Prising open trade doors

Date: 02/11/1995

By Tim Jones

WHEN some of Europe's top industrialists sit down opposite a handful of their Japanese counterparts next week, much of the talk will be about cooperation and the need for common fronts in setting the industrial and commercial policy agenda in Tokyo and Brussels.

But the EU-Japan Industrialists Round Table on 9-10 November, chaired by Etienne Davignon from Société Générale de Belgique and NEC Chairman Tadahiro Sekimoto, could be excused for having other things on its mind.

Just a day earlier, high-level talks will be held in Tokyo where many persistent grievances felt by European industry towards Japan will inevitably be aired at a meeting between the European Commission's Director-General for External Economic Affairs Horst Krenzler and Japan's Deputy Foreign Minister Kazuo Ogura.

The surge in the value of the yen over the past three years has certainly helped to prise open Japan's markets to European exports of furniture and even cars. EU exports to Japan rose nearly 18&percent; in 1994 and a further 36&percent; in the first four months of this year.

The European Commission, which conducts trade negotiations on behalf of the EU, has made progress in winning Japanese agreement to mutual recognition of products, distribution, food labelling and standards for electrical appliances.

Overall, however, the story is still the same. At 18.5 billion ecu in 1994, the Union's trade deficit with Japan remains immense.

“This huge imbalance is largely a result of Japan's regulatory, structural and cultural impediments to foreign direct investment,” said Europe's biggest business lobby in Japan, the European Business Community (EBC).

In a report published in September, the EBC warned the Japanese government that excessive regulation, the high costs attached to setting up business in Japan and a swathe of non-tariff barriers were sapping their desire to invest in the country. “Much action is still needed in order to create an environment that is truly conducive to foreign investment,” stated the report.

These barriers have left Japan with an unusually low level of external investment. The ratio of overseas direct investment by Japanese industry to foreign industrial investment in Japan is 15 to one. Compare this with Germany, where the ratio is less than three to one.

Add to this the strengthening of the yen, which has put enormous pressure on Japanese exporters to cut costs rather than lose markets, and that the Japanese are starting to worry that a full-scale investment drain has begun in earnest.

Car-making giant Toyota plans to build 65&percent; of its vehicles outside Japan by 1998, while Nissan recently announced plans to invest 230 million ecu in increasing capacity at its Mexico plant. Some analysts foresee a massive shift in Japanese car production to other parts of Asia, which will eventually outstrip Japanese output early in the next century.

In Europe, electronics firm Fujitsu announced in September that it planned to expand production at its semiconductor plant in north-east England at a cost of 1 billion ecu.

In an attempt to kill two birds with one stone, the Japanese government unveiled a stimulus package in September to pump 104 billion ecu into the economy via increased public spending and subsidies and a strategy to deregulate industry.

Last year, a government regulation audit estimated that nearly 11,000 rules were in force affecting 40&percent; of economic activity. Some of these can drive industrialists to distraction and have been at the bottom of all the recent trade spats with Washington.

One of the more notorious examples was the 18-month battle by Body Shop to get its banana shampoo registered in Japan. The move was blocked because this ingredient was not on the established shampoo recipe list.

A series of four deregulation packages have failed to impress either the Commission or the US administration. The problem for the Japanese is that deregulation, although obvious and necessary at face value, is political dynamite.

The Keidanren big business lobby, while advocating deregulation, warns that bringing Japanese rules into line with those of the US would create a net 750,000 jobs after a decade but, in the short-term, could put nearly 3 million out of work.

The Commission continues to press for changes diplomatically through its trade assessment mechanism negotiations with the Japanese. In a strategy paper endorsed by EU foreign ministers in May, the Commission reiterated its policy of “tireless and persistent pressure applied in a precise and focused manner” on Japan.

“Japan is becoming at once more inclined to change of its own accord, but ever more resentful of those who seek to impose such change from outside. The EU's strategy of persistent pressure for change from within is beginning to pay dividends,” said the Commission.

But these dividends are not as obvious to business as the concessions won from the Japanese by the Americans through strong-arm tactics over the past two years.

The EBC was concerned that recent concessions wrung from the Japanese by Washington in the areas of glassware, medical equipment and, above all, cars and car components, were leading to favouritism for US producers.

They warned that European market share in the sale of car components in Japan had shrunk from 40&percent; to 22&percent;, while the US share has grown from 25&percent; to 40&percent; in the months leading up to and after the June US-Japan Auto Agreement.

At the Quadrilateral meeting of trade ministers in the UK two weeks ago, Trade Commissioner Sir Leon Brittan won a pledge from Japan's Ryutaro Hashimoto to give the Union 'observer' status in monitoring implementation of the accord.

The deal ensured Japanese dealerships are open to foreign producers and deregulated the market for parts on a multilateral basis, but EU officials were worried that Japanese importers and dealers would feel obliged to favour US products.

At least in the area of automobile sales, prospects for the EU are looking up, according to Giorgio Garuzzo, the president of the European Automobile Manufacturers' Association (ACEA). “The success of European manufacturers in Japan suggests that the perception of Japanese consumers is changing,” he said last week.

In the first nine months of 1995, European car sales in Japan were up 30&percent; to 161,870 units, although the Commission always stresses how difficult it is to strip out the effects of the rising yen from a genuine change in Japanese tastes.

Some of the biggest problems for all foreign companies operating in Japan are the structural obstacles created by Japanese business culture, rather than the more obvious barriers.

For example, in Japan's troubled banking sector, the keiretsu system puts obstacles in the way of foreign participants. As a result, the 90 foreign banks in Japan have a mere 1&percent; market share in loans.

The Commission estimates that a similar presence of Japanese banks in the EU would win a 5&percent; share.

These are the kind of changes that will take years to make. In the meantime, the 15 European industrialists lining up to meet the heads of NEC, Ricoh, Sony and Komatsu next week will be looking for any signs that this market is being opened further.