Japan's Preference toward Bilateral Dispute Settlement Mechanisms with the United States

Young Jong Choi

University of Washington
Department of Political Science

International Studies Association
March 1998

Introduction

Japan's preference toward regional institutions has received a great attention in recent years in relation to the development of regional institutions in Asia (exclusively East Asia) and the Pacific (the broader Asia-Pacific region). Japan's policy toward Asia and the Pacific has often been characterized by "hegemonic defection" and Japan as a "reactive state". The former indicates the absence of Japan's leadership in regional institution building (Mack and Ravenhill 1995: 8). The latter portrays Japan as incapable of pursuing pro-active policies in regional affairs because of its consensus-oriented culture, historical legacy of colonialism, domestic political gridlock and most of all extreme dependence upon the U.S. security umbrella (Calder 1988; Hellmann 1988; Pyle 1992; Curtis 1993).

In corollary, Japan is held to have been passive and even reluctant to build binding regional institutions. Many Japanese policy-makers and scholars argue that Japan has a strong cultural affinity with a non-legalistic, consensus-oriented style of decision-making, which is mirrored in Japan's promotion of the "Asian-way" or "APEC-way" regional cooperation. ₁ Therefore, Japan has sought a substitute for formal institutions such as "pervasive production and marketing networks" (Hatch and Yamamura 1996), "soft economic bloc" based on its economic power (Pyle 1992: 131-9), an emerging "yen bloc" (Kwan 1994; Lincoln 1993: 183-6), or the idea of market-driven regional cooperation (Drysdale and Garnaut 1993: 187-8; Kobayashi et al. 1994).

I will argue that Japan has pursued a rational policy toward regional institutions on the basis of cautious calculation of benefits and costs of institutions. Japan's economic relationship with the United States has been highly interdependent, filled with numerous bilateral economic conflicts. In contrast to the rather smooth penetration into East Asia and the whole Asia-Pacific region, Japan has faced many problems and conflicts with the United States. Japan's institutional preference to settle these bilateral disputes may offer a good opportunity to test my rational assumption of Japan's policy.

The transaction cost approach is a good starting point to develop a rational account of a state's preference toward international institutions. The logic of the transaction cost approach--indicated in various versions such as functionalism, neofunctionalism, interdependence theory, neoliberal institutionalism, etc.--assumes a direct link between increasing economic interaction and the resultant high transaction costs on the one hand, and the demand for an institution to reduce transaction costs on the other. That is to say, the higher the level of economic transactions between states, the larger the incidence of economic conflicts and the costs of dispute settlement that the dyadic states will experience. This will in turn increase the demand for a dispute settlement mechanism.

However, transaction cost approaches cannot explain why and how different states come to have different preferences toward dispute settlement mechanisms. For example, Yarbrough and Yarbrough pointed out in a recent article that:

The United States and Japan, for example, face high potential benefits from more successful dispute-settlement in trade, but the very different styles and preferences of the two countries mean coordination would require substantial compromise, rendering such coordination difficult (1997: 153).

Yarbrough and Yarbrough saw that both Japan and the United States would benefit greatly considering the high dispute settlement costs arising from the close economic interdependence as well as the high incidence of bilateral conflicts.

However, a state's interests and institutional preferencesquite often diverge even if we accept the overall plausibility of transaction cost approaches. In this paper, I will argue that a state's domestic institutions and relative power position need to be taken into account, in addition to dispute settlement costs, to assess its preference toward institutions to settle bilateral disputes.

Theory

A Theory of States' Preference toward Dispute Settlement Institutions

A state's preference toward bilateral institutions geared to settling economic disputes implies not only the willingness to establish such institutions but also the degree of institutionalization. From a legal-institutional perspective, the degree of institutionalization can be understood by the clarity and formality of regime norms and the development of hierarchical organizations and their autonomous capacity over member states (Stone 1994: 471). ₂

Yarbrough and Yarbrough (1997) illustrate four types of dispute settlement mechanisms in progressive order of the authority of the third party: (i) "third-party information provision"; (ii) "non-binding third-party adjudication" as in GATT; (iii) "binding third-party adjudication" as in WTO; and (iv) "pure third-party enforcement" as in the European Court of Justice.

Institutions have two effects: "enabling" and "constraining" effects. Institutions enable states to do things they could not do otherwise. ₃ In other words, enabling effects make cooperation--e.g., prevention and diffusion of conflicts, settlement of disputes and implementation of agreements--easier and less-costly. Institutions reduce transaction costs and uncertainty, coordinate expectations, shape agendas, and monitor opportunistic behavior. ₄ They are at the core of neofunctionalism/neoliberal institutionalism.

In particular, bilateral institutions can provide a more effective and less costly mechanism to settle disputes than ad hoc, informal negotiations. They can be more efficient than global multilateral institutions in terms of transactions costs. As shown in the case of the various GATT rounds, it takes time and energy to reach an agreement in global trade negotiations since so many countries with different interests and agendas are involved. ₅

Institutions also constrain the behavior of the actors involved. Like a "double-edged" sword, institutions constrain not only outside actors but also domestic actors (Krasner 1983: 364-5). Institutions become more constraining as they mature and deepen (Caporaso 1994: 32). However, in the early stage of development, institutions tend to be more useful for powerful states in constraining less powerful states (Krasner 1983: 14-5). ₆

Institutions can be used by states with limited power to constrain the behaviors of more powerful states or to curb their arbitrary use of power (Krasner 1983: 7-9; 1991: 363). ₇ This effect becomes prominent when less powerful states come to combine powers in a similar position and take advantage of their numerical superiority (Krasner 1985). In contrast, the effect of inhibiting the powerful party will be less in a two-actor relationship. Therefore, Japan (the weak party) will have a stronger incentive to eschew binding institutions in U.S.-Japan bilateral dispute settlements. ₈ This fear of being dominated in the two-party relations, however, can be mollified if the state is willing to "tie itself to the mast [institutions]" to facilitate domestic reforms otherwise difficult to achieve (Caporaso 1994: 32).

Because of this mixed nature of institutions, states have an incentive to avoid binding institutions for dispute settlement unless ad hoc solutions become inadequate, ineffective, or costly in terms of political and economic costs. A state's relative power position and domestic institutional capabilities (to preempt, diffuse and resolve disputes) come to play a key role to determine the effectiveness of ad hoc measures. Conceptually, if a state is powerful enough to settle disputes on its own terms readily at any time, that state will have little need for formal dispute settlement mechanism; so will a state that is capable enough to make adjustments to any kind of outside demand with no significant political fallout domestically.

Dispute settlement costs (DSCs) indicate the cost of settling disputes or, in a broader sense, coordinating policies to resolve negative policy externalities. ₉ DSCs will go up as the number of disputes and their complexity grow. Disputes become more complicated with the expansion of the number of actors involved, both domestic and international. ₁₀ DSCs will also rise as the issues or their negotiation process become more politicized.

Dispute settlement costs (DSCs) are the key explanatory variable that determines the demand or preference for bilateral dispute settlement. Individual states' relative power positions and domestic institutions are more stable than the magnitude and nature of disputes. However, they do change gradually, and will have an impact on DSCs and the preference toward dispute settlement mechanisms.

Model and Hypothesis

Figure 1 illustrates the relationships between the variables that affect a state's preference toward bilateral dispute settlement mechanisms. I further elaborate them in the following hypothesis.

Hypothesis 1: The demand for bilateral dispute settlement institutions will increase as the costs of ad hoc dispute settlements (DSCs) go up.

1.1: DSCs will increase as the degree of bilateral economic interdependence goes up.

1.2: Domestic institutions can reduce DSCs by making it possible and less costly to prevent, diffuse or settle disputes, as well as to behave opportunistically at the implementation stage.

1.3: Relative power has the effect of reducing DSCs.

Hypothesis 2: The effect of power differentials on the demand for dispute settlement mechanisms will vary depending upon the relative power position of a state.

2.1: For the powerful party (the United States), the larger the power differential, the more willing it will be to take advantage of the constraining effect of institutions on the weaker party. As the power differential declines, institutions can become more self-constraining.

2.2: For the weaker party (Japan), the larger the power differential, the stronger will be the desire to avoid institutional constraints. As the power differential decreases, the less reluctant it will become toward institutional constraints.

Preliminary Evidence

Institutional Preference

Japan's preference toward bilateral dispute settlement mechanisms has evolved over time from Type IV, through Type III and then Type I. The Japanese government has become increasingly in favor of having an institution for dispute settlements. In addition, Japan's aversion to entering into binding agreements with the United States has dwindled.

Table 1: Japan's institutional preference toward bilateral dispute settlements

	Institutionalized
	yes	no
yes	I Japan (1990s) bilateral dispute settlement	II
binding
no	III Japan (1980s) Various institutional initiatives	IV Japan (1960s and 70s) ad hoc VERs

Up to the late 1970s, voluntary export restraints (VERs) had been the dominant mechanism to settle bilateral disputes. Japan had a strong preference for VERs, an informal and less binding measure whose implementation was up to the Japanese side. The Japanese Ministry of International Trade and Industry (MITI) had the capacity to sell VERs to domestic industries, as well as to control exports.

As the locus of bilateral disputes started to shift to opening Japanese markets, bilateral conflicts became increasingly complex and frequent. The United States began to initiate many organizations to exchange information and, if possible, to adjudicate on bilateral disputes. Some were transformed into bilateral organizations with a varying degree of institutionalization. Examples include Wisemen's group (1980-5), various regular subcabinet meetings (1979-on), Japan-U.S. Trade Committee (1981 on), Yen-Dollar Dialogue (1984-5), MOSS (market-oriented sector selective: 1985-6), SII (structural impediment initiatives: 1989-90) and Framework Talks (1993 on).

In the process Japan became increasingly receptive to a more structured approach to bilateral conflicts. The Japanese government has often been more assertive than the U.S. counterpart, especially after the mid-1980s. Japan began to hint on its intention to have a bilateral dispute settlement body in the late 1980s after which the Japanese government turned gradually to the "rule-oriented approach" to settle bilateral disputes. In November 1994 in the midst of bilateral negotiations on auto and auto parts, Hashimoto Ryutaro, then Japan's Minister of International Trade and Industry (MITI), formally expressed the intention to have a dispute settlement mechanism to moderate U.S.-Japan trade conflicts (Nikkei, Dec. 23, 1994). The U.S. side has become more elusive for fear of losing its unilateral leverage over Japan.

Dispute Settlement Costs

This gradual shift in Japan's preference toward bilateral dispute settlement mechanisms has coincided with the increase in the numbers and complexity of bilateral conflicts with the United States.

Table 2: Numbers of official bilateral negotiations and formal agreements: an indicator of DSCs

	73-76	77-80	81-84	8 5-88	89-92	93-95
# of official negotiations (A)	21	57	94	138	132	129< /td>
# of formal agreements (B)	8	9	7	11	14	4
B/A (%)	38	16	7	8	11	3

Source: A is from various issues of Nihon Keizai Shimbun Monthly Article Index; B is from United States Treaty Series.

Note: B/A stands for the number of official negotiations needed to produce a formal settlement.

Table 2 shows that the number of formal agreements to close bilateral economic disputes has increased moderately since the late 1970s. However, the number of official meetings between the two governments skyrocketed since the early 1980s. As a result, the success rate (B/A), as measured by the number of formal agreements against that of officials meetings to settle bilateral disputes, declined considerably. This indicates the increased transaction costs of negotiating and implementing settlements. This increase may have pushed Japan in the direction of more institutionalized solutions to bilateral conflicts

Power Differential (relative power)

If Japan's relative power position with respect to the United States is measured by the relative size of its economy and the ratio of trade dependence upon the United States, Japan's position has improved continuously. ₁₁ Table 3 illustrates a steady increase in Japan's relative GNP over the last three decades. It rose from the 20 percent of the US GNP in 1970 to 40 percent in 1980, and then to 64 percent in 1994. ₁₂ Japan has closed the gap with the United States in most of economic categories rapidly (Inoguchi and Okimoto 1988: passim)

Table 3: Japan's Relative Economic Size, GNP (US $ million)

	1970	1980	1990	1994
U.S.	975,240	2,639,060	5,186,469	6,737,367
Japan	198,840	1,053,930	3,140,948	4,321,136
Japan/U.S.	20%	40%	60%	64%

Source: World Bank, World Bank Atlas, various issues.

Note: GNP is calculated at market price.

As Table 4 demonstrates, Japan has achieved a remarkable export performance measured in terms of global share and growth rate. Japan's exports grew considerably faster than those of United States. In terms of global share, Japan closed the gap with the United States very rapidly. In particular, the growth of Japan's share of global manufacturing exports is most impressive. The figure was about 8.5 percent during 1965-69, far behind those of the United States at 19.1 percent and Germany 17.1 percent. Japan was about on par with the United States in the early 1990s. ₁₃

Table 4: Japan's Export Performance in a Comparative Perspective (%)

	average growth rate				global share
	60-70	70-80	80-90	90-94	1960	1970	1980	1990	1994
World	9.4	20.6	6.1	5.6	100	100	100	100	100
Japan	16.9	21.0	8.2	8.4	3.4	6.6	6.9< /b>	8.4	9.3
U.S.	8.1	18.1	5.7	6.8	16.6	14.6	11.9	11.5	12.0

Source: IMF, International Finance Statistics.

Table 5 also indicates that the direction of Japanese exports has become more balanced in recent years. The share of the East Asian markets grew rapidly from 25.2 percent in 1980 to 38.9 percent in 1994. On the contrary, the share of U.S. markets dropped from 37.6 percent in 1985 to 31.7 percent in 1990, and then to 30.7 percent in 1994. This may indicate that Japan feels less vulnerable to the U.S. threat of market closure, and therefore that Japan may be less reluctant to have bilateral institutions. However, Japan's export dependence upon the United States is still very high at 30 percent, higher than the 1980 level of 24.5 percent.

Table 5: Direction of Exports by Japan and the United States, 1980-94 (%)

Exporting Country	US	NAFTA	Japan	NIEs	ASEAN	China	East Asia	EC/EU
1980		22.9	9.4	6.2	2. 8	1.7	10.7	26.7
1985		28.6	10.6	7.9	2 .1	1.8	11.9	23.0
1990		28.3	12.4	10.4	2.7	1.2	14.4	24.9
1994		30.5	10.4	11.8	3.6	1.8	17.2	20.9

Exporting Country	US	NAFTA	Japan	NIEs	ASEAN	China	East Asia	EC/EU
1980	24.5	27.3		14.3	7.0	3.9	25.2	14.0
1985	37.6	40.8		12.8	4.2	7.1	24.1	11.9
1990	31.7	34.8		19.7	7.7	2.1	29.6	18.8
1994	30.0	32.6		23.9	10.3	4.7	38.9	15.7

Source: IMF, Direction of Trade Statistics Yearbook, various issues.

Note:NIEs denote Taiwan, South Korea, Singapore, and Hong Kong; ASEAN includes Indonesia, Malaysia, Thailand, and the Philippines; East Asia includes NIEs, ASEAN and China.

In consequence, Japan has only a limited capability to shape and reshape bilateral economic relations in spite of the rapid growth of its economic strength. Edward Lincoln concurs that "Japan may have gained a voice in world affairs or a recognition from the world but not enough to exercise power over the United States, the primary source of economic conflicts Japan faces" (Lincoln 1993: 216).

Japan's enhanced power position may explain its recent shift to a "rule-oriented" approach to bilateral economic conflicts. During the 1994-5 "framework talks" on auto and auto parts, Japan strongly opposed the U.S. requests for numerical targets. However, Japan has not yet exercised its economic power to change U.S. policies in Japan's favor. ₁₄

Domestic Institutions and DSCs

For Japan at the receiving end of various U.S. pressures in bilateral conflicts domestic institutions are closely related to the feasibility and costliness of making concessions and assuring their proper implementation. If a country has a "strong state"--both capable and autonomous--with highly cooperative government-business relations, domestic political costs of settling disputes (or in a broader sense DSCs) will be lower than otherwise. ₁₅ This point is illustrated well by various "domestic structure approaches". ₁₆ In addition, domestic political factors--e.g., the stability of the ruling coalition and the partisan composition (in particular labor-affiliated parties) of the incumbent government (Milner and Keohane 1996)--would affect the cost of dispute settlement.

Japan's domestic institutions score very high in every category. They are characterized by an autonomous and capable bureaucracy maintaining close cooperative relations with well-organized industries. Domestic politics in Japan has been unprecedentedly stable under the one-party rule of the Liberal Democratic Party (LDP). Labor has largely been missing from the equation of domestic and foreign policy-making (Pempel 1987). These institutional characteristics of Japan are reflected in the skillful management of VERs with the United States.

VERs (voluntary export restraints) and DSCs

VER is a mechanism designed to reduce various political and economic costs of GATT or US domestic legal procedures. ₁₇ Negotiations under the GATT Article XIX (escape clause) or the US trade laws usually take a long time with no guarantee of reaching the desired effect (Jackson 1989: 155-74). Moreover, unilateral imposition of import restriction, albeit legal, involves unbearable political costs for the United States as the most ardent advocate of a liberal trading order. ₁₈ A VER is also workable politically since the costs are diffuse among large domestic consumers while the benefits are concentrated in the hands of a limited number of producers and workers asking for protection. Quite often, exporting governments implement VERs "without any formal indication of international agreement or even any consensus arrangement" (Jackson 1989: 178).

Japan was highly receptive to accommodate U.S. demands through informal/bilateral negotiations like VER. VERs were less costly as compared with the procedures of GATT Article XIX or ITC (International Trade Commission); Japan could also limit concessions to the United States. The deals were usually beyond legal altercation, and Japan could have room for maneuvering in the implementation stage. Moreover, the benefits of VERs would accrue to Japanese exporters in the form of increased prices.

VERs could work as a dispute settlement mechanism as long as the Japanese government (especially MITI) was willing to accept them; MITI could rally domestic industries around the arrangement; and the resultant effects (of price and/or quantity control) could be contained within a bilateral framework. The case of the "textile wrangle" (1969-71) over VERs in textiles could not come to an agreement because of the absence of these three conditions. ₁₉ Then-mercantilistic (or nationalistic) MITI, especially the textile bureau, was strongly against the VER; so were the domestic textile industries composed of numerous small, fragmented producers with no ready option to "exit." Moreover, Japanese textile industries were competing with other East Asian exporters in the U.S. market, making unilateral concessions by Japan more difficult to take (Yoffie 1983; Destler et al. 1980; Cohen 1991). All these factors hindered Japan from accepting a deal.

After the painful experience of the textile dispute of 1969-71, ₂₀ the so-called "internationalist" faction took charge of the MITI. MITI steadily began to dismantle its machine of export promotion and import protection, and to adopt a more flexible economic strategy to avoid, diffuse and even preempt economic conflicts with the United States. The miracle of MITI seemed to work in the case of bilateral conflicts with the United States. A distinctive pattern of dispute settlement emerged, be it a VER or not, in which Japan settled bilateral economic conflicts politically. That is to say, after initial rounds of negotiations the ministry of foreign affairs (MFA) urged the prime minister to make concessions for the sake of amicable bilateral relations; then the MITI carried out the agreement using its well-known industrial policy and administrative guidance.

Japan's domestic institutions and political conditions--e.g., an autonomous and capable bureaucracy, stable politics and cooperative government-business relations--made it possible to implement VERs effectively and efficiently. VERs were administered by MITI through formal and informal policy tools. In many cases, MITI directly controlled exports by requiring formal export approval on the basis of the Export Trade Control Order and sometimes indirectly allowed the formation of export cartels based on the Export and Import Transaction Law granting exemptions to the Fair Trade Law prohibiting cartels.

The progress of concentration and centralization of Japan's major export industries in the hands of several oligopolistic keiretsu (business groupings)--such as consumer electronics, automobiles and steel--rendered the cooperation between MITI and private actors and/or among private actors easier to achieve by reducing the number of actors involved. This was a stark contrast to the case of the textile industry comprising countless small exporters.

Table 6: Major VERs between Japan and the United States

Date of initiation	Product	Arrangement
1956	cotton textile and apparel	VER (1957-61)
1962	metal flatware	VER (1962-94)
1964	pottery and chinaware	VER (1964-94)
1966	steel and steel products (including specialty steel)	VERs in 1966-69, 69-71, 72-74 and 84-92
1971	wool and synthetic fiber	VERs
1977	color TV	OMA (orderly marketing arrangement): 1977-80
1981	passenger cars	81-83: 1.68 million, 84: 1.85 million, 85-91: 2.3 million, 92-3: 1.65 million cars.
1987	machine tools	Arrangement Concerning Trade in Certain Machine Tools: VERs in 1987-91 and 92-93

Source: Adapted from Aoki and Umada (1996); GATT (1994), Trade Policy Review: Japan.

Table 6 lists examples of VERs and OMAs (Orderly Marketing Arrangements). In addition, the Japanese government agreed to the monitoring of the quantity and price of Japanese exports on numerous occasions in relation to dumping charges. ₂₁ Japan had not only the incentive but also the capacity to settle disputes in such a voluntary, informal way. Japan wanted to come to an early ending of disputes without shouldering legal responsibilities and possible U.S. sanctions. For the same reason, Japan settled the GATT dispute cases before the final rulings. This is indicated in the highest withdrawal ratio by Japan of GATT dispute cases (Hudec 1993).

However, VERs became unsuitable as a means of dispute settlement as the nature of conflicts reached beyond the capacity of Japan's domestic institutional capability. From the perspective of Japan's institutional capacity, VERs ended less because the WTO prohibited them and more because the Japanese government or MITI could no longer afford them. The case of semiconductors (1986, 1991 and 1996) shows exactly why the bilateral VERs were no longer a viable option. Price monitoring became increasingly difficult because of the rapid innovation in the semiconductor industry. It was more difficult to monitor the prices of Japanese chips in third markets (Sato 1991; Cohen 1991). ₂₂ Besides, the Japanese government could not enforce Japanese chip users to consume U.S.-made chips up to 20 percent of the domestic markets as agreed upon with the United States.

VIEs (voluntary import expansion) and DSCs

The primary source of bilateral economic conflicts began to shift from restraining Japanese exports to expanding Japanese imports of U.S. goods due to the rapid increase in bilateral trade imbalances. U.S. efforts to open Japanese markets were focused at first on pressuring Japan to comply with GATT regulations, especially NTBs (non-tariff barriers) and agricultural market liberalization discussed in the Tokyo Round. They were also leveled at clarifying gray areas in the GATT regulations or those left outside the GATT jurisdiction such as services (financial markets, legal services and investment) and intellectual property rights.

Table 7: Section 301 Cases against Japan

Product	Period	GATT panel (ruling)	Outcome
Steel	10/76-01/78	N/A.	rejected
Thrown silk	02/77-03/78	Yes secret	market opening specifically for the U.S.
Leather	08/77-12/85	Yes (for the U.S.)	Quota expansion (79-82); compensation (86).
Cigars	03/79-01/81	Yes no	bilateral deal; tariff reduction and increase in retail outlets
Pipe tobacco	/79-01/81	Yes no	The same as above
Footwear	10/82-12/85	N/A	compensatio n
Semi-conductors	06/85-06/91	N/A (EC filed complaint)	price monitoring in U.S. and 3rd markets; market share (20 percent of Japan); U.S. sanction imposed.
Cigarettes	09/85-10/86	no no	Japanese concession
Beef and citrus	05/88-07/88	Yes no	Bilateral agreement: tariffication of beef; tariffs lowered in others
Construction	11/88-07/91	N/A.	bilate ral (partial liberalization)
Satellites	6/89-06/90	N/A	(Super 301) liberalization of government procurement
Super-computers	06/89-06/90	N/A.	(Super 301) liberalization of government procurement
Wood products	06/89-06/90	N/A.	(Super 301) liberalization of TBs and NTBs

Source: Adapted from Bayard and Elliott (1994)

VIEs were a compromise between the complete overhaul of GATT on the one hand, and unilateral imposition of sanctions by the United States and the resulting trade wars on the other. VIEs could be imposed or implemented with the enactment of Section 301 in the Trade Act of 1974 and a series of reforms that eased the conditions of invocation and stiffened sanctions at the same time (Bayard and Elliott 1994: 25-49; Low 1993: 87-96; Jackson 1989: 103-7)

VIEs took the form of Japan voluntarily taking market opening measures not bound by clearly defined GATT regulations. Japan's VIEs included a series of case-by-case liberalization measures (e.g., market opening measures related to Section 301 cases), sector specific measures (e.g., MOSS, Dollar-Yen Dialogue), structural reforms (SII) and most recently "numerical targets" in specific Japanese markets (e.g., semiconductors since 1986 and various negotiations under the "Framework" talks since 1993). ₂₃

In the case of market liberalization, "the government's tactic of separating the process of external negotiation from the reaction of domestic vested interests became increasingly difficult to implement" (Shibusawa et al. 1992: 127). The ever-intensifying politicization--understood in terms of the degree of involvement of domestic interests in the policy-making process--in Japan as well as in the United States around the issue of liberalizing Japanese markets made it difficult and costly for Japan to settle these disputes.

The key to the success of Japan's VIEs with the United States was by making concessions and reducing trade imbalances enough to pacify the U.S. Congress or at least appease the concerned industries in the United States. More importantly, concessions could be tendered only to the United States to minimize the adverse impact on Japan's domestic interests. However, the Japanese government, albeit capable and autonomous, could not impose sacrifices on domestic interests at will just like any other states.

In contrast to the VERs in which the MITI had a firm control over production and export, VIEs had no single ministry in charge of their negotiation and implementation. Increasing number of ministries came to be involved in the negotiation process in various issues areas. As a result, the problem of a "compartmentalized" bureaucracy was aggravated, further undermining Japan's capacity to settle bilateral disputes (Kusano 1996: 76-7; Naka 1996; Schoppa 1997). Respective ministries were staunchly positioned to protect their own parochial interests, and politicians (or members of "zoku") were more concerned with pleasing their domestic constituent interests rather than mollifying U.S. concerns (Inoguchi 1987; Schoppa 1992; Armacost 1996). What Japan was able to do was to make concessions to the United States in the margins at the last moment. ₂₄

Since 1980, Japan has made about forty formal bilateral agreements with the United States to the effect that Japan would increase its imports from the United States through measures with varying degrees of VIEs. ₂₅ These liberalizing measures, albeit limited in outcome from the U.S. perspective, also undermined Japan's institutional capacity to adjust to pressures from the United States. As T.J. Pempel argues, "[b]y the mid- to late-1980s, conservative efforts to deal with external change through ad hoc domestic adjustments [VIEs and VERs] were reaching their limits" (1995: 26-7). In the past, Japan's political stability in the face of external shocks came from "continually high economic growth, the relative insulation of the Japanese market from outside investment and imports, and a series of specific side-payments to agriculture and small business." But all of these conditions had undergone drastic changes, and as a result became a thing of the past (Pempel 1995: 28).

Cosmetic reforms or liberalizing measures on the surface could be done without much political/social turmoil. However, deeper reforms of entrenched structural barriers--such as business practices, keiretsu and other NTBs--could not be made easily. ₂₆ The problem was aggravated by the absence of leadership in domestic politics. ₂₇ Moreover, it became increasingly difficult for the Japanese government to make concessions exclusively to the United States. For example, the EU's growing determination to have a say in discussions between the US and Japan made it difficult to keep trade issues bilateral. This point was well addressed in the case of auto and auto part negotiations (1994-5) and the renewal of semiconductor agreement in 1996 (Financial Times, Dec. 6, 1996). ₂₈

As a result, Japan lost much of its flexibility in bilateral trade negotiations (Nikkei Weekly, Jan. 3, 1994; Kusano 1996). This is partly due to the decline of MITI's control over domestic actors ₂₉ and partly due to the enhanced position of the most-favored-nation principle with the commencement of the WTO. Many MITI officials claim that WTO regulations leave little room for Japan to take the conventional method of extending special treatment only to the U.S. ₃₀

In this situation, it may be a rational strategy for Japan to lock itself into the binding norms of GATT/WTO or, in case of the absence or insufficiency of international norms, bilateral institutions for dispute settlement. A bilateral dispute settlement mechanism can play several roles including: (1) reducing bilateral disputes and maintain sound bilateral relations; (2) enhancing economic efficiency and reduce transaction costs; (3) facilitating domestic reforms; and (4) mitigating the abuse of power by the United States.

Periodization of Japan's Institutional Preference

Period One (until 1976): Prelude

Bilateral trade dispute between Japan and the United States started in the mid-1950s over the flooding of the U.S. market with so-called "dollar blouses" and various cheap items from Japan. Domestic pressures for some kind of import restriction began to mount in the United States. ₃₁ The United States chose a VER arrangement as the only viable strategy, and Japan willingly accepted a VER in 1956 which lasted between 1957 and 1961.

The degree of politicization of the issue was suppressed since the two allies, especially the State Department and the Ministry of Foreign Affairs of Japan, had a shared interest in preventing respective domestic interests from damaging bilateral security and political relations. Working-level negotiations were enough to ensure a VER (Sato 1991; Kawakami 1996: 49).

At that time, MITI had firm control over the cotton textile industry through licensing, allocation of export credits and control over raw materials. MITI was willing to implement VER as a means of industrial rationalization and restructuring (Yoffie 1983: 52). ₃₂ The reason was that MITI had already known by 1955 that the cotton textile industry was non-strategic and its future was doomed (Uriu 1996: 58).

The pattern of using "gaiatsu" (foreign pressure) to promote domestic economic reform or restructuring started at about this time. Although the industry was against VERs, it had no choice but to give in due to a weak external and domestic bargaining position (Uriu: 57-9). The cotton industry was compensated for the loss through the regulation of capacity expansion and financial support for diversification and rationalization (Uriu 1996: 62-74).

With regard to the format of agreement, Japan preferred a "gentlemen's agreement" with no formal restrictions or detailed specifics (Yoffie 1983: 53). To the contrary, the United States wanted more concrete and formal agreements with clearly stipulated concessions for domestic political purposes. A VER in cotton textile was worked out closer to the U.S. position without any noticeable spill-over into the political realm. This VER was further institutionalized on Washington's own initiative on a global scale due to the high degree of linkage (or externalities) to third parties--both exporting and importing sides. The outcomes were the Short-Term Arrangement (STA: 1961-2) and the Long-Term Arrangement Regarding International Trade in Cotton Textiles (LTA: 1963-72), an international regime of managed trade in cotton textiles. ₃₃

However, the cotton textile dispute was only a prelude to an endless flow of bilateral disputes. The year 1965 was a watershed in the sense that U.S. trade balances turned red irrevocably. Bilateral conflict became constant and increasingly intense.

In 1965, the conflict over textiles such as wool and man-made fibers was picking up steam. The U.S. attempt to follow the LTA (Long-Term Arrangement) model met bitter resistance in Japan, foreboding a full-scale "textile wrangle" in 1969-71 (Destler et al. 1979). Aside from the expected opposition from industry and politicians, MITI was also strongly against the LTA. In a meeting prepared to discuss the LTA on wool textiles in 1965, a MITI official stressed that "Japan will not go along with setting up another trade barrier, no matter what items are involved" (Yoffie 1983: 128). This objection continued into the late 1960s when the U.S. attempted to negotiate an LTA-type regime for multifiber textiles and apparel (Yoffie 1983: 133-5).

The MITI was in turmoil in the latter years of the 1960s over its future policy direction once the early industrialization drive powered by industrial policy had matured, leaving behind the assignment of industrial restructuring and economic liberalization (Johnson 1982: ch.8). The battle line was drawn between the "international faction" and traditional "industrial-policy cadres" led by Sahashi Shigeru, Vice-Minister (1964-66) of MITI (Johnson 1982: 274-80). ₃₄ The "internationalist faction" became dominant by 1968 (ibid.: 281)

Traditionalists criticized internationalists for their inclination to purse a "foreign appeasement" policy. Allegations of this kind had often driven leaders of the "international faction" to take a tough stance. This was the case with the United States-Japan textile negotiations (Johnson 1982: 280-1). However, their reference point was the principles or spirit of GATT. Traditionalists were more concerned with the protection of national interests or domestic industries without due consideration of its international ramification.

The bitter wrangle lasted more than two years. It finally ended with the threat of unilateral imposition of quotas by the United States under the Trading with the Enemy Act in October 15, 1971. The cost of politicizing the textile conflicts were extremely high to Japan. ₃₅ There were no major bilateral disputes for about five years after the textile wrangle.

On both sides of the Pacific, such a degree of conflict was not, however, enough to justify any attempts to institutionalize bilateral economic relations for dispute settlements. The textile wrangle was, for the United States, driven mainly by political objectives. It did not leave any institutional legacy when the political goal was achieved. The United States even declared in 1975 that the Joint Japan-U.S. Committee on Trade and Economic Affairs was no longer necessary due to the absence of major issues to resolve (Nikkei, August 4, 1975). ₃₆

As for Japan, the textile dispute gave an invaluable lesson in relation to the future handling of bilateral economic conflicts with the United States, especially to the MITI which was awakened to the importance of international factors. The "internationalist" faction became the majority in the MITI and came to show a great flexibility, compromising the need for the protection of domestic producers with the imperative of maintaining an amicable relationship with the United States.

On the regional front, Japan launched its first major initiative for regional cooperation in 1968 by holding the first PAFTAD (Pacific Trade and Development) conference in Tokyo. The PAFTA (Pacific Free Trade Area) idea was first drawn up by Professor Kojima in 1965, and taken up by Foreign Minister Miki in 1967 as an official policy option toward the region. Since Japan had a formidable export machine without prominent off-shore production investment, it might have been a rational policy to pursue a drastic reduction of region-wide trade barriers among the advanced regional countries as envisioned by Kojima. The PAFTA proposal, if materialized, could have been an effective mechanism to deal with growing protectionism in the advanced markets, e.g., the establishment of the EEC and burgeoning U.S. protectionism.

Even though the link between the growing trade conflicts with the United States and Japan's regional drive (PAFTA in this case) seemed tenuous, it became a pattern for Japan to go out into the Asia-Pacific region calling for regional cooperation whenever the United States tried to bind Japan with institutions geared to settle economic conflicts. The level of bilateral conflicts in this period was not high enough to justify an attempt at institutionalizing bilateral relations, and Japan and the United States were not serious about the PAFTA idea or any other regional institutions.

Period Two (1977-1985): Early Institutionalization

Bilateral economic conflicts flared up again in 1976 and continued thereafter, expanding into new sectors of heavy as well as high-technology industries. In this period, the United State was better armed with various weapons of import control and export expansion. The overhaul of "escape clause" and "anti-dumping" and "countervailing-duty" procedures in the Trade Acts of 1974 and 1979 reinforced the turn toward VERs (Low 1993: 55-60). Section 301 of the Trade Act of 1974 was the "cutting edge of aggressive, reciprocity-based, foreign-market opening initiatives" by the United States (ibid. p.87).

The United States launched a three-dimensional attack on Japan: conventional restriction of imports; new expansion of exports to Japan; and incipient macroeconomic (monetary and fiscal) policy coordination to reduce trade deficits. Japan accepted VERs on specialty steel (1976), OMAs on color TV's (May 1977) and VERs on automobiles. Compared with the case of textile VERs, Japan showed far greater willingness to accept these VERs. ₃₇ In addition to VERs and the OMAs, some Japanese industries which had difficulties in restraining exports to the United States began production directly in the United States. Color television industries took the lead, driving out US manufacturers abroad in search of a low wages (Sato 1995a: 239-40). This was followed by automobiles and other export industries.

U.S. requests for market liberalization met with Japan's deliberate efforts to make minimum concessions necessary to appease the U.S. Congress, so the concessions were made only to the United States. It became a ritual for Japan to announce periodic liberalization packages. The repetition of liberalization efforts put Japan at the lowest bracket in the world in terms of tariff rates by the mid-1980s. The continued accumulation of trade deficits in spite of the liberalization of Japanese markets put Japanese NTBs (non-tariff barriers) at the center of bilateral conflicts.

Bilateral conflicts became hot domestic political issues in the United States. It was commonplace for any bilateral conflict to be settled at the summit meetings after a long duration of negotiations. The number of bilateral negotiations needed to settle economic disputes increased dramatically since 1978. ₃₈ The U.S. administration was pressured to find an effective solution while not severely undermining bilateral relations with Japan. Under the circumstances, the U.S. administration was the first to seek an institutional framework that might offer effective and less costly solutions. It was expected that such a mechanism would prevent the extreme politicization of the dispute settlement process, promote mutual understanding and facilitate exchange of information. ₃₉

The first such attempt was made by Mike Mansfield, the U.S. ambassador to Japan. He proposed a kind of "standing consultative body" for bilateral trade conflicts in 1979. His idea was based on the expectation that bilateral trade conflicts might break out continuously, especially with the addition of the issue of opening Japanese markets. He envisioned a mild, non-binding consultative body, composed of former ambassadors to each other as well as the experts from governments and related industries (Nikkei, March 17, 1979).

The initial Japanese response to the proposal was very cautious. The Ministry of Foreign Affairs (MFA) expressed a reservation stating that:

it is not desirable to have an exclusive bilateral institution with the United States given the widespread presence of economic conflicts with other trading partners. This kind of institution will only aggravate criticism against Japan from the EC and other regional countries (Nikkei, March 17, 1979).

accumulation of trade defic

In addition to the concerns for other countries in and outside the Asia Pacific region, the Japanese government was also fearful of the constraining effect of bilateral institutions.

After a series of domestic consultations, especially between the cautious MFA and the more willing Kantei (the residence of the prime minister), the Japanese government reached an internal consensus to respond positively to the U.S. proposal. The key condition was that the new institution should not have a monitoring authority over the bilateral agreements so far made between Japan and the United States (Nikkei, March 20, 1979).

The Japanese government decided to push for a regular ministerial-level meeting at the upcoming Ohira-Carter summit in May 1979, an "Economic Ministers Meeting" to be held once or twice annually, similar to the Joint Japan-U.S. Committee on Trade and Economic Affairs ended in 1975 (Nikkei, March 31, 1979). The Japanese MFA was skeptical of the usefulness of a private-level, advisory council.

However, the final deal was cut in accordance with the U.S. position at the Ohira-Carter summit. Prime Minister Ohira and President Carter agreed to establish the Japan-U.S. Economic Relations Group (the so-called "Wisemen's Group"). Members were drawn from the private sector, and its role was to advise on long-term solutions to bilateral problems. The group made a comprehensive research on bilateral economic problems, which became the foundation for bilateral discussions in the coming decade, including the structural problems of the Japanese economy. ₄₀

In addition to the "Wisemen's Group" talks, Ohira and Carter agreed to utilize actively the subcabinet-level group meetings led by Japanese vice-minister of the MFA and the U.S. deputy-secretary of State Department, already in place to deal with bilateral trade and economic affairs. They were mainly geared to monitor the progress in macro-agendas--not micro, sector-specific problems--agreed upon at the summit as necessary to reduce trade imbalances and to maintain a stable exchange rate(Nikkei, May 3, 1979).

Moreover, UStr suggested a "Japan-U.S. Economic Adjustment Mechanism" (led by deputy UStr and vice-minister of MFA) to deal with specific trade issues (Nikkei, April 29, 1981). This proposal was substantiated into a full-fledged consultative body on trade conflicts and the opening of Japanese markets in late 1981 comprising high-ranking officials from the related ministries of both countries (Nikkei, September 16, 1981). ₄₁ Japan (or specifically the MFA), however, wanted to upgrade this to the ministerial-level meeting. ₄₂

Given the limited effect of bilateral economic conflicts on Japan's domestic politics and economy, Japan's primary goal in bilateral trade negotiations became more political, i.e., to prevent economic conflicts from spilling over into the political and security realms. The Japanese government (MFA in particular) expected that these political goals could be achieved better by higher level talks in which the adverse effects of low politics could be moderated by the concerns for high politics. By doing so, the MFA of Japan also wanted to maintain its traditional role as the sole authoritative channel of negotiations with the United States against the challenges from the MOF (Ministry of Finance) and MITI. ₄₃

In particular, MITI's discontent with the MFA-led trade negotiations was deep-rooted, dating back to the textile wrangle. ₄₄ MITI wanted to play a role in trade negotiations comparable to its status as the ministry in charge of trade issues. MITI and the U.S. Commerce Department jointly established the Trade Facilitation Committee (TFC) in 1977, a forum geared to discuss individual firm-level complaints on market access to Japan. ₄₅ TFC was upgraded to the vice-ministerial level in August 1981 to keep up with the similar move between the State Department and the MFA. ₄₆ The agenda was broadened to include ways to expand American exports to Japan as well as issues like industrial structure, technology, productivity, quality control and labor relations (Nikkei, Sep. 17, 1981). ₄₇

The Japanese Ministry of Finance (MOF) and the U.S. Treasury Department also launched their own forum called "Yen-Dollar" talks (Nikkei, Nov. 10, 1983). ₄₈ The growing discontent with bilateral trade negotiations increased the importance of macroeconomic policy coordination, especially monetary and fiscal policies, to reduce U.S. trade deficits. The agenda included the liberalization of Japan's financial markets and internationalization of the yen. This forum became a precedent for the following MOSS (market-oriented sector selective) and SII (structural impediments initiative), in which MOF and the Treasury Department took the initiative (Naka 1996: 193-8).

To summarize, the institution-building effort in this period was aimed at finding effective solutions to bilateral disputes with less costs while holding the U.S. Congress in check. The effort was three-pronged--State Department-MFA, Commerce Department-MITI, and Treasury Department-MOF--even though the first line was still the most important. A kind of cross-national bureaucratic alliances appeared as well as serious turf-battles between each prong.

The United States initiated institutionalization, and Japan responded positively but with a different preference. The Japanese government desired in unison to limit those institutions to an advisory role, suggesting recommendations, facilitating exchange of information and deepening mutual understanding. The suggestion of a formal dispute settlement mechanism was turned over to the next wave of institutionalization in the late 1980s.

At the regional level, Japan's worry over excessively close involvement with the United States found a way out in the renewed effort to promote regional cooperation, i.e., the so-called "Ohira Plan" to build a Pacific Basin community. The plan lacked concrete measures to build a region-wide institution. Since the plan was largely a balancing act between the United States and other regional countries, Japan had no imperative to pursue regional institutions seriously, especially in the face of the strong opposition from ASEAN countries.

Period Three (1985-1992): Japan's Positive Turn toward Institutionalization

Despite the efforts to reduce bilateral conflicts and U.S. trade deficits, the outcome was frustrating to the United States, especially to the U.S. Congress. Bilateral conflicts continued to break out, and the U.S. trade deficits with Japan were swelling continuously. The existing institutions became inappropriate or unable to solve the problems. Stephan D. Cohen described the situation:

With product-specific trade disputes erupting faster than the two bureaucracies could effectively respond...A steady stream of bilateral agreements was no substitute for the missing long-term strategy to address structural economic problems and political needs. No definitive settlement could be possible in the context of ad hoc agreements focused on symptoms instead of causes (Cohen 1991: 144-5).

The U.S. Congress stepped up the pressure on both the administration and Japan by enhancing its authority. The Trade and Tariff Act of 1984 ₄₉ and the Trade and Competitiveness Act of 1988 ₅₀ were such attempts. U.S. trade policy changed decisively from the traditional strategy of restricting imports to that of expanding its exports.

Under the circumstance, the U.S. administration had to act to meet the demands from Congress and domestic industries while controlling excessive inputs from domestic politics. This was especially the case with the so-called "pure economist" and "diplomat" groups in the U.S. trade policy-making establishment that opposed the idea of imposing import targets on Japan. ₅₁ The economist group wanted to have more open trade by removing barriers in Japanese markets; the diplomat group wanted to avoid an extreme politicization of trade issues (Fukushima 1992: 188-9). The MOSS talks came into being because the "pure economist group" won over the "trade group" with the support of the "diplomat group." ₅₂

MOSS was designed to address all identifiable trade barriers (administrative barriers) in several industries where the United States was internationally competitive but relatively unsuccessful in exporting to Japan. ₅₃ The format of the talks was composed of multi-level, intensive inter-departmental discussions held every three to four weeks for about a year. Even though the discussions were more structured and regularized, the costs of negotiation were very high since many issues and actors were involved in the negotiation processes.

Bilateral conflicts reached an apex around the passage of the Omnibus Trade Act of 1988. Again, the U.S. administration faced the dilemma of preventing an all-out trade war with Japan while soothing increasingly volatile domestic politics over trade deficits and national competitiveness (Fukushima 1992: 201-2; Mastanduno 1992: 237-8). Structural Impediments Initiative (SII) was an answer along the policy line of the "pure economist group" led by the Department of Treasury. ₅₄

SII covered systemic barriers in all sectors of the Japanese economy that caused huge trade deficits to the United States. ₅₅ The need to address structural issues was recognized very early in the first "Wisemen's Group" report in 1981. Since then, the issue had been discussed in "Yen-Dollar talks," "the United States-Japan Structural Economic Dialogue" ₅₆ and the MOSS talks. Even the U.S. Congress showed interests in making "comprehensive agreements" with the Japanese government inclusive of trade, defense and foreign aid issues (Nikkei, Jan. 28, 1989; May 21, 1989). ₅₇

Recognizing the need for a structured approach to bilateral disputes, the Japanese government also had a positive attitude toward possible talks on structural issues with the United States. As early as the fall of 1985, Prime Minister Nakasone organized a 17-member private advisory council on Economic Structural Adjustment for International Harmony, chaired by the former governor of the Bank of Japan, Maekawa Haruo, to recommend measures to deal with the trade imbalance with the United States (Pyle 1992: ch.5). ₅₈ Even though the Japanese government refused negotiations on Super 301, it was willing to consider some institutional frameworks to accommodate U.S. proposals for a U.S.-Japan Free Trade Agreement (FTA) and structural talks between 1988 and 1989. ₅₉

The idea of FTA with Japan was floated by former U.S. Ambassador to Japan Mike Mansfield and some Congressmen around 1988. This time Japan did show more willingness to have an institutional solution. In spite of the widespread reservation about the idea in the United States, ₆₀ the Japanese Ministry of Foreign Affairs (MFA) saw the possibility of containing the political spill-over of economic conflicts in the FTA idea. MFA was particularly interested in the kind of dispute settlement mechanism agreed on between the United States and Canada.

MITI's response was more cautious than MFA. A high ranking MITI official said, "Japan needs to be cautious, taking into account the positions of both Australia and other Asian countries. Instead, it would be better to put emphasis on region-wide framework for trade liberalization" (Nikkei, August 3, 1988). MITI set up a research group, the Council for the Promotion of Asia-Pacific Cooperation. This group was geared to promote a region-wide, government-level organization for economic liberalization and cooperation. ₆₁ The research outcome, a regular meeting of trade ministers of the Asia-Pacific region, was taken up by Australia and materialized into the Asia Pacific Economic Cooperation (APEC) in 1989 (Funabashi 1995).

Another interesting study was done by Nichibei Jiyuboeki Kenkyukai (A Research Group on U.S.-Japan Free Trade Agreement), indicating Japan's delicate turn to a "rule-based" approach to bilateral disputes. ₆₂ Based on the understanding that increasing bilateral economic interdependence inevitably creates economic conflicts, this group recommended a "US-Japan Economic Charter," a broader concept than the FTA. The Charter would include a provision to dismantle border measures, establish rules for activities not covered by GATT such as intellectual property rights, services and investments, a method of harmonizing economic systems (tax, competition and industrial policies), macroeconomic policy coordination and a dispute settlement mechanism (Matsushita and Kuroda 1990: 46-7).

Ministry of Foreign Affairs (MFA) enthusiastically adopted many of these proposals to improve bilateral relations with the United States. In the following years, the Japanese government (MFA in particular) showed an interest in building a bilateral economic regime with a focus on principles and norms rather than on concrete rules and decision-making procedures (ibid. p.48). Since then, the bilateral dispute settlement mechanism has been an indispensable component of Japan's policy preference toward the United States. ₆₃

For example, Japan proposed a comprehensive panel to discuss overall economic and trade issues with a degree of dispute settlement authority that may replace the existing subcabinet-level talks (Nikkei, Jan. 21, 1989). MFA thought an administrative level dispute settlement panel was necessary since the conflicts over trade (e.g., Super 301 and Japan's distribution system) and investment (e.g., Japan's explosive FDI into the United States) were extremely politicized in the U.S. Congress. This was formally proposed by the Japanese government at the Bush-Takeshita summit meeting of February 2, 1989.

The Bush administration was skeptical of Japan's proposals for a comprehensive panel on the grounds that it might be used "to gloss over trade problems created by long-established business practices such as Japan's arcane distribution system." ₆₄ Key members of Congress saw the proposal as a preemptive move to avoid the Super 301 provision and therefore a "ploy" to avert the real trade issues (New York Times, Feb. 3, 1989). Besides, criticisms against Japan were mounting in the United States to the point that the market mechanism was not properly working in Japan. A result-oriented approach, based on the "revisionist" views, became popular aimed at reforming Japan's domestic institutions (Matsushita and Kuroda 1990: 44).

The idea of the FTA lost momentum in the late 1989 in the face of record-high trade deficits with Japan. A subcabinet-level comprehensive panel proposed by Japan was simply not enough to satisfy the U.S. Congress. The United States finally settled with SII in 1989. Japan agreed to the SII proposal conditionally. ₆₅ Both American and Japanese negotiators had a high degree of shared interests to impress the U.S. Congress by producing commendable outcomes (Naka 1996: 60-62).

By then, however, Japanese domestic politics was no longer immune from intense politicization. SII was rich with examples showing high degrees of entanglement among the LDP, influential politicians and various ministries in the negotiation process. Conflicting and overlapping interests among various ministries often put the LDP or key politicians (Takeshita, Ozawa, Kanemura, etc.) in the most influential positions. Their presence or support was indispensable to the formation of winning coalitions in the sectoral negotiations (Schoppa 1997; Naka 1996; Armacost 1996).

SII was a highly institutionalized approach to structural problems. It was designed in part to reduce the transaction costs of a case-by-case approach to endless bilateral conflicts. However, structural problems or the problems of structure also involved high transaction costs due to the lack of clarity in the concept of "structure" or structural problems (information costs) in addition to the political costs (as evidence in the high degree of politicization) and technical difficulties (the absence of objective criteria to measure progress). The aftermath of SII meant for Japan a more rule-oriented, institutional approach and for the United States a more result-oriented approach based on numerical targets.

In sum, as the U.S. intensified its attempt at reforming Japan's domestic institutions to make them closer to those of the United States, the Japanese government (especially the MFA) grew increasingly positive toward bilateral institutions for dispute settlement. At the same time, Japan stepped up its move to promote Asia-Pacific regional cooperation. Again, the heightening of bilateral conflicts and the resultant pressure for tightening bilateral relations backfired by prompting Japan's move towards the region and to the idea of regional cooperation. ₆₆ Japan began to emphasize formal ties and cooperative relationships among the economies of the Asia-Pacific region. ₆₇

This time, as opposed to the MFA-led move in the previous period, MITI led the turn to the Asia Pacific by taking notice of Japan's diversifying economic relations in the region. MITI called for a regional economic ministers meeting. Japan found certain strategic interest in APEC and the idea of regional cooperation in general to mitigate bilateral pressures from the United States as well as to meet the growing need for institutions to manage increasingly interdependent regional economic relations. MFA was against the idea for fear of irritating the United States and losing a part of its foreign policy-making power to MITI (Nikkei, May 11, 1989).

Period Four (since 1993): Japan Searches for a Bilateral Dispute Settlement Mechanism.

The Clinton administration, inaugurated on January 20, 1993, launched a new approach to the "Japan problem," rejecting a quest for piecemeal agreements in favor of a comprehensive negotiation to include macroeconomic coordination as well as bargaining over sectoral and structural issues (the so-called "framework talks"). Frustrated with the meager results of SII, especially regarding exclusionary business practices, keiretsu issues and the distribution system, ₆₈ the United States began to emphasize objective criteria, either qualitative or quantitative or both, to measure Japan's progress in opening its market. The so-called "trade group" (UStr and the Commerce Department), armed with the "revisionist" views, was deployed to the front lines to deal with Japan (Armacost 1996: 176-81; Schoppa 1997: 261).

Road to Framework Talks

Japan, in this period, became more willing to formalize its relationship with the United States, especially after the addition of "objective criteria" to the already highly politicized problems regarding the "structure." Expecting a new administration in the United States, the Japanese government started to make a full-fledged effort to create an institution to replace SII in late 1992. ₆₉ Japan wanted to create a framework to discuss comprehensive bilateral economic problems at subcabinet level. This was to avoid the problems of sector-specific approaches such as MOSS and SII that had only intensified bilateral economic conflicts by luring the U.S. to seek numerical targets.

The plan was tentatively named a "Japan-U.S. Economic Policy Forum." Its goal was to discuss various issues such as macro-economic policy coordination, industrial cooperation and opening of agricultural markets mainly on the basis of bilateral and multilateral rules to prevent extreme politicization of the issues (Nikkei, Jan. 21, 1993). This idea was contained in a report prepared by Matsunaga Nobuo, the former Japanese ambassador to the U.S., and submitted to MFA minister Watanabe Michio in December 1992. MITI Minister Mori also hinted during his trip to Europe in January 1993, "Japan will propose a ministerial or subcabinet level meeting with the United States to replace the SII. Its primary goal is to preempt the outbreak of serious bilateral economic conflicts" (Nikkei, Jan. 14, 1993).

However, by then, MITI had already turned decisively to a "rule-oriented approach" based on the multilateral rules of GATT. MITI was highly skeptical of the wisdom of trying to resolve bilateral disputes through politically-motivated gatherings. ₇₀ Therefore, MFA was more assertive than MITI with regard to the idea. Prime Minister Miyazawa officially proposed a subcabinet-level framework institution to handle overall bilateral economic issues at the summit on April 16, 1993, and President Clinton agreed in principle (Nikkei, April 20, 1993). Soon after the agreement, the debate over "quantitative targets," "objective measure of success" and "market share and managed trade" erupted.

MITI strongly resented the U.S. intention to press for numerical targets in several key sectors in the soon-to-be established "framework talks." MITI was still fresh with the memory of the semiconductor trade agreements in 1986 and 1991. ₇₁ Right after the summit meeting between Miyazawa and Clinton in 1993, Hatakeyama, the MITI vice-minister said, "Japanese markets are in fact more open than U.S. markets. Therefore, Japan cannot agree to numerical targets. Japan will resort to multilateral rules and dispute settlement procedures from now on" (Nikkei: April 18, 1993).

When W. Bowman Cutter, a special aide to the president, announced an agreement on "objective criteria" with vice-Foreign Minister Owada Hisashi ruling out as a result any need for separate agreements with other Japanese ministries, MITI officials were irritated, and they had a bitter argument with MFA officials in front of the U.S. negotiators (Nikkei, July 25, 1993). The exclusion of MITI and MOF (Ministry of Finance) officials at the critical juncture of framework negotiations, though functional in reaching an agreement on the start of the Framework talks, had the effect of hardening "their determination to resist offering concessions when substantive talks began" (Armacost 1996: 180).

This cleavage in the Japanese bureaucracy became more of an obstacle when the LDP lost power to the coalition government led by Hosokawa in 1993. The Japanese bureaucracy was thrown into a complete deadlock lacking the pressure or mediation from the ruling party or influential politicians. During the Hosokawa-Clinton summit in February 1994, both sides announced that they agreed to disagree. Japan categorically rejected U.S. demands for accepting the quantitative indicators formula to determine market-opening measures in four priority sectors: insurance, auto and auto parts, telecommunications equipment and services, and hospital equipment.

Japan's turn toward a rule-based approach

Japan's turn toward a rule-based approach was largely construed by Americans as a ploy to delay market openings and regulatory reforms during the Framework talks (Armacost 1996: 185). However, Japan's shift to a rule-based, institutional solution of economic conflicts started in 1990. At that time, MITI organized a working group to investigate the unfair practices of foreign governments, especially the United States, and started to issue annual reports called "Report on Unfair Trade Practices of Foreign Governments" (Fukosei Boeki Hikokusho). ₇₂

By the early 1990s, the so-called "multi (maruchi)-faction" became the majority in the MITI (Nikkei-sha 1995: 32-3). They got the name from their view that the Japanese government had to settle bilateral conflicts with the United States according to the multilateral rules of GATT/WTO. ₇₃ As the economic rationale grew more important in bilateral relations with the end of the Cold War, their voice became increasingly influential in trade negotiations (Nikkei, May 11, 1996). ₇₄

"Multi-faction" members in MITI illustrated both the growing third-party linkages of the issues and the decline of MITI's control over domestic industries as the driving force behind this shift. Sakamoto, vice-Minister of MITI on international affairs, once mentioned that the effective and coherent handling of U.S. pressures, Japan's long-time trademark, had become a thing of the past; that the increasing costs of dealing with bilateral economic conflicts with the United States was pushing Japan to search for a more legalistic, institutional approach. ₇₅

The changes in MITI's stance are mirrored very well in the annual Fukosei Boeki Hokokusho. When Japan issued the first report in 1992, Japan expressed a firm intention to resolve trade conflicts according to GATT rules and GATT dispute settlement procedures. The report blasted that U.S. unilateralism backed by Section 301 was not only unfair but also (or as a result) very costly for Japan to swallow. ₇₆

The MITI report was a counterattack against a similar move from the United States, i.e., the NTE reports. ₇₇ An influential member of the subcommittee of the Industrial Structure Council in charge of the report once mentioned, "America publishes a report every year which points out other countries' unfair trade policies, and we thought it would be a good idea to reply to that" (Reuters, June 9, 1992). The United States was singled out as the most unfair trader in the world ever since the first report, even worse than East Asian countries.

The reference point of the report has been GATT/WTO rules. The Japanese government repeatedly announced that Japan would apply a rule-based approach to trade conflicts. For example, in response to the threat of unilateral sanctions against Japan's unfair bidding practices, Japan answered in the 1993 report, "If the US should actually resort to a unilateral measure, Japan should invoke the GATT dispute settlement procedures, and request the immediate removal of such measure" (1993: preface). The 1994 report detailed the absurdity of US attempt at VIE (voluntary import expansion) exhibited during the Framework talks. The 1996 report put utmost emphasis on the "rule-orientedness" of Japan's approach to avoid "illogical confusion over trade disputes" while suggesting a framework for "cool and constructive solutions." Result-oriented approach of [the United States], according to the report, "often adds only difficulty to the increasingly complicated international economic problems" (1996: preface). ₇₈

The Ministry of Foreign Affairs (MFA) also gradually turned toward a rule-oriented approach in dealing with bilateral economic conflicts with the United States in the early 1990s, especially when the Clinton administration began to press for numerical targets in opening Japanese markets (Nikkei, Sep. 23, 1993). MFA was also involved in the anti-managed trade campaign, albeit less enthusiastic than MITI, distributing to the foreign media its six principles for the Framework Talks including the intention to avoid a discussion on numerical targets. ₇₉ However, MFA was more willing to accept other demands from the U.S. such as fiscal expansion and economic stimulation geared to diffuse bilateral conflicts. ₈₀

MFA came to recognize the negative externalities of bilateral deals with the United States. A high ranking MFA official said: "if Japan continues its policy of succumbing to repeated U.S. demands, the EC and Asian countries will criticize the lack of attention to them, and the credibility of Japan's foreign policy will go down" (Nikkei, Sep. 23, 93). During the auto and auto parts negotiations in 1994-5, MFA connived at (or approved by default) MITI's tough stance even though it was in favor of an early resolution of the automotive dispute (Nikkei, May 11, 1996). Then, MITI was taking a collision course with the United States in automobile negotiations. At one point, in the face the imminent U.S. sanctions against some Japanese cars, the MITI even probed the list of potential countermeasures including the selling of U.S. treasury bonds (Nikkei-sha 1995: 60). Moreover, MITI took the case to the WTO dispute settlement body in 1995. ₈₁

Bilateral dispute settlement mechanism

As shown above, Japan's proposal for a bilateral dispute settlement mechanism began to appear in the late 1980s. It was the Ministry of Foreign Affairs (MFA) that pushed for the idea at that time. MFA wanted to maintain an amicable bilateral relations with the United States through an early resolution of disputes. In this period MITI was pushing the idea. When the automotive dispute was at its peak, Minister of MITI Hashimoto Ryutaro revealed its intention to pursue a bilateral dispute settlement mechanism (Nikkei, Dec. 23, 1994). Then, MITI proposed a "joint commission" geared to settle disputes in the automotive sector. MITI planned a third party panel, just like the dispute settlement body between Canada and the United States, which would review the issues and provide recommendations. ₈₂

Toyoda Masakazu, one of the key member of the "multi-faction," explained the background of MITI's proposal at the First Joint Conference of Carnegie Study Group and GISPRI (Global Industrial and Social Progress Research Institute) Study Group in Tokyo on March 15, 1995.

First, in the course of the frame talks, both countries came to have numerous negotiations and agreements. However, the costs of settlement and implementation have become extremely high. The opportunity costs of no agreement are also high in relation to other issues that need close bilateral cooperation. Second, result-oriented approach is highly costly. It is also very hard to prove the link between numerical targets and actual export increases. A process-oriented [rule-oriented] approach can quite often work better. Third, inter-governmental negotiations have become too politicized in recent years to have a calm, objective discussion. We need to depoliticize the negotiation process. Fourth, bilateral negotiations have usually lacked trans-parency. The involvement of a third party, even without a binding authority, can enhance transparency and public understanding in both countries. ₈₃

Toyoda admitted, however, that MITI had no sophisticated blueprint for such a body. Vice-Minister of MITI Sakamoto made MITI's position more concrete in a recent press conference:

We must solve disputes in accordance with international rules and on the basis of market mechanism. As for areas that lie outside the WTO rules, I think it would be useful to create bilateral dispute resolution mechanisms between our countries [the United States and Japan], such as those existing between Canada and the United States. ₈₄

There seems to be a degree of consensus in academia in favor of a U.S.-Canadian dispute settlement model (Greenwald 1994; Dobson et al. 1994; Sato 1995b; Carnegie Endowment 1995). ₈₅ The reason is that both sides (the U.S. and Canada) seem more or less satisfied with the workings of the bilateral dispute settlement mechanism. ₈₆ Given the absence of bilateral free trade agreement and its dismal future prospect, a less binding version of the U.S.-Canadian model is assumed to be most appropriate.

The U.S. response was apathetic on the surface. Mickey Kanter was quoted as having said that "there is no need to create a new bilateral dispute settlement body since we already have a proper mechanism under the multilateral trade system [WTO]" (Nikkei, Dec. 23, 1994). Underneath there was a deep suspicion against the Japanese move as a tactic to avoid making concrete commitment to market opening and deregulation (Armacost 1996: 179). ₈₇ Most of all, the U.S. did not want to lose its unilateral leverage over Japan. This may explain why the MITI's proposal was dropped at the final stage of the automotive agreement. ₈₈ The United States was against the bilateral dispute settlement mechanism in spite of the high dispute settlement costs it perceived. ₈₉

Given the difficulties of establishing a government-to-government level dispute settlement body, the focus is shifting to the private-level, "industry-to-industry" settlement of disputes. Since the major goal of dispute settlement body is to reduce politicization of bilateral conflicts, the privatization of disputes may work as a partial solution. Sato Hideo argues that many trade issues are by nature not suitable to inter-governmental negotiations, e.g., the keiretsu or business practices, and that they can be resolved better on an industry-to-industry (or firm-to-firm) basis (1995: 8). Similarly, the Japan-U.S. Business Conference (Nichibei Zaikaijin Kaigi), a regular gathering of business leaders from both countries held twice a year, issued a joint statement in July 1995 to the effect that bilateral economic disputes should be settled at the private level before developing into a full-fledged political conflict (Nikkei-sha 1995: 172-3).

It became clear during the semiconductor negotiations in 1996 that Japan decided to take the initiative at the private level. While vehemently rejecting any implication of numerical commitment, MITI agreed to set up an industry-level consultative body that "will collect data on semiconductor markets, provide the governments with reports on trade flows, market developments, and cooperative activities, and will make recommendation on issues of concern" (Japan Times, August 4, 1996).

Implication to Asia Pacific Regionalism

So far, Japan has shown a tendency to retreat to the Asia-Pacific region or to the idea of regional cooperation whenever its bilateral relationship with the United States became overheated and whenever U.S. pressure to tie Japan into binding agreements or institutional straitjacket intensified. The Clinton Administration made two drastic changes in its strategy toward Japan: one was a turn toward "managed trade" and the other was to begin to take a larger leadership role in the Asia-Pacific region or regional cooperation. The United States became an active participant in APEC since 1993 when President Clinton successfully arranged a summit meeting. There were several reasons behind this move. ₉₀ One of them was to add pressure to Japan by pushing region-wide economic liberalization or even trying to bypass the hopelessly closed Japanese markets.

Japan's interest in Asia-Pacific regional cooperation has been on the whole a balancing act intended to give the impression that Japan does care about other regional states, as well as to use it as a potential deterrent to the arbitrary use of power by the United States. Unlike its stormy relationship with the United States, Japan has not experienced either unmanageable conflicts with other regional states or insurmountable trade barriers in the region that may justify its serious institution-building efforts. Because of the derivative nature of regional cooperation to Japan, its turn to passivism in APEC in the face of U.S. activism is quite understandable.

When the U.S. pursued Japan into the Asia-Pacific region, Japan adamantly opposed the U.S. attempt at using APEC as an engine of regional trade liberalization. Japan feared that the U.S. might take most of the benefits from regional trade liberalization. Japan could successfully garner the Asian alliance against the U.S. move, and adopt the "APEC-way" or "Asian-way" as the guiding principle for APEC in Osaka.

Conclusion

This paper has examined the changes in Japan's preference toward bilateral dispute settlement mechanism with the United States. Japan's preference has become increasingly intense as the incidence of disputes increased. The shift in the focus of bilateral conflicts from export restraints to import expansion had the same effect on Japan's institutional preference. Japan's growing economic strength has not only reduced Japan's reluctance to establish bilateral institutions, but it has also emboldened Japan as far as to "agree to disagree" with the United States.

For both Japan and the United States, the increasing dispute settlement costs (or transaction costs) have been one of the major concerns along with the chronic U.S. trade deficits. The concerns about transaction costs have driven the administrations in Tokyo and Washington respectively to search for efficient institutional frameworks to settle disputes, to reduce the degree of politicization and to contain the spill-over effects of economic disputes into the security realm.

Japan's domestic institutions have contributed to its capacity to prevent, diffuse, preempt and settle bilateral disputes by enhancing the cooperative capacity of Japanese actors, in particular in the case of VERs. However, Japan has gradually lost this adjustment capability as its domestic politics became increasingly volatile in relation to the issues of liberalizing its markets. It has become difficult for Japan either to make a single voice or to pursue a coherent strategy in the face of continual U.S. demands. This also drove Japan to seek bilateral institutions for dispute settlement.

Japan retreated to the broader Asia-Pacific region or to the idea of regional cooperation whenever the United States pushed Japan too hard or tried to lock Japan into binding agreements or institutions. This was in part a balancing act between the United States and other regional countries and in part a move to avoid the constraining effect of institutions. The situation changed drastically under the Clinton administration when the United States became a more ardent advocate of regional cooperation based on "reciprocity" through APEC. Japan began to shift its attention to the rule-based approach founded on bilateral and global institutions.

I have also shown that Japan has changed, like other states, its policy toward institutions depending upon their expected benefits and costs. There is no immutable trait of "reactiveness" or "passivity" in Japan--in its culture, history, domestic institutions, or decision-making process--that defy its rational pursuit of national interests, even in relation to bilateral dispute settlement mechanisms. This indicates that Japan will become more active towards regional institutions in Asia (East Asia) and the Pacific (the whole Asia-Pacific region) as the costs of negotiations for economic liberalization and dispute settlements increase beyond its domestic carrying capacity, both politically and economically.

Notes

Note 1: The gist of the Asian-way and APEC-way is to avoid legalistic, binding institutions in favor of informal, voluntary, consensus-oriented regional cooperation. See Nicole and Stubbs (1997) for a recent discussion of the topic. Back.

Note 2: The degree of formalization of regime norms ranges from informal, tacit norms of interaction (behavioral regime) to formal, codified metanorms superior to nation state metanorms (constitutional regime). The degree of institutionalization means the development of hierarchical organizations with autonomous capacity over member states and their legal persons. With regard to the mechanism of implementation, Alex Stone illustrates three types in progressive order of the degree of institutionalization: "self-restraint," "self-help" and "third-party adjudication" (Stone 1994). Back.

Note 3: The idea of dividing the role of institutions into "enabling" and "constraining" aspects came from James A. Caporaso (1994, unpublished manuscript). Back.

Note 4: "Transaction costs" is a highly ambiguous term. Douglass North defines transaction costs as "the costs of specifying and enforcing the contracts that underlie exchanges." It comprises "all the costs of political and economic organization that permit economies to capture the gains from trade" (1994: 7). This seems to include overall information costs and the risks of opportunistic behavior as well. I am going to use the term transaction costs broadly, as North does, to imply both the costs of international commerce and dispute settlement. Back.

Note 5: Even though some scholars question the linkage between the magnitude of transaction costs and the number of actors (Haggard 1997; Kahler 1993), I think that the primary reason to build a regional (or bilateral) institution is the benefit of a smaller-N to reduce transaction costs. Back.

Note 6: Krasner shows how institutions can be of benefit to powerful states by altering the pay-off structures and strategies of other weaker states (1983: 15) Back.

Note 7: For example, the European Community wanted West Germany for the same reason as Canada wanted a free trade agreement with the United States. In Asia, ASEAN countries want to include Japan in EAEC (East Asian Economic Caucus) for a similar reason. Back.

Note 8: Interestingly, whenever the United States pressed Japan into binding bilateral institutions, Japan has shown more interest in regional (Asia-Pacific) institutions instead. Back.

Note 9: Liberal theories of economic interdependence claim that increasing transborder flows of goods, services, factors, or pollutants create "international policy externalities." (Cooper, 1986: 292-3). They arise where the policies of one government create costs and benefits for politically significant social groups outside its national jurisdiction. Where the achievement of domestic governmental goals depends on the policies of its foreign counterparts, national policies are interdependent and policy externalities can arise. This is closely related to the concept of transaction costs. Transaction costs are a broader concept than policy externalities since they can arise from natural factors as well as policy externalities. Negative policy externalities—such as protectionist barriers against the flows of foreign goods and capital, competitive devaluation, and lax domestic environmental pollution standards—provide incentives for cooperation through policy coordination. Back.

Note 10: In the case of semiconductor negotiations since 1986 (up to 1996), the U.S. had to take into account the interests of the domestic users of Japanese chips while taking into account that of European chipmakers who would be seriously affected by the U.S.-Japan agreement, thereby experiencing high transaction costs. Back.

Note 11: My understanding of power is similar to Albert Hirschman's "influence effects" of foreign trade. Hirschman saw the possibility of "trade dependence" becoming "the root cause of power" with the interruption of trade relations (1980: 16). This power (or influence effect) refers to the painfulness of the adjustment process brought by an interruption of trade and the strength of vested interests created by trade within the domestic economies (1980: 14-34). Keohane and Nye argue similarly that the asymmetry in both vulnerability and sensitivity creates a point of leverage for powerful states which can be applied to impose demands on less powerful states (1989: 11-9, 247). "Optimal tariff theory" supports that asymmetric interdependence can be a source of power. A large economy can manipulate the terms of trade by imposing optimum tariff rates or simply by threatening the closure of the market to foreign exporters (Lake 1988: 38). Back.

Note 12: Japan accounts for about 16-17 percent of GWP (gross world product) in recent years—16.2 percent in 1993 and 17 percent in 1994. The share of the United States were 26.3 percent and 27 percent respectively (World Bank, World Bank Atlas 1995). Back.

Note 13: Japan's share was 12.9 percent during 1991-3. In comparison, those of United States and Germany were 13.0 percent and 14.2 percent respectively (UNCTAD, Trade and Development Report 1996: 93) Back.

Note 14: The Japanese government debated but did not exercise the option of boycotting US treasury bonds to protest the punitive duties on Japanese exports in relation to the dispute over semiconductors (Lincoln 1993: 214). The possibility of Japanese using leverage may increase over time. This option reemerged during the auto and auto parts disputes (Nikkei-sha 1996: 60). Back.

Note 15: "Capacity" is used here to mean a state's ability to perform a range of activities such as reallocation of productive resources and imposition of costs on the economy and society. "Autonomy" denotes the degree of relative insulation from domestic interest groups. The insulation of the central decision-makers in the bureaucracy from societal influences ("autonomy") not only lessens a state's sensitivity to external conditions. That state can also have and implement more consistent and coherent adjustment policies. State capacity is an active concept. More capable states can force or stimulate economic adjustment; smooth out the adjustment process; and predict and act in advance. As a result, they can settle disputes with less costs than otherwise. Back.

Note 16: For a good summary of domestic structure approaches, see Risse-Kappen (1996). For example, Ikenberry argues that "greater inflexibility of domestic systems would enhance the values of international regimes; flexible domestic institutions would place fewer demands on the international system" (1988: 207). Back.

Note 17: VER was a negotiated protectionism, a compromise between free trade and unilaterally imposed import restrictions, to avoid the domestic political cost of both options (Yoffie 1983; Aggrawal, Keohane and Yoffie 1987). Yoffie defines VERs as "bilateral arrangement that attempt to bias consumption in the importing country in favor of domestic producers" (1983: 4). Even though VERs are basically "quantitative limits," they often include a voluntary price monitoring or restraining. Back.

Note 18: Therefore, the United States invoked "safeguard" measures sporadically. So far, 13 cases were taken since 1970: 3 (1970-4), 6 (1975-79) and 4 (1980-4) (MITI 1996: 65). Back.

Note 19: Stephan D. Cohen characterizes the textile dispute "the end of Japan's transition from a political-military dependent of the United States to its chief commercial nemesis...was the first major resistance by postwar Japan to a U.S. trade initiative; neither the Japanese government nor the Japanese textile industry was intimidated by a firm U.S. economic demand. The period of unquestioned Japanese acceptance of U.S. economic leadership had ended" (1991: 19). Back.

Note 20: It was painful in the sense that the U.S. virtually imposed a VER on Japan, taking advantage of its superior power. Back.

Note 21: According to the Trade Agreements Act of 1979, anti-dumping or countervailing-duty procedures can be halted through price undertaking, i.e., by agreeing to raise the prices (Low 1993: 59). VERs began to take on increasingly the aspect of "price control" with this change. Back.

Note 22: The United States wanted the Japanese government to monitor the prices of semiconductors in third-country markets in order to avoid a high-priced market for Japan-made chips, thereby losing competition with third parties (Cohen 1991: 56-7). Back.

Note 23: The United States requested the "import" version of VERs, called VIEs (voluntary import expansions). This was driven by the demand from the domestic exporters impatient with the Japan's adamant resistance to liberalization. The primary goal of VIE was that Japan expand imports to a sufficient degree by whatever means possible including the widely-criticized "administrative guidance" of MITI if Japan could not liberalize and disintegrate the so-called "Japan Inc." Back.

Note 24:

Former US ambassador to Japan, Machael H. Armacost called this a strategy of "least concession" (1996: 69). He insightfully observed:

Ministry officials were staunch defenders of constituency interests. Their defensive skill in defeating or avoiding concessions was widely and justly renowned. Indeed, the personal reputations of their negotiators with their peers and the press seemed to depend on their exhausting every defensive tactic before yielding even the most modest concession. Consequently, all negotiations seemed to end only at the last hour of the last day of talks (Armacost 1996: 69).

Back.

Note 25: Umada Keichi summarizes the problems of VIEs:(1) if the real problem resides in competitiveness, VIEs may not be effective in increasing market shares; (2) the Japanese government cannot guarantee the implementation of VIEs since it cannot force (through administrative guidance) the private enterprises to buy a certain amount of U.S. goods; (3) VIEs may give birth to the "import cartels" which the Anti-Monopoly Act prohibits; (4) VIEs may also harm consumers' utility since they are forced to purchase goods irrespective of quality and price; (5) VIEs contradict with the GATT principle of "MFN" and "non-discrimination"; and (6) VIEs have the danger of abuse since they have no adverse effect on soliciting countries (1996: 226-7). Back.

Note 26: SII (structural impediments initiative) and "framework talks" are the primary examples. Back.

Note 27: We may experience the Janus-faced Japan here: a well-coordinated "Japan Inc." in the case of VERs and a headless Japan suffering from domestic gridlock in the case of VIEs or market liberalization. Back.

Note 28: In the case of "auto and auto parts," the EU supported the Japanese position. In the more recent spat over the renewal of the US-Japan semi-conductor agreement, the EU objected to the bilateral arrangement on the ground that it was discriminatory. This opposition led to the establishment of a global forum (Global Governmental Forum: GGF) for semiconductor industry. Back.

Note 29: During the auto and auto part negotiations in 1994-5, automakers were not only more willing to accept U.S. demands than MITI. They were also highly critical of MITI's tough stance, even making independent contacts with the U.S. negotiators (Nikkei-sha 1995: 136-159). Back.

Note 30: Okamatsu Sozaburo, MITI vice minister for international affairs said, "if we compromise with the United States and pledge any import targets, we have to promise the same to all other trading partners. That is something we could never do" (The Nikkei Weekly, Jan. 19, 1994). Sakamoto Yoshihiro, Vice-Minister for International Affairs at MITI, recently mentioned that "considering the globalization of industrial activities, it is no longer relevant to negotiate and have an agreement on issues related to global industries in a limited bilateral context such as between Japan and the U.S. The era of bilateralism is over" (Foreign Press Club Speech, March 15, 1996). Back.

Note 31: South Carolina and Alabama passed laws to the effect of hindering local retailers from selling Japanese textile goods (Yoffie 1983: 47). Back.

Note 32: MITI was also very sensitive to the trade friction its cotton textile industry was causing in relation to the United States (Uriu 1996: 58) Back.

Note 33: For a detailed account of STA and LTA, see Yoffie (1983: ch.3). Back.

Note 34: Traditionalists were in favor of a continued reliance on mercantilistic—nationalistic and often protectionistic—industrial policy. Internationalists were well versed in the culture of international commerce through the experience in international institutions like IMF, GATT and OECD). They were sensitive to new, high-tech industries. However, they were not so qualitatively different from the traditionalists as to abandon industrial policy and industrial promotion. In this sense, Johnson called them "cosmopolitan nationalists" (ibid.). Back.

Note 35: Yoffie summarizes the costs like the following:

Japan jeopardized the return of Okinawa to Japanese sovereignty, and only narrowly escaped passage in the United States Congress of a highly restrictive trade bill. In addition to these near misses, the textile controversy undoubtedly aggravated United-Japan relations at a time of great uncertainty. While textiles may not have directly contributed to the Nixon "shocks"—Overtures to China and the monetary declarations—they played a major role in disrupting the alliance (1983: 155).

Back.

Note 36: This was the most significant bilateral forum established in 1961 by the agreement between Prime Minister Ikeda and President Kennedy to handle bilateral economic issues at the ministerial level. In addition to the absence of pending issues to settle, the United States illustrated the end of the Indochina crisis as the trigger to make that decision (Nikkei, April 8, 1975: evening edition). The committee was in fact inactive since July 1973. This forum was highly functional to resolve textile disputes. Back.

Note 37: Japan accepted VERs on specialty steel in 1976 ahead of any other countries. Automobile VERs were not a formal agreement imposed by the United States. The U.S. administration were divided over the VER. Congress was in favor of VER, and UAW was more interested in direct production in the U.S. Under this circumstance, MITI imposed restraints voluntarily and tacitly. Japanese automakers followed MITI's decision along with the expansion of local production (Sato 1995a: 240-43). The U.S. responded with vagueness accepting the VER by inference (Cohen 1991: 35). Back.

Note 38: See Table 2. Back.

Note 39: The assigned role of the resultant institutions for dispute settle-ment was to provide a forum in which, as Prestowitz once mentioned, "the U.S. trade team became an advisor [instead of a negotiator] to the government of Japan on how to handle the U.S. Congress" (1988: 281). Back.

Note 40: The wisemen's group was renamed in 1983 as the "Advisory Committee on Bilateral Economic Affairs." Its agenda included not only economic affairs but also security issues. Gradually, it became more security-oriented. Back.

Note 41: This was the Japan-U.S. Trade Committee (Nichibei Boeki Mondai Gurupu) headed respectively by deputy USTR and Japan's vice-Minister of Foreign Affairs on Economic Affairs. The meetings were held twice a year on average, and lasted until the launching of SII. Back.

Note 42: The "wisemen's group" recommended an "economic ministers meeting" in its first report issued in January 1981. Since then, the MFA of Japan had floated the idea on several occasions (Nikkei, March 16, 1982). However, the United States was reluctant on the grounds that it was not politically feasible for the United States to assemble key ministers in Japan at the same time. Back.

Note 43: The influence of Japanese MFA in domestic market liberalization was by far lower than the case of VERs. Therefore, the dissatisfaction with MFA-led trade negotiations was mounting both in Japan (for too conciliatory position) and the United States (for too slow progress) (Sato 1991: 248). Back.

Note 44: In fact, the battle between MFA and MITI started in 1945 even before the establishment of the MITI in 1949 (Kawakita 1991: 128-30). Prime Minister Yoshida, as a MFA-old boy, tried to control the trade bureaus of MCI (Ministry of Commerce and Industry) and later MITI by dispatching key officers from MFA. Back.

Note 45: Since its inception to November 1981, the TFC had resolved 18 out of 20 cases of complaints (Jiji Press, November 27, 1981). Back.

Note 46: As a way of balancing the State Department-MFA initiative in bilateral relations, MITI and Department of Commerce commenced regular trilateral (EC, U.S. and Japan) quadrilateral (including Canada) trade ministers meetings in 1981. Back.

Note 47: However, the committee failed to find a solution to many NTB-related cases such as safety regulations of compressed gas, regulation of cosmetic and food additives, date communications, water quality inspection standard and auto parts imports. By 1984, the TFC became no longer in use (Nikkei, Feb. 21: 1984). Back.

Note 48: This talk lasted from November 10, 1983 to May 29, 1984. After the initial talks in 1983-4, the follow-up meetings were held regularly for several years (Naka 1996: 195). Back.

Note 49: Major changes included: the authority to negotiate a bilateral FTA with Israel (and later used for the one with Canada); expansion of Section 301 to investment and service sectors; easing of anti-dumping, countervailing duties and escape clause. This act also required USTR to issue an annual NTE (National Trade Estimate) report listing significant foreign barriers and possible actions to take in that regard Back.

Note 50: This was the largest trade legislation initiative in U.S. history (Low 1993: 62-6). Some of the significant changes in relation to Japan were the introduction of Super 301 and the transfer of the Section 301 authority from the president to USTR. Back.

Note 51: Glen Fukushima argues that there are three policy-groups in the United States: a "trade group" (USTR and Commerce Department backed by Congress) favoring tough trade policy to protect US industries; a "diplomat group" (State and Defense Departments) putting more weight on high politics; and a "pure economist group" (CEA, OMB, the Justice Department and part of the Treasury Department) taking the position of laissez-faire and free trade (1992: 188-9). The struggle among the three groups started to intensify in the mid-1980s. The shift of power from the "diplomat" and "pure economist" groups to the "trade group" became obvious in the Clinton administration. Back.

Note 52: In response to a radical plan prepared by the Commerce Department to reduce trade deficits with Japan based on concrete targets, Ronald Reagan, the Secretary of Treasury and the Chair of SIGIEP (senior interagency group on international economic policy), proposed a negotiating forum taken after the Dollar-Yen Dialogue (Funabashi: 1987: 67-87). Back.

Note 53: The sectors selected were electronics and computers, tele-communications equipment, medical equipment and pharmaceuticals and forest products. Auto parts were added later. Barriers were limited to government policies, laws and regulations. Private business practices were relegated to the future negotiations in SII. Back.

Note 54: The Bush administration wanted to prevent Congress from adopting extremely aggressive, protectionist measures that may jeopardize not only the relationship with Japan but also the future of GATT and the Uruguay Round. Back.

Note 55: The SII agenda includes: (1) saving and investment patterns, (2) land policy, (3) distribution system, (4) exclusionary business practices, (5) keiretsu and (6) pricing mechanisms. Back.

Note 56: This was the first subcabinet-level talk on structure. Meetings held between April 1986 and October 1988 (Nikkei, Oct. 12, 1986). Structural Dialogue was not a trade negotiation but a forum to exchange ideas on issues almost the same as those covered in SII including Japan's land-use policies, the distribution system, savings rate, and the U.S. federal deficits. The Treasury Department chaired the Dialogue with the support from the State Department (NHK 1990: 70). Back.

Note 57: In an interview Nikkei Shimbun, Senator Baucus, Chairman of the Senate sub-Committee on International Trade, proposed a structural talk that should follow the imposition of Super 301. He pointed out that a case-by-case approach would simply make bilateral conflicts more serious and complicated. He suggested that a comprehensive institution for dispute settlement was essential for rational, less costly resolution of conflicts (Nikkei, May 16, 1989). Back.

Note 58: The council issued two reports, the so-called "Maekawa Report" in April 1986 and April 1987. The reports contained various issues that were dealt with later in the SII (1988-9) including the expansion of domestic demand through public works, increased imports, removal of tax-benefits for savings and five-day workweek (Pyle 1992: 93). Back.

Note 59: Kotama Yukihara, the vice-minister of MITI for administrative affairs, strongly resented against the application of the Super 301 provision to Japan, saying that "Japan cannot participate in the negotiations forcefully imposed by the United States" (Nikkei, June 28, 1989). Back.

Note 60: The "pure economist group" were largely in favor of the idea. The "trade group" was against the idea because the trade imbalances were caused by the differences in custom and institutions; the FTA with Japan would simply increase the size of U.S. deficits. The "diplomats" had concerns about the possible negative impact on other countries. Back.

Note 61: A MITI research group concluded that a regularly scheduled industry and trade ministers meeting be held to: (1) expand trade; (2) improve industrial infrastructure of the region's developing nations; (3) to take appropriate measures to maintain high economic growth; and (4) attain balanced economic development by reducing the heavy dependence on the U.S. economy (Ajia Taiheiyo Kyoryoku Suishin Kondankai 1989). Back.

Note 62: See its Interim Report of 1989 for details. This research group was supported by International Exchange Foundation (Kokusai Keizai Kyoryoku Zaidan, an affiliate to MITI). Later, this group became the nucleus of the advisory group that prepared early issues of the annual Fukosei Boeki Hokokusho (Annual Report on Unfair Trade Practices). Back.

Note 63: The U.S. response to bilateral dispute settlement mechanism was apathetic. Even though the ITC (International Trade Commission) report contained the similar idea as an alternative to FTA, it put more emphasis on the result-oriented approach. Back.

Note 64: In fact, the State Department, as a counterpart of Japanese MFA, was considering rather favorably the MFA's proposal for a new comprehensive panel. This was a development of the existing subcabinet-level meeting chaired by State Department and MFA. Therefore, State Secretary Baker was less enthusiastic about the proposal for SII. Meanwhile, the Treasury Department took the initiative in cooperation with USTR, leaving out the Commerce Department and the State Department in the early stage of SII. Back.

Note 65: The conditions were: (1) SII is not a "negotiation," aimed at producing binding agreements, but a "consultation" exchanging opinions and suggestions about structural problems; (2) SII has to be a "two-way dialogue," discussing problems in both countries; (3) Final agreements should not be binding. They should not be interpreted as the kinds of agreements defined by U.S. trade laws (Section 301) that enable the U.S. government to impose unilateral, punitive actions in case of violation (Fukushima 1992: 205-7). Back.

Note 66: In response to US proposal for a FTA between Japan and the United States, some in Japan called for FTAs with Asian countries in exchange for a US-Japan FTA (Japan Economic Journal, April 15, 1989). Back.

Note 67: Nakasone proposed the Pacific Forum for Economic and Cultural Cooperation in this context. He even suggested reviewing the possibility of a Pacific free-trade zone (Nakasone, Yasuhiro. 1988). Back.

Note 68: After the final agreement on SII in June 1990, Japan and the United States had several follow-up meetings in 1991 (the publication of the first year follow-up report in May) and 1992 (the second year follow-up report in July). However, Washington's dissatisfaction deepened continuously especially during the election campaign in 1992. In addition, many bilateral economic conflicts occurred one after another such as semiconductor (1991), VERs on machine tools (1992), MOSS follow-up meetings, construction and so on. At the same time, trade deficits were on the increase after a brief recess in 1990 and 1991. Back.

Note 69: Foreign Minister Nakayama expressed the intention to establish a new consulting body to replace SII as early as the spring of 1990 in his testimony to the Diet (Nikkei, April 10, 1990). However, Japan was against any mechanism initiated by the U.S. geared to monitor the process of Japan's structural reform (Nikkei, April 27, 1990). Back.

Note 70: Nihon Keizai Shimbun reports that, "there are concerns in other ministries about the MFA-led initiative, and it may not take a concrete shape before the summit" (April 10, 1993). Back.

Note 71: Both countries waged a heated battle over the interpretation of "sideletter" or "private letter" containing an expectation that U.S. semiconductors sales would increase to 20 percent of the Japanese market. The U.S. understood it as a binding commitment while Japan denied it. The dispute ended up with the U.S. imposing punitive tariffs (100%) unilaterally on the basis of Section 301. MITI repeatedly pledged that it would never repeat such a mistake. Back.

Note 72: The first of the kind was issued in 1991. It was an outcome of the research initiated by some in MITI and academia after SII negotiations. The motive was the recognition that a rule-based approach would be more efficient to deal with ever-intensifying US pressures and complaints. But the first report was not officially endorsed by the Japanese government. Back.

Note 73: Key members of the "multi-faction" such as Sakamoto Yoshihiro, Toyada Masakazu and Hosokawa were also behind the MITI's push for Asia Pacific cooperation (so-called "Sakamoto Report"). Back.

Note 74: So far Japan has stayed away from challenging the U.S. before the GATT dispute settlement mechanism except for semiconductors in 1987 and autos in 1995. Both cases were simply used as a bargaining chip, and never went to the stage of formal consultation or panel discussion. There are several reasons: (1) Even if Japan did win, it might have deteriorated the relationship with the United States (afraid of the "security spill-over") or invited U.S. retaliations; (2) it usually takes a long time to go through the GATT procedures; (3) there is no adequate enforcement mechanism in case of the U.S. failure to comply with the panel decision; and (4) alternative mechanisms (e.g., VERs) are readily available (Umada 1996: 208-9). Back.

Note 75: Foreign Press Club Speech, March 15, 1996. Back.

Note 76: Bhagwati describes MITI's position better than MITI itself:"[T]hese bilateral negotiations tied down to a one-way stream of demands, in which the United States casts itself simultaneously as complainant, jury and judge, constantly yelling at the Japanese, seeking concessions and offering none..." (1996: 279). Back.

Note 77: The initial US response to the publication of the report was not only critical but even cynical. White House spokesman Marlin Fitzwater said, "People who live in a glass house should be careful about their stones" (JEI Report March 31, 1992). However, the United Stated sensed the growing assertiveness of the Japanese government on trade issues (Los Angeles Times, June 8, 1992). Back.

Note 78: Similar statements are made several times in the 1997 report. In Chapter 2, the report reiterated the need to adopt a "rule-based approach", contrary to the "result-based approach" of the U.S., as its official strategy to liberalize trade barriers, urging the Japanese government to utilize WTO dispute settlement procedures more actively. Back.

Note 79: The change was more noticeable in the economic circles (e.g., bureau of economic affairs) of MFA. Those officials in charge of political and military affairs were less enthusiastic about a rule-based approach to the United States. Back.

Note 80: Saito Kunio, Vice-Foreign Minister on Administrative Affairs, said, "it is quite natural for Japan [MFA included] to reject numerical targets...the Japanese side should make effort to reduce bilateral trade deficits...but, MFA does not have the power over domestic economic policy" (Nikkei, March 24, 1994). Back.

Note 81: Both MITI and MFA were of an opinion that US sanctions be taken to the WTO. However, they differed with regard to the strategy to handle the United States. MITI was extremely confrontational while MFA was cautious taking overall bilateral relations into account (Nikkei, May 29, 1995). Back.

Note 82: Toyoda Masakazu confirmed such a proposal in his statement during the first Carnegie and Japan's GISPRI study groups in March 15, 1995. Back.

Note 83: This is from the transcript of the conference titled "Joint Conference Report" (p.112-3). Back.

Note 84: He made this remark during his Foreign Correspondents' Club of Tokyo Speech on March 15, 1996 (Nikkei, March 15, 1996). Back.

Note 85: U.S. Senator Bill Bradley made a similar proposal criticizing Clinton's approach of seeking numerical targets (Asahi Shimbun, Nov. 4, 1994). Back.

Note 86: If we look at the outcomes of the ruling during 1989-93, the U.S. won 7 cases and Canada won 8 cases while 10 cases resolved through mediation (Nikkei, Dec. 23, 1994). Back.

Note 87: U.S. participants in the joint Carnegie Endowment and GISPRI Study Groups meetings stressed that "it would be fruitless to discuss possible steps to improve management of the bilateral trade relationships [including dispute settlement mechanism] unless we address the core problems [Japan's NTBs]" (Carnegie Endowment 1995: 28-9). Back.

Note 88: An interview with a MITI official on September 12, 1996. Back.

Note 89: The high costs of ad hoc dispute settlement (both negotiation and implementation) for the United States are indicated very well by Ira Wolf of the American Chamber of Commerce in Japan in a recent Senate hearing:

USTR has three people devoted to Japan...the Commerce Department has five, or six, people devoted to Japan. Totally inadequate resources. These are good, quality people we have in the US government that work very hard. But it is too much. You [Senators] look at this, you look at the 40 odd agreements we have [with Japan out of 301 measures], how can three people, who have to negotiate a whole book's worth of current trade barriers [listed in NTE reports], at the same time monitor 40 some odd trade agreements? I mean, that's just not physically possible (Federal News Service, April 15, 1997).

Back.

Note 90: The heightened enthusiasm of the Clinton administration to strengthen APEC was in part purported to deter the European countries from constructing a "fortress Europe"; in part intended to preempt any attempt to build an exclusive-Asian economic bloc; and initiated partly out of a genuine interest in liberalizing regional trade and investment. Back.

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Newspapers and Magazines

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Nihon Keizai Shimbun (Nikkei)

Nikkei Weekly