Bad lawyering or ulterior motive? Why the United States lost the film case before the WTO dispute settlement panel

Goldman, Julie

I. INTRODUCTION

In order to convince countries such as the United States to forgo unilateral response measures to violations of the General Agreement on Tariffs and Trade (GATT),1 the World Trade Organization (WTO) Dispute Settlement Understanding (DSU) arose out of the Uruguay Round of GATT Negotiations in 1994,(2) as an efficient dispute settlement mechanism.

Since its inception, the Dispute Settlement Body3 has received 163 consultation requests on 125 different matters.4 The United States has invoked the WTO DSU in 34 cases to date as plaintiff, 7 of which have continued beyond the consultation phase.5 On January 30, 1998, the DSU panel, formed in October 1996 to hear the case brought by the United States against Japan and its photographic film market,6 announced its final decision that the United States had lost.7 This Note will attempt to analyze why. Did this infallible dispute settlement mechanism fail, or did the United States simply not have a case? Did the United States lose the case but still get what it wanted? This Note will also look at the consequences of this decision on international trade and examine alternative courses of action that the United States could have taken, has taken, and will probably take in the future.

II. BACKGROUND

A. The Route to the WTO

1. Eastman Kodak Complained

On May 18, 1995, Eastman Kodak Company (Kodak) filed a petition for relief from Japanese market barriers in consumer photographic film and consumer photographic paper with the U.S. Trade Representative (USTR) under section 301 of the Trade Act of 1974.(8) Kodak's petition alleged that the anticompetitive practices of Fuji Photo Film (Fuji) amounted to unfair trade practices under the Japanese Antimonopoly Act.9 Kodak argued that the Japanese government's tolerance of those practices had deprived it of $5.6 billion in cumulative forgone revenues in Japan since 1975 and created a protected profit sanctuary in Japan for Fuji.10 Kodak argued that this affected the global competitive balance between Kodak and Fuji and fostered dumping in world markets, including the U.S. market.11

Section 301 authorizes the USTR to take all "appropriate and feasible action" in order to obtain "the elimination of the act, policy or practice" that he or she determines is "unreasonable or discriminatory and burdens or restricts United States commerce."12 U.S. companies have been fighting trade barriers to the Japanese market for some time, citing such key barriers as the Japanese regulatory technique of "administrative guidance," keiretsu, and complex distribution systems.13 These restrictive practices were made the focal point of the section 301 petition.

The petition submitted that all four of Japan's major photographic supply wholesalers have exclusive supply contracts with Fuji.14 A market survey conducted by Kodak's legal team found that Kodak is wholly absent from two-thirds of the stores in Japan, unable to get its products on the shelves. The survey also found that Kodak only has a 9.8% market share in Japan, its lowest share in any major market in the world.15

On June 13,1996, following a one-year investigation, the USTR made its section 301 determination; that "certain acts, policies, and practices of the government of Japan with respect to the sale and distribution of consumer photographic materials in Japan [were] unreasonable and burden or restrict U.S. commerce."16 Specifically, the USTR mentioned Japan's toleration of a market structure that impedes U.S. exports, as well as "certain Japanese government liberalization counter-- measures" that it believes contravened Japan's obligations under the GATT and nullified or impaired the benefits accruing to the United States under this agreement.17

3. United States Requests WTO Panel

Pursuant to DSU procedures, the USTR requested a consultation with Japan.18 On September 19, 1996, after consultations had failed to resolve the complaint, the United States requested a panel to hear the dispute.19 A panel was established on October 16, 1996.(20)

B. The U.S. Submission21 to the WTO Dispute Settlement Panel

The U.S. Submission argued that the Japanese government instituted "liberalization countermeasures" in the film sector in response to the threat of increased foreign competition that followed Japan's commitment to liberalize foreign investment in Japan.22

1. Legal Arguments

Matters brought before the DSU Panel must allege violations of one of the agreements covered in the Appendix to the DSU,23 which include the original GATT agreement.24 In this case, the United States focused on three core principles of the GATT: (1) Article XXIII:1 (b) (Nullification and Impairment); (2) Article III:1(4) (National Treatment); and (3) Article X:1 (3) (Transparent Administration of Laws).25

In its Article XXIII:1 (b) argument, the United States alleged that, by replacing tariffs with other measures designed to restrict import access, Japan had nullified or impaired benefits owed to the United States within the meaning of Article XXIII:l (b).26 Japan began to make tariff concessions in the late 1960s. The history of the Japanese tariff bindings and progressive concessions is summarized in Table A, infra. Any subsequent countermeasures would negate any benefits of the negotiated tariff concessions, so Japan, in reality, would have conceded nothing. Japan argued that for a measure to come under Article XXIII of GATT, nullification could not reasonably have been anticipated at the time of the relevant concession. Because all of the measures in question had occurred prior to the most recent tariff concession and their effect could have been reasonably anticipated, Article XXIII did not apply.27 Japan also argued that Article XXIII has traditionally been viewed narrowly, because it permits a remedy without an actual violation of a specific provision,28 and interpreting it broadly would expand the remedy beyond any intended scope and undermine the safeguard of generally having to prove a violation.29 Japan argued that the measures governed solely private conduct, not government measures, and that the panel must only look at the measure on its face to determine whether a tariff concession is being nullified or impaired.30 The United States responded that, based on GATT precedent, in order to determine nullification, panels must look at all relevant facts and circumstances of the case and not limit its review to the isolated measure.31

The United States' Article III argument was twofold. First, it claimed that the government of Japan applied the distribution countermeasures to protect domestic production by systematically limiting an importer's ability to distribute and sell its product, in violation of Article III:1. Second, it claimed that Japan violated the mandate that the conditions for sale and distribution of imported goods be no less favorable than those for domestic goods.32 By creating distribution channels open only to domestic manufacturers, Japan intentionally enhanced the conditions for domestic goods, in violation of Article III:4.(33) To support this argument, the United States analogized the situation in Japan to the Canada-Beer case, where a DSU panel found that, by allowing access to domestic beer to points of sale not available to imported beer, Canada afforded domestic beer a competitive opportunity denied to imported beer.34 Japan responded that there was no facial discrimination in the measures in this case.35 Furthermore,Japan argued that the measures were no longer in effect; all that remained was the market structure and this alone did not amount to a "law," "regulation" or "requirement" under Article III of the GATT.36

In its Article X argument, the United States submitted that the government of Japan had relied on non-transparent forms of administrative action and used a network of public-private relations to implement its measures, thereby failing to publish its " [1] aws, regulations. . . and administrative rulings. . promptly in such a manner as to enable governments and traders to become acquainted with them."37 Japan argued that Article X:1 obligations are only applicable to measures of general application and that the measures in question were not in this category. Therefore, Article X:] was inapplicable.38 The Japanese submission further asserted that the United States had made no legal claim under Article X:3.(39)

Ultimately, the U.S. argument was that all these measures, taken together, had altered the terms of competition to the disadvantage of imports, as formal tariff restrictions gave way to less transparent protectionism.40 Looking at the measures as a whole would enable the panel to evaluate the reality of the effect on the market.41

The United States submitted that the countermeasures (1) targeted the film sector in Japan (2) with a clear intent to limit foreign film products in that market.42 The submission further stated that the Japanese government (3) succeeded in limiting foreign film products and keeping the market closed to foreign film and that these actions were inconsistent with WTO rules.43 The United States argued that the liberalization countermeasures targeted the film sector in three main ways. First, distribution countermeasures consolidated the wholesale distribution system44 through vertical and horizontal integration of domestic manufacturers.45 Second, the Japanese government enacted the Large Stores Law (Daitenho),46 affecting the large stores that are allegedly the primary outlet for foreign film products.47 Third, the government implemented various regulatory controls on price competition and advertising, known as premium laws.48 The United States claimed that these were aimed at restricting the marketing efforts of foreign manufacturers and that the Japanese government recognized the importance of marketing for these manufacturers.49

The Japanese government rebutted all of the distribution counter-- measures alleged by the United States as valid measures. First, Japan claimed that MITI's distribution policies were designed to improve the efficiency of a relatively backward distribution sector, and that the government was modernizing, not restricting access to the sector.50 Second, Japan contended that there was no correlation between the size of a store and the likelihood of it selling foreign film; therefore, the Large Store law had no effect on distribution.51 Third,Japan stated that its premium laws were enacted prior to any tariff concessions and could therefore not be a countermeasure, and that these laws regulate excessive premiums and misleading representations, not market access.52

Supporting the issue of intent to limit imports in the sector, the United States relied on the following: MITI's 1969 Report on the measures it was taking in the film sector, which it was claimed "ascribed a clear trade objective policy";53 the 1975 MITI-commissioned manual, which provided guidance for vertical integration and specifically mentioned Kodak's ability to cause distribution problems; and the 1970 MITI Business Bureau Report, which also referred to Kodak's potential to compete and the necessity of monitoring the trend of film prices.54

The U.S. Submission also presented factual arguments showing that Japan had succeeded in keeping its film market closed.55 It claimed first that the consolidation of the wholesale sector had created two distinct distribution channels for film and film products.56 One hundred percent of domestic film was distributed through primary wholesalers to retail outlets, primarily through four main wholesalers, all of which were special contract agents of Fuji film.57 Virtually all imports, on the other hand, were sold directly to retail outlets, as none of the major wholesalers would carry imported film.58 As a result, the United States alleged, imported film was unavailable in two-thirds of retail outlets.59 Second, the United States cited the fact that the import share of Japan's market for consumer photographic film and paper has remained stagnant for over thirty years.60 Japan presented substantial evidence on Kodak's and Fuji's market shares, contending that Kodak's market share in Japan was not stable at a low level but did in fact fluctuate, and that Fuji's market share in the United States was very similar, therefore suggesting that a lower market share in a foreign country is to be expected.61

C. The WTO Dispute Settlement Understanding

1. The Procedure

The DSU lays out both the procedure and time limits for bringing a dispute to the WTO for settlement.62 The first step is consultation between the parties.63 A request can then be made that the Dispute Settlement Board (DSB)64 establish a panel. Once the DSB decides a panel is appropriate, the parties may determine the terms of reference and agree upon the panelists.65 Under the strict timeline, submissions are made by both parties to the dispute and the panel announces its decision.66 There is an automatic right to appeal following the issuance of the final report.67

2. The Panel's Decision

The panel decision looked at both the violation (Articles III and X) and non-violation (Article XXIII) claims. The panel found each one of the twenty-one "measures" alleged by the United States as GATT violations to be legal.68 The panel based its decision primarily on fundamental issues of fact and evidence.69

The panel rejected the United States' Article III complaint on the grounds that there was no evidence that MITI's "administrative guidance" intentionally favored Fuji over Kodak in the Japanese market, or that the Large Stores law restricted Kodak's access.70

The panel rejected the Article XXIII claim on the grounds that the alleged measures were either not "measures," within the meaning of the nullification and impairment remedy, or that the United States had no reasonable expectations that they should not interfere with tariff benefits in place before the relevant tariff negotiations and therefore there could be no nullification or impairment under Article XXIII.71

The panel's analysis of the Article X claim turned on the issue of whether the rule or law in question was one of general application (and could therefore establish or modify criteria applicable in future cases)72 While the panel did accept that Article X also applies to administrative rulings, it found that there was insufficient factual evidence to show that that the alleged "guidance" measures amounted to a ruling nor that they were rulings of "general application," and Article X did not apply.73

In addition, the panel refused to look at the combined impact of all the separate measures. The panel found no relationship between government measures, market structure and effect on foreign participants in the market.74

The panel was willing to accept the United States argument that certain forms of government suasion or guidance (as opposed to specific laws) could be classified as "measures" in violation of trade laws, but indicated there should be direct evidence linking each specific government policy or measure with a specific violation or nullified or impaired benefit.75 The evidence and facts presented in the United States case were deemed not sufficient to satisfy this burden.76

III. ANALYSIS

A. Decisions in Prior Cases-All United States Victories77

The United States' three most recent victories have been the appellate proceedings on the EC banana regime (EC-Baanas),78 the panel decision on the EC's ban on the use of growth hormones in beef production (EC-Hormones) 79 and India's failure to provide intellectual property rights protection (India-Patents),80 summarized in Table B.81 All three cases dealt with specific measures easily identifiable as government measures.82 The Kodak case deals with the results of a combination of measures, invalid only when viewed as a whole. WTO panels are accustomed to dealing with specific trade barriers,83 but the case at issue in this Note deals with twenty years of "administrative guidance," building up of Keiretsu and general law making within a distinct cultural context that ultimately affected Japan's photographic film market structure.

B. Why the United States Lost This Time

The case was lost on factual grounds. The panel found that, despite two lengthy U.S. submissions containing both factual and legal arguments,84 there was no evidence showing that the Japanese government committed the alleged GATT violations.

To prevail, the United States needed to show that the Japanese government had (a) taken measures that (b) were intended to and (c) did in fact adversely affect competition between imported and domestic film products.85 In addition, for the Article XXIII claim, the United States needed to provide evidence that the effects could not have reasonably been anticipated when the tariff concessions were made.90

It appears from the opinion that the United States satisfied the foundational element of showing that the Japanese government had taken some measures.91 As for intent, it appears the United States amassed substantial evidence, primarily in the form of the Japanese government's own documents, that the alleged measures were all implemented in order to counter potential increased competition from foreign manufacturers.92 It is true that the measures taken by the Japanese government were subtle, but the panel was made up of experienced professionals-it should take more than semantics and subtleties to pull the proverbial wool over their eyes. Regardless of when these measures became effective, it seems clear that these measures did in fact exist. The fact that they might have been enacted prior to trade concessions should not affect the analysis of the claims under Articles III and X, as these claims represent actual violations of the GATT.93 It is irrelevant to the analysis whether the complaining State was aware of the measures allegedly in violation of these provisions, or whether these measures counteracted the trade concessions.94

The flaw here, apparently, is causation. The panel either found no effect on competition or found that the United States did not do enough to dispel other business reasons for low market share. There could have been an effect on competition-negative brand recognition. But this effect was not proven to be due to government measures. While negative brand recognition could be due to restrictions on marketing under the Premium laws, it could also be explained in at least two other ways. It could be: (1 ) a result of Kodak's own miscalculation in marketing strategy, or (2) nothing more than a natural preference for domestic goods, which also occurs in the United States market, where Fuji's market share is comparable to that of Kodak in Japan.

The Article XXIII claim did not prevail either. The panel insisted the United States should have been aware of the measures, and subsequently there is no benefit nullification (because the measures should be taken into account when negotiating the net benefit). Of course, had the panel decided the Article X claim in favor of the United States, it might have been less adamant on this point. The United States' Article X argument, discarded by the panel, was precisely that the measures were not transparent, and, therefore, the United States could not be aware of them. Once the panel ruled that Japan satisfied the publishing requirements under Article X, the United States could not win the Article XXIII argument based on lack of awareness. As it stands, the Article XXIII claim is inexorably tied to the Article X finding, and the United States seemed destined to lose both.95

The panel found that the United States did not provide enough evidence to support its Article X claim. Hence, the United States was virtually precluded from meeting its burden on the Article XXIII awareness front. Accordingly, in order to prevail in an Article XXIII claim, a party must keep abreast of every new law and regulation in other countries, even though these regulations may only satisfy the minimum Article X requirements of transparency. This is troubling in itself, as it is precisely countries with little transparency that are likely to secretly undermine benefits openly negotiated. The standard of evidentiary proof appears impossibly high.

A final and important point that should be considered is the fact that Kodak originally alleged antitrust violations and anticompetitive behavior by Fuji.96 A market structure that thwarts competition and allows exclusionary business practices,97 while perhaps a violation of U.S. and/or Japanese antitrust laws, does not necessarily indicate a violation of the GATT. The USTR attempted to show how government measures had created the market structure, and that this structure could be evidence of a violation. Nevertheless, the link was too attenuated for the WTO panel.

Following the release of the decision, the USTR commented that this case was particularly challenging, for the following reasons: (1) the panel was being asked to examine certain GATT obligations in a new light and to weigh a large number of disputed facts, and (2) considering these facts in the context of Japan's unique system of administrative guidance techniques was novel.98 The USTR went on to point out the benefits of having brought the case, despite losing it: the United States still has its unilateral measures available;Japan did liberalize some of its key premium laws (such as eliminating the nearly total ban on premiums that manufacturers may offer distributors and the explicit limitations on premiums that camera manufacturers and distributors may offer retailers and consumers)99; and the government of Japan made a number of formal representations concerning the openness of its film market.100 These representations are significant, especially given the controverted facts, which the United States claims show that the actual situation is far from this Japanese version of the truth.

The case is being considered one of first impression, the hope being that it will pave the way for future cases that will ultimately prevail. The WTO was not quite ready,101 but is now one step closer to being able to properly analyze intricate non-tariff barriers.

B. The Next Step

On February 3, 1998, three days after the WTO panel announced its final decision in favor of Japan, the USTR announced its next step.102 The United States did not appeal the decision, nor did it resort to unilateral sanctions under section 301. Instead, they formed an interagency committee to monitor the representations that Japan made during the WTO proceedings.los This monitoring initiative is based on the notion that Japan's "representations" to the WTO panel that its film market is open constitute "commitments" of the Japanese government.104 This announcement "holding" Japan to the statements that ensured its WTO victory suggests a glimmer of section 301 enforcement. This monitoring focuses on the three areas forming the core of the dispute argued before the WTO. This initiative offers no greater guarantee of change than the decision of the WTO panel. However, by using the outcome of the dispute settlement process to bind the Japanese government to its commitments and to legitimize enforcement of these commitments, it does seem to afford the United States the option of enforcement under section 301 in a manner compatible with the GATT.

In the past, the United States has not always waited for such an excuse. Its importance as a trading partner has essentially meant that the United States can, in practice, do whatever it wants. Realpolitik remains an important aspect of international trade relations. Notwithstanding this position, the United States' increasing dependence on export markets for its products creates a compelling reason for it to establish a solid, legitimate basis for international, multilateral dispute settlement, on which it can rely in the future. In addition, the United States needs to build domestic support for such agreements.105 U.S. industry and its political representatives can be convinced that the WTO DSU is beneficial when the United States is able to influence trade policy in other countries to the benefit of U.S. producers. Conversely, this recent decision could be a sign that U.S. industry is becoming more vulnerable in this era of multilateralism, and that the United States has less of a voice today.

This could explain why the USTR opted not to appeal. A decision based on questions of fact is unlikely to be reversed and would serve to reemphasize the loss. In addition, the USTR wants to secure certain precedents set by the case, probably including the broad definition of "measure," as well as the view that certain private sector activities can be actionable under the WTO.106

The propaganda machine already in motion supports this conclusion. Press releases and testimony before Congress take the "glass is half full" approach. The United States does not see the WTO decision as a loss, but as a smaller victory than anticipated. 107

The United States is unwilling to allow support for the WTO to fade. However, it is not yet prepared to put all its eggs into one basket. For example, bilateral initiatives, such as bilateral investment treaties (BITs), seem to be a creative way to protect the country's own specific interests without discarding the multilateral agreements.108 The USTR has confirmed this, stating that it "intends to continue pushing the dispute settlement envelope" and will bring difficult cases to ensure that "we reap the full advantage of the new trade benefits we fought so hard to achieve," but that "in the face of an adverse panel decision, we can develop creative options for addressing market access concerns."109 The United States has been careful to show that section 301 is still in the arsenal, and that it will protect the interests of U.S. industry.llo In this way, the United States can insist that it is complying with the WTO obligations, while taking unilateral measures to keep domestic industry content. The United States already has the EU on board, so any measures it subsequently takes will appear plurilateral at worst. The EU has pledged to "hold [the Japanese] to [their representations]."111 Consequently, when the time comes to enforce the monitoring, the United States can comfortably pick a unilateral measure out of its hat.

IV. RECOMMENDATIONS AND CONCLUSIONS

This case is complex, due to its complicated series of facts and measures spanning a twenty-year period, and the political undertones forever present in U.S.Japan business relations. What started as a dispute between two companies became a vehicle for insisting on fundamental changes to Japan's market structure. In this latter respect, the United States might not have lost at all. Ideally, the initiative will focus on elements that the Japanese government will be not only willing to change, but able to change without appearing merely to be responding to the monitoring. This should minimize the risk that Japan will continue to use non-transparent methods to avoid making changes it is not ready to absorb.

When analyzing a case brought as a violation of an international agreement, it is important to look at the purpose of the agreement, in this case the GATT, and the reason for invoking that agreement. The purpose of the GATT has been to promote international trade by reducing tariff or non-tariff barriers.112 The U.S. Submission presented substantiated evidence of Japanese measures to counter liberalization. While some argue that the decision has given Japan the go-ahead to continue their informal market controls and that "the Japanese government will be less willing to negotiate anything,"113 Japan has already voluntarily modified some of the laws and practices criticized by the United States.114 The USTR focused on this,115 stating that a WTO panel report "does more than determine who wins or loses a particular dispute."116 "Each finding helps build `WTO law' with a loss today producing legal reasoning that underpins tomorrow's victories."117

When Kodak came to the USTR in 1995, the WTO DSU was not the only avenue of relief open to the United States. In practice, the United States could have threatened section 301 retaliation or other unilateral measures. Alternatively, Kodak could have attempted to sue under either U.S. or Japanese antitrust laws.118 Instead, the USTR chose to bring this case to the WTO. Either the USTR believed the United States had a strong case, or it wanted to go through the DSU footwork. By using the DSU, the United States has had the opportunity to show its continued commitment to the WTO DSU mechanism, which has worked well for the United States in the past, especially to force compliance by developing countries.119 In addition, the United States is able to monitor Japanese government activity in the film market without looking as if it has acted unilaterally, by legitimately engaging the EU in its dispute (the EU joined in the original consultations) and basing its action on the Japanese formal submission to the DSU. Just as the Japanese government set up regulations under the guise of "guidance," the United States can take unilateral enforcement measures in the guise of "cooperative monitoring," beating the Japanese at their own game of subtlety.

Even though this decision was not a complete success for the United States, this Note has suggested that it did represent, in some respects, the desired result. Furthermore, while the United States has taken somewhat innovative action following the issuance of this decision, it appears that it will and should continue to rely on the WTO DSU. In this way, market access may not occur overnight, but at least it will occur. And the United States-and even Kodak-will have won what they set out to achieve.

1. General Agreement on Tariffs and Trade, art. XXIII:l, Annex 1A, Apr. 15,1994, inRESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS (1994), [hereinafter RESULTS OF THE URUGUAY ROUND], 33 I.L.M 1154 (1994) [hereinafter GATT]. The GATT disfavors unilateral measures, but countries such as the United States have always been reluctant to go into trade battles unarmed, and the United States has in the past wielded the section 301 sword over non-complying members' heads. Trade Act of 1974 sec 301, 19 U.S.C. . 2411 et. seq. (1974 & Cum. Supp. 1998). Section 301 of this Act authorizes the United States Trade Representative (USTR) to take certain unilateral action to relieve U.S. companies from unfair trade practices. See infra note 11 and accompanying text. Naturally, other countries object to the use of section 301,just as the United States objects to other countries' unilateral measures. See Ernest H. Preeg, The WTO and U.S.-Japan Trade, AM. CHAMBER OF COM. IN JAPAN J., Feb. 1, 1998; cf Matthew Schaefer, National Review of WTO Dispute Settlement Reports: In the Name of Sovereignty or Enhanced WTO Rule Compliance?, 11 ST. JoHN's J. LEGAL COMMENT. 307, 337 (1996) (suggesting that the WTO DSU is the exclusive means for pursuing remedies for WTO agreement violations, although arguably section 301 may still be consistent with the WTO in some contexts). While section 301 is still on the books, since the creation of the DSU, the United States has been reluctant to resort to it for sanctions. Id.

2. The Uruguay Round established the World Trade Organization (WTO). See Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Apr. 15,1994, in RESULTS OF THE URUGUAY ROUND (1994), 33 I.L.M. 1143,1144 (1994) [hereinafter Final Act]. The original GATT then became part of the WTO, along with other agreements. The DSU was formulated as Annex 2 to the Final Act. See Understanding on Rules and Procedures Governing the Settlement of Disputes, Apr. 15, 1994, WTO Agreement, Annex 2, in RESULTS OF THE URUGUAY ROUND (1994), 33 I.L.M. 1226 (1994) [hereinafter DSU].

3. The DSU Board consists of the permanent members of the General Council of the WTO. The Board, which meets on a monthly basis, determines whether a panel should be formed to hear a dispute. See Schaefer, supra note 1, at 311.

4. See Overview of the State-of-Play of WTODisputes (visited Feb. 25,1998) ; see also BARRY E. CARTER & PHEP R Tkm.mE, INrE,I. LAw 432 (2d ed. Authors' Update 1997).

5. See Andy Shoyer, No Dispute: The WTO Works,J. COM., Dec.18, 1997, at 6A 6. See Government of the United States,Japan-Measures Affecting Consumer Photographic Film and Paper, 154, 55 (U.S. Submission, 1997) [hereinafter U.S. Submission]. 7. See Barshefsky Launches New Initiative to Monitor Japanese Film Market, INSIDE U.S. TRADE, Feb. 6, 1998, at 7 [hereinafter Monitoring Initiative].

8. See Petition of Eastman Kodak Company Pursuant to Section 301 of the Trade Act of 1974, as Amended, for Relief from Japanese Market Barriers in Consumer Photographic Film and Consumer Photographic Paper, May 18, 1995 (visited Nov. 8, 1998) . 9. See id. 10. See id.

11. See id; see generally Frank J. Schweitzer, Flash of the Titans: A Picture of Section 301 in the Dispute Between Kodak and Fuji and a View Toward Dismantling Anticompetitive Practices in the Japanese Distribution System, 11 At. U. J. INT'L L. & POL'Y 847 (1996). 12. 19 U.S.C. 2 2411 (b). The section then delineates the types of action authorized, such as suspension of trade agreement concessions, imposition of duties or other import restrictions. See id. 22411(c)(1).

13. See Schweitzer, supra note 11, at 859-61. Administrative guidance is the term given to the Japanese system of informal rule-making between government and private industry, while keiretsu is a Japanese term referring to a style of vertically integrated companies particular to Japan. 14. See Summary Detail, Petition for Eastman Kodak Company, May 1995 (visited Nov. 8,1998) [hereinafter Summary Detail*]..

15. The petition alleged that these results were due to governmental guidance and measures, complex distribution barriers and exclusive contracts between Japanese companies (keiretsu forming). See id; see also U.S. Submission, supra note 6, 1 62.

16. Section 304 Determinations: Barriers to Access to the Japanese Market for Consumer Photographic Film and Paper, 61 Fed. Reg. 30,929 (1996) [hereinafter Section 304 Determinations].

17. See id; see also GATT, supra note 1.

18. See Section 304 Determinations, supra note 16; see also DSU, supra note 2, art. 4; GATT, supra note 1, art. XXIII: 1.

19. See U.S. Moves on Japan Film Case, 13 Int'l Trade Rep. (BNA) 1484 (Sept. 25,1996). On July 5, 1996, the European Union requested to participate in the consultations as a third party. See id. 20. See WTO Dispute Settlement Proceeding Concerning Certain Japanese Measures Affecting Imported Consumer Photographic Film and Paper, 61 Fed. Reg. 52,835 (1996) [hereinafter WTO Proceeding]; see also U.S. Submission, supra note 6, 1 55; WTO Panel Report, JapanMeasures Affecting Consumer Photographic Film and Paper, WT/DS/44/R, 1.3 (Mar. 31,1998) [hereinafter Japan-Film Panel Report] . 21. U.S. Submission, supra note 6.

22. See id. The submission cited as support for this assertion an article entitled Cabinet Decision Concerning Liberalization, 6 June 1967, at 4, reprinted in 17 MITI HISTORY Ex. 67-6, 1 4; see also id. I 85 (referring to a Ministry of International Trade and Industry (MITI) survey examining the problems domestic industry was likely to face as a result of liberalization). This liberalization had been undertaken in accordance with the Kennedy Round of GATT negotiations in 1967. Id. 1. 23. DSU, supra note 2, art. 1.1.

24. GATT, supra note 1.

25. See U.S. Submission, supra note 6, II 5s55, 377-83. 26. See GATT supra note 1, art. XXIII:I. Article XXIII:1 reads, in pertinent part: "If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of . . . (b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement...." (emphasis added).

Id.

27. Government of Japan, Japan-Measures Affecting Consumer Photographic Film and Paper, 1 30-31 Japan Submission 1997) [hereinafter Japanese Submission].

28. See id. 1 43-45. Article XXIII claims are usually considered subsidiary to actual violation claims, and panels do not usually consider non-violation issues until the alleged violations have been addressed. Here, Japan argues, the U.S. case is unusual, as it commences its legal argument with "non-violation nullification or impairment" claims regarding the distribution countermeasures, which it also claims constitute an Article III violation. SeeJapan-Film Panel Report, supra note 20, 1 3.9.

29. Japan-Film Panel Report, supra note 20, 1 3.9 n.89.

30. SeeJapanese Submission, supra note 27, II 589-594.

31. See Overview and Summary of the United States ' Submissions to the WTO Dispute Settlement Panel Japan-Measures Affecting Consumer Photographic Film and Paper August 1997 (visited Nov. 10, 1998) [hereinafter Sum mary].

32. See GATT, supra note 1, art. III. Article III states, in relevant part:

"1. ll]aws, regulations and requirements affecting the internal sale .. . [or] distribution . . . of products. . . should not be applied to imported or domestic products so as to afford protection to domestic production.

4. [t]he products of the territory of any contracting party ... shall be accorded treatment no less favorable than that accorded to like products of national origin ...." (emphasis added).

Id

33. See U.S. Submission, supra note 6, 1479.

34. GATT Dispute Panel Report, Canada-Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, Feb. 18, 1992, GATT B.I.S.D. (38th Supp.) at 27 (1992).

35. See Summary, supra note 31. 36. Japanese Submission, supra note 27, 39. 37. See U.S. Submission, supra note 6, 1 382; GATT, supra note 1, art. X:I. 38. Japanese Submission, supra note 27,1 40. 39. See sd. 1 714; see also GATT, supra note 1, art. X:3. 40. See Summary, supra note 31. In summary, the United States alleged: (1) that the distribution countermeasures, Large Stores Law, and promotion laws in combination nullify or impair benefits under Article XXIII:1 (b); (2) that "[t]he distribution countermeasures, as a set, also violate Article 111:4 and nullify or impair benefits"; (3) that the Large Stores Law nullifies or impairs benefits; (d) that the promotion measures as a set do the same; and (4) that the specific

failures to publish the MITI guidance and local authorities under the Large Stores Law that "establish or modify criteria applicable in future cases" violate Article X:I. Japan-Film Panel Report, supra note 20, 4.26 (emphasis added). 41. See U.S. Submission, supra note 6, II 3, 5. 42. See id. 1 52. 43. See id. 1 54.

44. This was done with the administrative guidance of MITI. See id. 6. 45. It is argued that this vertical alignment, or distribution keiretsu, may make a distributor dependent on a particular manufacturer, which makes distribution channels exclusive and raises entry barriers. See id. 72; see also Schweitzer, supra note 11. Many consumers believe that the best prints come from using the same film, paper, and processing equipment, therefore a lab that uses Fuji equipment is likely to use Fuji paper. See U.S. Submission, supra note 6, at 1 414.

46. See U.S. Submission, supra note 6, 162. The Large Stores Law became effective on March 1,1974. Id.

47. Large stores do not necessarily need to go through distribution channels and can buy directly from foreign manufacturers. The United States alleged that there are approximately 70,000 general merchandise stores, selling roughly one-third of all film sold. The law froze the market share of these stores, by restricting floor space, opening hours and other aspects of operation, and thereby froze the amount of foreign film stocked. See id. 38. Although this was a general measure, the U.S. Submission argued that it was aimed at imports and directly affected film distribution. The effect, it was argued, was twofold. First, it affected the large stores' strong buying power, which had enabled them to challenge the oligopolistic distribution structure. Second, it allowed the government to cripple the one channel of distribution that remained open to imported products. The United States presented that the Japanese government recognized that large stores would be more likely to carry imported products. See id. II 37-38, 166.

48. See id. 6. For factual background of the development of these measures, see generally id. at 15-141.

49. See id. II 365-76. The United States cited as a particular example of this effect the fact that, although Kodak had reduced its wholesale price by 56% since 1986, substantially undercutting its Japanese competitors, these price reductions were not passed on to the Japanese consumer. Japan contended that this was evidence of a bad brand image, not government wrongdoing. SeeJapanese Submission, supra note 27, 11 98-99.

50. See Japanese Submission, supra note 27, 1 4. The submission included a lengthy discussion of MITI's policies and goals in support of this assertion. See id. II 106-74; see generally Japan-Film Panel Report, supra note 20. 51. See Japanese Submission, supra note 27, I 4.

52. Japan submitted several affidavits of Japanese businessmen, who stated that Kodak had never tried to enter into serious business proposals with them, and that Fuji simply had more sales people. See id. 76. Japan argued there was nothing preventing Kodak from hiring more sales people itself. See id. at 1 29, note 38.

53. The text of the report stated in relevant part that " [w] e should . . . emphasize preventing the immense impact that would be felt if foreign capital took the lead in systematizing Japan's distribution activities, and quickly develop a system sufficiently capable of resisting the rational systems introduced by foreign capital." Summary, supra note 31.

54. See U.S. Submission ,supra note 6, 400, 407-8.

55. See generally id. 56-376.

56. See id. 6,7.

57. See id. 8.

58. See id. 9.

59. See Summary Detai4 supra note 14, 1 2.

60. "Only fifteen percent of Kodak film move[d] through secondary wholesale channels, and none through primary wholesalers" for the past 22 years. U.S. Submission, supra note 6, 1 9. Only ten percent of AGFA film (a German company) was able to pass through distribution channels. See id.

61. SeeJapanese Submission, supra note 27, 1 5. 62. See DSU, supra note 2.

63. If the consultations fail to settle the dispute within 60 days, then the complaining party may request the establishment of a panel. See id. art. 4. Only member states may be parties before the DSU, hence the United States, and not Kodak, was the complaining party once the USTR determined that the dispute would be brought before the WTO. See id. art. 1 (1 ).

64. The DSB is made up of the permanent members of the General Council of the WTO. 65. See DSU, supra note 2, art. 7. In this case, the panel was made up of the following three panelists: William Rossler, Swiss Ambassador to the WTO and Chairman of the WTO General Council; Adrian Macey, New Zealand's Ambassador to Thailand; and Victor do Prado, Brazilian Representative in Geneva, Chairman of the WTO Commission on Subsidies and Countervailing Duties. See Panel Members Agreed to US-Japan Film Dispute, 14 Int'l Trade Rep. (BNA) 9 (Jan. 1, 1997).

66. First in an interim report, and then in a final report. See DSU, supra note 2, arts. 15-16. 67. See DSU, supra note 2, art. 17.

68. See Daniel Moskowitz, An Even HarderNut to Crack, 11 INT'L Bus. 18 (1998). 69. See Mark Clough, Caught Out on Film: Why the WTO Rejected U.S. Charges Against Japan, FIN. TIMES, Jan. 20, 1998, at 13. With respect to 16 of the measures, the panel found no effect on competition between imports and domestic products under Article III. Furthermore, under Article XXIII analysis, it found no evidence of government action causing the nullification and impairment of tariff concessions. The five remaining measures were rejected for procedural reasons; however, the panel also determined that they had no effect on competition. See id 70. See id.

71. See Clough, supra note 69. The finding that the actions were not measures was apparently made despite the broad definition of the term "measures" under the GATT art. XXIII nullifica

tion and impairment remedy, which was deemed to include informal "guidance." See also discussion infra

72. See Japan-Film Panel Report, supra note 20, 1 10.388. 73. SeeJapan-Film Panel Report, supra note 20, IZ 10.384-10.401. 74. See Clough, supra note 69, at 13; accord Moskowitz, supra note 68, at 18. In fact, it has been suggested that the panel found that "the United States had not provided evidence of even minimal Japanese government intervention in the film market." Interagency Committee Will Test Japan Claims on Film Market, 15 Int'l Trade Rep. (BNA) 178 (Feb. 4, 1998). According to the United States, the distribution countermeasures worked together as an organic whole to violate Article III and to nullify or impair benefits under Article XXIII. In addition, the United States took the position that the Large Stores Law should be considered as one of the measures in the overall effort to create vertically aligned distribution. SeeJapan-Film Panel Report, supra note 20, 1 3.8. 75. See Japan-Film Panel Report, supra note 20, 1 10.204-08. 76. See The WTO Gets It Wrong, INT'L HERALD TRIB., Dec. 11, 1997, at 8. 77. While the United States has not prevailed in every case it has defended before a DSU panel, prior to January 1998, it had won all seven of the cases it brought as plaintiff-a no loss record. See Clough, supra note 69, at 13.

78. WTO Appellate Body Report, European Communities-Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R (Sep. 9, 1997), 37 I.L.M. 243 (1998) [hereinafter EC-Bananas Appellate Body Report]. 79. WTO Appellate Body Report, European Community-Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R (Jan. 16, 1998) [hereinafter EC-Hormones Appellate Body Report] .

80. WTO Appellate Body Report, India-Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R (Dec. 19, 1997) [hereinafter India-Patents Appellate Body Report].

81. See United States Trade Representative, Update on WTO, NAFTA Dispute Settlement Cases (visited Nov. 4, 1998) . 82. See, e.g., EC-Bananas Appellate Body Report, supra note 78; EC-Hormones Appellate Body Report, supra note 79.

83. Cf. The WTO Gets It Wrong, supra note 76.

84. USTR Charlene Barshefsky stated that: "Kodak has amassed an extraordinary amount of information" and that "the evidence we have . . . is quite good." Barshefsky Confident of U.S. Case in Kodak Film Dispute WithJapan, 13 Int'l Trade Rep. (BNA) 1551, 1551-1552 (Oct.9, 1996). 85. See Japan-Film Panel Report, supra note 20, 1 10.352.

86. General Agreement on Trade in Services, Apr. 15, 1994, art. I(2) (c), WTO Agreement, Annex lB, in RESULTS OF THE URUGUAY ROUND (1994), 33I.L.M. 1167 [hereinafter GATS].

87. Agreement on the Application of Sanitary and Phytosanitary Measures, Apr. 15, 1994, WTO Agreement, Annex lA, in RESULTS OF THE URUGUAY ROUND (1994) [hereinafter SPS Agreement].

88. Agreement on Trade-Related Aspects of Intellectual Property, Apr. 15, 1994, WTO Agreement, Annex 1C, in RESULTS OF THE URUGUAY ROUND (1994), 33 I.L.M. 1197 [hereinafter TRIPS Agreement].

89. The TRIPS Agreement requires that developing countries establish a mailbox system for patent applications, so that when patent protection is ultimately provided (there is a ten-year phase-in), the applications are examined based on priority date. The TRIPS Agreement also requires that countries grant exclusive marketing rights to certain products subject to mailbox application. See id. arts. 70(8), 70(9).

90. See Japan-Film Panel Report, supra note 20, 1 10.269. 91. In fact, the United States referred to countermeasures. There was debate over this term, however. In response to the Japanese argument that the word taisaku, referred to in the Japan Cabinet Decision Concerning Liberalization of Inward Direct Investment of June 6, 1967, should be translated as "measure," the United States provided substantial evidence that taisaku in English is translated as "countermeasures." See A Question of Credibility: Misleading Statements Formally Submitted by Japan to the WTO Dispute Resolution Panel Japan-Measures AffectingPhotographic Film and Paper (visited Nov. 9, 1998) . Defining the measures as countermeasures would strengthen the U.S. argument under art. XXIII that the measures were taken, by definition, post-concession. 92. This documentary evidence includes: (1) the 1969 MITI report on distribution stating the need to quickly develop a distribution system capable of resisting foreign capital; (2) a letter from MITI to the Photographic Materials Industry Association forcefully suggesting adoption of the 1970 distribution guidelines; (3) and a Japan Fair Trade Commission JFTC) Study on the effects of the Large Stores Law. See id.; see also Summary, supra note 31. 93. See Japan-Film Panel Report, supra note 20, 1 10.242. 94. See id. 6.515.

95. See U.S. Launches Broad WTO Case Under GATT GATS Against Japan On Film, INSIDE U.S. TRADE, June 14, 1996, at 1, 22 [hereinafter U.S. Launches WTO Case]. For an argument as to why this awareness requirement was unfair, see Hearing on the WTO Decision on the Film Case Before the Subcomm. on East Asian and Pacific Affairs of the Senate Comm. on Foreign Relations, 105th Cong. (1998) (prepared statement of Ira Wolf, Dir. Japan Relations & Vice President, Kodak Japan Ltd.) [hereinafter Wolf Statement] (arguing that it would have been near impossible for the United States to have recognized these actions, let alone reasonably expect them to interfere, given the non-transparent actions undertaken under the guise of "administrative guidance"). 96. See supra note 9 and accompanying text.

97. Cf. US. Launches WTO Case, supra note 95, at 22.

98. See Hearing on the WTO Decision on the Film Case Before the Subcomm. on East Asian and Pacific Affairs of the Senate Comm. on Foreign Relations, 105th Cong. (1998) (prepared testimony of Susan G. Esserman, General Counsel, Office of the USTR) [hereinafter Esserman Testimony]. 99. If the United States had resorted to section 301 retaliation in this case, the result most likely would have been to provoke Japan, and the market would probably have become even more inaccessible as the Japanese government discreetly maneuvered the domestic industry. By providing Japan with the opportunity to propose the changes of its own initiative, the feeling that the United States is trying to force a particular policy upon them and thus infringe upon Japan's autonomy is minimized.

100. These representations included, notably, the following assertions: (1) the Japanese distribution system for photographic film and paper is open; (2) the Japanese government actually encourages imports of foreign film and paper; the Japanese government does not tolerate restraints on competition in this sector; (3) the Japanese government does not restrain price competition in the sector; and (4) the government prohibits practices that discourage the opening of large stores. See Esserman Testimony, supra note 98, at 3. 101. See Wolf Statement supra note 95, at 5.

102. See EUJoins U.S. in Pledging to Test Japan's Film Market Claim, 15 Int'l Trade Rep. (BNA) 232 (Feb. 11,1998) [hereinafter EUJo%ns US.].

103. See id The monitoring committee will have the following task: to collect and analyze data on the availability of foreign film through Japanese distribution channels, the number and type of retail stores carrying film, and the aailability of imported film, by volume, in these stores. 104. See Monitoring Initiative, supra note 7, at 7.

105. See The WTO Gets It Wrong, supra note 76, at 8 (arguing that the panel's ruling fuels U.S. resentment of international trade rules).

106. See id. at 7.

107. See, e.g., Esserman Testimony, supra note 98 (reiterating the past success rate of the United Stated before the WTO and outlining the positive aspects of the decision).

108. See id. at 3.

109. Id. at 7.

110. "While it may be tempting to attack the WTO after a loss, we should put this loss in context.... he WTO dispute settlement system is additive-it does not detract from our existing approaches or remedies, including bilateral . . . initiatives, as well as proceedings under U.S. trade laws including. . . Section 301." Id. at 8.

111. See Schweitzer, supra note 11, at 875 (suggesting that now that the government of Japan's toleration of systematic anticompetitive trade practices in the Japanese film market has been put on record and subject to multilateral scrutiny, section 301 retaliatory measures sit "poised and ready to be implemented"); see also EUJoins US., supra note 102.

112. Non-tariff barriers (NTB's) have long been recognized as the mechanism of choice for countries wishing to avoid imparting the full benefit of an agreed concession to a competitor country while insisting others meet their obligations to the GATT. The reduction of these NTB's is an important goal of the WTO. 113. Moskowitz, supra note 68, at 20. 114. See Clough, supra note 69, at 13. 115. See generally Esserman Testimony, supra note 98.

116. Compare Alan Wm. Wolff, In the Hands of the WTO, WASH. PosT, Jan. 16, 1998, at A21 (the author, an attorney with the law firm representing Kodak in the case, argued that the United States got nothing from the panel other than verification that there was no remedy provided by the WTO) with The WTO Gets It Wrong, supra note 76, at 2 (arguing that the United States should do nothing to undermine impartial dispute panels, of which it has been the overwhelming beneficiary).

117. Shoyer, supra note 5, at 6A.

118. Assuming they were able to overcome the various jurisdictional hurdles such as choice of law and sovereign immunity.

119. See generally Preeg, supra note 1.

1999]

JULIE GOLDMAN*

* J.D. Georgetown University Law Center, anticipated 1999; B.A. Colorado State University, 1993.

Copyright Georgetown University Law Center Winter 1999
Provided by ProQuest Information and Learning Company. All rights Reserved