The Future of Japan's Trade Policy Regarding Bilateral Trade Disputes - Thoughts on the Enactment of "The Damages Recovery Law Countering the U.S. Anti-dumping Act of 1916"

Consulting Fellow, RIETI

On November 30, the Diet enacted the "The Damages Recovery Law Countering the U.S. Anti-dumping Act of 1916." As expected, this law, the content of which is difficult to grasp from its name alone, did not attract much attention from the general public. However, I believe the enactment of this legislation is a significant event in the history of Japan's trade policy regarding bilateral trade disputes.

The background of the drafting of "The Damages Recovery Law Countering the U.S. Anti-dumping Act of 1916"

First, let me briefly explain the backdrop for the drafting of this legislation. The U.S. "Anti-dumping Act of 1916" (hereafter called "the 1916 AD Act) is a law under which U.S. companies can sue importers or foreign producers for treble damages if they sell products in the U.S. at below market value with the intent of injuring or destroying a U.S. industry. Because World Trade Organization (WTO) agreements allow the member countries only to impose antidumping duties or price undertakings to counter dumping, and prohibit members from setting compensation obligations between individuals, Japan and the European Commission (EC) brought the matter before the WTO, arguing the 1916 Act violates WTO rules. A dispute settlement panel ruled in favour of Japan and the EC and stated the U.S. must either scrap the law or revise it to make it WTO-compatible.1

However, the U.S. Congress refused to comply with this ruling. As a result of this selfish attitude, so to speak, on the part of the U.S., the 1916 Act was left untouched and remained in force despite its inconsistency with WTO rules. Then, in December 2003, Goss International Corp., a U.S. manufacturer of printing presses, filed a lawsuit against a Japanese competitor, Tokyo Kikai Seisakusho (TKS) Ltd., with the U.S. District Court in Iowa based on the 1916 Act and the court ordered the TKS to pay more than $35 million (roughly ¥4 billion) in damages. The TKS appealed the ruling and the case is currently being heard in a U.S. Court of Appeals, but the possibility of the district court ruling being upheld cannot be denied.

"The Counter Law against the 1916 AD Act" aims to protect Japanese firms from lawsuits based on the 1916 AD Act. Specifically, the law stipulates that (1) even if a U.S. court rules that a Japanese firm must pay damages, Japanese courts are not obligated to recognize the verdict in question and may refuse to enforce such a judgment in Japan; and (2) a Japanese company can countersue the U.S. firm that filed the original lawsuit, its fully-owned subsidiaries or its parent company to recover or demand compensation for damages incurred by the enforcement of an antidumping ruling in the U.S. based on the 1916 Act.2

There are not many precedents in international trade law for such "counter-legislation," and such legislation is totally new to Japan. How should the fact that Japan drafted such special legislation be seen in the historical context of bilateral trade disputes between Japan and the U.S.?

Japan's "aggressive legalism" and the problem of U.S. noncompliance with the WTO ruling

Postwar trade disputes between Japan and the U.S. occurred in line with Japan's industrial development, beginning with textiles in the 1960s, and moving on to steel and colour television sets in the 1970s, and automobiles and semiconductors in the 1980s. The philosophy behind Japanese trade policy during this period is summed up in the following passage from a government White Paper on trade:

On our (Japan's) part, we must conduct our export business in an orderly manner so that we can avoid creating a situation where workers of a certain industry of the recipient country are thrown out of their jobs by a surge in Japan's exports of certain merchandise to that particular market. At the same time, it is necessary for us to build a trade structure which is not prone to create trade friction by diversifying export markets and by promoting import of manufactured goods in the medium and long run. (White Paper on International Trade, 1977).

But this policy, which stressed "moderation" in an effort to minimise friction, faced a major turning point from the late 1980s to the early 1990s. As the scope of trade disputes expanded from individual industries to macroeconomic issues and the structural problems of the Japanese market - the U.S. declared that even Japan's own domestic business practices were "unfair" - and the U.S. began adopting tough unilateral and results-oriented trade policies such as the Section 301 of the Trade Act of 1974, Japan's trade policy entangled in more ideological discussions concerning value judgments as to what is fair and what is not.

At the same time, there was the shift from the General Agreement on Tariffs and Trade (GATT) to the WTO, which led to a strengthening of the multilateral trade system, and with it the ideal of "a rules-oriented trade policy" gained ground. Although this ideal is now widely accepted as "natural," the idea that laws and principles compatible with the WTO agreements and other international rules are fair and those that are not are unfair, and that the final judgment regarding compatibility should be made objectively and neutrally under the Dispute Settlement Understanding (DSU), greatly changed the rules of the game, which previously centred on two countries sounding each other out to find a political compromise.

One important foundation for this policy ideal is, of course, Japan's success in its negotiations with the U.S. on automobiles, photo film and semiconductors in the 1990s. Against the backdrop of this success, Japan continued to actively use the WTO's dispute settlement mechanism as a means to resolve bilateral trade disputes, while stressing the importance of observing WTO rules in both attack and defence. In terms of individual disputes between Japan and the U.S. in particular, the attacker and the defender switched places; the number of cases in which Japan brought complaints against the U.S. to the WTO dispute settlement mechanism increased. Compared favourably with Washington's "aggressive unilateralism," Japan's stance was dubbed "aggressive legalism."3

However, in the real world of international politics, it is true that even WTO agreements are just one set of international rules with no ultimate legal force. And in practice Japan's "aggressive legalism" faces a problem in the failure of the U.S. to fulfil its obligations. Despite the fact that Japan has brought U.S. trade measures before the WTO and Washington has been obliged to alter the measures as a result, there have been several instances in which the U.S. did not fulfil its obligations within the set time frame.4

New developments in the issue of compliance and expectations for the expanded use of international trade rules

One major reason why the U.S. does not always meet its WTO obligations is the role of Congress in the U.S. government. Even a trade measure found to be incompatible with WTO rules is taken as an administrative step (i.e., an act of the president), the White House cannot ignore congressional opinion, much less if a law passed by the Congress itself is found to violate WTO rules. In such cases, Congress is required to enact legislation to abolish the law in question, but the administration often fails to persuade Congress to do so.

This is, in the end, however, a domestic matter for the U.S. and for the U.S. to leave its obligations unfulfilled goes beyond the direct problem of Japan's loss of economic benefit in any one instance. It creates a more serious problem in the medium to long term: If the WTO's dispute settlement mechanism is utilized to obtain a ruling that a WTO-inconsistent measure be changed, and if, despite this, it is uncertain that such a change will actually be implemented, Japan will be unable to win the support of firms at home in using the dispute settlement mechanism, thereby inviting a hollowing out of the "clients" of its trade policy.

Thus, Japan's trade policy is gradually shifting from a stage in which it "will not hesitate to take an issue to the WTO" to one in which it is "prepared to take additional action in the event of noncompliance." The harbinger of this new stance was last year's dispute over the U.S. steel safeguards, in which Japan decided for the first time to threaten retaliatory measures (raising tariffs on imports from the U.S.) in seeking a swift end to the U.S. safeguards, which had been ruled inconsistent with WTO rules. And in November of last year, Japan asked the WTO for authorization to take retaliatory measures against Washington's failure to take action on the Byrd Amendment. The damages recovery law, which aims to counter the 1916 Act, is another big step in this shift toward "additional action."

Although the damages recovery law had the indirect aim of preventing new lawsuits based on the 1916 Act, its immediate purpose was to protect a particular printing press manufacturer (TKS); as such it did not draw wide public attention. But conversely, the government clearly showed that it will make the utmost effort, including drafting legislation, to protect even a single firm from measures that are inconsistent with WTO rules.5

Such efforts by the Government of Japan have paid off. Congress has since enacted a bill that includes the repeal of the 1916 Act, which was signed into law by President Bush on December 3. Although this law is problematic in that the repeal will not affect cases that are already before the courts, it does at least abolish the 1916 Act. It is hoped that this accumulation of successes will lead to further expansion in Japan's use of the rules of international economic governance.

How to deal with trade disputes with South Korea and China

Of course, as I have already mentioned, trade disputes are political issues between states; not everything can be resolved simply through the judicial interpretation and application of international rules. Many have already pointed out the problems of the excessively judicial character of the WTO. This is why trade policy is a "policy," and policymakers are always called on to make high-level policy decisions. Put another way, the reason why Japan can argue on matters of principle with the U.S. is because bilateral political and economic ties are sufficiently close to allow disputes to be resolved in such a manner. I conclude by presenting in brief my opinions on how Japan's policy toward bilateral trade disputes will evolve in the future.

Although there are many possible developments and some may take issue with the points I raise here, I believe that given the changes in the international economic environment, in the near future Japan will see an increasing number of bilateral trade disputes with China and South Korea as compared with the U.S., and that in rows with these two countries, Japan will not only be the "plaintiff" but will find itself in the position of "defendant" in an increasing number of instances. Furthermore, it is highly likely that trade disputes with these countries will occur in highly sensitive areas such as high-tech products and agriculture. We are already seeing indications of this. There has been a sharp rise in the number of disputes with South Korea involving intellectual property such as plasma display panels and flash memory. Furthermore, for the first time ever, South Korea brought Japan to the WTO over dried seaweed. The heightened tension between Japan and China over Tokyo's safeguard measures against the surge in leeks and shiitake mushroom imports from China also springs to mind.

Such changes could force Japan to alter its recent policy of aggressive legalism. If Japan is to avoid this, the government will have to make efforts in two major areas.

First, it must ensure the domestic policy environment does not become protectionist. As global competition further intensifies, the possibility of protectionist pressures rising at home and the collapse of "aggressive legalism" from the inside cannot be denied.6 In order to avoid this, it is imperative for Japan to secure domestic understanding on the importance of obeying international rules through an accumulation of success stories. At the same time, it will have to continue to make efforts to improve and strengthen the WTO agreements themselves so that complying with rules serves Japan's national interests.

I mentioned earlier that the root of the U.S. problem of not fulfilling its obligations lies in the relationship between the president and Congress, but in Japan political involvement in trade policy has been comparatively limited (with the exception of agriculture). It is probably going too far to say that the enactment of the damages recovery law has opened a Pandora's box of active involvement by the legislature in trade issues, but in any case there is the possibility that the relationship between administrative authorities and politicians may become closer and more complex. How this relationship is built is one key.

Second, in order for Japan to calmly resolve individual trade disputes in line with international rules and separate them as much as possible from diplomatic issues, and to avoid excessively politicizing them, it is indispensable for Japan to build mature bilateral relationships that can withstand trade rows.

Japan's relationship with China, which has been dubbed "economically hot but politically cold ," is clearly too weak to deal calmly with the rise in bilateral trade disputes expected in the future. As is often pointed out, the "political coolness" could adversely affect the "economic heat," and needless to say, the process of political and economic integration in East Asia is also quite significant from this standpoint.

December 14, 2004
  1. WTO Appellate Body report, WT/DS136/AB/DS162/AB/R, 28 August 2000.
  2. There are many points of legal debate on this law, such as its relationship with illegal profits and illegal acts stipulated under the Civil Code, and the issue of the jurisdiction of international courts and its relationship with WTO agreements. For details, please refer to Hirose, Takashi, "A Commentary on the Law to Recover Damages in Connection with the U.S. Anti-dumping Act of 1916" (Kokusai-Shoji-Homu (International Business Law and Practice), vol. 32, No. 12-vol. 33, No.1).
  3. Pekkanen, Saadia M., "Aggressive Legalism: The Rules of the WTO and Japan's Emerging Trade Strategy," The World Economy, Volume 24, No. 5 (2001), 707-737.
  4. See, for example, the antidumping duties on hot-rolled steel sheets and the Byrd Amendment. The EC has also experienced several trade disputes (the "transatlantic issues") where the U.S. has not fulfilled its WTO obligations. RIETI is also studying the overall picture of problems related to fulfilment of WTO obligations. For a summary of the results of this research, please refer to Kawase, Tsuyoshi, and Araki, Ichiro, Fulfilment of Obligations under the WTO agreements - What the Experiences of the Dispute Settlement Understanding Suggest (tentative), (Sanseido Publishing Co.) (to be published in summer 2005).
  5. On November 23, lawsuits were brought against five Japanese companies based on the Act of 1916. It appears these suits are attempts to use the law just prior to its repeal.
  6. Although this is an issue between Japan and the U.S., an instance of Japan's "non-fulfilment" has already cropped up in the area of agriculture. In a case where the U.S. brought Japan to the WTO over its quarantine measures against fire blight in apples, the WTO said Tokyo must modify its policy. However, the matter is still being disputed as Washington maintains that the remedial measures taken by Japan are insufficient.

December 14, 2004