ASSESSMENT OF BARRIERS TO TRADE AND INVESTMENT BETWEEN THE EU
AND JAPAN
FINAL REPORT
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COLOPHON
Author: Client: Date: Contact:
Eva R. Sunesen, Joseph F. Francois and Martin H. Thelle DG Trade
Final report delivered on 30 November 2009
SANKT ANNÆ PLADS 13, 2nd FLOOR | DK-1250 COPENHAGEN PHONE: +45 7027 0740 | FAX: +45 7027 0741 WWW.COPENHAGENECONOMICS.COM
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TABLE OF CONTENTS
Preface………………………………………………………………………………………………………………..5
Summary …………………………………………………………………………………………………………….6
Chapter 2 Introduction …………………………………………………………………………………..14
2.1. Structure of the report……………………………………………………………………………….14
2.2. What do we mean by “non-tariff measures”?……………………………………………….15
Chapter 3 Current EU-Japan Trade ………………………………………………………………….18
3.1. EU-Japan trade………………………………………………………………………………………… 18
3.2. Import penetration in Japan is low ……………………………………………………………..19
3.3. Japan is losing importance as destination for EU exports……………………………….22
3.4. Composition of EU-Japan trade ………………………………………………………………… 24
3.5. Tariffs are low …………………………………………………………………………………………. 28
3.6. Other indicators of trade openness……………………………………………………………..31
3.7. Conclusion: A Japanese conundrum ………………………………………………………….. 35
Chapter 4 Non-tariff measures in Japan ……………………………………………………………37
4.1. Identified NTMs in Japan………………………………………………………………………….37
4.2. EU exporters perceive Japan to be a difficult market…………………………………….42
4.3. Regulatory environment is the most important NTM……………………………………45
4.4. Selection of sector studies………………………………………………………………………….47
Chapter 5 Quantification of NTMs ………………………………………………………………….50
5.1. Three methods for estimating goods NTMs ………………………………………………..50
5.2. Results of direct cost estimates (method 1) ………………………………………………….. 52
5.3. Results from gravity modelwithout NTM index (method 2) …………………………..58
5.4. Results from gravity modelwith NTM index (method 3)………………………………..64
5.5. Comparison of trade cost equivalents for goods …………………………………………… 64
5.6. Gravity estimates for services …………………………………………………………………….. 65
Chapter 6 Model simulations ………………………………………………………………………….68
6.1. The model and the scenarios……………………………………………………………………..68
6.2. Impacts on bilateral trade …………………………………………………………………………. 74
6.3. Global trade effects ………………………………………………………………………………….. 77
6.4. Output effects…………………………………………………………………………………………..79
6.5. Overall welfare effects ………………………………………………………………………………. 81
6.6. Alternative baselines…………………………………………………………………………………. 84
6.7. Systemic considerations ……………………………………………………………………………. 85
6.8. Conclusion: The merits of EU-Japan trade liberalisation ………………………………. 86
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Chapter 7 Other Non-Tariff Measures ……………………………………………………………..88
7.1. Public procurement issues in Japan ……………………………………………………………. 88
7.2. Competition issues in Japan……………………………………………………………………….92
7.3. Intellectual property rights issues in Japan …………………………………………………. 101
7.4. Summary of other NTMs in Japan …………………………………………………………… 103
Chapter 8 Barriers to FDI in Japan…………………………………………………………………104
8.1. Identified barriers to FDI in Japan ……………………………………………………………105
8.2. What is being done to increase FDI inflows? …………………………………………….. 108
8.3. Effects of reducing barriers to FDI …………………………………………………………… 112
References……………………………………………………………………………………………………….113
Appendix 1: Methodology to quantify European NTMs…………………………………………119
Appendix 2: Gravity model methodologies and results ………………………………………….122
A2.1 Gravity model for manufacturing goods …………………………………………………….122
A2.2 Gravity model for services………………………………………………………………………..125
Appendix 3: The inventory of Japanese NTMs……………………………………………………..132
Appendix 4: Business surveys on Japanese NTMs ………………………………………………..142
A4.1 Business survey for manufacturing sectors………………………………………………….142
A4.2 Business survey for financial services…………………………………………………………155
Appendix 5: CGE model ……………………………………………………………………………………165 Appendix 6: Pharmaceuticals sector study……………………………………………………………174 Appendix 7: Medical device sector study …………………………………………………………….188 Appendix 8: Processed foods sector study ……………………………………………………………210 Appendix 9: Motor vehicle sector study ………………………………………………………………224 Appendix 10: Transport equipment sector study……………………………………………………236 Appendix 11: Financial services sector study ……………………………………………………….240 Appendix 12: Communication services sector study ……………………………………………..254
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PREFACE
This report entitled “Assessment of barriers to trade and investment between the EU and Japan” has been prepared for the European Commission, DG Trade, by Copenhagen Economics A/S under the framework contract (TRADE/07/A2).
Copenhagen, 30 November 2009 Martin H. Thelle (Project Manager)
Final report delivered on 30 November 2009 Published on 3 February 2010
Disclaimer:
This report was commissioned by DG Trade (European Commission) and prepared by Copenhagen Economics. The views and opinions expressed in this report are not necessarily shared by the European Commission.
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SUMMARY
Assessment of barriers to trade and investment between the EU and Ja- pan
The EU and Japan are impor- tant trading partners
The EU and Japan are the largest and third largest economies in the world re- spectively. They respectively account for 33 percent and 11 percent of world GDP, and 17 percent and 6 percent of world trade.
Japan has a strong export orientation, with the ratio of exports to GDP stand- ing at 15 percent, compared to 10 per- cent in the EU. However, the domestic market in Japan is less open to imports than the EU market. Imports as a share of domestic demand reach 17 percent in the EU and only 6 percent in Japan. This low import penetration is spread out fairly evenly across most sectors.
The EU has a stronger presence in the world market for services, with the ratio of trade in services to GDP standing at 7.6 percent compared to 6.3 percent for Japan. The EU (4.1 percent) has a no- tably stronger export orientation for ser- vices than Japan (2.9 percent).
The bilateral trade relationship between the EU and Japan is important for both economies. For the EU, Japan is ranked fourth among its import partners (6 per- cent of EU imports) and fifth among its
export destinations (4 percent of EU ex- ports). Conversely, for Japan, the EU is
ranked third import partner (10 percent of imports) and also third export part- ners (15 percent of exports), after the US and China.
However, bilateral trade volumes are not as large as they could be. EU exports to Japan as a ratio of Japan's GDP is less than 2 percent, considerably below the ratio in the EU's other main markets such as the US, China, Korea or India.
Moreover, bilateral trade has been de- clining in relative importance in recent years. This is to a large extent due to macro-economic developments. Emerg- ing market economies in Asia and Europe have been growing fast over the last decade, faster than the EU and Ja- pan's economies. Rapid regional trade integration has also played a role. In Europe, Russia and Turkey have be- come major trading partners of the EU. In Asia, China and Korea have become Japan's most important partners. As a result, emerging markets account for an increasingly larger share of global trade in goods.
Still, a decline in the relative importance of bilateral trade between the EU and Japan should not necessarily be equated
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with low economic potential in the bilat- eral trade relationship. This report ar- gues that there is considerable unrealised economic potential to revitalise bilateral trade.
Measuring NTMs
It is often assumed that, because of al- ready low MFN tariffs between mature OECD economies, trade policy has little economic potential to offer. Average MFN tariffs are indeed low in the EU and Japan (3.8 percent on both sides). The study shows that there are still sig- nificant gains to be made from eliminat- ing tariffs. However, most of the poten- tial economic gains reside in the reduc- tion of trade costs associated with non- tariff measures (NTMs).
NTMs are not necessarily barriers to trade. They cover all non-tariff and non- quota measures that affect the cost of trade, such as the regulatory environ- ment, technical regulations and stan- dards, and differences in procedures for conformity assessment. While the trade cost of a tariff is straightforward, the trade cost of NTMs is not easy to esti- mate and may vary according to the measurement method and data used. To reduce the uncertainty linked to NTM measurement, this study com- bines several NTM estimation methods and data sources:
1. Direct estimation of trade costs for EU exports to Japan, based on sur- vey replies from EU firms operating in Japan
2. Estimation of NTM-linked trade costs for imports into the EU, based on a separate industry survey.
3. Estimation of NTMs in manufactur- ing and services sectors in the EU and Japan using gravity models.
Most attention in this study goes to the identification and trade cost estimation of NTMs in key sectors in Japan. An inventory of 231 NTMs in Japan from existing reports provided a platform for this study. Furthermore, a survey has been conducted of about 120 European firms exporting to and operating in seven key sectors in Japan, to gauge the impor- tance of these NTMs for their business and estimate the impact on their costs. These seven sectors cover the bulk of EU exports to Japan: automotive, pharmaceuticals, medical devices, proc- essed foods, transport equipment, tele- coms and financial services.
Three quarters of these firms perceive the Japanese market as more difficult than other markets. This is due to dif- ferences in consumer preferences and language barriers, but also to technical standards and regulatory issues. For two thirds of these firms, these barriers re- duce the variety of goods they supply to the Japanese market. It also increases the cost of exporting to Japan by 10 to 30 percent, depending on the sector. While Japanese consumers benefit from getting goods that are adapted to their preferences, they are also paying a price for many of these NTMs. Non-tariff measures imply higher prices for im- ported goods, and reduce the variety of products being offered to consumers.
The trade costs estimates of NTMs on the EU side have been taken from a previous study on transatlantic trade be-
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tween the EU and the US1 . These esti- mates are based on a survey of firms ex- porting to the EU and their perceptions of the trade obstacles induced by NTMs. Surveys can help to bring NTM trade cost estimates in line with the percep- tions of firms doing the actual interna- tional trade operations.
The third NTM estimation method uses more traditional gravity modelling tech- niques without the additional informa- tion supplied by firm-level surveys. This was applied mainly for the services sec- tors where trade data constraints and the absence of survey information left no other option. Gravity estimates in goods sector were also used as a control meas- ure to check the validity of survey-based results. The study made a conservative selection and uses the lowest NTM val- ues.
Reducing the cost of NTMs
Besides estimating the trade cost equiva- lent of NTMs, the study also investigates the extent to which NTMs can actually be reduced or eliminated. It does not judge whether NTMs are good or bad. Unlike tariff barriers that can be fully eliminated, regulatory measures can not just be abolished. They may have a le- gitimate purpose. They facilitate trade by setting common rules and standards, and enhance consumer welfare by protecting against health and safety risks. At the same time, rules may impose higher costs on foreign producers than strictly necessary to comply with the standards and regulations. Other rules may offer
1 "Studyonnon-tariffmeasurestoEU-UStrade and investment", final report by Ecorys BV for DG Trade, December 2009.
few benefits to consumer but restrict in- ternational competition and thereby benefit domestic producers. This study distinguishes between consumer welfare benefits and producer rents generated by NTMs. Regulatory heterogeneity be- tween countries induces trade cost. Seeking alignment on international stan- dards or convergence between different regulatory systems may reduce trade costs.
The measurement of the potential for NTM reduction is also to a large extent based on survey data, often comple- mented with expert opinions.
Steps that could be taken to reduce the cost of specific NTMs in the sectors covered by the Japan survey, are sum- marized below.
Potential gains from further trade opening
The study examines the trade and eco- nomic impact, both for the EU and Ja- pan, of dismantling all tariffs on goods, including agriculture, and reducing the cost of NTMs. Because of uncertainty regarding the level and possible reduc- tion of NTMs, minimum and maximum NTM reduction scenarios are tested. The sensitivity of the results with respect to a conclusion of the Doha Develop- ment Round is also examined.
The trade simulations show that EU ex- ports to Japan could increase by 23 per- cent or €14 billion if tariffs were abol- ished, including tariffs in agriculture and without taking into account tariff reduc- tions from a successful Doha round. The largest gains from tariff dismantling would occur in agricultural and proc- essed foods exports. However, EU ex-
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ports could increase by almost 50 per- cent or €29 billion if the cost of NTMs in Japan were reduced to the fullest pos- sible extent. The largest trade gains from NTM reduction occur in the chemicals (incl. pharmaceuticals) sector, followed by motor vehicles and medical equipment.
Conversely, Japan’s exports to the EU would increase by nearly 30 percent or €25 billion as a result of tariff disman- tling in the EU. By far the largest gains would occur in motor vehicles exports (€16 bn). Completion of the Doha- round would reduce the impact of re- moving bilateral tariffs on motor vehicles by half. Japan's potential gains from maximum NTM reduction in the EU are estimated at 32 percent or €28 bil- lion. Here the gains are also mostly gen- erated in the motor vehicles sector, fol- lowed by chemicals and electronics goods.
The combination of both bilateral elimi- nation of tariffs and the reduction of non-tariff measures would be beneficial to firms and consumers in both econo- mies and economic welfare will increase by €33 billion in the EU and €18 billion in Japan. A third of the benefits for the EU come from tariff dismantling, the rest from NTM reduction. For Japan, the vast majority of benefits are pro- duced by NTM reduction.
Note: in € billion per year Source: See chapter 6.
Simulations show that the overall bene- fits from bilateral tariff and non-tariff re- ductions would not be significantly lower in the event of a successful conclusion of the Doha Round, although impacts will be reduced in some sectors, if Doha is completed prior to a bilateral EU-Japan trade opening. Benefits could increase to the extent that some NTM reductions are by nature on an MFN basis, rather than preferential, and would thus affect all trading partners. The potential gains from increased EU market access in Ja- pan for public procurement, railway equipment and aircraft have not been quantified in the scenario simulations but could also significantly increase the above figures.
The simulations show that the trade ef- fects on other trading partners as a result of bilateral tariff and preferential NTM reductions between the EU and Japan will be negative but small (-€6 billion). Global welfare will increase as a result bilateral EU-Japan trade opening.
What actions are needed to achieve these benefits?
The report is novel in its quantification of the impact of NTMs. It addresses NTMs in seven sectors in Japan and identifies the possibilities for reducing these NTMs. The main findings are:
EU pharmaceutical exports to Japan are severely impeded by a complex and costly regulatory environment.
Summary of impact
Export effects: – Tariffs – NTMs
Welfare effects
EU
+ €14 bn +€29bn + €33 bn
Japan
+ €25 bn +€28bn + €18 bn
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Non-recognition of foreign clinical data adds to the cost of serving the Japanese market.
The approval process for market- ing new medicines in Japan is slow and overly burdensome. Introduc- tion of new medicines is delayed for two to three years. This allows Japanese firms to develop compet- ing products and narrow down the innovative advantage of EU pro- ducers.
Finally, the reimbursement rules in Japan provide inadequate incen- tives for the introduction of new and innovative medicines.
According to survey-based estimates, these factors increase the cost of EU pharmaceutical exports to Japan by 22 percent. As a result, EU pharmaceutical exports to Japan have grown much more slowly than in other markets. Subse- quently, Japanese patients and consum- ers are paying the price for costly and delayed access to the best medicines.
These NTM costs could be reduced to just 2 percent. In this case, EU pharma- ceutical exports would increase by 60- 100 percent, corresponding to additional exports of up to €3.4 billion a year.
The EU’s export of medical devices is also being restrained by the costly and cumbersome process of launching new products on the Japanese market.
Development costs for EU medical device producers are increased by requests for additional clinical trials from the Japanese authorities.
Excessive Japanese standards and regulatory requirements result in a significant device lag, and a large
number of medical devices are not even being submitted for approval in Japan.
The pricing and reimbursement system creates disincentives for in- troducing new and innovative products on the Japanese market.
According to our survey-based estimates, EU exporters of medical devices face an extra cost of 30 percent compared to their Japanese counterparts. As a result, EU producers are unable to respond to the increased demand for medical de- vices caused by Japan’s aging population.
To reduce the entry barriers to the Japa- nese market will require the Japanese authorities to speed up and streamline the medical device certification process by accepting clinical trial data produced in the EU and by harmonising its GCP guidance with international standards. Alternatively, Japan could adopt the EU SDoC2. Furthermore, Japan could also review the Foreign Average Price rule.
Targeting these issues would reduce Japanese NTMs to 18 percent. It is im- portant to note that neither of these steps will require changes in the regula- tory requirements in terms of the safety and efficacy of the devices.
If this reduction is achieved, EU exports of medical devices to Japan could in- crease by €1.1 billion – up by 51 percent.
For processed food the combination of differences between EU and Japanese standards and technical requirements as well as cumbersome border procedures
2 Suppliers'DeclarationofConformity.
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results in high costs for EU exporters. Since these costs are independent of the export volume, the result is important entry barriers (thresholds) to the Japa- nese market.
The limited number of permitted food additives in Japan and un- aligned standards between the EU and Japan increases costs and pre- vent EU exporters from utilising scale effects.
High conformity costs are incurred because Japanese authorities do not accept evaluations made by the EU or international bodies.
Food safety is a high priority in Japan and the combination of Japanese stan- dards and technical requirements results in an extra cost of 25 percent for EU ex- porters. As a result, the number of goods that EU producers can successfully ex- port to Japan is seriously limited.
The market potential for European ex- porters would be greatly enhanced by:
Harmonising Japanese legislation to international standards with re- spect to re-dating, labelling and nu- tritional standards.
An agreement by Japan to substan- tially increase the list of permitted additives.
Introducing mutual recognition of conformity assessment procedures which get rid of the duplicate costs of evaluations imposed on EU ex- porters.
Together, targeting these barriers will reduce Japanese NTMs to 16 percent. Our model simulations show that EU exports of processed foods will increase by 7 to 24 percent if these barriers are
reduced. Overall, food exports to Japan could increase by up to €1.1 billion.
The EU holds a strong position in the Japanese market for imported motor ve- hicles but Japanese import penetration is remarkably low compared to other OECD countries. The barriers encoun- tered by EU motor vehicle producers in Japan are mainly TBTs related to emis- sions, safety and noise standards. These barriers cause extra development and production costs for EU exporters.
The Japanese TRIAS regulation requires special testing on emis- sions and durability of exhaust sys- tems. This causes delays in approv- als which are particularly serious for innovative products.
The Japanese regulations regarding steady running noise and proximity stationary noise levels are not har- monised with UN-ECE standards.
Japan is introducing new safety standards that are not present in the UN-ECE.
According to our survey estimates, EU exporters of motor vehicles pay an extra cost of 10 percent. EU producers there- fore face a serious disadvantage since the high costs of NTMs fall disproportion- ately on exporters compared to Japanese producers.
To reduce the barriers to the Japanese market will require the Japanese authori- ties to streamline and simplify the certifi- cation process and find procedures for revisions of standards and technical guidelines to better accommodate inno- vative products. Most importantly, Japan should adopt international or UN-ECE
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standards, particularly those regarding emission, noise and safety. In many cases Japan has agreed to do so but has not yet implemented much of the neces- sary legislation.
Targeting these issues would reduce Japanese NTMs to 3 percent. If this re- duction is achieved, EU exports of mo- tor vehicles to Japan could increase by up to €4.7 billion, or by up to 84 per- cent.
The EU export of transport equipment, which mainly consists of aircraft and rail equipment, is also reduced by procure- ment rules and NTMs in Japan. We as- sess a potential for an additional €2.6 bil- lion export from these sectors.
In the services sectors, we find substan- tial barriers, but also very limited amounts of cross-border trade. The gains from removing barriers to cross- border service trade with Japan would have small impact. We have assessed the potential for financial services and tele- communication, and note a potential in- crease of 10-20 percent, but starting from a very small base.
We have also quantified the impact of reducing the costs of border procedures and introducing more competition in Ja- pan’s distribution services, which would provide gains in itself, but also facilitate market access for most goods sectors.
There are also barriers in other sectors (e.g. chemicals, wood products and metal products), and substantial NTMs can be removed here as well. These have not been quantified in detail in this report.
Barriers to Investment
Aside from being low on imports, Ja- pan's economy is also running on very
low foreign direct investment (FDI) in- flows. The Japanese government has recognised this problem and has pro- posed measures to address it. These are mainly structural barriers, rather than protectionist measures. Trade agree- ments may have only an indirect impact on this. Reforms are required in corpo- rate governance and mergers and acqui- sitions. Furthermore, the rules reducing the restrictions in triangular mergers are also important.
Need for more competition
Some of the problems for market access in Japan are due to weak competition. Regulation in telecoms, in the financial sector and in distribution, for instance, gives a strong advantage to the incum- bents, who are often in a dominant mar- ket position. In some cases, informal ar- rangements between trading houses may also make market access difficult. Com- petition policy rules as well as enforce- ment would need to be strengthened to facilitate foreign competition, through the privatisation of Japan Post or in tele- communications, for example. While clauses to reinforce competition in do- mestic markets are not normally part of trade agreements, such measures could considerably increase the potential for EU-Japan trade.
Public procurement market in
Japan can open further
The potential for opening up Japan’s public procurement market further has been quantified at €74 billion, which is the estimated value of Japan’s deroga- tions from the coverage of the Govern- ment Procurement Agreement (GPA). Of course, EU firms will not win all of these contracts, but they gain access to compete for the market. There are mar-
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ket access issues in railways equipment and aircraft, and we assess that EU ex- ports to Japan in these sectors could in- crease by €2.6 billion.
How to realize these potential
economic gains?
The EU-Japan economic and trade rela- tionship could be strengthened by an elimination of tariff barriers and a sig- nificant reduction in the trade costs of non-tariff measures and other barriers, for instance in public procurement. The on-going Regulatory Reform Dialogue is making slow progress. The Mutual Rec- ognition Agreement has brought some progress for a limited number of sectors. Some suggest that this could be acceler- ated by negotiating a comprehensive bi- lateral agreement to help stimulate bilat- eral trade and investments. Some Euro- pean exporters who face tough regula- tory and non-tariff measures in Japan, including stringent standards and testing for consumer goods, argue that a bilat- eral agreement will help remove obsta- cles to trade and also ease strict and complex Japanese rules and regulations which currently stifle European invest- ments in the country.
Japan (which is actively negotiating FTAs with its Asian neighbours) is thought to
be interested in an FTA agreement with the European Union. Among other things, several Japanese industries would like access to European markets to be on par with their Asian neighbours.
Difficulties associated with
reducing NTMs
Japanese NTMs must be reduced to en- sure that the EU gains from an EU- Japan negotiation. Tackling these NTMs poses some challenges however, espe- cially between two highly developed economies like Japan and the EU that have extensive and sophisticated domes- tic regulatory regimes in place. First, tar- iffs are measurable whereas NTMs are harder to quantify; that makes negotia- tions less transparent. Second, tariffs are bilateral whereas reductions of NTMs are often multilateral; other countries may free-ride on the benefits of NTM reduction. Third, NTM reductions are difficult without domestic reforms and could entail domestic regulation issues that are not normally negotiated within a bilateral trade framework, or that could easily be circumvented through new domestic regulation. It would require strong political will and administrative creativity to come to an agreement on meaningful NTM reductions.
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Chapter 2
Introduction
The purpose of this study is to assess the economic impact of existing barriers to trade in goods and services between the European Union and Japan. Special attention is given to quantifying the impact of non-tariff measures.
The report complements earlier studies on EU-Korea, EU-US and EU-Canada trade rela- tions commissioned by the European Commission. Using a similar analytical framework, this report focuses on the barriers to bilateral trade and investment between the EU and Japan.
Tariff barriers are generally low, though there are exceptions for specific goods. Still, the trade volume is large and significant gains from tariff reductions can be expected. How- ever, non-tariff measures (NTMs), or regulatory issues, constitute a more important obsta- cle to EU-Japan trade. NTMs on the EU side have already been examined extensively in these earlier studies. The present report therefore looks more extensively at regulatory ob- stacles faced by EU firms exporting to Japan. The overall economic analysis again com- bines both sides of the tariff and NTM picture to estimate the overall benefits of a bilateral reduction in barriers to trade.
For the purpose of this report, we have undertaken three main activities. We have exam- ined the sector barriers in Japan, conducted new and detailed gravity model analyses of trade flows with Japan, and undertaken both in-depth interviews and detailed question- naires of non-tariff measures (NTMs) as perceived by EU firms in Japan. This has contrib- uted to a quantification of the trade costs of NTMs in Japan, and helped to clarify to what extent these can be reduced. The economic and trade impact of a bilateral reduction in tar- iff and NTMs, both in Japan and in the EU, has been assessed using a computable general equilibrium model (CGE) of global trade.
2.1. STRUCTURE OF THE REPORT
Chapter 3 describes the current EU-Japan trade flows, and Chapter 4 describes the non- tariff measures identified in Japan. In Chapter 5 we quantify the impact of selected non- tariff measures on the cost of EU exports to Japan, and we use econometric models to es- timate so-called trade cost equivalents. We then move on to Chapter 6 to present how re- ductions of these costs would impact on trade flows, production output and consumer wel- fare.
In Chapter 7 we discuss the impact of some of the non-tariff measures that have not been quantified using our model, namely public procurement, intellectual property rights and competition policy. These are issues that have significant impact on EU-Japan trade rela- tions. In Chapter 8 we discuss the reasons for the lack of foreign direct investment in Japan and present the actions taken by several Japanese governments to attract foreign direct in- vestment to the country.
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The report has 12 appendices. The first five contain technical details about methodology. Appendix 1 to 4 describes the method we use to quantify European and Japanese NTMs. Appendix 1 describes the methodology used to quantify European NTMs. Appendix 2 provides technical details about the applied gravity models and their results. Appendix 3 presents the full inventory of Japanese NTMs and Appendix 4 gives background on the business survey on Japanese NTMs. Together they provide new information about the barriers facing European exporters in the Japanese market. Appendix 5 describes simula- tion model (CGE-model) that we apply in order to calculate the trade and welfare effects of trade liberalisation scenarios.
Appendix 6 to 12 contains seven detailed sector analyses of Japan’s non-tariff measures. These include pharmaceuticals (Appendix 6), medical devices (Appendix 7), processed foods (Appendix 8), motor vehicles (Appendix 9), transport equipment (Appendix 10), fi- nancial services (Appendix 11) and communication services (Appendix 12). Each of the sector analyses can be read independently and contain policy recommendations and simu- lation results.
2.2. WHAT DO WE MEAN BY “NON-TARIFF MEASURES”?
For the purposes of this study, the terms of reference define ‘non-tariff measures’ as “all non-price and non-quantity restrictions on trade in goods and services. This includes bor- der measures (customs procedures etc.) as well as behind-the border measures flowing from domestic laws, regulations and practices).” This implies that in this study we use the term “non-tariff measures” (NTMs) to cover the following seven categories:
1. Standards, technical regulations and conformity assessment (e.g. technical specifications, testing and certification)
2. Border procedures (e.g. customs procedures)
3. Distribution restrictions (e.g. seaport and airport, secondary dealers)
4. Pricing and reimbursement rules (e.g. in selling to public clients)
5. Public procurement issues (e.g. legal framework, market access restrictions)
6. intellectual property rights (e.g. copyright, trademark, patents)
7. Other non-tariff measures
The types and importance of NTMs within each group varies significantly from sector to sector. Border procedures, for example, are more important for exporters of perishable food products, while pricing and reimbursement rules are a major concern for pharmaceu- tical and medical device exporters.
Overall, divergent standards, technical regulations and conformity assessment procedures can be said to be the single most important type of NTMs, increasing the complexity and uncertainty of doing business and generating costs. Throughout this report we use the
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WTO definitions of standards, technical requirements and conformity assessment re- quirements, cf. Box 2.1.
Box 2.1 Standards, technical requirements and conformity assessment requirements
The definition of standards and technical requirements follows the WTO definition of standards and tech- nical regulations. These are documents approved by a recognised body providing for common and repeated use, rules, guidelines, or characteristics for products or related processes and production methods. This covers both standards where compliance is not mandatory (i.e. voluntary standards) and technical regulations where compliance is mandatory (i.e. government mandated standards, or standards in regulations).
The definition of conformity assessment requirements follows that of the WTO. This covers any procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled. They consist of activities such as certification, testing, quality system registration, and inspection. They also comprise procedures for sampling, evaluation, verification, assurance of conformity, registration, accreditation, and approval, as well as their combinations. They are either voluntary or mandatory. A volun- tary conformity assessment would have the purpose of assessing compliance with a voluntary standard; a mandatory conformity assessment is required in order to attest compliance with mandatory requirements, stipulated in technical regulations.
Source: WTO Agreement on Technical Barriers to Trade, Annex 1.
Recognition of potentially welfare-enhancing effects of NTMs
All types of regulations affecting international trade flows can be broadly defined as non- tariff measures. The term “non-tariff measures” has gradually replaced the previously widely accepted term “non-tariff barriers”. The use of the term “measures” instead of “bar- riers” is intended to emphasise the dual nature of regulation as discussed in Laird and Yeats (1990). On the one hand, NTMs can discriminate against imports and be trade- restrictive, as defined by Baldwin (1970), Hillman (1991), and others. On the other hand, NTMs can also be welfare-improving, providing consumers with additional, otherwise un- available information, and thus overcoming imperfect/asymmetric information problems (see, for example, Bureau et al., 1998, 2001; Movchan, 1999, Disdier et al., 2008). This dual nature of the NTMs is typical for sanitary and phyto-sanitary measures (SPS), and technical barriers to trade (TBT).
Special attention to regulatory barriers
The most important NTMs encountered by EU firms exporting to Japan, and probably also by Japanese firms exporting to the EU, relate to the regulatory environment in their destination markets: the regulations in Japan are often different compared to those of the EU. When we say “regulatory environment”, we mean the standards, technical regulations and conformity assessment procedures in place.
The fact that differences in the regulatory environment generate trade costs and hinder competition is not necessarily an argument for their removal. Governments impose regula- tion to protect the health, safety and well-being of citizens and the environment as well as to facilitate market transactions. The main problem with NTM liberalisation is that it is dif- ficult to know whether a particular norm serves public interests or protectionists’ interests, and, indeed, both motives are often found within a single NTM.
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As pointed out in Baldwin (2000), NTMs often result from norms, regulations and stan- dards that control the sale of goods in a particular market by specifying required product characteristics or production processes.3 There are two distinct aspects of this: content of the norm and conformity assessment procedures necessary to demonstrate that a product complies with the norm. We examine both types of NTMs in this study.
It is useful to distinguish between two subtypes of content-of-norm NTMs, horizontal and vertical. Vertical NTMs involve norms that can readily be characterised as being more or less stringent about the quality of a product or service. Higher quality increases consumer welfare. Horizontal NTMs cannot be said to be more or less stringent – norms are just dif- ferent and do increase consumer welfare; they just increase the cost of a product. Horizon- tal norms are probably more common. Many NTMs arise when a national or sub-national government adopts the specifications of the local firm’s differentiated product as its norm.
3 According to common usage, regulations are mandatory, while standards are voluntary.
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Chapter 3
CURRENT EU-JAPAN TRADE
This chapter examines current bilateral trade in goods and services between the EU and Japan. It shows that import penetration in Japan is generally lower than in the EU. More- over, Japan has gradually been losing its position as one of the top destinations for EU ex- ports.
The factors holding back Japanese imports in general, and imports from the EU in par- ticular, are divided into two: First those factors which cannot be affected by trade policy, such as the remoteness of the Japanese market, the large size of the Japanese market and various cultural and linguistic barriers. Japan’s macro-economic structure, with high savings and consequently smaller consumption compared to GDP also reduces potential import penetration. Second are those factors which can be influenced by policies. These include both tariffs and non-tariff measures. Our assessment shows that the former dominates.
We find that tariffs are low and that there are few de jure restrictions on trade. Factors such as distance and language differences provide some explanation for low import penetration. Still, we are left with an amount of missing trade that cannot be explained by distance, lan- guage difference and tariffs, and since there are few de jure discriminatory restrictions, we find this to be a conundrum of missing trade with Japan. We conclude that de facto non- tariff measures in Japan could be the key to understanding and potentially solving the Japanese conundrum.
3.1. EU-JAPAN TRADE
The EU and Japan are the largest and third largest economies in the world respectively. They respectively account for 33 percent and 11 percent of world GDP, and 17 percent and 6 percent of world trade. In 2008, the EU27 countries imported €75 billion worth of goods from Japan and exported €42 billion, cf. figure 3.1.
Figure 3.1 Trade in goods between EU and Japan 2000-2008
billion euros 100 90
80 70 60 50 40 30 20 10
EU27 import from Japan
EU27 export to Japan
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source:Eurostat, COMEXT
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The bilateral trade relationship between the EU and Japan is important for both econo- mies. Japan is ranked fourth among the EU's import partners (4.8 percent of EU-27 im- ports of goods) and fifth among its export destinations (3.2 percent of EU exports), cf. Figure 3.2. For EU services trade, Japan is ranked third both for imports (3.3 percent) and exports (5.4 percent).
Figure 3.2 Japan’s share in EU-27 trade with the World, 2000-2008
Share EU-27 trade with world
EU27 Import from Japan
EU27 Export to Japan
9,3%
8,3%
5,4% 5,1%
2000 2001
7,9% 7,7% 4,9% 4,7%
7,3%
6,3% 5,7%
5,5% 4,8% 3,5% 3,2%
2007 2008
2002 2003 2004
4,6%
4,2% 3,9%
2005 2006
Source:Eurostat, COMEXT
3.2. IMPORT PENETRATION IN JAPAN IS LOW
The EU’s penetration into the Japanese market remains low when compared to European exports to other countries, cf. Figure 3.3. Total European export to Japan was around €61 billion in 2008, when one includes the €18.7 billion of service exports. If the EU’s level of import penetration in Japan was raised to the average of its main trading partners, Euro- pean exports to Japan would increase by 44 percent or €27 billion.
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Figure 3.3 EU’s penetration into main export markets
Ratio of EU exports* to destination market GDP
[Xeu->j divided by GDPj]
0,050 0,045 0,040 0,035 0,030 0,025 0,020 0,015 0,010 0,005 0,000
Exports
+ € 27 bn
(+ 44% increase)
Current EU exports to Japan
~ € 61 bn
Rusia