts for Japanese vehicles on the road in Japan. These catalogues are essential to the marketing of replacement parts both in the U.S. and Japan. The lack of an active presence in Japan is certainly not representative of, or consistent with, being committed to a market.

It is a recognized fact that most U.S. aftermarket suppliers are primarily interested in the U.S. and North American aftermarket. The published reports JAMA has seen state that the national survey to which MEMA refers indicates that four of the lowest five priorities of U.S. suppliers (out of fifteen most prominent current issues) are: "exporting to Japan," "exporting to Europe," "producing in Europe" and "producing in Japan." In so far as we know, no one has challenged these results.

Under the circumstances, the $5.9 billion in sanctions based upon a relative lack of Japan aftermarket penetration by U.S. suppliers is absurd -- as most U.S. industry participants and observers will agree.

The fact of the matter is that, for the most part, U.S. suppliers typically export to countries where they have subsidiaries and/or affiliates or where there is a relatively substantial registration of Big 3 U.S. nameplate vehicles.

MEMA recognizes in its statement that modest export sales of U.S. Big 3 vehicles are a factor which has limited U.S. suppliers aftermarket sales in Japan. This merely confirms the point which JAMA is making.

• ALLEGATION:MEMA disagrees that the Japanese government has removed the basis for the allegations that the U.S. is making. MEMA says it is "our understanding" that the Japanese Government proposals have fallen short of U.S. demands and "to the best of our knowledge" Japan is unique in requiring a linkage between repair and inspections.
• FACT: The Japanese Government has agreed to every request put forth by the U.S. Government in the area of vehicle inspections except for the demand that private uncertified garages should be allowed to undertake vehicle inspections.

Japan's government has determined that the entity carrying out inspections should be a government agency or corporation established in the public interest to maintain its fairness and impartiality. In fact, for this reason, most entities that carry out such inspections in Europe are also public institutions. In Japan, the fundamental entity is the Ministry of Transportation ("MOT") Land Transport Office. The government delegates a part of implementation of the inspections to Designated Repair Service Garages, subject to certain conditions. Allowing private uncertified garages to undertake inspections can lead to misuse, haphazard inspections and compromise of safety. This was borne out by a U.S. General Accounting Office study in July 1990.

Beyond these principles, the fact remains that, as discussed above, the bulk of aftermarket parts sales in Japan is not affected by the vehicle inspection system.

• ALLEGATION: MEMA argues that U.S. industry practices have no bearing on this issue.
• FACT: There is no question that U.S. industry practices are both relevant and significant here. If the U.S. is allowed to arbitrarily, and without investigation, declare Japan's vehicle safety system a trade barrier, and then to unilaterally impose $5.9 billion dollars of sanctions, U.S. practices may well be subject to the same scrutiny and unilateral action by other countries.

There are indeed numerous practices in the U.S. replacement parts industry which could indeed be subject to such scrutiny. "Stock lifting" is indeed one such practice which limits the entrance of smaller companies, many of which may be importers. Stock lifting is a requirement in many cases for obtaining a contract. It involves buying up competitors' products which are then "dumped" at distressed prices, in many cases overseas. This activity is engaged in by large U.S. aftermarket manufacturers who can offer the distributor an auto parts line of products covering most years, makes and models. Often such deals are accompanied by extensive financing arrangements and bonus payments to the customers.

MEMA's narrow interpretation that U.S. industry practices are not relevant since they are not government mandated speaks to U.S. law under Section 301. It does not speak to the fact that unilateral retaliation under Section 301 is illegal under the rules of the World Trade Organization. If the U.S. can unilaterally retaliate by arbitrarily deciding what practices it believes are unfair in other countries, then other countries will do the same. Stock lifting is but one example.

Over and above the narrow issue of retaliation, MEMA's attack on Japan's aftermarket will undoubtedly bring attention to the aftermarket in the U.S., as it already has. Japan's inspection and repair practices are designed to assure safe vehicles on the road. In the U.S. the repair industry is the source of more consumer complaints than almost any other industry in the country.