WT/DS44/R
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D. UPSETTING THE COMPETITIVE POSITION OFIMPORTED PRODUCTS
1. THE LEGAL TEST
6.243 TheUnited States claims thatJapan, byitspromulgation andapplication ofthedistribution
countermeasures, theLarge Stores Law, andpromotion countermeasures, worked to"systematically
offset" theintended effects ofitstariff concessions. According totheUnited States, Japan identified
inasystematic fashion theadvantages itbelieved thatforeign firms andproducts enjoyed, thendesigned
policies andimplemented measures tooffset those advantages. Asaconsequence, theapplication of
thesethreegroups ofcountermeasures upset thecompetitive relationship between imports anddomestic
products intheJapanese market contrary toArticle XXIII:1(b).
6.244 TheUnited States notes thatonlyafewdisputes haveresulted inafinding ofnullification or
impairmentwithinthemeaningofArticleXXIII:1(b),buteachpaneladdressingtheissuehasemphasized
theimportanceofprotectingaparty'sreasonableexpectationsthattariffconcessionswillleadtoimproved
market access andwillnotbefrustrated. Forexample, thepanel inEEC-Oilseeds considered that
"...the mainvalue ofatariffconcession isthatitprovides anassurance ofbetter market
access through improved price competition. Contracting parties negotiate tariff
concessions primarily toobtain thatadvantage. They must therefore beassumed to
basetheir tariff negotiations ontheexpectation thattheprice effect ofthetariff
concessions willnotbesystematically offset".702
The1992 Follow-up Report oftheMembers oftheOriginal EEC -Oilseeds Panel heldthat"...the
assurance ofbetter market access ...would bemeaningless" ifconcessions could be"systematically
counteracted".703
6.245 TheUnitedStatesfurtherexplainsthatthekeyquestionconsideredbythepanelonEEC-Canned
Fruit,asinallcases involving Article XXIII:1(b), waswhether thegovernment measure inquestion
upset thecompetitive relationship between thedomestic andimported product.704Likewise, thepanel
inEEC-Oilseeds noted:
"Inthepast,ArticleXXIII:1(b)cases,theCONTRACTINGPARTIEShaveadoptedthesame
approach: theirfindings ofnullification orimpairment were based onafinding that
theproducts forwhich atariffconcession hadbeengranted weresubjected toanadverse
change incompetitive conditions".705
6.246 Article26.1(a)oftheDSUstatesthatthecomplainingpartymustprovidea"detailedjustification
insupport ofanycomplaint". Japan emphasizes that,while Article 3.8oftheDSU states thatin
violation cases, "there isnormally apresumption thatabreach oftheruleshasanadverse impact on
otherMembers", thereisnopresumption ofadverse impact innon-violation cases. Therefore, inJapan's
view, acomplaining partymustmeetitsburden ofproof byshowing thatameasure iscurrently upsetting
thecompetitive position oftheimported product concerned.706
702Panel Report onEEC-Payments andSubsidies PaidtoProcessors andProducers ofOilseeds andRelated Animal
Feed Proteins ("EEC -Oilseeds") ,BISD 37S/86, 128-129, para. 148. (Emphasis added).
703Follow-up onthePanel Report "EEC -Payments andSubsidies Paid toProcessors andProducers ofOilseeds and
Related Animal Feed Proteins ",16March 1992, BISD 39S/91, 116, para. 81,(unadopted).
704Panel Repor tonEuropeanEconomicCommunity-ProductionAidsGrantedonCannedPeaches,CannedPears,Canned
Fruit Cocktails andDried Grapes ("EEC -Canned Fruit"),GATT Doc. L/5778, 20February 1985, (unadopted), p.29,
para. 80.
705EEC -Oilseeds ,BISD 37S/86, 129-130, para. 150.
706Ibid.WT/DS44/R
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6.247 Japan argues thatallprevious non-violation findings haveaddressed onlytwospecific types
ofmeasures: product-specific subsidies andtariffs. Inthose situations, itwasunquestionable that
theprovision ofasubsidy onthedomestic product, oratariffconcession onsome products, established
lessfavourable competitive conditions forimports oftheproduct concerned. Thus, inallprior panel
decisions which found non-violation nullification orimpairment, thecomplaining party showed aclear
connection between thealleged measures andthecompetitive position ofimported products.
6.248 Japan points outthattheUSnon-violation claims inthiscase, however, challenge Japanese
policies, e.g.,encouraging modernization ofdistribution practices, regulation oflarge scaleretailing,
andregulation ofunfair trade practices, which make nodistinctions between imports anddomestic
products. InJapan'sview, there istherefore noexplicit connection between these alleged measures
andthecompetitive position ofimports.
6.249 TheUnited States explains thatinboththeEEC-Oilseeds andEEC-Canned Fruit cases,
themeasures applied weresubsidies thatgaveanadvantage todomestic products andeffectively offset
thebenefits ofthetariffreductions. Inthepresent case,however, Japan hasachieved thesameobjective
byapplication ofdifferent measures. Japan systematically sought tooffset theeffects ofitstariff
concessionsbyprecludingaccesstokeydistributionchannelsthroughsystemization,andthenbuttressing
themarket structure, established through systemization, byapplication oftheLarge Stores Lawand
promotion countermeasures. Astariffs werereduced, Japan placed additional hurdles inthepathof
imports (e.g., closing distribution channels) tomake itsubstantially more difficult todistribute and
sellimported products inJapan. TheUnited States alleges thatintaking these actions, Japan has
effectively crippled efforts byforeign firms toutilize theopportunity provided bytariff reductions
toimprove theirposition intheJapanese market.
6.250 Japanrespondsthatnoneoftheallegedmeasuresindisputeiscurrentlyupsettingthecompetitive
position ofimported black andwhite orcolour filmorpaper relative tothetimeofanyofthetariff
concessions citedbytheUnited States. Japan explains thatthisconclusion canbedemonstrated with
respect toeachofthethree setsofpolicies indispute inthree different ways:
(1) thealleged measures indispute donotdistinguish between domestic andimported
products, andimpose noinherent disadvantage onimports;
(2) there isnocausal connection between thealleged measures andanyunfavourable
competitive conditions; and
(3) thealleged measures astheyexisttoday areunchanged ormore favourable toimports
ascompared tothetimeofanyrelevant tariff concession.
6.251 IntheviewoftheUnited States ,Japan hasfabricated three rules asdefense against theUS
claim thattheliberalization countermeasures areresponsible fortheadverse competitive conditions
confronting imported filmandpaper which, intheUSview, cannot besubstantiated withthetextor
negotiating history ofArticle XXIII, orwithprior panel decisions:
(1) thePanel maylookonlyatthefaceofthemeasures todetermine ifatariff concession
isbeing nullified orimpaired;
(2) themeasures ontheirfacemust"formally distinguish" between imported anddomestic
filmandpaper orotherwise "inherently disadvantage" imports tonullify orimpair the
relevant tariff concessions; and
(3) themeasures mustbemore unfavourable toimports today thanatanypoint inthepast
tonullify orimpair aconcession.WT/DS44/R
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(a) Measures, trade effects andmarket structure
6.252 Japan argues thatindetermining whether abenefit isbeing nullified orimpaired, panels should
focus exclusively onthemeasures themselves. Changes inmarketplace conditions andtrade flows
alone, i.e.,apart fromchanges inthemeasures themselves, inJapan'sview, areirrelevant towhether
competitive conditions arebeing upset. Japan submits thatthepanel report onEEC-Oilseeds makes
thispoint unequivocally:
"The approach oftheCONTRACTING PARTIES reflects thefactthatgovernments
canoften notpredict withprecision whattheimpact oftheirinterventions onimport
volumes willbe.Ifafinding ofnullification orimpairment depended notonlyon
whether anadverse change incompetitive conditions tookplace butalsoonwhether
thatchange resulted inadecline inimports, theexposure ofthecontracting parties
toclaims under Article XXIII:1(b) would depend onfactors theydonotcontrol; the
rulesonnullification andimpairment could consequently nolonger guide government
policies ....ThePanel further noted thatchanges intrade volumes result notonly
from government policies butalsoother factors, andthat,inmost circumstances, it
isnotpossible todetermine whether adecline inimports following achange inpolicies
isattributable tothatchange ortoother factors".707
6.253 Inview ofthefindings ofthepanel onEEC-Oilseeds ,708Japan argues thattherelevant
consideration inthecontext ofnon-violation complaints iswhether thealleged measures, notthemarket
situation, haveestablished, andcontinue toestablish, conditions ofcompetition thatarelessfavourable
forimported products. Given thatArticle 26.1(a) oftheDSU refers to"anycomplaint relating toa
measure", andthatArticle 26:1(b) oftheDSU states, "where ameasure hasbeenfound tonullify or
impair benefits", Japan concludes thatArticle 26oftheDSU supports itsposition.
6.254 TheUnited States responds thatJapan triestoimpose unjustifiable limitations onthefacts
andcircumstances thatthePanel canexamine indeciding whether thereisnullification orimpairment
ofabenefit under GATT. TheUnited States points outthatpanels typically havefound thatthe
complaining party neednotpresent evidence ofdeclining trade flows (e.g., decreases inimports or
market share) toprevail onitsclaim.709Inthiscontext, theUnited States refers tothepanel report
onEEC-Canned Fruit710which noted that"benefits accruing frombound tariffs under Article IIalso
encompassfuturetradingopportunities"sothat"complaintsbycontractingpartiesregardingnullification
andimpairment should beadmissible evenifthere wasnotyetstatistical evidence oftrade damage".
TheUnited States further argues thattheresponding party cannot defeat aclaim bypresenting evidence
ofthecomplaining party'simproving trade flows (e.g., increases inimports ormarket share). The
EEC-Oilseeds panel rejected theEC's"defense" thatthesubsidies onoilseeds didnotdisplace or
impede imports andtherefore didnotactually nullify orimpair thetariff concessions onoilseeds.711
Thisissobecause panels havegenerally understood GATT toprotect competitive opportunities, not
onlytrade flows, asexplained bythepanel onEEC-Oilseeds :
707EEC -Oilseeds ,BISD 37S/86, 130-131, para. 151.
708"The Panel further noted thatchanges intrade volumes result notonlyfrom government policies butalsoother factors,
andthat,inmost circumstances, itisnotpossible todetermine whether adecline inimports following achange inpolicies
isattributable tothatchange ortoother factors". EEC -Oilseeds ,BISD 37S/86, 130-131, para. 151.
709TheUnited States alsonotes thatJapan acknowledged that:"[W]hether ornotthegovernmental (dis)incentives, actions
orinterventions achieved thedesired objective initself isirrelevant intheanalysis ofanon-violation claim, because what
theclaim should beconcerned withistheimpact ontheconditions ofcompetition byagovernment measure, andnotthe
actual results ofagovernmental action".
710EEC -Canned Fruit,GATT Doc. L/5778, p.28,para. 77.
711EEC -Oilseeds ,BISD 37S/86, 129-131, paras. 150-151.WT/DS44/R
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"InthepastArticleXXIII:1(b)cases,theCONTRACTING PARTIES haveadoptedthesame
approach: theirfindings ofnullification orimpairment werebased onafinding that
theproducts forwhich atariffconcession hadbeengranted weresubjected toanadverse
change incompetitive conditions. Innoneofthese cases didtheyconsider thetrade
impact ofthechange incompetitive conditions tobedetermining. Inonecasethey
specifically rejected therelevance ofstatistics ontrade flows forafinding on
nullification andimpairment. [Citation omitted]. Itisofcourse truethat,inthetariff
negotiations intheframework ofGATT, contracting parties seektariff concessions
inthehopeofexpanding theirexports, butthecommitments theyexchange insuch
negotiations arecommitments onconditions ofcompetition fortrade, notonvolumes
oftrade".712
6.255 TheUnitedStatespointsoutthatpanelshaveappliedthesamelogicinArticleIIIcases,generally
inresponse totheresponding party'sattempt tousetrade flows asameans ofdefending itsmeasures,
notinresponse tothecomplaining party'spresentation ofitsclaims. Inthiscontext, theUnited States
emphasizes thatthepanel onUnited States -Section 337rejected theUS"defense" thatthepanel's
determination "could onlybemade onthebasisofanexamination oftheactual results ofpastSection
337cases".713
6.256 TheUnitedStatesfurtherarguesthatpriorpanelreportssupportthepropositionthatcomplaining
partiesmaysubmit,andpanelsshouldconsider,informationonmarketstructureandmarketconditions.714
Thepanel onAustralia -Ammonium Sulphate would nothaveknown thatthetermination ofthesubsidy
forChilean fertilizer would haveupset theconditions ofcompetition between Chilean andAustralian
fertilizers ifithadnotlooked beyond thefaceoftheterminated subsidy program tounderstand how
thetwoproducts actually competed inthemarketplace.715
6.257 ThustheUnited States stresses thatpanels should examine thedesign, architecture, andstructure
ofthemeasuresatissue716andfocusonthemarketstructureandconditionsatthetimeJapanimplemented
thevarious measures tounderstand theeffect ofthemeasures oncompetitive opportunities forimports
versus domestic photographic filmandpaper. Furthermore, panels should examine themarket structure
andconditions today forconfirmation thatthemeasures havehadandcontinue tohaveanadverse effect
onthecompetitive opportunities forimported filmandpaper.
6.258 Accordingly, theUnited States requests thePanel toreject Japan'srulethatit(i)mustlimit
itsinquiry tothefaceofthemeasures indetermining whether atariff concession isbeing nullified
orimpaired; and(ii)cannot consider evidence of"marketplace conditions" or"trade flows". TheUnited
States explains thatsome measures maybeblatantly protectionist ordiscriminatory thatapanel only
712Ibid.
713Panel Report onUnited States -Section 337oftheTariff Actof1930 ("United States -Section 337"),adopted on7
November 1989, BISD 36S/345, 386-387, paras. 5.12-5.13.
714TheUnited States notes thatthere isonecasewhich focused onthepanel'streatment ofthetrade flowdatapresented
bythecomplaining party aspartofitsaffirmative case-versus trade flowdatapresented bytheresponding party initsdefense.
InUnited States -Automobile Taxes ,theECpresented trade flowdatatoprove thattheUnited States haddrawn adistinction
between automobiles onthebasis ofselling price soastoafford protection todomestic production. Thatpanel considered
thedataanddetermined theywerenotconclusive, thereby supporting theUSposition inthiscasethatthisPanel mayconsider
allrelevant factsandfactors, including evidence related totrade flows. SeeUnited States -Taxes onAutomobiles ,GATT
Doc. DS31/R, p.101, para. 5.13.
715Report oftheWorking Party ontheAustralian Subsidy onAmmonium Sulphate ("Australia -Ammonium Sulphate") ,
BISDII/188, 192-193, para.12.SeealsoJapan-TaxesonAlcoholicBeverages("Japan-AlcoholicBeverages"),WT/DS8/R,
pp.113,116-119, paras.6.23, 6.29-6.32 (consi deringevidence outsidethefourcornersofthetaxmeasur esatissuetodetermine
ifdifferently taxed products arelikeproducts ordirectly competitive orsubstitutable products).
716SeeAppellate Body Report onJapan -Taxes onAlcoholic Beverages ("Japan -Alcoholic Beverages") ,WT/DS8, 10
and11/AB/R, p.29.WT/DS44/R
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needs tolookwithin thefourcorners ofthemeasure tounderstand itsprotective effect.717But,for
many measures, theUnited States submits, apanel cannot determine whether themeasure isaffecting
thecompetitive opportunities forimported products ifitdoesnothavesomeunderstanding ofthemarket
structure andconditions inwhich theimports arebeing sold.718
6.259 Japan argues thattheexisting marketplace conditions ortradeflows result fromvarious factors,
suchasmarket forces andprivate practices, andarebeyond thecontrol ofthegovernment. Determining
thenullification orimpairment ofthebenefit byinference from themarketplace conditions ortrade
flows, which allegedly demonstrates actual trade damage, could leadtotheconsequence thata
government would beheldresponsible forwhatitdoesnotcontrol. InJapan’sview, therefore, the
panel mustfocus onthemeasures themselves, andnotonthemarketplace conditions ortrade flows.
6.260 According toJapan, inevaluating theupsetting ofcompetitive conditions allegedly caused by
measures, panels thusmustlookexclusively totheprovisions ofthemeasures themselves, andwhether
theyareinherently lessfavourable toimports ofthebound product thantodomestic products. The
panel should notbemisled byincidental consequences, i.e.,inthiscase, theallegedly "closed"
distribution networks intheJapanese filmandpaper markets today.
6.261 Japan submits thattheprinciple thatmeasures should bejudged bytheirprovisions, andnot
bytheiractual consequences, iswellestablished inArticle IIIjurisprudence where thecompetitive
conditions established bymeasures aresimilarly atissue. Thepanel report onUnited States -Section
337oftheTariff Actof1930found thatpanels should basetheirArticle IIIanalysis "onthedistinctions
made bythelaws, regulations, orrequirements themselves andontheirpotential impact, rather than
ontheactual consequences forspecific imported products".719
6.262 Japan alsomentions theunadopted panel report onUnited States -Taxes onAutomobiles ,720
which dealtwiththeissueofwhether measures altered thecompetitive relationship between imported
anddomestic products. Inthatcase,theUnited States imposed aluxury taxonallautomobiles priced
over$30,000. TheECargued thatthistax,while facially neutral, discriminated against European
carsinviolation ofArticle III:2, given thatalarge percentage ofthecarsimported fromtheECwere
priced over$30,000 while many UScarswerepriced under $30,000. Thepanel rejected thisargument
ontheground thatthedistinction drawn between automobiles priced under andabove $30,000 was
notinherently disadvantageous toEuropean imports andconcluded thattheUSmeasure didnot
discriminate automobiles from theECinviolation ofArticle III:2.721
6.263 TheUnited States rejects thenotion thatameasure cannot nullify orimpair benefits unless
it:(i)draws "formal distinctions" between imported anddomestic products; or(ii)isotherwise
"inherently lessfavourable" toimports. TheUnited States submits thatinproposing andapplying
thisrule,Japan refers toanumber ofterms suchas"formal distinctions", "distinguishes between",
"explicit disadvantage", "inherently lessfavourable", "inherently disadvantageous", and"inherently
717InEEC-Oilseeds ,forexample, thepanel appears tohavelimited itsconsideration ofwhether thesubsidies atissue
upset thecompetitive relationship between imported anddomestic products bylooking exclusively atthefaceofthemeasure.
EEC -Oilseeds ,BISD 37S/86, 128, para. 147.
718See,e.g.,Australia-AmmoniumSulphate,BISDII/188, 192-193, para.12.TheUnitedStatesexplainsthat,forexampl e,
ameasure applied intheoligopolistic photographic materials sector inJapan could haveanentirely different effect ifapplied
forexample, inthehighly competitive textiles sector inHong Kong. Only byreviewing themeasure inthecontext ofthe
market inwhich itisapplied cantheeffect ofsome measures oncompetitive opportunities beunderstood.
719Panel Report onUnited States -Section 337,BISD 36S/345, 387, para. 5.13.
720Panel Report onUnited States -Taxes onAutomobiles ,GATT Doc. DS31/R, 11October 1994 (unadopted).
721"[A]selling price above $30,000 didnotappear fromtheevidence tobeinherent totheECorother foreign automobiles.
Inparticular, noevidence hadbeen advanced thatECorother foreign automobile manufacturers didnotingeneral have
thedesign, production, andmarketing capabilities tosellautomobiles below the$30,000 threshold, orthattheydidnotin
general produce such models forother markets". Ibid., p.102, para. 5.14.WT/DS44/R
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unfavourable", without defining themeaning ofthese terms, except through areference tothepanel
report inUnited States -Automobile Taxes .TheUnited States suggests thatJapan mischaracterizes
theAutomobile Taxes report asstanding fortheproposition thatameasure cannot violate Article III:2
ifitis"notinherently disadvantageous toimports". IntheviewoftheUnited States, thatpanel found
thatthetaxes atissuedidnotdiscriminate against foreign automobiles because neither theaim,effect,
noranyother evidence showed thatthemeasure afforded protection todomestic production.722
6.264 IntheUSunderstanding, Japan appears tobearguing thatonlymeasures which obviously
discriminate against imported products cannullify orimpair tariff concessions within themeaning of
Article XXIII:1(b). While Japan substantiates itsinterpretation withananalogy toArticle III,theUnited
States contends thatJapan'sinterpretation hasnotevenbeenapplied intheArticle IIIcontext. The
United States points outthatpanels havefound thatlaws, regulations, andrequirements thatdonot
discriminate against products onthebasisoforigin nevertheless canviolate Article III.723Panels also
haveaffirmedthatameasurewhichdoesnotdrawanyformaldistinctionsbetweenimportedanddomestic
products onthebasis oforigin orother product characteristics canviolate Article III.724More
importantly, theUnited States emphasizes thatifthisrulewereapplied under Article XXIII:1(b), that
Article would become redundant, thereby effectively eliminating aMember 'srightofredress fornon-
violation nullification andimpairment. Suchanoutcome would notonlybeinconsistent withthegeneral
rules oftreaty interpretation,725butwould alsobeinconsistent with theplain language of
Article XXIII:1(b), which provides arightofredress ifabenefit under theGATT isbeing nullified
orimpaired asaresult ofanymeasure "whether ornotitconflicts withtheprovisions" oftheGATT.
6.265 Inresponse totheUnited States claim thatJapan’sposition isnotvalidbecause itwould render
Article XXIII:1(b) alegalnullity, Japan argues thattheUnited States bases thisargument ontheview
thatallinherently discriminatory measures maybeaddressed under Article III.InJapan’sview,
however, notallcases ofinherent discrimination canbeconsidered tobeinviolation ofArticle III.
Forexample, production subsidies which arepotentially discriminatory arespecifically excluded by
Article III:8(b) fromthescope ofArticle IIIandArticle XXIII:1(b) could alsodealwithnon-mandatory
government measures ifitimposes asubstantive equivalent oflegally binding obligations, whereas
Article III:4onlycovers laws, regulations, andrequirements andhasanarrower scope.
722Ibid., pp.100-102, paras. 5.12-5.14.
723See,e.g., Panel Report onJapan -Alcoholic Beverages ,WT/DS8, 10and11/R (finding thatJapanese taxmeasures
thatdifferentiated between spirits byproduct characteristics violated Article III:2); Panel Report onUnited States -Measures
Affecting Alcoholic andMaltBeverages ("United States -Alcoholic Beverages") ,adopted on19June1992, BISD 39S/206,
277, para. 5.26 (finding thataMississippi taxthatdifferentiated between wines bygrape typeviolated Article III:2).
724See,e.g., Panel Report onUnited States -Section 337,BISD 36S/345, 386, para. 5.11 (noting thatit"hastobe
recognized thatthere maybecases where application offormally identical legal provisions would inpractice accord less
favourable treatment toimported products"); Panel Report onCanada -Import, Distribution, andSaleofCertain Alcoholic
Drinks byProvincial Marketing Agencies ,adopted 18February 1992, BISD 39S/27, 83,para. 5.27(finding that"minimum
prices applied equally toimported anddomestic beerdidnotnecessarily accord equal conditions ofcompetition toimported
anddomestic beer"); Panel Report onThailand -Restrictions onImportation ofandInternal Taxes onCigarettes ("Thailand
-Importation ofCigarettes "),adopted 7November 1990, BISD 37S/200, 224,para. 78(noting that"Itmight beargued
that... ageneral banonallcigarette advertising would create unequal competitive opportunities between theexisting Thai
supplier ofcigarettes andnew, foreign suppliers"); United States -Alcoholic Beverages, BISD 39S/206, 275,para. 5.19
(finding that"thegranting oftaxcredits onanon-discriminatory basis tosmall breweries inside andoutside theUnited States '
would beinconsistent withArticle III:2aslongasimported beerfrom large breweries were subject tohigher taxes"). See
alsoArticle XVII ofGATS (providing that"formally identical orformally different treatment shallbeconsidered tobeless
favourable ifitmodifies theconditions ofcompetition infavour ofservices orservice suppliers ofanyother Member").
725TheAppellate Body hasnoted ontwooccasions that"[o]ne ofthecorollaries ofthe'general ruleofinterpretation '
insetoutinArticle 31oftheVCLT isthatinterpreter mustgivemeaning andeffect toallterms ofthetreaty. Aninterpretation
isnotfreetoadopt areading thatwould result inreducing whole clauses orparagraphs ofatreaty toredundancy orinutility.
Appellate Body Report, Japan -Alcoholic Beverages, pp.11-12, (citing Appellate Body report, United States -Standard
forConventional andReformulated Gasoline ).WT/DS44/R
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6.266 Japan further argues thatthecomplaining party mustshow thatthebenefit "isbeing" nullified
orimpaired bythemeasure. Japan emphasizes thatmany ofthealleged "measures" complained against
ended years ago. However, ameasure which isnolonger ineffect cannot currently beestablishing
lessfavourable conditions ofcompetition forimports ofthebound product, andtherefore cannot result
innullification orimpairment. Ontheother hand, Japan concedes thatthere aresome "measures"
identified bytheUnited States thatarestillineffect. However, inJapan'sview, those alleged measures
cannot upsetthecompetitive position ofimported filmandpaper because ameasure thatdoesnot"apply"
tothegiven product assuch, isincapable ofupsetting competitive conditions forimports ofthatproduct.
6.267 TheUnited States notes thatitconcurs withJapan ontheproposition thatafinding of
nonviolation nullification andimpairment maybebased onlyonmeasures thatarecurrently inforce.
TheUnited States doesnotbelieve, however, thatJapan haspresented credible evidence thatits
intervention inphotographic material distribution ismerely "afactofthepast".
(b) Causal connection
6.268 Japan argues thatevenifthepanel looks beyond theprovisions ofthemeasure inquestion
andexamines actual consequences, attheveryleastthecomplaining party mustberequired toprove
aclear causal connection between thealleged measures andcompetitive conditions unfavourable to
imports. Japan explains thatthisrequirement isreflected inthephrase "astheresult of"asstipulated
inArticle XXIII:1. Inparticular, inJapan'sview, thecomplaining partymustnotonlyestablish (1)that
conditions areinfactunfavourable toimports, butalso(2)thatthose conditions areduetothealleged
measures inquestion. Otherwise, Japan contends, ifnocausal connection between themeasures and
unfavourable competitive conditions isestablished, anynon-violation finding would restsimply on
changes inmarketplace conditions alone, aresult squarely atoddswiththerelevant provisions ofthe
WTO Agreement andwithpastprecedent.
6.269 TheUnited States responds thatitdoesnottakeissue withtheproposition thatthere must
beacausal connection between themeasures andthecompetitive conditions complained of.However,
totheUnited States, itappears thatJapan isadvocating arequirement thatthecomplaining party must
establish causation ina"butfor"sense; i.e.,thattheUnited States mustestablish thattheunfavourable
competitive conditions inJapan forimported photographic filmandpaper were solely theresult of
themeasures taken byJapan andthat"butfor"these measures, these conditions would notexist. To
theextent thatthisisthecausation standard advocated byJapan, theUnited States strongly disagrees.
6.270 According totheUnited States, Japan citesthephrase "astheresult of"inArticle XXIII:1,
insupport ofa"butfor"causation standard. TheUnited States contends thattextual interpretation
ofthisphrase doesnotsupport suchastrict standard ofcausation. IntheUSview, ifthedrafters had
intended suchastandard, theywould haveinserted aword like"directly" or"solely" immediately
before thephrase "astheresult of".726A"butfor"causation standard isalsoinconsistent withthe
object andpurpose ofArticle XXIII:1(b). Thedrafters clearly intended thatArticle XXIII:1(b) be
capable ofproviding relief inappropriate circumstances. However, under a"butfor"causation standard,
theUnited States submits, acomplaining party essentially would facetheimpossible taskofproving
thenegative, e.g., inthiscase, thatthedocumented unfavourable market conditions forimported
photographic filmandpaper would nothaveexisted "butfor"theactions oftheJapanese Government.
TheUnited States asserts thatsuchanapproach would render Article XXIII:1(b) adeadletter, aresult
atoddswiththeintent ofthedrafters. Inthisregard, theUnited States recalls thattheAppellate Body
hascautioned against reading intoprovisions ofWTO agreements requirements thatarenotreflected
726TheUnited States notes thatinArticle 8.2(a)(iv) and(v)oftheSCM Agreement, thedrafters usedthephrase "directly
astheresult of"torefer tothetypes ofcosts thatcould becovered bynon-actionable government assistance forresearch
activities. Thus, theUnited States argues thatwhen thedrafters intended astrict causation standard, theyknew howtoexpress
their intentions.WT/DS44/R
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inthetextofthose provisions. Forexample, intheUnited States -Underwear727andtheUnited States -
Wool Shirts728cases, theAppellate Body stressed theimportance ofrespecting thebalance ofrights
andobligations asreflected intheactual language usedbythedrafters.
6.271 TheUnited States warns thattheestablishment ofa"butfor"causation standard would amount
torewriting Article XXIII:1(b). Accordingly, theUnited States claims tohaveestablished whatitis
required toestablish under Article XXIII:1(b), i.e.,that(i)Japan sought toaltertheconditions of
competition forthedistribution andsaleofphotographic filminJapan; and(ii)those conditions have
beenaltered.
6.272 TheUnited States further contends thatrather thanapply abut-for causation standard, thePanel
should determine whether Japan took measures thataffirmatively contributed totheformation,
strengthening, andmaintenance ofconditions oftheoligopolistic distribution structure inJapan. Japan
didsothrough aseries ofactions promoting exclusive dealings between Japanese manufacturers and
wholesalers, cementing such relationships where theyalready existed, pushing those exclusive
relationships asfardownstream aspossible, anddefending themagainst competition fromforeign firms
andalternative distribution channels. Specifically, Japan pursued these endsthrough measures that:
1. shiftedthebalanceofeconomicpowerbetweenmanufacturersandwholesalers(throughshortened
payment terms);
2. created anincentive forvolume purchasing andchannel exclusivity (through volume discounts,
rebates);
3. chilledforeignfirms’abilitytooffermorecompetitivetermstowholesalers(throughstandardized
transaction terms, international contract notification, JFTC Notification 17andthecomparable
underlying provisions oftheAntimonopoly Law);
4. enhanced domestic manufacturers ’integration with, andcontrol over, wholesalers (through
electronic information link,jointdistribution facilities);
5. limited theavailability ofalternative distribution channels toforeign firms (through subsidies
tolaboratories, Large Stores Law);
6. curtailed competition tomanufacturer domination ofthedistribution structure bysuppressing
large stores (through theLarge Stores Law); and
7. stifled foreign manufacturers ’ability toutilize their strengths inpromoting their products
(through thepromotion countermeasures).
With thesupport ofthese measures: Fujiachieved exclusive control ofitsfourprimary wholesalers;
Konica solidified itsrelationships withitspreviously independent primary wholesalers, firstthrough
establishing jointdistribution facilities withthem andthenbyacquiring them outright; secondary
wholesalers became aligned withthedomestic manufacturers ’vertical distribution chains; andFuji
727IntheUnderwear case, theAppellate Body declined toreadintoArticle 6.10oftheAgreement onTextiles andClothing
alicense tobackdate theeffective dateofatemporary restraint measure. TheAppellate Body previously hasrelied ona
comparison ofthetextsofdifferent WTO agreements inorder toelucidate themeaning ofaparticular provision. Appellate
Body Report onUnited States -Restrictions onImports ofCotton andMan-made Fibre Underwear ,adopted 25February
1997, WT/DS24/AB/R, p.17,n.25.
728IntheWool Shirts case, theAppellate Body declined toreadintotheAgreement onTextiles andClothing arequirement
thattheimporting Member beartheburden ofproving thattemporary safeguard action wasnotinconsistent withArticle
6oftheAgreement onTextiles andClothing. Appellate Body Report onUnited States -Measures Affecting Imports ofWoven
Wool Shirts from India,adopted on23May 1997, WT/DS33/AB/R.WT/DS44/R
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gained domination overavastnetwork ofphoto processing laboratories, substantially limiting their
availabilityasanalternativedistributionchannelforforeignfilmandasamarketforforeignphotographic
paper. These measures alsosignificantly impaired theability offoreign manufacturers toovercome
theobstacles oftheoligopolistic distribution system byoffering competitive incentives towholesalers
orconsumers orby-passing wholesalers togodirectly tolargestores. Eachoftheseactions andresults
issignificant initself. Buttogether, theycombine tosubstantially altertheconditions ofcompetition
inways thatareadverse toimports.
6.273 Japan responds thattheUnited States appears toargue thatcausation canbeestablished by
showing theexistence ofgovernment measures ononehand, andtheexistence ofunfavourable market
conditions ontheother hand, without proving thelinkage between them. Although Japan doesnot
argue thatitisnecessary foracomplaining party toshow thattheunfavourable competitive conditions
were"solely" theresult ofthealleged measure, Japan considers itindispensable toprove aclearlinkage
between thealleged measures themselves andthealleged unfavourable competitive conditions with
"detailed justification". InJapan’sview, theexisting marketplace conditions result fromvarious factors
suchasmarket forces andprivate practices. Determining thenullification orimpairment ofthebenefit
byinference fromthemarketplace conditions could leadtotheconsequence thatagovernment would
beheldresponsible forwhatisdoesnotcontrol.
(c) Relevance ofthetimeofthetariff concession
6.274 Japan emphasizes thatinorder todemonstrate current nullification orimpairment, itisnecessary
tocompare themeasure inquestion asitexists today withthemeasure (orabsence thereof) asitexisted
atthetimeoftherelevant tariff concession. Ifameasure atpresent isnotmaterially changed, oris
nowmore favourable totheimports, ascompared tothetimeoftherelevant tariff concession, there
canbenoupsetting ofthecompetitive position.729ForJapan, itisirrelevant whether marketplace
conditions haveworsened inthatinterim period.
6.275 IntheviewoftheUnited States ,there isnolegalbasis forJapan'sposition thatameasure
which continues toexistinitsoriginal oramodified formcannot nullify orimpair tariff concession.
TheUnited States explains thatthefactthatameasure mayhave been upsetting thecompetitive
relationship between imported anddomestic products forsome period oftimedoesnotmean thatthe
measure suddenly ceases tohavethateffect. Similarly, thefactthatameasure maybe"liberalized"
doesnotmean thatitnolonger upsets thecompetitive relationship between imported anddomestic
products. Forexample, ifaMember began providing asubsidy in1979, thesubsidy could stillbe
nullifying orimpairing tariff concessions onthesubsidized products tenyears later. Similarly, ifa
Member began providing asubsidy in1979andthencutinhalftheamount ofthesubsidy totherecipient
tenyears later, thesubsidy could stillbenullifying orimpairing tariff concessions onthesubsidized
products.
6.276 Japan responds thatunlike Article IIIofGATT 1994, thetariff concessions under Article II
oftheGATT1994donotestablishequalcompetitiveconditionsbetweendomesticandimportedproducts,
sinceatariffisbyitsnature abarrier toimported products. Forthepurpose ofanon-violation remedy,
therefore, thebenefit ofthetariff concessions accruing under Article IIconsists ofthelegitimate
expectation thatcompetitive conditions forimported products hadimproved compared tothecompetitive
conditions thatexisted before thetariff concessions. InJapan’sview, thisanalysis isinlinewiththe
finding oftheEEC-Oilseeds panel, which stated that,"[i]nthepastArticle XXIII:1(b) cases, the
contracting parties haveadopted thesameapproach: theirfindings ofnullification orimpairment were
729TheEEC-Oilseedspanel found that:"InthepastArticleXXIII:1(b) cases, theCONTRACTING PARTIES haveadopted
thesame approach: theirfindings ofnullification orimpairment were based onafinding thattheproducts forwhich atariff
concession hadbeengranted weresubjected toanadverse change incompetitive conditions". EEC-Oilseeds ,BISD 37S/86,
129-130, para. 150.WT/DS44/R
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based onafinding thattheproducts forwhich atariff concession hadbeengranted were subjected
toanadverse change incompetitive conditions".730
2. OVERVIEW OFTHE IMPACT OFSPECIFIC MEASURES ONTHE COMPETITIVE
POSITION OFIMPORTS
6.277 According totheUnited States ,on6June1967, astheKennedy Round wasconcluding, the
Japanese Cabinet announced thatitwould apply "countermeasures" to"create thefoundation toenable
ourenterprises tocompete withforeign enterprises onequal terms. ...".731FortheUnited States, the
purpose ofthecountermeasures wasnottoensure thatforeign enterprises hadequal opportunities to
competewithJapaneseenterprisesinJapan.IntheUSview,Japansoughtto"restrainforeignenterprises
comingintoJapanafterliberalizationfromdisturbingorderindomesticindustriesconcernedbyresorting
tothestrength oftheirsuperior power andfromadvancing intothenon-liberalized sectors byevading
control".732TheUnited States concludes thatthevery premise oftheJapanese Government 's
countermeasures wastoupset thecompetitive relationship between domestic andforeign enterprises
byneutralizing theperceived advantages offoreign enterprises oftheirsuperior capital resources,
organizational scale, andmarketing expertise.733
6.278 TheUnited States claims thattheJapanese Government designed measures toneutralize the
advantages offoreign enterprises arising fromthetariffconcessions, working closely withtheJapanese
industry togiveeffect totheclosing oftheJapanese market:
(i) MITIandotherJapaneseGovernmentagenciesimplementeddistributioncountermeasures
tolimitforeign penetration oftheJapanese market through Japanese wholesalers and
retailers;
(ii) MITI implemented theLarge Store Law, inpart,tocontrol thegrowth oflargestores
which would promote thesaleofimported products; and
(iii) theJFTCimplementedpromotionalcountermeasurestomakeitmoredifficultforforeign
enterprises toattract Japanese consumers toimported products.
6.279 During theTokyo Round, USnegotiators onceagain attached ahighpriority toobtaining from
Japan tariffconcessions onbothblack andwhite, andcolour photographic filmandpaper.734TheUnited
States argues that,having closed theprimary distribution network, limited theoperation oflarge-scale
retail stores andimposed apanoply ofrestraints onpromotions following theKennedy Round,
nonetheless, following theTokyo Round, Japan imposed further burdens onlargestores andmarketing
activities.
6.280 TheUnited States further submits thatintheUruguay Round, Japan entered intoazerobinding
oncolour photographic filmandpaper.735During theUruguay Round negotiations, Japan'strading
partners knew thattheJapanese market wasdifficult topenetrate, butthewayinwhich thedistribution
countermeasures,LargeStoresLaw,andpromotioncountermeasuresworkedinconcerttosystematically
730EEC -Oilseeds ,pp.129-130, para. 150(emphasis added).
7311967 Cabinet Decision, p.3-4.USEx.67-6.
732Ibid., p.4.
733TheUnited States notes thattheDistribution Committee initsSixth Interim Report explained thatJapanese enterprises
wereinferior totheirAmerican counterparts onthebasisofcapital resources, organizational scale(asmeasured bythenumber
ofemployees, number ofstores, salesvolume, andnetprofit), andsalestechnique. Sixth Interim Report, p.29,USEx.68-8.
734Given thatcolour filmandpaper hadreplaced black andwhite filmandpaper asthemajority consumer product in
1971 andthepredominant consumer product in1975, USnegotiators sought andreceived evendeeper cutsinthetariff rates
forcolour filmandpaper products (4percent oneach) thanforblack andwhite filmandpaper products (7.2percent and
6.6percent, respectively).
735TheUnited States sought fullmarket access inJapan andachieved tariff bindings toensure thatsuchmarket access
would continue, notwithstanding thatJapan hadmaintained anapplied rateofzerosince 1990.WT/DS44/R
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offset tariff concessions onphotographic filmandpaper wasnotknown. Thiswebofliberalization
countermeasures hascontinued tooperate tonullify orimpair USbenefits, dueto:(i)foreclosure from
theprimary wholesale channels ofdistribution asaresult ofthedistribution countermeasures; (ii)sharp
diminution ofalternative channels, i.e.,large stores, andsecondary wholesalers; and(iii)inability
topriceandpromoteproductseffectivelyandcompetitivelyasaresultofrestrictionsunderthePremiums
LawandAntimonopoly Law.
6.281 According totheUnited States, Japan achieved thisresult through several measures:
6.282 First, theUnited States submits thatJapan promoted andimplemented standardized transaction
terms between manufacturers andwholesalers, andbetween primary wholesalers andsecondary
wholesalers andretailers. These transaction terms fostered exclusive dealing between Japanese
manufacturers, wholesalers, andretailers ofphotographic filmandpaper. Where suchexclusive
relationships already existed, theterms promoted bytheJapanese Government further cemented the
relationships. Inaddition, thestandardization oftransaction terms among manufacturers andamong
wholesalers limited theability offoreign manufacturers toattract wholesalers withmore competitive
transaction terms. Eachcontract between aforeign manufacturer andJapanese distributor wassubject
toautomatic scrutiny bytheJFTC, andmore favourable terms could beconsidered anunfair trade
practice inviolation oftheLaw.
6.283 Second, Japan isalleged tohaveusedadministrative guidance andconcessionary financing
toestablish orsolidify physical infrastructure andcomputer tiesbetween Japanese manufacturers and
wholesalers. These tiesfurther cemented theclosed vertical relationships intheJapanese distribution
system, totheexclusion offoreign products.
6.284 Third, theUnited States argues thatJapan usedadministrative guidance andconcessionary
financing tolimitforeign firms'access toanewdistribution channel thatbegan toemerge inthelate
1960s andearly1970s, i.e.,colour photoprocessing laboratories. Through itssubsidized loans, Japan
helped ensure that84percent ofcolour laboratories actascaptive distributors forJapanese film
manufacturers andacaptive market forJapanese photographic paper manufacturers.
6.285 Fourth, according totheUnited States, Japan implemented, amended, andaggressively applied
measures torestrict thegrowth ofwhat Japan'sownreports identified asthegreatest threat tothe
oligopolistic distribution structure ofdomestic manufacturers, i.e.,large stores. Notonlywerelarge
stores achallenge totheoligopolistic distribution structure, theyalsopresented apotentially significant
alternative distribution channel forforeign filmtoby-pass theexclusive wholesale system. IntheUS
view, Japan'sstrict application ofbothformal andinformal adjustment procedures under thelawhave
veryeffectively suppressed thegrowth oflarge stores inJapan forthree decades.
6.286 Fifth, theUnited States contends thatJapan substantially curtailed theability offoreign firms
toplytheircapital strength andmarketing prowess toattract Japanese distributors andconsumers to
theirproducts. Japan notonlydeveloped strictlimits onpromotions, itauthorized theJapanese private
sector todevelop andenforce itsown,stricter standards, anditallowed thesestricter standards togovern
themarket asawhole.
6.287 According totheUnited States, theresult ofthese measures isamarket structure inwhich
noneoftheprimary wholesalers carries foreign filmorpaper, whereas Japanese filmmanufacturers
sellalloftheirproduct through these wholesalers.736Thedisadvantages tobeing excluded from the
principal distribution channel aremanifold given thatforeign firms havenoprospect ofmatching or
736Among thetwoforeign manufacturers, Kodak isabletosellonly15percent ofitsfilmthrough secondary wholesalers
and25percent through colour laboratories; theremainder itmust selldirect toretail. Agfa relies ondirect toretail sales
forvirtually allofitsfilm.WT/DS44/R
Page237
re-creating theinfrastructure, geographic reach, relationships withcustomers, andefficiencies ofscope
thattheprimary wholesalers have.737
6.288 TheUnited States emphasizes thatthedistribution countermeasures, Large Stores Law, and
promotion countermeasures haveplayed aninstrumental roleintheestablishment andmaintenance
oftheclosed, domestic-manufacturer-dominated distribution system forphotographic filmandpaper
inJapan. Bymeans ofaseries ofmeasures, theJapanese Government hascontributed totheformation,
strengthening, andmaintenance ofexclusive tiesbetween manufacturers andwholesalers, andbetween
primary wholesalers andsecondary wholesalers andretailers. Japan undertook additional measures
thathave protected thissystem from competition from foreign suppliers andfrom thegrowth of
alternative channels, suchaslargestores andlaboratories, forthedistribution ofimported photographic
filmandpaper. TheUnited States submits thatitexplains indetail howeachofthemeasures assists
inaccomplishing these results, including:
(i) shifting thebalance ofeconomic power between manufacturers andwholesalers (through
shortened payment terms);
(ii) creatinganincentiveforvolumepurchasingand"channelexclusivity"(throughvolumediscounts,
rebates);
(iii) chilling theability offoreign firms tooffermore competitive terms towholesalers (through
standardizedtransactionterms,internationalcontractnotification,PremiumsLawNotification17
andthecomparable underlying provisions oftheAntimonopoly Law);
(iv) enhancing domestic manufacturers 'integration with, andcontrol over, wholesalers (through
electronic information links, jointdistribution facilities);
(v) limiting theavailability toforeign firms ofalternative distribution channels (through subsidies
tolaboratories, Large Stores Law);
(vi) limiting competition tomanufacturer domination ofthedistribution structure bysuppressing
large stores (through theLarge Stores Law); and
(vii) stifling theability offoreign manufacturers toutilize theirstrengths inpromoting theirproducts
(through thepromotion countermeasures).
6.289 TheUnited States claims thatitdocuments notonlyhowthese measures helped create the
verticallyintegrateddistributionsystembeginning30yearsago,butalsohowtheyhavebeeninstrumental
inmaintaining ituptothepresent. Inaddition, theUnited States argues thatitdemonstrates that,as
aresult ofthemeasures applied byJapan, theconditions ofcompetition forthedistribution andsale
ofphotographic filminJapan havebeenaltered tothedisadvantage ofimported products.
6.290 According toJapan ,toshow thatthe"measure" inquestion isupsetting thecompetitive position
ofimported products, thefollowing three criteria should bedemonstrated:
(1) whether ornotthemeasures themselves, notthemarketplace conditions, areupsetting
thecompetitive conditions oftheimports;
(2) whetherornotthecomplainingpartyhasdemonstratedaclearcausalconnectionbetween
thealleged measures andcompetitive conditions unfavourable toimports; and
737TheUnited States request thePanel toexamine howthese measures have operated inthemarket, andhowJapanese
Government andtheprivate sector have interacted togive themeasures effect. TheUnited States emphasizes that
government/industry relations andtheuseofadministrative guidance inJapan areunique. According totheUnited States,
theprocess of"concer tedadjustment"involvesextensiveback-and-for thinteractionbetween industryandgover nment ,including
surveyingofmarketconditions,coordinationtobuildconsensus, gover nment validationoftheconsensus through announcement
ofguidance, andconstant government monitoring toensure thattheguidance isimplemented. While toanoutsider theformal
policy announcement maynotappear particularly binding orforceful, within Japan, however, thepervasive government
involvement, monitoring, peerpressure, andpotential foradditional formal orinformal action carries significant force.WT/DS44/R
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(3) whether ornotthecompetitive conditions oftheimports arelessfavoured under the
measure inquestion asitexists today thantheywereunder themeasure asitexisted
atthetimeoftherelevant tariff concessions.
6.291 Asforthefirstpoint, Japan emphasizes thatthealleged measures donotmake anydistinction
between products, either explicitly orimplicitly, based ontheircountry oforigin, ordraw anyline
atallbetween products based onanyproduct characteristics. InJapan'sview, these features are
important indications thatthealleged measures donotupset thecompetitive conditions ofimports.
6.292 Regarding theneedtodemonstrate acasual connection, Japan notes thattheexisting marketplace
conditions ortrade flows result from various factors suchasmarket forces andprivate practices and
arebeyondthecontrolofthegovernment.Japanexplainsthatdeterminingthenullificationorimpairment
ofthebenefit byinference fromthemarketplace conditions ortradeflows, which allegedly demonstrates
actual trade damage, could leadtotheconsequence thatagovernment would beheldresponsible for
whatitdoesnotcontrol. Therefore, Japan maintains thatthelegalexamination should focus onthe
measures themselves, andnotonthemarketplace conditions ortrade flows.
6.293 With regard tothethird point, Japan emphasizes thatunlike Article IIIofGATT, thetariff
concessions under Article IIofGATT donotestablish equal competitive conditions between domestic
andimported products, since atariff isbyitsnature abarrier toimported products. Forthepurpose
ofanon-violation remedy, therefore, thebenefit ofthetariff concessions accruing under Article II
consists ofthelegitimate expectation thatcompetitive conditions forimported products hadimproved
compared tothecompetitive conditions thatexisted before tariff concessions. InJapan'sview, this
analysis isconsistent withthefinding ofthepanel onEEC-Oilseeds ,which stated that,"[i]nthepast
Article XXIII:1(b) cases, thecontracting parties haveadopted thesame approach: theirfindings of
nullification orimpairment were based onafinding thattheproducts forwhich atariff concession
hadbeengranted were subjected toanadverse change incompetitive conditions".738
3. DISTRIBUTION "COUNTERMEASURES"
6.294 According totheUnited States ,atthetimeJapan began liberalizing tariffs andquantitative
restrictions onphotographic filmandpaper, aforeign manufacturer attempting tobreak intotheJapanese
distribution system could notinvest inaJapanese distributor, could notgiveprizes, gifts, cash, or
other premiums toaJapanese distributor beyond atoken amount, andcould notoffermore competitive
transaction terms toadistributor without reporting themtotheJFTC andrisking Antimonopoly Law
action. Even simply price cutting could bring automatic scrutiny under theinternational contract
notification provisions, andraise theriskofa"dumping" orunfair trade practices caseunder the
Antimonopoly Law. Meanwhile, thetightened payment terms, rebates, andvolume discounts continued
towork -along withother aspects ofthe"systemization" policy suchasinformation linksandphysical
integration ofdistribution -toestablish andsolidify exclusive vertical relationships intheJapanese
distribution system forphotographic filmandpaper. These barriers prevented foreign manufacturers
from forming ormaintaining relationships withJapanese wholesalers thatwould accord meaningful
access totheJapanese market. Thecontinuation ofthesebarriers fornearly threedecades hasallowed
theJapanese manufacturers tomaintain domination overthewholesale distribution system, tothenear
exclusion offoreign suppliers. Thefactual aspects ofthese measures arealsodescribed inSection B
ofPartIIand,inmore detail, inSection AofPartV.
738EEC -Oilseeds ,BISD 37S/86, 129-130, para. 150.WT/DS44/R
Page239
(a) Evolution ofsystemization, rationalization andstandardization ofdistribution policies
6.295 1967 Cabinet Decision :TheUnited States submits thatinJune1967, theJapanese Cabinet
approved theuseofdistribution countermeasures739tolimitforeign enterprises from penetrating the
Japanese market through Japanese distributors.740Toimplement thispartoftheCabinet ’sdecision,
MITI, theJFTC, theSmall andMedium Enterprise Agency (SMEA), andtheJapan Development Bank
(JDB) developed aseries ofcountermeasures that: (1)limited theability offoreign enterprises touse
economicincentivestoinduceJapanesedistributorstocarrytheirproducts;(2)promoted"systemization"
ofwholesalers intomanufacturer-controlled distribution channels, including through theuseof
standardizedtransactiontermswhichexcludedforeignenterprisesfromthemainchannelsofdistribution;
and(3)financed thedevelopment ofthese exclusive distribution channels. TheUSclaims thatthese
distributioncountermeasuresupsettheconditionsofcompetitionbetweenimportedanddomesticproducts
following theconclusion oftheKennedy Round.
6.296 1967JFTC Notification 17:InMay1967, theJFTC issued Notification 17which seta100,000
yenmaximum limitonthepremium thatamanufacturer could givetoawholesaler orretailer (ora
primary wholesaler toasecondary wholesaler orretailer) inoneyearforallproducts traded between
thetwo.741TheUnited States claims thateventhough the100,000 yenrestriction applied toboth
domestic andforeign enterprises, itupset thecompetitive relationship between thetwo. Foreign
enterprises entering theJapanese market ortrying toexpand theirmarket share werenotabletoinvest
intheir owndistribution networks, andhadtocompete withJapanese manufacturers forexisting
wholesalers anddistributors tocarry theirproducts. Notification 17limited theability offoreign
enterprises to"outbid" Japanese enterprises inthecompetition forJapanese distributors bysetting an
arbitrarily lowceiling ontheamount ofpremiums thatamanufacturer could givetoawholesaler or
retailer inanyoneyear. JFTC Notification 17wasapplicable onlytooffers ofgoods. Lowprice
offers, rebates andoffers ofgoods toassist theother parties 'promotional activities wereoutside the
scope oftheregulation.
6.297 1968SixthInterim Report :TheUnited States notes thatinAugust 1968, theMITI Distribution
Committee 'sSixth Interim Report recommended the"rationalization oftransaction terms" asanother
means ofpreventing foreign enterprises frompenetrating theJapanese market through thedistribution
system.742Specifically, itrecommended (i)standardizing transaction terms, (ii)rationalizing physical
distribution techniques,743and(iii)making improvements inthedistribution environment.744Thegoal
wastoimprove theefficiency and,more importantly, togivecontrol ofthedistribution channels in
Japan todomestic manufacturers.745In1969, MITI'sTransaction Terms Standardization Committee
wasformed todevelop sector-specific transaction terms foreleven products, including film.
6.298 1969Seventh Interim Report :TheUnited States submits thatMITI Distribution Committee 's
Seventh Interim Report noted that"theconcerted efforts ofgovernment andtheprivate sector must
bedirected atsystemization from thepoint ofviewofacapital liberalization countermeasure."746It
recommended (i)establishing a"Distribution Systemization Promotion Council" comprised ofscholars,
manufacturers, wholesalers, retailers, andcomputer specialists, toestablish consensus onthebasic
direction forsystematizing distribution activities; (ii)researching andpromoting distribution
739Japan strongly disagrees withtheUSphrase "distribution countermeasures." Seetranslation issue 1.
7401967 Cabinet Decision, p.6.USEx.67-6.
741JFTC Notification 17,20May 1967, p.1,USEx.67-4.
742Industrial Structure Deliberation Council -Distribution Modernization Outlook andIssues, 27July1968 (Sixth Interim
Report), p.39,USEx.68-8.
743Sixth Interim Report, p.33,USEx.68-8.
744Ibid. p.33.
745Ibid., p.36.
746Distribution Systemization -Industrial Structure Council Distribution Committee, 22July1969(Seventh Interim Report
1969), p.46,USEx.69-4.WT/DS44/R
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systemization; and(iii)providing financial incentives through loans orspecial taxtreatment tosupport
systemization.747
6.299 1970Guidelines onTransaction Terms :In1970, MITI issued "Guidelines forStandardizing
Terms ofTrade forPhotographic Film," establishing industry standards for,e.g., sales contracts;
discounts; rebates; frequency of,andminimum order per,delivery; return ofgoods; terms ofpayment,
anddispatched employees.748TheUnited States alleges thattheapplication ofthe1970 Guidelines
upset thecompetitive relationship between imported anddomestic photographic materials inseveral
ways asdiscussed indetail below.749
6.300 1971 International Contract Notification :TheUnited States argues thatthe1971 "Rules on
Filing Notification ofInternational Agreements onContracts"750require eachcontract between aforeign
manufacturer andaJapanese wholesaler tobereported totheJFTC. Thisnotification requirement
enables theJFTC toseeiftheforeign manufacturer isoffering more competitive transaction terms
departing from theindustry standard, andifso,toconsider action under theAntimonopoly Law.
6.301 1971 Basic Plan forDistribution Systemization :TheUnited States submits thatMITI's
Distribution Systemization Promotion Council751issued a"Basic PlanforDistribution Systemization"
inJuly1971. Thatplanannounced thatmodernization oftheJapanese distribution sector wasurgent
fromthestandpoint ofcapital liberalization countermeasures,752explained thattheentire distribution
process should beregarded asasingle system, andinstructed individual industries touserational
transaction conditions toprevent disruption byforeign capitalized firms.753
6.302 1975 Manual forSystemization ofCamera andFilmDistribution :TheUnited States points
outthatMITI'sDistribution Systemization Development Centre, established in1972, pursuant tothe
1971Basic Plan, issued the"Manual fortheSystemization ofCamera andFilmDistribution" in1975.754
Itstressed theneedtoprotect against foreign manufacturers gaining market shares forimported products
byconsolidating producer-distributor linkages thatwould improve Japanese manufacturers 'capacity
toresist theforeign capital-affiliated corporations.755Specifically, theManual (i)advised businesses
tomaintain "appropriate prices" andproper discount andrebate margins, torationalize payment terms,
andtoimproveorderanddeliverysystems;(ii)recommendedthatthecameraandfilmindustriesimprove
theirinformation systems tofacilitate communication among firms andtoimprove access toimportant
business information; and(iii)called forestablishing anindustry association andagovernment-affiliated
committee which recommended systemization projects forgovernment funding.
6.303 AccordingtotheUnitedStates,duringtheUruguayRoundnegotiations,Japan'stradingpartners
producing photographic materials knew thattheJapanese market wasdifficult topenetrate, butthe
wayinwhich thedistribution countermeasures, Large Stores Law, andpromotion countermeasures
747Ibid., p.54,USEx.69-4. TheDistribution Committee Ninth Interim Report described theSeventh Interim Report
as"apowerful political blueprint forreforming thedistribution sector". Industrial Structure Deliberation Council -Distribution
forthe1970s (Ninth Interim Report), 22July1971, USEx.71-9.
748Foramore detailed description ofthe1970 Guidelines, seePartII.B.2.(c), PartV.A.5.(b), andUSEx.70-4.
749See,inter alia,sub-sections (b-d) ofthisPartVI.D.3.
750JFTC, RuleRegarding International Agreement onInternational Contract Notification, RuleNo.1,12April 1971,
USEx.71-6.
751TheCouncil wasestablished asaresult oftherecommendations oftheSeventh Interim Report inSeptember 1970.
752TheBasic Plan, p.2,USEx.71-10.
753Ibid, p.10.
754MITI, Manual forSystemization ofCamera andFilmDistribution, March 1975, p.2-15, 43("1975 Manual"), US
Ex.75-5.
755TheManual described thechanges intheindustry since theearly 1960'swhich paralleled thechanges thattheJapanese
Government hadpromoted through various policy documents between 1967 and1975, e.g., distributors began topaytheir
balances monthly and,inmost instances, nolonger carried competing products.WT/DS44/R
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worked inconcert tosystematically offset tariffconcessions wasnotknown. IntheUSview, thisweb
ofliberalization countermeasures hascontinued tooperate tonullify orimpair USbenefits accruing
notonlyfrom theUruguay Round, buttheTokyo andKennedy rounds aswell.
(b) Objectives underlying theintroduction oftransaction terms
6.304 According totheUnited States ,Japan heldoffforeign investment inthedistribution sector
inorder toensure thatforeign manufacturers could notestablish theirowndistribution networks in
Japan untilJapanese manufacturers hadrestructured theirowndistribution networks andmade them
more efficient. FortheUS,Japan specifically sought toneutralize acompetitive advantage ofimports
andtoprevent foreign distributors from acquiring Japanese distributors, andmove upstream into
manufacturing anddownstream intoretailing.756IntheUSview, Japan’srestructuring ofthedistribution
sector wasmore thanjustanattempt tomake thesystem more efficient forthebenefit ofdomestic
manufacturers. Japan worked toputdistributors outofthereach offoreign manufacturers through
a"systemization" policy thatfostered vertical distribution "keiretsu". Japan sought toensure thatthe
distributorsstayedoutofreachofforeignmanufacturersthroughitspoliciesregardingthestandardization
oftransaction terms, andmeasures tolimittheavailability ofalternative distribution channels such
asthelaboratories andlarge stores.
6.305 Japan argues thatMITI hasconsistently sought toencourage themodernization oftheJapanese
distribution system overthepastthree decades foravariety oflegitimate policy reasons which were
mostly unrelated tocapital liberalization orimport competition. Totheextent thatMITI'sdistribution
policies werepartially aresponse tocapital liberalization, theyweremotivated byadesire tomodernize
andbolster thecompetitiveness ofarelatively backward sector intheeconomy, nottohinder imports '
access tothisbackward sector. Promoting thecompetitiveness ofdomestic industries isacommon
practice ofcountries around theworld. Japan emphasizes thatitsought topromote efficiency and
competitivenessofdomesticindustries,nottoblockimports.InJapan'sview,distributionmodernization,
which initially served topromote efficiency andtocopewithinflationary pressures would alsohelp
theJapanese distribution sector compete withforeign capital. Thepurpose wastosecure effective
competition inthedomestic market through improving theefficiency ofthedomestic distribution sector.
6.306 Inresponse toJapan’sargument thatitintended onlytopromote efficiency andnotprotect
domestic manufacturers, theUnited States argues thatifpromoting efficiency werethetruegoal,then
Japan should havewelcomed foreign investment indistribution rather thanpostpone ittothelastof
thesectors liberalized. According totheUnited States, theforeign distributors were fourtoseven
times more efficient thandomestic distributors. Those efficient foreign distributors could have
contributed substantially totheupgrading ofJapan’sstillhighly inefficient distribution system.
Nonetheless, Japan chose topostpone 100percent foreign investment innewdistribution enterprises
until 1976, andinexisting distribution enterprises until 1979, andmaintained aprior approval
requirement forsuchinvestment until1985 andaprior notification requirement untilthe1990s. The
Seventh Interim Report explicitly acknowledged thatforeign interests would accelerate modernization,
butconcludedthat"develop[ing]asystemsufficientlycapableofresistingtherationalsystemsintroduced
byforeign capital" should be"emphasized" inMITI policy.757TheUnited States alsonotesthatJapanese
academic analysis support theUSconclusion thatthemainobjective inpursuing thesystemization policy
wasnotefficiency buttoexclude foreign products though thereinforcement ofdistribution keiretsu.758
6.307 Japan responds thatmultilateral liberalization oftrade orinvestment generally occurs over
time, withtransitions toavoid excessive shock tothedomestic economy. Given thatJapan pursued
756Sixth Interim Report, USEx.68-8, p.22.
757Seventh Interim Report, USEx.69-4.
758Sasaki Yasuyuki, Distribution Policies inJapan andtheWest, 16June1995, USEx.95-12; Takeshi Shirahige, Current
Distribution Issues inModern Japan, Tokyo, 26February 1974, p.108, USEx.74-1.WT/DS44/R
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modernization inawaythatitsdistribution sector could compete onalevel playing fieldoncefull
liberalization tookplace, itsdistribution modernization policy cannot beconsidered evidence of
protectionist intent.759Japan emphasizes thatMITI sawthebackwardness ofthedistribution sector
asan"Achilles ’heel" thatwould render domestic manufacturers unable tocompete withforeign
products.760Specifically, theconcern wasthatdomestic manufacturers would belimited toexisting
distribution channels while foreign producers, freed fromcapital restrictions, would beabletochoose
between using existing Japanese distribution channels orconstructing theirownmodern (andexclusive)
distribution channels.
6.308 IntheviewoftheUnited States ,theJapanese Government andprivate sector clearly understood
thepotential forstandardized transaction terms, incombination withscrutiny under theAntimonopoly
Law, torestrict foreign firms. FortheUnited States, Japanese Government documents, aswellas
academic studies ofthesystemization policy, leave nodoubt ofJapan’sintent tocreate andsupport
vertically-tied,domestic-manufacturer-dominateddistributionchannels.761Thisismadeclearbyrepeated
statements inthekeysurveys, studies, andguidance fromthetimethatJapan pursued itstransaction
termspoliciesinordertoinsulatethephotographicmaterialsdistributionsystemfromforeigncompetition
bypromoting vertical keiretsu:
a. According totheUnited States, in1967, theForeign Investment Council issued areport
stating thatforeign firms "will often become theobject oftheregulation oftheAntimonopoly Law"
because theirstrong capital position would allow them tocompete aggressively inJapan. Thereport
called fordeveloping clear"standards" offairandunfair business practices, tohelpregulate foreign
capital.762
b. In1968, theDistribution Committee ’sSixth Interim Report recognized thatforeign
investment could promote efficiency inseveral different ways.763Thereport concluded, however, that
there wereveryserious disadvantages toliberalizing investment inthedistribution sector, including
that"[t]here isariskthatthemanufacturing sector willbedominated bycontrolling thesalesroutes,
bringing about theinternational subcontracting ofJapanese industry".764
c. In1969, aleading Japanese competition policy scholar andmember oftheForeign
Investment Council published anarticle along thesame lines.765
d. In1969, theSeventh Interim Report stated thatunder systemization, "more systems
willprobably beformed inwhich keiretsu routes arecovered under theguidance ofthemanufacturer"766
and"...comprehensively andsystematically integrate thevarious aspects ofproduction, processing,
and[distribution] services".767
759Japan’scapital restrictions were imposed through legitimate reservations under theOECD Capital Code, andthe
liberalization schedule wasfully consistent withJapanese obligations under theCode.
760Japan notes thatexisting distribution channels were notperceived as"crown jewels" butasan"achilles heel."
761E.g., August 1969 discussion bytheJFTC ofdistribution "keiretsu-ka". Thisdocument usestheterm"systemization"
interchangeably withtheword orconcept "keiretsunization". USEx.69-8, p.3.
762USEx.67-5B.
763USEx.68-8, p.7.
764USEx.68-8, p.8.
765"When foreign capital affiliates unfairly givepreferences tocompanies with[which theyhave] special relationships
ortotheirownprimary wholesalers ...interms ofprice or[transaction] terms, theywillthereby become subject toregulation"
under theAntimonopoly Law. IyoriHiroshi, Basic Approach Capital Liberalization andAntimonopoly Law: Basic Approach,
Types ofRegulation, Sample Cases, Zaikai Keizai Koho, No.1332-1333, 24November 1969, p.6-7, USEx.69-7.
766USEx.69-4, p.7.
767USEx.68-8, p.4.WT/DS44/R
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e. MITI’s1970Guidelinesstatedthatstandardizedtransactiontermswillhelpresistinroads
byforeign capital: "...inorder toprevent disruption oftheestablished order oftrade byforeign
businesseswithpowerfulcapitalstrength,thestandardsforrationaltransactiontermsmustbeclarified".768
f. The1971 Basic PlanfortheSystemization ofDistribution made thesame point.769
Itmakes clearthatvertical linksarethegoal: "[t]he critical point hereistoregard theentire process
ofdistribution from production toconsumption asasingle system".770and"there isaneedtoview
individual industry sectors as‘closed systems, ’andtoachieve asystematic coordination ofproduction,
distributionandconsumptionwithinsuchaframework".771TheBasicPlanemphasizedthestandardization
oftransaction terms andtheestablishment ofinter-company electronic information linksasimportant
elements foraccomplishing systemization. Italsostated thatMITI’sTransaction Terms Standardization
Committee haddrafted standardized transaction terms forindividual sectors suchasfilm,andthatMITI
"will seektoobtain thecooperation ofrelevant industry groups todraft standard agreements that
incorporate thesubstance ofthese guidelines".772
g. In1971, aphoto industry journal explained toitsreaders that"The Ministry of
International Trade andIndustry 'sguidelines fornormalizing transaction conditions iswhatmaybe
called an‘immunization ’....Forinstance, standard rebates wereadopted sothattheuseofnon-standard
rebates byforeign capital maybechecked bytheapplication oftheAntimonopoly Law".773
h. The1975 Manual emphasized thatthemajor issues facing theJapanese filmindustry
include "theliberalization ofcapital andtrade" and"theUSlanding inJapan". Itstated an"urgent
needtoimprove thestructure ofmanufacturers toacapacity thatwillresist foreign capital affiliated
firms"andrecommendedseveralactionstoward"systemization,"including"standardizationoftransaction
terms".774
i. A1976 industry journal article notes that100percent capital liberalization was"the
mostfeared development by[Japanese] photosensitive materials makers," andthatinpreparation for
thisevent, Japanese manufacturers had"requested thegovernment toimplement measures centering
around legislating antimonopoly measures thatcould effectively restrict mammoth multi-national
corporations from dominating theJapanese industry".
6.309 Japan emphasizes thatMITI’spolicies about volume discounts andrebates were notdriven
byprotectionist intent. MITI’sobjective wasincreased distribution efficiency. Since large volume
transactions lowered distribution costs, theuseofvolume discounts, ifusedinatransparent way,may
promote thebenefits oflower costs. MITI never encouraged progressive rebates, andurged thatall
rebates bekepttoaminimum. Forexample, Japan contends thatthe1967 Cabinet Decision, didnot
reveal concern toblock foreign manufacturers. While the1969 Survey acknowledges Kodak ’srole
asacompetitive factor inthisindustry, butinnowayurges keeping distribution channels "outofthe
hands offoreign manufacturers". Rather, the1969 Survey mentions theproblems thatwillariseif
newplayers entering themarket introduce irrational transaction terms.
6.310 Japan concludes thatanother objective oftrade termrationalization wastohelpensure fair
competition inthemarket. Bysetting abasic framework toprevent companies from abusing their
7681970 Guidelines ontheStandardization ofTransaction Terms forthePhoto Film Industry, USEx.70-4.
769"Inconnection withcapital liberalization inthedistribution sector, rational transaction terms should beclarified in
order toprevent disruption ofthe[established] order oftrade byforeign capital-affiliated firms. USEx.71-10, p.10.
770Ibid.
771Ibid., p.6.
772Ibid.
773USEx.71-11.
7741975 Manual fortheSystemization ofDistribution byIndustry (Camera -Film), USEx.75-5, p.121-22.WT/DS44/R
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dominant position, butleaving thespecific terms tobenegotiated case-by-case, MITI sought tosecure
alevelplaying fieldonwhich foreign anddomestic companies would compete fairly bythesamerules.
(c) Competitive position ofimported products
6.311 Intheview oftheUnited States ,through thisvariety ofreports andspecialized expert
institutions, MITI directed industry toestablish vertical distribution channels controlled byJapanese
manufacturers andinstructed industry onhowtoaccomplish thisgoal. TheJapanese Government ’s
guidance wascritical inbinding together domestic filmandpaper manufacturers withwholesalers,
andwholesalers withretailers, inlargeexclusive business structures under eachJapanese manufacturer.
Japan promoted, enlarged andstrengthened these exclusive channels, i.e.,carried outtheprocess of
systemization, toimpede foreign firms fromcompeting intheJapanese market andtoprotect Japanese
manufacturersfromforeigncompetition.Theproduction-distributionstructuresthatitpromotedthrough
extensive useofgovernment measures, including administrative guidance andgovernment resources,
blocked orsubstantially impeded access byforeign products tokeychannels ofdistribution. TheUnited
States claims thatbyfacilitating thesaleofdomestic products while simultaneously establishing
roadblocks tothesaleofimported products through thesystemization ofdistribution, Japan severely
disrupted theconditions ofcompetition intheJapanese market thatotherwise would haveprevailed
andthatwould haveenabled imports from theUnited States (andother countries) totakeadvantage
ofthetariff concessions granted byJapan intheKennedy Round.
(i) 1970 Guidelines andtransaction terms
6.312 TheUnitedStatesclaimsthatthestandardizationoftransactiontermschilledtheabilityofforeign
manufacturers tooffer competitive terms toJapanese wholesalers:
6.313 First,theUnited States argues thatthe1970 Guidelines, bysetting uniform transaction terms,
limited theability offoreign enterprises tooutbid theirJapanese competitors. Foreign enterprises could
notcircumventtheGuidelinesbecausetheJapanesegovernmentwasmonitoringtheindustry’scompliance
withtheGuidelines. MITI declared itsexpectation thatindustry would voluntarily comply withthe
Guidelines andinstructed thePhotographic Materials Industry Association tomake aprogress report
toMITI within 5months.775Inaddition, thetransaction terms between manufacturers andwholesalers
weretobeclearly stated intheirsalescontracts776which meant thattheJFTC could monitor compliance
withtheGuidelines when itreviewed contracts involving foreign enterprises pursuant toits"Rules
onFiling Notification ofInternational Agreements onContracts".777Once transaction terms are
standardized, theJFTC more easily canfindthattransaction terms departing from thestandard are
unfair trade practices under theAntimonopoly Law.
6.314 Second ,theUnited States submits thattheGuidelines established shortened payment terms
thatenhanced thefinancial strength ofJapanese manufacturers attheexpense ofwholesalers, and
positioned domestic manufacturers tobetter withstand foreign penetration. Prior totheiradoption of
standardized transaction terms, competition forced Japanese manufacturers toallow wholesalers and
retailers tocarry large outstanding balances andtopayoverextended periods oftime. Thenew
standardized transaction terms shifted thefinancial burden fromthemanufacturers towholesalers and
gavedomestic manufacturers greater control ofthewholesalers.
775FujiTranslation,RewritingHistory,WillkieFarr&Gallagher forFujiPhotoFilmCo.,Ltd.,31July1995, USEx.70-3.
776Inpresenting thestandardized terms tothephotographic materials industry, MITI explained that,"toprevent foreign
corporations withhuge investment capacity from disrupting thetrade order, reasonable trade terms mustbeclearly stated".
MITI Guidelines, reprinted inRewriting History, Tab11,p.9,USEx.70-3.
777JFTC, RuleRegarding International Agreement onInternational Contract Notification, RuleNo.1,12April 1971,
USEx.71-6.WT/DS44/R
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6.315 Third,theUnited States claims thattheGuidelines established standardized terms thatwere
bytheirverynature more beneficial toJapanese manufacturers thanforeign manufacturers. MITI
intended Japanese manufacturers tousevolume rebates todevelop exclusive supply contracts with
Japanese wholesalers, whereas foreign manufacturers, withtheirrestricted market share, could not
havedone this. Volume rebates promote exclusivity byencouraging distributors topurchase from
asingle source toachieve andmaximize therebate. With volume rebates, distributors onlywantto
enterintoexclusive supply relationships withmanufacturers thathaveasufficient share ofthemarket.778
6.316 Japan responds thatthestarting pointforanalysis should bethewording ofthe1970 Guidelines
themselves. Specifically, theGuidelines didnoteither mandate uniform transaction terms orprovide
specific transactiontermstobefollowedbymanufacturers,wholesalers,secondarydealers,andretailers.
TheGuidelines onlymade general suggestions related topayment terms, volume discounts, andrebates
including that:
(i) interest should becharged foranunusually longpayment period (neither thereasonable
payment period, theamount ofinterest tobecharged, norotherterms werespecified);779
(ii) volume discounts should have clear transparent terms (whether andunder what
circumstances suchdiscounts should begranted andtheamount ofthediscounts were
notspecified); and
(iii) rebates should beminimized (with nodetails atallabout thespecific terms ofrebates).
6.317 Japan notes thattheGuidelines didnotevenusetheword "standardize" inconnection with
thesuggested transaction terms, anddidnotencourage standardization oruniformity. They urged
theadoption ofeconomically rational transaction terms, andthenleftittoindividual manufacturers,
wholesalers andretailers toestablish theirownspecific terms. Infact,thetransaction terms ofindividual
manufacturers mayanddovary, e.g.,Fujihadandcontinues tohavedifferent transaction terms with
eachofitsfourindependent primary wholesalers. Japan concludes thatthere isnoevidence thatthe
payment terms, volume discounts, andrebates ofthevarious companies intheindustry haveeverbeen
standardized oruniform.
6.318 Japan states thatMITI believed thatrationalizing transaction terms would helptoensure fair
competition inthemarket. Ifopaque, secret, andcustomer-specific transaction terms werecommon
intheJapanese distribution sector, itwould bemore difficult toidentify unfair trade practices (e.g.,
dumping, excessively progressive rebates) committed byforeign companies abusing theirdominant
position. There wasnosuggestion, however, thatforeign enterprises would beheldtoadifferent legal
standard thandomestic enterprises. MITI wasmerely interested insecuring alevelplaying fieldin
which foreign anddomestic enterprises would compete fairly bythesame rules.
6.319 Japansubmitsthattherewasneitherongoingmonitoringnorongoingenforcementofcompliance
withtheGuidelines. IftheGuidelines werethecentrepiece forprotecting theJapanese photographic
filmmarket, thequestion arises howtherelatively passive government efforts served toimpose or
evenencourage theiradoption.780Thus, thealleged adverse effects should beevaluated inlightof
boththespecific recommendations oftheGuidelines andtheabsence ofefforts bytheJapanese
Government toimpose, encourage, orevenmonitor compliance.
778In1969, when theGuidelines were issued, domestic producers had93percent oftheJapanese filmmarket and87
percent ofthepaper market -leaving imports withonly7percent and13percent shares, respectively.
779TheUSalleges that"there isnological difference" between favouring shortened payment terms andadvocating charging
interestforlongpayment terms. TheGuidelines,however ,recommended theinterestshouldbechargedonlyonthepromissory
notes with"unusually longsight" which isexceptional and"only fewinnumber". Itdidnotfavour shorter payment terms.
780Japan recalls thatonlyoneofthree industry associations evenbothered torespond toarequest forareport ofactions
taken, andnoefforts were directed tospecific companies.WT/DS44/R
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6.320 Japan asserts thattheUnited States hasnotshown thatanything inthedistribution policies
explicitly discriminates against imports. Those policies pursued distribution modernization ina
completely neutral manner. InJapan'sview, theUnited States doesnotidentify asingle example of
agovernment policy thatfacially treats imports orother certain products differently.781Whereas the
United States complains about theunderlying effect ofthepolicies tofindsome adverse impact on
imports, Japan contends that
(i) there isnothing inherent about imported products thatmakes them anymore orless
abletocompete equally inamarket characterized byrationalized terms oftrade and
single-brand distribution;
(ii) thereisnofactual basistofindanycausal connection between thedistribution policies
andsingle-brand distribution; and
(iii) there havebeeneither nochanges atall,ornochanges lessfavourable forimports,
tothose policies since thetimeofrelevant tariff concessions.
(ii) 1970 Guidelines andprogressive rebates
6.321 With respect torebates, Japan states thatthe1970 Guidelines recommend clearly thatthey
should bekepttoaminimum. MITI stated thatrebates were often discretionary andwithout clear
criteria, andtherefore customers could notbesurewhether ornottheywould receive them. MITI
opposed thistendency ofrebates tointerfere withthebusiness planning ofrebate recipients, andsought
todiscourage thispractice.
6.322 InresponsetoJapan'sargumentthatitdidnotpromotetheuseofrebatesbetweenmanufacturers,
wholesalers andretailers, theUnited States contends thatMITI repeatedly endorsed theneedfor
progressive rebates inthephotographic materials sector. Whereas the1970 Guidelines statethatrebates
"should bekepttoaminimum", theydonotcondemn rebates, particularly because theynotethewide
useofrebates andconclude thatsuchuse"will beallowed".782TheUnited States alsostresses that
atthenumerous times, MITI published orrepublished surveys orother documents clearly emphasizing
thatMITI favoured progressive rebates.
6.323 Japan notes thattheUSargument seems tobethatsince MITI didnotcompletely prohibit
allrebates, itwassomehow encouraging rebates, arather strange interpretation ofthesuggestions to
"minimize" rebates.
6.324 TheUnited States notes thatMITI’sBusiness Bureau completed draftguidelines based onthe
1969 survey inSeptember 1969 andpublished them inaphoto industry journal.783ThedraftMITI
guidelines stated, "[w]ith regard torebates, progressive rebates should beaggressively promoted in
order tofacilitate largevolume transactions".784Subsequently initscover notetothe1970guidelines,
MITI directed theindustry associations toformulate andimplement more specific transaction terms,
781ForJapan, theonlypossible exception istheinternational contract notification requirement. Japan notes thatithas
raised procedural objections withrespect tothismeasure.
782"Rebates aregenerally awarded atthediscretion ofthesellers. Therefore, rebates arewidely usedasameans of
controlling thedistribution process .However, their excessive usemayconstitute anunfair trade practice under the
Antimonopoly Law. Even when itdoesnotconstitute aviolation oflaw,thedistribution process canineffect becontrolled.
Also, itmaymake itdifficult forrecipients [oftherebates] toformulate aclear management plan, andthefinalprice may
notfullyreflect themerits derived from rebates. Inaddition, therebate system hasbecome verycomplicated inrecent years,
andtheadministrative burden ofrebates hasincreased. Inprinciple, discounts should beusedasameans toreward consumers
forthebenefits oflarge quantity transactions. Theuseofrebates willbeallowed asasupplementary means toachieve other
price policies. However, theuseofrebates should bekepttoaminimum". 1970 Guidelines, Japan Ex.B-24.
783MITI, Standardization ofTransaction Terms: Draft Submitted forPhotographic Film, Camera Times, 9September
1969, p.2,First Panel Meeting, Supplemental Panel Questions andUSAnswers, Attachment 2.
784Ibid.WT/DS44/R
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andtoreport backtoMITI byNovember 1970. Thephotospeciality wholesalers association responded
bypublishing a"Transaction Outline" which stated, "with regard toquantity-related [volume] rebates,
these willbeadopted".785In1971, MITI republished the1969survey which noted thatthe"problem"
wasthat"progressive rebates withclearstandards thatfunction asvolume discounts arenotbeing used
veryoften".786TheUnited States further noted thattheguidance wasbeing issued based onthe
recognition that,atthetime, rebates were inwidespread useinthephotosensitive materials sector.
IntheUSview, ifMITI hadmeant forthose practices tobeeliminated, itwould havesaidsodirectly.787
6.325 TheUnited States argues thatJapan promoted theuseofrebates aspartofaseries ofgovernment
actions tostandardize transaction terms andthatMITI’sefforts inthisregard should beexamined in
terms ofthewaytheJapanese industry understood MITI’srecommendation. TheUnited States argues
thatinaddition toguidance thatspecifically called forprogressive rebates, theJapanese filmindustry
interpreted MITI’spolicy onvolume discounts asequating rebates withvolume discounts because it
sawverylittledifferences between thetwo.TheUnited States citesthewholesalers ’Transaction Outline
which explained thatrebates werethesameasdiscounts, andnotes thattheoutline stated that"quantity-
related [volume] rebates willbeadopted".788TheUnited States further argues thatwhen theChamber
ofCommerce issued itsstandard contract which itprepared pursuant toaMITI commission, although
theChamber didnotinclude aprovision onrebates, itincluded aspecific provision ondiscounts with
theexplanation that:"Volume discounts arenotuncommon withphotographic film. However, since
thediscounts arepaidatsetintervals, thesediscounts seemalmost thesameasrebates".789TheUnited
States recalls thatthewholesalers ’outline andtheChamber ’sstandard contracts wereprepared under
theclose scrutiny ofMITI. TheUnited States argues that,accordingly, there canbenoquestion that
MITI considered bothdocuments consistent withitspolicy under the1970Guidelines, andthatMITI
promoted bothrebates andvolume discounts, topromote incentives forlarge-volume transactions, which
foster "channel exclusivity".
6.326 Japan contends thatitdidnotencourage progressive rebates:
(i) TheMarch 1969 Survey wasprepared byanoutside research group andonlynotes
theimportance ofclearcriteria fordiscounts andrebates aspartoftrade termrationalization.
(ii) In1969, while areference toprogressive rebates inadraftoftheguidelines stressed
theirability tofunction economically likevolume discounts, thisreference wasdeleted from
thefinalversion oftheSeptember 1969 Guidelines.790
785Japan Ex.B-31
786MITI Business Bureau, Actual Condition ofTransaction Terms intheWholesale Industry, 31August 1971, p.62,
USEx.20andFirst Panel Meeting, Supplemental Panel Questions andUSAnswers, Attachment 4.(The United States
notes thatthisdocument isanedited andrepublished version ofthe1969 Survey.) TheUnited States argues thatJapan failed
toquote theentire sentence from therepublished version ofthe1969 survey, thereby inverting themeaning ofthedocument.
Thefulltranslation states: "The problem isthatcategories ofrebates thataccord significant discretion tosellers suchasfixed
rebates andgoalachievement rebates arethemainrebates, andprogressive rebates withclearstandards thatfunction asvolume
discounts arenotbeing used veryoften".
787TheUnited States notes thatatthesame timeMITI issued these guidelines forthephotographic filmsector, italso
issued transaction terms guidelines for12other sectors. Rebates were widely usedinallofthose 12other sectors. In9
outofthe12sectors, theguidelines usetheexact same formulation regarding rebates asinthefilmguidelines, indicating
thattheformulation clearly wasgeneric. Inthree ofthe12sectors, MITI called formodifications intherebate programs,
indicating thatwhen MITI wanted changes inrebates, itknew howtosaysodirectly. Japan Ex.B-1.
788Foradiscussion ofstatements specifically calling forprogressive rebates, seepara. 6.322 andfootnote 782,Japan
Ex.B-31.
789Japan Chamber ofCommerce, Recommendation onStandardized Contracts forTransactions, commissioned bythe
Ministry ofInternational Trade andIndustry, January 1975, p.22,USEx.32.
790Japan notes thatthe"draft" guidelines were never published byMITI.WT/DS44/R
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(iii) TheMarch 1970 JFTC Report made norecommendation about anyrebates, andthus
saidnothing about progressive rebates.
(iv) TheJune1970 Final Guidelines regard discounts asamore rational approach forlarge
volume transactions, andthenstatethat"theuseofrebates should bekepttoaminimum".
Thus there isnomention atallofprogressive rebates.
(v) TheNovember1970PolicyOutlinebyanindustryassociationnotedthat"quantity-related
rebates" could beadopted. Japan emphasizes thatthePolicy Outline didnotrepresent
government thinking, ignored the1970Guidelines suggestion tokeeprebates toaminimum,
anddidnotevenbindassociation members.
(vi) TheAugust 1971 Survey specifically identified rebates anddiscounts without clear
standards asanirrational practice, andnoted that"progressive rebates withclear standards
thatfunction asvolume discounts arenotbeing usedveryoften".791Thesurvey explained
aposition ofanoutside research group that(a)rebates should havesome rational economic
basis;(b)rebatesshouldbebasedonclearcriteria;(c)progressiverebatesaremoreeconomically
rational thanfixed raterebates, since theycould function toachieve largevolume transactions
likevolume discounts, but,ifused, suchrebates should haveclear criteria.
(vii) Furthermore, theMarch 1975 Manual didnotevenmention progressive rebates.
6.327 Japan points outthatofthese seven documents, three donotmention progressive rebates at
all,andthreedocuments mention progressive rebates, butnoneofthemencourage progressive rebates
andnone represents agovernment statement. Finally, theonedocument thatactually encouraged
progressive rebates wasadraftdocument reported inanindustry journal that,when finalized, deleted
anyreference toprogressive rebates, andinstead specifically discouraged theuseofrebates.
(iii) 1970 Guidelines andsingle-brand distribution
6.328 Japan emphasizes thatMITI policies didnotforceJapanese wholesalers tobecome single-brand
distributors fordomestic manufacturers because thenature ofthepolicies atissuewasdifferent: First,
the1970 Guidelines didnotencourage rebates; theydiscouraged rebates andurged thattherebesome
efficiency basis torebates orvolume discounts. Second, the1970 Guidelines alsodidnotencourage
shorter payment terms; theyonlyindicated thatafterareasonable period customers should payinterest
forcontinued credit term.792Japan emphasizes thatthesepayment terms arecommon inmany industries
throughout theworld. Moreover, payment terms arenotthereason thatthedistributors chose tobecome
single-brand orremain single-brand, butareonlyoneelement ofthecosttothebuyer. Intheview
ofJapan, theUSassumes, thatthemanufacturer didnotadjust theinvoiced price toreflect shortened
payment terms, orthattheadditional coststothewholesalers werenotpassed ontotheircustomers.793
6.329 TheUnited States alleges thatJapan promoted shortened payment terms, volume discounts,
andprogressive rebates, among other transaction terms. Shortening payment terms ineffect tightened
credit between manufacturers andwholesalers, andbetween primary wholesalers andsecondary
wholesalers andretailers. Thistightening ofcredit weakened thewholesalers andmade them more
791Torihiki Jouken NoJittai, TheInstitute ofDistribution Research 's1969 survey oftrade conditions inthefilmand
other industries, Japan Ex.B-1,pp.6-7,para. 309.
792Furthermore, Japan argues thatthisrecommendation wasaimed atdealings between wholesalers andretailers, not
manufacturers andwholesalers.
793InJapan'sview, since theUnited States alleges thatthenextstepintheprogression waspushing theshortened payment
terms downstream, theUnited States itself appears toassume thattheadditional costs oftheshorter payment terms were
infactultimately absorbed notbytheprimary wholesalers butbytheir customers.WT/DS44/R
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susceptible tocontrol byJapanese manufacturers intworespects. Itincreased thewholesalers ’need
forfinancial support fromthemanufacturers andtheir"keiretsu" banks, anditmade itmore important
forthewholesalers toearnvolume discounts andprogressive rebates fromthedomestic manufacturers,
which meant focusing theirsalesefforts ontheproducts ofthedominant suppliers, FujiandKonica.794
With either avolume discount orrebate, thepurchaser hasanincentive toconcentrate itspurchases
onthesuppliers from which itcanexpect toreceive thegreatest rebate ordiscount from volume
purchases, usually thedominant supplier. These types oftransaction terms havethepotential toenhance
manufacturer dominance overdistribution.795Theparticular transaction terms promoted byJapan helped
cement exclusive vertical relationships inthedistribution system, andthestandardization ofthose terms
across manufacturers andacross wholesalers limited theability offoreign manufacturers tooffermore
favourable terms toJapanese manufacturers.
6.330 AstotheUSargument thatthewholesalers wereweakened bytheshorter payment terms and
became more dependent onthemanufacturers and,inparticular, onvolume discounts andrebates,
Japan responds thatthe1970 Guidelines didnotencourage theuseofvolume discounts without
reservation, anditnever encouraged rebates. Infact,theGuidelines encouraged transparency ifvolume
discounts weregiven, anddiscouraged theuseofrebates. Themore transparent thevolume discount,
theeasier itwould beforacompetitor toprovide thebuyer anoffsetting incentive (e.g., lower price)
topurchase itsproduct rather thantheproduct ofthemanufacturer offering thevolume discount. Thus,
ifanything, theencouragement oftransparency improved theposition ofcompetitors withacustomer.
6.331 Japan notes thatastopayment terms, theGuidelines ’recommendations werealsocompletely
unexceptional. TheGuidelines didnotcallforshorter payment terms. They merely stated thatafter
acertain period, suppliers should charge theircustomers interest forlatepayment. Latepayment charges
arenotnovel orunusual; rather, theyareacompletely normal termofcredit arrangements. Itissimply
notcredible tocontend thattheinstitution oflatepayment charges isadraconian assertion ofcontrol
bysuppliers overtheircustomers.
6.332 Inthealternative, evenassuming thatthe1970Guidelines facilitated thedevelopment ofsingle-
brand relationships between domestic filmmanufacturers andtheirprimary wholesalers byencouraging
volume discounts andrebates andtighter payment terms, Japan argues thatsuchencouragement was
notinherently unfavourable toimported filmorpaper. There isnothing intrinsic tothenature ofimports
thatrenders them incapable ofcompeting inthecontext ofsuchdistribution practices.796Even ifthe
guidelines evenwentsofarastoencourage single-brand distribution,797there isnothing intrinsic to
thenature ofimports thatrenders them incapable ofcompeting insuchamarket structure.798
794TheUSsubmits thatvolume discounts andrebates favour thedominant supplier. Bystriving tohitthetargets for
discounts orrebates from itsdominant suppliers, thewholesaler orretailer islikely toreceive amuch larger value inrebates
ordiscounts thanifithitsthetargets from itsminor suppliers. AtthetimeMITI began promoting standardized transaction
terms, FujiandKonica were (astheyaretoday) thedominant suppliers inJapan. Therefore, volume discounts andrebates
favoured them overtheforeign manufacturers whohadbeen keptfrom themarket bytrade andinvestment restrictions.
BythetimeJapan began toliberalize those restrictions, thetransaction terms andother measures pressed bytheGovernment
ofJapan hadcemented theexclusive relationships between Japanese manufacturers andwholesalers, andtoasignificant extent
theretailers aswell.
795E.g., MITI’s1970 Guidelines, USEx.70-4, p.6.
796Japan explains thatthepanel inUS-Automobiles found thataluxury taxoncarspriced higher than$30,000 wasnot
inherently lessfavourable forimports, despite thefactthatmost imported carswere indeed inthehigher priced category.
US-Automobiles ,DS31/R, para. 5.14. Bythatstandard, there isnoargument thattheprovisions ofthe1970 Guidelines
were inherently lessfavourable forimports.
797According toJapan, thecontrary wastrue,i.e.,vertical integration wasperceived asaproblem towatch, notapolicy
topromote.
798Japan submits thatindustry experts andevenKodak officials severely criticized Kodak foritsfailure toinvest sooner
initsownsingle-brand distribution network. Thiscriticism reflects aview thatsingle-brand distribution could notbea
competitive disadvantage forimports.WT/DS44/R
Page250
(iv) Other distribution measures
6.333 According toJapan, mostofthedistribution measures identified bytheUSaremerely reports
byadvisory councils orpublic corporations, e.g.,thevarious Distribution Committee interim reports,
the1971 Systemization Report, andthe1975 Manual. InJapan'sview, noneofthese reports northe
1967 Cabinet Decision discussed policies thatwere inherently disadvantageous toimports.
6.334 Japan argues thatthe1967 Cabinet Decision --which implemented thefirststage ofcapital
liberalization --wasquitedirect inexpressing aconcern about theability ofdomestic industry tocompete
withforeign rivals. TheJapanese Government sought topromote theefficiency andcompetitiveness
ofdomestic industries, notblock imports. InJapan'sview, theconclusions drawn bytheUnited States
havenosupport inthetextoftheCabinet Decision. Japan stresses thatthere isnodiscussion of
promoting domestic manufactureres from foreign competition atall,letalone adiscussion ofusing
distribution policies toprotect manufacturing companies.
6.335 Japan argues thattheinternational contract notification requirement doesnotallow theJFTC
totakeaction against foreign manufacturers thatareoffering morecompetitive terms thantheirdomestic
counterparts.Thisprovisionismerelyareportingrequirementapplicabletotradetransactionsingeneral,
import aswellasexport transactions, forthepurpose ofpolicing Antimonopoly Lawviolations. Japan
emphasizes thattheJFTC does notenforce MITI Guidelines andquestions therelevance ofthe
international contract notification requirement tofilmgiven that,during the1970s, sales ofKodak
filminJapan weremade exclusively byadomestic Japanese company, Nagase, which wasnotsubject
tothatrequirement inrespect ofcontracts withother wholesalers, secondary dealers, orretailers.799
6.336 Japan concludes thatthecompetitive conditions allegedly established byMITI’sdistribution
policies -assuming theyconstitute "measures" forpurposes ofnon-violation complaints -arenotless
favourable forimported filmandpaper thanfordomestic products. Japan emphasizes thatcompetitive
conditions must beexamined exclusively onthebasis oftheprovisions ofthealleged measures
themselves, andnottoanyincidental consequences, suchassingle-brand distribution. Japan maintains
thatthereisnocausal connection between thealleged measures andsingle-brand distribution orbetween
single-brand distribution andthealleged impeded market access. Moreover, noneofthesedistribution
measures draws anyformal distinctions between imported anddomestic products. Forthese alleged
measures toestablish lessfavourable competitive conditions forimports, theirprovisions mustsomehow
beinherently disadvantageous toimports. However, according toJapan, distribution modernization
policies themselves were notinherently disadvantageous toimports.
(v) Black andwhite filmandpaper
6.337 Moreover, Japan points outthattheUSallegations arecompletely irrelevant toblack andwhite
filmandpaper. ForJapan, theUS"distribution bottleneck" theory ispremised onthelarge number
ofretailfilmoutlets, butthose arecolour filmoutlets. However, black andwhite filmisaniche product
thatissoldthrough amuch smaller number ofretail outlets, generally photospecialty retailers. Thus
Japan concludes thattheUStheory isnotevenapplicable toblack andwhite film.
6.338 Withregard topaper ,Japan asserts thattheUSclaims focus onJapan’salleged encouragement
ofthedomestic filmandpaper manufacturers ’vertical integration intocolour photofinishing, thereby
allegedly creating a"captive market" forcolour paper. However, whatmatters inthepresent context
799Kodak hadmade afundamental decision torelyexclusively onNagase, anddidnotreevaluate thismarketing strategy
untilyears later, longaftertheperiod inquestion. Although Kodak reestablished asubsidiary in1977, thatsubsidiary only
provided support tothedistributors. Itwasnotuntil1983 thatKodak reassessed thatbusiness strategy anddecided tobecome
more active. Japan Ex.B-45.WT/DS44/R
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isthatithasnothing todowithblack andwhite paper. With respect tothe1967 tariff concessions,
which were made onlyonblack andwhite filmandpaper, these factsprovide anadditional reason
whythere isnoupsetting ofcompetitive conditions onaccount of"distribution countermeasures".
6.339 OnJapan’sargument related tothecompetitive dynamics ofamarket forblack andwhite film,
theUnited States responds thatthesubject andtitleofthisdispute isconsumer photographic filmand
paper. Thatisbecause Japan’sliberalization countermeasures were andaredirected atconsumer
photographic filmandpaper, whether black andwhite, orcolour. Until 1970-1972, black andwhite
wasthepredominant consumer film(andpaper) usedinJapan, thereafter itwascolour.800Accordingly,
Japan’sfocus ontherelationship between theKennedy Round concessions (onblack andwhite products)
andcurrent colour filmandphoto-finishing outlets isnotrelevant. Given thatblack andwhite film
(andpaper) wasthedominant product atthetimetheJapanese Government began pursuing liberalization
countermeasures, andthattheGovernment recognized thatcolour would surpass black andwhite at
some timeinthenearfuture, theGovernment directed theliberalization countermeasures atobstructing
thedistribution andsaleofconsumer photographic filmandpaper, whether black andwhite, orcolour.
(d) Causal connection between distribution measures andcompetitive position ofimports
6.340 Japan emphasizes thatevenifthePanel looks beyond theprovisions ofthealleged measures
andattempts toevaluate theirpractical consequences, theUSclaims failbecause ofthelackofany
actual causal connection (i)between thealleged measures andcurrent single-brand distribution, or
(ii)between current single-brand distribution andthealleged current impeded market access.
6.341 According toJapan, even ifthe1970 Guidelines area"measure" forpurposes of
Article XXIII:1(b), theyarenota"measure" thathasanything atalltodowiththealleged nullification
orimpairment ofthebenefits oftariff concessions. InJapan'sview, theUSclaims thatthealleged
nullification orimpairment comes fromsingle-brand distribution, while being unable toshow anynexus
between the1970 Guidelines andsingle-brand distribution. Private companies hadadopted single-brand
distribution prior tothealleged measures. Japan alleges thattheUnited States triestoshiftthefocus
fromthemeasures themselves tothemarket structure thatallegedly disadvantages imported products.
However, GATT precedent hasconsistently focused onthemeasures themselves, andnotmarket
outcomes. Japan addsthatevenifthepanel were inclined todepart from thispastGATT practice,
there isnofactual basistoconclude either thatMITI policies created themarket structure, orthatthe
market structure infactdisadvantages imported consumer photographic products.
6.342 ForJapan, itisalsoimportant toexamine whether thereiscurrent nullification orimpairment.
Putting asidetherelationship between MITI’spolicies andtheprivate sector during the1960s and‘70s,
whatmatters iswhether thereisanycausal connection between thealleged measures andcurrent business
decisions bywholesalers andoutlets regarding whatkindoffilmandpaper topurchase. InJapan's
view, since thealleged "measures" arenolonger ineffect, there isnosuchconnection.
6.343 EveniftheUSinterpretation ofMITI’sdistribution policies argument wereaccurate, inJapan's
view, there isnoupsetting ofthecompetitive position forimported products. According toJapan,
theUnited States alleged thatMITI hassought overthepast30years toestablish andthenmaintain
anexclusionarymarketstructureforfilmandpaperinwhichforeignbrandsareblockedfromtheprimary
distribution channels. ForJapan, inlightofthenature ofthesuggestions being made, andtheprivate
sector response tothose suggestions, itisnotcredible toargue thatthere issome connection. While
theUnited States hassubmitted voluminous background information ontheevolution ofgovernment
policy thinking, however, theongoing policy debate during theprocess ofpolicymaking ismuch less
800Until 1970-72, black-and-white filmandpaper werethepredominant products usedinJapan. Thereafter, thedominant
productswerecolourfilmandpaper.Today, colourfilmandpaper account for97percentofJapan'stotalmarketforconsumer
photographic materials, withblack andwhite accounting foronly3percent.WT/DS44/R
Page252
relevant thanwhateventually happened. Japan emphasizes thatprivate sector actions happened either
tooearly ortoolatetohaveanymeaningful connection tothegovernment andadvisory committee
suggestions being made intheearly 1970s.
6.344 FortheUnited States ,thereisample evidence tosuggest thatthenearly simultaneous decisions
ofFujiandKonica totighten payments andintroduce newrebates anddiscounts in1966wereinresponse
toJapanese Government policy. By1965-66 theJapanese Government already hadbegun theprocess
ofworking closely withindustry tostudy anddevise waystorespond tocapital andtradeliberalization.
TheIndustrial Structure Council ’sDistribution Committee hadstudied theneed forrationalized
transaction terms initsFifthInterim Report in1965. Alsoin1965, MITI worked withtheJapanese
photographic filmandpaper manufacturers intheNatural Colour Photography Promotion Council
(NCPPC) todevise means toprepare fortrade andcapital liberalization. Among other things, the
NCPPC considered andreported onspecific "import suppression counter measures".801TheUnited
States concludes thattheJapanese Government ’sguidelines andadministrative guidance toindustry
hadaclearpurpose atthetimetheyweregiven, andtheyaccomplished theirobjectives veryeffectively.
6.345 JapanrespondsthattheUnitedStateselevatespreliminarydeliberationsoftheIndustrialStructure
Council ’sDistribution Committee andtheNatural Colour Photography Promotion Council (NCPPC)
andtheIndustrial Structure Council ’sFifthInterim Report tothelevelofJapanese Government policy.
InJapan'sview, these were activities ofnon-governmental bodies: (i)thatwere intheearly stages
ofstudying distribution issues, andwerenotyetevenmaking specific recommendations; (ii)thattook
place twoyears prior tothe1967 Cabinet Decision endorsing thebroad concept ofmodernizing the
distribution sector; and(iii)thattookplace fiveyears prior tothefirstspecific government statement
ontheissue ofrationalizing transaction terms forthephotographic products industry. Therefore, in
Japan'sview, theUnited States hasnotsubmitted evidence tolinktheactions taken byFujifilm and
Konica regarding transaction terms togovernmental action.
(i) Introduction oftransaction terms
6.346 Astothetimingproblemswiththisallegedlinkbetweentheintroductionofdistributionmeasures
andtheupsetting ofcompetitive conditions forphotographic materials, Japan argues thatprivate
companies hadtaken actions themselves regarding payment terms andrebates wellbefore anyactions
bytheJapanese Government regarding "standardized"802transaction terms. ForJapan, itisclearthat
thesedocuments cannot havecaused Fuji'sandothermanufacturers 'decision toimplement e.g.,volume
rebates. Forexample, Konica began tightening payment terms in1962andFujistarted in1966. Trade
journalsdiscussedthesebusinessdevelopmentsandthequitenaturaldesireofthedomesticmanufacturers
toimprovetheiraccountsreceivablesthroughshorterpaymentterms.Thus,themanufacturers'tightening
oftransaction terms fortheirprimary wholesalers aswellasFuji'svolume discount policy predate
boththe1967 Cabinet Decision andthe1970 Guidelines. Fujimade nochange initspolicy inresponse
tothe1967 Cabinet Decision. Regardless ofMITI's1970 Guidelines, Japanese manufacturers inthis
sector hadalready begun toadjust theirrebate policies andshorten payment terms before 1967, three
years ormore before MITI firstannounced itssuggestions.
6.347 TheUnited States notesthatJapan doesnotdenythatitsmanufacturers implemented shortened
payment terms, rebates, andvolume discounts. While Japan raises aquestion oftiming, theUnited
States contends thatthereisnotiming mismatch initsposition. Specifically, theUnited States argues
801Studying aPolicy forCoping: Natural Colour Photograph Promotion Council, Approaching Liberalization ofTrade
inColour Film, Camera Times, 2March 1965, USEx.65-3.
802Japan notes thatitdistinguishes "standardization," withitsimplication ofuniformity, from "rationalization," which
doesnothavethisnuance. Japan points outthattheUnited States consistently translates "tekisei(-ka)" as"standardization"
ratherthanthemoreaccuratealternative"rationalization".InJapan'sview,iftheJapanese originalhadmeant "standardization",
itwould have used theterm "ityoujun-ka".WT/DS44/R
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thatthereweretwopurposes forJapan'stransaction terms policies, i.e.:(1)standardizing transaction
terms inorder tocreate abenchmark against which tojudge the"fairness" ofcompetition fromforeign
firms using non-standard terms, and(2)implementing specific terms thatpromoted channel exclusivity.
6.348 According totheUnited States, interms ofthefirstgoal, thetiming ofJapan’smeasures was
perfect. TheJapanese Government actively pressed forstandardized transaction terms inthe1968-75
timeframe precisely when lowering tariffs andmoving toward thefirstsignificant liberalization of
capital investment. Japan wanted itsmanufacturers, primary wholesalers, andsecondary wholesalers
tostandardize transaction terms inorder toresist thisincreasing competition bymeans ofscrutiny under
theAntimonopoly Law. TheUnited States emphasizes thatthe1969 survey oftransaction terms
submitted byJapan803shows that, atthistime, transaction terms were notstandardized between
manufacturers, primary wholesalers, secondary wholesalers andretailers. MITI’srepeated andactive
efforts tostandardize theterms (including through publicizing theparticular terms applied byindividual
wholesalers) served tostandardize those terms atthistimewhen standardization wasmostneeded to
resist theimminent threat offoreign competition. ItwasalsoatthistimethatJapan implemented
Notification 17toprevent foreign manufacturers from offering attractive premiums towholesalers,
andRuleNo.1under theinternational contract notification provisions oftheAntimonopoly Law, which
ensured theopportunity toscrutinize eachcontract between foreign manufacturers andJapanese
wholesalers for"unfair" departures from standardized terms.
6.349 TheUnited States emphasizes thatJapan’stiming wasrightonthemark regarding thesecond
goalaswell. Although Japanese manufacturers hadimplemented rebates, volume discounts, and
shortenedpaymenttermsbeforethe1970Guidelines,the1969surveyandthe1970Guidelinesthemselves
noted thatrebates andvolume discounts were lesswidely usedbetween primary wholesalers and
secondary wholesalers andretailers. These documents alsoindicated thatlongpayment terms were
common attheselevels ofthedistribution system. IntheUSview, Japan wanted toadvance itskeiretsu
distribution system beyond thefirsttierofmanufacturer-to-primary-wholesaler toencompass these
lower levels aswell. Moreover, greater efforts werenecessary toaccomplish keiretsu-nization atthese
levels, since itwasnotnecessarily intheinterest ofthewholesalers orretailers. Thelowlevels of
foreign access tothesecondary wholesalers demonstrates thatJapan’spolicies werelargely successful
atthislevelaswell.
(ii) Introduction ofsingle-brand distribution
6.350 ForJapan itisclearthatneither volume discounts norrebates wereresponsible forthedecision
byprimary wholesalers tobecome single-brand intheJapanese market. Private companies hadadopted
single-brand distribution prior toanygovernment action. Single-brand distribution hademerged by
themid1960s,andwasessentiallycompleteby1968.804Konica’sprimarywholesalersweresingle-brand
since atleast 1955. Three ofFuji’sfourmajor primary wholesalers were already single-brand
wholesalers wellbefore 1970. Accordingly, single-brand distribution offilmwasalready theindustry
normby1968,yearspriortothe1970Guidelines,whichweretheonlygovernmentstatementconcerning
transaction terms,805andother alleged measures. Thus, wellbefore the1970 Guidelines, theindustry
hadalready shifted tosingle-brand distribution andnotsurprisingly, the1970 Guidelines saidnothing
about single-brand distribution. Japan concludes thatthehistory ofbusiness decisions inthisindustry
reveal thetiming problems oftheUStheory ofcausation because itisimpossible foragovernment
action tocause something thathappened before thatgovernment action wastaken.
803Japan ExB-1.
804Theonlyremaining multibrand wholesaler wasAsanuma, which became single-brand in1975 afterbeing rebuffed
byKodak when Asanuma tried toreestablish direct dealing withKodak.
805Theother reports andsurveys were notformal government actions orstatements. Moreover, eventhese items came
after single-brand distribution hademerged asthepredominant industry practice.WT/DS44/R
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6.351 Japan points outthatKodak ’sagent Nagase hadacquired Kuwada, andturned theformerly
multibrand primary wholesaler intoasingle-brand wholesaler, andbecame adirect competitor ofthe
other independent primary wholesalers in1967. Thereafter, independent primary wholesalers would
havetocompete inselling Kodak withtheirsupplier (anobvious impossibility given thatthesupplier
could always ensure itsability tounderprice theindependent wholesaler) ortoactasasecondary
wholesaler. Those thathadtheability toremain aprimary wholesaler foranother manufacturer chose
thiscourse ofaction. Thisdecision wasnotbecause ofrebates orvolume discounts, itwasbecause
Kodak hadchosen exclusive distribution attheprimary wholesale level andinsodoing effectively
excluded independent primary wholesalers fromaroleindistributing Kodak products. InJapan'sview,
ultimately, thesuccess orfailure ofvolume discounts andrebates inattracting business fromawholesaler
isamatter ofbusiness judgement. However, neither necessarily leads toexclusivity. Wholesalers
mustchoose between theadvantages oflower purchase costsfromvolume discounts andagreater variety
ofbrands which isapurebusiness decision.
6.352 Japan states thatAsanuma remained awholesaler ofKodak filmuntil1975. Thus Asanuma
didnotterminate itsrelationship because ofpayment terms, volume discounts, rebates, "keiretsu"
relationships orpurported policies oftheJapanese Government toencourage single-brand distribution.
InJapan'sview, Asanuma terminated itsrelationship withKodak because Kodak wasunwilling todeal
withitdirectly asaprimary wholesaler. Similarly, theother primary wholesalers remain single-brand
Fujidistributors because theyhavemade abusiness decision todoso.806
6.353 TheUnited States contests Japan'sargument thatitsmeasures could nothavecaused thealleged
effects because Japanese manufacturers began implementing shortened payment terms andvolume
discounts andrebates in1966, before theseries ofJapanese Government measures from1968through
1975 thatcalled forsuchtransaction terms. IntheUSview, there arenotiming problems intheUS
argument.
6.354 TheUnited States notes thatthereweretwopurposes fortheGovernment ofJapan’stransaction
terms policies: (1)standardizing transaction terms inorder tocreate abenchmark against which to
judge the"fairness" ofcompetition fromforeign firms using non-standard terms; and(2)implementing
specific terms thatpromoted channel exclusivity. Interms ofthefirstgoal, Japan actively pressed
forstandardized transaction terms inthe1968-75 timeframe precisely asJapan waslowering itstariffs
andmoving toward thefirstsignificant liberalization ofcapital investment. Japan wanted its
manufacturers, primary wholesalers, andsecondary wholesalers tostandardize transaction terms in
order toresist thisincreasing competition bymeans ofscrutiny under theAntimonopoly Law. The
1969 survey oftransaction terms807shows thatatthistime, transaction terms were notstandardized
between manufacturers andwholesalers orbetween primary wholesalers andsecondary wholesalers
retailers. MITI’srepeated andactive efforts tostandardize theterms (including through publicizing
theparticular terms applied byindividual wholesalers) served tostandardize those terms atthistime
when standardization wasmost needed toresist theimminent threat offoreign competition. Itwas
alsoatthistimethatJapan implemented Notification 17toprevent foreign manufacturers fromoffering
attractivepremiumstowholesalers,andRuleNo.1undertheinternationalcontractnotificationprovisions
oftheAntimonopoly Law, which ensured theopportunity toscrutinize eachcontract between foreign
manufacturers andJapanese wholesalers for"unfair" departures from standardized terms.
6.355 TheUnited States alsoemphasizes thatJapan’stiming wasright onthemark regarding the
second goalaswell. Although Japanese manufacturers hadimplemented rebates, volume discounts,
andshortened payment terms before the1970 Guidelines, the1969 survey andthe1970 Guidelines
themselves noted thatrebates andvolume discounts werelesswidely usedbetween primary wholesalers
806Affidavit ofTakenosuke Katsuoka, Japan Ex.A-11; Affidavit ofKaoru Konno, Japan Ex.A-15, Affidavit ofYukiyoshi
Noro, Japan Ex.A-14, Affidavit ofTomihiko Asada, Japan Ex.A-12.
807Japan Ex.B-1WT/DS44/R
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andsecondary wholesalers andretailers. These documents alsoindicated thatlongpayment terms
werecommon attheselevels ofthedistribution system. Japan wanted toadvance itskeiretsu distribution
system beyond thefirsttierofmanufacturer-to-primary-wholesaler toencompass these lower levels
aswell. Moreover, astheUnited States provided evidence for,greater efforts were necessary to
accomplish keiretsu-nization attheselevels, sinceitwasnotnecessarily intheinterest ofthewholesalers
orretailers. Thelowlevels offoreign access tothesecondary wholesalers demonstrates thatJapan’s
policies were largely successful atthislevelaswell.
(iii) Governmental endorsement ofprivate actions
6.356 TheUnited States argues that,totheextent thatmanufacturers already hadimplemented some
ofthedesired transaction terms, theJapanese Government 'sendorsement ofthose terms made clear
thattheywere approved government policy, andshould beperpetuated orstrengthened.
6.357 Japan contends thatthecompanies ’economic self-interest wasasufficient reason tomaintain
rationalized transaction terms. Moreover, Japan points outthatthealleged objective behind theadoption
ofthese transaction terms, i.e.,single-brand distribution, isthecommon form ofdistribution inthe
filmindustry inevery market intheworld. Itresults from business decisions astohowtomost
effectively compete. Manufacturers selling inJapan would notneedthegovernment ’sendorsement
toadopt andmaintain practices andmarket structures thathadproven successful inallother markets
intheworld. Therefore, payment terms, discounts, andrebates werenotresponsible fortheevolution
tosingle-brand distribution inJapan anymore thantheywere intheUnited States ortheEuropean
Union. Noraretheuseofpayment terms, discounts, andrebates asatoolofcompetition constrained
inJapan. They havebeenandremain competitive tools constrained onlybytheapplication ofthe
relevant competition statutes equally applied tobothforeign anddomestic competitors.
(iv) Downstream standardization
6.358 According totheUnited States ,Japan wanted these transaction terms implemented and
standardized further downstream inthedistribution system. Thesurveys andtheguidelines fromthe
late1960s andearly 1970s notethattransaction terms between primary wholesalers andsecondary
wholesalers andretailers werenotyet,butshould be,standardized.808Pushing itssystemization policies
further downstream would helpensure thestability ofthesystem asawhole, anditsresistance toforeign
capital enterprises. When wholesalers actually began toimplement theterms suggested byMITI, the
retailers raised objections.
6.359 Japan responds thatthisargument ignores theeconomic incentives forthetransaction terms
topassdownstreamandtheactualeconomicconsequencesofdownstreamtransactiontermrationalization.
AstotheUStheory thattightening terms atthemanufacturer-wholesaler levelcreated financial pressure
onthewholesaler, Japan responds thatefforts toshorten transaction terms atthewholesaler-retailer
levelwould actually helpwholesalers byrelieving thefinancial pressure fromshorter payment terms
atthemanufacturer-wholesaler level. Thus, therecould benoactual financial effects onthewholesaler,
which would thennotleadtotheexclusive manufacturer-wholesaler relationship alleged bytheUnited
States.809Ifmanufacturers andwholesalers had,oftheirownaccord, adopted shorter payment terms,
rebates, andvolume discounts, inevitably these changes would eventually havetheirowneffect on
thedownstream terms from thewholesaler tothecustomer, regardless ofwhat thegovernment
recommends asdistribution modernization. Japan concludes thatthealleged government ’sendorsement
ofthewholesaler-to-retailer transaction terms, which werethelikely consequence ofthechanges already
8081970 Guidelines, USEx.70-4.
809According toJapan, theUnited States citestrends inwholesaler profitability. Yetthisdatainfactshows thatasthe
manufacturers tightened payment terms inthemid1960s, profitability actually increased. Thedecline inprofitability did
nothappen untilseveral years later. Thetiming ofthese trends hardly supports theUSallegations.WT/DS44/R
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taking place inthemanufacturer-to-wholesaler terms, hadnothing todowiththeunderlying economic
forces pushing transaction terms downstream.
(v) Uniformity andstandardization
6.360 IntheviewoftheUnited States ,thestandardization oftransaction terms served twopurposes:
(i)toencourage vertical alignment ofdistribution, and(ii)toestablish abaseline forstandard industry
practices, thedeparture fromwhich would bescrutinized under theAntimonopoly law. Thefactthat
thedomestic manufacturers hadimplemented rebates, discounts, andshortened payment terms in1966
or1967doesnotmean thattheterms wereuniform across manufacturers andwholesalers. TheJapanese
Government needed industry tostandardize theterms, andtokeepthem standard, inorder toresist
inroads from foreign capital.
6.361 With regard totheUSemphasis ontheimportance ofthegovernment inensuring uniformity
oftransaction terms, Japan argues thatthisargument hasnosupport inthegovernment actions or
theprivate sector actions during thisperiod, given thatrationalized transaction terms didnotlimitthe
ability offoreign ordomestic manufacturers tooffer more competitive terms.
(i) Inparticular, Japan emphasizes thatthe1970 Guidelines didnotspecify thepayment
terms, theinterest ratesonextended payment terms, theterms ofvolume discounts, ortheterms of
rebates. None oftheother documents identified bytheUnited States specifies target "standards" for
anyofthese elements.810TheGuidelines provided onlybroad suggestions, notspecific details of
suggested transaction terms. Moreover, theGuidelines didnotevenusetheword "standardize" in
connection withitssuggestions regarding transaction terms.811
(ii) AstotheUSargument thatthe"standard contract" drafted byanindustry group812
pushed foruniformity, Japan responds thatthedraft"standard contract"813clearly lefttoindividual
negotiation every major element ofthebusiness transaction andwould notprevent acompetitor from
offering better terms towinbusiness. Thus standardizing ofanyspecific transaction terms wasnot
intended.
(iii) InJapan'sview, theideathatrationalizing transaction terms somehow limited theability
offoreign manufacturers tooffer competitive terms alsocontradicts recent USstatements. The
1990 Guidelines statethat"Business operators trying toenter anewbusiness sector areclueless as
totheamount ofrebates itwould offerinorder tomaintain aposition superior toitsrivals".814Here
the1990 Guidelines, which aresupported bytheUnited States, assume thattherationalization of
transaction terms willhelpnewentrants, including foreign manufacturers, tooffercompetitive terms.
810Japan notes thattotheextent the1969 Survey contained examples ofactual transaction terms, suchinformation is
quite common insuchfactual surveys. There isnoindication thesurvey evaluated anyspecific terms either favourably or
unfavourably, andthustheycould notbe"targets".
811Japan states thattheUnited States consistently translates "tekisei(-ka)" as"standardization" rather thanthemore accurate
"rationalization". IftheJapanese original hadmeant "standardization," itwould have usedtheterm"hyoujun-ka". e.g.,
seeUSEx.71-11 (Zenren Tsuho, August 1971); USEx.70-4(Zenren Tsuho, July1970); USEx.69-5(Zenren Tsuho,
November 1969).
812Thecontract wasreprinted inanindustry trade journal atthetime. Nihon Shashin Kogyo Tsushin (1July1972).
Japan Ex.F-2.This"standard contract" wasmade asamodel formofcontract anddidnothaveanybinding effect whatsoever.
MITI merely encouraged theJapan Chamber ofCommerce andIndustry todraftit.Itspurpose wastoencourage theprivate
sector tousewritten forms andmake contracts more transparent.
813Japan underscores thattheStandard Contract: (i)leftblank thenumber ofdaysinthepayment period; (ii)leftblank
theinterest ratetobecharged onlatepayment; (iii)leftblank thediscount rateforcashdiscounts; (iv)indicates thatvolume
discounts should beinaccordance with"separately specified standards," and(v)makes nomention ofrebates atall.
814Shoukankou KaizenNoKihontekiHoukou NiTsuite(BasicDistributiontobeTaken fortheImprovement ofCommer cial
Practices), 20June 1990 [hereinafter "1990 Guidelines"], USEx.90-5, p.2.WT/DS44/R
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6.362 Japan concludes thatevenassuming theUSallegations about thetiming, themeaning ofthe
1970 Guidelines, andtheireffect onencouraging exclusivity, werecorrect, these USarguments still
would failbecause theyassume thatthere were legal constraints ontheability tooffer competing
transaction terms tocustomers. However, therewerenoconstraints onacompetitor, whether foreign
ordomestic, tooffer more attractive transaction terms.
(e) Financing forrationalization, systemization andstandardization
(i) JDBfunding forjoint distribution facilities
6.363 TheUnited States claims thatJapan alsopromoted thevertical integration ofmanufacturers
andwholesalers through administrative guidance andfinancial incentives formanufacturers, wholesalers
andretailers toestablish jointdistribution facilities. Theestablishment ofcommon facilities between
these different levels ofthedistribution system bound theparticipating companies closer together and
made itmore difficult forforeign suppliers toestablish ormaintain relationships withtheparticipating
distributors. TheDistribution Committee ’sSeventh Interim Report recommended financing bythe
Japan Development Bank("JDB") topromote systemization.815In1976, theJDBprovided asubsidized
loanof550million yentoKonica toestablish ajointdistribution centre forKonica anditsfourprimary
wholesalers.816JDBfundingofthedistributioncentregaveKonicathemeanstoestablishstrong,physical
andelectronic tieswithitsprimary wholesalers andconsequently stripped thewholesalers oftheir
independence andmade itallbutimpossible forother manufacturers toovercome thewholesalers ’
exclusive relationships withKonica.817TheUSalleges thattheJDB’sselective financing ofJapanese
manufacturers intheirattempts tosystematize distribution channels forphotographic filmandpaper
upset theconditions ofcompetition between imported anddomestic products since theloans helped
tofurther tiedomestic manufacturers toprimary wholesalers thatotherwise would havebeenavailable
todistribute imported products.
6.364 Japan contends thatKonica hadalready acquired itsprimary wholesalers before theJDBloan
andthattheloanwasthustoolatetoencourage vertical integration. Nogovernment intervention is
necessary totellsubsidiaries tocooperate withtheparent company. ForJapan, thecooperation between
Konica anditsprimary wholesalers andtheirjointdevelopment ofadistribution facility cannot bethe
result ofsome government plantostrengthen therelationship between these primary wholesalers and
Konica.
6.365 TheUnited States responds thatJapan doesnotdenythattheloanwasmade forthepurpose
ofestablishing thejointdistribution between Konica anditswholesalers, orthatthecentre wasinfact
established using theloan. AstoJapan'sargument thatKonica already hadacquired itsprimary
wholesalers atthetime, theUnited States contends thatKonica merged withitslasttwoindependent
primary wholesalers (i.e., Haruna Shokai andDaiwa Shokai) on13July1977, more thanayearafter
theJDBloan.818TheUnited States maintains thattheestablishment ofthejointdistribution centre
further interwove themanufacturer anditswholesalers, making itmore difficult foraforeign supplier
toestablish arelationship with, orpurchase, aKonica wholesaler.
6.366 AccordingtoJapan,giventhatsingle-branddistributionisnotinherentlyunfavourabletoimports,
itfollows thatMITI’sencouragement ofsystemization, theJDBloantoKonica forajointdistribution
815USEx.69-4.
816TheDirection ofRegulating Multi Level Marketing, Catalog Sales andDoor toDoor Sales (Eleventh Interim Report,
Dec. 1974, USEx.74-6.
817ThePresident ofKonica atthetimereferred tothedistribution centre as"akindofbusiness merger onthedistribution
front". Standing Before aTrial Photographic Distribution Industry, Camera Times, 8May 1976, USEx.76-4.
818Anindustry journal article from 20July1977 reported themerger: EraforReorganizing Distribution: "Retailers
AreLike Octopi," Shashin Kogyo Junpo, 20July1977, p.8,USEx-37.WT/DS44/R
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centre-whichatmost,evenaccordingtoUSallegations,merelylentsomeencouragementtosingle-brand
distribution-werenotinherentlyunfavourable.JapanexplainsthattheJDBdidnotanddoesnotevaluate
applications from foreign enterprises thatcarry foreign products anydifferently thanitevaluates
applications fromdomestic enterprises.819Thus, ifNagase (i.e.,Kodak 'simporter) andKuwada (i.e.,
Nagase 'ssingle-brand primary wholesaler subsidiary) applied foraloantobuild ajointdistribution
centre, theJDBwould haveevaluated theapplication based onthesamecriteria usedtoevaluate Konica 's
application.
6.367 AstoJapan'sargument thattheJDBinthe1970s would have, andtoday would, provide the
same typeofloantoforeign manufacturers, theUnited States rebuts thatthefactremains thatthe
onlymanufacturer whoreceived suchaloanwasJapanese.820
(ii) SMEA loans tophotoprocessing laboratories
6.368 According totheUnited States, ascolour photography became popular inthe1960s and1970s,
photoprocessing laboratories became apotential alternative distribution channel, andapotential threat
totheoligopolistic distribution system maintained byFujiandKonica. In1968, thedirector ofthe
Small andMedium Enterprise Agency (SMEA) called forapplying SMEA programs toimprove the
structure ofmedium andsmall businesses inlightofthe"advancing capital liberalization," andas
"protective countermeasures against theselling ofoneself toforeign capital".821The1969 MITI-
commissioned survey oftransaction terms inthephotographic sector822notes aspotential threats "if
theoligopoly ofthetwodomestic manufacturers isbroken upbyaforeign company," and"ifanew
[distribution] route emerges tocompete against theroute ofphotographic material dealers, which is
thecoreexisting route inthedistribution market". Thesurvey further warned that"foreign companies
havealready provided financial assistance totheprocessing industry" andadvocated taking steps "to
minimize theanticipated disorder inthedistribution market". Among therecommended measures were,
"subsidize theprocessing industry".823Inresponse, theUnited States claims, MITI'sSMEA gave
substantial subsidies tothephotoprocessing industry aimed atmodernizing theequipment inthefacilities
inanticipation ofcapital liberalization. InJuly1967, SMEA approved "colour filmdevelopment and
printing laboratories" asoneoffoursectors deemed eligible thatyearforsubsidized loans.824The
Chairman oftheLaboratories Association, whoalsowasthepresident ofFujiColour Service,825stated
that"themain purposes ofthelaboratory industry becoming designated industry are...ascapital
liberalization countermeasures, tomodernize facilities andthereby solidify thefoundations of
businesses".826When thelaboratories weredesignated aseligible foranother SMEA subsidy program
in1973, thechairman oftheLaboratory Association again stressed theneed torespond totrade
liberalization.827Japanese filmmanufacturers usedSMEA financing toconvert black andwhite to
819Japan notes thatsince 1984, theJDBhasbeenpromoting imports byproviding loans fortheconstruction ofdistribution
facilities andservice facilities forimported products. JDBAnnual Report 1995, p.26-27, Japan ExB-36.
820According totheUnited States, Japan alsoargues thatitwasinKonica ’sinterest toestablish thejointdistribution
centre, asifthatfactalters theGovernment ’sresponsibility forintervening inthemarket tofacilitate thatresult.
821Small andMedium Enterprises Director, Otsutake Kenzo, Main Points ofFiscal 1968MITI Policy; NewPolicy Dealing
With Capital Liberalization; Approach toPolicy onSmall andMedium Enterprises, Tsusan Journal, December 1967, vol.
2no.2,10-15, USEx-12.
822Institute ofDistribution Research, Fact-Finding Survey Report Pertaining toTransaction Terms: Actual Conditions
ofTransaction Practices intheWholesale Industry, March 1969, p.1-21, 287-319. USEx-15.
823Ibid.
824The1967 and1968 SMEA Annual Reports confirm thattheSMEA played aleading roleinproviding company-specific
financing,consul ting,guidance, andmonitoringinsuppor tofIndust rialStructureCounci lDistributionCommi ttee'sliberalization
countermeasures. White paper onSmall andMedium Enterprises bytheSMEA 1967, USEx.67-1.
825TheUnited States notes thatallchairmen oftheAllJapan Laboratories Association (Laboratories Association) have
been Fujiemployees.
826Murakami Eiji,WithThisOppor tunityasDesignatedIndust ry,Let'sStriveforFurtherDevel opment oftheLabIndust ry,
CFA News, Special Issue, 1967, p.4,USEx-9.
827Murakami Eiji,AYear ofTrial, JCFA News, 1January 1973, No.34,p.2,USEx-27.WT/DS44/R
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colour photo processing laboratories inthelate1960s andearly 1970s. During thistime, SMEA
provided approximately 160million yentosupport thiseffort. After conversion, these laboratories
tended toremain closely affiliated withtheJapanese manufacturers. These subsidies helped tiethe
laboratories intoexclusive relationships withthedomestic Japanese photographic filmandpaper
manufacturers.
6.369 TheUnited States submits thattheclose linksbetween domestic manufacturers formed under
thisSMEA program helped domestic manufacturers close offanother distribution channel forfilm,
since photoprocessing laboratories aretheprimary market forphotographic paper andanimportant
distribution channel forphotographic film. Because thelaboratories make frequent stopsatretail stores
topickupexposed filmforprocessing andprinting anddropofffinished prints, thelaboratories are
inagood position todeliver newundeveloped filmaswell. Moreover, thebrand ofdeveloping and
processing equipment thelaboratory usesoften corresponds tothebrand ofphotographic paper ituses
andthebrand offilmdistributes. Consumer perception, ifnottechnology, oftensuggests thatthebest
prints come from using thesame brand offilm, paper, andprocessing equipment. Accordingly, a
laboratory withonecompany ’sphotoprocessing equipment islikely topurchase photoprocessing paper
andchemicals fromthatsamecompany, aswellasitsfilm,toensure compatibility andtomeetconsumer
expectations forconsistency between thebrand offilmandpaper used. Alaboratory thatusesFuji
equipment often willuseFujipaper andchemicals, andifitdistributes film, itlikely willbeFuji.
6.370 Japan responds thatthere isnological nexus between government financing andthetrend
toward vertical integration. Thetrend toward affiliation actually began longbefore anyofthealleged
government efforts tointegrate thephotofinishing laboratories came intoeffect. BothFujiandKonica
were beginning todevelop affiliations withitslaboratories bytheearly 1960s which shows thatthe
timing ofSMEA financing hadnothing todowiththistrend.
6.371 IntheviewoftheUnited States ,given thatlowered tariffs onphotoprocessing equipment and
astrengthened yenwould decrease thecostofimported photoprocessing equipment andmaterials, and
therefore improve thelaboratories ’bottom line,liberalization would beathreat tothelaboratories
onlyiftheywere tiedinrelationships withFujiorKonica anddidnotfeelfreetopurchase cheaper
imported equipment andmaterials. Inthissituation, concessionary government financing could help
reduce thecomparative costofpurchasing domestic equipment andmaterials, andtherefore helpform
orcontinue thebonds between laboratories anddomestic filmandpaper manufacturers. Therefore,
intheUSview, Japan severely disrupted theconditions ofcompetition intheJapanese market that
otherwise would haveprevailed andthatwould haveenabled imports fromtheUnited States (andother
countries) totakeadvantage ofthetariff concessions granted byJapan intheKennedy Round.
6.372 Given that,inJapan 'sview, single-brand distribution isnotinherently unfavourable toimports,
itfollows thatMITI’sencouragement ofsystemization andSMEA financing formodernization of
photofinishing laboratories -which atmost, even according toUSallegations, merely lentsome
encouragement tosingle-brand distribution -werenotinherently unfavourable. Japan emphasizes that
theSMEA financing tophoto laboratories wasavailable toanylaboratory withanyaffiliation toany
manufacturer. Thefinancing wasdesigned tohelpthesmall laboratories, notthemajor manufacturers,
tobuyorleasenewequipment tohandle thenewdeveloping technologies forcolour film. Obviously
smaller laboratories would experience more difficulty financing suchalarge capital expenditure.
Laboratories receiving thefinancing werefreetochoose thetypeandbrand ofalltheequipment they
acquired withthehelpoftheloans. Once thelaboratories obtained thenewequipment, theywere
thenavailable ascustomers toanyone whocould supply thecolour paper theywould needtousethe
newtechnology. Japan argues thatthisindependent source offinancing actually reduced anydependence
thelaboratories would haveonthemanufacturers. InJapan'sview, theUnited States hasnotexplained
whytheSMEA financing would favour Japanese manufacturers rather thananyother supplier with
acompetitive product.WT/DS44/R
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6.373 Inresponse toJapan'sargument thattheSMEA programs didnotspecify thatthelaboratories
receiving thesubsidies purchase onlyequipment byJapanese manufacturers, theUnited States maintains
thatthemanner inwhich SMEA operated these programs disadvantaged foreign manufacturers. In
theUSview, MITI ingeneral hasoperated itsSMEA programs tosupport itsindustrial policy goals,
including preparing Japanese industry toconfront trade andinvestment liberalization.828The
administration oftheSMEA financing programs helps ensure thatloans aredispensed inconformity
withMITI industrial policy. Loans areapproved onacase-by-case basis, atthediscretion ofaMITI
certified "management consultant". Toobtain certification asamanagement consultant, anindividual
must passanexamination onMITI andSMEA industrial policies, including distribution policy.829
IntheUSview, these policies have contributed toFuji’sstrong andextensive tieswithJapanese
photoprocessinglaboratories,andthatthesetieshavereinforcedFuji’sdominantpositioninthemarket.830
6.374 Japan underscores thatSMEA loans continue tobemade available tolaboratories affiliated
withbothforeign anddomestic manufacturers. From thefiscal year1993 tofiscal year1995,
48.2percent oftheloans were distributed toFujilaboratories, 9percent toKodak laboratories and
7.1percent toKonica laboratories.
6.375 TheUnited States contends thatthereceipt ofahandful ofsubsidized loans under theSMEA
programs byKodak-affiliated laboratories intheperiod from 1993 through 1995 doesnotdisprove
thattheprogram hasoperated foryears tostrengthen Japanese industry ’scontrol overitslaboratory
network.
(f) Electronic information links
6.376 TheUnited States submits thatMITI sawthedevelopment ofinformation linksasanintegral
partofitsdistribution systemization efforts andstrongly advocated improving computer linkages to
cement theclosed vertical distribution system andensure itsperpetuation, e.g.,inthe1969 Seventh
Interim Report orthe1975 Manual. MITI created, beginning inthemid-1970s, aseries ofgovernment-
industry entities tofacilitate thecreation ofcomputer networks between Japanese manufacturers and
Japanese distributor. TheJapanese Government alsoworked closely together withprivate companies
todevelop computer tiesandaddress thevariety ofobstacles theyfaced inachieving thisgoal,including
through low-interest financing.
6.377 Japan responds thatthere isnobasis forassuming thatMITI'ssystemization policies, e.g.,
thecreation ofinformation ties,hadanyexclusionary impact. MITI'spolicies recognized andaddressed
alldistribution channels forfilm,including distribution channels usedbyimports.831ForJapan, there
828"The needtoincrease international competitive strength withtheliberalization oftrade atthestartofthe1960s made
iteven more necessary todothis[i.e., improve thefacilities ofSMEs]. TheSME modernization policies thatgotfully
underway inthe1960s were apolicy response tothisnecessity". Takashi Yokokura, Chapter 20:Small andMedium
Enterprises, Industry Policy ofJapan Edited byRyutaro Komiya, Masahiro Okuni, andKotaro Suzumura, 1988, p.521.
Chapter 11:TheDevelopment ofNewPolicy Measures, MITI History, Vol.15,31May1991, p.431-2, USEx.70.Among
thespecified industrial policy objectives were response to"capital andtrade liberalization". Ibid.
829Asexplained inarecent guide tobecoming aMITI-certified "management consultant": "Individuals taking the
examination should review thelatest andimmediately previous editions ofthe[SMEA] White Paper. Thisisanextremely
useful source forunderstanding ...thedirection inwhich thegovernment itattempting toguide small andmedium enterprises".
Nagano Hiroji, AnEasy Guide toBecoming aConsultant forSmall Business, 26January 1997, p.35-36, USEx.104.
830"The source ofpower forbuilding FujiFilm'shighmarket share, which paysnoheedto[Agfa retailer Nihon] Jumbo 's
aggressive pricing policies, isthekeiretsu-nization ofwholesalers andlaboratories. Thisstructure isthefoundation fora
strong corporate system thatproduces bigprofits from filmandprinting paper". "Firm Control ofFilmDistribution -The
FairTradeCommi ssiondoesnottakeactionasdiscount ersposenothreat,"SpecialFeature-Part2,NikkeiBusiness, 28March
1993, pp.16-19, USEx-79.
831Japan notes thatNagase 'ssubsidiary Kuwada, asingle-brand primary wholesaler forKodak, wasamember ofthe
wholesalers 'trade association ("Shashoren") atthetimeMITI'sDistribution Manual wasprepared. Thus imports were not
leftoutoftheprocess.WT/DS44/R
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isthusnoreason whyimports would haveencountered difficulties because theydidnotshare thesame
standardized forms andpractices.
6.378 TheUnited States contends thatJapan waswellaware thatcreating information linksbetween
manufacturers andtheirdistributors risksreinforcing oligopolistic distribution structures andlimiting
competition.832TheJFTC ’slistofhighly oligopolistic industries includes theJapanese photographic
filmandpaper industry. Inthese circumstances, theUnited States argues thattheformation ofFuji-
controlled information linksshould haveraised concerns bytheJapanese Government rather thanits
explicit support.
6.379 AstotheUSargument thatJapanese manufacturers established on-line computer links with
theirprimary wholesalers asaresult oftheguidance bythe1975 Manual, Japan responds thatFuji
didnotestablish itsfirston-line connection withaprimary wholesaler until1989. ThusJapan contends
thatthealleged systemization guidance thattheUnited States claims wassoeffective increating an
exclusionary market structure wasinreality ignored foratleastfourteen years.
6.380 AccordingtotheUnitedStates,theJapaneseGovernment'ssupportandpromotionofinformation
links spanned nearly 25years:
a. In1968, theimportance ofinformation flows wasfirstidentified intheSixth Interim
Report which stated that"appropriate conditions oflocation, theformation ofdistribution information
networks should bepromoted ...".833
b. In1969, intheSeventh Interim Report, MITI’sDistribution Committee setforth a
specific information "systemization" program which waspremised onthebelief thatinformation flows
were "afundamental keytopursuing systemization ofdistribution activities".834
c. In1971, theDistribution Committee 'sNinth Interim Report835reiterated theimportance
ofstrengthening information tiesaspartofdistribution systemization andcalled fortheestablishment
of"guideposts" fordevelopment ofinformation tiesneeded tostrengthen horizontal andvertical linkages
ofa"type thatclusters client retailers around apowerful wholesaler thatserves asitsnucleus; atype
where thefulcrum isanorganized system ofintegrated wholesale centres andthewholesale business
districts".836
d. With the1971 Basic Plan forDistribution Systemization, Japan called forthe
strengthening ofinformation tiesasakeyelement ofdistribution systemization. Theplanspecifically
called forthecreation atthenational economic level ofdistribution information networks, the
implementation ofjointinformation activities, andthecreation ofspecial organizations topromote
theprovision ofdistribution information. Theplanstated "such systemization ofdistribution must
berealized through various stages: vertically fromtheintra-firm level, horizontally ontheinter-firm
832AJFTC study ofinformation networking inthedistribution sector noted: "Information networking especially under
thesoledirection ofoligopolistic manufacturers maybeconsidered asaproblem which could expand thegapincompetitiveness
...Inparticular, inthecasethatoligopolistic manufacturers useinformation networks asanintegral partoftheirmanagement
ofdistribution channels, itisfeared thatthedependence ofother information network participants onthenetwork leader
fortransactions willincrease, andthattheir freedom toconduct business activities willbecome restricted". FairTrade
Commission Office, Fact-Finding Survey Report Regarding Information Networking intheDistribution Sector, September
1989, p.57-65. USEx.65.
8331968 Sixth Interim Report, USEx.68-8 andUSEx.14.
8341969 Seventh Interim Report, p.4.USEx.69-4.
835Industrial Structure Council Distribution Committee, Distribution forthe1970's(Ninth Interim Report), 22July1971.
USEx.71-9.
836Ibid., p.80-81, USEx.71-9.WT/DS44/R
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leveltothenational economic level. Furthermore, inseeking toimplement this,sufficient attention
mustbepaidtotheintroductionofcomputersasaneffectivemeansofachieving[suchsystemization]".837
e. InDecember 1971, MITI established the"Distribution System Development Centre"
("theCentre")838inorder tofacilitate systemization, including thestrengthening ofinformation linkages,
inclose cooperation between thegovernment andtheprivate sector. TheCentre orchestrated the
development ofstandardized state-of-the-art hardware andsoftware andcoordinated thestandardization
ofinformation formats tofacilitate computer integration.
f. In1975,theCentreproducedtheMITI-commissioned"1975Manual",whichunderscored
theurgency ofdeveloping information links topromote systemization.839TheCentre alsostudied
distribution inspecific sectors, including thefilmandphotographic paper sector, andmade further
proposals forenhancing systemization.
g. In1975,theCentrepublishedastudyonFuji’sstrategytorespondtocapitalliberalization
andtheentry ofKodak intothemarket. Thestudy commented thatFujihadbeenhighly successful
atinternal computerization andconcluded thatFuji'snextstepwastobuild a"Total Distribution
Management System" toinclude distributors. Thestudy noted thekeyrolethatcomputer linkswould
play.840
h. In1976, theCentre produced asecond study ofFuji'scomputer system, recommending
thatFujidevelopinformationlinkswiththeprimaryphotospecialtywholesalersandretailerstostrengthen
itscontrol overthewholesale distribution channel.841
6.381 TheUnited States further submits thatMITI continued toactively promote information
systemization throughout the1980s:
a. In1985, MITI promulgated its"Vision foranInformation-Armed Wholesale Industry"
("Vision"), which called forsupport from theJapanese Government forinformation networking in
thedistribution industry, including study groups ondeveloping information systems forthewholesale
industry, creation oflowinterest financing, andintensive financing ofcomputerization ofsmall and
medium-sized wholesale industry.842
837TheBasic PlanforDistribution Systemization, 28July1971, USEx.71-10, p.4.
838Establishment of‘Distribution System Development Centre ’andthePromotion ofDistribution Systemization Measures,
Tsusansho Koho,20December 1971, pp.5-6,13-18 USEx.71-13. Japan notesthattheofficialEnglishname ofthisinstitution
isthe"Distribution System Research Institute".
839"...Thus, inaddition torationalization oftransactions anddistribution, thecamera andfilmindustry must improve
itsinformation systems, bringing them toanadvanced level". 1975 Manual, USEx75-5.
840"The building ofaninformation system oriented physical distribution system willserve asthefront-line inimproving
thestability ofchannels thatarecentred onthecompany 'sprimary wholesalers andpursuing thecreation ofacompetitive
distributionsystem".Asada Koji,SpecialSeries-PDStrategy:DistributionSystemandDistributionChannel (No.9),Physical
Distribution Management, April 1975, pp.55-61, USEx.75-1.
841"...(2)Theonline system hasallowed thecompany toascertain thestatus ofitsinternal inventory. Inthefuture an
attempt should bemade tocome closer toasystem thatenables [theuser] toascertain andcontrol inventory atthedistribution
stage. (3)Because itisimportant inmanaging filminventory, ascertaining thestatus ofinventory atthewholesale andretail
stages willalsoleadtothestabilization ofchannels centred onexclusive tokuyakuten, andthere aregreat benefits bothin
information andinphysical distribution ..".Yoshioka Yoichi, TheOnline Inventory Control System atFujiPhotographic
Film Co., Ltd., Ryutsu toShisutemu, July1976, pp.61-68, USEx.35.
842MITI Industrial Policy Bureau, Division oftheInformation-Armed Wholesale Industry, 14June 1985, USEx.52.WT/DS44/R
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b. In1986,toimplementthe"Vision,"theCentreissuedareport843toserveasthe"guiding
light" forthebasic position oftheinformation-armed wholesale industry andoversaw aseries of
government-industry committees toaddress theproblems identified inthereport.
c. In1987, the"Photography Industry Information Systemization Symposium," i.e.,the
System Council wasestablished under MITI auspices tostandardize theinformation systemization
infrastructure.844TheSystem Council focused mainly ontheproblem ofincompatibility ofdataformats
butalsoconducted yearly studies ontheadvancement ofinformation systemization inthephotography
industry.
d. In1988,theSystemCouncil845finallysolvedtheproblemofincompatibilityofcomputer
systems inthephotography industry bystandardizing thedataformats, product codes, andtransaction
forms across companies thatwere toparticipate inaparticular information network.
e. InJanuary 1989, theCouncil issued standard filmdeveloping andprocessing product
codes.846
f. InFebruary 1989, theCouncil issued uniform vouchers forusebymembers ofthe
photography industry.847
g. InMarch 1989, theCouncil issued "Comprehensive Photo Industry Informization
Manual", which served astheindustry ’sreference manual forstandardization ofinformation systems.848
6.382 According totheUnited States, asnoted byJapan, Fujifinally established on-line connections
withitsprimary wholesalers in1989.849
6.383 Japan admits thatthe1971 Systemization Report discussed suggestions forstandardization
ofpaperwork anddistribution, andbetter information exchanges through thedistribution chain and
the1975 Manual expanded onthese suggestions inamore detailed manner. However, whatever the
advisory councils andpublic corporations wererecommending, Japanese manufacturers inthisindustry
werenotpaying much attention. Specifically, Japan maintains thatthelargest Japanese manufacturer
inthissector didnotfinish installing jointcomputer systems withitswholesalers until1993, almost
20years aftertherecommendations were made.
(g) Current competitive position ofimports
6.384 TheUnited States emphasizes thatJapan’sactions todeprive foreign manufacturers access
tothewholesale distribution channels haveadversely altered theconditions ofcompetition forimported
photographic materials. Foreclosure from thewholesale system substantially impairs theability of
imported products tocompete bylimiting theiraccess toretail outlets, increasing theirdistribution
costs relative tothose ofdomestic manufacturers, andneutralizing vigorous attempts tomarket
843Distribution Organization Centre, "Research Report onInformation Networking intheWholesale Industry: Toward
AnInformation Oriented Wholesale Industry," March 1996.
844Photo Industry Information System Manual (TheFourth Edition), Photo Industry Distribution System Council, April
1996, USEx.96.
845TheSystem Council wasrenamed the"Conference forPhotography Trade Information Systems" inOctober 1988.
846Saito Seiichi, "Uniform Voucher Policy Facing New Challenges," Ryutsu toShisutemu, March 1992, pp.86-97,
USEx.75.
847Ibid.
848Photo Industry Distribution Information System Council, Photo Industry Distribution Information System Manual (The
First Edition), March 1989, USEx.62.
849Affidavit ofMr.Tanaka, General Manager, FujiPhoto Film Co., Ltd., Japan Ex.A-10, p.3-4.WT/DS44/R
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aggressively. Furthermore, market surveys demonstrate thatimports haveaccess toonlyalimited
segment ofthemarket, ascompared withdomestic products.
(i) Primary andsecondary wholesale channels
6.385 TheUnited States submits thatvirtually alldomestically manufactured filminJapan flows to
retail outlets through wholesale channels, while imported filmisalmost entirely excluded fromthose
channels. Foreign manufacturers sellvirtually nofilmthrough primary wholesalers. Kodak sellsonly
15percent ofitsfilmtosecondary wholesalers, andAgfasellsnofilmthrough secondary wholesalers.850
6.386 IntheUSview, primary wholesale channels provide theJapanese photographic filmandpaper
manufacturers withassets pivotal toprotecting theirdominance oftheJapanese market, e.g.,access
tothecustomer relationships which theprimary photospecialty wholesalers havedeveloped overmuch
ofthelastcentury which areavitalelement ofsuccessfully doing business inJapan. Moreover, through
thisexclusive access, Japanese filmmanufacturers havegained unparalleled marketing power andsuch
services asinventory control, after-sales services, sales promotion, andfront-line sales personnel.
Foreignsuppliersmustperformsuchmarketinganddistributionfunctionsthemselvesandsoareburdened
withahigher relative coststructure. Foreign filmmanufacturers cannot replicate these relationships
orprovide comparable services inaneconomically viable manner.
6.387 TheUnited States submits thatsecondary wholesalers support theoperations oftheprimary
wholesalers buttheycannot substitute forthem.851Secondary wholesalers aresmall andregional in
theiroperations anddonothaveeither thescaleorthegeographic reach oftheprimary wholesalers.
Moreover, Fujianditsprimary photospecialty wholesaler control ordominate anumber ofthelarger
secondary wholesalers, andareinaposition toinfluence allsecondary dealers because ofFuji'sstatus
assupplier ofthedominant brand.852While some secondary wholesalers carry multiple brands offilm,
most donot,andforeign filmisalmost asscarce inthese channels asitisinprimary channels.853
6.388 TheUnited States maintains thatanyforeign manufacturer isdisadvantaged inthissituation
because itwould facemany ofthesame obstacles intrying toconvert asecondary wholesaler intoa
primary wholesaler asitwould intrying tobuild anewdistribution network from theground up.
These include, e.g., theneedtoestablish relationships withmany small retail outlets; theneedto
establish apersonnel basewiththenecessary technical skills andmarket knowledge; andtheneed
todevelopwholesalesupplierrelationshipswithvariousmanufacturersofphotographicsupplies(cameras,
accessories, etc.). Even those secondary wholesalers thatwillsupply multiple brands buyalargeshare
ofthefilmandother products theydistribute from theprimary photospecialty wholesalers. Were a
secondary wholesaler totrytoexpand itsbusiness, itwould finditselfindirect competition withthese
primary wholesalers (who alsoareitssuppliers ofFujifilm) andattempting todisplace primary
wholesalers withwhom mostretailers havelongstanding andstable relationships.854Moreover, those
manufacturers thatcurrently distribute through theprimary wholesalers would beunlikely tojeopardize
850Photo Market 1996, USEx.96-1.
851Inresponse toJapan'sargument thatsecondary wholesalers provide thekeytoaccessing small retail outlets, theUS
argues thatJapan hasprovided nosupporting evidence andthatonlyabout one-third ofFuji’sfilmsalesgothrough secondary
wholesalers totheretailers, while themajority goes directly from theprimary wholesalers totheretailers. USEx.96-1,
p.132.
852Affidavit ofSumi Hiromichi, 27November 1996, USEx-96-10.
853Foreign filmaccounts foronly7percent ofthefilmsoldthrough secondary channels. Photo Market, 10June1996,
pp.132-133 and254, USEx.99.
854ThestabilityofthesetiesisapparentfromtheconstantshareofFujifilmsalesthroughprimaryandsecondar ywholesalers
since 1980. While Kodak ’sfilmsales through thevarious distribution channels changed inaccordance withitschanging
market strategies, Fuji’ssales through primary wholesalers have remained atexactly 59percent since 1981 anditssales
through secondary wholesalers have remained atexactly 33percent since 1980, according toPhoto Market ,thestandard
Japanese statistical publication forthephotography sector.WT/DS44/R
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theirrelationships withthese primary wholesalers byselling their products toanupstart primary
wholesaler.Finally,theexistingprimaryphotospecialtywholesalersachieveefficiencies(i.e.,"economies
ofscope") bydelivering cameras andawidevariety ofother photospecialty products beyond filmand
paper. Aforeign filmandpaper manufacturer building anewdistribution system from theground
upwould nothavethebenefit ofsuchefficiencies. Thus, theUnited States alleges thatforaforeign
manufacturer itwould beimpossible toestablish thecustomer basetoachieve theeconomies ofscope
necessary tomake itsoperations economically viable.
(ii) Current market structure inthedistribution system
6.389 ForJapan ,thecoreoftheUSallegations regarding distribution policies istheclaim thatsingle-
brand distribution inJapan impedes market access forforeign brands offilmandpaper andthatitis
impossible foraforeign manufacturer toselldirectly toallthe280,000 outlets thatsellfilminJapan.
Togainaccess tothose outlets, according toJapan, theUnited States claims thatitisnecessary tosell
through national wholesalers, suchastheprimary wholesalers ofthedomestic manufacturers. Japan
disagrees withthischaracterization because Kodak, theleading foreign manufacturer, doesnotsell
directly toJapanese retail outlets. Similarly toFujiandKonica, itsellsthrough anational wholesaler.
Kodak ’snational wholesaler, Kodak Japan, justhappens atpresent tobeawholly owned subsidiary.
Inthepast,itwasaJapanese company, Nagase, andthenajointventure withNagase.
6.390 TheUnited States responds thatKodak doesbusiness inJapan through itswholly-owned
subsidiary, Kodak Japan, Ltd., which performs technical support, product development andmarketing
tasks. Lacking access towholesale channels, Kodak Japan necessarily sellsKodak filmdirectly to
retail outlets, whereas thatfactdoesnotmake ita"wholesaler".
6.391 Japan responds thatKodak transfers itsfilmtoKodak Japan, which thensellsthefilmtothe
verysamesecondary wholesalers andretailers. Kodak thusdistributes itsfilmverysuccessfully through
aparallel saleschannel toFujifilm. InFujifilm ’scase, theindependent primary wholesalers transfer
thefilmfrom Fujifilm totheircustomers. ForKodak, Kodak Japan transfers thefilmfrom Kodak
totheverysame customers. Thus, Kodak Japan performs thesame function asFujifilm ’sprimary
wholesalers. Japan alsonotes thattheUnited States confuses Kodak Japan andEastman Kodak Japan.
Although Eastman Kodak Japan provides bothmarketing andtechnical services, andisnotawholesaler,
Kodak Japan functions asaprimary wholesaler.
6.392 Japan emphasizes thatnonational wholesaler ofanymanufacturer sellstoall280,000 outlets,
ortoanything close tothatnumber. Fuji’sprimary wholesalers selltoacombined totaloffewer than
5,000 accounts. Most ofthese accounts arelarge retailers; about 300aresecondary wholesalers and
photofinishing laboratories thatresell filmonaregional basistothehundreds ofthousands ofremaining
retail outlets.
6.393 TheUnited States contends thatevenifthese numbers werecorrect, Fujineeds thefourlarge
primary wholesalers toservice these5,000 accounts. Because theforeign manufacturers havenoaccess
totheseprimary photospecialty wholesalers ortomany ofthesecondary wholesalers thatservice these
accounts indirectly forFuji,theyhavetoservice these accounts directly. Direct distribution orother
alternative channels created byforeign firms provide them withaccess toonlyalimited segment of
themarket, specifically incentral neighbourhoods oflarge cities, where photospecialty outlets are
relatively large anddensely located.
6.394 InJapan 'sview, theprimary wholesalers donotprovide thekeytoaccessing large numbers
ofsmall retail outlets because thatisthefunction ofsecondary wholesalers, andtheytypically carryWT/DS44/R
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multiple (including imported) brands.855Theprimary wholesalers, liketheircounterpart Kodak Japan,
sellmainly tolarger volume retailers. Thedegree ofoverlap ishighgiven thatnearly 90percent of
Fuji'ssalesvolumegoestoaccountsthateithercarryKodakfilmorhaveanexistingbusinessrelationship
withaKodak supplier. Thus, Japan concludes thatthere isno"distribution bottleneck".
6.395 TheUnited States responds thatthese figures vastly overstate theavailability ofKodak film
intheJapanese market. AFujisurvey finds that62percent oftheprimary wholesalers 'customers
currently carry Kodak film. Thisfigure includes anyoutlet evenifitcarries onlyatoken amount of
Kodak filmandcounts alloutlets inachain evenifonlyoneoutlet inthatchain carries Kodak film.
Inorder toobtain the"nearly 90percent" figure, Japan addsFuji'sprimary wholesalers 'customers
thatdonotcarry Kodak filmbutdobusiness withsellers ofother Kodak products. Thefigure therefore
includes alloutlets served byasecondary wholesaler affiliated withoneofFuji'sfourprimary
wholesalers ifthatsecondary wholesaler soldanyother Kodak product, evenifneither theprimary
norsecondary wholesaler waswilling tocarry Kodak film. TheUnited States refers toanassociated
Fujisurvey thatwasconducted offilmavailability attheretail level. AUSanalysis ofthissurvey,
fromwhich the90-percent figure isallegedly derived, shows discrepancies between theactual survey
results andthefigures reported byJapan.856TheUnited States further argues thatinspection ofthe
Fujisurvey alsoreveals thatitusedbiased survey andsampling techniques. TheFujisurvey islimited
tosixmajor metropolitan areas. There isample evidence thatthefilmmarket inJapan isnot
homogeneous andthatforeign filmismore available inmajor metropolitan areas thanother areas.857
6.396 Japan responds thattheUnited States ’attack onthesesurvey results reveals itsownconfusion.
TheUnited States attacks thesurvey sampling methodology, yetapparently forgets thatthesurvey
ofwholesaler customers wasnotasampling atall.Rather, over95percent ofthecustomers, virtually
theentire customer base, weresurveyed. There canbenoissue of"sampling bias" when theentire
universe issurveyed.858
6.397 TheUnited States emphasizes thattheKodak survey shows thatKodak filmisactually available
inabout 40percent ofthestores inJapan. Kodak ’ssurvey design, which utilized well-accepted statistical
sampling methodology, wasbased onthemethod usedforJapan’sNational Survey ofPrices. Atotal
of2,028 outlets in144cities and45of47prefectures wererandomly surveyed inproportion totheir
share offilmsales. Forexample, approximately halfofthefilmsoldinJapan isthrough photospecialty
stores, sohalfoftheoutlets surveyed werephotospecialty stores. Theresults werethenweighted by
filmsalesbyprefecture because actual salesdatabystore arenotpublicly available.
6.398 According toJapan ,historically, single-brand distribution didnotstopforeign market share
ofcolour filmfromdoubling from1970to1981(from 10.1to20.0percent), andforeign market share
855According toJapan, inasurvey ofthe278secondary wholesalers thatcarry Fujibrand film, 62.0percent oftheoutlets
representing 77.3 percent ofthevolume offilmbeing soldcarried atleastoneforeign brand offilm.
856TheUnited States notes thatareview ofthesurvey forms provided byJapan inresponse totheUSrequest showed
that2,061 stores were surveyed, not1,966 stores asclaimed byJapan. Furthermore, stores were surveyed inninedifferent
prefectures, notsixcities isclaimed byJapan. Japan claimed thattherandom sample included 600photospecialty stores
and114supermarkets, butonexamination theUnited States found thattherandom sample instead included 609stores of
atleast10different outlet types. Finally, thestatement that"thenumber ofsamples wasdetermined inproportion toits
sales share inthefilmmarket" wasfound tobeinaccurate. Forexample, 26percent offilmsoldinJapan issoldinstores
inthesupermarket-department store category; however, only10percent oftheoutlets intheFujisurvey were ofthattype.
Convenience stores sellapproximately 8percent ofthefilminJapan, but19percent ofthestores surveyed byFujiwere
convenience stores, Survey onFilm Retail Outlets, 1997, Japan Ex.C-22.
857According totheUnited States, fewer thanonethird ofthesurvey 's2,061 outlets were randomly surveyed. Thus,
Fuji’s"random sample" wasdrawn inamanner which would systematically biasupward thereported availability ofKodak
film.
858InJapan'sview, theUnited States appears toconfuse theexhaustive survey ofthewholesalers ’customers withthe
sampling done fortheretail availability survey. Japan responds toUSallegations about thesampling techniques oftheretail
availability survey inJapan Ex.F-7.WT/DS44/R
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ofblack andwhite filmfromsurging more thansix-fold from1970to1985(from 6.6to41.4percent).
Atpresent, single-brand distribution hasnotprevented foreign consumer filmfromextensive penetration
ofdistributionchannels.Accordingly,62percentofthecustomersbuyingfromsingle-brandwholesalers
ofFujibrand film,representing 77percent ofsalesvolume, already carry Kodak brand film,obtained
fromother channels. Furthermore, Japan emphasizes thattherearenogovernmental orlegalbarriers
todomestic manufacturers ’primary wholesalers carrying competing brands iftheythought ittobe
intheirbusiness interest todoso.Japan concludes thatthegovernment didnotcreate themarket
structure, andthemarket structure hasnotlimited opportunities forforeign consumer photographic
products.
6.399 Japan contests theUSallegation thatcutting prices "could bring automatic scrutiny". Japan
contends that,while theUnited States underscores Kodak 'sefforts tocutprices, itdoesnotidentify
asingle instance ofJapanese Government intervention todiscourage Kodak fromoffering lowprices.
Theonlyscrutiny ofprices wasandremains scrutiny bytheJFTC ofparallel andsimultaneous price
increases byallmanufacturers, domestic andforeign, intheJapanese market.
(iii) Vertically integrated distribution system
6.400 According totheUnited States ,theJapanese Government andJapanese analysts havefrequently
acknowledgedthatmanufacturer-dominateddistributionkeiretsuoperatetotheadvantageofthedominant
manufacturers andlimitcompetitors 'access, including access offoreign firms. TheJFTC 's1992study
ofhighly oligopolistic industries concluded thatmanufacturer-dominated distribution systems "may
serve ameans forcompetitive obstructionist actsofexclusionary behaviour".859A1989study bythe
Institute forDistribution Research observed that"once keiretsu-ka hasbeenestablished, itcangive
theimpression of[adistribution system thatis]inflexible andclosed. Many foreign firms, especially,
haveseenitasaproblem withthedistribution system ingeneral".860TheEconomic Planning Agency
concluded ina1989study thatJapan'sdistribution system withkeiretsu-nized channels was"hindering
theimport expansion" and"iftheforeign businesses contract theirownmarketing channels, initial
costforparticipating inournation 'smarket willbeexcessive".861TheUnited States quotes aformer
member ofMITI'sIndustrial Structure Council whocommented that"policies ...protecting small
distributors ...arecompetition controlling policies [which] maintain thedistribution system which is
closed toforeigners".862
6.401 Japan responds thattheUnited States struggles todevelop alogical linkbetween MITI
distribution policies andincentives tovertically integrate forasimple reason: thedocuments themselves
donottalkdirectly about anyintent toencourage vertical integration. There arenostatements -either
byMITI orbythevarious advisory councils -directly calling forvertical integration. Tothecontrary,
totheextent thereisanydiscussion ofvertical integration atall,onefindsinthevarious advisory council
reportsambivalenceatbestandoftenhostilitytowardsexcessiveverticalintegration.Japancallsattention
859Thestudy observed filmthat"Fuji Film hascontracts withseven stores; fourofthetokuyakutens areessential and
operate onanational scale". JFTC Economic Research Survey Council Report, TheCompetitive Situation inHighly
Oligopolistic Industries, August 1992, USEx.92-4, p.28.
860Distribution Problem Research Council, Report ontheSeventh Distribution Problem Research Committee Meeting,
1989, USEx-63.
861"Distribution keiretsu-nization achieves channel control andorganizes thedistribution route bycreating along-term
andfixedtraderelationshipwiththedistributorinorderforthemanufact urertodevelopthemarketingstrategyeffectively....[I]n
akeiretsu-nized channel, these arecases inwhich imported products aredifficult tohandle duetofragmentation ofthechain
stores, etc.,andthismeans thatexisting marketing channels cannot beusedbytheforeign businesses. Economic Planning
Agency, Planning Bureau, Research Related toImports andPrices, 1989 Report, p.8,USEx89-1.
862Miyashita Masafusa, 4.Problems intheWholesale Industry andDirection forReinforcing Functions, Henkakuki no
Ryutsu (Distribution inTransition: Strategic Challenges foraNewEra). Edited byYoshihiro Tajima, 22November 1991
pp.69-80, USEx.72.WT/DS44/R
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totheSixth Interim Report in1968, which continues toseevertical integration asaproblem. The
report notes theimportance ofmaintaining abalance ofpower throughout thedistribution chain:
"Inaddition, itisdesirable thatsituations inwhich oneparty indistribution activity
issubordinate totheothers, anditsdevelopment hindered, should beeliminated as
much aspossible, andthatcommercial activity should beconducted onthebasis of
fairnegotiations between theparties. Great importance should beattached tothefact
that,ifsuchabalance ofpower isrealized, evenifmore powerful enterprises and
organizations emerge attheproduction distribution orconsumption stage, other stages
willacttocounter [such counter influences] andwillfulfill thefunction ofpreventing
harmful effects".863
InJapan'sview,recognizingthetrendtowardverticalintegration,thereportdiscussesbothitsadvantages
anddisadvantages.
(iv) Alternative distribution policies
6.402 TheUnited States notes thatKodak attempted tofindaroute tomarket around theclosed
wholesale distribution channels, butwithonlylimited results. Kodak hasaggressively sought toexpand
filmsalesthrough thephotofinishing laboratory channel, butisonlyabletosellabout one-quarter of
itsfilmthrough thischannel. Moreover, Kodak facesconstraints infurther expanding itssalesofpaper
tolaboratories anddistribution offilmthrough laboratories because many laboratories haveexclusive
relationships withJapanese manufacturers.864
6.403 Japan responds thatKodak hasanetwork ofaffiliated laboratories justlikethedomestic
manufacturers.Moreover,approximately60percentoftotalpapersalesinJapanaretominilaboratories,
which existcompletely outside the"captive market" complained about bytheUnited States.865Japan
alsonotes, quoting anindustry report,866thataffiliations between manufacturing andphotofinishing
laboratories arecommon around theworld.
6.404 According totheUnited States ,Kodak hassought tocompete onthebasisofpriceandproduct
innovation seeking tobothgainaccess totheprimary wholesale channels andestablish alternative routes
tothemarket.867However, therewasanegative correlation between Kodak 'swholesale pricereductions
anditsshare ofdomestic sales, which declined slightly during thesame period. Furthermore, Kodak
introduced avariety ofinnovative products withnocompetitive Japanese counterparts andundertook
aggressive marketing campaigns.868Contrary toJapan'sargument thatFujiandKonica spent 18times
theamount offoreign brands onadvertising,869theUnited States point outthattheEconomist estimates
thatKodak ’sadvertising expenditures inJapan weretriple thoseoftheJapanese manufacturers combined
during the1980s, theperiod citedbyJapan.870
863Sixth Interim Report, p.10-11, U.S. Ex.68-8.
864Affidavits ofSumi Hiromichi, USEx96-10 andWilliam Jack, USEx.97-2.
865Seealsosub-section V.A.3.(e) on"The market forpaper" above, inparticular para. 5.67.
8661993-1994 International Photo Processing Industry Report, p.7-2,Japan Ex.B-54.
867According totheUnited States, Kodak lowered prices by56percent during theperiod of1986-1995, further widening
thealready sizeable gapbetween itswholesale prices andthose oftheJapanese manufacturers.
868TheUSstates thattheimpact ofadvertising istypically evaluated notonlybymoney spent, butbytheextent towhich
brand recognition isincreased. Kodak hasfocused onadvertising campaigns thatwould mostincrease itsbrand recognition.
869YuryokuKigyonoKokoku-S enden-Hi (Adver tisingExpenses ofMajorCompani es),NikkeiKokoku Kenkyusho, December
1974 -September 1994, Japan Ex.A-7.
870TheRevenge ofBigYellow, Economist, 10November 1990, p.2.WT/DS44/R
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6.405 Japan notes thatKodak hasbeentelling retailers thatitwould likeKodak filmtohaveexactly
thesame price asFujibrand film.871Japan alsonotes thatduring mostofthelate1980s, Kodak was
simply unwilling tocompete based onprice. Thisempirical reality canbeconfirmed bystatements
byKodak management. Kodak officials havemade repeated public statements overthepastdecade
totheeffect thatKodak hadnointention ofattempting togainmarket share inJapan through underselling
domestic brands. In1986, astheyenwasappreciating rapidly, thenKodak Chairman KayWhitmore
made clearthatKodak would nottakeadvantage ofthisexchange rateshifttoundersell domestic brands:
"The President ruled outthepossibility ofthecompany passing onexchange gains
from theyen’sappreciation against theUSdollar toJapanese consumers intheform
oflower prices. HesaidKodak isnotaprice leader inJapan andhadnointention
oflowering itsprices towinincompetition withitsJapanese rivals".872
6.406 TheUnited States alsosubmits thatKodak hasinvested heavily inJapan, establishing Kodak
Japan in1977 -lessthanayearafterphotographic materials manufacturers were permitted toown
100percent ofanewenterprise -toprovide technical andmarketing services. Kodak aswellasAgfa
alsohaverepeatedly sought toreestablish tiestothefourprimary photospecialty wholesalers without
success.873
6.407 JapanrespondsthattherealstoryoftheliberalizationofinvestmentintheJapanesefilmindustry
isthatofKodak missing opportunities toexpand itspresence intheJapanese market. Asaresult of
Japan’scapital liberalization policies, Kodak hadmany opportunities toinvest inJapan. However,
withtheexception ofasmall liaison office established in1977, Kodak made noeffort toestablish a
presence inJapan until1986. Atthistime, 15years aftertheonset ofcapital liberalization, Kodak
announced thatitwould expand itspresence inJapan through ajointventure withNagase toserve
theJapanese photographic marketplace directly. Thus, thetiming ofcapital liberalization for
photographic materials sector thushadnoimpact onKodak ’sinvestment plansduring the1970'sbecause
Kodak hadnoinvestment plans during thisperiod.
(h) Change indistribution policies
6.408 Withrespect totheUSallegation thatMITI’sdistribution policies established lessfavourable
competitive conditions forimported filmandpaper, Japan responds thatwhat matters iswhether
competitive conditions today arelessfavourable thanthose atthetimeoftherelevant tariffconcession .
6.409 Japan notes thatevenassuming thatMITI’salleged distribution policies oritseffects continue
tothepresent day,therehasbeennomaterial adverse change intheJapanese market structure forfilm
orpaper since 1967, andnoadverse change since 1979 or1994. Thetrend toward single-brand
distribution offilmbegan farinadvance of1967, andaffiliations between filmmanufacturers and
photofinishing laboratories werealready common bythenaswell. Thealleged measures thatoccurred
after1967 suchasthe1970 Guidelines were, according totheUnited States ’ownargument, merely
continuations ofpre-existing policy. Japan further points outthatinitsdiscussion oftheTokyo Round
claims, theUSmakes onlyallegations about the"promotion countermeasures" andtheLarge Stores
Law, buttheUSdoesnotevenmake allegations about "distribution countermeasures" withregard
totheTokyo Round. Japan concludes thatwithout anymaterial adverse change ingovernment policy,
there canbenoupsetting ofthecompetitive position andhence nonullification orimpairment.
871Seesub-section V.A.2. on"The development oftheJapanese filmmarket" above, inparticular para. 5.31.
872Kodak Intends toEstablish Stronghold inJapan: Pres. Whitmore, JijiPress Ticker Service, 26August 1986, Japan
Ex.A-21.
873WTOGATT Affidavit,AlbertL.Silg,FormerPresident,KodakJapan Ltd.,9Januar y1997, andWTOGATT Affidavit,
William Jack, Manager ofNewBusiness Development, Consumer Imaging, Eastman Kodak Company, 13February 1997,
USEx.97-1 andUSEx.97-2.WT/DS44/R
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(i) 1990 Guidelines
6.410 InJapan'sview, totheextent MITI’sdistribution policies havechanged since 1967 or1979,
thechange hasbeen favourable forthecompetitive position ofimports. Specifically, MITI’s
1990 Guidelines, which remain ineffect today, areexplicitly committed toencouraging changes in
distribution practices torender theJapanese market more accessible toimports. According toJapan,
theUnited States aspartofitsderegulation proposals recently urged Japanese industry toadhere to
those guidelines.874Since 1994, theUnited States hasnotidentified orevenalleged anychange at
allinMITI’sdistribution policies. Inlightofthesefacts, Japan concludes thatthedistribution policies
ineffecttodaydonotestablishconditionsofcompetitionlessfavourableforimportsthanthoseestablished
bythedistribution policies of1967, 1979, or1994.
6.411 Japanpointsoutthatthe1990Guidelinesaddressedexactlythesamekindsof"irrational"business
practices asthose targeted bythe1970 Guidelines, e.g.,rebates, returns anddispatched employees.
However, forthe1990 Guidelines, encouragement ofimports wastheguiding purpose fortargeting
these practices, given thattheyhadtheirorigin intheUS-Japan Structural Impediments Initiative
("SII")875atthedirect request oftheUnited States torender theJapanese market more accessible to
imports. In1996, theUSrequested Japan toensure adherence oftheitsbusiness community tothese
guidelines.876
(ii) Business Reform Law
6.412 TheUnited States submits thatwhen theUruguay Round ended, theexclusionary distribution
system thatJapan hadorchestrated aftertheKennedy Round, together withtheLarge Stores Lawand
thepromotion countermeasures, werecompletely embedded intheJapanese market andwerecontinuing
successfully toimpede market access forimported products likephotographic filmandpaper.
Nevertheless, Japan enacted yetanother measure toensure thatanytariffconcessions negotiated during
theUruguay Round would beoffset, ashadthose oftheTokyo andKennedy rounds.
6.413 According totheUnited States, in1995, theJapanese Dietenacted theSpecial Measures Law
toPromote Business Reform forSpecified Industrialists (Business Reform Law).877Thelawisintended
tofacilitate "reforms" bybusinesses inMITI-designated industries, which arebeing affected bythe
diversification andstructural changes inthedomestic andoverseas economic environment.878The
Business Reform Lawcontains afocus ondomestic production activities879inrelation to"new systems
concerning thedistribution ofproducts".880Thelawauthorizes abroad range ofassistance tobusinesses
thatarepartofadesignated industry, including: (i)preferential financing; (ii)taxincentives;
(iii)domestic andforeign business intelligence; and(iv)potential exemptions fromtheAntimonopoly
874Japan notes again thatthisUSrequest toencourage compliance withthe1990 Guidelines occurred aftertheUSpanel
request inthiscase.
875"Astotradepractices concerning distribution, animproved environment willbesought fromthestandpoint ofpromoting
competition andsecuring market openness". Final Report oftheJapan -USStructural Impediments Initiative, Actions on
Government ofJapan Side, 28June 1990, p.III-1, Japan ExB-30.
876"MonitorandreportonadherencebytheJapanese businesscommuni tytotheMITI 1990 GuidelinesonBusinessPractices
inorder topromote afree, transparent, andcompetitive distribution system". Submission bytheGovernment oftheUnited
States totheGovernment ofJapan Regarding Deregulation, Administrative Reform, andCompetition Policy inJapan,
15November 1996, p.7,Japan ExB-23.
877Special Measures LawtoPromote Business Reform forSpecified Industrialists ,LawNo.61,1995 [Jigyo Kakushin
NoEnkatsuka Nikansuru Rinji Sochi Ho](Business Reform Law), USEx.95-1.
878MITI Industrial Structure Division, Commentary ontheBusiness Reform Law, Article IofBusiness Reform Law,
USEx.95-4.
879Ibid.
880Ibid., p.13,USEx.95-4.WT/DS44/R
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Law.881Todate,MITI hasdesignated 165industries aseligible forassistance under theLaw, among
them"ManufacturersofCamerasandAccessories"882and"RetailBusinessofCamerasandPhotosensitive
Materials".883TheUS'current understanding isthatMITI hasneither received norapproved abusiness
reform proposal related tothephotographic filmandpaper industry.
6.414 Inviewofthebroad grant ofauthority represented intheBusiness Reform Law, thestatements
byMITI officials concerning theirintended application ofthelaw,andJapan'sactions overthelast
30years inrestricting import access intothissector, theUnited States hasserious concerns thatits
zero-tariff bindings, which represent theculmination ofnegotiations overthreemultilateral traderounds,
areatrisk. Intheparticular context ofgovernment-business relations inJapan, theenactment ofthe
Business Reform Law, andthedesignation ofthissector asoneeligible forassistance, havealready
sentasignal thattheJapanese Government isprepared tocontinue itssupport ofthissector. The
United States doesnotallege atthistimethattheBusiness Reform Lawhasalready nullified orimpaired
tariff benefits thattheUnited States reasonably expected inconnection withJapan’sUruguay Round
tariffconcessions onphotographic filmandpaper. Buttheclearpotential exists forthislawtobeused
toreinforce orsupplement theother measures ofprotection thatJapan hasimplemented inthissector.
6.415 Japan responds thattheUSdescription oftheBusiness Innovation Law(the"Business Reform
Law" asreferred tobytheUnited States) ismisleading. Thelaw'sfairtreatment ofdomestic and
foreign enterprises andproducts isevident notonlyfromthecontent ofthelaw,butalsofromthefact
thatseveral foreign-affiliated companies havereceived benefits under thelaw. Japan notes thatthe
lawwasnever applied tothephotosensitive materials retailing sector (theonlyeligible sector under
thelawwhich related tofilmandpaper) andasaresult ofaregular revision ofthecoverage ofthe
eligible sectors, eventhatsector isnolonger aneligible sector. Moreover, Japan emphasizes thatthe
United States specifically refrained from making anylegalclaims regarding thislaw.
4. RESTRICTIONS ONLARGE RETAIL STORES
(a) General overview oftheallegations
6.416 TheUnited States claims thatthesuppression oflargestores under theLarge Stores Lawaffects
thedistribution offoreign filminJapan intworespects: First, therestriction oflargestores indirectly
supports manufacturer domination ofoligopolistic distribution structures. Thisstructure depends on
manufacturer dominance ofwholesalers, andwholesaler dominance overretailers. TheUnited States
argues thatretailers withgreater purchasing power andbusiness sophistication could effectively play
thevarious wholesalers andmanufacturers offofeachother togainmore favourable terms, andto
resist attempts toholdtheretailers under thecontrol ofasingle manufacturer-wholesaler chain. Second,
theUnited States asserts thatlarge stores provide analternative channel tomarket forforeign
manufacturers excluded fromthewholesale distribution system. Withasufficiently developed network
oflargestores, amanufacturer could reach alargeportion oftheJapanese market withalimited number
ofaccounts.884Consequently, theUnited States claims thatJapan upset thecompetitive relationship
between imported anddomestic photographic filmandpaper byinhibiting thedevelopment ofaviable
alternative channel forthedistribution andsaleofimported filmandpaper.
881TheUnited States explains thatinorder toreceive assistance, abusiness inadesignated industry mustsubmit abusiness
reform plantothecompetent ministry (e.g., MITI) which must approve theplan. Assistance isavailable forretooling,
restructuring, expanding orcontracting operations, ormaking additional capital investment atgreatly reduced costs.
882Designation number 123, MITI Ministerial Order No.31,1995.
883Designationnumber 164. MITI MinisterialOrderNo.31,1995. Thelistof165industriesisprovidedforunder Article2
Clause 1oftheBusiness Reform Law.
884E.g., Agfa sellsabout halfofitsfilminJapan toasingle store chain, Daiei, Japan'slargest supermarket.WT/DS44/R
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6.417 Withrespect totheKennedy Round ,theUnited States submits thatatthesametimewhen Japan
closed offtheprimary Japanese distribution channels asthetraditional routes ofdistribution toimported
photographic filmandpaper, itbegan taking steps tocontrol thegrowth oflarge stores. According
totheUnitedStates,between1968and1971,MITIlimitedthegrowingnumberandcommercialviability
oflarge stores byissuing administrative guidance withaviewto:
(i) expanding andstrengthening theapplication oftheexisting Department Store Lawto
types ofstores notwithin thelaw'slegislated scope;
(ii) imposing prior notification requirements;
(iii) establishing adjustment procedures toreduce thesizeofproposed orexpanding stores;
and
(iv) limiting certain retailer activities suchasadvertising, bargain salesandpricing, and
hours ofoperation.
6.418 In1973, theDietapproved theLarge Stores Lawwhich became effective on1March 1974.885
Under thelawasitwasfirstenacted, builders andretailers ofstores larger than1,500 square meters
wererequired tonotify MITI prior tothecompletion ofconstruction ortheopening ofalarge store.
IfMITI determined thatthestorerisked causing asignificant impact onlocalsmall andmedium-sized
retailers, itcould subsequently adjust:
(i) thesizeofthestore;
(ii) theopening date;
(iii) thenumber ofholidays; or
(iv) thehours ofoperation.
6.419 TheUnited States alleges thattheenactment oftheLarge Stores Lawresulted infewer large
retail stores, stores ofsmaller size,andsubstantial delays inlarge store openings orexpansions.886
Thisinturnresulted insignificant limitations ontheopportunity forimported products topenetrate
theJapanese market through largestores. According totheUnited States, largestores wereextremely
valuable toforeign filmandpaper manufacturers because large stores:
(i) havethepotential toserve asanalternate route todistribute imported film;
(ii) havemore shelfspace tocarry secondary andtertiary brands, including imports;
(iii) typically purchase directly fromthemanufacturer, notfromprimary wholesalers; and
large stores havethecapacity toactassecondary wholesalers.
6.420 Therefore, theUnited States claims thatbyreducing theaggregate sizeandefficacy oflarge
stores, Japan upset thecompetitive relationship between imported anddomestic products and,in
conjunction withtheother countermeasures, effectively neutralized anybeneficial impact thatJapan's
Kennedy Round tariff concessions hadonUSexports offilmandpaper products toJapan.
885According totheUnited States, theDietacted upon advice bytheDistribution Subcommittee 'sTenth Interim Report
which recommended replacing theDepartment Store Lawwithanewlawthatwould apply toallstores ofaspecified size,
regardless ofstoretype. Industrial Structure Council, Distribution Committee, Retail Business Under Distribution Reforms,
TheDirection ofRevising theDepartment Store Law(Tenth Interim Report), November 1972, USEx.72-3.
886Frederick Nagai: Affidavit, pp.2-4,USEx.97-8. TheMITI Vision forthe1990'sstated thatunder theLarge Stores
Law, "therehavebeen ...instances inwhichtheadjustment process hasbeenneedlesslyprolonged" .AftertheImplement ation
ofthe"Large Store Law" Consistent Results from Time Restrictions, Camera Times, 11May1976, p.5,USEx.76-3.
After theLarge Stores Lawwasenacted in1974, thenumber ofapplications for"large stores" declined steadily overthe
five-year period 1974 to1978 (with theexception ofatemporary increase in1977) towellbelow the1974 level.WT/DS44/R
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6.421 Withregard totheTokyo Round ,theUnited States submits that,on11May1979, exactly one
month before theformal endofthenegotiating round, Japan implemented anamendment totheLarge
Stores Law887andMITI issued several directives. These amendments:
(i) dramatically expanded thescope oftheLarge Stores Lawwhich previously hadcovered
stores of1,500 square meters ormore byextending ittocover stores assmall as500
square meters;
(ii) delegated totheprefectural governors responsibility forregulating largestores between
500and1,500 square meters; and
(iii) gavesmall andmedium businesses amore significant roleintheformal review process
byrequiring thatbuilder notifications besubmitted 13months prior totheproposed
building completion dateduring which timethebuilder, proposed storeoperator and
localbusinesses would engage inan"informal adjustment process" tonegotiate changes
inthenotification.888
6.422 TheUnited States further explains thatinJanuary 1982, MITI gaveguidance toprefectural
governors discouraging acceptance ofanynotifications inareas having a"high level" ofstores larger
than1,500 square meters ordefined as"small inscale".889Atthesame time, MITI introduced a
requirement thatbuilders provide a"prior notification explanation" totheaffected community before
attempting tosubmit anotification toMITI.
6.423 According totheUnited States, thepost-Tokyo Round changes totheLarge Stores Lawhad
twoprimary effects. First, theperiod oftimebetween notification andthecompletion oftheadjustment
process increased significantly. Second, small andmedium retailers tookfulladvantage ofthe"pre-
notification explanation" and"informal adjustment" processes toextract adjustments thatwould not
berealized through theformal adjustment process.890TheUnited States claims that,asaresult, the
number oflarge store notifications declined sharply notwithstanding thattheamended lawregulated
stores ofmuch smaller sizethanthelawasoriginally enacted. Thisinturnupset theconditions of
competition between imported anddomestic photographic filmandpaper. TheUnited States stresses
thatMITI'sstrengthening oftheLarge Stores Lawwassoeffective thatretailers attempted tocircumvent
itbymerging withother retailers toavoid theinevitable difficulties anddelays involved intrying to
openanewlargestoreorexpand anexisting large store. InJuly1981, theJFTC issued special Retail
Merger Guidelines thatapplied ahighly restrictive market definition which hadtheeffect ofimpeding
retailers from using mergers toavoid theLarge Stores Law.891
6.424 IntheUSview, theregulations onlargestores significantly limited theopportunity forimported
products topenetrate theJapanese market through large stores. Thiswasaccomplished byfurther
887TheUnited States notes thattheamendment totheLarge Stores Lawwaspassed inNovember 1978, butdidnotbecome
effectiveuntilMay1979. TheUnitedStatesandJapan concludedtheirsubstantiveTokyo Round negotiationsonmany products,
including film, inthesummer of1978. Letter toWalter Fallon, President ofKodak, from Deputy Trade Representative
Alan Wolff of30August 1978, USEx.78-6.
888MITI Directive Nos. 365and366,11May1979, USEx.79-2and79-4. Theprior adjustment stepincreased the
restrictiveness oftheadjustment process byproviding anunofficial forum notattended byanyLarge Scale Store Council
officials inwhich localretailers could levydemands upon large scale stores. Because officials attheformal adjustment stage
required consensus from prior adjustment inorder toapprove anadjustment plan, thisprocess resulted inagreements and
memorandums ofunderstanding thatseverely limited thecompetitiveness oflarge scale stores. Agreements reached pursuant
totheinformal adjustment process were presented intheformal adjustment process andwere usedindeveloping theLarge
Store Council 'srecommendations toMITI forthereduction instore size,delay inopening date, andchanges inclosing times
andnumber ofholidays.
889MITI, Industrial Policy Bureau, Immediate Measures Regarding Notification toEstablish Large Scale Retail Stores,
Policy Bureau No.36,30January 1982, USEx.82-2.
890E.g., price restraints andpromises nottoenter intocertain product lines orservices.
891RetailMergerGuideline(extract):AdministrativeProcedur eStandardsforExami ningMergersforTransfer sofBusiness
intheRetailing Sector, 24July1981, USEx.81-6.WT/DS44/R
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reducing theaggregate sizeandefficacy oflarge stores asanalternative channel forthedistribution
andsaleofimported film. Intheabsence ofthegovernment 'sregulation oflarge stores, imported
filmwould havehadsubstantially greater opportunities fordistribution andsaleintheJapanese market
following theTokyo Round.892TheUnited States claims thattheJapanese Government imposed these
measures toneutralize theability offoreign producers tocapitalize onthemarket opportunities that
theylegitimately anticipated would emerge following thetariff concessions thatJapan made during
theTokyo Round andthusnullified andimpaired thebenefits ofthose concessions within themeaning
ofArticle XXIII:1(b).
6.425 AstotheUruguay Round negotiations, according totheUnited States, atthatpoint Japan's
trading partners knew thattheJapanese market wasdifficult topenetrate, butthewayinwhich the
Large Stores Law worked inconcert with thedistribution countermeasures andpromotion
countermeasures tosystematically offset tariff concessions forphotographic filmandpaper wasnot
known.TheUnitedStatesclaimsthatthiswebofliberalizationcountermeasureshascontinuedtooperate
tonullify orimpair USbenefits, interalia,duetothesharp diminution ofalternative channels toprimary
wholesale channels ofdistribution.
(b) Effect oftheLarge Stores Lawonimported products
6.426 Japanarguesthatinanon-violationcasethecomplainingpartymustshowhowthe"application"
ofameasure tospecific products nullifies orimpairs benefits withrespect tothose products. Since
thebenefit consists oflegitimate expectations concerning thecompetitive opportunities forimported
products, itfollows thatforameasure tonullify orimpair thatbenefit, itmust"apply" totheproducts
inquestion.893
6.427 Japan notes thatinthepresent casetheUnited States bears theburden toshow specifically
howtheapplication oftheLarge Stores Lawtothespecific products atissue, i.e.,black andwhite
filmandpaper, andcolour filmandpaper, nullifies orimpairs some benefit. Japan maintains that
thelawanditsimplementing regulations neither apply directly tofilmorpaper, nortoanyproduct
generally.
6.428 Further, Japan submits thatthelawdoesnotdistinguish between domestic andimported film
andthusthere isnoexplicit disadvantage imposed onimports. Furthermore, theregulation oflarge
stores under thislawalsodoesnotimpose anyinherent disadvantage onimports andthere isnothing
intrinsic inthenature ofimports thatrenders them lesscapable ofcompeting inamarketplace where
adiversity ofretailing types ispromoted.894Accordingly, thelawcannot beupsetting thecompetitive
position ofimported photographic filmandpaper.
6.429 Moreover, Japan points outthattheLarge Stores Lawdoesnotvestthegovernment withthe
authority torecommend ororder anystoretocarry certain products orproducts ofacertain origin.895
Inaddition, theregulations imposed bythelawonlargestores donotdepend ontheorigin ofproducts
carried bylargestores orsmall retailers within theirvicinity. Thus, thelawdoesnotcreate anyartificial
incentive forretailers tobuydomestic film,nordoesitdiscourage retailers frombuying imported film.
ForJapan, there isthusnoreason tobelieve thatlarger retail space inherently works totheadvantage
892TheUnited States notes thatfrom 1990 to1992, Japan made anumber ofchanges tothelaw,purportedly toreduce
itsadverse impact ontheoperation oflarge stores. Asthe1995 JFTC Study documents, however, these amendments failed
toalleviate themajor restrictive impact ofthelaw.
893Japan recalls thatallprevious findings concerning non-violation complaints haveaddressed onlytwospecific typeof
measures: product-specific subsidies andtariffs, which have been clearly "applied" totheproducts inquestion.
894SeeUnited States -Automobiles ,GATT Doc. DS31/R, para. 5.14.
895Japan claims thattheonlydistinction thelawdraws withrespect toproducts istoapply more liberal rules withrespect
toretail stores thatcarry imported products.WT/DS44/R
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ofimported filmproducts, because retailers choose products tomaximize profit, andthesizeofretail
space does notchange theprofitability offilmproducts totheadvantage ofdomestic brands.
Accordingly, thelawisthusincapable ofaltering evenindirectly thecompetitive conditions between
domestic andimported products.896Japan concludes thatitisnotpossible forthislawtofrustrate any
reasonable USanticipation concerning specific products atthetimeofanyoftherelevant tariff
concessions.
6.430 TheUnited States points outthatithasbeenestablished under GATT jurisprudence that
investment measures can"affect" trade ingoods within themeaning ofArticle III,andtherefore are
notexempted from being thesubject ofdispute settlement. Thepanel onCanada -Administration
oftheForeign Investment Review Act("Canada -FIRA") found thatprovisions inCanada 'sinvestment
lawhadadirect impact ontrade ingoods.897
"...thePanel could notsubscribe totheassumption thatthedrafters ofArticle IIIhad
intended theterm"requirements" toexclude requirements connected withtheregulation
ofinternational investments anddidnotfindanything inthenegotiating history, the
wording,theobjectivesandthesubsequentapplicationofArticleIIIwhichwouldsupport
suchaninterpretation".
TheUnited States emphasizes thattheCanada -FIRA panel made clear thatitwasexamining the
challengedpracticesundertheFIRA"solelyinthelightofCanada's"tradeobligations"undertheGeneral
Agreement".898
6.431 Japan responds thattheCanada -FIRA panel'sholding wasquite narrow andprovides an
important benchmark foracomparison withthebroad measures atissueinthisdispute. Specifically,
Japan notes thatthepanel'sconsideration waslimited toinvestment measures thatwere conditional
uponthepurchase andexport oforigin-specific products. Thus, theCanadian measures werenotbroad,
faciallyneutralrequirementsliketheLargeStoresLaw,butratherorigin-specificrequirementspertaining
toproductswhichhappenedtomanifestthemselvesasconditionstomorebroadinvestmentrequirements.
6.432 TheUnited States further submits thatprevious panels found thatameasure maybeinconsistent
withArticle III:4ifitaffects thedistribution ofproducts, regardless ofwhether themeasure "directly
governs" treatment ofproducts, orrather regulates service providers anddoesnotdirectly regulate
products.899Intheview oftheUnited States, thestandard certainly should benohigher under
Article XXIII:1(b), where theissue iswhether there isnullification orimpairment ofbenefits "asthe
result of...theapplication byanother contracting party ofanymeasure, whether ornotitconflicts
withtheprovisions ofthisAgreement".
6.433 Japan recalls thatinthecontext ofArticle III,theUnited States itself hasargued that
"governments make regulatory distinctions formany reasons thathave nothing todowithtrade
protection" onspecific products. Japan mentions thatinitssubmission inJapan -Taxes onAlcoholic
Beverages case, theUnited States commented onbroad based lawsthatmayaffect thedistribution of
foreign origin goods, andargued thatthese types oflawsshould notviolate Article IIIsimply because
896Large Scale Retail Store Law, Article 7,Japan Ex.C-1.(Deliberation Procedures, Section I,Japan Ex.C-4). Japan
notes thattheUnited States hasnotchallenged thischaracterization andrather seems toclaim thatlarge stores favour foreign
products while smaller stores carry more domestic filmbecause oftheallegedly exclusive distribution network forfilm.
897Adopted on7February 1984, BISD 30S/140, 161, para5.12.
898Ibid. p.157, para. 5.1.
899SeealsoPanel Report onCanada -Certain Measures Concerning Periodicals ,adopted 30July1997, WT/DS31/R,
p.2,paras. 5.13-5.19. (Panel found thatmeasure could becovered byArticle IIIwhether ornotGATS could alsoapply
tothatmeasure).WT/DS44/R
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ofadisproportionate impact. Inparticular, theUnited States hypothetically examined Sunday retail
closing laws, which areverysimilar totheLarge Stores Lawatissue here:900
"Many jurisdictions haveadopted Sunday closing laws, which disproportionately affect
supermarkets andotherlargeretailbusinesses which distribute goods offoreign origin.
These stores sellexactly thesame products onSunday andontheother daysofthe
week. Wedoubt thatsuchmeasures should bedeemed tobeviolations ofArticle III
simply because ofthedisproportionate impact ofSunday closing lawsonimports".
6.434 Japan alsorecalls thatinthecontext ofArticle XXIII:1(b) theUnited States argued before the
panel onEEC-Oilseeds :"TheUnited States didnotconsider thatanychange ingovernmental policies,
evenifithasharmful tradeeffects, constitutes non-violation nullification orimpairment".901TheUnited
States thenwentontogivethespecific example thatachange inincome taxrateswould falloutside
Article XXIII:1(b).902InJapan'sview, theLarge Stores Lawisindistinguishable interms ofitsnature
fromtheexample ofachange inincome taxratescitedbytheUnited States. Even ifpeople withhigher
income tendtopurchase moreimported products, theintroduction ofprogressive income taxrateswould
notbeactionable under Article XXIII:1(b), despite thegreater impact onthose whotendtobuymore
imported products. Japan contends thattheLarge Stores Lawdoesnotregulate anyofthespecific
products atissue here, i.e.,black andwhite orcolour filmandpaper. Whereas GATT disputes have
traditionally focused onhowspecific measures affect specific products, thelawinquestion inthiscase
doesnotdraw distinctions withrespect tofilmorpaper, orevenmention them. Accordingly, Japan
concludes thattheLarge Stores Lawcannot upset thecompetitive position ofimported products within
themeaning ofArticle XXIII:1(b).
6.435 Japan suggests thatunder theoverbroad UStheory ofArticle XXIII:1(b), virtually every form
ofgovernment policy would become actionable asmeasures potentially relating tospecific products.
Forexample, allrestrictions oninvestment would become actionable, because investment could relate
toefforts tosellproducts. Japan believes thataclearnexus mustexistbetween specific products and
thechallenged government measure, andthattheUSallegations concerning theLarge Stores Lawdo
notmeetthistest.
900Panel Report onJapan -Taxes onAlcoholic Beverages ,adopted 1November 1996, WT/DS8, 10and11/R, para.
4.40. Appel lateBody Repor tonJapan-TaxesonAlcoholicBeverages,adopted1November 1996, WT/DS8,10and11/AB/R,
p.21.
901EEC -Oilseeds ,BISD 37S/86, 117-118, para. 114.
902Ibid.WT/DS44/R
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(c) Causal connection
6.436 TheUnited States recalls thatrecent Japanese Government studies document thatlargestores
aremore likely tocarry imports thansmall stores.903Thereasons forthisgreater "import friendliness"
oflarge stores include theirgreater shelfspace which allows them toofferadiversity ofbrands, and
theireconomies ofscale thatmake direct-to-retail sales efficient forforeign suppliers. TheUnited
States points outthatnumerous other studies byJapanese Government, industry, andacademic experts
alsofound thegreater likelihood oflarge stores tocarry imports.904TheUnited States alsoclaims
tohavesubmitted amethodologically rigorous survey demonstrating thatlarge stores aremore likely
tocarry foreign film. Specifically, according tothatsurvey, foreign filmwasavailable in40percent
ofstores under 500square meters, 49percent ofstores between 500and2,999 square meters, and
63percent ofstores 3,000 square meters andgreater. Moreover, theUnited States ’analysis ofthe
retail filmsurvey conducted forthiscaseandsubmitted bytheJapanese Government reveals thatstores
subject totheLarge Stores Lawweresignificantly more likely tocarry foreign filmthansmall stores
(those under theLarge Stores Lawfloorspace minimums).905
6.437 InJapan'sview,theUnitedStateshasnotprovedthatrestrictionsonlargestoresimpedeimports
offilmorpaper. AstotheUSargument thatlarge stores areespecially accessible toimports because
ofeconomies ofscale intheirpurchasing activities, Japan responds thatthepresence ofeconomies
ofscale isnotdependent upon retail floor space.
6.438 With regard totheUSevidence showing acorrelation between store sizeandpropensity to
sellimported film,Japan responds thatthisevidence failstotakeintoaccount thetypeofretail outlet
andtherelative filmsales volume oftheoutlets surveyed. InJapan'sview, proper analysis shows
thattheavailability ofimported filmhasnocorrelation withthestore size,inparticular because of
thesmall sizeoffilm. Japan presented theresults ofasurvey ofapproximately 2,000 stores, comparing
903TheUnited States citesthefollowing Japanese Government studies insupport ofthese points:
(i) A1989 study bytheEconomic Planning Agency found thatrelaxing therestrictions onlarge stores would promote
compet itionand"facilitatethepromotionofimports;"Economi cPlanningAgency, PlanningBureauResear chrelated
toImpact Prices, 1989, p.23,45,USEx.89-1.
(ii) AJune1995 study bytheJFTC 'sGovernment Regulation andCompetition Policy Research Council found that
Japan'sregulation oflarge stores interfered withtheexpansion ofimports ofproducts; JFTC Concerning the
Reevaluation ofGovernment Regulations intheDistribution Sector, June 1995, USEx.95-11.
(iii) Another 1995 study bytheJFTC found thattherestrictions onlarge stores hindered price competition andimports;
JFTC, Research onDomestic andImported Products SoldatLower Price, June1995, pp.29-30, USEx.95-10.
(iv) ADecember 1995 study bytheSmall andMedium Enterprise Agency found thatstores withhigher annual sales
were more likely tocarry imports. MITI Medium andSmall Industry Agency, Medium andSmall Retail Data
Book: Current Situation andIssue intheMedium andSmall Retail Industry, 1December 1995, pp.96,98,
USEx.95-19.
Japan responds thatnone ofthese studies makes anyattempt tosupply anystatistical datainsupport ofthecontention that
large stores generally aremore likely tocarry imported products thansmaller ones.
904Examples cited bytheUnited States include:
(i) In1987, Japan'sleading business association thatincludes allmajor manufacturing exporters, theFederation of
Economic Organizations, issued aproposal forstimulating imports ofmanufactured goods intoJapan. Theproposal
noted that"large-scale retailers areactively selling imported products andhave plans tocontinue doing so,but
ontheother handavariety ofregulations make itdifficult tocarry outthese plans [including theLarge Stores Law]".
Proposal OnTheStimulation ofImports ofManufactured Goods Based OnTheResults ofCaseStudies ofIndividual
Products, Japan Federation ofEconomic Organizations, 22September 1987, USEx.60.
(ii) In1982, aJFTC study concluded, "therelatively small sizeofthestores andlimited retail floor space ...imposes
alimitonhowmany different products theycancarry". Thestudy alsofound, "most department stores andmajor
supermarkets have taken apositive stance toward introducing foreign brand name products". Kyoso Mondai
Kenkyujo, Kosei Torihiki Joho, 17May 1982, USEx.43.
905Seesub-section V.B.2.(a) on"Import-friendliness oflarge stores" above, inparticular para. 5.243.WT/DS44/R
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therelative foreign filmbrand availability instores covered andnotcovered bytheLarge Stores Law:
Theavailability wasessentially identical.906
6.439 TheUnitedStatescontendsthatthefactthatfilmisasmallproductisirrelevanttothecorrelation
between store sizeandimports. While asingle rolloffilmmight nottakeupmuch room, carrying
several different types andspeeds offilmfrom several different manufacturers takes upconsiderable
retail space. Ifaretailer carries afulllineofonebrand offilm,tocreate competing displays forKodak,
Fuji, Konica, andAgfa would mean quadrupling thefloor space dedicated tofilm. Accordingly, it
isnotthesizeoftheproduct thatmatters, butthesizeofthedisplay fortheproduct inallitsvariations
andallthecompeting brands thatistheissue.907Inmoststores shelfspace isaprecious commodity,
andeachretailer mustmake choices about howmany different types ofproducts anddifferent brands
tocarry. TheUnited States concludes thatlimitations onfloorspace bytheoperation ofgovernment
regulation verymuch canaffect thechoices thatretailers make about thenumber ofbrands anddiversity
ofproducts theywillcarry.908
6.440 Japan responds thatretailers donotnecessarily display afull-line ofonebrand. They may
sellapartial linesofseveral different brands based upon theirownbusiness decisions astowhich
productsandwhichbrandswillmaximizeprofit.Thus,evensmallconveniencestoresmaycarrymultiple
brands, while large stores donotnecessarily havealarge areadevoted tofilm.
6.441 With respect toJapan'scontention thatinstead ofthecorrelation between astore'ssizeand
itslikelihood ofcarrying foreign film, abetter correlation isbetween astore'svolume offilmsales
anditslikelihood ofcarrying foreign film,theUnited States responds thatthese twofindings arenot
mutually exclusive ifastore'svolume offilmsalescorrelates withitssize. IntheUSview, alarge
store isalsomore likely tohaveahigher volume offilmsales, andinbothcases itismore likely to
carry foreign film. TheUnited States argues thatingeneral larger stores havehigher volume sales909
andthatJapan hasnotsubmitted credible datatoshow thatthislogical correlation doesnotapply in
906Survey conducted byNippon Research Centre Ltd.andCommissioned byFujifilm during theSection 301proceedings.
Fujifilm 'sRebuttal Regarding theAlleged "Distribution Bottleneck", 21December 1995, Japan Ex.A-16.
907Afulldisplay ofKodak filmwould include, ataminimum, 100,200, 400,and1000 ASA colour film, inrollsof
12,24,and36exposures, forslides andforprints, aswellasblack andwhite filmand"multipacks" combining rollsof
various speeds, andsingle-use cameras. Inthecolour filmproduct linealone, Kodak offers thefollowing items: Super
Gold in100,200,400and1600 -insingle rolls(12,24,35,and36exposures), andin2,3,4,or5rollpacks; Royal Gold
in25,100,and400-insingle rolls(24and36exposures), and2,3,or5rollpacks; Ectochrome Dyna in50,100,200
and400-insingle rolls(24and36exposures), and5and20packs; Chrome in25,64,and200insingle rolls(24and
36exposures), and3and10packs; single usecameras infivedifferent varieties including anewAPSversion.
908Inaletter ofDecember 1996 toMITI, Japan'slargest photospecialty retailer, Yodobashi, makes clearthatadownward
revision ofitsfloorspace plans foranewstore affected theretailer 'sability tomarket foreign filmasithadplanned. The
letter protested thedecision inthelarge-store review process toreduce thestore'sfloorspace from theproposed 8,050 square
meters tosmaller than6,500 square meters: "...ifwereduce thestore'sfloorspace, asituation canbeanticipated inwhich
ourcompany 'sstore-opening planitself might become impossible toimplement. Moreover, even ifwetriedtomaintain
thepreviously planned efficiency using thereduced floor areabychanging thecontent ofourstore plan, wewould have
noother choice thantodrastically change theplansothat,forexample, thesales display ofimported film...would have
tobereduced". Letter Form Akikazu Fujizawa, President, Yodobashi Camera K.K. toDirector General Tohoku Region
Trade andIndustry Bureau, MITI, Members oftheTohoku Committee andLarge Retail Store Deliberation Council, RE:
Report from Yodobashi Camera toMITI Concerning theOpening ofTheir NewRetail Store inSendai, 6December 1996.
USEx.102.
Inresponse, Japan points outthatintheletter, thePresident notes thatshelf-space forimported filmwillhave
tobecutback, butalsoexplains therealreason forthispolicy isthepoorsalesrecord ofimported film, notitsforeign origin.
Moreover, according toJapan, thestore inquestion, Yodobashi Camera, isactually selling imported filmtoday.
909Datapublished byMITI show adirect correlation between storesizeandannual salesinJapan: e.g.,lessthan1percent
ofthesmallest stores (lessthan33square meters) haveannual sales greater than300million yen,while percent ofthelargest
store category (more than218square meters) havesales inexcess of300million yen. MITI, Current Status andChallenges
Facing Small andMedium-Sized Retailers, 1December, 1995, p.1,USEx.92.WT/DS44/R
Page279
thecaseofphotographic film.910Infact,ananalysis oftheJapanese survey datasubmitted attheUS
request911reveals thatstores subject totheLarge Stores Lawweresignificantly more likely tocarry
foreign filmthansmall stores (those under theLarge Stores Lawfloorspace minimums), andthatthe
stores subject tothelawalsosoldhigher volumes offilm.912TheUnited States concludes thatJapan
hasrefuted neither thegeneral studies northefilm-specific study showing aclearcorrelation between
storesizeandlikelihood todealinimports. TheUnited States maintains thatthesuppression oflarge
stores inJapan isasuppression ofsalesopportunities forimports.913
6.442 Japan further argues thatbothofthesurveys agree thatastoreselling ahighvolume offilm,
forexample photospecialty stores andsupermarket stores, arelikely tocarry multiple brands tomeet
theirconsumers ’demand, while others likekiosks tendnottodoso,asdescribed inSection V.B.2(c)
above. Japan further points outthatitisclearthatwhatamarket survey shows isnotthecompetitive
relationshipbetweenproducts,buttheresultsofmarketcompetition,whichisgeneratedfromthecomplex
interaction ofvarious factors, among which thecompetitive relationship isnomore thanonefactor.
Thus, competitive relationship cannot bededuced from market survey results.
6.443 ForJapan, theUnited States claims regarding theLarge Stores Lawdonothaveanylogical
relevance tophotographic paper, sincethatisaproducer, notaconsumer product. First, photographic
paper isnotsoldatretail, itisrather soldtophotofinishing laboratories which arevirtually never covered
bytheLarge Stores Law. Second, theUSargument about discouraging multiple brands isirrelevant
inthecontext ofphotographic paper because nopurchasers usemultiple brands ofpaper atthesame
time. Thus, inJapan'sview, theLarge Stores Lawdoesnotaffect thepropensity ofaphotofinisher
tochoose domestic orforeign brands ofphotographic paper.
(d) Change inpolicies orcontinued restrictions oflarge stores
6.444 TheUnited States argues thattheconcern thatlargestores would undermine themanufacturer-
dominated distribution system isrecurrent insurveys byJapanese Government: Itisreflected inthe
1969survey oftransaction terms inthephotographic filmsector;914in1986, theEconomic Planning
Agency made thesame connection;915in1989, aJapanese survey drew thesame connection between
910TheUnited States criticizes thatJapan presents anunusable diagram, withanunreadable scale, based onindefensible
methodology, from which noconclusion canbedrawn.
911First Panel Meeting, Japan'sResponse toUSQuestion 2.
912IntheUSview, aswithanyscientific study, credibility depends onsubmitting theentirety ofone'sdataandanalysis
forscrutiny andverification byother experts. TheUnited States inthiscaseprovided theentirety ofitsdatatoJapan, including
each individual questionnaire response.
913TheUnited States hasperformed another runofitsdatausing store typeasaproxy forsales volume. Specifically,
theUnited States sorted itsdataontheassumption that:(I)kiosks, small convenience stores, pharmacies, andcleaners were
likely todealinsmall volumes offilm; (ii)large convenience stores, convenience stores attourist sites, andgrocery stores
were likely todealinintermediate volumes offilm; and(iii)photospecialty stores, supermarkets, anddiscount stores were
likely todealinthelargest volumes offilm. According totheUnited States, thisdatashows thatthecorrelation between
store sizeandimports holds even when controlling forsales volume, (i.e., these store types).
Inresponse, referringtothecategory(iii)above, Japanarguesthatthetwosurveysthemsel vesindicatenomeani ngful
difference intheimported filmavailability atstores included inthiscategory, regardless ofwhether thestore sizeisabove
orbelow 500square meters. Theremaining stores -notmajor distribution channels offilm-consist ofconvenience stores
andkiosks forthemost part, andshow thelower availability ofimported film. Stores selling ahighvolume offilm, for
example, photospecialty stores andsupermarket stores, arelikely tocarry multiple brands tobestmeetconsumers ’demand,
while other stores likekiosks tendnottodoso.
914Institute ofDistribution Research, Fact-finding Survey Report Pertaining toTransaction Terms: Actual conditions
ofTransaction Practices intheWholesale Industry, March 1969, pp.1-21, 287-319, USEx.15.
915"What arethefactors behind suchalarge number ofmicro-sized retail stores inJapan? Thefollowing factors may
becited...(3)keiretsunization ofdistribution byoligopolistic manufacturers". Distribution andBusiness Practices ofImports,
Edited bythePrice Policy Department, Price Bureau, Economic Planning Agency, 28March 1986, USEx.54.Inaddition,
theUnitedStatespresentsaneconomi canalysisfromJapanese antitrustscholarsthatconfirmtheconnect ionbetween restrictions
onlarge stores andJapan'soligopolistic distribution system. These scholars explain thattheLarge Stores LawdisruptedWT/DS44/R
Page280
thegrowth oflarge stores andachallenge tovertically integrated distribution.916IntheUSview, this
demonstrates thatconcern about themarket power oflargestores andchain stores persists inallsegments
ofthemarket.917
6.445 Japan responds thatitwasnever theintention oftheJapanese Government toprotect thealleged
oligopolistic, manufacturer dominated distribution structure intheJapanese filmmarket. Onitsown
terms, theLarge Stores Lawregulates largestores without regard towhatrelationship theyandnearby
small andmedium-sized retailers havewithanymanufacturer ordistributor. Japan points outthat
theLarge Stores Lawwasdesigned topreserve adiversity ofretailing outlets, apolicy pursued by
many national andlocal governments around theworld. Accordingly, thelawdoesnotregulate
convenience store chains, which areoutside thealleged exclusive distribution network ofdomestic
manufacturers, andwhich arecompeting withsmall retailers thatmayhaveaparticular affiliation with
domestic manufacturers. Japan further submits thatthematerials citedbytheUnited States donot
support theUSclaims; forexample, the1969 report simply notes theneedforexisting stores to
streamline commercial practices toimprove theirefficiency.
6.446 Japan points outthat,while thelawandits1978amendments werepassed afterthe1967tariff
concessions, thesechanges represented an"outgrowth" ofpre-existing policy, namely theDepartment
Store Lawof1956. Japan emphasizes thattheLarge Stores Lawismore liberal thantheDepartment
Store Lawwasin1967, inparticular, inlightofitsmoreliberal notification system andfewer regulations
onstore holidays andclosing time.
6.447 Further, Japan asserts thattheLarge Stores Lawtoday ismore liberal thanitsoperation in
1994. Thus, evenifitwereaccepted thatrestrictions onlarge scaleretail stores areunfavourable to
imported products, thelawisnowmore favourable toimports. Three setsofderegulation oftheLarge
Stores Lawduring theearly1990s werecompleted by1994, andtherehavebeennosignificant changes
since then. Inparticular, Japan explains whythelawiscurrently more liberal thanin1979: Thelaw
doescurrently notmake anyadjustment foraclosing timethatisnolaterthan8:00p.m., orforstore
holidays nofewer than24days; whereas in1979, thecorresponding figures were6:00p.m.and48
days. Since 1994, thelawhasalsobeenliberalized largely toexclude stores inthe500square meters
to1,000 square meters range fromthenormal adjustment procedures under thelaw.918Japan further
emphasizes thatefforts bytheJapanese Government toensure thatlocalgovernments more faithfully
adhere tothenational standards foradministering thislawmake itmore liberal.
6.448 Japan submits thatinthealternative, ifthechanges inmeasures which occurred aftertherelevant
tariffconcessions arenotcurrently ineffect, butwerenonetheless deemed relevant toadetermination
regarding theupsetting ofthecompetitive position ofimports, the1978 amendments extending the
reach ofthelawfromstores with1,500 square meters tostores withasfewas500square meters could
"pursuit ofeconomies ofscale" inthedistribution sector, which contributed toinefficiency andalackofcompetition inthe
distribution sector. Thisinturn"had provided acomfortable profit source forJapanese exporting firms" andhadworked
"toforeclose theaccess offoreign products intotheJapanese market". Thescholars added, "[a]distributor 'sdependence
onaparticular manufacturer would make distribution channels exclusive andraise entry barriers significantly". The
Antimonopoly Laws andPolicies ofJapan, J.Iyori andA.Uesugi, Federal Legal Publications, Inc., 1994, p.293,USEx
94-1.
916InJune1989, theEconomic Planning Agency (EPA) concluded thatderegulation ofrestrictions onstores would: "not
onlyserves toencourage horizontal competition among different types ofbusinesses, butalsoencourages vertical competition
through theexercise ofbuying power, thereby producing theresults andeffects ofarelative lowering ofcommodity price
levels andbroadening thelineofproduct offered through thepromotion ofdevelop-and-import schemes". EPA, Economic
Theory ofDeregulation, 10June 1989, USEx.64.
917Asageneral matter, intheUSview, there canbenodoubt thatlarge stores tendtohave more market power than
small stores. TheUnited States submits thatsurveys andstudies performed byandfortheJapanese Government repeatedly
make theconnection between controlling large stores andprotecting theoligopolistic distribution system.
918Japan argues thatstores inthisretail space range areinprinciple exempt from theLarge Stores Lawprocess andthat
only2.9percent ofstores inthisretail space range hadtogothrough thelaw'sfullprocess.WT/DS44/R
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beseenasaregulatory tightening. However, Japan argues thatthese changes were already partof
theoperating environment ofthelawby1979. With respect totheUScomplaints about alleged
regulatory tightening intheearly 1980s, Japan responds thatthese allegations arelegally irrelevant
sincethose measures havesincebeenrepealed. Therelevant comparison isbetween current competitive
conditions andthecompetitive conditions, atthetimeoftherelevant tariffconcession, notcompetitive
conditions thatmayhaveoccurred along theway.
6.449 TheUnited States responds thatstores withafloorspace oflessthan500square meters, e.g.,
convenience stores, arefrequently subject toreview andadjustment under themeasures applied by
localgovernments.919Japanese Government studies havefound thatthese localregulations continue
tobewidespread andthattheyimpose asignificant burden ontheopening ofstores lessthan500square
meters. Justasunder theLarge Stores Law, thelocalmeasures frequently require abuilder orretailer
toprovide advance notice ofitsplans toestablish orexpand anewstore, andtoundertake adjustments
withlocalcompetitors. Insupport ofthisposition, theUnited States provides anagreement between
aconvenience storeretailer andalocalshopping center association inwhich theassociation made several
demands oftheretailer. Intheend,theretailer feltcompelled toenter intoanagreement withthe
shopping center, which among other things limited theretailer ’sfloorspace, mandated certain holidays
andclosing times, restricted theretailer ’sability to"sellcompeting products atasignificant discounted
price," andrequired theretailer toadvertise onbehalf ofitscompetitors.920
6.450 Japan responds, however, thatinJanuary 1992 theGovernment expressly abolished
administrative guidance regarding priorexplanation, andmade thisfactwellknown toalltheprefectural
andmunicipal governments, aswellasalltheMITI branches byCirculars. Since then,thegovernment
hasmade itsbestefforts tocorrect anylocalregulations which require orrecommend priorexplanations
orprior adjustments, andconsequently, nosuchlocalregulations exist.
6.451 Further, Japan points outthatatthestage oftheCouncil deliberation, itisneither MITI nor
prefectural governments, buttheCouncil itselfthatselects parties topresent theirviews. Therelevant
circular requires thatthose parties include consumers andneutral persons oflearning andexperience,
andthatthechoice ensure equitable representation. Further, according toJapan, theUnited States
relies onseveral erroneous translations ofthecited reports bytheJapanese Government insupport
ofitscontention thattheCouncil isstrongly influenced bylocalretailers.
6.452 TheUnited States rejects Japan'sarguments thattheLarge Stores Lawandrelated measures
donotcurrently suppress thegrowth oflargestores, andthatthelawhasbeenliberalized significantly
inrecent years. IntheUSview, Japan doesnotappear torefute thefactthatthelawaggressively
checked thegrowth oflarge stores inpastyears, butrather asserts thatitliberalized thelawinthe
early 1990s.
6.453 TheUnited States maintains thattheoperation andapplication oftheLarge Stores Lawdoes
currently suppress thegrowth oflarge stores aswellasthatJapan hasimposed restrictions onlarge
storesfordecadesinthepast.Thissuppressionoflargestoreshassupportedtheoligopolisticdistribution
system,andhaslimitedanalternativechannelforforeignproductstoreachtheJapanesemarket.Without
Japan'sstrong measures against largestores, intheUSview, largestores might havebrought sufficient
bargaining power andcompetition intotheJapanese distribution system toerode theexclusive vertical
control overdistribution exercised byJapanese manufacturers.
919According totheUnited States, Japanese Government studies havefound thatlocalregulations continue tobewidespread
andimpose asignificant burden ontheopening ofstores lessthan500square meters.
920Arrangement Between ANew Retail Store andtheLocal Shopping Center Association, 1996, USEx.93.WT/DS44/R
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(e) Conclusions
6.454 TheUnited States summarizes thatithasdocumented conceptually, empirically, andanecdotally
howtheformal andinformal adjustment processes continue toimpose substantial burdens onthe
establishment andoperation oflarge stores inJapan.
6.455 Conceptually ,theUnited States explains that:
- Floor space reductions reduce store revenue, andtherefore mayforce aretailer to
operate atasizelessthanoptimal foritsprofitability.921
6.456 Empirically ,theUnited States argues thatithasdemonstrated thattheformal andinformal
adjustment procedures continue tobeapplied aggressively:
(i) According totheUnited States, datasubmitted byJapan indicates thatin1992to1995,
floorspace reductions wereimposed in22to27percent ofthecases. Forthese cases,
theaverage amount offloorspace reduction was24percent. Thus, eventoday, after
thesupposed liberalization, one-quarter oflarge stores facereductions ofone-quarter
oftheirproposed floor space. FortheUnited States, thisisasignificant burden on
large stores. Moreover, information submitted byJapan indicated thatin4percent
ofstorenotifications, theformal adjustments imposed aresoburdensome astocause
thestore tocancel itsplans toopen.
(ii) Information submitted byJapan alsodocuments thatapproximately one-quarter oflarge
stores areforced toaddholidays andshorten hours ofoperation.
(iii) TheUnited States point outthatthese numbers greatly understate theextent of
reductions, since, astheJapanese Government itselfdocuments, inmany cases stores
undertake adjustments asaresult oftheinformal adjustment process thattakes place
before astoresubmits formal notification. According totheUnited States, theJapanese
Government documents thatmany stores arelikely toprefer tomake theiradjustments
throughtheinformalprocess,sinceiftheyfailtoreachconsensuswiththeircompetitors,
theymaybesubjected toanevengreater adjustment intheformal process.
6.457 Anecdotally ,theUnited States reported onseveral cases inwhich stores faced significant
adjustments andrestraints ontheiroperations asaresult ofeither theformal orinformal adjustment
process.922
6.458 Japan contends thattheUnited States hasfailed todemonstrate howtheLarge Stores Law
currently nullifies orimpairs tariff concessions forconsumer photographic film.
a. Conceptually,JapanpointsoutthattheUnitedStateshasfailedtoexplainwhyrestrictions
onlargestores alterthecompetitive conditions relating tothespecific product, i.e.,consumer
film,soastodisadvantage imports. Japan emphasizes thatthelawdoesnotinanywayregulate
which products arecarried bylarge stores, much lesstheorigin ofthese products; similarly,
thelawdoesnotregulate large stores based onwhich products theyorthesmall retailers in
theirvicinity carry, much lesstheorigin oftheproducts theycarry. Japan argues thatretailers
921TheUnited States submits recent evidence from aretailer describing therevenue lossfordifferent levels offloorspace
reduction, aswellasanindustry journal report attributing declines intheprofitability ofJapan'slargest retailer toreductions
initsfloor space andoperations arising from theLarge Stores Law.
922See,sub-section V.B.6.(a) on"Adjustments under formal procedures" above, inparticular para. 5.330.WT/DS44/R
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choose products tomaximize profits, andthatthere isnoreason tobelieve thatrestrictions
onthesizeofretail space changes therelative profitability offilmproducts totheadvantage
ofdomestic brands offilm. Moreover, Japan explains thatthere isnoreason tobelieve that
small andlarge stores approach profit maximizing differently.
b. Empirically ,Japan argues thattheUnited States alsohasfailed todemonstrate any
causal connection between restrictions ontheoperations oflarge retail stores andthesaleof
importedconsumerphotographicfilm.ForJapan,althoughthecompetitiverelationshipbetween
products cannot bededucted frommarket survey results, theonlyverifiable survey relied upon
bytheUnited States failed toactually takeaccount ofeither thetypeofretail outlet orthefilm
salesvolume oftheoutlets surveyed. Further, bothofthesurveys indicate thatstores selling
ahighvolume offilm,forexample, photospecialty stores, andsupermarket stores, arelikely
tocarry multiple brands tomeettheirconsumers demand, while others likekiosks tendnot
todoso,asdescribed inSection V.B.2(c). Thus, while theUnited States failstomeetitsburden
ofdemonstrating acausal connection, theevidence provided byJapan demonstrates alackof
causal connection.
5. PROMOTION "COUNTERMEASURES"
(a) General overview
6.459 According toJapan ,when theJapanese economy entered thephase ofmass production and
consumptioninthe1950s,premiumssales,includingpromotionallotteries,becameincreasinglypopular.
Prize money andmerchandises grew very expensive. Thesociety grew concerned about these
promotionalprizeswhichencouragespeculativebehaviourandcouldimpedeconsumers'rationalselection
ofgoods. Concerned about thelackofadequate means tocontrol misrepresentations, thepublic called
fortheintroduction ofeffective control ofmisleading representation.
6.460 Withrespect totheKennedy Round ,theUnited States submits thatthe1967Cabinet Decision
approved theuseofcountermeasures for"preventing foreign enterprises fromdisturbing order inour
industries".923TheJapanese Government recognized that,ingeneral, themarketing andpromotional
abilities ofJapanese firms wereweaker andtheircosts werehigher thanthose offoreign enterprises,
andthusJapanese firms would beatadisadvantage inrelation toforeign firms. Toaddress these
problems, theJFTC imposed newrestrictions ontheuseofpremiums. TheUnited States claims that
theJFTC 'sactions inthisregard upset theconditions ofcompetition between imported anddomestic
products aftertheKennedy Round byseverely limiting theinducements enterprises could usetoattract
wholesalers, retailers, andconsumers totheirproducts.
6.461 Following theTokyo Round ,according totheUnited States, theJapanese Government applied
itspromotion countermeasures against filmandpaper indistinctly newways. Forthefirsttime, Japan
unleashed itscartel-like private sector enforcement councils toregulate commercial matters specifically
related tofilmandpaper. Thecodes established bythese councils constrain theuseoftwoforms of
economic inducements: (1)dispatched employees; and(2)economic contributions toretailpromotions.
Thecodes alsorestrict avariety ofdifferent representations made inadvertisements forphotographic
materials, especially where discount orprice-oriented promotions areinvolved. TheUnited States
alleges thattheseries ofpromotion countermeasures serves toreinforce theframework ofrestrictions
theJapanese Government established aftertheKennedy Round. These newandstrengthened measures
operated toupset thecompetitive relationship between imports anddomestic products inJapan's
photographic materials market byconstraining theability ofimports toassail thedominance ofdomestic
9231967 Cabinet Decision p.3,USEx.67-6. Inthefilmsector, thedomestic industry was"afraid thatKodak would
useitscapital strength tocontrol themarket withhuge incentives likelowprices, orattach some kindofgifttothefilm".
New York Times, 5July1995, USEx.95-14.WT/DS44/R
Page284
marketleadersthroughaggressivemarketingtechniquesandutilizationofalternativedistributionchannels.
6.462 TheUnited States submits thatduring thenegotiations oftheUruguay Round ,theUnited States
andJapan'sother trading partners whoproduced photographic filmandpaper knew thattheJapanese
market wasdifficult topenetrate, butthewayinwhich thepromotion countermeasures, thedistribution
countermeasures, andtheLarge Stores Law,worked inconcert tosystematically offset tariffconcessions
wasnotknown. TheUnited States claims thattheongoing application ofthiswebofliberalization
countermeasures hascontinued tooperate tonullify orimpair benefits accruing totheUnited States
notonlyfrom theUruguay Round, butalsotheTokyo andKennedy rounds, dueto,interalia,the
inability toprice andpromote products effectively andcompetitively asaresult ofrestrictions under
thePremiums LawandAntimonopoly Law.
(b) JFTC Notifications under thePremiums Law
6.463 TheUnited States points outthat,inMay1967, theJFTC issued Notification 17,which banned
most premium offers between businesses. TheUnited States hasexplained thatthisrestriction had
aparticularly inhibiting effect onestablishing orimproving relations between photographic material
manufacturers andJapanese distributors. TheUnited States further submits that,inJuly1971, the
JFTCissuedNotification34,rulingthatprizesofferedthroughadvertisedlotteries,involvingnorequired
purchase ofaproduct, could notexceed 1,000,000 yen.InMarch 1977, theJFTC issued Notification 5
which imposed limits onthevalue ofapremium andhadtheeffect ofseverely restricting theoffering
ofpremiums onphotographic filmandpaper togeneral consumers. Given therelatively lowprice
oftheseproducts, thevalue ofanypremium falling within theJFTC 'srestrictions would benegligible.
TheUnited States argues that,withNotification 17andMITI's1970 Guidelines forStandardized
Transaction Terms, theJFTC 'snewmeasures onpremiums upset thecompetitive relationship between
imported photographic filmandpaper andthedomestic products byseverely limiting theability of
challenging brands, e.g.foreign manufacturers, toattract Japanese consumers through marketing and
promotions. Following theKennedy Round, imported photographic filmandpaper hadaverylimited
market share -thelegacy ofyears ofimport restrictions, hightariffs, andforeign investment restrictions.
Producers challenging leading brands needtopromote theirproducts toattract consumers. Forproducts
likefilm,thepromotion mustbesignificant enough toovercome strong consumer brand loyalty because
theconsequences ofproduct failure aresosignificant, e.g.,poorpictures ofanimportant event. By
imposing significant limitations onthepremiums thatcanbeoffered inopenlotteries orinconjunction
withsalestogeneral consumers, theJFTC notonlyseverely restricted theextent towhich theforeign
enterprises could drawattention totheirimported products, butalsoprevented foreign enterprises from
exceeding thepremiums offered bytheirJapanese competitors. TheUnited States concludes thatin
sodoing, Japan disrupted theconditions ofcompetition intheJapanese market thatotherwise would
haveprevailed andthatwould haveenabled imports fromother countries totakeadvantage ofthetariff
concessions.
(i) Competitive position ofimports
6.464 TheUnited States alleges thatthepromotion countermeasures havedirectly interfered with
andupset thecompetitive relationship between domestic andimported products intheJapanese market
byconstraining theability oftheperson selling imported products to:(1)attract consumer interest
inimported products through discounts, gifts, coupons andother price-cutting methods; and(2)rely
oninnovative promotional campaigns, particularly onesinwhich prices orprice comparisons are
discussed. According totheUnited States, theJapanese Government perceived thatthemarketing
andpromotional abilities ofJapanese firms were weaker andtheircosts were higher, andJapanese
firms were lessabletocompete aggressively onthebasis ofprice withforeign firms andimports.
While foreign producers regularly advertise andotherwise promote theirproducts inJapan, theyhave
beensubstantially chilled fromdoing thepromotions necessary tocompete effectively. Theseeming
neutrality ofthesemeasures belies thefactthattheydecisively tipcompetitive conditions against imports,WT/DS44/R
Page285
which more thandomestic products needtorelyupon premiums andother promotions iftheyareto
attract theattention ofdistributors andconsumers.
6.465 Japan contends thatthePremiums Lawdoesnotestablish conditions ofcompetition thatare
unfavourable forimported filmorpaper. Theexpress textofthePremiums Lawmakes nodistinction
between imported ordomestic products. Ingeneral, theregulation ofpremiums andrepresentations
under thePremiums Law, which aimsatprotecting consumers 'interests andpromoting competition,
applies equally toimported anddomestic products, andthusdoesnotdisadvantage imports. Moreover,
thereisnothing about restrictions onexcessive premiums ormisleading representations thatisinherently
unfavourable toimports, noristhere anything intrinsic inthenature ofimports thatmakes them
particularly reliant onmisleading representations ortheexcessive premiums regulated bythislaw.924
ThePremiums Lawistrade-neutral inthesense thatitsimpact onthemarket access willbefeltequally
bydomestic andforeign products. Inresponse tothe"chilling effect" argument, Japan argues that
theUnited States should show howthecombination oftheregulation, acode, andthePromotion Council
hasoperated systematically against imported products. Japan concludes thatthepresent regulations
arenotexcessively restrictive ordisadvantageous forimported products withalower market share,
thanfordomestic products.
6.466 TheUnited States concedes thatthepromotion measures arefacially neutral. However, in
theUSview, Japan ignores thedisparate impact itsmeasures havehadonimported photographic
materials andunderstates thesignificance ofthepromotional activities ithasbanned. Although the
measures arefacially neutral, theyhelppreserve thedominant position ofJapanese filmandpaper
manufacturers byshielding them from significant forms ofpromotion competition. Marketing is
especially important toforeign producers challenging thedomestic market leaders because theyhave
beenexcluded from theprimary wholesalers, theyhavelimited distribution alternatives interms of
large retail stores, andtheiropportunities tocompete through price discounts areminimal.
6.467 Japan argues thatothereconomically advanced countries havecounterparts oftheseregulations,
andtheJapanese regulations areinnowaymore restrictive thanthese counterparts. Moreover, even
ifregulations areeased, dominant brands arelikely tocounter suchattempts withpromotional activities
oftheirown. Consequently, inthisparticular market atleast, relaxation oftheregulations would not
necessarily operate totheadvantage ofthechallenging brands.
6.468 TheUnited States argues thatJapan'spromotion countermeasures must beviewed inlight
ofthepeculiarities ofJapan'sphotographic materials market. These restrictions disadvantage imported
filmandpaper because theyserve toreinforce thesignificant advantages ofthedomestic manufacturers
thathavedominated Japan'sphotographic materials market since1945. These domestic manufacturers
haveconsistently controlled 80to90percent ofJapan'smarket. They haveexclusive access toJapan's
leading photospecialty wholesalers andtheirproducts areallocated fargreater shelfspace inretailstores
which mostoften donotcarry anyforeign filmatall.IntheUSview, given theoligopolistic nature
ofthemarket andthebottle-necked distribution system, foreign photographic material manufacturers
areacutelydependentuponmarketingtogeneratedemandfortheirproductsamongwholesalers,retailers
andconsumers. Inparticular, impediments placed inthewayofoffering premiums oradvertising
about aprice discount actasabarrier against greater market access forimports.
6.469 Japan submits thatthePremiums Law, JFTC Notifications andother JFTC regulations govern
activities ofbusiness entities astheyfocus oncompetitive behaviour ofthese entities. Theprovisions
areunrelated totheorigin oftheproducts, anddonotinherently afford more favourable treatment
todomestic products. Thus, thereisnoelement ofdiscrimination which would nullify orimpair benefits
accruing totheUnited States under Japan'stariff concessions. According toJapan, theUnited States
924United States -Automobiles ,DS31/R, para. 5.14 (unadopted).WT/DS44/R
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emphasizes thedisadvantage feltbyachallenging brand against adominant brand, andnotthatbetween
imported products anddomestic products. Japan recalls thatFujiisnottheonlydomestic brand, there
aredomestic challenging brands including Konica intheJapanese market.
(ii) Objectives underlying thepromotion "countermeasures"
6.470 Japan notes thatthePremiums Lawisasub-set ofcompetition lawwhose objective isthe
prevention ofexcessive premiums andmisleading representations forpurposes ofconsumer protection.
Article 1ofthePremiums Lawdefines itsobjective as"tosecure faircompetition, andthereby toprotect
theinterest ofconsumers ingeneral byestablishing provisions toprevent inducement ofcustomers
bymeans ofunjustifiable premiums ormisleading representations". Reference tothetwinobjectives
offaircompetition andconsumer protection isalsorecorded invarious parts oftheDietminutes.925
6.471 TheUnitedStatescontendsthatJapan'srestrictionsnotonlywereintendedtoprotectconsumers,
buttheyalsowere designed toprotect domestic production. FortheUnited States, thispurpose is
evident inavariety ofmeasures, suchasJapan's30-year restriction ontheuseofpremiums between
businesses, ameasure which hadlesstodowithconsumer protection thandampening competition from
foreign competitors.926IntheUSview, Japan hasrecognized thatitsdominant domestic manufacturers
arevulnerable topromotion competition from foreign producers.927Japan believed thatforeign
competitors haveadvantages interms oftheexpertise andcapital theycould relyupon inpromoting
theirproducts inJapan.928According totheUnited States, theJapanese Government determined that,
ifunchecked, foreign competitors, especially Kodak, could increase theirpresence inJapan'smarket
through innovative promotions,929andJapan, therefore, instituted countermeasures to"create a
foundation" onwhich Japanese companies could "compete onequal terms" withtheirforeign rivals.930
Inenacting thePremiums Law, Japanese officials hoped thatthefacially neutral measure would prevent
circumstances inwhich "foreign trading companies ...maycome intoJapan andenjoy advantageous
positions through excessive advertisements orbyinviting buyers toforeign countries".931
6.472 InJapan 'sview, theUSclaims restonaconspiracy hypothesis. Japan emphasizes thatthe
truth isthattheJFTC haslongbeenanactive advocate ofamore open Japanese economy.932For
925Minutes oftheHouse ofCouncillors, Committee onCommerce andIndustry, 13April 1962, Japan Ex.D-19, US
Ex.62-2.
926TheJFTCexplainedwhen itpromulgatedNotification17:"Theprimaryobjectiveof[Notification17]is(a)rationalization
ofthedistribution stage ...;and(b)eliminat[ion] ofthestronger preyupon theweaker sales competition based onthepower
ofcapital ...IfUScapital were toconduct [premium offers] directed attheJapanese distribution sector, thiswould beno
match for[Japan], sotherestrictions should beapplied asabreakwater before liberalization". Severe Restrictions Placed
onBusinesses forPremium Offers: Shatokuren Hears JFTC Explanations atJyosui Kaikan onthe12th, Nihon Shashin Kogyo
Tsushin, 20June 1967, USEx.67-8.
927"Along withtheliberalization ofcapital andtrade, themajor issues facing thisindustry today include theUSlanding
inJapan andmarket expansion ...Thestruggle tocapture market share willdepend substantially onpromotional activities
based onfinancial strength". MITI, Manual fortheSystemization ofCamera andFilm Distribution, March 1975, p.58,
USEx.75-5.
928See,e.g., Preparing forCapital Liberalization: Rationalization ofTrade Practices isUrgent Task; Foreign Capital
Attacks onTwoFronts -Production andSales, Nihon Shashin Kogyo Tsushin, 10June1967, p.10,Draft aStandard Contract
forFilm With Criteria forStandardization ofTransactions Terms, Zenren Tsuho, August 1971, USEx.71-11.
929New York Times, 5July1995, USEx.95-14.
9301967 Cabinet Decision p.4,USEx.67-6.
931DietRecord ofthe40thSession oftheLower House Committee onCommerce andIndustry, No.31,18April 1962,
USEx.62-4.
932TheJFTC Chairman stated in1967: "Although itistheJFTC 'sresponsibility tovigorously enforce theAntimonopoly
Law, should foreign capital commit actsof[unfair trade practices], weshallnotdiscriminate theforeign capital byimposing
more burdensome regulations compared toJapanese entities. Werecognize theimportance ofindustrial reorganization and
ofstrengthening theinternational competitive position oftheJapanese business inpursuance ofthepolicy towards capital
liberalization ."..WT/DS44/R
Page287
Japan, theJFTC 'shistory ispictured bytheUnited States asthatofacollaborator incounteracting
theeffects oftrade liberalization.
6.473 TheUnitedStatesrespondsthatJapanhasofferednoexplanationastohowconsumersbenefitted
from theJFTC 'ssimultaneous certification ofacamera cartel, theissuance ofanotification almost
completely banning theuseofpremiums byanybusiness thatmanufactures orsellscameras, andthe
approval ofcodes restricting theuseofpremiums among camera manufacturers andwholesalers. The
United States emphasizes thattheJFTC hasacknowledged thatamajor factor intaking theseprotective
measureswasstiffcompetitionfromKodak,especiallythedevelopmentofitsinnovative,easyinstallation
film.933
6.474 With respect to"faircompetition codes" (discussed inSection (c)below), theUnited States
argues thattheJapanese Government established itsprivate-sector-enforced codesystem, atleastin
part,tocounteract theperceived superior marketing abilities andpromotion budgets offoreign firms.
Asaleading Japanese antitrust scholar hasexplained: "Fair competition codes canalsobeeffective
incontrolling foreign firms iftheydisturb themarket".934
6.475 According totheUnited States, eventhough thecountermeasures wereneutral ontheirface,
theimpact (andintended impact) oncompetition decidedly wasnot.Infact,themeasures substantially
disrupted thecompetitive relationship between imports anddomestic products byplacing severe
constraints onakeycomparative advantage oftheimports, i.e.,theirability topromote andmarket
products effectively andcreatively. IntheviewoftheUnited States, these restrictions takeoneven
greater significance given theclosed distribution system, oligopolistic nature ofthemarket, andthe
existence ofother constraints suchastheLarge Stores Law.
6.476 Japan notes thatthe"intent" ofthegovernment isirrelevant forpurposes ofanon-violation
claim, given thatthepanel onJapan -Taxes onAlcoholic Beverages935found thattheinterpretation
ofdomestic lawshould bebased primarily onthetextofthestatute, rather thanthelegislative history.
JapanrespondstoUSargumentsabout"intent"toprotectthedomesticindustrybyintroducingregulations
more favourable todomestic products asfollows:
6.477 Japan submits thatinstatements before theDietCommittee atthetimeofintroduction ofthe
Premiums Law,thereference toforeign capital reflects anorigin-neutral response toanticipated changes
incompetitive conditions ontheeveofliberalization offoreign capital, aphenomenon unprecedented
fortheJapanese economy. InJapan'sview, nointent ofdiscrimination canbefound. Theintroduction
ofthePremiums Lawwaswellbefore thecapital liberalization ofthelate1960s, andwasaresult of
circumstances unrelated toforeign capital.
6.478 Japan emphasizes thattheCabinet Decision ofJune1967didnotcontain anymeasure related
tothePremiums Law. NordidtheJFTC takeanymeasure. Thereports oftheForeign Capital
Council 'sExpert Committee alsoreflect anorigin-neutral response toanticipated changes incompetitive
conditions ontheeveofcapital liberalization.
6.479 Japan admits thattheJFTC officials incharge ofNotification 17appear tohavebeenconscious
offoreign capital. ForJapan, however, itisalegitimate, universal phenomenon forpeople inthe
policy-making process toassess theimpact ofamajor policy change onthemarket. Japan doesnot
findintent todiscriminate against imported products infavour ofdomestic products. Onthecontrary,
933Otsuka Noritami, JFTC Trade Practices Division, Recent Activities Concerning thePremiums Law, Kosei Torihiki,
November 1965, p.3,USEx.65-5.
934Matsushita Mitsuo, Antimonopoly LawandInternational Transactions, 25May 1970, p.817, USEx.70-2.
935Japan -Alcoholic Beverages ,WT/DS8/R, para. 87.WT/DS44/R
Page288
twoChairman oftheJFTC made veryclearin1967thattheCommission should notdiscriminate against
foreign capital.
6.480 Japan emphasizes thattheultimate litmus testofintent should bewhether ornotthere is
recognizable "intent" or"objective" builtinthestructure ofthesystem indispute, rather thanindividual
statements. Thefundamentally origin-neutral regulation ofthePremiums Lawcontains nosuchbuilt
inmechanism based onan"intent" or"objective" ofdiscrimination.
(iii) Causal connection
6.481 Japan argues thatthere isnoconstraint suffered byforeign filmproducers inpromoting their
products. They cancompete onprice andquality, andarefreetospend asmuch astheywant for
advertising. According toJapan, Kodak, theleading foreign brand, isoften soldatretail atsubstantial
discountsoffmanufacturer'ssuggestedretailprice.936AlthoughingeneralKodakchoosesnottoadvertise
asheavilyasitsdomesticcompetitors,itdoesengageinfocusedcampaignsoftargetedheavyadvertising,
withpredictable results.937InJapan'sview, thesefactsareinconsistent withtheUSclaims thatforeign
producers areunable topromote theirproducts effectively duetoPremiums Lawrestrictions.
6.482 TheUnited States contends thattheability offoreign manufacturers touseprice discounts
toexpand theirpresence inJapan hasbeenrather limited. Kodak hasreduced itsprices by56percent
since 1986, substantially undercutting itsJapanese competitors, yetKodak 'sdramatic price discounts
havehadvirtually noeffect onthemarket. Similarly, Agfa'saggressive efforts tousediscount channels
tomarket itsproducts haveyielded onlymarginal results. Price reductions byforeign photographic
material producers, eventolevels wellbelow those ofdomestic competitors, often arenotpassed on
toconsumers attheretail level.938Thislackofpricecompetition inthephotographic materials sector
isreflected bythefactthatJapan'sconsumer price index forfilmhasshown almost nomovement
between thethirdquarter of1989andthethirdquarter of1996, aperiod ofseven years.939Little price
differential exists among Fuji,Konica andKodak ateither theretaillevel940orwithrespect towholesaler
prices toretail outlets.941Thesame lackofprice differentiation isobservable withrespect tovarious
filmspeeds, types ofoutlets andindividual cities. TheUnited States concludes thatlimited price
competition, coupled withforeclosed distribution channels, renders promotions especially significant
toforeign photographic material producers.
6.483 JapanpointsoutthatAmericanbusinesshasbeenabletocompetefreely,subjecttonorestriction
whatsoever under thePremium 'slaw,inpricing andquality, thetwomostimportant aspects ofmarket
competition. There isawiderange ofpromotional initiatives; theJFTC regulates nothing other than
936Japan notesthatamong otherpromotionalstrategies,Kodaksellsfilminmultipacks atlowper-rollprices,cross-pr omotes
withother products, andadvertises extensively. Fujifilm 'sRebuttal Regarding Vertical andHorizontal Price Fixing, 28March
1996, pp.22-23.
937Japan notes thatKodak 'sheavy advertising andpromotion inNagano siteofthe1998Winter Olympics (ofwhich Kodak
isacorporate sponsor), hasledtoadoubling ofitsmarket share inthearea.
938According totheUnited States, Japan'sownexhibits reflect theconnection between price stabilization andthepromotion
countermeasures. APolicy Outline onCommercial Transactions withCustomers bytheFederation ofPrimary Wholesalers,
stated:
"The notices onthe"Fair Competition Code ontheRestrictions onSupplying Premiums intheCamera Wholesale
Industry" andtheJapanese FairTrade Commission 's"Restrictions ontheMatters Related toSupplying Premiums", have
bothbeenplaying animportant roleasapartofmarket price stabilization .Primary wholesalers willensure nothing regrettable
occurs bygiving fullconsideration tothese issues when sponsoring events". Japan Ex.B-31. (Emphasis added.)
939Photo Market, 1996, p.31,USEx.101. TheUnited States further submits thatin67percent ofthe99medium-size
cities andsmall towns surveyed bytheJapanese Government initsannual Retail Price Survey, theretail price offilmdid
notgoupordown byeven oneyenforatwo-year period between 1992 and1994. Statistics Bureau, Management and
Coordination Agency, Japan'sAnnual Report ontheRetail Price Survey, 1992, pp.523, 610, 631, USEx.74.
940Management Analysis ofPhoto Stores, Camera Times, 1979-1996, USEx.40.
941Const ructionResear chInstitute,InformationonPrices,MonthlyEdition,December 1972 -September 1996, USEx.22.WT/DS44/R
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distortive practices, namely, (i)excessive premiums, i.e.,excessive freegifts, andexcessive prizes
offered through lotteries orcompetition, and (ii)misleading representations. However, the
Antimonopoly LawandthePremiums Law, ortheirimplementation, donotrestrict lowprice offers
ofphotographicfilmandpaper,ortheamountofpublicrelationsexpenditures.Norarelawfulpremiums
ornon-misleading representations restricted.
6.484 TheUnited States contends thatDesignation 6under JFTC Notification 15of1982prohibits
"unjust lowpricesales", including "unjustly supplying acommodity orservice atalowprice, thereby
tending tocause difficulties tothebusiness activities ofother entrepreneurs".942
6.485 Inaddition, theUnited States provided anumber ofspecific examples inwhich application
ofthePremiums LawandtheAntimonopoly Law, andtheactivities offairtrade councils constituted
bytheJFTC, hadtheeffect ofrestricting Kodak ’sdiscounting andpromotional efforts. Inthe1983
trial-pack incident, forexample, actions bytheJFTC andthePromotion Council curtailed Kodak ’s
promotional campaign forareduced-price package ofdifferent rollsoffilm. Theepisode involved
Kodak ’sprincipal newfilmproduct ofthefirsthalfofthe1980'sandchilled Kodak ’spromotional
efforts inlateryears.943JFTC Notification 5of1977 prevented Kodak from implementing avariety
ofjointpromotions (e.g., offering afreerolloffilmwithaMcDonald ’sHappy Meal andimplementing
promotions foritsPanorama single usecamera).944TheJFTC hastaken action tosuppress avariety
ofpromotional efforts undertaken byretail outlets inconnection withthesaleofKodak products.945
Kodak hasbeenlimited initsability todispatch employees towork onthepremises ofretail stores
byperiodic directives from thePromotion Council.946
6.486 Japan submits thatregulations onpremiums andrepresentations under theAntimonopoly Law
andthePremiums Lawdonotrestrict lowprice offers.
(iv) Change inpolicies
6.487 Japan submits thatinthecourse ofareview ofitsregulations under thePremiums Law:
(i) theJFTC hasstreamlined itsgeneral ruleonexcessive premiums lastyear;
(ii) therestriction onpremium offers tobusinesses hasbeenabolished; and
(iii) theceiling onprizes hasbeenraised.
Japan notes thateachofthese measures facilitates newentry intotheJapanese market, inanon-
discriminatory manner andthatthese initiatives areundertaken pursuant totheJFTC 'scommitment
under theStructural Impediment Initiative (SII). InJapan'sview, theseinitiatives should becompelling
evidence toprove thattheJFTC iscommitted tovigorously pursuing thegoaloffreeandfaircompetition
intheJapanese market.
942Unfair trade practices, JFTC Notification 15,18June1982, USEx.82-6. TheUnited States doesnotconsider this
designation tobealiberalization countermeasure andseeks noreview ofthismeasure bythePanel. TheUnited States only
raises ittorebut Japan’scontention thatJapanese lawcontains nolimitation onlowprice offers. TheUnited States further
notes thattheJapanese Government hasadmitted thatitwould "monitor" filmprices sothatKodak could notdominate the
market inJapan asithadelsewhere. Considering Tariff Reductions andInternational Competitiveness: MITI Examines Print
Price andInvestigates theDirection ofFilmPrices (MITI Business Bureau Report), 12November 1970, reprinted inZenren
Tsuho, December 1970, p.43,USEx.70-8.
943Ishikawa Sumio Affidavit p.2,USEx.97-10, Hiromichi Sumi Affidavit, USEx.96-10.
944William JackAffidavit, p.7,USEx.97-2.
945Affidavit ofIsshiNorito, p.1-3.ISEx.97-5, Suzuki Yosuyuki Affidavit, p.1-2,USEx.97-6, William JackAffidavit,
p.6-9,USEx.97-2.
946Promotion Council Issue No.6-3,17January 1995; USEx.95-7 andNational Photographic Industry FairTrade
Promotion Council Issue No.8-1,22July1996, USEx.96-7.WT/DS44/R
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6.488 Japan argues thattheenforcement mechanism wascertainly augmented bythe1972amendment,
which delegated partoftheauthority totheprefectural governments. However, inJapan'sview, this
modification innowayserved toaltercompetitive relationships infavour ofdomestic goods.
6.489 TheUnited States underscores thatinthepast,theJFTC hasinterpreted thePremiums Law
inasweeping manner: "Premiums which aretheobject ofnotifications refers [sic]toproducts, cash,
marketable securities, entertainment, orother economic benefits which aregiven inconnection with
atransaction involving commodity orservice".947TheJFTC hasexplained thatitdistinguishes between
premiums andpricediscounts orrebates onacase-by-case basis, examining thefacts"inlightofnormal
business practices, taking intoaccount details ofthetransaction, details oftheeconomic benefit, the
method andtheconditions ofoffer, andthecustoms ofthatparticular industry".948Inthisregard,
intheUSview,theJFTChasacknowledgedthatsomeformsofdiscountsorrebatesmaybepremiums.949
6.490 Japan stresses thatthePremiums Lawdoesnotrestrict lowprice offers orfreesamples. On
thecontrary, theLawserves topromote lowpriceoffers andother price/quality competition byplacing
arestriction onexcessive premiums. Japan notes thattheword "money" aspartofpremiums was
included primarily tocover lottery prizes. Cashlottery prizes, which werewidely usedin1962, could
become excessive, andareincluded inpremiums subject torestriction.
6.491 TheUnited States disagrees withJapan'sstatement thattheuseoffreesamples andlowprice
offers would be"lawful under thePremiums Lawatanypoint initshistory". Notification 17of1967,
restricting premiums between businesses, andNotification 5of1977, restricting premiums togeneral
consumers, provide thatsamples areexempt fromcoverage onlyiftheyare"found reasonable inthe
lightofnormal business practices". Inaddition, certain lowpriceoffers mayberegulated asan"unjust
lowprice" under Designation 6ofNotification 15of1982.
(c) FairTrade Councils andFairCompetition Codes
6.492 TheUnited States submits that,following theTokyo Round, inOctober 1979, theJapanese
Cabinet approved theestablishment ofaDistribution Sector Office (DSO) intheJFTC to"administer
duties pertaining tounfair trade practice designations related todistribution".950TheDSOstudied 16
business sectors, andinDecember 1981issued findings oncameras andphotographic materials advising
"camera,photographicmaterials,colourphotolaboratoriesandrelatedindustries"toaddress"problems"
created bymanufacturers dispatching employees tolarge retail stores.951Thereafter, theJFTC called
uponthephotographic industry todevelop "self-regulating rules" controlling "thepermanent dispatch
ofsalespeople".952
947FTC/Japan Views: Information andOpinion from theJapan FairTrade Commission, No.2,April 1988, p.15,US
Ex.88-3.
948Ibid. p.16.
949Ibid.
950Cabinet Order No.43of1979, USEx.79-1.
951According totheUnited States, dispatched employees areaunique form ofeconomic inducement between businesses
since theyreduce costs forwholesalers andretailers andthereby allow forincreased salesbased upon costorprice reductions
passed down thelineofdistribution.
952Kosugi Misao, Trade Practices Department, Distribution Sector Office JFTC, Status ofDistribution ofCameras, Kosei
Torihiki, No.377, March 1982, p.8,USEx.82-3.WT/DS44/R
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(i) Promotion Council
6.493 TheUnited States points outthatthedomestic photographic industry responded in1982 by
formingtheFairTradePromotionCouncil(PromotionCouncil)andbypromulgatingthe"Self-Regulating
Measures Regarding Making Business Dealings WithTrading Partners Fair". TheCouncil represented
allelements ofthephotographic industry, i.e.,manufacturers, wholesalers andretailers, andwasformed
toactonbehalf oftheJFTC inenforcing the"Self-Regulating Measures".953TheSelf-Regulating
Measures andtheCouncil 'sarticles ofassociation govern theuseofdispatched employees andmonetary
contributions toretail promotional campaigns.954Thearticles ofassociation arenoteworthy dueto
theextraordinary latitude theyconvey upon theCouncil, including providing forafirmtoseekpre-
approval from thecouncil before using dispatched employees.
6.494 Japan submits thatthePromotion Council wasestablished bythephotographic industry as
anorganization toimplement voluntary standards ondispatched employees. Theindustry wasinfact
working onsuchstandards evenbefore theJFTC published areport andissued administrative guidance.
6.495 In1983, theJFTC urged thePromotion Council toexpand intodumping andloss-leader
advertising.955IntheviewoftheUnited States ,thePromotion Council recognized thatdumping cases
arequitecomplex andoften difficult towin,anddetermined thatimposition ofregulations controlling
advertisement ofprices would prove tobeamore effective means ofrestraining competition because
thestandards aremore subjective anddonotrequire theanalysis ofcomplex costandpricing data.956
6.496 InMay1984, thePromotion Council issued "Self-Regulating Standards Concerning Display
ofProcessing FeesforColour Negative Film" defining theinformation thatmustappear inconnection
witharepresentation ofprices forcolour filmdeveloping andprinting, including theprinting fee,
developing fee,processing time, andpaper manufacturer.957
6.497 ForJapan ,theintention of"Self-Regulating Standards Concerning Display ofProcessing Fees
forColour Negative Film" wastogiveconsumers adequate information ofbothcharges. InJapan's
view, assuch, these self-regulating standards arenotrelated tosalesoffilmproducts.
6.498 According totheUnited States ,byregulating theuseofdispatched employees, promotional
funds andprice-related representations, thePromotion Council serves toprevent undue competition
forfilm, paper andother photographic goods.958TheCouncil 'senforcement record reflects the
extraordinary range ofitsactivities andthepotency ofitsenforcement powers. ThePromotion Council
succeeded infoiling Kodak 'smostimportant promotional campaign ofthe1980's,theVRTrial-Pack.
Working withtheJFTC, theCouncil determined before thecampaign hadevenbegun thatKodak 's
anticipated advertisement ofadiscount pricewasamisrepresentation. TheJFTC summoned Kodak ’s
representatives andissued administrative guidance toKodak to(1)clarify thelimited nature ofthe
offer, identifying thevolume oftrialpacks, thestores carrying them andtheterms oftheoffer, and
953The"fairtrade councils" thathadbeen previously established represented onlyonehorizontal level oftheindustry,
e.g., justmanufacturers orwholesalers.
954Self-Regulation Rules Regarding Making Business Dealings withTrading Partners Fair, reprinted inCamera Times,
22June 1982, p.3,USEx.82-8.
955Yamada Akio, Premiums andRepresentations Guidance Division Director, JFTC, Suggestions onHowtheFairTrade
Promotion Council Should be,Zenren Tsuho, May 1983, p.2,USEx.83-9.
956What theFairTrade Promotion Council isDoing Now, andWhat itPlans todointheFuture, Zenren Tsuho, October
1983, pp.5-6,USEx.83-21. Round table discussion onanonymous Promotion Council andZenren members reported.
Ibid.
957Self-Regulating Standards Regarding Representations Have Been Finalized, Kosei Torihiki Joho, 28May1984, p.3,
USEx.84-4. TheStandards define "businesses developing" as"those whoreceive colour filmdirectly from thegeneral
consumer forprocessing". Ibid. Promotion Council called forthepromulgation ofa"fair competition code".
95849thZenren Conference, Iwate, General Assembly, Camera Times, 19October 1982, USEx.82-11.WT/DS44/R
Page292
(2)cutbackitssecond shipment oftrialpacks andannounce ateachstore counter when theproduct
wasnolonger available. Accordingly, thepromotion wascutbackandadvertisements forthecampaign
were quite muted.
6.499 Japan submits thattheJFTC wasnotworking withthePromotion Council. There isno
alignment between theJFTC andthePromotion Council, andnolawsallow theJFTC todelegate its
authority tothePromotion Council. Inaddition, thetrialpackwasshipped eventually intheplanned
volume intheVRcampaign.
(ii) Retailers 'Council
6.500 TheUnited States further notes thatin1987, theJFTC approved theestablishment ofthe
Retailers Fair Trade Council (Retailers Council) andtheFair Competition Code Regarding
RepresentationsintheCameraandRelatedProductsRetailersIndustry(RetailersCode).959TheRetailers
Code provides theRetailers Council withauthority totakeenforcement actions formisrepresentations
inpromotions notonlyunder thecodeitself, butalsounder thePremiums Lawandrelated competition
laws.960LikethePromotion Council, theRetailers Council actsasasubstitute enforcement bodyfor
theJFTC intheviewoftheUnited States.
6.501 TheUnited States points outthattheRetailers Code setsforthnumerous requirements foralmost
allforms ofpromotions inthephotographic retail sector. Thecodespecifies thatadvertised price
comparisons must relyonthemanufacturer 'ssuggested retail price, theimporter 'ssuggested retail
price, ortheshop'snormal retail price. Thecoderestricts theuseofterms like"cheapest" or"very
best"unless "objective factors" canbedemonstrated. Similarly, thecodeprohibits theuseofexpressions
suchas"super cheap", "give-away price" or"super special price" ifsuchexpressions willleadthe
"consumer tobelieve theoffer isbetter thanitactually is".
6.502 IntheUSview, theRetailers Code isquite distinct fromtheManufacturers andWholesalers
Premiums Codes promulgated in1965 and1966, respectively. Unlike theearlier codes, which
exclusively apply totheuseofpremiums, theRetailers Code governs representations about promotions
forphoto items, including filmandpaper.961TheRetailers Council applies thecodetopromotional
activities ofnon-members andnotjustbusinesses thatagreed toadhere tothecodes. Thispractice
comports withtheposition oftheJapanese Government thatcompetition codes mustapply industry-wide
inorder tohavetheirintended effect: "there islikely tobelittleeffect iftheindustry asawhole is
nottargeted andregulated".962
6.503 Japan argues thatitisnecessary toelaborate onfaircompetition codes orfairtrade councils
asnoneofthemcover photographic filmandpaper. Excessive premiums andmisleading representations
maybefound routinely anywhere inJapan. Furthermore, theseactivities tendtoquickly spread among
competitors, andtoescalate intheprocess. Itistherefore desirable foreffective enforcement ofthe
959FairCompet itionCode Regar dingRepresentationintheCamer aandRelatedProductsRetailersIndust ry,Kanpo, [Official
Gazette] 11April 1987, p.1,USEx.87-4.
960Article 14.7 oftheFairCompetition Code states thattheRFTC shall perform "Activities pertaining tomaking the
ActAgainst Unjustifiable Premiums andMisleading Representations andother lawsandordinances pertaining toFairTrade
widely understood andpreventing violations thereto". USEx.87-4.
961According totheUnited States, theRetailers Code doesnotspecifically limitthephotographic items which fallwithin
itsscope. IntheUSview, theRetailers Council construes theCode ascovering filmandpaper.
Japannotesthatalthough theimplement ationrulesoftheRetailIndust ryCode specificallyrefertosuchmiscellaneous
goods astripoids orbags, theydonotmake anyreference tosuchmajor items asfilmandpaper andthatthismeans that
filmandpaper areconsciously excluded.
962AsaiShigeo, Premiums andRepresentations Division, Trade Practices Department, JFTC, Protect Consumers from
Misleading Representations andAdvertising, Tsusansho Koho, 8June1971, pp.9-19, USEx.71-8. SeealsoItoda Shogo,
JFTC Secretary General, JireiCompetition Policy Law(15December 1995), pp.420-21, USEx.95-20.WT/DS44/R
Page293
Premiums Lawtohavebusiness entities agree onself-restraint ofsuchbehaviour andtoprevent actual
violation oftheLaw. Itisagainst thisbackground thatArticle 10oftheLawallows business entities
toadopt, subject totheJFTC ’sapproval, voluntary rulesonpremiums andrepresentations, toensure
consumers ’proper selection ofmerchandise andfaircompetition inthemarket.
(iii) Coverage ofphotographic materials
6.504 Japan emphasizes thatnofaircompetition codecovers photographic filmandpaper andthat
observance ofthe"spirit ofthecode", asprovided forintheRetailers 'Code, maynotextend toitems
notincluded inthe"camera category". Even iftheindustry were todecide toexpand thescope of
thecodes toinclude these products, suchadecision hasnoimpact ontheoperation ofthePremiums
Law, ortheAntimonopoly Law, unless itisapproved bytheJFTC.
6.505 Given thatthereisnofaircompetition codeapplicable tothephotographic filmorpaper, Japan
argues thatthustheJFTC 'sapproval hasnotinanywaynullified orimpaired thebenefits ofconcessions
fortheUnited States inrespect ofthese products. More fundamentally, anon-violation claim against
JFTC approval offaircompetition codes raises noparticular issuedistinct fromtheissues surrounding
theregulation under thePremiums LawandJFTC Notifications because theJFTC doesnotapprove
anycodewhich isinconsistent withtheregulation. Therefore, Japan concludes thataslongasno
nullification orimpairment results fromthecontent oftheJFTC regulation, theJFTC approval does
notnullify orimpair benefits ofJapan'strading partners.
6.506 With respect toJapan'scontention thatthecodes andcouncils donotregulate thesaleor
promotion ofphotographic materials andthatthecodes werenotdrafted withfilmorpaper inmind,
theUnited States responds thattheactual market effects these codes andcouncils istostultify
promotions forphotographic materials intheJapanese market, andthatitisthisactual effect towhich
theUnited States objects.
6.507 FortheUnited States, theevidentiary record reflects therelationship between thecodes and
photographic materials. InthecaseofthePromotion Council, e.g.,its1984Self-Regulating Measures
provide thattheycover "DPrepresentations", or"representation[s] ofthephoto processing feefor
colour negative film".963Withrespect totheRetailers Code, itslanguage provides anample basisfor
thewidespread perception among retailers thatitinfactapplies tofilmanddevelopment orprocessing.
TheUnited States points outthatArticle 2.2oftheRetailers Code provides that"[t]oattain theobjectives
outlined ...above ...businesses aretorespect thespirit ofthiscodeevenwhen theproducts being
dealtwithdonotcorrespond exactly toCameras andRelated Products". Anindustry member explained,
itwould "indeed havebeenimpossible topersuade Zenren members whose main lineofbusiness is
development printing tocontribute if[theregulations] only[apply to]hardware".964
6.508 Japan argues thatthestatement oftheSecretary General ofZenren inthesame article ("Iwill
endeavour tomake bothphotosensitive materials anddevelopment printing fallunder thecode") should
beunderstood asanexpression ofwilltoextend thecodetofilmandpaper which presently donot
fallunder thecoverage.
6.509 TheUnited States believes thatitisirrelevant whether thecodes andcouncils govern film
andpaper dejureordefacto. What doesmatter isthatJapan hasorganized themostpowerful elements
ofitsdomestic photographic industry andallowed themtosetstandards onhowproducts intheirsector
maybepromoted. TheUnited States contests Japan'sstatement thatrulesadopted byJapan'sleading
963SelfRegulating Standards Regarding Representations ofDeveloping FeesforNegative Colour FilmhavebeenFinalized,
Kosei Torihki Joho, 28May 1984, p.3,USEx.84-4.
964Discussion ofProgress ofFairTrade Council Focuses onMaking FairCompetition Code Fully Known, Zenren Tsuho,
August 1987, p.3,USEx.87-7. Japan contests thecorrectness ofthistranslation. Seetranslation issue 18.WT/DS44/R
Page294
photographic retailers orwholesalers, which govern thepromotion ofalmost every itemthesebusinesses
sell,willhavenoeffect onfilmandpaper.965IntheUSview, Japan hasinvited itsphotographic industry
todevise andenforce rules intheirself-interest, andobvious market realities associated withsuch
extraordinary industry cooperation should notbeignored.
(d) Conclusions
6.510 TheUnited States argues thatJapan liberalization countermeasures directed against wholesalers
andretail stores through aseries ofpromotion restrictions have disadvantaged imported foreign
photographic material manufacturers byconstraining theirability toincrease salesthrough theuseof
gifts, prizes andother economic inducements, ortorelyupon innovative advertising campaigns,
particularlywherepriceorpricecomparisonsarediscussed.TheUnitedStatesallegesthatJapanimposed
these countermeasures forthepurpose ofdampening import competition and,toensure theirsuccess,
enlisted theaidofthedomestic photographic materials industry inenforcing theregime.
6.511 Japan claims thatthereisnomeasure inthePremiums Law, JFTC Notifications orotherJFTC
regulations which nullifies orimpairs benefits accruing totheUnited States. Accordingly, inJapan's
view, theUnited States hasnotdemonstrated therelevant conditions tosubstantiate itsnon-violation
claim.
965TheUnited States questions thatpromotions otherwise banned would bewelcomed bymembers ofa"fairtrade council"
simply because theyareused, e.g., forfilminstead ofatripod orcamera bag.WT/DS44/R
Page295
E. REASONABLE ANTICIPATION
1. THE LEGAL TEST
6.512 TheUnited States claims thatitnegotiated inthree separate rounds ofmultilateral trade
negotiations fortariff concessions fromJapan inthephotographic materials sector. Ateachpoint in
timethatitreceived atariff concession from Japan, theUnited States hadareasonable expectation,
based onthe"pertinent factsavailable" atthetimeofthenegotiation, thatJapan would nottakefuture
action tonullify orimpair theconcession. TheUnited States emphasizes thatthere werenofactsof
which theUnited States reasonably "should havebeenaware" concerning measures thattheJapanese
Government mayhavetaken prior totheconclusion ofatariff negotiation thatthereafter nullified or
impaired theconcessions.
6.513 TheUnited States recalls thattheEEC-Oilseeds panel found thatparties negotiating tariff
concessions, aprincipal benefit ofwhich istheopportunity forimproved pricecompetition withrespect
todomestic products, maybeassumed nottoanticipate actions bythecountry granting theconcession
thatoffset theprice advantage toresult from thetariff reduction:
"The Panel considered themain value ofatariff concession isthatitprovides an
assurance ofbetter market access through improved price competition. Contracting
parties negotiate tariff concessions primarily toobtain thatadvantage. They must
therefore beassumed tobasetheirtariff negotiations ontheexpectation thattheprice
effect ofthetariff concessions willnotbesystematically offset".966
6.514 Further, the1961 Panel Report onTheOperation oftheProvisions ofArticle XVIexplained
thataparty'sreasonable anticipation would beevaluated inlightofthe"pertinent factsavailable" at
thetimeitnegotiated thetariff concession.
"BythisthePanel understands thatthepresumption isthatunless suchpertinent facts
wereavailable atthetimethetariffconcession wasnegotiated, itwasthenreasonably
tobeexpected thattheconcession would notbenullified orimpaired bytheintroduction
orincrease ofadomestic subsidy."967
6.515 TheUnited States further submits thatthepanel onEEC-Canned Fruit approached theissue
ofreasonable anticipation withrespect tomeasures thatexisted prior totheconclusion ofthetariff
negotiations byasking whether thecountry receiving theconcessions "should havebeenaware" of
themeasuresinquestionsuchthatit"shouldhavetakendueaccountof[them]innegotiatingconcessions"
withrespect totherelevant products.968
6.516 Japan contends that,although theUnited States triestoassume theburden ofproof away by
incorrectly quoting precedents foroverbroad propositions, interpreted properly, theprecedents cited
bytheUnited States donotsupport itsposition. Inthe1961 Panel Report ontheOperation ofthe
Provisions ofArticle XVI,theterms ofreference were quite specific inreferring to"subsidies" and
afewotherspecific policy issues. Japan'snotes thatthefollowing passage reveals important limitations
onexactly whatparties canbeheldtoreasonably assume:
966EEC -Oilseeds, BISD 37S/86, 128-131, para. 148; paras. 149-150.
967Panel Report onOperation oftheProvisions ofArticle XVI("Operation ofArticle XVI"),adopted on21November
1961, BISD 10S/201, 209, para. 28.
968EEC -Canned Fruit,GATT Doc. L/5778, p.29,para. 79(unadopted).WT/DS44/R
Page296
"Sofarasdomestic subsidies areconcerned, itwasagreed thatacontracting party
which hasnegotiated aconcession under Article IImaybeassumed forthepurpose
ofArticle XXIII, tohaveareasonable expectation, failing evidence tothecontrary,
thatthevalue oftheconcession willnotbenullified orimpaired bythecontracting
party which granted theconcession bythesubsequent introduction orincrease ofa
domestic subsidy ontheproduct concerned".969
6.517 ForJapan, itisthusclearthatthispanel report hardly establishes thekindofgeneral principle
which theUnited States claims, butrather reflects averyspecific concern about domestic subsidies
granted toproducts thathadbeensubject totariff concessions. Moreover, thislanguage alsomakes
clear thatthedomestic subsidy mustbeintroduced orincreased subsequent tothetariff concessions
relevant inthiscontext. Thesame limitations existed intheEEC-Oilseeds panel: themeasures at
issueinthatcasewereproduct-specific domestic subsidies introduced subsequent totherelevant tariff
concessions.970Thefinding oftheEEC-Oilseeds panel about theassumption ofreasonable expectations
hastobeunderstood inthespecific factual context ofthatcase.
6.518 TheUnited States accepts thatanumber ofprior panel reports haveinquired whether a
product-specific subsidy wasintroduced orincreased subsequent tothetariffnegotiations.971However,
theUnited States submits thatthecurrent dispute isnotabout product-specific subsidies, which are
easytodetect andwhose effects areeasytopredict. TheUnited States emphasizes thataMember
cannot beheldtothesame standard ofknowledge about non-transparent, non-traditional andoften
non-sector-specific measures asforproduct-specific measures. But,theUnited States rejects Japan’s
characterization ofthefactors andfindings intheEEC- Oilseeds dispute. Inthatcase,thepanel rejected
theEC'sargument thattheexistence ofsome measures atthetimeofthetariff concession --which
were latersubstantially enhanced --meant thattheUnited States could orshould havereasonably
anticipated theirmodification orenhancement.972
6.519 Astotheissue ofthekindofknowledge thatforms thebasis oflegitimate expectations with
respect totherelevant tariffconcessions, Japan explains thatthe"reasonably anticipated" requirement
recognizes thattradenegotiations donottakeplace inavacuum; countries bargain against abackground
oftheirownandother countries ’policies andeconomic conditions, i.e.,past,present, andanticipated
inthefuture. Expectations concerning thisbackground shape theconcessions thatareoffered andthose
thatareaccepted. Itistherefore reasonable toassume thatcountries takeintoaccount other countries ’
past,present, andanticipated future policies when negotiating trade concessions.
6.520 Accordingly, participants ofthetypeofnegotiations stipulated byArticle XXVIII bisofGATT
should bedeemed tohavetaken intoaccount allexisting policies andmeasures, aswellasallpolicies
andmeasures thatcould bereasonably anticipated atthattime, when negotiating thetariffconcessions.
ForJapan itfollows thatcountries should notbeallowed toclaim nullification orimpairment byreason
ofmeasures orpolicies thatalready existed orcould havebeenreasonably anticipated atthetimewhen
therelevant tariffconcession, i.e.,the1994Uruguay Round tariffconcessions, weremade. InJapan's
view, itsinterpretation isconsistent withthefindings oftheEEC-Oilseeds panel, which heldthat
969Panel Report onOperation ofArticle XVI, op.cit.,para. 27.
970TheEEC-Oilseeds panel found that"thecasebefore itdoesnotrequire thePanel toaddress thequestion ofwhether
theassumption created bythe1955 decision oftheCONTRACTING PARTIES applies toallproduction subsidies, including
generally available subsidies serving broad policy objectives ...[a]tissue inthecasebefore itareproduct-specific subsidies
."... EEC -Oilseeds ,BISD 37S/86, 128, para. 148.
971TheAustralia -Ammonium Sulphate andGerman -Sardines decisions didnotinvolve product-specific subsidies. See
Report oftheWorking Party ontheAustralian Subsidy onAmmonium Sulfate ,adopted 3April 1950, BISD II/188-196, para.
12;Panel onTreatment byGermany ofImports ofSardines, G/26, adopted 31October 1952, BISD 1S/53-59, paras. 16-17.
972See,e.g.,EEC -Oilseeds ,paras. 81and149.WT/DS44/R
Page297
whether ornotthemeasures atissuecould havebeenreasonably anticipated bythecomplaining party
isoneoftheimportant elements intheexamination ofanon-violation complaint.973
6.521 FortheUnited States ,therearetwocompelling reasons whyJapan’s"reasonably anticipated"
testshould berejected:
a. First, there isnotextual basis forsucharuleintheGeneral Agreement. Article
XXIII:1(b) refers to"theapplication ...ofanymeasure, whether ornotitconflicts withtheprovisions
ofthisAgreement." IntheUSview, thedrafters ’selection oftheterm"anymeasure" evidences their
intent thatArticle XXIII:1(b) bereadtoaddress allsituations inwhich aMember believes thatbenefits
accruing toitunder theGeneral Agreement havebeennullified orimpaired byanother Member ’s
measures. Therefore, theUnited States concludes thattheordinary meaning ofArticle XXIII:1(b)
doesnotprovide abasisforJapan’sargument thatanymeasure should beexcluded fromconsideration
thatexisted -orisrelated toameasure thatexisted -prior tothetimeatwhich theFinal Actofa
multilateral tariff negotiation issigned.
b. Second, itiswellestablished that"acontracting partywhich hasnegotiated aconcession
underArticleIImaybeassumed,forthepurposeofArticleXXIII:1(b),tohaveareasonableexpectation,
failing evidence tothecontrary, thatthevalue oftheconcession willnotbenullified orimpaired by
thecontracting party which granted theconcession ...".974TheMember receiving theconcession is
entitled tothispresumption "unless suchpertinent factswereavailable atthetimethetariffconcession
wasnegotiated" thatwould undermine thisexpectation.975
6.522 TheUnited States submits thatthecriteria developed inGATT jurisprudence ontheissue of
what kind ofknowledge forms thebasis forlegitimate expectations follow afundamental and
practical logic: SolongasMembers areaware ofthe"pertinent facts" concerning measures ofother
Members, "there isnothing toprevent [them], when theynegotiate reduction oftariffs, fromnegotiating
onmatters ...which might affect thepractical effects oftariff concessions".976Bycontrast, inthe
USview, ifthe"pertinent facts" arenotavailable, parties cannot beexpected toaddress them during
tariff negotiations. NorcanMembers beexpected toconduct extensive research oneachtariff item
todetermine whether there aremeasures thatcould reasonably beexpected tonullify orimpair. The
United States submits that,astheEEC-Canned Fruit panel found, theissue iswhether andtowhat
extent thecountry receiving theconcessions "should havebeenaware" ofthemeasures inquestion
suchthatit"should havetaken dueaccount of[them] innegotiating concessions" withrespect tothe
relevant products.977
6.523 According toJapan ,there isnoprecedent ordecision tosupport theUStheory thatthelack
ofknowledge ofcertain pre-existing "measures" bythecomplaining party leads toaconclusion that
abalance oftariff concessions needs tobeadjusted when newknowledge isacquired:
a. Thepanel onEEC-Oilseeds onlydealtwithacasewhere themeasures atissue were
introduced subsequent totherelevant tariff concessions andnotacaseabout pre-existing
measures;
973Ibid., p.129, para. 149.
974Ibid., p.127, para. 147.Working Party Report onOther Barriers toTrade ,adopted on3March 1955, BISD 3S/222,
224, para. 13.
975Working Party onOperation ofArticle XVI,BISD 6S/201, 209,para. 28.Thepresumption wasestablished forand
hasbeenapplied onlyinnon-violation cases involving subsidies. Thelogic ofthepresumption, intheUSview, should also
apply toanon-violation caseinvolving anytypeofmeasure: thecomplaining party should onlybeheldtoknowledge of
measures forwhich pertinent facts were available atthetimeofthenegotiation.
976SeeOperation ofArticle XVI,op.cit.,para. 28,citing Working Party onOther Barriers toTrade, op.cit.,para14.
977EEC -Canned Fruit,GATT Doc. L/5778, p.29,para. 79(unadopted).WT/DS44/R
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b. The1955 Working Party Report onOther Barriers toTrade978made itclearthatthe
domestic subsidy mustbeintroduced subsequent totherelevant tariffconcessions inthiscontext;
c. The1961 Panel Report onOperation oftheProvisions ofArticle XVI979alsodealt
withthereasonable expectation thattheconcession would notbenullified orimpaired bya
subsequent measure (i.e., theintroduction orincrease ofadomestic subsidy inthatcase);
d. The1985 panel onEEC-Canned Fruit,980which isunadopted, istheonlyprecedent
thatdealtwithameasure thatalready existed atatimeofatariffconcession under consideration.
However, thatpanel found thatthecomplaining party should havebeenaware oftheexistence
ofthemeasure, andnotthatacomplaining party wasexcused from being presumed tohave
knowledge about apre-existing measure.
6.524 More generally, Japan contends thattheUnited States triestoshifttheburden ofproving that
itcould nothavereasonably anticipated thealleged measures atissue. Japan emphasizes thatitisthe
United States thatbears theburden ofproving thatthechallenged measures were notreasonably
anticipated atthetimeofthetariff concessions.
6.525 TheUnited States doesnotdisagree thatthecomplaining partyhastheinitial burden ofshowing
thatitdidnotreasonably anticipate thechallenged measures atthetimeofthetariff concessions. The
United States hasmade suchashowing inthiscasebased onthepertinent factsavailable atthetime
ofeachnegotiation. However, theresponding party, inorder toprevail, mustprovide firmevidence
rebutting thecomplaining party’sdemonstration thatitwasnotaware ofpertinent factsthatwould
havealtered itsreasonable expectations. Ifthatwere notthecase, complaining parties would bear
theburden ofproving whytheyshould nothaveanticipated thatthedefending party would implement
itstariff concessions inbadfaith. Aparty receiving atariff concession doesnotandshould nothave
toprove whyitdidnotassume thattheparty granting atariff concession would frustrate thevalue
ofthose tariff concessions.
6.526 TheUnited States explains thatinformation ontheexistence ofmany oftheindividual measures
atissueinthiscasewasnot"available" because itwasnotprinted insources thatgovernments typically
usetoannounce tradepolicies ortowhich tradenegotiators orforeign business persons typically have
access. Even iftrade negotiators could have, withextensive efforts, identified andlocated some of
themeasures, theycould nothavedeveloped acoherent picture ofthegroup ofmeasures because they
wereissued indozens ofsources ranging fromthereports ofgovernment-industry committees onwhich
noforeigners served toarticles inindustry association journals available totheassociation ’s
predominantlyJapanesemembership.TheUnitedStatesemphasizesthatitisexactlytheinterrelationship
between these measures thatdeprives foreign producers ofmarket access.
6.527 Japan rejects theUSargument thatitcould nothaveknown theadditional, combined effects
ofthemeasures atissue, given that,inJapan'sview, theUnited States admitted thatitwasaware of
theexistence ofmany ofthemeasures andtheiralleged general effects. Inresponse totheUSnotion
ofmeasures "working together," Japan points outthattheUSargument onthispoint isnotspecific
andthat,inJapan'sview, nothing "working together" withnothing isstillnothing.
6.528 FortheUnited States ,indetermining what measures itshould havebeenaware ofbefore
entering intotariffnegotiations withJapan orwhatmeasures theUnited States should haveanticipated
thatJapan would impose afterthetariff negotiations, itisimportant toconsider thenature ofthe
978Working Party Report onOther Barriers toTrade ,op.cit.,para. 13.
979Panel Report onWorking Party ontheOperation oftheProvisions ofArticle XVI,op.cit., p.224, para. 28.
980EEC -Canned Fruit,GATT Doc. L/5778, (unadopted).WT/DS44/R
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measures. IntheUSview, thetypeofmeasures atissue inthisdispute aredramatically different -
andsubstantially harder todetect andcomprehend -thantheproduct-specific subsidies atissueinprior
Article XXIII:1(b) disputes.981TheUnited States explains thattheindividual measures usedbythe
Japanese Government toimplement itscountermeasures program arenotthekinds ofmeasures countries
would normally examine todetermine whether tariff concessions might benullified orimpaired.
AccordingtotheUnitedStates,Japan'smeasuresarenotthetypesoftradeinstrumentsthathavetypically
beenusedbygovernments torestrict thebenefits flowing fromtariffconcessions, arenotlabelled trade
instruments, andcould notbefound instatutory compilations oftypical trade instruments, suchas
subsidies, anti-dumping measures, other customs measures orsafeguards.
6.529 Japan disagrees withtheUSargument thatitcould nothaveanticipated theJapanese measures
inquestion because theyarehardtodetect andcomprehend byvirtue oftheirnature, because ofthe
publicity ofthealleged measures inthiscase,USconcerns about themexpressed intheNational Trade
Estimates Reports andbilateral discussions during thelate1980s andthefirsthalfofthe1990s. Japan
further argues thatitisreasonable toassume thatUStrade negotiators areincommunication with
representatives oftheirexporting industries.982Industry representatives arefullyaware ofindustry-
specific trade barriers, realorimagined, andarefullycapable ofcommunicating anyconcerns they
have. Trade negotiators are,andshould bedeemed tobe,well-equipped tojudge whether existing
policies ormarket conditions arelikely toundermine thevalue ofaparticular tariff concession offer.
Accordingly, inJapan'sview, theUSargument thattrade negotiators should bepresumed unaware
ofpublished documents andpublicly known factsisunconvincing.
6.530 TheUnited States underscores thatmostofthese measures areneutral ontheirface. Thus,
assumingthattradenegotiatorshadtheinsighttounderstandthesingularnatureofgovernmentregulation
ofbusiness inJapan andhadtimetoexamine these measures oflaw,eventhen, theywould likely not
haveunderstood themeasures 'roleandeffect. Inaddition, theUnited States points outthatmany
ofthemeasures werenotsector-specific andwereissued inliterally dozens ofsources, ranging from
thereports ofgovernment-industry committees onwhich noforeigners served, toarticles inindustry
association journals available totheassociation 'spredominantly Japanese membership. Even if,with
extensive efforts, trade negotiators hadbeenabletoidentify andlocate these measures, theywould
nothavebeenabletounderstand howthemeasures operated generally intheJapanese economy as
awhole, letalone howthecountermeasures worked specifically inthephotographic materials sector.
6.531 Japan emphasizes thatalloftheUSallegations inthiscase, (i)thatsingle-brand distribution
impedes imports, (ii)thattheLarge Scale Retail Store Lawimpedes imports, and(iii)thatregulations
under thePremiums Lawimpede imports, havebeenapplied generally toproducts across theboard,
andthesegeneral concerns wereclearly ontheminds ofUStradenegotiators during theUruguay Round.
InJapan'sview, theUnited States cannot haveformed some legitimate expectation thatitsconcerns -
assuming thattheywere valid -would notapply tofilmandpaper among other products.983
6.532 TheUnited States requests thepanel todirect itsinquiry atwhether theUnited States was
aware, orshould havebeenaware oftheeffects ofanexisting measure, orcould haveanticipated the
effects ofanewmeasure, onthespecific products ortariff concessions under consideration, taking
981SeeEEC-Canned Fruit, GATT Doc. L/5778, p.18,para. 52(unadopted) (finding thattheUnited States should have
beenaware ofasubsidy granted oncanned peaches inMay1978 prior totheconclusion oftheTokyo Round inJune1979,
andtaken dueaccount ofthisinthenegotiations).
982Japan notes thattheUnited States documented thatUStrade negotiators were incommunication withKodak during
theTokyo Round negotiations.
983Japan notes thattheUnited States itself stressed itslongheldanddeepinterest inthissector initssubmissions tothis
Panel: "During theTokyo Round, theUnited States once again attached ahighpriority tonegotiating tariff concessions
onphotographic filmandpaper from Japan." "The value thattheUnited States placed onobtaining tariff concessions on
photographic filmandpaper... isevident from itscontinuing efforts tosecure improved access totheJapanese filmandpaper
market during three successive rounds ofmultilateral trade negotiations."WT/DS44/R
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intoaccount allrelevant factsandcircumstances. These include, (i)thenature ofthemeasure (i.e.
whether itisproduct-specific likeasubsidy ormore generic likeJapan’sPremiums LawandLarge
Stores Law), (ii)themanner inwhich themeasure waspromulgated andpublicized, and(iii)theway
inwhich themeasure operated inconjunction withother measures. TheUnited States explains that
thecomplaining party’sknowledge ofameasure anditseffect onthespecific products under negotiation
isrelevant indetermining whatbenefits thecomplaining party could reasonably haveexpected toflow
from thetariff concessions forwhich itbargained. Forexample, acomplaining party should have
lesser expectations if,atthetimeofthenegotiations, ithasknowledge ofameasure -orcanpredict
theintroduction ofameasure -anditseffect onthebenefits flowing from atariff concession.
6.533 Japan emphasizes thattheeffects ofthemeasures should beirrelevant tothereasonable
anticipation test. Anexamination ofwhether theeffects ofthemeasures, including potential effects,
arereasonably anticipated could, inJapan'sview, leadtosubjective andarbitrary judgements onthe
content andtheextent oftheeffects tobeanticipated. Thebenefit oftariffconcessions under Article II
isnottheactual economic result oftariff concession (i.e., import volumes), buttheexpectation of
improved competitive conditions forimports. ForJapan, itwould thusbeinappropriate totrytojudge
theeffects ofthemeasures atissue inlightofactual trade results when determining theexistence of
"reasonable anticipation".
6.534 Japan further advocates aclearandstable standard ofjudgement inexamining whether ornot
toallow thealleged lackofknowledge ofcertain measures bythecomplaining party tojustify anon-
violation complaint. Tothisend,theevaluation ofwhether acertain measure could havebeenreasonably
anticipated orknown should bedetermined based notonthe"subjective" criteria ofwhether aparticular
government ataparticular timecould haveanticipated orknown themeasure atissue, butrather on
objective criteria, suchasdegree ofpublicity ofthemeasure.
6.535 TheUnited States underscores thatnegotiators fromother countries intheKennedy, Tokyo,
orUruguay Rounds could notdiscern whether thedistribution countermeasures, Large Stores Law,
andthepromotion countermeasures would disrupt theflowofbenefits flowing from market access
commitments. IntheviewoftheUnited States, torequire Members inthemidst ofongoing multilateral
tariff negotiations toundertake thetypeofinvestigation andanalysis thatwould havebeennecessary
touncover theindividual elements ofJapan’sliberalization countermeasures andthenature andscope
ofthescheme asawhole, would fundamentally undermine theprocess oftariff negotiations under
Article IIofGATT. Ifthiswerethestandard, theUnited States suggests thatnonegotiator could ever
besufficiently certain thataconcession would notbenullified orimpaired toaccept suchaconcession.
Inparticular, theUnited States stresses thataMember should notberequired toassume thatallmeasures
existing atthetimeofatariffnegotiation havethepotential tonullify orimpair specific tariffconcessions
ortoanticipate thattheparty granting thetariff concession willintroduce newmeasures tonullify or
impair itsconcessions. FortheUnited States, suchanapproach would imply thatWTO Members
should assume thattariff concessions arenotnegotiated ingood faith.
6.536 Japan ,inturn, requests thePanel toapply strictly thecriterion ofreasonable anticipation.
Otherwise, there would nolonger beanysecurity inthebalance oftariff concessions, since thenon-
violation remedy would expose tariff bargains toconstant attack ontheground thatcertain Members
hadinsufficient understanding ofwhat theywere doing when theyaccepted other Members ’trade
concessions.Inthatevent,Japanargues,ArticleXXIII:1(b)wouldberenderedperverselyself-defeating.
InJapan'sview,aprovisiondesignedtopreservetheintegrityoftariffconcessionswouldinsteadbecome
aninstrument forundermining it.
6.537 According totheUnited States ,Japan hasargued thattheUnited States knew orhadreason
toknow ofsome ofthediscrete elements oftheliberalization countermeasures and,therefore, itsnon-
violation argument fails. TheUnited States acknowledges thatovertimeother countries havebecome
aware ofconditions inJapan other thantariffs thatposeobstacles toimported products. However,WT/DS44/R
Page301
theUnited States didnotunderstand, untilitbegan toprepare thiscaseintheWTO, andonlythrough
extensive research diditcome tounderstand thattheJapanese Government played acentral rolein
closingthedistributionsystem.NorwastheUnitedStatesawarethatJapanusedothermeasuresaffecting
wholesaling, retailing andmarketing toprevent foreign products from circumventing theclosed
distribution system.
6.538 Japan responds thattheUnited States gives noreason why, afterithasbeenunable toacquire
therequisite knowledge forthepasttwodecades ormore, theclouds havesuddenly lifted theendof
theUruguay Round, revealing everything toitandallowing ittobring itscomplaint.
6.539 TheUnited States maintains thatJapan acted attheendofeachnegotiating round toestablish,
reinforce, andsubstantially enhance measures thatcaused thesystematic exclusion ofimports from
keydistribution channels. TheUnited States points outthatittookextensive investigation andreview
ofthousands ofdocuments fromawidevariety ofseemingly unrelated sources topiece together and
understand thefullimport ofJapan’sactions. IntheUSview, forthese actions tobenowexcused
onthebasis thatother parties should haveknown about oranticipated itsactions would undermine
confidence inthetariff negotiating process under Article II.
6.540 InJapan ’sview, theUSapproach would overburden andpossibly haltatariff negotiation
process, because theparty granting theconcessions would feelcompelled topresent indetail tothe
other parties tothenegotiation extensive information regarding anypolicy andanyaction which could
otherwisebeusedforfuturenon-violationclaims.Inthisregard,Japanarguesthatwhilethepresumption
ofthelackofknowledge ofmeasures onthepartofacomplaining party maybeestablished forsuch
measuresasdomesticsubsidiesintroducedsubsequentlytothetariffconcessions,measureswhichalready
existed atthetimeoftariffconcessions, especially those which werepublicly known, should bedeemed
tobeknown bytheparty receiving thetariff concessions.
6.541 Japan requests thePanel toreject theUSnon-violation claims because theUnited States could
reasonably haveanticipated thealleged measures atthetimeofthe1994tariffconcessions. ForJapan
itisclearthattheUnited States could havereasonably anticipated theparticular Japanese policies at
issue inthiscaseatthetimetherespective tariff concessions were being made. Accordingly, Japan
contends thattheUnited States hasnotmetitsburden ofproviding a"detailed justification" forits
claims under Article 26.1(a) oftheDSU.
2. SPECIFIC NEGOTIATING ROUNDS ONTARIFF CONCESSIONS
(a) General overview
6.542 TheUnited States declares thatateachpointintimeitreceived atariffconcession onconsumer
photographic filmandpaper from Japan (i.e., intheKennedy Round, Tokyo Round andUruguay
Round), theUnited States hadareasonable expectation, based onthe"pertinent factsavailable", that
Japan would notimpose measures tonullify orimpair theconcessions. TheUnited States asserts with
respect tothemeasures Japan applied subsequent toeachround, therewerenofactsavailable thatwould
haveenabled theUnited States reasonably toanticipate those actions would undermine theconcessions.
TheUnited States isconvinced thatfollowing theKennedy, Tokyo andUruguay Rounds, withrespect
toJapan'songoing application ofcertain measures neither theUnited States noranyother contracting
party either should orcould havebeenaware oftheexistence oroperation ofthese measures suchthat
it"should havetaken dueaccount of[them] innegotiating concessions".984
984EEC -Canned Fruit,op.cit., p.29,para. 79.WT/DS44/R
Page302
6.543 Astotheissue ofthekindofknowledge thatforms thebasis oflegitimate expectations with
respect totherelevant tariff concessions, Japan argues thatforUSexpectations tobelegitimate in
thiscontext, theymusthavetaken intoaccount allofJapan'smeasures thatcould havebeenreasonably
anticipated atthetimethe1994 Uruguay Round tariff concessions were made.
6.544 Inthealternative, ifthePanel decides thatthe1994 Uruguay Round tariff concessions were
nottheonlyconcessions relevant tothiscase,Japan contends thattheUSnon-violation claims remain
flawed bythreshold timing problems.
6.545 AstotheTokyo Round ,Japan argues thatalmost allofthealleged measures indispute occurred
before the1979Tokyo Round tariffconcessions, which werethefirsttariffconcessions oncolour film
andpaper. InJapan'sview, those alleged measures thatoccurred subsequently should havebeen
reasonably anticipated bytheUnited States. Accordingly, forJapan there arenoalleged measures
indispute thatarecapable ofnullifying orimpairing benefits accruing withrespect tocolour filmor
paper. Allthatremains isblack andwhite filmandpaper, which currently comprise lessthantwo
percent ofthetotalJapanese consumer photosensitive materials market.985
6.546 With respect totheKennedy Round ,Japan further admits thatmany ofthealleged measures
indispute occurred afterthe1967 tariffconcessions onblack andwhite filmandpaper.986Nevertheless,
according toJapan, eventhesealleged measures were"outgrowths" ofpreviously announced policies,
andthusshould havebeenreasonably anticipated bytheUnited States. Consequently, inJapan'sview,
evenifexpectations concerning earlier tariffconcessions remain protected, theUSnon-violation claims
cannot meetthefirstbasic requirement, i.e.,a"benefit" oflegitimate expectations capable ofbeing
nullified orimpaired.
6.547 TheUnited States responds thatallofJapan’stariff concessions -intheKennedy, Tokyo and
Uruguay Rounds -arerelevant. Japan’sliberalization countermeasures were directed atconsumer
photographic filmandpaper, whether black andwhite, orcolour. Until 1970-1972, black andwhite
wasthepredominant consumer film(andpaper) usedinJapan; thereafter, itwascolour. Thetariff
concessions theUnited States received from Japan tracked thisprogression ofthemarket.987
6.548 IntheviewoftheUnited States, Japan isarguing, ineffect, thattheUnited States should have
known thatJapan wasnullifying orimpairing itsKennedy Round tariff concessions, andshould have
anticipated thatitwould continue nullifying orimpairing itssubsequent tariffconcessions intheTokyo
andUruguay Rounds onphotographic filmandpaper. Intheunderstanding oftheUnited States, Japan
suggests thataMember isdeemed tohaveknowledge ofanymeasure thatexisted -orisrelated to
ameasure thatexisted -prior tothetimeatwhich theFinal Actofamultilateral tariff negotiation is
signed, andtoanticipate thatsuchmeasures would undermine thetariff concession.
(b) Kennedy Round
6.549 JapansubmitsthattheKennedyRoundwasformallyconcludedon30June1967.Allsubstantive
negotiations were finished atthelastminute.988During theKennedy Round, Japan accepted bound
tariff reductions forblack andwhite filmandpaper, butmade noconcessions atallwithrespect to
colour filmorpaper. Thus, theKennedy Round isonlyrelevant atallifthealleged measures nullified
985Photo Market 1996, p.55,Japan Ex.A-1.
986There werenoKennedy Round concessions oncolour filmorpaper. Japan notes thatthefirstUSsubmission incorrectly
indicates thatthere were bound tariff concessions oncolour filmandpaper intheKennedy Round, butthatthesecond US
submission correctly indicates theabsence ofanybound tariff concessions.
987Seealsoparas. 2.2,2.4,5.26 and6.43, above.
988SeeGilbert Winham, International Trade andtheTokyo Round Negotiation (1986), p.77-78 (noting ECinternal
difficulties thatprevented anyserious negotiations from starting untilJanuary 1967), Japan Ex.E-6.WT/DS44/R
Page303
orimpaired theconcessions related toblack andwhite filmandpaper. Moreover, Japan recalls that
black andwhite filmandpaper onlyrepresent about 2percent ofthepresent Japanese market. Thus,
totheextent theKennedy Round isrelevant tothiscase, itisonlyrelevant toatrivial portion ofthe
products atissue. However, foreign brands haverepresented asmuch as40-50 percent ofthemarket.
6.550 TheUnited States claims thatduring theperiod 1964 to1967, there werenopertinent facts
available tonegotiators from theUnited States oranyother GATT contracting party thatchallenged
theirreasonable expectations thatJapan would notnullify orimpair Japan’sKennedy Round concessions
onphotographic filmandpaper. AtthetimeoftheKennedy Round negotiations, (i)Japan hadnot
articulated aclearpolicy ofdistribution systemization; (ii)hadnotdetermined thatitwould aggressively
limittheexpansion oflarge stores; and(iii)hadnotindicated itwould userestrictions oneconomic
inducements toprevent foreign enterprises frompenetrating theJapanese market. Norwasthere any
reason thattheUSGovernment should haveknown thattheJapanese Government would takesuch
actions attheconclusion oftheKennedy Round.989
(i) Distribution "countermeasures"
6.551 Japan 'snotes thattwoitems listed bytheUSpreceded thetariff concessions oftheKennedy
Round:
(i) 1967 Cabinet Decision; and
(ii) JFTC Notification 17(1967).
6.552 First, Japan explains thatthe1967 Cabinet Decision wasadopted on6June1967, before the
finalagreement concluding theKennedy Round agreement on30June1967. TheCabinet Decision
ratified public debate from thepreceding twoyears andclearly endorsed distribution modernization
asawaytoremedy inefficiency andprepare forimminent capital liberalization. Second, theJFTC
issued Notification 17inMay1967, evenearlier thanthe1967 Cabinet Decision.
6.553 TheUnited States responds thatatthetimeoftheKennedy Round negotiations, there were
nopertinent facts available concerning theactions Japan waspreparing totaketoimplement its
liberalization countermeasures program. The1967 Cabinet Decision, which approved theuseof
countermeasures toprevent foreign enterprises from penetrating theJapanese market through key
distribution channels, hadyettobepromulgated andimplemented. TheUnited States argues thatJapan
hadnotarticulated aclearandcoordinated systemization policy toblock access toprimary wholesalers.
6.554 IntheUSview, theJapanese Government 'sarray ofopaque, informal measures toimplement
thesystemization policy could nothavebeenforeseen:
(i) 1969 Survey Report onTransaction Terms;
(ii) 1970 Guidelines;
(iii) 1971 Basic Plan;
(iv) 1975 Manual;
(v) JDBfunding forKonica 'swholesalers (which commenced in1976);
(vi) SMEA funding forphoto processing laboratories (first designated inJuly1967).
6.555 According toJapan ,while theitems listed bytheUnited States occurred afterthe1967
concessions, thefollowing items werean"outgrowth" ofMITI'songoing distribution modernization
policies aimed atrationalization oftransaction terms andsystemization ofdistribution practices:
989Seealsoparas. 5.26and6.339 above. FortheUSresponse toJapan'sarguments concerning Japan'stariff concessions
oncolour, andblack andwhite filmandpaper, seepara. 6.337-6.338 inthesub-section VI.D.3.(c).(v). on"Black andwhite
filmandpaper" above.WT/DS44/R
Page304
(i) the1969 Survey;
(ii) the1970 Guidelines; and
(iii) the1971 Basic Plan;
(iv) theinternational contract notification requirement.
6.556 InJapan'sview, thesame holds truefortheinterim reports oftheDistribution Committee,
andthefirstandsecond interim reports oftheDistribution Committee of1964and1965, respectively,
which alsoendorsed modernization ofthedistribution sector. Japan points outthatthese reports were
published intheMITI Gazette, awidely readofficial MITI publication. Japan explains thatthe1967
Cabinet Decision, which occurred before theconclusion oftheKennedy Round andalmost ayearprior
totheJapanese acceptance oftheKennedy Round package, clearly embraced distribution modernization
asanecessary response toimminent capital liberalization. Japan point outthatthisdecision was
published andwidely publicized. ForJapan, itisinconceivable thattheUnited States Embassy inTokyo
would nothavewatched closely howJapan resolved thehigh-profile debate about capital liberalization
thathadbeentaking place in1966and1967. Japan further argues thattherequirement forinternational
contract notification alsotookplacepriortotheconclusion oftheKennedy Round. Although theUnited
States citesaminor change in1971, therequirement forinternational contract notification itself goes
backto1953. Therefore, Japan concludes thattheUnited States should havereasonably anticipated
thattheJapanese Government would continue topursue these policies.
6.557 Japan alsosubmits thatSMEA financing predates theconclusion oftheKennedy Round.
According toJapan, under SMEA financing, whose general framework wasestablished in1956,
photofinishing laboratories weredesignated asaneligible industry on1April 1967.990Thisspecific
financing program tophotofinishing laboratories thuspredated theKennedy Round deal. InJapan's
view, theUnited States could nothavehadanylegitimate expectation thatfinancing would notbegranted
toqualifying applicants inthephotographic sector.
6.558 Even assuming thatMITI’sdistribution modernization policies during the1960s and‘70s
encouraged single-brand distribution offilmandpaper asameans toexclude foreign brands from
traditional distribution channels, forJapan itisclear thatthese trends began wellinadvance ofthe
conclusion oftheKennedy Round. Astofilm,Japan argues thattwoofFuji’sfourprimary wholesalers
werealready single-brand dealers, aswereallofKonica ’sprimary wholesalers thateventually became
subsidiaries. Japan claims thattheUnited States should havebeenaware ofthistrend, since Fuji’s
thirdprimary wholesaler, Misuzu, terminated itsdealings withKodak inApril 1967, months before
thefinalKennedy Round deal. Similarly, Kodak ’sdistributor inJapan, Nagase, acquired Kuwada
in1967, andconverted Kuwada intoasingle-brand distributor. Kodak notonlyknew ofthetrend,
Kodakwaspartofthetrend.Publicpressaccountsdocumentedthetrendtowardsingle-branddistribution
forfilmaswellascameras. Asearlyas1964, tradepublications werealready noting thetrend toward
single-brandwholesaledistribution.991Astopaper,Japansubmitsthataffiliationsbetweenmanufacturers
andphotofinishing laboratories werealready common by1967.992InJapan'sview, theUnited States
could nothaveanylegitimate expectation thatthese trends would notcontinue.
6.559 TheUnited States claims thatJapan didnotarticulate, letalone implement, aclear and
coordinated systemization policy toblock access toprimary wholesalers untilaftertheKennedy Round
hadconcluded, thatnoneofitssubsequent actions wasforeseeable toJapan'snegotiating partners during
990According toJapan, theUnited States alleges thatthedatewasJuly1967. Japan contends thatthedesignation date
wasinfact1April 1967, anextremely common dateforsuchdesignations inJapan, since 1April marks thestartofanew
fiscal yearforthegovernment.
991Distribution Keiretsu Gaining Strength -AsShown byFuji’sSpecial Contract (Tokuyakuten) Shops, Zenren Tsuho,
May 1964, p.5,USEx.64-3.
992According todomestic industry sources, these affiliations began asearly as1960 andwere relatively common place
by1965. Affidavit ofTanaka Takeshi, p.3,Japan Ex.A-10.WT/DS44/R
Page305
theKennedy Round andthattheseactions havebeendifficult touncover, identify andunderstand even
withthebenefit ofintensive andunprecedented investigation and25years hindsight.
(ii) Restrictions onlarge stores
6.560 TheUnited States claims thatatthetimeoftheKennedy Round negotiations,
(i) theLarge Stores Lawhadnotyetbeenproposed; and
(ii) MITI'stwokeydirectives, which laidthefoundation forthelawbyexpanding the
scope oftheDepartment Store Law, werenotissued untilJune1968 andSeptember
1970, respectively.
6.561 Japan responds thattheenactment oftheLarge Stores Lawin1973andsubsequent amendments
in1978 anduptotoday, while subsequent totheKennedy Round, haverepresented thecontinuation
ofalongstanding policy ofpreserving retailing diversity through regulation oflargestores. Specifically,
theDepartment Store Lawwasenacted in1956, andrequired newdepartment stores toobtain permits
before opening. According toJapan, theLarge Stores Lawmerely represented anextension ofthis
preexisting regulatory policy toothertypesoflargestores thatwerestarting toarise(e.g., supermarkets,
discount stores) andtoblock thedeliberate circumvention ofthelaw. Japan argues thattheUnited
States could nothavehadanylegitimate expectation thatlarge stores would beallowed todisplace
small andmedium-size retailers intheabsence ofanygovernment adjustment process.
6.562 Moreover, inJapan'sview, thecurrently existing Large Stores Lawismore liberal thanthe
Department Store Lawforthefollowing reasons: First, theformer substituted anotification system
forthelatter’spermission-based system. Second, theformer ’sregulations onstoreholiday andclosing
hours arelessrestrictive thanthelatter’s.993Third, while only84percent ofapplications werepermitted
andimplemented under theDepartment Store Law, approximately 96percent ofnotified plans are
implemented under theLarge Stores Law. Therefore, Japan concludes thatevenifitwere accepted
thatrestrictionsonlargeretailstoresareunfavourabletoimportedproducts,thereisnothingunfavourable
totheimports thattheUnited States could nothaveanticipated atthetimeoftheKennedy Round tariff
concessions.
(iii) Promotion "countermeasures"
6.563 TheUnited States argues that,atthetimeoftheconclusion oftheKennedy Round, Japan's
decision tousefaircompetition codes asan"effective countermeasure" wasjustabout tobeannounced
andimplemented.994There wasnoreason whytheUnited States could orshould haveknown that
Japan wasabout totaketheseactions which resulted innullification orimpairment ofitsKennedy Round
tariff concessions.
6.564 Japan submits thatthePremiums Lawwasenacted in1962. Thislawtargeted conduct that
hadbeenidentified bytheJFTC asunfair trade practices asearly as1953. According toJapan,
Notifications 5and34merely represented elaborations ofthegeneral norms setforthinthePremiums
Law. The1972amendments granted enforcement authority toprefectural governments. Japan contends
thatallofthese developments should havebeenreasonably anticipated bytheUnited States, since the
United States hadnolegitimate basisforexpecting thatexcessive premiums anddeceptive advertising
would gounregulated, orthatthisregulation would notbeenforced vigorously.
993Japan notes that,under theDepartment Store Law, theminimum number ofstore holidays without permission was
48days (4days amonth) forurban areas and24days (2days amonth) forother locations forayear.
994Report oftheForeign Investment Council Expert Committee, reprinted inFinance, June1967, p.3,USEx.67-5.WT/DS44/R
Page306
(c) Tokyo Round
6.565 Japan submits thattheTokyo Round wasformally concluded on11July1979. TheTokyo
Round marked Japan’sfirsttariffconcessions oncolour filmandpaper, aswellasadditional concessions
onblack andwhite filmandpaper.
6.566 TheUnited States argues thatatthetimetheUnited States negotiated the1979Tokyo Round
concessionsonphotographicfilmandpaper,thethreeelementsofJapan’sliberalizationcountermeasures
hadall,toonedegree oranother, beenputintoplace andapplied. Inentering intotheTokyo Round
negotiations, theUnited States wasaware thatJapan regulated large stores through theLarge Stores
Lawandpromotions andinducements through thePremiums LawandtheAntimonopoly Law.
6.567 However, according totheUnited States, whatnegotiators could nothaveknown, anddidnot
know, was: (i)theextent towhich Japan’sclosed distribution system forphotographic filmandpaper
wastheresult ofthegovernment ’s"distribution countermeasures"; (ii)thatthedistribution
countermeasures, theLarge Stores Lawandthepromotion countermeasures worked together toimpede
market access. TheUnited States emphasizes thatduring theTokyo Round negotiations, neither the
United States noranyother GATT contracting party could haveanticipated theactions Japan would
take(iii)todramatically expand thescope andinvasiveness oftheLarge Stores Lawfollowing the
Tokyo Round; (iv)toescalate byasubstantial degree theenforcement ofthePremiums Lawandthe
Antimonopoly Lawtothephotographic filmandpaper sector toundermine Japan'stariffconcessions,
specifically forthepurpose ofconsolidating andstrengthening theexclusionary distribution system
against newthreats fromcommercial challengers suchaslargestores. Inthiscontext, theUnited States
points outthatthepanel onEC-Oilseeds specifically rejected theEC'sargument inthatcasethatthe
existenceofsomemeasuresatthetimeofthetariffconcession-whichwerelatersubstantiallyenhanced-
meant thattheUnited States could orshould have reasonably anticipated their modification or
enhancement.995Moreover, theUnited States maintains thatnocountry wasinaposition toconduct
thekindofinvestigation thatwould havebeenrequired tounderstand thatJapan hadutilized abroad
array ofinformal, nontransparent measures toengineer virtually import-free distribution channels and
wascontinuing toapply avariety ofmeasures tomaintain those channels.
6.568 InJapan 'sview, theUnited States should havereasonably anticipated alleged measures in
effect atthetimeofthetariff concessions: TheLarge Scale Retail Store LawandthePremiums Law
werepublished lawswithpublished regulations andtheirrequirements werepublic facts; Likewise,
alloftheso-called "distribution countermeasures," which arenotevenincluded intheUSnon-violation
claim concerning theTokyo Round tariff concessions, werepublic facts, asweretheiralleged effects
onthedistribution structure forfilmandpaper.996Thus, Japan concludes thatnosignificant government
measures orpolicy changes occurred after1979. According toJapan, there wereprocedural changes
inonepre-existing law,andindustry self-regulation actions under thegeneral authority ofanother pre-
existing law. InJapan'sview, there wasthusnomeasure, unanticipated atthetimeofthe1979tariff
concessions, thatwascapable ofupsetting thecompetitive position ofimported filmorpaper. Even
assuming thatexpectations concerning 1979tariff concessions remain protected asaseparate benefit,
Japan asserts thattheUSnon-violation claims relating tothose concessions areunfounded.
(i) Distribution "countermeasures"
6.569 TheUnited States submits thatbythelate1970's,importers likeAgfaandKodak weredenied
access toprimary wholesale channels duetowholesalers 'exclusive relationships withdomestic
manufacturers. What theUnited States claims nottohavebeenabletoknow wastheextent towhich
995See,e.g.,EEC -Oilseeds ,p.129, para. 149.
996AllFujifilmprimarywholesalersweresingle-branddistributorsby1975; allKonicaprimarywholesalersweresingle-brand
wholesalers attheir inception, andsubsidiaries by1977.WT/DS44/R
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concerted government policy hadcaused thisexclusion andobstructed alternative channels, andthe
degree towhich ongoing application ofgovernment measures continued tosupport thisdistribution
system asanexclusionary system. According totheUnited States, following theTokyo Round, Japan
developed (i)newbusiness assistance programs tobolster thesystemization oflaboratories andexclude
imports ofbothfilmandpaper fromthisalternative channel; pressed forward withstrengthening the
(ii)informationaltiesbetweenmanufacturersandwholesalers;andcontinuedtorelyupon(iii)Chambers
ofCommerce inongoing application ofstandard transaction terms. Moreover, theUnited States argues
thatitcould nothaveanticipated theeffects of(iv)theinternational contract notification provisions
which required reporting ofallcontracts between foreign manufacturers andJapanese distributors.
Further, theUnited States argues thatitcould notexpect thatdepartures fromstandardized transaction
terms could be(v)"unfair trade practices" under theAntimonopoly Law.
6.570 InJapan 'sview, bythetimeoftheconclusion oftheTokyo Round, virtually allofthealleged
distribution measures indispute hadalready occurred. Japan argues thatthehistorical measures and
actions discussed bytheUnited States arethuslegally irrelevant toaproper analysis ofthe1979 tariff
concessions, i.e.,thefirstconcessions forcolour filmandpaper, because theyoccurred before the
1979. The"Distribution Systemization Manual" wasissued inMarch 1975, morethanfouryears before
theconclusion oftheTokyo Round. TheJDBloanwasmade in1976 andtheSMEA financing came
in1967.997Thelastmultibrand primary wholesaler, Asanuma, stopped carrying Kodak in1975, again
fouryears before theconclusion oftheTokyo Round. Therefore, forJapan itisclearthattheUnited
States could reasonably anticipate thealleged measures thatalready existed andthemarket structure
asitexisted attheendof1975, when thetariff concessions werefinalized in1979 during theTokyo
Round.
6.571 InJapan'sview, theUnited States does noteven allege anyso-called "distribution
countermeasures" subsequent totheTokyo Round, although these alleged distribution measures are
thecentrepiece oftheUSnon-violation claims.
(ii) Restrictions onlarge stores
6.572 Withrespect torestrictions onlargestores, theUnited States alleges that,astheTokyo Round
concluded, Japan tightened theenforcement oftheLarge Stores Lawandrelated measures toblock
newchallenges totheclosed distribution system. TheUnited States claims thatJapan builtonthese
substantial newrestrictions by:
(1) creating the"prior adjustment" and"formal adjustment" processes (1979);998
(2) adding the"prior explanation" requirement toprecede thebuilder 'sArticle 3
Notification, i.e.,requiring thebuilder tomeetwithandobtain theconsent oflocal
retailers before submitting theArticle 3Notification (1982);999and
(3) mandatingthattheadjustmentprocess"becarriedoutinarestrictivemanner"(1982).1000
6.573 TheUnited States submits thatDietamendments totheLarge Stores Lawthatbecame effective
inMay1979vastly expanded thecoverage andimpact ofthelawintwokeyrespects. First, thelaw,
which hadpreviously applied onlytostores with1,500 square meters andabove, wasbroadened to
include stores with500square meters ormore, causing store applications under thelawtoexplode,
997Japan notes thattheUnited States indicated thattheSMEA financing wasgranted in1977. However, Japan claims
thatSMEA financing forphotofinishing laboratories wasfirstauthorized inApril 1967 andthatevenUSdocuments mention
such financing inthelate1960s.
998MITI Directive No.365of1979, USEx.79-2.
999MITI Directive No.36on"Immediate Measures Regarding Notification toEstablish Large Scale Retail Stores",
30January 1982, USEx.82-2.
1000Ibid.WT/DS44/R
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increasing by300percent in1979. Second, largestores under thelawweredivided intoClass Istores
(1,500 andabove), which fellunder direct MITI jurisdiction, andClass IIstores (500to1,500) which
wereplaced under theregulation ofprefectural governors. TheUnited States explains thatthisdivision
substantially increased thepersonnel andother resources available toinvestigate andorder adjustments
tostores. IntheUSview, asaconsequence, Class IIstoreapplications, which reached 1,029 in1979,
fellto424in1980 andto308in1981, asimplementation suppressed these stores.
6.574 Japan argues thatbythetimeoftheconclusion oftheTokyo Round, virtually allofthealleged
measures indispute regulating largestores hadalready occurred. According toJapan, onlythefollowing
alleged measure regulating large stores occurred subsequent totheJuly1979 tariff concessions, i.e.,
MITI administrative guidance on"prior explanation" andtreatment ofnewnotifications under theLarge
Scale Retail Store Law(1982).
6.575 InJapan'sview, other historical measures andactions discussed bytheUnited States arethus
legally irrelevant toaproper analysis ofthe1979 tariff concessions. Allother alleged measures in
dispute, asenumerated below, regulating largestores occurred before the1979tariffconcessions, and
therefore should havebeenreasonably anticipated bytheUnited States atthetimethose concessions
were made:
(i) theLarge Scale Retail Store Lawof1973;
(ii) theamendments oftheLarge Scale Retail Lawof1978.
6.576 According toJapan, theUnited States argues thatthe1978amendments occurred afterthe1979
tariff concessions. Specifically, inJapan'sview, theUnited States seems toargue thatsubstantive
negotiations between theUnited States andJapan onfilmwere concluded byAugust 1978, andthat
thisdateshould serve asthetimeoftheconcessions. ForJapan, theUnited States position inthis
casehasnosupport inprior non-violation cases since tariff concessions haveuniformly beentimed
bythedateofthefinalactofthenegotiating round inquestion, e.g., 11July1979 fortheTokyo
Round.1001Japannotesthatthe1978amendmentswereendorsedbytheCabineton6June1978,approved
bytheDieton20October 1978, andofficially promulgated on15November 1978. Japan maintains
thattheUnited States knew orshould haveknown about these amendments while theTokyo Round
wasongoing. Japan points outthattheUnited States could havereopened negotiations onfilmorany
other product allegedly impacted bytheamendments. Japan emphasizes thattheCabinet action took
place almost three months before theUSTR letter toKodak announcing filmtariff concessions on30
August 1978. Accordingly, Japan contends thatanyalleged upsetting ofcompetitive conditions as
aresult ofthe1978 amendments should reasonably havebeenanticipated bytheUnited States.
6.577 InJapan'sview, datasubmitted bytheUnited States shows thatfrom 1982 notifications of
bothcategories oflarge scale stores consistently increase innumber andthat, accordingly, the
1982 administrative guidance hadnomaterial effect onthepreexisting operation ofthelaw. Japan
describes thattherewasadecline frompeaklevels during the1979to1981period, butwhatever caused
thatdecline could logically havenothing todowithameasure passed in1982. Similarly, after1982,
boththepercentage ofretail sales inJapan through large scale stores andthepercentage ofretail
establishments thatarelargescalestores haveincreased steadily andconsistently.1002Therefore, Japan
concludes that,byanyoftheseempirical benchmarks, the1982amendments didnotrepresent amaterial
change inthelaw.1003
1001Seee.g., EEC -Canned Fruits ,L/5778, p.6,Table 2,para14.
1002Japan contends that,although thenumbers increased, theUnited States callsthese trends "constant". Butwhether
oneviews thetrends asincreasing orconstant, Japan considers astherelevant legal conclusion thatthe1982 amendments
were notamaterial change inthelaw.
1003According toJapan, theUnited States acknowledges thatthisguidance wasrepealed in1992 andisthusnolonger
ineffect.WT/DS44/R
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6.578 TheUnited States submits thatJapan complemented these restrictions under theLarge Stores
Lawwithnewconstraints ontheability ofmedium andlargeretailers tomerge andexpand: i.e.,new
constraints onpotential direct challenges totheexclusionary distribution system.1004TheJFTC then
codified therestrictive policy reflected initsblocking order innewRetail Merger Guidelines which,
according totheUnited States, werespecifically directed attheretailsector inorder tolimitopportunities
forlarger retailers toavoid thetightening restrictions oftheLarge Stores Lawthrough pursuing
acquisitions, rather thanbyhaving toopenorexpand stores.
6.579 Japan responds thattheUnited States ’argument onthedifficulty ofmergers between large-scale
retailers --duetothereview ruletoconsider themarket share oflarge-scale stores alone --ismisguided.
Even ifsuchmergers become easier, thetotalareaoffloor space willnotincrease, therefore, there
isnolinkbetween themerger regulations andthelarge-scale store regulations.
6.580 Japan further submits thatthemeasures inquestion -which, according toJapan, havebeen
abolished -were predictable "outgrowths" ofpreexisting policies. The1982 MITI administrative
guidance on"prior explanation" during theLarge Scale Retail Store Lawprocess introduced amere
procedural change tothelaw,requiring priorexplanation ofthenewstoreplan.1005Thebasicoperation
ofthelaw,i.e.,regulation oflargestores topreserve diversity ofretailers, remained unchanged. Japan
contends thattheUnited States should havereasonably anticipated thatthelawwould besubject to
suchprocedural modifications thatdidnotaffect itsunderlying substance. InJapan'sview, therewas
nothing unexpected about the1982 guidance.1006
6.581 Japan further emphasizes thatthecurrent Large Scale Retail Store Lawisanextension ofthe
respective lawof1979, andactually more liberal thantheonein1979. Accordingly, Japan contends
that,evenifitwereaccepted thatrestrictions onlargeretailstores areunfavourable toimported products,
thereisnothingunfavourabletotheimportswhichtheUnitedStatescouldnothavereasonablyanticipated
atthetimeofthetariff concessions intheTokyo Round. Japan argues thatthisderegulation canbe
seenbycomparing thepastlawwiththepresent lawwithrespect tothe(i)exemption ofretail stores
withretail space lessthan1,000 square meters, (ii)regulations onstoreholidays, and(iii)regulations
onclosing time.
(iii) Promotion "countermeasures"
6.582 Withrespect tothePremiums Law, theUnited States submits thatJapan'snegotiating partners
could nothaveanticipated thatJapan would respond totheTokyo Round tariff cutsbyengaging in
elaborate andaggressive efforts tothwart foreign firms'ability tomarket andpromote imports inthe
photomaterials andother sectors. According totheUnited States, within ayearoftheconclusion of
theTokyo Round:
1004TheUnited States notes thatin1981, theJFTC blocked aproposed merger between aleading supermarket chain,
Kyushu Daiei andalarge local supermarket inKyushu bythename ofUneed.
1005Japan further notes thatthe1982 guidance alsorefers topotential large stores exercising "selfrestraint". Totheextent
thisguidance simply suggested thatstores themselves think about howtheirplans would affect thesurrounding community,
thisguidance hadnorealimpact ontheoperation ofthelaw. InJapan'sview, theUnited States jumps totheconclusion
thatthisguidance wasa"freeze". Pursuant totheguidance, prefectural governments might designate municipalities asthose
inwhich self-restraint onnewnotifications should beadvised, provided themunicipalities metwiththespecified requirements.
InJapan'sunderstanding, justafraction ofmunicipalities were designated assuch.
1006Japan points outthattheUnited States itself notes thatearlier notification policies hadalready beenadopted inMay
1979, twomonths prior totheendoftheTokyo Round.WT/DS44/R
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(i) theJFTC pressed forthecreation ofanumbrella group, theFederation ofFairTrade
Councils, tocoordinate theactivities ofthefairtrade councils overseeing the52fair
competition codes forrepresentations andthe30codes forpremiums;1007
(ii) theJFTC approved theestablishment ofaDistribution Sector Office ("DSO") and
directed ittoexamine 16business sectors, including cameras andphotographic
materials;1008
(iii) thedomestic photographic industry responded toJFTC guidance inpromulgating its
firstsetof"Self-Regulating Measures Regarding Making Business Dealings With
Trading Partners Fair" inJune1982;
(iv) theformal establishment ofthePromotion Council anditsbroad articles ofassociation
followed inDecember 1982;
(v) thePromotionCouncil'sactions-togetherwiththeZenrenandJFTC-toderailKodak's
marketing campaign fortheVRpackoccurred inJune1982;
(vi) thePromotion Council published itssecond setofself-regulating measures in1984;
(vii) theJFTC 'sefforts inthisregard culminated inthecreation oftheRetailers Fair
Competition Code andFairCompetition Council in1987, tosetandenforce standards
formisrepresentations inadvertising related toprice/promotional terms.
6.583 Japan contends that,bythetimeoftheconclusion oftheTokyo Round, virtually allofthe
alleged promotion measures indispute hadalready occurred. According toJapan, onlythefollowing
alleged promotion measures indispute occurred subsequent totheJuly1979 tariff concessions:1009
(i) FairTrade Promotion Council self-regulatory codeondispatched employees (1982);
(ii) FairTrade Promotion Council statement onphotofinishing pricerepresentations (1984);
(iii) Camera Retailers ’FairCompetition Code onadvertising (1987).
6.584 InJapan'sview, other historical measures andactions discussed bytheUnited States arethus
legally irrelevant toaproper analysis ofthe1979 tariff concessions. Allother alleged promotion
measures indispute occurred before the1979 tariff concessions, andtherefore should have been
reasonably anticipated bytheUnited States atthetimethose concessions were made.
6.585 Withregard totheCamera Retailers ’FairCompetition Code, Japan insists thatitisirrelevant
tothiscasebecause itrelates onlytocameras. Moreover, inJapan'sview, theJFTC approval ofthe
Code in1987 wasanapplication ofthepre-existing Premiums Law, andbrought about nochange to
theimplementation policy oftheLaw.
6.586 AstotheFairTrade Promotion Council actions ondispatched employees andphotofinishing
pricerepresentations, Japan responds thatsuchactions areirrelevant heresincetheyareprivate conduct.
Therefore, Japan contends thatthereisnogovernment measure which theUnited States could nothave
anticipated.
1007TheFairCompetition Code System andStatus ofEstablishing FairCompetition Codes, Kosei Torihiki, No.390,
April 1983, pp.37-38, USEx.83-8.
1008Cabinet Order No.43of1979 asreported inJFTC Annual Report 1980, p.283, USEx.79-1.
1009TheUnited States mentions the1979establishment oftheDistribution Sector Office intheJFTC. Thisaction, however,
ledonlytosector-specific advisory reports, notanygovernmental action.WT/DS44/R
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(d) Uruguay Round
6.587 According totheUnited States ,bythetimeoftheUruguay Round negotiations, theUnited
States andother countries werebeginning tounderstand thatconditions inJapan other thantariffs that
posed obstacles toimported products andthatJapan'sdistribution system wasdifficult ingeneral.1010
TheUnited States concedes that,atthetimeoftheconclusion oftheUruguay Round, itwasaware
thatJapan regulated largestores through theLarge Stores Lawandpromotions andinducements through
thePremiums LawandtheAntimonopoly Law. ButtheUnited States could nothaveknown, and
didnotknow, howthethree types ofcountermeasures worked together within thecontext ofJapan’s
closed distribution system forphotographic filmandpaper, norwhatitsrestrictive effects were. The
United States explains thatevenatthetimeoftheUruguay Round itstilldidnothave(andcould not
havehad)sufficient appreciation forthewaygovernment policies interwove andsupported thisclosed
distribution system inthefilmsector.
6.588 TheUnited States submits thatitwasonlywiththepreparation forconsultations inthiscase
thattheUnited States gained anunderstanding of
(i) howthestandardized transaction terms worked;
(ii) howtheLarge Stores Lawcontinues tosuppress large stores through non-transparent
mechanisms aswellasformal procedures;
(iii) howthesuppressionoflargestoresdirectlysupportstheoligopolisticdistributionsystem
inJapan’sphotosensitive materials sector;
(iv) howtherestrictions onpromotions directly limitopportunities forforeign filmand
paper;
(v) howsubsidization ofthelaboratories takes them outofreach offoreign suppliers;
(vi) howJapan'sactive development ofinformation linksfurther enhanced systemization
ofdistribution totheexclusion offoreign imports.
6.589 Japan contends thattheissues nowraised bytheUnited States werenotjustdiscussed inreports,
theyhavealsobeenthesubject ofintense bilateral discussions between theUnited States andJapan.
According toJapan, inthelate1980s andearly1990s, many oftheseissues wereextensively discussed
anddebated between theUnited States andJapan aspartoftheStructural Dialogue (1986-1988) and
theStructural Impediments Initiative (1989-1990).1011Therefore, Japan contests theUSclaim thatthe
alleged measures arenotofthekindthattradenegotiators should reasonably beexpected tounderstand,
since thekindofallegations before thisPanel areprecisely thekindthatUStrade negotiators have
emphasized foryears intheirdealings withJapan. Inlightofthishistory, Japan objects totheUS
argument thatitcould nothavereasonably anticipated thealleged measures indispute asof1994.
ForJapan, itisobvious thattheUnited States didknow during theUruguay Round about (i)single-brand
distribution, (ii)theLarge Stores Law, and(iii)restrictions under thePremiums Law, andhadalready
formulated theallegations concerning them which thatithaspresented tothisPanel.
6.590 TheUnited States rejects Japan'sargument thattheUnited States could haveanticipated that
these measures would diminish thevalue ofJapan'sUruguay Round tariff concessions. TheUnited
States maintains thatbilateral discussions between theUnited States andJapan during theUruguay
Round inthelate1980s andearly1990s under theStructural Impediments Initiative donotdemonstrate
thattheUnited States could have"anticipated" orunderstood Japan'sprogram ofmeasures atissue
10101990 National Trade Estimates Report onForeign Trade Barriers (NTE), p.124, Japan Ex.E-4.
1011Summary Report onUS-Japan Structural Dialogue (Japan Ex.E-5)andSIIFinal Report. (Japan Ex.B-30) Bycontrast,
onthese occasions, theUnited States even endorsed some ofthemeasures theJapanese Government took. Forexample,
theReport said, "obviously, [thePremiums lawincluding FairCompetition Codes] isnotintended tobeanimpediment to
newentry byforeign ordomestic firms, andtheFairTrade Commission (FTC) hasenforced andwillcontinue toenforce
thissystem sothatitdoes notimpede such entry". SIIFinal Report.WT/DS44/R
Page312
inthiscase: According totheUnited States, noneoftheactual measures atissue wasdiscussed in
relation toitseffect onthephotographic filmandpaper sector because thefocus ofthese bilateral
discussions wasonprivate obstacles totrade.1012TheUnited States further emphasizes thatitdidnot
have anyideaatthetime, andonlyrecently became aware of,theJapanese Government 'sdirect
responsibility forthese measures, andthecollective impact ofthese measures onthedevelopment and
maintenance ofJapan’sexclusionary market structure forfilmandphotographic paper.
6.591 Specifically, theUnited States submits thatnoneofthe21measures ithasidentified wassubject
tobilateral discussions withJapan inthelate1980s orearly1990s, withtheexception ofthefollowing:
(1) TheJFTC ’srestrictions ontheuseofpremiums, including itsrestrictions on
(i) premiums towholesalers contained inJFTC Notification 17;
(ii) premiums toconsumers contained inJFTC Notification 5;and
(iii) prize offers inopenlotteries contained inJFTC Notification 34.
(2) TheJFTC ’snotification requirements forinternational contracts, including those
contained inJFTC Rule1concerning "Rules onFiling Notification ofInternational
Agreements onContracts".
(3) TheLarge Stores Law.
(i) Distribution "countermeasures"
6.592 TheUnited States tookatfacevalue Japan'scommitments intheSIItoaddress these private
sector obstacles andliberalize itsrestrictive distribution structure. Forexample, in1993, during the
closing months oftheUruguay Round negotiations, theUnited States acknowledged "newcommitments
bytheGovernment ofJapan contained intheSecond Annual Report ofSII...intheareasofdistribution
andexclusionary business practices".1013
6.593 TheUnited States confirms thattheJFTC ’snotification requirements forinternational contracts,
including those contained inJFTC Rule1concerning "Rules onFiling Notification ofInternational
Agreements onContracts" werediscussed withJapan inthecontext oftheSII.However, theUnited
States contends thatitwascompletely unaware oftheroletheinternational contract notification
requirements played inobstructing access todistribution channels inJapan byauthorizing theJapanese
Government toscrutinize transaction terms between foreign manufacturers anddomestic distributors
inlinewithJapan’sguidance onstandardizing transaction terms.
6.594 InJapan 'sview, theUnited States should haveknown anddidknow asof1994 about allof
thealleged measures currently indispute. Astodistribution policies, allofthealleged "distribution
countermeasure" documents werepublished.1014Many official MITI publications, which areprecisely
the"sources thatgovernments typically usetoannounce tradepolicies".1015InJapan'sview, thealleged
effects ofMITI’sdistribution modernization policies, i.e.,thedecisions bytheprimary wholesalers
nottocarry other brands offilm,werepublicly known facts.1016Inparticular, according toJapan, the
1012See,e.g., Ibid.. Seealso1994 National Trade Estimates Report onForeign Trade Barriers (NTE): "Inshort,
exclusionary andparticularly collusive business practices often prevent newparticipants, betheyJapanese orforeign firms,
from easily entering theJapanese market andcompeting formarket share", 1994 NTE p.145, Japan Ex.E-4.
10131993 National Trade Estimates Report onForeign Trade Barriers, p.146, Japan Ex.E-4.
1014Japan notes thattheUnited States wasabletoobtain copies ofallofthese items frompublic sources. Theonlyexception
isthe1975 Manual, drafted byapublic corporation, butnever officially published.
1015Japan points outthat,e.g., thevarious interim reports andthe1970 Guidelines cited bytheUnited States were all
published intheMITI Gazette (the"Tsusansho Koho").
1016According toJapan, theUnited States argues thatitdidnotknow andcould nothave known "theextent towhich
Japan’sclosed distribution system forphotographic filmandpaper wastheresult ofthegovernment ’s‘distribution
countermeasures. ’"Japan agrees inthesense thattheconnection between MITI’sdistribution modernization policies and
single-brand wholesale distribution offilmwasunknowable because itwasnonexistent. InJapan'sview, since 1975, theWT/DS44/R
Page313
United States complains about thealleged "distribution countermeasures" inthisproceeding onthe
ground thattheyencouraged single-brand distribution offilmandpaper. Inthiscontext, Japan notes
thattheUnited States hasregularly complained about single brand distribution inNational Trade
Estimates Report onForeign Trade Barriers ("NTE Reports") published bytheOffice oftheUnited
States Trade Representative. Inthe1990 Report, thesection entitled "Distribution System" contains
thefollowing passage:
"The complexity andrigidity ofJapan’sdistribution system raises thecosts ofnew
market entry andlimits market penetration ofUSfirms. ...Exclusive relationships
amongretailers,wholesalers,andmanufacturers,andlargenumbersofsmallwholesalers
andretailers make setting upadistribution system expensive fornew-to-market
companies. Thisadded costofentry affects bothUSmanufacturers ofconsumer and
producer goods".1017
6.595 Japan emphasizes thatthe1994 NTE Report1018evenincluded theafilm-specific passage in
thesection entitled "Distribution:"
"Japan ’sdistribution system canalsoserve tolimitthemarket share ofcompanies that
havegained access toJapan’smarket. Aleading U.S. producer ofconsumer film,
forexample, hasencountered problems inincreasing itsmarket share inJapan due
torestrictive distribution channels. Despite significant investment andyears ofeffort,
thecompany ’smarket share remains extremely lowcompared toitsmarket share in
therestoftheworld".1019
(ii) Restrictions onlarge stores
6.596 TheUnited States claims that,atthetimeofthe1994 Uruguay Round tariff negotiations, it
wasnotaware, andnotabletobeaware, thatJapan hadseized upon theLarge Stores Lawasakey
instrument toprotect andsupport thevertical integration ofdistribution intheconsumer photographic
materials sector. Furthermore, intheUSview, itcould nothavebeenaware oftheextent towhich
supporting vertical integration ofdistribution wasinfactaffirmative Japanese Government policy.
6.597 With respect totheLarge Stores Law, Japan points outthatthelawandrelevant regulations
havebeenpublished andthattheirrequirements arecurrently known andhavelongbeenpublicly known
facts.1020Moreover, Japan contends thattheUnited States hasbeenmaking these claims concerning
theLarge Stores Lawwithrespect toimports generally foryears. ThusJapan concludes thattheUnited
States notonlyshould haveknown, itcertainly didknow about these measures.
6.598 Japan refers totheexample ofthe1990 NTE Report ’schapter onJapan which includes the
following specific headings: "Law onLarge Retail Stores," and"Marketing Practice Restrictions".
Thesection on"Law onLarge Retail Stores" contains thefollowing statement:
onlyalleged "distribution countermeasure" iscontinued acquiescence bytheJapanese Government insingle-brand wholesale
distribution. Thisalleged "measure" wasapublicly known factthatshould have been known andwasindeed known by
UStrade negotiators before 1994. Ifanalleged "measure" consists simply ofamarket structure, andthatmarket structure
wasknown atthetimeofthetariff concession andhasnotchanged since, there canbenofrustration oflegitimate expectations
andhence nonullification orimpairment ofthebenefit oftherelevant tariff concessions.
10171990 National Trade Estimates Report onForeign Trade Barriers, p.124, Japan Ex.E-4.
1018The1994 National Trade Estimates Report ofForeign Trade Barriers waspublished on31March 1994, before the
Uruguay Round Agreement wasconcluded, andwasobviously written even earlier.
10191994 National Trade Estimates Report onForeign Trade Barriers, p.172-173, Japan Ex.E-4(emphasis added).
1020TheLarge Scale Retail Store lawwaspublished inKampo on1October 1973. ThePremiums Lawwaspublished
inKampo in1962.WT/DS44/R
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"Although export losses duetothislaw’simpact cannot bequantified, theyarebelieved
tobesignificant asalarge number ofproducts areaffected. Since larger retailers are
usually more willing toriskintroducing newproducts, often directly imported from
overseas suppliers, oraggressively promote imported product lines, limits onretail
expansion effectively hinder theimport ofUSgoods".1021
6.599 According toJapan, theUSconcedes thattheLarge Scale Retail Store Lawandseveral key
elements ofitsclaim about thePremiums Lawweresubject tospecific bilateral discussions inthelate
1980s andthatitsawareness andexpectations concerning aspecific lawshould apply toallproducts.
Given thatthelawtreats filmnodifferently thanittreats other products, inJapan'sview, itisnot
credible fortheUnited States toassert thatwhile itwasaware ofhowthelawapplied generally, it
wasnotaware ofhowthelawapplied tofilm. ForJapan, theUSargument would make itvirtually
impossible toidentify "reasonable expectations" forspecific products andwould undermine thiselement
ofthenon-violation remedy.
6.600 Withrespect tothetalksunder theStructural Impediments Initiative, theUnited States argues
thatittookatfacevalue Japan'sassurances toliberalize restrictive distribution structures, andto
substantially liberalize theLarge Stores Lawasoneofthecentral means fordoing so.1022According
totheUnited States, Japan specifically indicated withrespect totheLarge Retails Stores Lawthatit
would:
(i) shorten thecoordination process foropening stores;
(ii) relax regulations onclosing times andholidays;
(iii) address separate regulations bylocalpublic authorities;
(iv) exempt fromcoordination procedures afternotification thenewopening orexpansion
ofnewspace dedicated toimport sales;
(v) further review theLarge Stores Lawevery twoyears.
6.601 TheUnited States admits thatJapan didinfactimplement formal changes tooperating hours
andthecoordination process foropening newstores andexpanding space dedicated toimports, asstated
intheSIIreport. TheUnited States alsoconcedes thatJapan tookaction toaddress separate local
regulations. Therefore, theUnited States wasinitially optimistic thatthesechanges would beeffective
inincreasing competition inJapan'sdistribution sector which isalsoreflected inthe1993 National
Trade Estimates Report published bytheUSTR.1023
6.602 However, theUnited States submits thatby1994, subsequent totheconclusion oftheUruguay
Round, itbecame clear thatthelimited reforms oftheLarge Retail Stores Lawandother areas of
business practice andgovernment regulation putinplace byJapan hadnotfundamentally changed the
10211990 National Trade Estimate Report onForeign Trade Barriers, p.124, Japan Ex.E-4.
1022Inthe1990 SIIreport, forexample, Japan stated thatwithregard totheLarge Stores Law:
"Asdynamic changes arecalled forinthedistribution industry, deregulation measures willbetaken inorder to
meetnewneeds ofconsumers, toenhance thevitality ofthedistribution industry andtoensure smooth procedures foropening
newstores. Deregulation measures willbeputinplace byboththecentral Government andlocal public authorities".
1023The1993 National Trade Estimates Report noted that"thedistribution system isoneofthesixmajor areas being
addressed inSII.TheJointReport issued inJune1990, contains aseries ofJapanese Government commitments addressing
importantdistributionsystemissues. Oneofthemostimportantwasapledgetoeasesignificantlyrestrictionsonnewlarge-scal e
retail stores, including thefurther shortening ofthenewstore application waiting period totwelve months bytheendof
1991. Therevision oftheLarge Retail Store Lawin1990 haslargely beeneffective inreducing barriers totheestablishment
ofretail outlets". Japan Ex.E-4.WT/DS44/R
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restrictive nature ofthelaworthelocalregulations. TheUSTR ’s1994National Trade Estimates report
reflects thisgrowing disappointment.1024
6.603 TheUnited States maintains thatdespite itscommitment to"dynamic changes" toderegulate
theLarge Stores Lawandtoopendistribution systems, Japan hascontinued toaggressively apply the
lawinawaythatlimits theability oflarge stores toopenandexpand inJapan, stores assmall as500
square meters, ascompared to1500square meters when thelawwasimplemented in1974. Thedelays,
downward adjustments infloor space, reduced hours ofoperations, forced holidays, andburdens of
theadjustment process significantly impair theability oflargestores toexpand andoperate atthepace
andlevels theywould choose intheabsence ofregulation. TheUnited States further submits thatit
didnotexpectJapanwouldcontinuetorequireorencouragelargestorestoundertake"priorconsultation"
or"local consultation" withtheirlocal competitors, andwould continue allowing thevoice oflocal
competitors todominate thelarge store review process.1025Thisprocess ofundertaking adjustments
withlocal competitors isparticularly burdensome forlarge stores, asoften large stores must agree
toburdensome restrictions inorder toensure smooth passage through theformal review system.
6.604 Japan responds thattheLarge Stores Lawtoday ismore liberal thanitsoperation in1994.
Three setsofderegulation ofthelawduring theearly 90'swerecompleted by1994, andthere have
beennosignificant changes since then. Anyeffort bytheJapanese Government toensure thatlocal
governments more faithfully adhere tothenational standards foradministering thislawinfactmakes
thelawmore liberal, notless.
(iii) Promotion "countermeasures"
6.605 TheUnited States claims thatonlyrecently itbecame aware oftheextent towhich theJapanese
Government andthefairtrade councils usethePremiums Lawandthefaircompetition codes tolimit
howforeign photographic materials manufacturers andtheirdistributors maypromote theirproducts.
Likewise, theUnited States submits thatitbecame aware onlyrecently oftheactions bythefairtrade
councils inthephotographic sector todiscipline bothmembers andnon-members inorder tolimit
competition bynewentrants onthebasis ofprice orpromotional offers.
6.606 With respect tothepromotion measures, Japan states thatthePremiums Lawandpertinent
notifications werepublished andtheirrequirements arecurrently, andhavelongbeen, publicly known
facts.1026AllJFTC notifications andfaircompetition codes arealsopublished, andaretherefore publicly
known facts.1027Japan underscores thattheUnited States should becharged withknowledge ofthese
published documents andpublicly known facts. Itfurther submits thatthe1990NTEReport 'ssection
on"Marketing Practice Restrictions" attacks thePremiums Lawandevenrefers specifically tofilm:
"Japan FairTrade Commission (JFTC) regulations significantly restrict theuseof
premiums andother salesincentives offered toconsumers, distributors andretailers.
Under Japan’s"Premiums Act"of1962, theJFTC mayauthorize theestablishment
1024The1994 National Trade Estimates Report noted that"Inrevising theLarge Scale Retail Store Law, MITI rejected
suggestions thatthelawbeabolished, amove MITI maintained could havetheeffect ofincreasing localgovernment regulations
onlarge stores. TheUnited States believes thatMITI, ataminimum, should takesteps tofurther streamline theLarge Scale
Retail Store Law, forexample byreducing thecurrent review period from 12months to3months". USTR, 1994 National
Trade Estimates Report, Japan Ex.E-4.
1025According totheUnited States, thefactthatlocal competitors continue todominate thelarge store review process
isdocumented byJapanese Government studies.
Japan ,however, points outthatthisUSassertion relies onseveral translation errors ofthecited documents, as
describedinsub-sect ionV.C.2.(b).(i i)on"SubstantiveprovisionsofthePremiumsLaw" above, inparticularparas.5.400-5.402.
1026TheLarge Scale Retail Store lawwaspublished inKampo on1October 1973. ThePremiums Lawwaspublished
inKampo in1962.
1027TheUSsubmission provides copies ofalltheJFTC notifications from readily available sources.WT/DS44/R
Page316
ofFairCompetition Codes. ...Under thisscheme domestic manufacturers establish
industry promotion rulesthatarethenaccorded legalstatus bytheJFTC. These rules
impair foreign firms’ability tocompete intheJapanese market. ...Eliminating further
restrictions could increase salesofmany products. ...itcould alsoincrease market
opportunities forgoods likefilmandcandy, which areusedaspremiums".1028
Thus, Japan concludes thatin1990 theUnited States wasmaking exactly thesame arguments thatit
hasmade tothisPanel. Japan further mentions thatmuch ofthelanguage quoted above wasthen
repeated, virtually verbatim, inthe1991, 1992, 1993, and1994 reports.1029
6.607 Withrespect tothePremiums Law, theUnited States submits thattheUnited States andJapan
discussed inthecontext oftheSIItheJFTC ’srestrictions ontheuseofpremiums, including its
restrictions on
(i) premiums towholesalers contained inJFTC Notification 17;
(ii) premiums toconsumers contained inJFTC Notification 5;and
(iii) prize offers inopenlotteries contained inJFTC Notification 34.
6.608 However, theUnited States emphasizes that,while these items were discussed asageneral
matter, thelawwasnotdiscussed initsrelation tothephotographic materials sector. TheUnited States
further contends thatthespecific codes atissueinthiscase,specifically theRetailers FairCompetition
Code, werenever discussed. Moreover, totheextent thatthePremiums Lawandthefaircompetition
codes werediscussed generally during SII,theUnited States believed thatJapan would follow through
onitscommitments intheSIIReport "toenforce thissystem sothatitdoesnotimpede newentry"
byforeign ordomestic firms.
10281990 National Trade Estimate Report onForeign Trade Barriers, p.125, Japan Ex.E-4.
1029Japan Ex.E-4provides therelevant excerpts from eachofthese National Trade Estimates Reports onForeign Trade
Barriers.WT/DS44/R
Page317
F. THE COMBINED EFFECT OFTHE THREE SETS OFMEASURES
6.609 Distribution countermeasures: Intheview oftheUnited States ,the"distribution
countermeasures" worktogether asanorganic whole. Theindividual specific studies, reports, surveys,
guidelines, financing programs, orother distribution countermeasures standing alone maynothave
beensufficient toaccomplish Japan’sgoalofrestructuring thedistribution system. According tothe
United States, MITI explained thattheprocess ofestablishing anewindustrial order would require
back-and-forth interaction between government andindustry overtime. MITI expected government
andindustry towork together tosetthetargets forindustrial restructuring, andforbusinesses tomake
efforts toachieve thetargets, supported bygovernment fiscal andother incentives. Leading scholars
inJapan agree thatonewaythatadministrative guidance ismade effective isbyacontinuing process
ofstudying, surveying, cajoling, andtargeting theuseoffiscal incentives thatkeeps theprivate sector
focused onthegoals setbythegovernment, assesses theirachievement ofthose goals, andbuilds peer
pressure onthose whoarefalling behind intheirachievement.
6.610 TheUSclaim isthatthemeasures listed inthe"distribution countermeasures" section operate
asaset,i.e.thedistribution countermeasures asaset(i)violate Article III:4and(ii)nullify orimpair
benefits under theGATT within themeaning ofArticle XXIII:1(b).
6.611 Distribution countermeasures incombination withtheLarge Stores Law: TheUnited States
alleges thattheLarge Stores Lawandrelated measures haveoperated tosupport thevertically aligned
distribution system fostered bytheGovernment ofJapan inthephotographic filmandpaper sector.
A1971MITI survey andreport regarding transaction terms demonstrates thatMITI viewed largestores
asathreat toFujiandKonica ’soligopolistic distribution systems. Itcitesastwothreats tothis
oligopolistic system the"growth ofretail routes (especially regular chains andsupermarkets) other
thanthephoto retail route andchanges intransaction terms duetothisleadership", andsecondly the
"effects offullparticipation ofEastman Kodak". Theguidance explained whylarge stores threatened
oligopolistic distribution: "When thisshare [theshare offilmsalesbysupermarkets] becomes larger,
influence overmanufacturers willgrow, andthemarket system controlled bymanufacturers willbe
shaken". Without themeasures torestrict thegrowth oflarge stores, theUnited States contends that
largestoreswouldhavebroughtsufficientbargainingpowerandcompetitionintotheJapanesedistribution
system toerode theexclusive vertical control overdistribution exercised byJapanese manufacturers.
Therefore, theUnited States takes theposition thattheLarge Stores Lawandrelated measures should
beconsidered asimportant measures inJapan’soverall efforts tocreate andsupport manufacturer-
dominated, vertically aligned distribution inJapan.
6.612 Therefore, theUSclaim isthattheLarge Stores Lawandrelated measures andthedistribution
countermeasures incombination nullify orimpair benefits under theGeneral Agreement within the
meaning ofArticle XXIII:1(b).
6.613 Japan contends thattheUnited States merely takes astatement outofcontext tosupport its
argument thattheLarge Scale Retail Store Lawhas"operated tosupport" thedistribution system
allegedly fostered bythegovernment inthephotographic filmandpaper sector.1030Japan argues that
innocuous comments about "future problems" areadiscussion about thethreat ofthereintroduction
ofirrational business terms, notthepossible threat oflarge stores tosome supposed oligopolistic
distribution system thatthegovernment wasallegedly trying toprotect. Japan points outthatitviewed
1030Specifically, Japan notes thattheUnited States selects afewsentences from theresidual category "other" attheend
ofaseveral hundred page report ontransaction terms. Japan's1969 Survey, p.309, Japan Ex.B-1.WT/DS44/R
Page318
"free competition" asapositive development.1031Thefearexpressed regarding theincrease insales
bysupermarkets wasnotoverthethreat tosome established domestic oligopoly, butrather afearthat
thesenewretailchannels would introduce irrational business practices, suchasabnormally longpayment
periods, product returns, anddispatched employee practices.1032
6.614 Restrictions onlarge stores: TheUnited States claims thatindependently oftherolethatthe
Large Stores Lawplays insupporting theoligopolistic distribution system intheJapanese photographic
filmandpaper sector, therestrictions onlarge stores havelimited market access bycurtailing an
alternative channel tomarket foreign products. Even ifunrestricted growth inlarge stores didnot
altertheexclusive manufacturer domination overJapanese wholesalers, itstillwould allow expansion
ofasaleschannel thathasproven tobemore friendly toimports inJapan. TheUnited States presents
asanexample thatAgfamakes atleasthalfitsfilmsalesinJapan totheDaiei supermarket chain, Japan’s
largest retailer. IfDaiei’sgrowth hadnotbeenretarded forthree decades byrepressive Japanese
government regulation, itmight beanevenlarger chain today andAgfa’ssalestoitwould begreater.
Ontheother hand, ifJapan’sprimary wholesalers werenotinexclusive relationships withJapanese
manufacturers andwerewilling tocarry foreign film,theneedtorelyonlargestores asanalternative
would bemuch reduced.
6.615 Thus, inaddition totheposition stated above regarding theLarge Stores Lawincombination
withthedistribution countermeasures, theUSclaim isthattheLarge Stores Lawandrelated measures
bythemselves ,inthecontext ofaclosed distribution system, nullify orimpair benefits under theGeneral
Agreement within themeaning ofArticle XXIII:1(b).
6.616 Inresponse, Japan firstemphasizes thattheLarge Stores Lawdoesnotregulate which products
largeretailers cancarrynordoesittakeintoaccount whatproducts, much lesstheorigin oftheproducts,
thataretailer sellswhen determining whether andwhat adjustments arenecessary. Second, Japan
rebuts thealleged import friendliness oflarge stores byarguing thatretailers, whether large orsmall,
choose thebrands theycarry tomaximize profit; there isnoreason tobelieve thatthesizeofstores
inanywaychanges theprofitability ofparticular products. InJapan’sview, thereisinfactnocorrelation
between astore’ssizeanditslikelihood ofcarrying foreign brands; Agfa’ssuccess withDaiei, alleged
bytheUnited States, mayhaveresulted fromAgfa’sconcentration ofitsbusiness effort onDaiei, and
thus, hasnological connection tothelarge retail space ofsome ofDaiei’sstores (inaddition tolarge
stores, Daiei operates anumber ofsmall andmedium-sized stores). Third, Japan points outthaton
itsownterms, thelawregulates largestores without regard towhatrelationship theyandnearby small
andmedium-sized retailers havewithanymanufacturer ordistributor; thelawwasdesigned topreserve
adiversity ofretailing outlets, apolicy pursued bymany national andlocalgovernments around the
world. Accordingly, Japan concludes thattheLarge Stores Lawcannot beupsetting thecompetitive
position ofimported photographic filmandpaper.
6.617 Promotion countermeasures: TheUnited States alleges thatthepromotion countermeasures
alsohavesupported theclosed, manufacturer-dominated distribution system. Mostdirectly, Notification
17under thePremiums Lawtookaway animportant means forforeign manufacturers toofferJapanese
distributors amore attractive dealtohandle foreign products. Notification 17essentially ruled out
allmanners ofpremiums from manufacturers towholesalers, except those oftoken value. Limiting
theability toofferpremiums restricted theability offoreign manufacturers tousetheirfinancial and
marketing strengths toentice Japanese distributors from theirexclusive relationships withJapanese
1031Japan pointsoutthattheUnitedStatesleftoutakeyportionofthequote:"themarketsystemcontrolledbymanufact urers
willbeshaken, thusleading toanenvironment offreecompetition "(emphasis added). Japan alsonotes atranslation error:
attheendofthisquote, Japan inadvertently leftoutthephrase "and thiseffect isdesirable". Although itisunlikely that
theinitial quote would beviewed asidentifying athreat, thecorrected quote clearly indicates that"free competition" is
"desirable".
10321969 Survey, Japan Ex.B-1,p.309.WT/DS44/R
Page319
manufacturers, ortosolidify theirrelationships withJapanese distributors. Because Notification 17
directly supported theJapanese manufacturer dominated distribution system, itshould beconsidered
both asadistribution countermeasures andapromotion countermeasure. Other promotion
countermeasures alsohelped torestrict market access forforeign photographic filmandpaper inJapan.
When aforeign manufacturer haslimited access tothedistribution system, itisespecially important
thatitbeabletoreach Japanese wholesalers, retailers andconsumers withattractive premiums and
promotions. Taken individually, anyoneofthelimits onpremiums andpromotions might nothave
substantially impaired theability offoreign firms tocompete inJapan. Buttaken asagroup, the
promotion countermeasures didhaveasignificant chilling effect, particularly inthecontext ofthesystem
ofenforcement through thefaircompetition codes andfairtrade councils. Accordingly, theUnited
States claims thatthepromotion countermeasures should beconsidered asasetforthepurposes of
Article XXIII:1(b).
6.618 Given themarket structure inJapan inwhich foreign manufacturers effectively hadnoaccess
totheprimary wholesaler channels, theUSclaim isthatthepromotion countermeasures asasetby
themselves havenullified orimpaired benefits under Article XXIII:1(b),
6.619 Japan rejects theUSclaims withrespect tothevarious individual allegations, since, inits
view,noneoftheallegedmeasuresindividuallyadverselyaffectimportedproductsoraltertheconditions
ofcompetition facing imported products. Japan emphasizes thatevenwhen thedistribution policies
andthemeasures related tothePremiums Lawareindividually considered asa"setofmeasures",
theydonotinanywaydisadvantage imports because, inJapan'sview, combining nothing withnothing
stillproduces nothing.
6.620 Promotion measures, distribution measures andrestrictions onlargestores: TheUnited States
further claim thatthepromotion countermeasures asasethaveoperated incombination withJapanese
Government efforts torestructure thedistribution system through thedistribution countermeasures and
large stores measures tonullify orimpair benefits under theGATT within themeaning of
Article XXIII:1(b).
6.621 Japan contends thattheUSclaims ofthethree categories ofmeasures acting incombination
witheachother arefactually andlogically flawed. First, inJapan'sview, theUnited States didnot
submit credible evidence thatthemeasures wereintended toandinfactacted incombination. Japan
alsoalleges thattheUnited States hasnotprovided evidence thattheLarge Stores Lawinanyway
sought toaffect foreign product given thatthelawcurrently applies andhasalways applied uniformly
toallentities seeking toprovide retailing services. Similarly, Japan contends thattheUnited States
hasnotprovided evidence ofJFTC actions adversely affecting foreign products. According toJapan,
themeasures hadverydifferent policy objectives, andwere notintended towork together.
6.622 Japan concludes thatpanels should review measures themselves, nottheconsequences orthe
actual tradeimpact ofthemeasures1033given thatthereareamyriad ofinfluences onmarketplace results.
When theUnited States asksthePanel tofocus onthealleged interaction ofindividual measures, in
Japan'sview, itappears toassess thisinteraction bylooking tomarketplace results suchaslowimport
market share. Japan contends thattheUnited States hasnotshown anyexplicit interaction ofthese
1033Panel Report onJapan -Taxes onAlcoholic Beverages ,WT/DS8, 10,11/AB/R, AB-1996-2, p.16;Panel Report
onUnited States -Section 337ofTariff Actof1930,adopted on7November 1989, 36S/345, 386-387, paras. 5.11-5.13;
Panel Repor tonUnitedStates-TaxesonPetroleumandCertainImportedSubstances,adoptedon17June1987, BISD34S/136,
154-159, paras. 5.1.1-5.1.9. Japan concedes thatthese panel reports addressed thisissue inthecontext ofArticle III,given
thesimilarity oftheelements tobeexamined, Japan deems theArticle IIIprecedents citedasuseful guide inevaluating the
USnon-violation claims.WT/DS44/R
Page320
measures, buthasnoalternative buttorelyimplicitly onthemarketplace results.1034Accordingly,
JapanconcludesthattheUnitedStatesisthusaskingthisPaneltodowhatpanelshaverepeatedlydeclined
todointhepast,i.e.,togobeyond theterms ofthemeasures themselves andassess themarketplace
results. Japan strongly disagrees withthisapproach asamatter ofWTO legalprinciple, noting that,
however, werethePanel toconsider market share figures relevant, itactually undermines theUSclaims.
Japan recalls thatvirtually nothing happened afterthe1979 Tokyo Round concessions, butthatsome
government actions occurred afterthe1967 Kennedy Round concessions onblack andwhile filmand
paper. Thelevelandgrowth ofimport market share forblack andwhite filmandpaper, however,
arecompletely inconsistent withanyconceivable nullification orimpairment.1035
1034Inthe1996 NTE Report, USTR noted thatinthiscase"liberalization countermeasures" were implemented between
1967 and1984, butthat"MITI ’spastprotection ofthissector continues tohave alingering effect today inthedistribution
structure forconsumer photographic materials". InJapan'sview, itisclearthattheUnited States iscomplaining about alleged
"lingering effects", notmeasures.
1035Specifically, theforeign market share forblack andwhite filmandpaper grew ashighas41.4percent (1985) and
54.0 percent (1989) respectively.