Snapping at the heels of the Japanese giants

Date: 17/07/1997

By Tim Jones

EUROPEAN support for a US complaint against alleged unfair trade practices in the Japanese photo-film market may well turn out to be a defining moment in commercial history.

By weighing in with the Americans - even if it only backed part of their case at the World Trade Organisation - the Union ended a decade of reticence in attacking Japan, claims US photo-film giant Eastman Kodak.

“What the EU did in this case was really significant,” says Chris Padilla, Kodak's director of international trade relations. “It was the first time that the EU had come in strongly behind the US on a major systemic allegation in dealing with Japan.”

In 1995, Kodak filed a complaint under Section 301 of the 1988 US Omnibus Trade Act with the US administration, claiming that the Japanese government supported and then tolerated practices which had created a dominant position for Fuji Photo Film in the Japanese market.

Under Section 301, the US government must investigate trade restrictions and negotiate them away or impose retaliatory sanctions within 12 months.

To the relief of the EU, the US chose to shun this bilateral weapon and instead filed a complaint with the WTO.

Three months ago, the Union gave its qualified support to the US complaint, claiming that its manufacturers - chiefly German firm Agfa - encountered similar problems with the Japanese distribution system for photo-film.

“Clearly, the EU was not in favour of bilateralism,” says Padilla. “It feels more comfortable using the disputes settlement mechanism to address systemic problems in Japan instead of letting the US use its traditional bilateral tools and then following through by grabbing its own piece of the market.”

The European Commission has always been wary of bilateral struggles between the US and Japan - such as those over trade in auto parts or semiconductors - fearing that the result would simply replace Japanese protectionism with joint US-Japanese protectionism in a carved-up market.

Now, Padilla believes, the Europeans will be happier to launch joint assaults via the WTO to bring an end to Japanese distribution barriers for agriculture, chemicals or high-technology products.

“The European interest is much the same as the American interest and the experience is similar, too,” he argues.

The Kodak-Fujifilm dispute is coming close to a resolution after two years of wrangling. At the beginning of June, the two governments summed up their arguments in Geneva and an interim decision, which is certain to prompt an appeal, is due in September.

Fujifilm alleges that Kodak is paying for a history of poor marketing and under-investment in Japan rather than any barriers to trade. Padilla is scathing about these claims.

“This is the same argument the Japanese have used to justify their protectionism against every other industrial sector in the world: that foreigners just do not try hard enough,” he says. “They have used it in the case of autos, beef, construction equipment, film, glass, insurance, semiconductors and ski equipment.”

In fact, says Padilla, the Japanese government has systematically closed off distribution possibilities for foreign photo-film manufacturers. Tokyo's ministry of international trade and industry (MITI) has actively encouraged the formation of a network of four single-brand distributors controlling 70&percent; of the Japanese market and not carrying Kodak or Agfa film.

Kodak claims that having shut down these distribution channels, the government has regulated the big shops out of existence with its Large-Scale Retail Store Law. In the US, the company sells most of its films through megastores such as Wal-Mart and K-Mart, but it cannot do the same in Japan.

“By eliminating large stores from the picture, the Japanese government got rid of a player that might have exerted more independence from Fuji, and thereby shut off a possible distribution outlet for Kodak and Agfa film,” says Padilla.

This only leaves the small 'mom-and-pop' drugs stores and kiosks. But these retailers belong to 'fair trade associations' in which they get together and fix film prices, and Kodak claims that if any retailer tries to sell film at a discount or offers a premium with imported film, all the other retailers will report that store to Fuji and the Japanese government.

Two years ago, Kodak developed a throw-away camera for the Japanese market which won a design award from MITI, but it could not sell it. Seven months later, an almost identical product from Fuji was launched and took 95&percent; of the market overnight.

“Now that is a symptom of a rigged market,” says Padilla. “When you rig the distribution system, quality and price do not buy you market share in Japan.”