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   Sir  Leon  devoted  the main part of his speech to Japan  and  the  trade
   problem  which  it poses for the European Community.  Japan's  trade  and
   investment surplus with Europe has been rising again at an alarming  rate
   in recent months.
   "Europe  must  pursue  an active  policy  towards  Japan.  Passivity  and
   fatalism  are  no response to the damaging consequences  of  an  economic
   system  in  Japan,  and a business culture, which  serves  -  whether  by
   accident  or design - largely to exclude exports except in certain  niche
   luxury  markets.  Europe shares the concerns which have been  articulated
   by the United States in the Structural Impediments Initiative,  including
   for example concerns about:
        *             Japan's distribution system
        *             the keiretsu
        *             land prices, and land use policy
        *             savings and investment patterns
        *             limitations of anti-trust policy
        *             discriminatory trading rules
        *             the impossibility of takeover of Japanese companies.
   The  tremendous  trade and investment imbalances between  Japan  and  her
   major  competitors clearly demonstrate a problem.  Price studies  confirm
   it : e.g. Lipstick indexed at 100 in Tokyo would cost 52 in New York  and
   39  in London. Beef indexed at 100 in Tokyo comes out at 43 in Paris  and
   26 in New York. All this is bad for Japanese consumers; bad for the world
   economy;   and   provokes   protectionist   reactions   amongst   Japan's
   Sir  Leon expressed, however,  mounting concern about solutions  proposed
   in some quarters to resolve the problem, and in particular the  evidence,
   in  President  Bush's  visit, of an  American  preference  for  bilateral
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   "The  United States has been the driving force behind the application  of
   free  trade principles which have generated unprecedented growth  in  the
   post-war era.  That is why I have been disappointed and concerned by  the
   mounting  evidence  that  the US is drifting  towards  a  preference  for
   managed   trade.  Already  America  boasts  an  impressive   arsenal   of
   protective trade measures including :
   -  export subsidies;
   -  the Buy American Act;
   -  highly restrictive rules on internal transport;
   -  the  protection of sectors such as telecoms or  textiles  by  powerful
   -  a definition of national security which seals off the defence industry
      market and supports related sectors (civil aviation, electronics);
   -  massive agricultural subsidies;
   -  Voluntary Export Restraint arrangements.
   Now  there is pressure for a renewed "Super 301" clause in the  US  Trade
   Act  to  permit (or even to require) unilateral trade  sanctions  against
   foreign trading partners who become uncomfortably competitive.
   President  Bush's visit to Japan last week was disappointing  insofar  as
   the President was applying direct political pressure for bilateral  trade
   US  and European car producers for example,  both failed in the 70's  and
   early 80's to develop an export market into Japan.  The European reaction
   has  been  to  attack the Japanese market, and producers  have  now  made
   important  in-roads.  For all the difficulties (and I accept  that  there
   are  many)  European producers - not least the Germans -  have  developed
   meaningful levels of trade.    Meanwhile, the Commission has announced  a
   phased  liberalisation of Japanese car imports into Europe.  The  various
   national  restrictions  (ranging from voluntary restraint  agreements  to
   outright  quotas)  have  not  served the  interests  either  of  European
   consumers or European producers.
   The US reaction,  by contrast, has been to demand a certain share of  the
   Japanese  market on political rather than commercial grounds.  This is  a
   pattern  in  US/Japanese trade relations which has become more  and  more
   pronounced since the 1986 Semiconductor Agreement.  We saw it in the  US-
   Japan Public Works Agreement.  We have seen it in fields of  aeronautics;
   satellites  and telecommunications.  Now we see it in the field  of  cars
   and car parts.
   I  do  not  believe that political deals of this  kind  help  to  resolve
   underlying trade problems or to close the gap between Japan and the US in
   terms of productivity and competitiveness.  What they do, rather, is to :
                                     - 3 -
   -  create  exaggerated  expectations in the US, which serve  to  increase
      bilateral trade frictions over time;
   -  erode the multilateral world trading system.
   This   is  my  real  concern.  Europe  is  wholeheartedly  committed   to
   strengthening  the  GATT system.  We urgently want to  see  a  successful
   conclusion  of  the Uruguay Round - hard though  this  is  proving.  That
   effort,  however,  is  weakened by the evidence of  a  US  drift  towards
   managed trade.
   I  have  repeatedly reminded both the US and  Japanese  authorities  that
   opportunities  open to American companies in the Japanese market must  be
   open  to Community business as well.  The Commission will be vigilant  in
   ensuring that this is indeed the case.
   But  that is an exercise in damage-limitation.  The positive  strategy  -
   which I continue to advocate as the most fruitful approach to trade  with
   Japan is :
   -  To uphold and develop the GATT, which is the only basis upon which  to
      achieve  mutually  compatible  trading systems and a  basis  for  fair
      international competition through structural change in Japan.
   -  To  develop  a fuller, deeper relationship with Japan at  a  political
   -  To  maintain  an unremitting search for evidence of change  in  Japan.
      Declarations of good intent are not enough.
   -  To pursue a focussed agenda in our efforts to secure change in  Japan,
      combining forces with the US and others where we have common concerns.
   -  To  be  present  in Japan.  It is pointless to open  up  the  Japanese
      market unless European companies are willing to invest time, money and
      effort in developing it.
   -  To  change our attitude towards Japanese investment  in  Europe.  Such
      investment  is  welcome.  We must stop thinking so much  in  terms  of
      promoting pure-bred "European" companies, (which can lead us into very
      high-risk  strategies)  and  more in  terms  of  European  employment,
      research, production and global partnership.
   The Japanese, for their part, must integrate fully into the fabric of the
   European  economy.  That  is  in their interests and  in  ours.  We  must
   encourage rapid Europeanization of the production, management,  supplies,
   research, design, and distribution of Japanese companies in Europe.  That
   is already happening, but we must accelerate the process.
   The  EC  has had the confidence, internally, to take on  vested  national
   interests  which  compartmentalized  our  market.  We  must  carry   that
   confidence  into  our external relationships.  An  unrelenting,  focussed
   effort to break into the Japanese market and to achieve structural change
   in  Japan  only  makes  sense, however,  in  the  context  of  a  renewed
   commitment to open multilateral trade."
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