JAPAN FOREIGN MINISTRY STILL SQUEAMISH ABOUT WTO

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 001181

SIPDIS

SIPDIS

STATE PASS USTR FOR AUSTRS STRATFORD AND CUTLER
USTR ALSO FOR JAPAN - BEEMAN, MEYERS; CHINA - WINTER,
MCCARTIN
GENEVA ALSO FOR USTR
PARIS FOR USOECD

E.O. 12958: DECL: 03/16/2027
TAGS: ECON ETRD WTRO PGOV JA CH
SUBJECT: JAPAN FOREIGN MINISTRY STILL SQUEAMISH ABOUT WTO
CHINA CASES


Classified By: Amb. J. Thomas Schieffer. Reason: 1.4 (B, D)


1. (C) Summary: Japan remains hesitant to join U.S.-
initiated dispute settlement cases against China in the
World Trade Organization (WTO) largely over concerns
about possible Chinese retaliation against Japanese
companies that have invested in China, according to the
director-general for economic issues of Japan's
Ministry of Foreign Affairs (MOFA). The Japanese
suggested more contacts between Japanese and U.S. firms
in China as a way to identify common interests that
might result in joint action in the WTO. Domestic
political factors will probably sustain Japan's
reluctance to cooperate more actively with the United
States on China-related issues in the WTO in the near
term. End summary.

Japan Disappointed with Chinese Behavior in WTO
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2. (SBU) Leading off a March 8 dinner discussion with
Assistant U.S. Trade Representative for China Affairs
Timothy Stratford, MOFA Economic Affairs Bureau
Director General Yoichi Otabe noted that China's
interest in multilateral and regional forums had
expanded rapidly in recent years. Japan, he indicated,
had hoped, in particular, that China would play a
constructive role in the WTO following its accession in
2001 and not simply seek to lead the bloc of developing
countries in the organization. The Chinese, however,
had not worked to convince developing countries -- most
importantly large states like India -- in the non-
agricultural market access (NAMA) negotiations to lower
their tariff rates. China Economic Office Director
Morio Matsumoto added that China had looked to expand
its influence regionally as well, especially with
ASEAN.


3. (SBU) Stratford replied that, in his view, China
had not set itself up as a champion of the developing
countries as it had much to gain from a successful
resolution to the NAMA negotiations. It had, however,
stayed silent to avoid alienating the developing
countries in the WTO. The Chinese, consequently,
tended to play a "double game" with respect to its
relations with the poorer WTO members.


4. (C) Stratford told Otabe that frustration in
Washington toward Japan's reluctance to cooperate with
the United States on China and other issues had
increased substantially. With respect to China, he
outlined how the U.S. "two track" strategy of
intensified dialogue combined with a willingness to
bring cases to the WTO dispute settlement once dialogue
had been exhausted had begun to yield results. Most
importantly, the Chinese had shown signs of acceptance
of WTO litigation as a normal part of participation in
the international trading system and not as a
fundamentally hostile act.


5. (SBU) Otabe acknowledged that, in the past under
the GATT, Japan, too had not been accustomed to dealing
with dispute settlement procedures, but, following
instances in which Japan had both won and lost cases
without serious political or economic repercussions, it
had become more comfortable with the system. He added
that the dispute settlement mechanisms of the WTO had
been strengthened so that they now functioned better
than before and noted that, overall, it was better to
take a particular problem to the WTO in order to gain
resolution, at least after an adequate period of time,
than to continue to try to resolve the issue
bilaterally.

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Probing of U.S. Motivations, Obstacles on WTO Cases
-------------- --------------


6. (SBU) Otabe asked whether the large expansion of
U.S. business interests in China had helped to
ameliorate trade frictions. Stratford replied that the
views of the U.S. business community, particularly
toward WTO possible disputes, was evolving and
fragmented. Different industries have different
interests. Some were also more vulnerable to possible
Chinese retaliation than others. That was one reason,
Stratford noted, that the auto parts case in which the
United States was participating had been submitted not
just as a U.S. complaint but as a joint complaint by
the United States, the European Union, and Canada. In
addition, the case focused on systemic issues related
to Chinese local content requirements and did not refer
to any particular company so as to keep the Chinese
from punishing any individual firm for complaining
about the Chinese regulations.


7. (SBU) Otabe pressed Stratford as to whether U.S.
firms that already had an established business presence
in China might ask USTR not to bring a particular case
in order to maintain special privileges they might have
gained from the Chinese. Stratford stressed that if an
issue was a clear WTO violation and some U.S. companies
complained about it, USTR would be compelled to take
action even though certain other U.S. firms might not
benefit from that action. USTR must take the position
that represents the broadest U.S. interest, Stratford
explained.

IPR Case: Ongoing Concerns over Chinese Retaliation
-------------- --------------


8. (SBU) According to Otabe, Japan and the United
States had different approaches on these issues. For
example, although Otabe himself -- as a former
negotiator on the TRIPs agreement -- would like to see
Japan take a tougher line in the WTO on Chinese IPR
violations, Japanese industry strongly favored an
approach based on discussion and engagement with the
Chinese, without recourse to WTO litigation. Stratford
replied that the Japanese approach might have yielded
some progress but that the problem of piracy had also
increased. He questioned what the downside would be
for Japan in joining an IPR complaint against China.


9. (SBU) Matsumoto indicated that Japan might join an
IPR case as a full complainant if it could be convinced
that winning the case would bring concrete
improvements. He stressed, however, that because Japan
investment in China is concentrated in manufacturing --
where protection of brand names was the most important
IPR element -- it would be difficult for the Japanese
to produce sufficient evidence of damage in order to
win the case. In addition, Japanese firms remained
worried about the possibility of Chinese retaliation
should Japan join the case. Stratford rebutted
Matsumoto by noting that the case being proposed by the
United States would not require that kind of evidence
as it was based solely on deficiencies in Chinese law.
Matsumoto also acknowledged that the Japanese
bureaucracy was under pressure from certain (unnamed)
politicians to avoid taking steps that might provoke
the Chinese. Stratford emphasized that the IPR case
conceived by the United States would act as a crucial
first step to strengthen Chinese criminal enforcement
actions against IPR violations.


10. (SBU) Otabe, drawing further on his experience as

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a negotiator at the WTO, observed that the language in
the TRIPs agreement is vague in many areas and much was
left out in the final agreement, such as provisions on
the export of counterfeit goods. He indicated his
approval of U.S. willingness to address IPR issues like
those with China through the WTO rather than by using
bilateral instruments like "Special 301" but responded
sharply that he would prefer that, if Japan decided to
take a similar approach with China, it do so on its own
initiative and not at the urging of the United States.
Matsumoto reinforced the point by stressing that Japan
is not inactive but is endeavoring to achieve positive
results on IPR in China in its own way. Otabe further
added that Japan had IPR problems not just with China
but with other countries as well and was looking at
ways to create an entirely new global architecture for
IPR protection. Stratford responded that the U.S.
government was focused on China because that was the
source of most counterfeit products seized in the
United States.

Search for Common Interests by U.S. and Japan
--------------


11. (SBU) Cooperation among U.S., Japanese, and
possibly European business groups in China might be a
way to create a common position on how to deal with the
Chinese, Otabe suggested. Both he and Matsumoto
expressed admiration for the willingness of the
American Chamber of Commerce in China to put forward
its concerns and recommendations to the Chinese
authorities. Matsumoto observed that Japanese
companies in China tended to be unenthusiastic about
joining their own Chamber of Commerce because they saw
it as achieving little in the way of tangible benefits
in comparison to the costs involved in supporting the
organization. He added that being a member of the
Japanese Chamber could also make companies more
vulnerable to sanctions in the event should the Chinese
authorities focus again on the historical issues
related to Japan's actions in World War II. Stratford
indicated he would be interested in Seeing Amcham China
exchange views with members of the Japanese business
community in China.


12. (SBU) Recounting his most recent assignment as
director-general of the Foreign Ministry's Africa
Bureau, Otabe also noted that Japan was concerned about
China's foreign assistance and export credit policies.
Although China is not a member of the OECD and,
therefore, not bound by the guidelines of the
organization's Development Assistance Committee, there
is a possibility that Chinese export credit regime
could violate the WTO Subsidies Agreement, Otabe said.
The Japanese were currently studying this issue.


13. (C) Picking up on Otabe's remarks, Stratford
suggested that the Japanese government look for China-
related issues of concern both to government and to
industry where there might be WTO implications. This
could form the basis of joint litigation with the
United States in Geneva. When Otabe suggested using
WTO mechanisms, such as the specialized committees,
rather than the dispute settlement system to address
these issues, Stratford explained that the institutions
already in place such as the transitional review
mechanism and the trade policy review had not proven
particularly effective in moving the Chinese to address
our concerns. The Chinese simply avoid answering the
questions put to them and do not seem particularly
sensitive to "peer pressure" applied by other WTO
members. Dispute settlement, on the other hand, could
compel Chinese action, Stratford noted.

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14. (C) Otabe replied that big countries like China
and the United States itself were not particularly
vulnerable to peer pressure either in the WTO or in
other international organizations. Japan, while also a
large country, is, however, much more sensitive in this
regard, he affirmed. Nevertheless, Japan is also an
ally of the United States and together needed to find a
way to press China to abide by international standards,
Otabe observed. He posited that, in dealing with China
-- whose legal and other regulatory institutions
remained relatively undeveloped -- a medium to long-
term approach was needed, something that USTR, which
had to respond to short-term demands from Congress and
industry, might find difficult to adopt. Japan's goal,
he indicated, was to promote reforms in China that
would allow a "level playing field" for foreign
companies. Stratford explained that USTR was clear on
the structural reasons behind the U.S. trade deficit
with China but emphasized that it was vital to be tough
on those issues where real violations of China's WTO
commitments were evident in order to be credible with
the Chinese regarding U.S. resolve to hold China to
those commitments.


15. (C) Otabe affirmed that the United States and
Japan needed to approach China-related issues as
allies, despite their differences in approach. He
raised the possibility of official discussions on China
and other third country economic issues like those
underway on bilateral topics. He also reiterated that
a dialogue between U.S. and Japanese businesses might
help to develop a base of support for the Japanese
government to take action in the WTO on problems vis-a-
vis China. Stratford observed that USTR and other USG
agencies are increasingly dissatisfied with Japan's
approach, and that the United States would look very
closely at what Japan said as a third party in the
subsidies case against China in the WTO.

Comment
--------------


16. (C) Otabe and Matsumoto appeared to get the
message that U.S. patience with Japan's reluctance to
join the United States in WTO litigation against China
is wearing thin. Nevertheless, they brought little to
the discussion apart from reiterating longstanding and
well-known fears of Chinese retaliation against
Japanese business interests in China. With the
improvement in the political atmosphere with China seen
as one of Prime Minister Abe's few substantial
achievements during his time in office, there is little
enthusiasm in the Foreign Ministry to join in a U.S.-
led effort to compel China's adherence to its WTO
commitments through the dispute resolution mechanism.
The political price of a souring of Sino-Japanese
relations is simply too high, particularly with
sensitive Upper House elections looming in July. That
said, a low-key process to identify issues of strong
common interest to Japan and the United States where
Japan might take the lead -- although relatively slow
and labor-intensive -- could reap useful benefits.
However small or limited the case, once the Japanese
gain confidence that they can turn to the WTO in
dealing with China without cataclysmic political
repercussions, the chances of their joining with the
United States in cases more tied to U.S. interests will
rise substantially.


17. (U) AUSTR Stratford has cleared this message.
SCHIEFFER