Statement of William C. Duncan
General Director, Washington Office
Japan Automobile Manufacturers Association

Before the United States Trade Representative
Section 301 Committee
Docket No. 301-93

Mr. Chairman and Members of the Section 301 Committee, I am William C. Duncan, General Director of the Washington Office of the Japan Automobile Manufacturers Association, which represents the thirteen manufacturers of motor vehicles and motorcycles in Japan. I am accompanied today by Russell Smith of the law firm of Willkie Farr & Gallagher, who serves as General Counsel to the JAMA Washington Office.

At the outset, I would like to thank the Committee for the opportunity to appear today to state the position of JAMA with respect to the issues in this proceeding.

The alleged basis for the proposed duty increases is regulation. All developed countries regulate automobile operations for the protection of public safety and the environment, so this is not an issue that is unique to Japan. In that context, the proposed duty increases are inappropriate because they arbitrarily seek to use trade retaliation as a means of demanding changes in safety and environmental regulation for the economic benefit of a few preferred companies. It is vital to note that when Japanese auto and auto parts companies have problems with U.S. or E.U. safety or environmental regulation, they do not ask their government to unilaterally retaliate in order to force the U.S. Government or the E.U. to change their minds. They go through the normal administrative process and pursue routine agency review of their concerns. This has been the case with respect to fuel economy, auto labeling, air bags, crash protection, and dozens of other issues. The entire U.S. auto industry is now involved in a controversy over how stringent local emissions inspections will be and how they will be conducted. This is a local and national matter, and should not be subject to international threats of retaliation.

As requested in the Notice of Determination and Request for Public Comments, my statement today will address the appropriateness of the proposed tariffs, the levels at which duties should be set, and the adverse effects of a duty increase on U.S. consumers.

Appropriateness of the Duty Increase
It is JAMA's position that the proposed 100 percent duties are inappropriate and indefensible. Above all, as a matter of international law, they are simply illegal. The unilateral, retroactive imposition of punitive tariffs clearly violates United States obligations under the rules of the World Trade Organization, including GATT 1994. These duties are discriminatory in that they are levied against imports from Japan alone, and therefore violate Article I of the GATT, which requires "most favored nation" treatment to all signatories. As the United States has emphasized so often, both in the recent debate over adoption of the Uruguay Round Agreement and in past trade disputes, international obligations are more than just words. The United States Supreme Court has recognized that customary international law is U.S. law, and the MFN principle is without question now part of customary international law. Indeed, there is probably no principle more consistently and widely followed among nations than the MFN principle.

It is not lost on JAMA, and I suspect others around the world, that the United States places an extremely high political and economic value on MFN status as a principle in trading relationships, but seems willing to disregard it when it serves its purposes. This attitude brings into question the basic legitimacy of U.S. Government actions.

In particular, the U.S. Government's attempt to justify taking unilateral action by also stating its intent to file a WTO complaint -- a case of "sentence first, trial later" -- is wholly inconsistent with any reasonable theory or interpretation of WTO principles. Unilateral retaliation, in violation of WTO rules, lacks any legitimacy and has not unexpectedly subjected the United States to severe criticism by other countries.

The proposed duties ignore the dispute settlement mechanisms established under the WTO. Under the WTO, trade disputes between signatories must be submitted to review. Only after such mandatory dispute resolution, and a determination by the WTO that there has been a violation, can one nation take "legal" retaliatory action against the trading partner that is in violation. It is the United States, along with Japan and other nations, that struggled so hard and so long in the Uruguay Round negotiations to give the new dispute resolution procedures and rules real "teeth," precisely so that WTO members would not feel free to pursue protectionist actions without any real limits. It was recognized that binding dispute resolution was absolutely necessary to the integrity of the new international trading system. Having recognized the relevance and applicability of such dispute resolution procedures, the U.S. Government cannot now ignore the limitations set forth in those procedures without serious repercussions.

This Committee is I imagine acutely aware of the fact that no less of a scholar of international law than Professor John Jackson of the University of Michigan has explicitly condemned these proposed duty increases, stating that:

These duty increases are therefore wholly inappropriate as a matter of law.

The duty increases are also inappropriate because they are unjustified by any substantive findings. Section 301 contemplates an investigation into the acts or practices which are subject to review. In this case, based on the "Reasons for Determination" set out in the Notice, it seems obvious that no substantive investigation was conducted. The "Reasons" offer no specific evidence of any specific act or practice, and they fail to demonstrate any example of a U.S. auto part that cannot be marketed in Japan because of an alleged act or practice.

Moreover, USTR has failed to justify in any way its quantification of the alleged damages from the unspecified acts or practices involved. Although USTR refuses to release the basis for its damage calculations, the $5.9 billion figure could only be arrived at by comparing import shares of the total parts market in Japan to the markets in the U.S., Canada and Mexico. Such a comparison is clearly distorted because the U.S., Canadian and Mexican markets comprise the NAFTA free-trade area, where parts flow freely across borders to supply manufacturing facilities. The cross-border shipment and sale of finished vehicles and parts among the Big 3 and their suppliers in the NAFTA market result in large import market shares. This intra-Big 3 trade should not be used to determine an "expected" import share of the Japanese after-market.

There can be differences over what is a critical assembly or what certification standards should be imposed but, as I have already emphasized, these are not and should not be trade issues, nor can they possibly be the bases for a six billion dollar trade confrontation. U.S. after-market parts are not sold in high volumes in Japan because most cars operating in Japan are Japanese, and U.S. parts manufacturers are not making replacement parts for Japanese cars built in Japan. In fact, a recent survey undertaken in Japan showed that less than a handful of U.S. after-market suppliers offer catalogs and application data for Japanese nameplate vehicles sold in Japan. Lastly, a recent U.S. survey determined that over two-thirds of the U.S. after-market suppliers have little, if any, interest in exporting to Japan.

Procedurally, legally, and substantively, USTR's proposal to place punitive tariffs on $5.9 billion in auto exports based on a few sentences of unspecified claims of regulatory practices is simply unjustifiable, arbitrary and capricious.

USTR has attempted to show that the U.S. market for replacement parts is "open" but the Japanese market is "closed." One of the anecdotal situations USTR has been describing involves shock absorbers. This Committee and the American public should know that the share of foreign brand shocks and struts sold for Big 3 cars and light trucks in the U.S. independent after-market is under 1.5 percent. By contrast, Tenneco reports that its shock absorbers have a three percent share of Japan's aftermarket.

In terms of other U.S. acts or practices, it should be of interest to this Committee that in the United States, practices of suppliers to the after-market clearly raise competitive questions. For example, U.S. parts companies engage in "stock lifting," in which they purchase all the inventory of their competitors from a distributor, replace it with their product, and arrange for the resale of competitors' products, often knowingly dumping them overseas. Stock lifting is not only market-disruptive, but it also makes it very hard for new domestic or foreign competitors to break into the U.S. after-market. Stock lifting is just one example of numerous, pernicious practices in the U.S. after-market.

This U.S. challenge to the Japanese safety and inspection system thus inevitably renders the entire U.S. vehicle inspection and repair system and the U.S. after-market open to the scrutiny of other nations, and if it is arbitrarily deemed discriminatory or anticompetitive, to challenge and possible unilateral retaliation.

These duties are inappropriate because the Government of Japan has in fact stated that while its inspection and repair system is without question nondiscriminatory, Japan is going to take steps to address differences over both what parts are subject to inspection and how garages are certified. These steps were part of a comprehensive, substantive Japanese proposal made in the framework negotiations. Japan has in essence removed the basis for even the allegations that the U.S. is making. The United States has ignored this proposal. Its attempt to argue now that Japan has failed to address U.S. concerns about after-market regulation is both incorrect and disingenuous.

Finally, the United States has offered no evidence of any kind that the Japanese inspection and repair system has any other primary basis than safety. This Committee well knows how fatal this weakness is to the claim that the Japanese system is a discriminatory trade barrier, since it was the United States that won the 1994 GATT case involving the so-called "gas guzzler" tax. In a finding welcomed by Ambassador Kantor, the GATT determined that so long as regulations are primarily intended to and have the primary effect of protecting safety or the environment, they are GATT-legal even though they may have an adverse effect on imports. The applicability of this precedent to the present situation is absolutely decisive. U.S. retaliation against the Japanese inspection and repair system cannot possibly be justified on the basis of an arbitrary and unproven claim that it is not grounded in safety.

Levels at Which Duties Should Be Set
The Committee has asked for comments on the level at which duties should be set. This answer here is clear. It is illegal under international law for the United States to undertake unilateral trade retaliation without submitting to WTO dispute resolution. It is doubly illegal for that retaliation to take the form of a duty increase, because the tariffs on autos are bound under Article II of GATT 1994 and cannot be raised in this manner. The bound tariff is and should continue to be 2.5 percent, and only 2.5 percent.

I want to add at this point that JAMA objects to the retroactive imposition of the proposed duty increases. Beyond the illegality of the sanctions themselves, it is highly unusual for one nation to impose previously unannounced trade restrictions on another nation without at least permitting goods already ordered from production and "on the water" to be entered into the United States free of restrictions. Japanese auto companies "locked in" their current production schedules months ago, so the manufacturers simply are not in a position to inflate their inventories artificially between May 16 and June 28. It is therefore wholly inequitable and unjustified to raise duty rates on vehicles ordered and produced long before there was any notice of the duty increase. Such an action also violates the provisions of the U.S.-Japan Treaty of Friendship, Commerce and Navigation, which requires at least 30 days' notice of tariff changes or exemption of goods in transit.

Adverse Effects of a Duty Increase On U.S. Consumers
The history of protectionist trade actions in the United States is marked by one consistent set of effects -- consumers always suffer. The proposed duty increases will inevitably produce higher prices for automobiles. In short, as history has shown, American consumers will pay, and pay dearly, for the Administration's effort to protect the Big 3 from further competition.

The economic costs to consumers will not be the only price to be paid. Even Ambassador Kantor has admitted that Japanese competition has been a major factor in the improvement of the U.S. auto industry over the last two decades. This is clearly true for the auto parts industry as well. Shutting out imports of Japanese luxury cars will restrict consumer access to many technological developments, engine and operation improvements, and the constant drive to achieve the highest standards of quality. With consumer surveys repeatedly showing that the very cars being restricted are the U.S. leaders in quality and reliability, the Administration is in effect relieving the Big 3 from this pressure to compete and improve their products.

This Committee cannot ignore the fact that the proposed duties will cost American jobs, as Ambassador Kantor has admitted. These workers at dealers, suppliers, and other facilities are also consumers, thousands of them, and they will suffer the greatest adverse effect of all -- losing their jobs and in some cases their businesses. That the United States Government should be purposefully putting Americans out of business and out of jobs to lash out at Japan for no substantive reason simply cannot be rationalized or justified as being beneficial to the United States or Japan.

There is one last point that needs to be made here. As I have said, a dispute over regulation of after-market parts does not justify punitive tariffs on $5.9 billion in Japanese auto exports. But, as we all know, these outrageous duties are in fact U.S. punishment of JAMA members and the Government of Japan for not agreeing to U.S. demands to establish new so-called "voluntary plans" for purchasing U.S.-made parts at levels that meet U.S. Government expectations. As JAMA has stated publicly, this coercion will not work. JAMA members purchase the best and most competitive products and services from global suppliers and will continue to do so.

Earlier this week, JAMA held its "one-on-one" conference in which sixty U.S. supplier companies met with about 200 Japanese auto company personnel and 275 supplier representatives to explore parts sales opportunities. It is this business-to-business cooperation that has increased U.S.-made parts purchases so dramatically, from $2.5 billion in 1986 to $15.5 billion in 1993.

It is this industry-to-industry approach which has brought the successful relationships and business we see today. JAMA and its member companies are trying to maintain those successful relationships in the face of truly unprecedented U.S. Government and private efforts to undermine them. That cooperation is the only way that this successful relationship can continue. What a shame that our tremendous accomplishments to date stand to be undermined by short-sighted economic isolationism. Even in the face of an almost overwhelming economic threat, JAMA member companies cannot willingly participate in undermining the rule of law in international trade to serve narrow political and commercial interests. Thank you.