METI REMAINS CAUTIOUS TOWARD U.S. APPROACH ON CHINA

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 001184

SIPDIS

SIPDIS

STATE PASS USTR FOR STRATFORD AND CUTLER

E.O. 12958: DECL: 03/16/2027
TAGS: ECON ETRD WTRO PGOV CH JA
SUBJECT: METI REMAINS CAUTIOUS TOWARD U.S. APPROACH ON CHINA


Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 (b/d).

Summary and Comment
--------------


1. (C) Assistant U.S. Trade Representative for China Tim
Stratford, in meetings with METI officials on March 9,
stressed that the U.S. "two track" approach of intensified
dialogue combined with a willingness to take China to dispute
settlement in the WTO had shown substantial progress. The
Japanese were uniformly cautious about pursuing litigation in
the WTO from worries over possible Chinese retaliation
against Japanese firms but seemed willing to explore the
possibility for greater cooperation with the United States.
As a first step, Stratford and METI Trade Policy Director
General Masakazu Toyoda agreed that it would be beneficial
for both the United States and Japan to exchange information
on what each saw as China's most significant WTO violations.
We believe this may be useful in helping Japan overcome its
self-imposed taboo on taking China to the WTO. (Stratford
met earlier with MOFA Economic Affairs Director General
Yoichi Otabe, which is reported septel.) End Summary and
comment.

Japan Should Adopt Two-Track Approach with China
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3. (C) AUSTR Stratford urged officials in two meetings on
March 9 at Japan's Ministry of Economy, Trade, and Industry
(METI) -- hosted separately by DG Toyoda and DG for
Multilateral Trade Tsunehiro Ogawa -- to consider adopting a
two-track approach to dealing with China similar to the one
the United States has adopted. Dialogue is critical, he
said, but so should be a willingness to use the WTO dispute
settlement mechanism when problems prove intractable. He
added that dispute settlement had proven an effective way to
"compartmentalize" differences and ensure that they not
become politicized. In both his METI meetings, Stratford
said that it was better to start engaging the Chinese now in
the WTO rather than wait five year when China would be
stronger and more aggressive on trade issues.


4. (C) DG Toyoda said he appreciated the U.S. approach,
while DG Ogawa was largely in listening mode. Toyoda quipped
that in the past five years Japan had had a "no-track
approach," but now Japan was reaching the stage where a
two-track approach may be better. The Trade Policy DG agreed
with Stratford's assertion that taking disputes to the WTO
may be the best way to avoid their politicization. Toyoda
described Japan's frustration in trying to engage Beijing on
disputes and getting little in return. However, he did note
a tariff issue that was resolved after Japan indicated it
would take the case to the WTO. He also said that the
Chinese were providing more information in the wake of
warming relations after PM Abe's visit to China. Stratford
noted that the U.S. willingness to use the WTO for dispute
settlement had made the dialogue half of the economic
relationship more efficient.

Subsidies Case - Japan In a Box
--------------


5. (C) AUSTR Stratford underscored the importance the United
States attaches to the case it took to the WTO in February
against China on subsidies. Japan should be every bit as
concerned as the United States. The Chinese government needs
to focus on domestic demand, and the subsidies in dispute are
distorting Chinese economic development. Toyoda, seemingly
uncomfortable with his talking points, said that Japan could
not join the United States in the case because it had not
been able to get the necessary information from the Chinese.
Stratford expressed puzzlement at the explanation, noting
that information about the subsidies is widely available;
"prohibited subsidies are prohibited subsides," and the case
is very clear. Even some Chinese experts, Stratford added,
share this view. "This was a lost opportunity for Japan."


6. (C) When Toyoda turned to a staffer for further
explanation of the GOJ position, the staffer noted that the
subsidies regulations were in Chinese and their experts were
unclear from the language as to whether the subsidies are

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provided automatically or at the discretion of the Chinese
government. Stratford quipped that he hoped when Japan
considers bringing cases against the United States in Geneva
that it shows the same exacting legal standards as it has
shown with Beijing. He added that the Chinese reaction to
the case so far has been fairly muted. In both his meetings
at METI, officials told Stratford that concern about
retaliation, particularly among some in Japanese industry,
has contributed to Japan's reluctance to go the WTO route.


Auto Parts - Appeasement Policy
--------------


7. (C) The U.S. auto parts case against China came up in both
of Stratford's METI Meetings. In the meeting led by Ogawa,
who is responsible for multilateral trade issues, Deputy
Division Director Kenichiro Urakami stated that the GOJ must
consider the practical impact of bringing a case to the World
Trade Organization. Although Japan has only signed on as a
third party in the case, Japanese auto companies operating in
China have reported subtle acts of retaliation such as
delayed issuance of permits. Japanese auto companies, he
said frankly, would prefer an "appeasement" policy.


8. (C) Urakami asked if the U.S. auto industry had
complained about the WTO case, an issue raised also in the
Toyoda meeting. Stratford said that they had not and that
the United States was disappointed that Japan only signed on
as a third party, since the intent behind the National
Development and Reform Commission (NDRC) rules was
specifically to target Japanese companies. The United States
brought this case to address a systemic problem in China,
which should be of bigger concern to Japan than the United
States, he said. Toyoda noted that METI had sought more
information from the Chinese on the case but had made no
progress. Toyoda's sense was that the Chinese were "engaging
in delaying tactics."


9. (C) Urakami said the GOJ is concerned about the NDRC's new
auto industry policy that limits investment and encourages
further development of Chinese-branded automobiles. Other
measures appear to be subtle subsidies for export vehicles.
China needs to be more transparent not only on auto issues
but also on issues such as transfer pricing taxes. Stratford
stated that the United States is also watching this situation
closely. The Chinese government is testing the limits of
China's WTO counterparts and watching which governments will
respond, Stratford said. This is all the more reason that
the United States and Japan should work closely together to
address China-related issues in the WTO.

IPR Case
--------------


10. (C) METI Division Director for WTO Compliance and
Dispute Settlement, Naoshi Hirose, asked Stratford about the
status of bringing IPR and market access cases to the WTO for
resolution and how the Strategic Economic Dialogue with China
may affect this issue. Stratford explained that the United
States is working hard to make authorities in Beijing
understand that bringing a case to the WTO is not a hostile
action but rather a constructive one. It allows the parties
to isolate problems and not have them spill over to other
parts of the relationship.


11. (C) Hirose said that, while he appreciated the rationale
behind the two-track approach, he wondered if China may
suspend the dialogue part and simply wait for the United
States to go to Geneva. He also asked how, if the United
States brings a case to the WTO, it would be handled in the
SED? Stratford replied that the SED discusses IPR in the
context of innovation. It is possible the Chinese would
decide not to participate in future dialogues if a case is
brought to Geneva, but this would be counterproductive
because it would stop efforts in many other areas. He
dismissed the general concerns about retaliation raised in
both METI meetings as not having been justified by the
experience so far.


12. (C) The Chinese have no systemic way to deal with IPR

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infringement, Stratford underscored with Hirose. The United
States continually urges the GOC to take concrete steps to
ameliorate the situation but the GOC has refused to do so.
The GOC has even refused to cooperate with the IFPI optical
disk forensic center, saying it has "no authority" to compel
optical disk manufacturers to provide disks to the
organization that could later be used to determine which
factory was producing pirated goods. Because of the lack of
progress on IPR issues, Stratford predicted that the United
States would likely bring a case to the WTO "soon," and urged
the GOJ to rethink its approach to this case. He told Toyoda
that IPR enforcement to date had been scant, while penalties
on those rare cases where convictions are obtained have not
measured up to the crimes committed.

Nonferrous Metals
--------------


13. (C) METI Deputy Director of the Nonferrous Metals
Division, Kazunori Fukuda, said that the GOJ is increasingly
concerned about export controls China is applying to
non-ferrous metals. China controls 93 percent of the world's
rare earths used in such things as mobile phones, PCs, and
defense items. While world demand for rare earths is
expected to increase at ten percent a year, China is
decreasing its exports. When Japan has expressed its
concerns, China has declined to discuss the matter. Fukuda
said China's policies were not WTO/GATT consistent and Japan
would like to work with the United States to resolve this
issue. Stratford replied that the United States shares this
concern and would welcome any information, data or legal
analysis Japan has. On a broader level, the United States
and Japan need to identify more common interests and areas of
cooperation. DG Toyoda agreed, and said that perhaps it
would soon be Japan's turn to play a leading role in bringing
a WTO case against China.

Currency Manipulation
--------------


14. (C) Toward the end of their meeting, Toyoda asked
Stratford what he thought of the currency issue in China: How
did the United States assess the strength of the renminbi
from a WTO legal standpoint? Stratford answered cautiously,
noting that USTR did not have the lead on currency issues and
was not actively pursuing this issue from a WTO perspective.
He commended a very interesting speech that touched on the
subject that Federal Reserve Board Chairman Bernanke recently
delivered. Toyoda said he thought Beijing's policies to keep
the renminbi undervalued were "distorting China's economic
structure." Measures to address the trade imbalance, while
China's currency remains undervalued, "don't help," Toyoda
asserted.

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


15. (C) It's not likely that we will see any discernible
shift in Japan's approach toward China any time soon. AUSTR
Stratford's meetings showed how cautious the Japanese remain
about using WTO dispute settlement. The Trade Ministry
bureaucrats continue to keep their fingers to the wind to
measure where Japan's business community is. The Foreign
Ministry counterparts of Stratford's METI interlocutors
displayed similar inclinations to let the Japanese business
community take the lead in shaping GOJ policy. DG Toyoda,
for his part, was the most forward leaning of Stratford's
interlocutors, conceding that Japan's trade diplomacy with
China had not been very effective. His apparent readiness to
exchange information on what the U.S. and Japan consider
China's most significant WTO violations could be a useful
step in building Japan's confidence to take China to the WTO.
However, until such time as the Japanese identify an issue
of such vital interest to their industries that they feel
compelled to take the case to the WTO -- and feel confident
both of the prospects for victory and of U.S. support -- they
will likely continue their current policy: talking to China
while basically free-riding on Washington's WTO coattails.
SCHIEFFER