Regulatory reforms must continue Japan has, in recent years, made
enormous efforts to reinvigorate its economy. The wide-ranging reform
programme of Prime Minister Koizumi was followed by further decisive
action under his successor, Mr Abe. The European Business Council in Japan
(EBC) greatly welcomed these developments. The EBC has long drawn
attention to persistent, substantive market access problems in Japan,
arguing that the removal of these obstacles would not only improve
business conditions for foreign firms but, crucially, also help the many
Japanese companies seeking to tap into foreign sources of capital,
increase the level of competition within the Japanese market and therefore
stimulate the economy as a whole. Hence the EBC particularly appreciates
recent reforms that mean foreign stocks can at last be used as
consideration in mergers with or acquisitions of Japanese companies,
through the triangular merger scheme allowing tax deferral so long as
certain conditions are fulfilled. It applauds the conclusion reached by
the Council for Economic and Fiscal Policies that promoting Tokyo as a
financial centre requires priority action on the long-standing problems
caused by firewall regulations between securities and banking operations.
It is delighted that the Government is finally addressing excessive
regulation in the field of air transportation, where liberalisation of
pricing and market entry would bring enormous benefits to the economy at
large. And last but not least, the EBC is relieved that the Council of
Regulatory Reform is now addressing the outdated requirement that
foreigners holding valid visas must additionally apply for a re-entry
permit if they wish to avoid losing their resident status each time they
leave Japan for even the shortest business trip or family visit. Overall, the EBC believes that the new Japanese government can do far more to ensure that conditions for doing business within Japan support and stimulate competitive enterprise, at the same time as promoting social welfare and safeguarding the environment. In particular, the approach taken to regulation will influence whether or not Japan is seen as an attractive place to do business, boosting the prospects of local firms and drawing in new capital and investment from abroad. Implementing the recommendations provided in this report would substantially increase the business opportunities both for European and Japanese companies and what currently is simply a strong trade relationship could be transformed into a great one, benefiting both national economies and individual companies. However, current instruments for enhancing cooperation between Japan and the European Union are largely confined to dialogues that yield, at best, a harvest of understandings, goodwill and piecemeal improvement, of little help to companies battling structural barriers, constant red tape and competitive pressure. The EBC therefore argues that a new approach is needed, which will lead the European Union and Japan towards integration of their respective rules and regulations, offering the prospect of greatly increased market access and mutual trade, while respecting shared concerns for economic, social and environmental "balance". The EBC has expressed this new approach in terms of an Economic Integration Agreement (EIA) and in this report identified issues we believe should be addressed within such.an accord. EU - Japan Economic Integration Agreement The Economic Integration Agreement envisaged by the EBC would entail Japan and the European Union working together towards the abolition of obstacles to mutual trade. Member States of the European Union long ago realised the benefits that could be created by cooperating on these issues and have invested hugely in the establishment of a Single Market, characterised by the free movement of goods, people, services and capital. Given the equal level of economic development, the EBC believes that an ambitious EU-Japan agreement addressing issues beyond the WTO framework is not to the detriment of the multilateral system, but to the benefit of each side. This is not to suggest that the EU and Japan should embark on the very extensive programme of integration that has been achieved by EU Member States, but recommends that they should focus on achieving the benefits of much closer cooperation in the economic arena. The motivation for doing so is strong. The European Commission has estimated that, thanks to the Internal Market, EU GDP in 2002 was 1.8% or 164.5 billion euro higher than it otherwise would have been. Benefits for consumers include a wider choice of quality goods and services, in many cases at lower prices, and the opportunity to move across borders for work without foregoing welfare protection. Benefits for business of having a single set of rules and unified certification schemes are obvious, especially to small and medium-sized enterprises, which might previously have been deterred from entering new markets by the costs and difficulties involved The effort and commitment required to achieve the EU Single Market should not be under-estimated. Yet many years' work by committees and expert groups from across the Member States have led to balanced agreements on numerous issues that, without compromising on efficiency, are sensitive to the technical, social and cultural concerns of all parties. The inclusive approach has favoured outcomes that are acceptable to all and thus more likely to prove successful than a unilateral approach to rule-making. The result is a body of singularly robust rules and regulations, adopted and supported by 27 Member States, that have boosted trade within the EU. Why, then, not use this work to inspire - and even give substance to - a body of rules and regulations of even greater significance, also for an agreement between EU and Japan? Europe and Japan share many of
the same concerns and challenges at the global trade level. Both have a
co-operative, inclusive and sensitive approach to solving socio-economic
issues. The sheer size of their combined economies - EU and Japan account
for 40% of Global GDP - means that each offers huge potential to the
other. Yet our mutual economic and trade relationship currently suffers
from endless wrangling over differences in respective rules and
regulations. The EBC believes that this is the time to work together to
create a shared set of rules and regulations. The greater the consistency
in rules and standards, the better for business - provided of course that
the rules and standards are founded in real business experience, rather
than pure politics. Free movement of goods between the EU and Japan There are no physical barriers to the movement of goods across the borders between EU Member States. The absence of customs documentation requirements reduces both delivery times and costs. More technical barriers to trade between countries are also considerably reduced, either by allowing products legally sold in one Member State (i.e. in compliance with national rules) to circulate freely throughout the Union; or, in more complex cases, by harmonising national rules in the form of single EU Directives. Recognising how the EU approach has eased cross-border trade, the EBC believes its benefits should be extended to EU-Japan trade, and calls on the European Union and Japan to initiate discussions on mutual acceptance of standards and certification schemes in product areas such as Construction Materials, Medical Equipment, Medical Diagnostics, Animal Health and Vaccines, as well as all products sold on retail markets where certification schemes exist. How would mutual acceptance work? It helps that both European Union standards (EN) and Japan Agricultural Standards (JAS) / Japan Industrial Standards (JIS) are scientifically-based and highly sensitive to issues of human and environmental safety. In the case of products such as machinery, industrial installations, toys, electrical equipment, electronics, domestic appliances, pressure equipment, personal protective equipment, recreational craft, refrigerators and sawn timber, standards exist in both the EU and Japanese systems and are basically the same, so it should be easy for each side to agree on direct and unconditional acceptance of the others' standards. Certain other products are covered by EN standards but not JIS/JAS - Medical Devices and Medical Diagnostics being prime examples. In these cases, however, Japan employs a policy of certification per product (or what would be called "market authorisation" in the EU context) based on the same requirements as the EN standards, as set out under Good Clinical Practice (GCP), Quality Management System (QMS) and Good Manufacturing Practice (GMP) regulations. Furthermore, both the EU and Japanese approaches are built on ISO requirements, albeit these have been slightly modified by Japan. Given their common foundations, it should be possible to establish mutual acceptance of EN standards on the one hand and Japanese certifications on the other in respect of Medical Equipment and Medical Diagnostic products, and also of respective market authorisations of Pharmaceuticals, Animal Health, Vaccine and Cosmetic products. The EBC would therefore expect mutual acceptance of all these products to be included in the first phase of any EU-Japan Economic Integration Agreement. It will also be important for Japan and the European Union to agree on systems for ensuring human and environmental safety where this is not linked to specific product certifications or standards - for example, the positive lists used respectively in the European Union and in Japan concerning ingredients in cosmetics and residues in food; acceptable food additives; the quarantine list of pests acceptable in cut-flowers without requiring fumigation; and authorised chemicals. From a business perspective, mutual acceptance of each party's lists would be the most practical solution, as it would enable companies to enter the foreign market by simply following home jurisdiction regulations. From the regulators' perspective, however, agreeing to this could be problematic since substantial differences exist between the two sides and could even increase in the future. The EBC therefore believes that the European Union and Japan should aim to create a set of common standards in these fields. The potential benefits of mutual acceptance and common standards cannot be over-stated. Both the European Union and Japan would gain from reduced administrative costs and from increased trade. Moreover, the benefits to consumers could be vast. For example, the current certification procedure delays the introduction of foreign, new life- and cost-saving medical devices and vaccines onto the Japanese market. After having cut re-imbursement prices over the line for many years, the Government of Japan now seems to be realising that such products are actually capable of reducing social costs and boosting economic performance over the longer term, as the population gains access to better therapeutic and preventative healthcare. Circumventing the lengthy national certification procedure and being able simply to accept products already certified in Europe would be a cost-efficient and safe way of improving access for Japanese consumers. It would also allow Japan to increase competition within its home market, and by doing so, improve the competitiveness of domestic industry. Moreover, the reciprocity of a mutual acceptance approach would lower entry barriers for Japanese manufacturers wanting to enter EU markets and so could boost their performance: certification in Japan would be sufficient to allow access to the whole of Europe! Free movement of services between EU and Japan EU companies have the right to establish themselves in other Member States, and to provide services on the territory of a Member State in which they are not established. To reinforce these rights, specific legislation has been enacted in fields such as financial services, telecommunications, broadcasting and the recognition of professional qualifications. A more general Services Directive will eliminate remaining obstacles and discriminatory barriers, cut red tape, and modernise and simplify the legal and administrative framework, with a view to improving the competitiveness not just of service enterprises, but also of European industry as a whole. The EBC argues that such benefits could be extended across the EU-Japan trade relationship and suggests that work should focus particularly on establishing common competition rules and common standards for service providers in the financial, legal, telecom, and construction sectors. At present, differences in the views of European and Japanese regulators on basic principles relating to risk management and handling conflicts of interests make it inherently difficult for financial services firms to integrate their Japan and EU businesses. Indeed, Japanese firewall regulations prevent integration of the Japan business into global operations and are also, at times, in conflict with European home regulator requirements. Hence, firms active on both markets would have much to gain if the EU and Japan could agree on how to ensure good governance in the financial sector under a principles-based system. This would reduce administration, and allow true integration and seamless development of innovative products for both markets. It would also take Japan a significant step nearer to being able to realise its potential as a global financial centre. Crucially, it is foreign lawyers working in Japan who have provided many of the services essential to introducing new corporate and financing techniques to the country. They consistently play a key role in the integration of the Japanese and EU economies, interfacing between European and Japanese firms on cross-border investment. Lawyers are, however, restricted in the extent to which they may exercise their profession since legal qualifications are currently not recognised across jurisdictions and, in some cases, their activities are circumscribed by local rules. The EBC therefore believes that an EU-Japan Economic Integration Agreement should aim to deliver mutual acceptance of legal qualifications and of engagement by lawyers in the scope of activities permitted by their home jurisdiction. In the area of telecom carriers, it is most important that the European Union and Japan should work to develop common rules that will ensure free and fair competition and inspire confidence in the market. The rules should include guidelines on funding Universal Services and calculating connection fees. Governments should implement measures that guarantee transparent costs, ensure that charges to competitors are cost-based, and monitor anti-competitive behaviour in relation to the price and non-price terms of supply. Competition Establishing common rules for competition would also be crucial in other services sectors. At present, the EBC has serious concerns about the so-called privatision of Japan Post, which seems to be enjoying special treatment from the Government (still its only stockholder) with a view to securing future profitability. A special section has been created within the FSA to deal with the Japan Post Insurance and Japan Post Bank companies, instead of subjecting them to the same regulatory department as their competitors. The need for strengthened compliance and risk management functions within the Japan Post Life Insurance Company, Kampo, is not being given sufficient priority and there are doubts whether a level playing field for all issuers of insurance will be guaranteed. The impact is also being felt by European carriers and forwarding companies in Japan. They already struggle with high costs and insufficient infrastructure at international airports, rigid custom clearance procedures and outdated restrictions on foreign-owned companies engaging in domestic freight forwarding business. Now Japan Post's plans to expand, for example in the international express market, while still benefiting from preferential regulatory treatment, are posing a serious threat to the functioning of the market and the ability of competitors to provide services to the Japanese public. Procurement Both Japan and the EU are party to the plurilateral WTO agreement on government procurement (APG) and have implemented WTO-plus provisions aiming to open up as much of this business as possible. Nevertheless, participation of European companies in public works in Japan remains very low, in part because, while transparent procurement procedures are in place, they are often simply not used, and also because contracts are so sub-divided that they none meets the threshold to be covered by the WTO agreement. The EBC therefore considers that an EU-Japan Economic Integration Agreement should seek to secure reciprocal market access with binding rules and simplified, yet more effective compliance measures than those of the WTO APG, guaranteeing equal treatment of foreign and domestic suppliers; transparency of information on and notice of government procurement opportunities; relevant brand neutral specifications; the process for bid evaluation; the award challenge procedure; and concrete enforcement mechanisms. Free movement of people between EU and Japan Ensuring free movement of people is crucial to the successful operation of the EU's Single Market. So, with a few (temporary) exceptions, citizens of the European Union have been granted extensive rights to travel freely and settle in any Member State, study or seek work there (while retaining entitlements to unemployment benefit for up to three months), practice a profession or set up a business, and ultimately retire to any Member State and be paid their statutory pension in their new country of residence. Similarly, any attempt at achieving greater economic integration between the EU and Japan will depend on the ability to make it easier for people to move between the two. This will entail substantial revision - and in some cases abolition - of current visa and work permits for EU citizens in Japan and Japanese citizens in Europe, and should also facilitate participation in respective education and academic programmes, such as Erasmus. The Agreement should also ease obstacles in the form of national social security procedures, and eliminate the need for individually brokered arrangements between each Member State and Japan on issues such as reimbursement of compulsory state pension contributions. Free movement of capital
between EU and Japan Free movement of capital is an essential condition for the proper functioning of the EU's Single Market, facilitating trade across borders and enabling workers' mobility. It is also essential for the cross-border activities of financial services companies. Recently, the legislative phase of an action plan aimed at developing a true European-wide market in financial services was completed, which will eventually provide consumers with a wider choice of financial products - such as loans, insurance, saving plans and pensions - which they will be able to buy from anywhere in Europe, and will also make it easier and cheaper for companies to borrow money, bringing down the cost of capital, goods and services for everybody. These are strong arguments for working towards the free movement of capital between the European Union and Japan. Besides the issues already addressed concerning the financial services industry (see above), an Economic Integration Agreement would need to focus on tax issues, eliminating double taxation between the EU and Japan and the withholding tax on dividends, royalties and interest. It should also enable employers' and employees' contributions to social security systems within the EU and Japan to be tax deductible on a mutual basis, and establish joint guidelines on interpretation and harmonisation of documentary requirements for transfer pricing assessments. Intellectual Property In addition to working towards establishing the free movement of goods, services, people and capital, an EU-Japan Economic Integration Agreement would need to address a number of broad issues fundamental to any effort to boost mutual trade, to ensure free and fair competition, transparent investment rules and shared policies on intellectual property rights and enhanced institutional cooperation on rules and enforcement. It would need to go beyond the limitations of current WTO discussions and agreements, but could ultimately provide a lead for future WTO negotiations. For example, both Japanese and EU companies are leading benefactors of strict international intellectual property protection and their respective Governments have indicated that the WTO TRIPS agreement is inadequate, particularly in the area of enforcement. An Economic Integration Agreement between the EU and Japan should therefore take TRIPS as a starting point and seek to build on a proper enforcement regime. It should contain ambitious undertakings on the protection of intellectual property, establishing identical protections for right-owners in both markets; mutual recognition of geographical indications, copyrights, and patent protection and licensing systems; and common rules and principles for penalties applying to counterfeiting and patent infringements on the Internet. A forward-looking Economic Integration Agreement could particularly help to safeguard innovation, research and development in areas such as new drugs, by harmonising rules on the data protection period and selection of brand names. To sum up, given the challenges of the global economic landscape, the strength of bilateral relations between the European Union and Japan, the importance of their mutual trade and their shared interest in fostering competitiveness, the EBC believes the time is right for further, faster economic integration. Cooperation on the development of a formal EU-Japan Economic Integration Agreement, that builds on, complements, and goes beyond WTO, would accelerate the reduction of non-tariff barriers and could provide the impetus for a step change in EU-Japan trade and investment. It could also enable leadership in the development of future rules and standards for use not only at home, but in markets across the world. Surely that is a prize worth working for? How this report is organised This report consists of 31 chapters covering a wide range of sectors and business areas. Each chapter addresses the concerns of a specific EBC sector committee and derives from the collective first-hand experiences of committee members doing business on the ground in Japan. Chapters consist of a series of recommendations for further regulatory reform with a section on prospects for economic integration highlighting the priorities of each sector of the industry. We trust this report will prove to be a positive contribution to the thinking of the Japanese Government and other authorities seeking to improve the environment for business and investment in Japan.
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