ASSESSMENT OF BARRIERS TO TRADE AND INVESTMENT BETWEEN THE EU AND JAPAN FINAL REPORT 2 COLOPHON Author: Eva R. Sunesen, Joseph F. Francois and Martin… [628714]
1
ASSESSMENT OF BARRIERS TO TRADE
AND INVESTMENT BETWEEN THE EU
AND JAPAN
FINAL REPORT
2
COLOPHON
Author: Eva R. Sunesen, Joseph F. Francois and Martin H. Thelle
Client: DG Trade
Date: Final report delivered on 30 November 2009
Contact: SANKT ANNÆ PLADS 13, 2nd FLOOR | DK-1250 COPENHAGEN
PHONE: +45 7027 0740 | FAX: +45 7027 0741
WWW.COPENHAGENECONOMICS.COM
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Preface………………………………………………………………………………………………………… ……..5
Summary ………………………………………………………………………………………………………… ….6
Chapter 2 Introduction …………………………………………………………………………………..14
2.1. Structure of the report……………………………………………………………………………….14
2.2. What do we mean by “n on-tariff m easures”?……………………………………………….15
Chapter 3 Current EU-Japan Trade ………………………………………………………………….18
3.1. EU-Japan trade …………………………………………………………………………………………18
3.2. Import penetration in Japan is low ……………………………………………………………..19
3.3. Japan is losing importance as destination for EU expo rts……………………………….22
3.4. Composition of EU -Japan tr ade …………………………………………………………………24
3.5. Tariffs ar e low ………………………………………………………………………………………….28
3.6. Other indicators of trade op enness……………………………………………………………..31
3.7. Conclusion: A Japane se conund rum …………………………………………………………..35
Chapter 4 Non-tariff measures in Japan ……………………………………………………………37
4.1. Identified NTMs in Japan………………………………………………………………………….37
4.2. EU exporters perceive Japan to be a diffic ult mark et…………………………………….42
4.3. Regulatory environment is the most impo rtant NTM ……………………………………45
4.4. Selection of sect or stud ies ………………………………………………………………………….47
Chapter 5 Quantification of NTMs ………………………………………………………………….50
5.1. Three methods for esti mating good s NTMs ………………………………………………..50
5.2. Results of direct cost estimates (m ethod 1)…………………………………………………..52
5.3. Results from gravity modelwit hout NTM index (method 2) …………………………..58
5.4. Results from gravity modelw ith NTM index (method 3)………………………………..64
5.5. Comparison of trade cost equivalents fo r goods……………………………………………64
5.6. Gravity estimates for serv ices ……………………………………………………………………..65
Chapter 6 Model simulations ………………………………………………………………………….68
6.1. The model and th e scenar ios……………………………………………………………………..68
6.2. Impacts on bila teral tr ade ………………………………………………………………………….74
6.3. Global trade effects …………………………………………………………………………………..77
6.4. Output effe cts…………………………………………………………………………………………..79
6.5. Overall welfar e effects……………………………………………………………………………….81
6.6. Alternative baselines………………………………………………………………………………….84
6.7. Systemic cons ideratio ns …………………………………………………………………………….85
6.8. Conclusion: The merits of EU-J apan trade liber alisation……………………………….86 TABLE OF CONTENTS
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Chapter 7 Other Non-Tariff Measures ……………………………………………………………..88
7.1. Public procurement i ssues in Japan…………………………………………………………….88
7.2. Competition issues in Japan……………………………………………………………………….92
7.3. Intellectual property righ ts issues in Japan………………………………………………….101
7.4. Summary of other NT Ms in Ja pan ……………………………………………………………103
Chapter 8 Barriers to FDI in Japan…………………………………………………………………104
8.1. Identified barriers to FDI in Japan ……………………………………………………………105
8.2. What is being done to increase FDI inflow s?……………………………………………..108
8.3. Effects of reducing barriers to FDI ……………………………………………………………112
References……………………………………………………………………………………………………… .113
Appendix 1: Methodology to quantify Europ ean NTMs…………………………………………119
Appendix 2: Gravity model me thodologies an d results ………………………………………….122
A2.1 Gravity model for manu facturing goods …………………………………………………….122
A2.2 Gravity model fo r servic es………………………………………………………………………..125
Appendix 3: The inventory of Japanese NTMs……………………………………………………..132
Appendix 4: Business survey s on Japanese NTMs ………………………………………………..142
A4.1 Business survey for manu facturing se ctors………………………………………………….142
A4.2 Business survey for fi nancial se rvices…………………………………………………………155
Appendix 5: CGE model……………………………………………………………………………………165
Appendix 6: Pharmaceutical s sector st udy……………………………………………………………174
Appendix 7: Medical de vice sector study …………………………………………………………….188
Appendix 8: Processed f oods sector study ……………………………………………………………210
Appendix 9: Motor vehi cle sector study ………………………………………………………………224
Appendix 10: Transport equi pment sector study……………………………………………………236
Appendix 11: Financial serv ices sector study ……………………………………………………….240
Appendix 12: Communication serv ices sector study ……………………………………………..254
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This report entitled
“Assessment of barriers to trade and investment between the EU and
Japan” has been prepared for the European Commission, DG Trade, by Copenhagen
Economics A/S under the framework contract (TRADE/07/A2).
Copenhagen, 30 November 2009 Martin H. Thelle (Project Manager)
Final report delivered on 30 November 2009
Published on 3 February 2010
Disclaimer:
This report was commissioned by DG Trade (European Commission) and prepared by Copenhagen Economics. The views and opinions expressed in this report are not necessarily shared by the European Commission. PREFACE
6
Assessment of barriers to trade and
investment between the EU and Ja-
pan
The EU and Japan are impor-
tant trading partners
The EU and Japan are the largest and
third largest economies in the world re-
spectively. They respectively account for
33 percent and 11 percent of world GDP, and 17 percent and 6 percent of
world trade.
Japan has a strong export orientation,
with the ratio of exports to GDP stand-
ing at 15 percent, compared to 10 per-cent in the EU. However, the domestic
market in Japan is less open to imports
than the EU market. Imports as a share of domestic demand reach 17 percent in
the EU and only 6 percent in Japan.
This low import penetration is spread out fairly evenly across most sectors.
The EU has a stronger presence in the world market for services, with the ratio
of trade in services to GDP standing at
7.6 percent compared to 6.3 percent for Japan. The EU (4.1 percent) has a no-
tably stronger export orientation for ser-
vices than Japan (2.9 percent).
The bilateral trade relationship between
the EU and Japan is important for both economies. For the EU, Japan is ranked
fourth among its import partners (6 per-
cent of EU imports) and fifth among its export destinations (4 percent of EU ex-
ports). Conversely, for Japan, the EU is
ranked third import partner (10 percent
of imports) and also third export part-
ners (15 percent of exports), after the US and China.
However, bilateral trade volumes are not as large as they could be. EU exports to
Japan as a ratio of Japan's GDP is less
than 2 percent, considerably below the ratio in the EU's other main markets
such as the US, China, Korea or India.
Moreover, bilateral trade has been de-
clining in relative importance in recent
years. This is to a large extent due to macro-economic developments. Emerg-
ing market economies in Asia and
Europe have been growing fast over the last decade, faster than the EU and Ja-
pan's economies. Rapid regional trade
integration has also played a role. In Europe, Russia and Turkey have be-
come major trading partners of the EU.
In Asia, China and Korea have become Japan's most important partners. As a
result, emerging markets account for an
increasingly larger share of global trade in goods.
Still, a decline in the relative importance of bilateral trade between the EU and
Japan should not necessarily be equated SUMMARY
7
with low economic potential in the bilat-
eral trade relationship. This report ar-
gues that there is considerable unrealised
economic potential to revitalise bilateral trade.
Measuring NTMs
It is often assumed that, because of al-ready low MFN tariffs between mature OECD economies, trade policy has little
economic potential to offer. Average
MFN tariffs are indeed low in the EU and Japan (3.8 percent on both sides).
The study shows that there are still sig-
nificant gains to be made from eliminat-ing tariffs. However, most of the poten-
tial economic gains reside in the reduc-
tion of trade costs associated with non-tariff measures (NTMs).
NTMs are not necessarily barriers to trade. They cover all non-tariff and non-
quota measures that affect the cost of
trade, such as the regulatory environ-ment, technical regulations and stan-
dards, and differences in procedures for
conformity assessment. While the trade cost of a tariff is straightforward, the
trade cost of NTMs is not easy to esti-
mate and may vary according to the measurement method and data used.
To reduce the uncertainty linked to
NTM measurement, this study com-bines several NTM estimation methods
and data sources:
1. Direct estimation of trade costs for
EU exports to Japan, based on sur-
vey replies from EU firms operating in Japan
2. Estimation of NTM-linked trade
costs for imports into the EU, based on a separate industry survey. 3. Estimation of NTMs in manufactur-
ing and services sectors in the EU and Japan using gravity models.
Most attention in this study goes to the
identification and trade cost estimation of NTMs in key sectors in Japan. An
inventory of 231 NTMs in Japan from
existing reports provided a platform for this study. Furthermore, a survey has
been conducted of about 120 European
firms exporting to and operating in seven key sectors in Japan, to gauge the impor-
tance of these NTMs for their business
and estimate the impact on their costs. These seven sectors cover the bulk of
EU exports to Japan: automotive,
pharmaceuticals, medical devices, proc-essed foods, transport equipment, tele-
coms and financial services.
Three quarters of these firms perceive
the Japanese market as more difficult
than other markets. This is due to dif-ferences in consumer preferences and
language barriers, but also to technical
standards and regulatory issues. For two thirds of these firms, these barriers re-
duce the variety of goods they supply to
the Japanese market. It also increases the cost of exporting to Japan by 10 to
30 percent, depending on the sector.
While Japanese consumers benefit from getting goods that are adapted to their
preferences, they are also paying a price
for many of these NTMs. Non-tariff measures imply higher prices for im-
ported goods, and reduce the variety of
products being offered to consumers.
The trade costs estimates of NTMs on
the EU side have been taken from a previous study on transatlantic trade be-
8
tween the EU and the US1 . These esti-
mates are based on a survey of firms ex-
porting to the EU and their perceptions
of the trade obstacles induced by NTMs. Surveys can help to bring NTM trade
cost estimates in line with the percep-
tions of firms doing the actual interna-tional trade operations.
The third NTM estimation method uses more traditional gravity modelling tech-
niques without the additional informa-
tion supplied by firm-level surveys. This was applied mainly for the services sec-
tors where trade data constraints and the
absence of survey information left no other option. Gravity estimates in goods
sector were also used as a control meas-
ure to check the validity of survey-based results. The study made a conservative
selection and uses the lowest NTM val-
ues.
Reducing the cost of NTMs
Besides estimating the trade cost equiva-
lent of NTMs, the study also investigates
the extent to which NTMs can actually be reduced or eliminated. It does not
judge whether NTMs are good or bad.
Unlike tariff barriers that can be fully eliminated, regulatory measures can not
just be abolished. They may have a le-
gitimate purpose. They facilitate trade by setting common rules and standards, and
enhance consumer welfare by protecting
against health and safety risks. At the same time, rules may impose higher
costs on foreign producers than strictly
necessary to comply with the standards and regulations. Other rules may offer
1 "Study on non-tariff measures to EU-US trade
and investment", final report by Ecorys BV for DG Trade, December 2009. few benefits to consumer but restrict in-
ternational competition and thereby
benefit domestic producers. This study
distinguishes between consumer welfare benefits and producer rents generated by
NTMs. Regulatory heterogeneity be-
tween countries induces trade cost. Seeking alignment on international stan-
dards or convergence between different
regulatory systems may reduce trade costs.
The measurement of the potential for NTM reduction is also to a large extent
based on survey data, often comple-
mented with expert opinions. Steps that could be taken to reduce the
cost of specific NTMs in the sectors
covered by the Japan survey, are sum-marized below.
Potential gains from further
trade opening
The study examines the trade and eco-
nomic impact, both for the EU and Ja-
pan, of dismantling all tariffs on goods,
including agriculture, and reducing the cost of NTMs. Because of uncertainty
regarding the level and possible reduc-
tion of NTMs, minimum and maximum NTM reduction scenarios are tested.
The sensitivity of the results with respect
to a conclusion of the Doha Develop-ment Round is also examined.
The trade simulations show that EU ex-
ports to Japan could increase by 23 per-cent or €14 billion if tariffs were abol-
ished, including tariffs in agriculture and
without taking into account tariff reduc-tions from a successful Doha round.
The largest gains from tariff dismantling
would occur in agricultural and proc-essed foods exports. However, EU ex-
9
ports could increase by almost 50 per-
cent or €29 billion if the cost of NTMs
in Japan were reduced to the fullest pos-
sible extent. The largest trade gains from NTM reduction occur in the
chemicals (incl. pharmaceuticals) sector,
followed by motor vehicles and medical equipment.
Conversely, Japan’s exports to the EU
would increase by nearly 30 percent or €25 billion as a result of tariff disman-
tling in the EU. By far the largest gains
would occur in motor vehicles exports (€16 bn). Completion of the Doha-
round would reduce the impact of re-
moving bilateral tariffs on motor vehicles by half. Japan's potential gains from
maximum NTM reduction in the EU
are estimated at 32 percent or €28 bil-lion. Here the gains are also mostly gen-
erated in the motor vehicles sector, fol-
lowed by chemicals and electronics goods.
The combination of both bilateral elimi-nation of tariffs and the reduction of
non-tariff measures would be beneficial
to firms and consumers in both econo-mies and economic welfare will increase
by €33 billion in the EU and €18 billion
in Japan. A third of the benefits for the EU come from tariff dismantling, the
rest from NTM reduction. For Japan,
the vast majority of benefits are pro-duced by NTM reduction.
Summary of impact
EU Japan
Export effects :
– Tariffs + €14 bn + €25 bn
– NTMs + €29 bn + €28 bn
Welfare effects + €33 bn + €18 bnNote : in € billion per year
Source : See chapter 6.
Simulations show that the overall bene-
fits from bilateral tariff and non-tariff re-ductions would not be significantly lower
in the event of a successful conclusion of
the Doha Round, although impacts will be reduced in some sectors, if Doha is
completed prior to a bilateral EU-Japan
trade opening. Benefits could increase to the extent that some NTM reductions
are by nature on an MFN basis, rather
than preferential, and would thus affect all trading partners. The potential gains
from increased EU market access in Ja-
pan for public procurement, railway equipment and aircraft have not been
quantified in the scenario simulations
but could also significantly increase the above figures.
The simulations show that the trade ef-fects on other trading partners as a result
of bilateral tariff and preferential NTM
reductions between the EU and Japan will be negative but small (-€6 billion).
Global welfare will increase as a result
bilateral EU-Japan trade opening.
What actions are needed to
achieve these benefits?
The report is novel in its quantification
of the impact of NTMs. It addresses
NTMs in seven sectors in Japan and identifies the possibilities for reducing
these NTMs. The main findings are:
EU pharmaceutical exports to Japan are
severely impeded by a complex and
costly regulatory environment.
10
Non-recognition of foreign clinical
data adds to the cost of serving the
Japanese market.
The approval process for market-
ing new medicines in Japan is slow
and overly burdensome. Introduc-
tion of new medicines is delayed for two to three years. This allows
Japanese firms to develop compet-
ing products and narrow down the innovative advantage of EU pro-
ducers.
Finally, the reimbursement rules in
Japan provide inadequate incen-
tives for the introduction of new
and innovative medicines.
According to survey-based estimates,
these factors increase the cost of EU
pharmaceutical exports to Japan by 22 percent. As a result, EU pharmaceutical
exports to Japan have grown much more
slowly than in other markets. Subse-quently, Japanese patients and consum-
ers are paying the price for costly and
delayed access to the best medicines.
These NTM costs could be reduced to
just 2 percent. In this case, EU pharma-ceutical exports would increase by 60-
100 percent, corresponding to additional
exports of up to €3.4 billion a year.
The EU’s export of medical devices is
also being restrained by the costly and cumbersome process of launching new
products on the Japanese market.
Development costs for EU medical
device producers are increased by
requests for additional clinical trials
from the Japanese authorities.
Excessive Japanese standards and
regulatory requirements result in a
significant device lag, and a large number of medical devices are not
even being submitted for approval
in Japan.
The pricing and reimbursement
system creates disincentives for in-
troducing new and innovative
products on the Japanese market.
According to our survey-based estimates,
EU exporters of medical devices face an
extra cost of 30 percent compared to their Japanese counterparts. As a result,
EU producers are unable to respond to
the increased demand for medical de-vices caused by Japan’s aging population.
To reduce the entry barriers to the Japa-nese market will require the Japanese
authorities to speed up and streamline
the medical device certification process by accepting clinical trial data produced
in the EU and by harmonising its GCP
guidance with international standards. Alternatively, Japan could adopt the EU
SDoC
2. Furthermore, Japan could also
review the Foreign Average Price rule.
Targeting these issues would reduce
Japanese NTMs to 18 percent. It is im-portant to note that neither of these
steps will require changes in the regula-
tory requirements in terms of the safety and efficacy of the devices.
If this reduction is achieved, EU exports of medical devices to Japan could in-
crease by €1.1 billion – up by 51 percent.
For processed food the combination of
differences between EU and Japanese
standards and technical requirements as well as cumbersome border procedures
2 Suppliers' Declaration of Conformity.
11
results in high costs for EU exporters.
Since these costs are independent of the
export volume, the result is important
entry barriers (thresholds) to the Japa-nese market.
The limited number of permitted
food additives in Japan and un-aligned standards between the EU
and Japan increases costs and pre-
vent EU exporters from utilising scale effects.
High conformity costs are incurred
because Japanese authorities do not accept evaluations made by the
EU or international bodies.
Food safety is a high priority in Japan and the combination of Japanese stan-
dards and technical requirements results
in an extra cost of 25 percent for EU ex-porters. As a result, the number of goods
that EU producers can successfully ex-
port to Japan is seriously limited.
The market potential for European ex-
porters would be greatly enhanced by:
Harmonising Japanese legislation
to international standards with re-
spect to re-dating, labelling and nu-tritional standards.
An agreement by Japan to substan-
tially increase the list of permitted additives.
Introducing mutual recognition of
conformity assessment procedures which get rid of the duplicate costs
of evaluations imposed on EU ex-
porters.
Together, targeting these barriers will
reduce Japanese NTMs to 16 percent.
Our model simulations show that EU exports of processed foods will increase
by 7 to 24 percent if these barriers are reduced. Overall, food exports to Japan
could increase by up to €1.1 billion.
The EU holds a strong position in the Japanese market for imported motor ve-
hicles but Japanese import penetration is
remarkably low compared to other OECD countries. The barriers encoun-
tered by EU motor vehicle producers in
Japan are mainly TBTs related to emis-sions, safety and noise standards. These
barriers cause extra development and
production costs for EU exporters.
The Japanese TRIAS regulation
requires special testing on emis-
sions and durability of exhaust sys-tems. This causes delays in approv-
als which are particularly serious
for innovative products.
The Japanese regulations regarding
steady running noise and proximity
stationary noise levels are not har-monised with UN-ECE standards.
Japan is introducing new safety
standards that are not present in the UN-ECE.
According to our survey estimates, EU exporters of motor vehicles pay an extra
cost of 10 percent. EU producers there-
fore face a serious disadvantage since the high costs of NTMs fall disproportion-
ately on exporters compared to Japanese
producers.
To reduce the barriers to the Japanese
market will require the Japanese authori-
ties to streamline and simplify the certifi-cation process and find procedures for
revisions of standards and technical
guidelines to better accommodate inno-vative products. Most importantly, Japan
should adopt international or UN-ECE
12
standards, particularly those regarding
emission, noise and safety. In many
cases Japan has agreed to do so but has
not yet implemented much of the neces-sary legislation.
Targeting these issues would reduce Japanese NTMs to 3 percent. If this re-
duction is achieved, EU exports of mo-
tor vehicles to Japan could increase by up to €4.7 billion, or by up to 84 per-
cent.
The EU export of transport equipment ,
which mainly consists of aircraft and rail
equipment, is also reduced by procure-
ment rules and NTMs in Japan. We as-sess a potential for an additional €2.6 bil-
lion export from these sectors.
In the services sectors , we find substan-
tial barriers, but also very limited
amounts of cross-border trade. The
gains from removing barriers to cross-border service trade with Japan would
have small impact. We have assessed the
potential for financial services and tele-communication, and note a potential in-
crease of 10-20 percent, but starting
from a very small base.
We have also quantified the impact of
reducing the costs of border procedures
and introducing more competition in Ja-
pan’s distribution services, which would
provide gains in itself, but also facilitate market access for most goods sectors.
There are also barriers in other sectors
(e.g. chemicals, wood products and
metal products), and substantial NTMs
can be removed here as well. These have not been quantified in detail in this
report.
Barriers to Investment
Aside from being low on imports, Ja-
pan's economy is also running on very low foreign direct investment (FDI) in-
flows. The Japanese government has
recognised this problem and has pro-
posed measures to address it. These are mainly structural barriers, rather than
protectionist measures. Trade agree-
ments may have only an indirect impact on this. Reforms are required in corpo-
rate governance and mergers and acqui-
sitions. Furthermore, the rules reducing the restrictions in triangular mergers are
also important.
Need for more competition
Some of the problems for market access
in Japan are due to weak competition.
Regulation in telecoms, in the financial
sector and in distribution, for instance, gives a strong advantage to the incum-
bents, who are often in a dominant mar-
ket position. In some cases, informal ar-rangements between trading houses may
also make market access difficult. Com-
petition policy rules as well as enforce-ment would need to be strengthened to
facilitate foreign competition, through
the privatisation of Japan Post or in tele-communications, for example. While
clauses to reinforce competition in do-
mestic markets are not normally part of trade agreements, such measures could
considerably increase the potential for
EU-Japan trade.
Public procurement market in
Japan can open further
The potential for opening up Japan’s
public procurement market further has
been quantified at €74 billion, which is
the estimated value of Japan’s deroga-tions from the coverage of the Govern-
ment Procurement Agreement (GPA).
Of course, EU firms will not win all of these contracts, but they gain access to
compete for the market. There are mar-
13
ket access issues in railways equipment
and aircraft, and we assess that EU ex-
ports to Japan in these sectors could in-
crease by €2.6 billion.
How to realize these potential
economic gains?
The EU-Japan economic and trade rela-
tionship could be strengthened by an
elimination of tariff barriers and a sig-
nificant reduction in the trade costs of non-tariff measures and other barriers,
for instance in public procurement. The
on-going Regulatory Reform Dialogue is making slow progress. The Mutual Rec-
ognition Agreement has brought some
progress for a limited number of sectors. Some suggest that this could be acceler-
ated by negotiating a comprehensive bi-
lateral agreement to help stimulate bilat-eral trade and investments. Some Euro-
pean exporters who face tough regula-
tory and non-tariff measures in Japan, including stringent standards and testing
for consumer goods, argue that a bilat-
eral agreement will help remove obsta-cles to trade and also ease strict and
complex Japanese rules and regulations
which currently stifle European invest-ments in the country.
Japan (which is actively negotiating FTAs with its Asian neighbours) is thought to be interested in an FTA agreement with
the European Union. Among other
things, several Japanese industries would
like access to European markets to be on par with their Asian neighbours.
Difficulties associated with
reducing NTMs
Japanese NTMs must be reduced to en-
sure that the EU gains from an EU-
Japan negotiation. Tackling these NTMs poses some challenges however, espe-
cially between two highly developed
economies like Japan and the EU that have extensive and sophisticated domes-
tic regulatory regimes in place. First, tar-
iffs are measurable whereas NTMs are harder to quantify; that makes negotia-
tions less transparent. Second, tariffs are
bilateral whereas reductions of NTMs are often multilateral; other countries
may free-ride on the benefits of NTM
reduction. Third, NTM reductions are difficult without domestic reforms and
could entail domestic regulation issues
that are not normally negotiated within a bilateral trade framework, or that could
easily be circumvented through new
domestic regulation. It would require strong political will and administrative
creativity to come to an agreement on
meaningful NTM reductions.
14
The purpose of this study is to assess the econ omic impact of existing barriers to trade in
goods and services between the European Unio n and Japan. Special attention is given to
quantifying the impact of non-tariff measures.
The report complements earlier studies on EU-Korea, EU-US and EU-Canada trade rela-
tions commissioned by the Euro pean Commission. Using a similar analytical framework,
this report focuses on the barriers to bilate ral trade and investment between the EU and
Japan.
Tariff barriers are generally low, though there are exceptions for specific goods. Still, the
trade volume is large and significant gains from tariff reductions can be expected. How-
ever, non-tariff measures (NTMs), or regulatory issues, constitute a more important obsta-
cle to EU-Japan trade. NTMs on the EU side have already been examined extensively in
these earlier studies. The present report theref ore looks more extensively at regulatory ob-
stacles faced by EU firms exporting to Japa n. The overall economic analysis again com-
bines both sides of the tariff and NTM picture to estimate the overall benefits of a bilateral
reduction in barriers to trade.
For the purpose of this report, we have unde rtaken three main activities. We have exam-
ined the sector barriers in Japan, conducted new and detailed gravity model analyses of
trade flows with Japan, and undertaken both in-depth interviews and detailed question-
naires of non-tariff measures (NTMs) as percei ved by EU firms in Japan. This has contrib-
uted to a quantification of the trade costs of NTMs in Japan, and helped to clarify to what
extent these can be reduced. The economic and trade impact of a bilateral reduction in tar-
iff and NTMs, both in Japan and in the EU, ha s been assessed using a computable general
equilibrium model (CGE) of global trade.
2.1. STRUCTURE OF THE REPORT
Chapter 3 describes the current EU-Japan tr ade flows, and Chapter 4 describes the non-
tariff measures identified in Japan. In Chapte r 5 we quantify the impact of selected non-
tariff measures on the cost of EU exports to Japan, and we use econometric models to es-
timate so-called trade cost equivalents. We th en move on to Chapter 6 to present how re-
ductions of these costs would impact on trade flows, production output and consumer wel-
fare.
In Chapter 7 we discuss the impact of some of the non-tariff measures that have not been
quantified using our model, namely public pr ocurement, intellectual property rights and
competition policy. These are issues that have significant impact on EU-Japan trade rela-
tions. In Chapter 8 we discuss the reasons for th e lack of foreign direct investment in Japan
and present the actions taken by several Japane se governments to attract foreign direct in-
vestment to the country.
Chapter 2 INTRODUCTION
15
The report has 12 appendices. The first five contain technical details about methodology.
Appendix 1 to 4 describes the method we use to quantify European and Japanese NTMs.
Appendix 1 describes the methodology used to quantify European NTMs. Appendix 2
provides technical details about the applied gravity models and their results. Appendix 3 presents the full inventory of Japanese NT Ms and Appendix 4 gives background on the
business survey on Japanese NTMs. Together they provide new information about the
barriers facing European exporters in the Ja panese market. Appendix 5 describes simula-
tion model (CGE-model) that we apply in order to calculate the trade and welfare effects of
trade liberalisation scenarios.
Appendix 6 to 12 contains seven detailed sector analyses of Japan’s non-tariff measures.
These include pharmaceuticals (Appendix 6), medical devices (Appendix 7), processed
foods (Appendix 8), motor vehicles (Appendix 9), transport equipment (Appendix 10), fi-
nancial services (Appendix 11) and communication services (Appendix 12). Each of the
sector analyses can be read independently and contain policy recommendations and simu-
lation results.
2.2. WHAT DO WE MEAN BY “NON-TARIFF MEASURES ”?
For the purposes of this study, the terms of reference define ‘non-tariff measures’ as “ all
non-price and non-quantity restrictions on trad e in goods and services. This includes bor-
der measures (customs procedures etc.) as well as behind-the border measures flowing
from domestic laws, regulations and practices). ” This implies that in this study we use the
term “non-tariff measures” (NTMs) to cover the following seven categories:
1. Standards, technical regulations and conformity assessment (e.g. technical
specifications, testing and certification)
2. Border procedures (e.g. customs procedures)
3. Distribution restrictions (e.g. seap ort and airport, secondary dealers)
4. Pricing and reimbursement rules (e.g. in selling to public clients)
5. Public procurement issues (e.g. legal framework, market access restrictions)
6. intellectual property rights (e.g. copyright, trademark, patents)
7. Other non-tariff measures
The types and importance of NTMs within each group varies significantly from sector to
sector. Border procedures, for example, are more important for exporters of perishable
food products, while pricing and reimbursem ent rules are a major concern for pharmaceu-
tical and medical device exporters.
Overall, divergent
standards, technical regulations and conformity assessment procedures
can be said to be the single most importan t type of NTMs, increasing the complexity and
uncertainty of doing business and generating costs. Throughout this report we use the
16
WTO definitions of standards, technical re quirements and conformity assessment re-
quirements, cf. Box 2.1.
Box 2.1 Standards, technical requirements and conformity assessment requirements
The definition of standards and technical requirements follows the WTO definition of standards and tech-
nical regulations. These are documents approved by a recognised body providing for common and repeated
use, rules, guidelines, or characteristics for products or related processes and production methods. This covers
both standards where compliance is not mandatory (i.e. voluntary standards) and t echnical regulations where
compliance is mandatory (i.e. government mandated standards, or standards in regulations).
The definition of conformity assessment requirements follows that of the WTO. This covers any procedure
used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are
fulfilled. They consist of activities su ch as certification, testing, quality system registration, and inspection.
They also comprise procedures for sampling, evaluation, verification, assurance of conformity, registration,
accreditation, and approval, as well as their combina tions. They are either vol untary or mandatory. A volun-
tary conformity assessment woul d have the purpose of assessing comp liance with a voluntary standard; a
mandatory conformity assessment is required in orde r to attest compliance with mandatory requirements,
stipulated in technical regulations.
Source: WTO Agreement on Technica l Barriers to Trade, Annex 1.
Recognition of potentially welfare-enhancing effects of NTMs
All types of regulations affecting international trade flows can be broadly defined as non-tariff measures. The term “non-tariff measur es” has gradually replaced the previously
widely accepted term “non-tariff barriers”. Th e use of the term “meas ures” instead of “bar-
riers” is intended to emphasise the dual natu re of regulation as discussed in Laird and
Yeats (1990). On the one hand, NTMs can di scriminate against imports and be trade-
restrictive, as defined by Baldwin (1970), Hi llman (1991), and others. On the other hand,
NTMs can also be welfare-improving, provid ing consumers with additional, otherwise un-
available information, and thus overcoming imperfect/asymmetric information problems
(see, for example, Bureau et al., 1998, 2001; Movchan, 1999, Disdier et al., 2008). This
dual nature of the NTMs is typical for sani tary and phyto-sanitary measures (SPS), and
technical barriers to trade (TBT).
Special attention to regulatory barriers
The most important NTMs encountered by EU firms exporting to Japan, and probably
also by Japanese firms exporting to the EU, re late to the regulatory environment in their
destination markets: the regulations in Japan are often different compared to those of the
EU. When we say “regulatory environment”, we mean the standards, technical regulations
and conformity assessment procedures in place.
The fact that differences in the regulatory environment generate trade costs and hinder
competition is not necessarily an argument fo r their removal. Governments impose regula-
tion to protect the health, safety and well-bein g of citizens and the environment as well as
to facilitate market transactions. The main prob lem with NTM liberalisation is that it is dif-
ficult to know whether a particular norm serves public interests or protectionists’ interests,
and, indeed, both motives are often found within a single NTM.
17
As pointed out in Baldwin (2000), NTMs ofte n result from norms, regulations and stan-
dards that control the sale of goods in a part icular market by specifying required product
characteristics or production processes.3 There are two distinct aspects of this: content of
the norm and conformity assessment procedures necessary to demonstrate that a product
complies with the norm. We examine both types of NTMs in this study.
It is useful to distinguish between tw o subtypes of content-of-norm NTMs, horizontal and
vertical . Vertical NTMs involve norms that can readily be characterised as being more or
less stringent about the quality of a product or service. Higher quality increases consumer
welfare. Horizontal NTMs cannot be said to be more or less stringent – norms are just dif-
ferent and do increase consumer welfare; they just increase the cost of a product. Horizon-
tal norms are probably more common. Many NT Ms arise when a national or sub-national
government adopts the specificat ions of the local firm’s differ entiated product as its norm.
3 According to common usage, regulations ar e mandatory, while standards are voluntary .
18
This chapter examines current bilateral trad e in goods and services between the EU and
Japan. It shows that import penetration in Ja pan is generally lower than in the EU. More-
over, Japan has gradually been losing its positi on as one of the top destinations for EU ex-
ports.
The factors holding back Japanese imports in general, and imports from the EU in par-
ticular, are divided into two: First those fact ors which cannot be affected by trade policy,
such as the remoteness of the Japanese market , the large size of the Japanese market and
various cultural and linguistic barriers. Japan’s macro-economic structure, with high savings
and consequently smaller consumption compared to GDP also reduces potential import penetration. Second are those factors which ca n be influenced by policies. These include
both tariffs and non-tariff measures. Our a ssessment shows that the former dominates.
We find that tariffs are low and that there are few
de jure restrictions on trade. Factors such
as distance and language differences provide some explanation for low import penetration.
Still, we are left with an amount of missing trade that cannot be explained by distance, lan-
guage difference and tariffs, and since there are few de jure discriminatory restrictions, we
find this to be a conund rum of missing trade with Japan. We conclude that de facto non-
tariff measures in Japan could be the key to understanding and potentially solving the Japanese conundrum.
3.1. EU-J APAN TRADE
The EU and Japan are the largest and third la rgest economies in the world respectively.
They respectively account for 33 percent an d 11 percent of world GDP, and 17 percent
and 6 percent of world trade. In 2008, the EU 27 countries imported €75 billion worth of
goods from Japan and exported €42 billion, cf. figure 3.1.
Figure 3.1 Trade in goods between EU and Japan 2000-2008
0102030405060708090100
2000 2001 2002 2003 2004 2005 2006 2007 2008billion eurosEU27 import from Japan
EU27 export to Japan
Source: Eurostat, COMEXT
Chapter 3 CURRENT EU-J APAN TRADE
19
The bilateral trade relationship between the EU and Japan is important for both econo-
mies. Japan is ranked fourth among the EU's import partners (4.8 percent of EU-27 im-
ports of goods) and fifth among its export de stinations (3.2 percent of EU exports), cf.
Figure 3.2. For EU services trade, Japan is ra nked third both for imports (3.3 percent) and
exports (5.4 percent).
Figure 3.2 Japan’s share in EU-27 trade with the World, 2000-2008
9,3%
8,3%7,9% 7,7%7,3%
6,3%5,7%5,5%4,8%5,4% 5,1%4,9% 4,7% 4,6%4,2%3,9%3,5%3,2%
2000 2001 2002 2003 2004 2005 2006 2007 2008Share EU-27 trade with world
EU27 Import from Japan EU27 Export to Japan
Source: Eurostat, COMEXT
3.2. IMPORT PENETRATION IN JAPAN IS LOW
The EU’s penetration into the Japanese mark et remains low when compared to European
exports to other countries, cf. Figure 3.3. To tal European export to Japan was around €61
billion in 2008, when one includes the €18.7 billion of service exports. If the EU’s level of
import penetration in Japan was raised to th e average of its main trading partners, Euro-
pean exports to Japan would increase by 44 percent or €27 billion.
20
Figure 3.3 EU’s penetration into main export markets
Ratio of EU exports* to destination market GDP
[Xeu->j divided by GDPj]
0,0000,0050,0100,0150,0200,0250,0300,0350,0400,0450,050
Rusia Canada S. Korea* China India Mexico USA Taiwan* Japan
*) including service exports. Measured in values based on 2004 GTAP data.Current EU exports
to Japan
~ € 61 bn
Exports
+ € 27 bn
(+ 44% increase)
Note: This penetration indicator is calculated as the ratio of EU exports to the destination market’s GDP.
Source: Copenhagen Economics’ calculations based on data from GTAP. See McDougall (2001) for more in-
formation about GTAP.
However, it is not only EU exporters who ar e facing difficulties when exporting to Japan.
Japan’s general import penetration4 measured as share of domestic demand is around 6
percent, which is lower than other major economies including the EU, which imports around 17 percent of domestic demand, exclud ing intra-EU trade, cf. Figure 3.4. The
OECD reach a similar conclusion when they say that “
despite Japan’s growing investment
and trade links with China and other Asian economies, the level of import penetration –
defined as imports of goods as a share of do mestic demand – remains the lowest in the
OECD ” , OECD (2006).
4 Import penetration is the proportion of a coun try's domestic consumption accounted for by imported goods.
On this generally accepted measure, Japan is less open th an others. If measured in terms of more simple meas-
ures, such as imports per unit of GDP, we find that Ja pan’s imports per unit of GDP are not lower than in the
EU. This can be due to many reasons, since GDP includes much more than just consumption, i.e. net savings
and net exports. Furthermore, as we shall see, large econom ies like the EU import less relative to its size than
smaller economies.
21
Figure 3.4 Japan has low import penetration
0,1 8 0,1 8 0,1 7 0,1 7
0,1 4 0,1 4
0,1 2
0,08 0,08
0,06
-0,02 0,04 0,06 0,08 0,1 0 0,1 2 0,1 4 0,1 6 0,1 8 0,20
CAN KOR MEX EU CH N RUS IND BR A USA JPNImport Penetration major economies, 2004
Import s as share of domest ic demand
Note: Imports divided by domestic demand.
Source: Copenhagen Economics’ calculations based on data from GTAP.
However, we also see that US import penetrat ion is almost as low as Japan. The reasons
for low import penetration result partly from size and distance and because these two economies differ due to the distinct macroeco nomic and structural characteristics of their
respective economies. Based on a gravity mo del analysis, the OECD (2006) still concludes
that the level of imports in Japan is surprising ly low, even after controlling for country size,
transport costs and per capita income, although there may be other economic factors. Our
gravity results, as presented in chapter 5, confirm this result.
Figure 3.5 The impact of economic factors on import penetration
-10-5051015
BEL
IRL
CAN
DEU
CZE
GBR
AUT
KOR
SVK
SWE
ISL
DNK
MEX
USA
FRA
NLD
ESP
NOR
CHE
ITA
PRT
JPN
AUS
NZL
FIN
GRC
Note: Import penetration (the 1995-2004 average for good s and services) is estimated as a function of popula-
tion, per capita income and transport costs. A negative (positive) residual indicates that import penetration
is below (above) the level predicted by economic fact ors. For Japan and four other countries, these re-
siduals are significant at a 5% level.
Source: OECD (2006), page 20.
Low import penetration is consistent across most sectors in Japan. Only four of 20 sectors
have higher than average penetration, namely primary sectors, air transport, water transport
as well as agriculture, forestry and fisheries, cf. Figure 3.6. The higher import penetration
for air transport and water transport can be ex plained because Japan is an island. The high
import penetration for primary sectors is because Japan is not self-supporting with food
22
and agriculture production. Gravity model result s, as presented in chapter 5, support this
result, since we show that import penetration in Japan’s individual sectors is still low when
controlling from size, distance, language and tariffs.
Figure 3.6 Import penetration in Japan is low in most sectors
0,87
0,41
0,29
0,23 0,20 0,19 0,18 0,17 0,12 0,12 0,09 0,08 0,05 0,03 0,03 0,03 0,02 0,01 0,01 0,01
-0,10 0,20 0,30 0,40 0,50 0,60 0,70 0,80 0,90 1,00 Import Penetration, 2004
Imports as share of domestic demand
Japan Average major economies
Note: Imports divided by domestic demand.
Source: Copenhagen Economics’ calculat ions based on data from GTAP data.
3.3. JAPAN IS LOSING IMPORTANCE AS DESTINATION FOR EU EXPORTS
Japan has gradually been losing its position as one of the most important destinations for
EU goods exports over the last decade. Unt il 2002, Japan was the EU’s second largest ex-
port destination after the US (not counting exports to EFTA countries Norway and Swit-
zerland). In 2003, Japan dropped to third plac e, and second place was taken by China. In
2004, Japan dropped further to fourth place, when EU’s exports to Russia took off, Russia
became the third most important export destin ation. In 2005, Japan took its current posi-
tion as the EU’s fifth most important export destination as Turkey took over the fourth
place, cf. Table 3.1.
23
Table 3.1 The EU’s main export destinations, 2000-2008
Rank 2000 2001 2002 2003 2004 2005 2006 2007 2008
1 U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S. U.S.
2 Japan Japan Japan China China Russia Russia Russia Russia
3 Turkey Russia China Japan Russia China China China China
4 China China Russia Russia Japan Turkey Turkey Turkey Turkey
5 Russia Canada Turkey Turkey Turkey Japan Japan Japan Japan
Note: The table shows the rank of th e five largestEU-27 export destinations for goods outside EFTA in each
year. Total trade values are in € constant.
Source: Copenhagen Economics calculations’ based on data from Eurostat.
The declining role of Japan as main export destination for European goods can be ex-
plained by a variety of factors. Japan's relati vely low economic growth rate over the past
decade, especially when compared to fast growth in emerging market economies like
China, Russia and Turkey, probably explains a co nsiderable part of this relative decline.
Moreover, rapid integration of the East Asian economies has buoyed intra-regional trade.
Multinational firms (including many from Japa n) have built production networks and sup-
ply chains stretching across As ia, regardless of borders, in order to benefit from the com-
parative advantages of individual countries. Many (intermediate) goods are being repeat-
edly shipped around the region before they r each their final destination, generally in the
EU or U.S. East Asia is an increasingly inte grated region, and inter-regional trade as a
share of East Asia’s total trade reached 55 percent in 2006, not far from the 66 percent ob-served in the European Union in the same ye ar, and remarkably higher than NAFTA’s 44
percent
5.
Business driven integration in Asia is further fuelled by trade policy driven integration. Be-
tween 2000 and 2009, Asian FTAs increased from just seven to over 100 bilateral agree-
ments being concluded, negotiated or proposed.
The combination of business driven integrat ion and the tremendous increase in the num-
ber of FTAs in the region has resulted in an impressive increase in Japan’s trade with other
East Asian partners. Japan’s trade with ASEA N increased by 93 percent over the last ten
years, which is much faster than Japan’s tr ade with the European Union, which increased
by 23 percent in the same pe riod, cf. Figure 3.7. Fast ec onomic growth and rapid trade
opening in East Asia explains to a large extent the relative decline of Japan as an export
market for EU goods. An acceleration in trade opening between the EU and Japan could
counterbalance this downward trend and give a new boost to bilateral trade.
5 Asian Development Bank (2008) “Regionalism as an Engine of Multilateralism: A Case for a Single East Asian
FTA”, Regional Economic Inte gration Working Paper Series, http://www.adb.org/Documents/Papers/Regional-
Economic-Integration/wp14.asp .
24
Figure 3.7 Rapid increase in Japan’s trade with East Asian partners
-5.000 10.000 15.000 20.000 25.000
Japan-EU Japan-ASEAN
1998 2008+23%+93%Total trade = Import + Export (billion yen)
Source: Own calculations based on data from trade statistics of Japan, Ministry of Finance.
3.4. COMPOSITION OF EU-J APAN TRADE
EU goods import from Japan
Looking at the composition of trade, EU im ports from Japan are concentrated in a few
sectors, cf. Figure 3.8. The EU’s import from Japan is very concentrated and only two sec-
tors – automotives and electronics – that accoun t for more than 50 percent of total imports.
Machinery and office equipment (ICT) are also important sectors. There is virtually no
import of food products from Japan.
25
Figure 3.8 EU imports from Japan are concentrated in a few sectors
2625
16
11
87
3211000
051015202530Di st ri but i on of t rade across sect ors
(as a share of t ot al t rade)
Note: Import in a particular sector is calcul ated as a share of the total value of import.
Source: Copenhagen Economics’ calculat ions based on data from Eurostat.
Japan goods imports from EU
The EU’s export of automotive products and chemicals accounts for 30 percent of the to-
tal European exports to Japan, whereas food, machinery, pharmaceuticals, medical devices
and textiles account for approximately ten pe rcent each. Machinery and office equipment
(ICT) are also important sectors EU export to Japan is less concentrated, cf. Figure 3.9.
Together food, machinery, pharmaceuticals, me dical devices and textiles account for al-
most 50 percent of the total European export to Japan.
26
Figure 3.9 EU exports to Japan are more broadly distributed across sectors
16
14
11
10 10
99
6
5
4
3
2
1
024681012141618Distribution of export across sectors
(as a share of t ot al t rade)
Note: Export in a particular sector is calcul ated as a share of the total value of export.
Source: Copenhagen Economics’ calcul ations based on data from Eurostat.
Services
The service sector is important for Japan. As in most OECD countries, services account
for around 70 percent of economic output and employment. But Japan’s service sector faces challenges. Productivity in Japan’s servic e sector is lower than in most other OECD
countries, productivity has grown more slowly than other sectors in Japan, and it has been
declining in recent years. This may be partially due to Japanese consumer preferences for labour intensive service delivery. At the same time, it has become increasingly clear that
low productivity holds back on many benefits for manufacturing sectors (and the Japanese
economy as a whole) from improved efficiency in the services sectors.
6
The EU exports around €20 billion of services to Japan per year, and Japan exports about
€14 billion to the EU. Japan’s import of services is much below its potential compared to other countries. Japan’s import penetration is particularly low in business services and
communications (telecommunication and post) serv ices, where it is the lowest of the largest
economies in the world, cf. Table 3.2.
6 See for example the impact assessment of the EU intern al market for services, Copenhagen Economics (2005a),
or the impact assessment of the ma rket opening of EU network indust ries, Copenhagen Economics (2004).
27
Table 3.2 Import penetration in selected service sectors
Country Business services
(percent) Communication services
(percent) Financial services
(percent)
India 38.1% 7.4% 7.0%
Mexico 30.0% 3.2% 4.4%
Russia 12.8% 10.1% 8.5%
Korea 10.1% 2.9% 1.5%
European Union 8.0% 7.5% 8.2% Canada 7.9% 5.3% 4.9%
China 7.0% 1.5% 1.0%
Brazil 6.3% 1.3% 1.9% United States 3.2% 1.6% 0.8%
Japan 2.6% 0.8% 2.2%
Note: Import penetration is calculated as imports as share of domestic demand. In tra-EU trade is excluded.
Source: Copenhagen Economics’ calcul ations based on data from GTAP.
Business services constitute 30 percent of glob al trade in services, and it is the largest
traded private service sector. It is, therefore, remarkable that Japan’s import of business
services only makes up less than three perc ent of the domestic de mand for business ser-
vices (2.6 percent), whereas, for example, the US imports services account for a share of
3.2 percent of domestic demand for business services from abroad. The EU imports 8.0
percent of domestic demand for business servic es through cross-border trade from outside
the EU.
Communication services are generally less trad ed across borders. In Japan, less than one
percent of domestic demand for communication services is covered by imports. In the EU,
7.5 percent of domestic demand is covered by imported services from outside the EU. Fi-
nancial services are generally traded more frequently across border s than communication
services. In this sector, Japan has some foreig n participation, with 2.2 percent of domestic
demand covered by imports. This is still below the level of penetration in the EU market
by non-EU service suppliers (8.2 percent).
The EU has a trade surplus in service trade with Japan. Three quarters of the EU27 sur-
plus in services comes from financial serv ices and travel. In 2007, the EU27 exported
€19.4 billion of services to Japan, while import s of services from Japan amounted to €13.8
billion, meaning that the EU27 had a surplus of €5.6 billion in trade in services with Japan.
This surplus was mainly due to financial services (+€2.9 billion), as well as travel (+€1.3 bil-
lion) and computer and information services (+€0.9 billion). Japan accounted for around 3.5 percent of the total extra-EU27 trade in services.
28
Table 3.3 EU27 trade in services with Japan
Export Import Trade balance
2005 2006 2007 2005 2006 2007 2005 2006 2007
Total 19,620 18,607 19,378 12,001 13,193 13,805 7,619 5,414 5,573
of which:
Transportation
5,070
5,127
5,038
4,473
4,718
4,854
597
409
184
Travel
2,362
2,422
2,181
867
921
900
1,495
1,501
1,281
Other services
12,187
11,059
12,149
6,659
7,556
8,039
5,529
3,504
4,109
of which:
Communication services
321
144
165
96
102
117
225
42
48
Construction services
109
157
122
82
125
77
26
32
45
Insurance services
254
508
387
144
145
157
111
363
231
Financial services
3,005
3,606
4,426
1,211
1,671
1,502
1,793
1,935
2,924
Computer and inform a-
702
774
991
208
178
134
494
596
857
Royalties and licenses
2,068
1,714
1,806
1,496
1,486
1,592
572
228
214
Other business services
5,178
3,774
3,913
3,286
3,686
4,307
1,892
88
-394
Personal, cultural and
500
344
308
53
65
45
447
279
263
Government services
51
39
30
82
99
109
-32
-60
-79
Total extra-EU27
403,396
447,080
498,523
349,282
378,555
414,399
54,114
68,525
84,124
Japan / total extra-EU27 4.9% 4.2% 3.9% 3.4% 3.5% 3.3%
Note: Data is in € million.
Source: Copenhagen Economics’ calculat ions based on data from Eurostat.
3.5. TARIFFS ARE LOW
Both the EU and Japan have low tariffs on good s, with simple average MFN tariff rates of
3.8 percent for both partners. Japan, however, has more duty-free tariff lines (47.4 percent
of tariff lines in Japan compared to 25.8 in th e EU). More than two thirds of EU’s export
value to Japan is duty-free, whereas 36.9 percen t of Japan’s export to the EU is duty-free.
As mentioned, EU’s exports to Japan are also more diversified than the Japanese export to
the EU. For EU exports to Japan, it takes 71 HS 2-digit tariff lines to cover 95 percent of
trade (or 1.279 HS 6-digit tariff lines), while for Japan’s export to the EU, 95 percent of
trade can be included under only 50 HS 2-digi t tariff lines (or 848 HS 6-digit tariff lines),
cf. Table 3.4.
The trade weighted tariff protection in Japan fo r EU exports is 1.7 percent, while the trade
weighted tariff rate for Japan’s exports to the EU is 3.4 percent. This is because the EU has
tariffs on products that have large trade volu mes, whereas Japan’s tariff peaks are generally
on products that the EU is not exporting to Japan in any large volumes.
29
Table 3.4 EU-Japan trade and duties faced
EU exports to Japan Japan exports to EU
Value of exports , 2008 €42.4 bn €74.8 bn
Diversification
95% of trade in no. of tariff lines
– HS 2-digit 71 50
– HS 6-digit 1.279 848 Duty-free imports
– Tariff lines in % 47.4 25.8
– value in % 71.7 36.9 MFN average of traded tariff lines
– simple 3.8 3.8 – weighted 1.7 3.4
Source : International Trade Centre, World Tariff Profiles 2008 Country Profiles Part B (pages 78 and 99). Value
of exports from EUROSTAT (Comext, Statistical regime 4).
Japan has high tariff peaks in agriculture, e.g. dairy products, with an average bound tariff
of 126.8 percent and an average applied MFN ta riff of 154.7 percent, but with peaks above
500 percent and no duty-free products. Petroleum, textiles, clothing and leather have also
high tariffs.
Table 3.5 Japan tariffs and imports by product groups
Source : International Trade Centre, World Tariff Profiles 2008 Country Profiles Part A.2 (page 99).
The EU also has tariff peaks in agriculture an d food products, but the peaks are generally
lower than in Japan as maximum rates go up to 231 percent, whereas Japan has several peaks above 500 percent. The has tariffs on key Japanese export products such as cars and
electronics, with tariffs on these prod ucts of 22 and 14 percent respectively.
Final bound duties MFN applied duties Imports
Product groups AVG Duty-free
in % Max Binding
in % AVG Duty-free
in % Max Share
in % Duty-free
in %
Animal products 17.6 41.2 438 100 13.9 43.8 438 1.7 3.8
Dairy products 126.8 0 552 100 154.7 6.7 552 0.1 21.8
Fruit, vegetables, plants 10. 3 20.4 414 100 12.3 19.8 414 1.2 11.1
Coffee, tea 14.3 22.2 165 100 15.5 22.7 165 0.4 62.1
Cereals & preparations 79.5 7.9 648 100 64.3 10.6 648 1.3 62.0
Oilseeds, fats & oils 9.8 46.6 522 100 10.9 42.3 522 0.7 79.8
Sugars and confectionery 38.7 7.3 120 100 23.2 13.0 120 0.1 66.5
Beverages & tobacco 14.8 22.0 53 100 13.9 32.1 53 1.3 62.1
Cotton 0.0 100.0 0 100 0.0 100.0 0 0.0 100.0
Other agricultural products 4.5 68.0 544 100 5.3 70.0 544 0.8 71.7
Fish & fish products 5.0 4.2 12 90.7 5.5 3.8 15 2.2 4.4
Minerals & metals 1.0 70.2 10 99.9 1.0 70.3 10 22.1 90.7
Petroleum 60.9 11.1 520 50.0 0.6 72.1 8 21.9 96.8
Chemicals 2.0 46.2 7 100 2.5 30.3 7 8.2 44.9
Wood, paper, etc. 0.9 80.0 10 97.6 0.8 81.0 10 3.4 77.2
Textiles 5.4 7.9 25 100 5.5 7.3 25 2.1 7.3
Clothing 9.2 0 13 100 9.2 0 13 4.2 0
Leather, footwear, etc. 8.6 48.6 483 100 11.2 54.7 483 1.8 44.8
Non-electrical machinery 0. 0 100.0 0 100 0.0 100.0 0 10.3 100.0
Electrical machinery 0.2 96.1 5 100 0.2 96.4 5 5.9 98.7
Transport equipment 0.0 100.0 0 100 0.0 100.0 0 3.7 100.0
Manufactures, n.e.s. 1.0 77.2 8 100 1.2 74.7 8 6.5 94.8
30
Table 3.6 EU tariffs and imports by product groups
Final bound duties MFN applied duties Imports
Product groups AVG Duty-free
in % Max Binding
in % AVG Duty-free
in % Max Share
in % Duty-free
in %
Animal products 26.8 20.6 215 100 25.9 23.6 215 0.4 15.2
Dairy products 66.8 0 237 100 62.4 0 215 0.1 0.
Fruit, vegetables, plants 10. 7 22.8 231 100 11.6 18.5 231 1.6 11.4
Coffee, tea 6.9 27.1 88 100 6.9 27.1 88 0.7 80.4
Cereals & preparations 24.3 6.3 116 100 19.8 10.7 116 0.4 26.7
Oilseeds, fats & oils 5.6 48.2 113 100 6.0 43.1 113 1.2 69.1
Sugars and confectionery 29.5 0 133 100 29.8 0 133 0.2 0
Beverages & tobacco 23.2 23.0 210 100 20.0 19.8 191 0.6 15.3
Cotton 0.0 100.0 0 100 0.0 100.0 0 0.0 100.0
Other agricultural products 5.1 67.1 120 100 5.6 65.1 119 0.5 68.3
Fish & fish products 11.2 10.7 26 100 10.6 14.1 26 1.1 6.9
Minerals & metals 2.0 49.6 12 100 2.0 50.7 12 17.4 70.8
Petroleum 2.0 50.0 5 100 2.3 41.1 5 21.7 96.4 Chemicals 4.6 20.0 7 100 3.8 34.4 13 9.6 60.5
Wood, paper, etc. 0.9 84.1 10 100 0.9 81.3 10 3.1 90.3
Textiles 6.5 3.4 12 100 6.6 2.1 12 2.4 1.9
Clothing 11.5 0 12 100 11.5 0 12 4.8 0 Leather, footwear, etc. 4.2 27.8 17 100 4.1 26.1 17 2.5 19.6
Non-electrical machinery 1. 7 26.5 10 100 1.7 27.3 10 13.1 67.6
Electrical machinery 2.4 31.5 14 100 2.6 28.3 14 6.3 39.5
Transport equipment 4.1 15.7 22 100 4.1 17.0 22 6.1 22.9 Manufactures, n.e.s. 2.5 25.9 14 100 2.5 24.2 14 6.3 56.8
Source : International Trade Centre, World Tariff Profiles 2008 Country Profiles Part A.2 (page 78).
Japan seldom uses trade defense instrument s. In the period 1995 to 2003, Japan did not
initiate any antidumping or countervailing du ties investigations, while the EU initiated 270
antidumping investigations and 41 countervailin g duties investigations over the same pe-
riod7.
In summary, Japan has low tariffs . In fact, Japan has the lowest tariffs on industrial goods in
the Quad according to Kommerskollegium (2 008). Japan seldom uses trade defense in-
struments and Japan has a sizabl e number of zero-tariffs.
While some of the low level of trade between EU and Japan can be explained by tariffs on
agriculture and food, and by EU tariffs on cert ain industrial goods, the low level of imports
into Japan cannot be explained by tariffs. We will need to look for the impact of non-tariff
measures to find the reasons for the low level of trade between EU and Japan.
Pre- and Post-Doha tariffs
Tariffs above zero will remain after the comple tion of the Doha-round. Mostly in food and
beverages, where Japan’s trade-weighted tariff on European food and beverage exports will
decline from 34.7 percent to 23.9 percent, and the EU’s tariff on Japanese food and bever-
ages will go down from 12.4 percent to 7.2 perc ent. Japan will also have higher tariffs on
agricultural products, with an average MFN ta riff against EU imports of 6.7 percent, com-
pared to an EU tariff of 4.8 percent. Thes e will decrease to 2.8 and 2.9 percent respec-
7 Calculations done by the Swedish National Board of Trade, based on WTO reports on anti-dumping. The simi-
lar number for the U.S. is 288 antidumping investigations and 73 countervailing duties investigations. Canada has
initiated 113 and 15 investigations respectively.
31
tively. The EU will have higher tariffs than Ja pan for non-agriculture ma nufacturing. This is
notably true for motor vehicles, where the EU will have a tariff of 4.0 percent down from
8.7 percent, cf. Table 3.7, while Japan’s motor vehicle tariffs are already duty-free prior to
Doha.
Table 3.7 Pre- and Post-D oha MFN tariffs (percent)
Sector EU tariffs on Japanese import Japanese tariffs on EU import
Pre-Doha Post-Doha Pre-Doha Post-Doha
Primary agriculture 4.82 2,92 6.70 2,78
Other primary 0.22 0,20 0.13 0,09
Food and beverages 12.36 7,25 34.71 23,94
Chemicals 2.60 1,67 1.08 0,74
Electrical machinery 2.32 1,29 0.00 0,00
Motor vehicles 8.66 4,03 0.00 0,00
Other transport equipment 4.04 2,45 0.00 0,00
Other machinery and equipment 1.87 1,41 0.10 0,06 Metals and metal products 2.30 1,58 0.83 0,62
Wood and paper products 0.52 0,39 0.93 0,75
Other manufactures 3.45 2,05 3.12 3,29
Note: The table shows bilateral trade weighted tariffs on goods trade from EU to Japan and vice versa (percent).
3.6. OTHER INDICATORS OF TRADE OPENNESS
The importance of non-tariff measures can be summarised in different ways. One way is to
use frequency counts of non-tariff barriers as done in the UNCTAD TRAINS database.
This approach only informs us about the exis tence of certain measures, but not about the
impact on trade costs or prices. Another approach is to quantify the impact of NTMs through international price comparisons of sim ilar products. While this approach provides
a quantification of the impact in terms of high er prices and higher trade costs, it does not
link these results to the existence of identifiab le NTMs. A third approach is to look at
various survey-based analyses of indices of openness such as the World Economic Fo-
rum’s Global Trade Enabling index or the World Bank’s Ease of Doing Business index,
which from a business perspective aims at a ssessing the ease of access to markets around
the globe.
Looking across these many measures of NTMs, it appears that NTMs in both the EU and
in Japan are high and that there are generally higher costs of NTMs in Japan than in the
EU. Japan is the least open partner in terms of NTMs in the Quad.
Frequency measures
Based on frequency counts of NTMs, there is not much difference between the EU and
Japan. In both countries, 17 percent of tari ff lines are affected by NTMs according to
counts based on the UNCTAD TRAINS database. Looking at the share of imports on
these tariff lines, it occurs that only 7 perc ent of imports in Japan are affected by NTMs,
32
while 14 percent of EU imports are affected. Note that the UNCTAD data on NTMs are
from 1999 for the EU and from 2001 for Japan.
Table 3.8 Frequency counts of NTMs in major economies
EU US Canada Japan
Share of tariff lines affected by NTBs (%) 17,2 21,9 8,9 17,0
Share of imports affected by NTBs (%) 14,4 31,6 11,3 7,4
Note: Calculations by the National Board of Trade, based on the UNCTAD TRAINS database. Frequency and
import coverage analysis of NTMs for industrial goods (H S category 25 to 97). Anti-dumping and countervailing
duties are not included and neither are the now abolished textile quotas. EU (15) data are from 1999, US data
from 1999 and 2000 (import), Canadian data from 2000 and 1995 (imports) and Japanese data from 2001 and
1999 (import).
Source : Kommerskollegium (2008), p. 106-111.
Kee et al (2008) have used the UNCTAD data and tariff data to estimate so-called overall trade restrictiveness indices. They estimate an overall trade restrictiveness index using only
tariffs and one with the combined effect of tariffs and NTMs. They conclude that NTMs
have a significant contribution to the level of trade restrictiveness measured by their indi-
ces. Indeed, according to the estimates by K ee et all (2008) NTMs add on average an addi-
tional 87 percent to the level of trade restrictiv eness imposed by tariffs. In 34 countries (out
of 78) the contribution of NTMs to the overa ll level of restrictiveness is higher than the
contribution of tariffs. The authors conclude that “neglecting the restrictiveness of NTMs
can be very misleading”.
This is indeed also true for the estimates on EU NTMs and Japanese NTMs. According to
the estimates by Kee et al (2006), Japan is more restricted than the EU both with respect to
tariffs and with respect to th e combined effect of tariffs and NTMs. The combined effect
of tariffs and non-tariff measures is given by the Overall Trade Restrictiveness Index, which
shows the tariff level that keeps imports at thei r observed level. According to this broad es-
timate, the level of trade protection is 14.3 pe rcent in Japan, compared to 12.6 percent in
the European Union and 8.2 percent in the Un ited States. The contribution of NTMs to
the overall level of restrictiveness is much high er than the contribution of tariffs. According
to Kee et al (2006), NTMs between EU and Japan add by a factor of 2.5 in case of Japan and up to a factor of four in the case of th e EU, to the level of trade restrictiveness im-
posed by tariffs.
Table 3.9 Impact of tariffs and NTMs compared
Trading partner OTRI using tariffs OTRI using tariffs and NTMs
European Union 3.0 12.6
Japan 5.8 14.3
United States 2.7 8.2
Average of 13 OECD countries in study 5.8 11.0
Note: The table shows the trade costs added by the OTRI tariff index and by an OTRI index which also in-
cludes NTMs
Source: Kee et al (2006).
33
Price gap analyses
Bradford and Lawrence (2004) offers estimates of general price gaps for the four largest
trading partners. The approach is to consider barriers to arbitrage across national borders
as barriers to trade. Controlling for unavoida ble costs associated with shipping goods be-
tween countries, price gaps between equivalent goods in two different countries are seen as
indicators that the higher-priced market is a ffected by trade barriers. Moreover, the price
gap is used as a measure of the extent of prot ection, thereby quantifying the total effect of
all trade barriers for that product. As argued by the authors, these gaps may be caused in
part by policies that are not explicitly designed to impede trade, such as certification re-
quirements that are more restrictive than is re quired. No matter what the intent, it is argued
that policies which segment nation al markets are trade barriers.
The analysis shows that the average price im pact in Japan is 61 percent higher prices,
compared to a price impact of NTMs in the EU of 35 percent. The NTMs in Canada and
the US are significantly lower, at 17 percen t and 15 percent respectively, cf. Table 3.10.
Table 3.10 Price gaps for similar products in major economies
EU Japan US Canada
Price gap of national basket in comparison to
minimum priced basket (1999) +35% +61% +15% +17%
Note: Estimates are from Bradford and Lawrence (2004). Pr ices are compared to the lowest available price in the
countries in each case and then a weighted average is calculated.
Source : Kommerskollegium (2008), p. 106-111.
Bradford (2003) uses a similar approach to esti mate price gaps by sector. Bradford did not
estimate an average EU NTM impact. Instead we can use the estimates for Germany as a
proxy for the EU average. Using detailed pric e data for 29 product groups, Bradford iden-
tifies eight sectors were Japan has higher es timates than Germany (processed food, textiles,
footwear, furniture, chemicals, potter y, electronics, and other machinery).
According to estimates of price impacts provid ed by Ferrantino et al (2006), Japan prices
are not high compared to EU, based on NTM incidence measures.
Indices of trade openness
Both Japan and most EU countries are regarded to be relatively open, as measured by
standard indices. Japan is 12th of 181 countries in the World Bank “Ease of Doing Busi-
ness” index, while three EU members rank better than Japan (Denmark on 5th place, the
UK on 7th and Ireland as 8th on the list). The 24 other EU members ranks equal with Japan,
with Greece on 96th place in the ranking.
Japan ranks 13th in the World Economic Forum’s “Global Trade Enabling” index. Six EU
countries rank better than Japan (namely Sweden on 3rd place, Denmark 6th, Finland 7th,
Germany 8th, Netherlands 11th and Luxemburg 12th). The other EU member states thus
34
ranks on par with Japan or worse, with Bulg aria being the lowest ranking of the 27 mem-
bers in 60th place of the 118 countries in the ranking.
The same five EU members perform well on the World Competitiveness Index and better
than Japan at 9th place of 134 countries in the World Competitiveness Index. In the OECD
ranking on product market reforms (PMR), Japan is rated 7th among the OECD countries,
cf. Box 3.1.
Box 3.1 Japan generally ranks well in various global indices
Japan’s ranking in the global Enabling Trade Index (ETI)
Note: The box illustrates Japan’s ranking in various in dices measuring the framework conditions for trade and
investment in the country. The ETI covers 118 countr ies and is a comprehensive index that measures the
factors, policies and services facilitating the free flow of goods over borders and to destination. The index
is composed of four overall issue areas, or sub-inde xes: (1) market access, (2) border administration, (3)
transport and communications infrastructure and (4) the business environment.
Sources: World Bank (2008), OECD indicators of pr oduct market regulation and World Economic Forum
(2009).
These indices do, however, also highlight areas where Japan is performing less well. The
OECD product market reform indicators reveal that barriers to entry into network indus-
tries (telecommunications, postal services, elec tricity and transport) are substantially above
the restrictive level, and to barriers to entry in services, which are also much above the re-
strictive level. Furthermore, the OECD point to “direct control over business enterprises”
as a problem of specific importance in Japan together with “discriminatory procedures”. Ease of Doing Business World Comp. Index Global Trade Enabling OECD PMR
Japan: 12th of 181 countries
►17 on ”trading across border”
►average compared to EU on
indicators like cost of container,
average number of documents
and the time for customs
clearanceJapan: 9th of 134 countries
►No. 3 on innovation and
size►No. 98 on macro stability
►No. 42 on financial market
►No. 21 on effectiveness of
competition policy►No. 85 on prevalence of
trade barriers
►No. 90 on rules for FDI
►No. 47 on customs
proceduresJapan: 7th of OECD countries
Has high score (>2.0 = restrictive) :
►Barrier to entry in network
industries (3.68)
►Barrier to entry in services
(3.36)
►Direct control over business
enterprises (2.85)
►Dicriminatory procedures
(2.25)
Has low score (<1.0 = open):
►Use of control&command
regulation (0.31)
►…
►…
►FDI restrictions (0.97) Japan: 13th of 118 countries
►strengths in market access
and availability and quality of transport services
►weaknesses in business
environment, especially in
regulatory environment►35 on tariff barriers
►21 on non-tariff barriers
►41 on openess to
multilateral trade rules
►37 on share of duty free
imports
►20 on efficiency of customs
►14 on procedures
►16 on transparency of
border procedures►61 on regulatory
environment
Japan occupies the 13th position in the ETI ranking. Free market access and the expo rt orientation of local com-
panies contribute to this rating, along with the physical security environment. At the same time, the ETI report worries that some aspects of the regulat ory environment are not conducive to en abling trade, due to laws that do
not encourage FDI and obstacles to hiring foreign labour.
Although Japan is a very export-oriented economy, imports of goods appear to be hampered by administrative
procedures and barriers. In particular, businesses cons ider customs procedures to be somewhat cumbersome,
which are ranked 38
th overall. This is also reflected in the fairly high cost to import: the cost of importing goods
is almost three times higher in Japan than in Singapore, the best performer on this measure. Once goods are over th e border, the country has excell ent infrastructure, ranked 7
th for this indicator. In particu-
lar, the ETI re port ar gues, postal and lo gistics services stand out for their quality and efficienc y.
35
The Global Trade Enabling index, produced by the World Economic Forum, also points
to both positive and problematic aspects of market access in Japan. The main reason for
ranking Japan at 13th place is due to its transportati on system, which, when compared to
most other countries in the index, is outstanding. However, when it comes to trade policy
related issues, Japan ranks much lower. Accord ing to the Global Trade Enabling index, it
is considered to be ranked 21st out of 118 countries regarding non-tariff barriers, 41st on
openness to multilateral trade rules and 61st on regulatory environment.
The World Competitiveness Index also ranks Japan poorly on trade barriers more gener-
ally. In the most recent report from the World Economic Forum, Japan ranks 85th out of
the 134 countries analysed on the perception of trade barriers.
3.7. CONCLUSION : A JAPANESE CONUNDRUM
There is a Japanese conundrum: There is littl e trade, but few barriers. On one hand, Ja-
pan’s imports from Europe are low compared to the size of the Japanese economy. On the
other hand, formal barriers in the form of ta riffs are low and on some of the general indi-
ces Japan appears to be one of the more open OECD economies.
We acknowledge that EU exports to Japan are hampered by the long distance to Japan,
and recognise that the language difference hi nders trade and will continue to do. Further-
more, large countries of Japan’s size generally import less per unit of GDP than smaller
countries.
In addition, the macro-economic structure of Japan’s economy with high savings and in-
vestments is also factor to take into account. Export-driven economies such as Japan, with
high savings rates and high investments, gene rally have smaller imports relative to GDP.
All in all, there are many factors explaining the low level of Japanese imports.
However, controlling for these factors still leave the conclusion that imports into Japan are
low. Furthermore, available sources on non-tari ff measures in Japan point to restrictions on
trade resulting from NTMs, and indicated that NTMs might add substantially more to the
cost of trade than tariffs. Some studies have indicated that the impact of NTMs is up to
four times higher than the impact of tariffs. Other studies have pointed to price effects of
NTMs of more than 30 percent in Europe and more than 60 percent in Japan. The
OECD analyses also point to the barriers in Japan to include barriers to entry into network
industries, barriers to entry in other services industries, and point to a large amount of di-
rect control over business enterprises and to restrictive discriminatory procedures. The re-
strictiveness of the overall regulatory environm ent in Japan also ranks low according to the
Global Trade Enabling index.
36
We therefore conclude that NTMs are indeed part of the explanation for the low volume
of trade between EU and Japan, and that NTMs are probably higher on the Japanese side
than on the European side.
37
In the previous chapter, we looked at bila teral trade flows between the EU and Japan and
saw that imports into Japan are relatively low. We examined various factors that could ex-
plain this and concluded that, among the tr ade policy variables, non-tariff measures
(NTMs) are an important factor in explaining the relatively low level of imports in Japan,
and imports from the EU in particular. In this chapter we identify the concrete non-tariff
measures which affect European businesses in Japan. We rely on an inventory of NTMs
identified in policy documents and on results from a questionnaire directed at EU export-
ers in Japan who describe their perception of the Japanese market. In the next chapter we
will use these survey results as one of the inpu ts into the measurement of the bilateral trade
costs of NTMs.
4.1. IDENTIFIED NTM S IN JAPAN
Based on information from the European Commission (2008a), the European Business
Council in Japan (2008a), the World Trade Or ganisation (2004) and the US Department
of State (2008), we have constructed an inventor y of NTMs which are listed as barriers to
the Japanese markets in these policy documents. Across all sectors, we have identified a to-
tal of 215 issues. The complete list of NTMs is presented in Appendix 3.
The inventory is based on a four-step methodology that was developed with the purpose of identifying Japanese NTMs across sectors. Not all issues raised by business or policy mak-
ers would qualify as an NTM according to ou r definition. We have applied the following
four steps in order to identify NTMs in Japan:
Impact: We assess that the issue has an impact on trade
Problem: There is a clearly identifiab le problem underlying the NTM
Solvability: There are reasons to believe that the NTM is solvable
Instrument: We can identify instruments to re medy the damage created by the NTM
Of the 215 issues identified, 194 are related to NTMs, while 21 issues are issues that do
pose difficulties to European firms in Japan, but cannot be considered as NTM related.
This covers issues related to ta riffs (e.g. on steel) or domestic taxes (e.g. on motor vehicles).
Also in this group, we find issues related to the lack of scientific cooperation (e.g. the re-
quest for more cooperation on ocean manage ment). Of the 194 NTM issues, four are
found in agriculture, 99 are found in manufact uring, and 62 issues are identified in ser-
vices. A total of 29 issues are cutting across sectors (e.g. customs procedures, which will af-
fect all good trading sectors or requests to improve competition policy enforcement).
Table 4.1 Number of issues identified in Japan
Agriculture Manufacturing Services Cross-cutting Total
NTM related 4 99 62 29 194
Other issues 1 12 4 4 21
Total nb of issues 5 111 66 33 215Chapter 4 NON-TARIFF MEASURES IN JAPAN
38
Note: The table shows the count of issu es identified. The count of issues does express gravity of the issue.
Source: Copenhagen Economics inventory of Japanese NTMs.
Identified NTMs in manufacturing
From our inventory of Japanese NTMs we id entify 111 issues across 13 manufacturing sec-
tors out of which 99 are found to be trade- related and can be characterised as NTMs.
Looking across sectors, we find that pharm aceuticals, processed food, office and IT
equipment as well as automotives have the high est number of issues that can be character-
ised as NTMs. Together these four sectors a ccount for 82 out of the 99 issues, cf. Figure
4.1.
Figure 4.1 Total number of NTM issues grouped by solvability
NTMs in Japan
number of issues identified
11 2311201914
6
7
331110
2
3
1
1
05101520253035
Pharm aceuticals
Food
Office
Automotive
Cosmetics
Medical
Paper
Aerospace
Chemicals
Iron
Only solveable with domestic reforms
Solvable in com bination with domestic reforms
Solvable with trade policy instrumentsTotal am ount of barriers: 100
Note: The category “Only solvable with domestic reforms” involves trade barriers that are entirely domestically
founded; the category “Solvable in combination with do mestic reforms” includes barriers that involve both
trade and non-trade themes; and the category “Solvabl e with trade policy instru ments” includes purely
trade-related barriers to trade. Details of the IPSI inventory of Japanese NTMs can be found in Appendix
3.
Source: Copenhagen Economics inventory of Japanese NTMs.
First, we distinguish between discriminato ry NTMs and non-discriminatory NTMs. Do-
mestic measures that apply equally to foreig n and domestic firms are non-discriminatory.
Pure trade measures, which apply only to fore ign suppliers are considered discriminatory.
NTMs that are discriminatory would normally be included in trade policy negotiations.
However, as we shall see, this is not the prevailing type of NTMs in Japan.
Total number of issues: 99
39
The discriminatory NTMs are solvable with trade policy instruments. For the non-
discriminatory NTMs, we distinguish between NT Ms that are solvable in combination with
domestic reforms; and those that are only solv able with domestic reforms. The first group
of NTM issues (with purely discriminatory i ssues) should obviously be incorporated into
FTA negotiations, whereas one should carefully target the most harmful issues listed in
group two. The latter group of issues function as effective trade barriers (and might actually
be the most harmful). Moreover, since thei r abolishment involves both trade and non-
trade themes, some degree of adjustment toward s domestic firms is likely to be required.
We call the last category “only solvable with domestic reforms” and this group consists of
issues that de facto hinder trade, but where solutions are entirely domestic. These are non-
discriminatory NTMs.
Most of the NTM issues listed in the inventor y are only solvable in combination with do-
mestic reforms. For the four sectors – pharm aceuticals, food, office and automotives – 59
out of 82 issues are solvable in combination with domestic reforms.
The NTMs in the inventory can also be groupe d according to the type of NTM. The most
frequently mentioned NTMs listed by exporter s to Japanese markets are technical barriers
to trade (TBTs) and sanitary and phyto-san itary (SPS) measures, cf. Figure 4.2.
Figure 4.2 Total number of NTM issues in manufacturing grouped by sector and type
NTMs in Japan
number of issues identified
23
99 8 7
3411129
3
11
2
1
105101520253035
Pharm aceuticals
FoodOffice
Automotive
Cosmetics
Medical
Paper
Aerospace
Chemicals
Other
Sanitary and phytosanitary
Technical barriers to trade
Note: "Other" contains public procurement, cross-border procedures, intellectual property rights and other is-
sues.
Source: Copenhagen Economics IPSI inventory of Japanese NTMs.
40
TBTs are the most frequently mentioned barr ier to Japanese markets as measured across
sectors, cf. Figure 4.3. Of the total number of NTMs of 99 in manufacturing, TBT account
for 65 of the listed issues.
Figure 4.3 Total number of NTM issues in manufacturing grouped by type of NTM
NTMs in Japan
Distribution by NTB
Public Procurem ent;
7
Intellectual Property
Rights; 8
Other; 10
SPS; 12 TBT; 65Cross-Border
Procedure; 1Services; 1
Note: Includes all barriers except NTB types that are registered as "not trade-related".
Source: Copenhagen Economics IPSI inventory of Japanese NTMs.
The nature of the TBT and SPS barriers are, in the majority of cases, linked to conformity
assessment (CA), cf. Figure 4.4.
Figure 4.4 Problems with conformity assessment dominates
Conformity
assessment
64%Regulation
21%Standards
15%
RS
CA
41
Note: The diagram shows the distribution of all TBT and SPS issues identified in manufacturing sectors in Ja-
pan according to three types: “CA” is where the issue mentioned relates to conformity assessment prob-
lems (e.g. costly and cumbersome procedures cause ex cessive delays in getting new products approved in
Japan). “R” relates to regulatory diffe rences, i.e. the compulsory norm in Japan is different than in Europe
and this is the cause of the problem. “S” is similar to “R”, but relates to standards being different in EU
and Japan.
Source: Copenhagen Economics IPSI inventory of Japanese NTMs.
Identified NTMs in services
The barriers to services trade (all modes) can be classified in several dimensions:
Affecting establishment (the ability of service suppliers to establish physical outlets
in an economy and supply services through those outlets) or ongoing operations
(the operations of a services supplier after it has entered the market).
Non-discriminatory (restricting domestic and foreign services suppliers equally) or
discriminatory (restricting only foreign services suppliers).
Affecting prices of services or costs of service providers.
In our NTM inventory, we have id entified 66 issues in services. Most of these are barriers
affecting ongoing operations in a non-discriminatory manner that affects the costs of service
providers. However, several barriers also affe ct establishment and are, therefore, barriers
to foreign direct investment (FDI).
Of the 66 issues identified as barriers, the fi nancial service sector comes out as the sector
with most issues listed (21 i ssues). Communications is second with respect to the number
of issues identified (15 issues). Ten issues were identified in transport service sectors (five
in air transport, three in water transport and two in other transport services). Insurance ser-
vices account for nine of the identifi ed service issues, cf. Figure 4.5.
42
Figure 4.5 Number of issues identified in services in Japan
NTMs in Japan
number of issues identified
7
15
113
14
4
43321
1
1
2
0510152025
Financial
ser v ic esCommuni ca ti on
ser v ic esInsurance Air transport Business
ser v ic esConstruction Water transport Other transport
ser v icesSolv able with traditional tr ade policy instruments
Solv able in combination with domestic r efor ms
Only solv eable with domestic reforms
Note: The category “Only solvable with domestic reforms” involves trade barriers that are entirely domestically
founded, the category “Solvable in combination with do mestic reforms” includes barriers that involve both
trade and non-trade themes, and the category “Solvabl e with trade policy instru ments” includes purely
trade-related barriers.
Source: Copenhagen Economics IPSI inventory of Japanese NTMs.
Only five of the 66 issues identified are issues that appear to be solvable with trade policy
instruments (or other bilateral policy instruments). These include the restrictions in Japan’s
bilateral air service agreements hindering foreig n airlines’ access to operate; restrictions on
foreign ownership of airports; the need to apply equivalent customs clearance procedures
for private and public express carriers (incl. du ty declarations); and finally some discrimina-
tory practices based on nationality requirements (regarding rules for registration as a lawyer
and a discrimination between foreign and dome stic bank branches). Another 14 of 66 is-
sues have been categorised as “only solvable through domestic reforms”.
The remaining 47 issues are expected to requir e a combination of trade policy instruments
and domestic changes in order to be solved. Eigh t of these relate to “lack of competition in
the telecommunications sector”, and include issues related to ensure equal access to inter-connections according to the standards of tran sparency, to resolve the unreasonably high
interconnection fees in telecommunications and to introduce facilities-based competition
across different broadband platforms. These are issues which require domestic policy
changes, but
de facto affect market access for foreign op erators, and can be considered to
be a NTM, as defined in this study.
4.2. EU EXPORTERS PERCEIVE JAPAN TO BE A DIFFICULT MARKET
In this section we present results from a comprehensive questionnaire completed by Euro-
pean business managers in Japan. We use the questionnaire to reveal the businesses’ per-
ceptions of the NTMs and how they affect va rious parts of their value chain from product
development to final delivery to the customer in Japan.
43
We use information from EU firms actually ex porting to Japan, drawn from a substantial
and detailed questionnaire which was submitted to managers of the Japanese branches of
128 EU firms in six sectors. A total of 92 mana gers replied (71 percent response rate). The
128 EU firms in the sample covers the majority of European exporters within the selected
industries with own operations in Japan8. The questionnaire and the details of the re-
sponses are described in Appendix 4.
Overall perception of the Japanese market
Responses to our questionnaire show that three out of four managers consider Japan to be
“more difficult to access than other markets” (51 percent) or “much more difficult to ac-
cess than other markets” (25 percent), cf. Figu re 4.6. Scoring replies from 1 (much easier)
to 5 (much more difficult), we calculate an average restrictiveness score of 4.1.
Figure 4.6 Perceived difficulty of exporting to Japan
0%4%7%51%
25%
0%10 %20%30%40%50%60%
Muc h le ss diffic ult
(score=1)Somewhat l ess
difficult (score=2)Equally difficult
(score=3)Somewhat more
difficult (score=4)Much more difficult
(score=5)How do you f i nd market access f or export t o Japan, compared t o export i ng t o other
count ri es?
Note: Average score = 4.1. Details of the busi ness survey can be found in Appendix 4.
Source: Copenhagen Economics Questionnaire to managers of European firms that export to Japan (all sectors).
There is no significant variation from the aver age in the individual sector responses. Phar-
maceutical firms have the lowest average scor e of 3.8 and medical devices have the highest
score of 4.3, thus we conclude that all firms across sectors share the perception that market
access to Japan is more difficult than other export markets.
Perceived restrictiveness compared to home market
We have also asked the EU managers in Japan to range the restrictiveness of the Japanese
market on a scale from 1 to 10, with 10 repres enting an entirely closed market, cf. Figure
8 A smaller survey among European SMEs exporting to Ja pan shows that more than 90 percent entered the mar-
ket through a Japanese distributor. Since the Japanese distributor handles all the difficulties of getting the products approved and sold on the Japanese market, we expect th at the SMEs have less information about the cost impact
of Japanese NTMs. Average score = 4.1
44
4.7. Measured in this way, the average score of 5.7 illustrates that EU exporters consider
the Japan market to be slightly closed.
Figure 4.7 Average restrictiveness score
Completely 'free trade' Entirely closed market
Average restrictiveness score
(N = 92) 5,7 123456789 1 0
Note: Replies to the question: “Consider exporting to Japa n, keeping in mind your domestic market. If 1 repre-
sents a completely “free trade” environment, and 10 re presents an entirely closed market due to barriers,
what value between 1 – 10 would you use to describe the overall level of restrictiveness of the Japanese
market to your export?”. Details of the bu siness survey can be found in Appendix 4.
Source: Copenhagen Economics Questionnaire to managers of European firms that export to Japan (all sectors).
There are some differences in the replies at the sector level. Again pharmaceutical firms
perceive Japan as being slightly less restrictiv e (score of 4.4) than average across all firms
(score of 5.7), while medical device firms consid er Japan to be slightly more closed (score
of 6.7) than average. Average restrictiveness scores from other sectors lie between the two.
Importance of NTMs relative to other factors
Factors other than NTMs also restrict trade. Of these, “customer requirements” comes out
as the most important factor restricting EU ex ports to Japan (average score of 3.0). On av-
erage, NTMs are considered to be the second most important factor for trade (average
score of 2.8), closely followed by language diffe rences and the third most restricting factor
(average score of 2.7), cf. Figure 4.8. Th is picture is consistent across sectors.
45
Figure 4.8 Importance of NTMs relative to intrinsic factors
Average restrictiveness score
(N = 92)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Language
Taxes
Labour costsCultural differencesLack and cost of landCostumer requirements
Tariffs
Non-tariff measures2,7 12345
2,0 12345
2,4 12345
2,5 12345
2,3 12345
3,0 12345
1,5 12345
2,8 12345
Note: Replies to the question: “Please give the following factors a score between 1 and 5 in terms of the degree
to which they restrict your export to Japan”. Details of the business survey can be found in Appendix 4.
Source: Copenhagen Economics Questionnaire to managers of European firms that export to Japan (all sectors).
4.3. REGULATORY ENVIRONMENT IS THE MOST IMPORTANT NTM
The regulatory environment in Japan is seen as the biggest obstacle for the responding
European companies, cf. Figure 4.9. The second largest barrier is related to standards and
conformity assessment which increase the complexity and uncertainty of doing business
and generating costs. Quantity control measur es as well as pricing and reimbursement rules
are perceived as being equally important. Customer require-ments
46
Figure 4.9 Restrictiveness of the types of NTM
Average restrictiveness score
(N = 12)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Regulatory environment
(e.g. costs and complexity of doing business)
Price control measures
(e.g. anti-dumping measures, countervailing measures)
Quantity control measures
(e.g. quotas, prohibitions)
Government assistance issues
(e.g. subsidies, export refunds)
Public procurement issues
(e.g. legal framework, contract conditions)
Distribution channels
(e.g. seaport and airport regulations, secondary dealers)
Lack of intellectual property rights
(e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures
(e.g. customs procedures)
Standards and conformity
assessment requirements
(e.g. technical regulations, certification)
Other non-tariff measures3,5 12345
1,5 12345
2,0 12345
1,4 12345
1,5 12345
1,9 12345
1,4 12345
2,0 12345
1,7 12345
2,5 12345
1,112345
Note: Replies to the question: “Please give the following non-tariff measures a score between 1 and 5 in terms of
the degree to which they restrict your export to Japan”. Possible replies include regulatory environment
(e.g. costs and complexity of doing business), price control measures (e.g. anti-dumping measures and
countervailing measures), quantity control measures (e .g. quotas and prohibitions), public procurement is-
sues (e.g. legal framework and contract conditions), di stribution channels (e.g. seaport and airport regula-
tions, secondary dealers), lack of IPR (e.g. copyright, trademark and patents), border procedures (e.g. cus-
toms procedures) and technical regulations and certif ication (e.g. standards and conformity assessment re-
quirements). Details of the business survey can be found in Appendix 4.
Source: Copenhagen Economics Questionnaire to managers of European firms that export to Japan (all sectors).
There are large sector differences. Pharmaceut ical and medical device companies rate the
regulatory environments, barriers related st andards and conformity assessment require-
ments in addition to the pricing and reimburs ement rules as being highly restrictive. The
latter most seriously hamper the export of ph armaceutical products. The same factors re-
strict exports of motor vehicles and processe d food products but access to distribution
channels and quantity control measures are al so important in these two sectors. Processed
food is the only sector where Japanese border procedures seem to have a restrictive impact on export.
NTMs in Japan create new costs, but they also (and perhaps more importantly) have an
impact on the capacity of foreign companies to offer their complete portfolio of products,
and their ability to offer new products quickly. Japanese consumers attach at least as much
47
importance to having the latest and most fash ionable product than to the cost of the prod-
uct. This aspect has also been addressed in th e questionnaire and is an element that is fac-
tored into the subsequent analyses.
The majority (60 percent) of EU exporters in ou r survey replied that they have a smaller or
much smaller product range in Japan than other markets in Asia. Almost 40 percent said
that their firm offers substantially fewer prod ucts on the Japanese market than other Asian
markets. A minority of 12 percent have a larger product range in Japan than in other Asian
markets, cf. Figure 4.10.
Figure 4.10 Product range is reduced in Japan
Much smaller
tha n othe r
Asian market s
39%
Som ewhat
smaller t han
other Asian
markets
21%Similar to other
Asian market s
20%Larger t han
other Asian
markets
6%Much larger
tha n othe r
Asian market s
6%I don't
know
8%How is your product range when exporting to J apan?
Source: Copenhagen Economics Questionnaire to managers of European firms that export to Japan (all sectors).
In our model assessment of the impact of redu ctions of the NTMs we take this into ac-
count, since the model applied uses so-called love-of-variety demand functions. This
means that there are welfare benefits to co nsumers from a wide range of differentiated
products, and that there are productivity gain s from an increasing the variety of suppliers.
These assumptions imply that lowering of NTMs in Japan will have both a cost reducing
effect and product range expansion effect, an d both effects are captured in the model.
4.4. SELECTION OF SECTOR STUDIES
We have selected five manufacturing sectors (pharmaceuticals, medical devices, processed
food, motor vehicles and transport equipment) and two services sectors (financial services
and communication services) for in-depth invest igation. The results of the sector studies
are reported in Appendices 6 to 12, and the results are summarised in the next chapter.
The selection is first based on existing trade vo lumes in order to identify sectors with large
amounts of trade and secondly we select sector s with a high expected increase of EU ex-
ports as a result of NTM reductions. Thirdl y, amongst the sectors with large current vol-
48
umes and large potential increases, we have chosen sectors where the NTM inventory
listed the most substantial amount of concrete and solvable barriers.
The selected manufacturing sectors
Processed foods has been selected because the curren t trade flows are high (approximately
7 percent of total EU export value to Japan) and because the current tariffs in Japan are
very high and are holding back trade. We have also identified many NTMs affecting trade
in the sector and the potential for barrier reduction is judged to be substantial. Reductions
of tariffs and NTMs may be essential to unlock trade in the sector.
Medical devices has been selected, even though the current export level is not among the
highest (approximately 3 pct of total EU export s to Japan). Importantly, EU exports in the
sector appear to be depressed below potential level. Furthermore, many barriers are men-tioned and the potential for barrier reduction is judged to be substantial. Furthermore, the
sector is interesting because there is widespread SDoC
9 in the EU. Also, these products
have been under the present MRAs, but recent reports confirm that this has been without
much effect. Therefore new policy options will ha ve to been considered to unlock the po-
tential for increased EU exports to Japan. Fina lly, the EU medical device industry is very
innovative and high-skill intensive, and thus interesting from a growth perspective.
The
motor vehicles sector has been selected because it represents around 9 percent of to-
tal EU export value to Japan. The potential EU market share is estimated to be much
higher than the current level and estimates of trade barriers are high and with large differ-
ences in market access costs in Japan and the EU to the disadvantage of EU exporters.
The inventory highlights many NTMs as having an impact on trade and barrier reduction
potential is judged to be high.
Pharmaceuticals has been selected because is consti tutes approximately 7 percent of total
EU exports to Japan. A number of non-tariff m easures have been identified in the sector
and estimates of trade barriers are high and wi th large differences in market access costs in
Japan and EU, to the disadvantage of EU exporters.
Transport equipment has been selected, not so much because of the current trade flow
(which makes up about 1 percent of total EU export value to Japan) but more because the
potential increase is judged to be particular high. The export of rail road equipment and
aircraft to Japan is low and is hindered by a number of NTMs and issues related to pro-
curement rules.
Selection of service sectors
Service sectors constitute nearly 35 percent of EU exports to Japan. According to the
OECD (2008), specific importance should be given to restrictions in major service indus-
9 SDoC is short for manufactures self declaration of conformity.
49
tries which are characterised by either low prod uctivity or high growth potential. Following
this argument, the sectors to focus on are: retail distribution, energy, transport, telecom-
munication services, public se rvices and business services.
Since total service trade with Japan is very lo w, and since the service sector in Japan ap-
pears to be very closed, when measur ed by the standard measures of
de facto openness
such as import penetration, foreign affiliate sales and foreign direct investment, we should
be cautious when basing our conclusions on th e size of current trade flows. Large parts of
service trade with Japan are entirely missing, an d predicting trade potentials based solely on
percentage increases of existing trade levels will not reveal the real issues (a 100% increase
from zero is still zero).
Therefore, we need to carefully consider whe ther the underlying reasons for the lack of
openness are to be found in domestic issues whi ch cannot be influenced by trade policy, or
whether there are options for reducing restrictin g domestic regulation within the realms of
trade policy.
We have chosen to focus on
financial services because there is already some EU trade and
commercial presence in Japan. The sector is al so ranked as the number one service sector
in our NTM inventory of trade-related issues for industry. Furthermore, the welfare impact
in the EU of increased trade is higher than most other sectors partly because the financial
service sector is skill intensive.
Furthermore, we have chosen
telecommunications even though EU trade and commercial
presence in Japan appears to be highly depr essed by regulatory issues. The much higher
import penetration of EU telecom services in other economies indicates a hidden trade po-
tential if current barriers were reduced. Also the internal EU process of market opening in
telecommunications has shown clear benefits fr om reducing barriers to cross-border trade
and commercial presence.
Finally, the retail trade and wholesale trade sect or in Japan would also be worth further in-
vestigation. Due to constraints in the current da ta, quantifications regarding barriers in this
sector have not been possible. However, a co nsiderable amount of other evidence points
to central role of the Japanese distribution system, including retail and wholesale trade. Barriers in the retail sector may have significant impacts on the
de facto market access of
many other industries, particularly in manufact uring, and this sector may hold the key to
unlock many of the difficulties faced by EU firms trading with or being commercially pre-
sent in Japan.
50
In chapter 3 we examined bilateral trade flow s in goods and services between the EU and
Japan, and concluded that NTMs are a more im portant trade policy factor than tariffs to
explain relatively low levels of trade, especially in Japan where import penetration is relatively low. In chapter 4 we focused specif ically on the identification of NTMs in Japan
and drew more detailed conclusions on the nature of these NTMs by means of an
inventory of NTMs and a survey of EU firms operating in Japan.
In this chapter we produce a more comprehe nsive picture of the trade costs of NTMs,
both in Japan and in the EU, for goods and fo r services. Estimating the trade costs of
NTMs is difficult and subject to many uncertainties. Various methods have been developed in recent years, all of which have th eir pros and cons. In order to contain these
uncertainties, we draw on several sources of information: the survey results for selected
sectors in Japan as discussed in the previous chapter, another set of business survey results
for the EU, and more traditional "gravity model" estimates which we use for services sectors and as a "control" value for goods sectors. Th e estimates of trade cost equivalents (TCEs)
of the NTMs that we show in this chapter will be used in the next chapter to run a number
of trade policy scenarios on EU-Japan trade. Barriers to trade in services have been quan tified using gravity methods. Gravity estimates
of the trade costs of these barriers are done by sector, both for Japan and for the EU, using
panel data of bilateral services trade flows and using OECD indicators of service trade
restrictiveness.
5.1. THREE METHODS FOR ESTIMATING GOODS NTM S
Given the intangible nature of NTMs quantify ing such measures is non-trivial, and so far
no methodological consensus has been reache d in the empirical literature. We use three
distinct approaches to estimate Japanese NT Ms. We use both assessments of trade costs
derived directly from a detailed business surv eys and results from two types of gravity
models.
All three approaches allow us to calculate trad e cost equivalents (TCEs) expressing the cost
impact on cross-border trade of the identified NTMs, cf. Figure 5.1. Intuitively, a TCE of,
say, 25 percent informs us that the NTMs add on average 25 percent more costs as a result
of regulatory barriers that the exporter has to comply with. From the three approaches, we
use the most conservative, i.e. the lowest, of the estimates for a given sector. The resulting
sector TCEs are subsequently implemented in a general equilibrium model used to evalu-
ate the impact NTM reduction scenarios (see chapter 6).
Chapter 5 QUANTIFICATION OF NTM S
51
Figure 5.1 Method to calculate the gains of tariff and NTM reductions
NTM inventoryBusiness
survey on
Japanese
NTMsQuantification
of NTMs and
calculationof
TCEs
Gravity model
with dummy
variablesQuantification
of NTMs and
calculationof
TCEs
Global NTM
surveyGravity model
with NTM
indexQuantification
of NTMs and
calculationof
TCEsScenario
definition and
simulationn
o
pDirectcost
measure
from survey
Gravity model
with Japan
specific factor
Gravity model
with NTM
index from
surveyTCEsTCEs= Trade Cost
Equivalents
The impact of the NTM
converted into a tariff
equivalent expressing
how many percent the
price abroad increases
as a result of the NTM
Source: Copenhagen Economics.
Method 1: Direct cost measure
In Method 1, direct cost measure , we use the information from the comprehensive ques-
tionnaire completed by European business manage rs in Japan (as discussed in the previous
chapter) to produce bottom-up direct estimate s of the trade costs. We use businesses’ own
assessments of how the NTMs affect various pa rts of their value chain from product devel-
opment to final delivery to the customer in Japan. Assessments provided by the managers
of EU exporters in Japan have yielded estima tes of individual NTM cost elements as well
as estimated cost reduction potentials. The di rect cost measures generally provide more
conservative estimates of the TCEs than the gr avity models and, for that reason, we use the
TCE values generated by Method 1 for the six selected goods sectors in Japan. The ques-
tionnaire and the survey are described in Appendix 4.
Method 2: Gravity model w ith country-specific factor
In Method 2, a gravity model with a Japan-specific factor , we use gravity modeling of global
trade flows per sector over several years and between all trading partners (i.e. more than
120.000 data points). Gravity models explain the volume of bilateral trade in each sector by
means of the following explanatory factors: GDP, distance, language, common border, tar-
iffs and a country-specific dummy variable (” time invariant importer dummy ”).
We specify our gravity model for the
manufacturing sectors using so-called importer
dummy variables and the model used inter alia by Anderson and van Wincoop (2003) and
Bergstrand, Egger and Larch (2007), see Append ix 2.2 for further details. These importer
dummies capture country-specific barriers to trade and reflect deep-rooted structural, insti-
tutional and regulatory factors that have an impact on trade in a particular sector.
However, importer dummies are likely to over estimate the size of the country-specific
NTMs since these restrictions also reflect a coun try's culture, structural/institutional factors,
52
consumer preferences, comparative advantages and other import barriers that cannot be
removed by trade policy instruments.
The outcomes from Method 2 could thus be considered as a control value or ceiling on TCEs, with the actual value probably being lowe r. That is precisely why we prefer the sec-
tor specific information for the selected sector s in Japan covered by the survey to provide a
conservative estimate of the trade cost impact of Japanese NTMs. For sectors not covered by the survey we have to rely on these estimates.
Method 3: Gravity model with NTM index from survey
In Method 3, gravity model with NTM index , we use the same gravity model specification
as in Method 2 but we use a NTM index collect ed from a global business survey instead of
the time-invariant importer dummies. We in troduce the NTM index in the gravity equa-
tion in order to have a specific control vari able for the perceived restrictiveness of NTMs
in a particular country in a particular sector.
The NTM index is based on a large scale fi rm survey conducted for the European Com-
mission by Ecorys (2009), in which firms from 40 countries have reported the perceived
NTM barrier by sector regarding their main tr ade destinations. In particular, firms have
been asked to indicate on a scale of 0 to 100 how restrictive they find exporting from their
home country to the EU and their other export destinations (including Japan).
Box 5.1 Question on level of restrictiveness
Question A12a. Consider exporting to [name of export market] , keeping in mind your domestic market. If 0
represents a completely ‘free trade’ environment, and 10 0 represents an entirely closed market due to NTBs,
what value between 0 – 100 would you use to descri be the overall level of restrictiveness of the [name of ex-
port market] to your export product in this sector?
Note: Companies were asked to state their main export destin ations in terms of export shares. Firms indicate on a
0 to 100 scale, how restrictive they find exporting from th eir home to each of their main export destinations.
Source: Ecorys (2009)
Responses to this question provide us with a measure of NTMs for each trading partner as
perceived by exporters to that market. For perceived barriers to the EU we get a satisfac-
tory number of responses and we therefore rely on this method to quantify the NTMs that
Japanese exporters face in European markets. However, the number of observations for
Japan as destination market in the original survey was low, Ecorys (2009). We have there-
fore asked the same question again in our surv ey specifically to Eu ropean firms exporting
to Japan, but only in the five sectors covered in our in-depth questionnaire.
5.2. RESULTS OF DIRECT COST ESTIMATES (METHOD 1)
Method 1 produces bottom-up direct cost esti mates of the impact of NTMs in Japan. The
results of these direct cost estimates are base d on the survey of European exporters to Ja-
53
pan in the selected key sectors and they provid e a direct cost estimate from companies in a
particular sector. We summarise the results below.
Pharmaceuticals
According to the survey responses, the curre nt regulatory requirements, administrative
procedures for conformity assessment and reim bursement procedures imply an additional
cost for European pharmaceutical exporters of approximately 22 percent. In other words,
the identified NTMs have an economic impact corresponding to a 22 percent tariff on the
imports of pharmaceutical products into Japan.
According to estimates provided by European managers in Japan, about 15 to 20 percent-
age points of these 22 percent extra costs ca n be avoided through actions aimed at elimi-
nating Japanese NTMs related to standards, technical regulations and conformity assess-
ment procedures. This implies that up to 20 percentage points of the barrier can poten-
tially be reduced. The remaining 2 percent are costs that relate to issues for which Euro-
pean exporters see no or little potential for solutions.
Reducing barriers to pharmaceutical exports re quires a combination of policy instruments.
No single solution is preferred by a majority of the firms in the sector. The most desired
solution to reduce the regulatory burden is through harmonisation and convergence be-
tween the EU and Japan regarding rules and re gulations in the sector (mentioned 24 per-
cent of the time), cf. Figure 5.2. The use of international standards is mentioned in 19 per-
cent of the replies as the second most desire d solution. Mutual recognition of the certifica-
tion procedure is also frequently mentioned (19 percent of the items mentioned). Review
of the pricing and reimbursement system is noted in 15 percent of the mentioned solu-
tions.
There is no direct link between the frequenc ies of the mentioned solutions and the cost
impact of these solutions. For example, the fa ct that MRAs are mentioned in 19 percent of
the replies does not necessarily mean that the absence of workable MRAs constitutes 19
percent of the potential cost impact of NTMs . The frequencies of the replies are not nec-
essarily reflecting individual contributions to the NTM cost. Rather the frequencies are
used to show that, based on the assessment from EU exporters in Japan, a multitude of so-
lutions are needed to reduce the NTM barriers identified.
54
Figure 5.2 Quantification of cost reduction potentials
2%20%
0%5%10 %15 %20%25%
NTM estimate for EU pharma exports to J apanTrade cost equivalent, TC E
Remaining barrie r
Reduction potential
24%19%19%15%9%4%10%
Contribution to barrier reductionOther
Common positive and
negative list of additives
Introduction of new
standards
Review the pricing and reimbursement systems
Mutual recognition of conformity assessment
Use of international
standards
Harmonisation/convergence of regulations
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
Medical Devices
According to our estimates, the current regula tory requirements, administrative procedures
for conformity assessment and reimbursement assessment imply an additional cost for
European medical device exporters of approxim ately 30 percent. In other words, the iden-
tified NTMs have an economic impact compar able to the impact of a 30 percent tariff on
the imports of medical devices.
According to estimates provided by European managers in Japan, about 8 to 12 percentage
points of these 30 percent extra costs can be avoided through various actions requiring ef-
forts from both European and Japanese policy makers.
The actions required to achieve this kind of reduction will multiple. No single solution is
preferred by a majority of respondents. The preferred solution to reducing the regulatory
burden is through the use of international st andards (mentioned in 21 percent of the re-
plies), cf. Figure 5.3. The second most popu lar solution is to see harmonisation and con-
vergence between the EU and Japan regarding rules and regulations in the sector (men-
tioned 18 percent). Simplification of the cert ification procedure and speeding up the certi-
fication process also gets frequently mentione d. Introduction of a SDoC is also mentioned
by some exporters as their preferred solutio n. Review of the pricing and reimbursement
system appear as the least frequently mentio ned solution. Recall that the frequencies of
these replies does not necessarily reflect the co ntribution to the cost impact, but rather the
solutions most frequently mentioned as preferred solutions by EU exporters in Japan.
Preferred solutions:
Frequencies of answers NTM estimate for
EU exporters to Japan
55
Figure 5.3 Quantification of cost reduction potential
18 %12 %
0%5%10 %15 %20%25%30%35%
NTM estimate for EU medical device exports to J apanTrade cost equivalent, TC E
Remaining barrier estimate
Reduction potential
21%18%12%11%11%9%7%5%7%
Contribution to barrier reduction
Other
Review the pricing and
reimbursement systems
Introduce third party certification system
Simplification of certification procedures
Suppliers’ declaration of conformity
Speed up the certification process
Mutual recognition of conformity assessment procedures
Harmonisation/convergence of rules and regulations
Use of international standards
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
Processed Food
According to the survey responses, the barrie r estimate for processed food is between 25
percent and 70 percent. We take the conservative approach and use a TCE of 25 percent
in the CGE simulations.
Not all of this barrier can necessarily be re moved. According to the responses from the
managers in Japan, costs corresponding to 5 to 7 percent of the value of sales in Japan can
be avoided by addressing the regulatory en vironment and costs corresponding to 1 to 2
percent of value of sales can reduced by im proving the conformity assessment procedures.
According to these estimates, about 6 to 9 perc entage points of the 25 percent barrier costs
can be avoided through various actions aimed at reducing NTMs related to standards,
technical requirements and conformity assessme nt. To achieve this kind of reduction will
most likely require a multitude of actions, cf . Figure 5.4. 30 percent of the respondents
find that the introduction of international st andards would be an effective tool to reduce
barriers in the Japanese food sector. A common positive and negative list of additives is
also on the European exporters’ wish list. Harmonisation/convergence of rules and regula-
tions is listed as an alternative.
Preferred solutions:
Frequencies of answers NTM estimate for
EU exporters to Japan
56
Figure 5.4 Cost reduction potential in the processed food sector
16 %9%
0%5%10 %15 %20%25%30%
NTM estimate for EU processed foods exports to J apanTrade cost equivalent, TC E
Remaining barrier
Reduction potential
30%23%18 %18 %5%5%3%
C ontribution to barrier reduction
Ot h er
Review t he pricing and
reimbursement systems
S implification of certification procedures
Harmonisation/ convergen
ce of rules and regulations
Mutual recognition of
conformity assessment
procedures
C ommon positive and
negative list of additives
Use of international
st andards
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to manage rs of European processe d food firms in Japan.
Motor Vehicles
According to our survey estimates, EU exporter s of motor vehicles pay an extra cost of 10
percent. EU producers therefore face a seriou s disadvantage since the costs of TBTs fall
disproportionately on exporters compared to Japanese producers. To reduce these barri-
ers will require that the Japanese authorities streamline and simplify the certification proc-ess and find procedures for revising standa rds and technical guidelines to better accom-
modate innovative products. Most importantl y, Japan should adopt international or UN-
ECE standards, in particular with regards to emission, noise and safety. In many cases Ja-
pan has agreed to do so but has not yet impl emented much of the necessary legislation.
Not all of the NTMs can necessarily be remo ved. According to the responses from the
managers in Japan, costs corresponding to ar ound 9 percentage points of the 10 percent
can be reduced by reducing barriers related to standards and technical regulations. In addi-
tion, 7 percentage points can be reduced by eliminating barriers related to conformity as-sessment requirements. If both types of NTMs are eliminated it would therefore be possi-
ble to stimulate EU export to Japan even more than our simulation results predict.
The majority of respondents call for an increas ed use of international standards as a tool
for lowering the barriers in the Japanese motor vehicles industry related to standards, cf.
Figure 5.5. Alternatives could be the harmon isation/convergence of rules and regulations
or the mutual recognition of co nformity assessment procedures.
Preferred solutions:
Frequencies of answers NTM estimate for
EU exporters to Japan
57
Figure 5.5 Quantification of cost reduction potentials for motor vehicles
1%9%
0%2%4%6%8%10 %12 %
NT M estimate for E U automobile ex ports to J apanTrade cost equivalent, TC E
Remaining barrier
Reduction potential
40%28%23%5%3%3%
C ontribution to barrier reduction
Don't know
Implementation of license
syst em f or dist ribut ion
S uppliers’ declaration of conformity
Mut ual recognit ion of
conf ormit y assessment
procedures
Harmonisat ion/ convergence of rules and regulations
Use of international st andards
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to mana gers of European motor vehicle firms in Japan.
A speedier certification process is listed by re sponding managers as a means of reducing
barriers related to conformity assessment req uirements. Next follows the use of interna-
tional standards and the simplificat ion of certification procedures.
Transport equipment
There is a large potential in the transport equi pment sector for bilateral trade gains on EU
exports of aircraft and railway products to Ja pan. While there are several explanations for
barriers to trade in the railway sector, the reason s for lack of bilateral aircraft trade between
the EU and Japan are less clear.
Improving Japanese bilateral trade relations on air and rail products could potentially in-crease the total EU27 export revenue of the transport equipment sector by around 340
percent since the EU27 revenue of €1.1 billion in 2007 could potentially increase to €3.7
billion, provided the implementation of the necessary regulatory reforms in Japan.
The Japanese purchase of aircrafts is strongly biased towards U.S. suppliers. Equalising the
percentage of Japanese imports from the EU and the USA could increase EU aircraft ex-
ports by approximately €2 billion per year. A dditionally, opening the Japanese market of
railway products to foreign companies (e.g. by public procurement contracts) is likely to
boost Japan's imports of railway products from the EU by approximately €600 million.
The total export potential is thus €2.6 billion.
Given the trade elasticity of the transport eq uipment sector we have calculated the trade
cost equivalent corresponding to this potent ial. This corresponds to a trade cost of
45percent and a reduction potential of 75 to 90 percent, with the maximum scenario im-
plying a realisation of the €2.6 billion increase in exports. Preferred solutions:
Frequencies of answers NTM estimate for
EU exporters to Japan
58
5.3. RESULTS FROM GRAVITY MODELWITHOUT NTM INDEX (METHOD
2)
Method 1 only generates TCE estimates for six goods sectors in Japan. These are the most
important sectors in terms of trade volumes and potential trade impacts of NTMs. But we
also need estimates for the remaining smaller sectors, including services, and for NTMs in
the EU. To fill this gap, we use two other methods.
In Method 2 we use a gravity model of global trade flows per sector over several years and
between all trading partners. We explain the vo lume of bilateral trade in each sector by
means of the following explanatory factors: GDP, distance, language, common border, tar-
iffs and an importer specific factor (”
time invariant importer dummy ”).
We find that the importer specific factor is generally higher for Japan than for the EU and
higher than for other OECD countries. This is in line with the findings in OECD (2006).
Our result tells us that imports in Japan in most sectors are depressed over and above what can be explained by the other explanatory fa ctors (GDP, distance, language and tariffs).
We assume that this "over and above" trade redu ction is due in part to non-tariff regulatory
measures.
The gravity model also sheds light on what fact ors other than NTMs are restraining trade.
The factors restraining exports from the EU to Japan can be divided in two. First, those
factors which cannot be affected by trade po licy, such as the remoteness of the Japanese
market, the large size of the Japanese market and the cultural and linguistic barriers. The
macro-situation also belongs to this category. Second are the factors that can be influenced
by policies. These include both tariffs and no n-tariff measures. Our assessment shows that
the factors that cannot be affected by policy have a large impact on trade.
Distance and language are two important factors in explaining the lack of trade between the
EU and Japan. To illustrate, our gravity model shows that:
Geographical distance between the EU and Japan reduces trade significantly. On
average, transport from Europe to Japan takes 3 times longer than from EU to
the U.S. This fact alone reduces EU ex ports to Japan by 15 to 20 percent com-
pared to trade with the US.
Language differences also si gnificantly reduce trade. On average, only 12 percent
of Japanese speak business English and on ly very few Europeans can manage in
Japanese.
10 In comparison with EU exports to the U.S., where the English lan-
guage facilitates trade, language difference with Japan is a major factor in account-
ing for the gap in trade. To illustrate the large impact of language on trade, one could consider a hypothetical and very unlikely scenario, where the EU and Japan
10 Besides the mother tongue, the most commonly spoken foreign languages in Europe are English (32%), French
(11%), German (8%), Russian (6%) and Spanish (5%).
59
share a common language. The impact on trade would be enormous. EU exports
to Japan could increase by more than 70 percent in the pharmaceutical industry,
by 50 percent in the medical device sector, by 40 percent in the food sector and
by 14 percent in the automotive sector.
In sum, language difference and geographical distance reduce trade. Neither of these will
change considerably in the foreseeable future . Better and faster transport can reduce the
impact of distance, and better knowledge of foreign language can reduce the impact of lan-
guage. But a scenario which el iminates all language barriers between the EU and Japan is
not foreseeable. At the same time, it must be recognised how large an impact language has
on trade. We take that into account when we assess the potential for NTM reductions.
In our assessment of NTM reductions we keep the impact of distance and language on
trade constant, and only assess potential new trade which could be created given the exist-
ing language and distance barriers.
NTMs pose serious challenges to European exporters
Even after accounting for distance, language an d tariffs, part of the low import penetration
can still be explained by high Japanese barriers to import, as captured by the importer dummies in the gravity model, cf . Figure 5.6. This is clear fr om the positive and significant
importer specific dummies. For Japan, the esti mated coefficient on the importer dummy is
2.0, and this is higher than for the EU (1. 27) and the U.S. (1.35). The difference between
the EU and the Japan dummy variables is 0.73, which suggests that the Japanese import
would be 73 percent higher if Japan’s restrictiveness was reduced to the level of the EU.
60
Figure 5.6 General restrictiveness of manufacturing import
1, 272
1, 35
00,511, 522,5
EU Jap an US AO ve ra ll ba rrie rs in E U a nd J a pa n
Note: Restrictiveness is concluded after accounting for othe r variables (language, distance and tariffs). It is meas-
ured by the importer dummy from the gravity model for manufacturing goods. The importer dummies
take the value 1 for a particular importer country and 0 otherwise. See Appendix 2.1 for further details on
the gravity model.
Source: Copenhagen Economics’ gravity model for manufacturing goods.
Our estimates of the importer specific variables at the sector level show that Japan is less
open than the EU in 11 out of the 13 sector s. Only food and cosmetics show the reverse
picture. This suggests that sector-specific import barriers other than tariffs are larger in Ja-
pan than in the EU. The difference is substantia l: the Japanese importer specific effect ex-
ceeds the EU importer specific effects by significant amounts, ranging from 0.26 in phar-
maceuticals to 1.69 in electronics. The Japanese barrier to EU exports is particularly high
in aerospace, where the difference is 3.30.
61
Figure 5.7 Openness to import across sectors
00,511, 522,533,544,5Sector-specific barriers in EU and J apan
Japan
EU
Note: A higher figure means more restrictive on imports. The importer dummies take the value 1 for a particu-
lar importer and 0 otherwise.
Source: Copenhagen Economics’ gravity model for manufacturing goods.
The difference of 0.26 for pharmaceuticals (Tab le 5.1) tells us that Japan’s imports of
pharmaceuticals would be 26 percent higher than their current levels if their impediments
were as low as the EU’s vis-à-vis non-EU trad e partners in the same sector. Similar inter-
pretations can be made for other sectors.
Table 5.1 Importer specific factors for EU and Japan by sector
Sector EU importer
specific effect Japan importer
specific effect Difference
(EU minus Japan estimate)
Aerospace -0,68 -3,97 -3,30
Electronics -0,98 -2,67 -1,69
Machinery -1,66 -2,91 -1,25
Iron -1,28 -2,24 -0,96
Office -1,10 -2,05 -0,95
Medical -1,29 -2,13 -0,84
Automotives -1,67 -2,50 -0,83
Textiles -0,69 -1,42 -0,73
Paper -1,52 -2,23 -0,71
Pharmaceuticals -1,42 -1,68 -0,26
Chemicals -1,29 -1,30 0,00
Cosmetics -2,08 -1,71 0,36
Food -1,20 -0,77 0,44
Note: Importer-specific factors are captured by the impo rter dummies from the gravity model. All estimates are
significant at the 5% level. All importer dummies are listed in Appendix I.
Source: CE gravity model.
62
Not all of the impediments to trade that are ca ptured by the importer specific variables can
be removed through bilateral trade negotiations . We rely on detailed sector analyses and
surveys to assess which impediments can be removed and which cannot. Gravity models based on method 2, alone, cannot inform us about how much various policies and actions
can provide in terms of removing or reducing these impediments.
Knowing that the importer specific variables ar e likely to overestimate the cost impact of
NTMs, we can still calculate a trade cost equivalent based on method 2. To calculate the
implicit trade costs we use the estimated tariff elasticity to translate changes in export vol-
umes (quantities) into trade cost equivalents (prices).
The result shows a high imputed trade cost for cosmetics exports in both countries (a trade
cost corresponding to over 90 percent tariff) . Most other sectors range between 20 and 60
percent trade costs based on method 2. Fo r pharmaceuticals, machinery, automotives and
aerospace sectors, we cannot produce a TCE estimate because our models do not yield
any significant tariff elasticity estimates.
Table 5.2 Trade costs imputed from importer specific factors for EU and Japan
Sector Tariff
elasticityImporter specific factor Imputed Trade Cost Equivalent
(TCE)
EU Japan EU Japan
Chemicals -3,315 -1,292 -1,296 32% 32%
Pharmaceuticals insign. -1,418 -1,680 – –
Cosmetics -0,639 -2,076 -1,713 96% 93%
Machinery insign. -1,663 -2,914 – –
Electronics -5,461 -0,975 -2,665 16% 39%
Office -2,193 -1,102 -2,054 39% 61%
Medical -3,250 -1,289 -2,127 33% 48%
Automotives insign. -1,673 -2,500 – –
Aerospace insign. -0,676 -3,971 – –
Food -1,352 -1,202 -0,767 59% 43%
Iron -6,386 -1,283 -2,241 18% 30%
Textiles -3,058 -0,688 -1,419 20% 37%
Paper -5,993 -1,523 -2,233 22% 31%
Note: Trade costs are calculated based on the importer specific factor estimated for Japan and EU and by using
the tariff elasticities derived from the same gravity equation.
Source: CE gravity model method 2.
As said before, we should be careful not to over-interpret these gravity-based estimates.
Other factors than NTMs are captured in the im porter specific factor in the gravity model
and other aspects than NTMs may play a role in explaining the country- and sector-specific
"missing trade". For instance, one should bear in mind the macroeconomic aspect of
global trade when comparing Japan's import pe netration with other countries. Goto (1991)
suggests that, in addition to lack of imports du e to relative factor endowments (particularly
63
its small land space, distance to its trading partners and scarce natural resources) and its
economic size, Japan’s rapid capital accumulati on might add to the explanation of the low
level of import penetration in Japan.
A particularly important factor to explain missi ng trade can be Japan’s strong global com-
petitive position in some sectors of the ec onomy, which makes it hard for foreigners to
compete with Japan in these sectors and would thus explain low imports into Japan from elsewhere. To verify the validity of this expl anation we have calculated revealed compara-
tive advantage (RCA) indicators for Japan. Ja pan has a strong revealed comparative advan-
tage in the automotive industry; iron, steel and metal products; machinery; as well as tex-
tiles, clothing and footwear, cf. Table 5.3. In the automotive indust ry, for example, a RCA
of 2.1 means that Japan’s share of global export in this sector is 2.1 times higher than its
overall share of global export.
11
Table 5.3 Revealed comparative advantage in the EU and Japan
Sector EU ~ World Japan – World
Food and beverages 0.9 0.2
Textiles, clothing and footwear 1.0 1.2
Paper and paper products 0.7 0.2
Chemicals 1.0 0.3
Rubber and plastic products 1.1 0.9
Iron, steel, metal products 1.0 1.6
Automotive industry 0.6 2.1
Machinery 0.9 1.3
Note: The revealed comparative advantage (RCA) indicato r measures a country’s competitiveness vis-à-vis the
rest of the world. The indicator is calculated as RCA = (X ik/∑iXik)/(∑kXik/∑i∑kXik), where X ik is country i’s
export in sector k. It thus measures a country’s share of exports in a given sector relative to its total share
of exports. Values greater than one indicate that the country has a comparative advantage in that sector.
The GTAP and Eurostat sector definitions to not ma tch completely and what is denoted electronics in
Eurostat largely corresponds to the machinery sector in GTAP. Intra-EU exports are not included in the
analysis as we are interested in analys ing the EU’s external competitiveness.
Source: Copenhagen Economics’ calcul ations based on data from GTAP.
However, accounting for comparative advantages does not alter our estimates of the Japan-
specific import factor. We have tested the in clusion of these RCA variables in our gravity
model, and it turned out that this inclusion of the RCA variable did not alter the estimated
importer specific effect, so we conclude that large importer specific impact in Japan cannot
be explained by the comparative advantage variable.
11 The EU, on the other hand, does not seem to have its main competitive strength in manufacturing. Only in
rubber and plastic products does the EU have a RCA greater than one, and the EU’s export in this sector is 1.1 times higher than the EU’s overall share of exports.
64
5.4. RESULTS FROM GRAVITY MODELWITH NTM INDEX (METHOD 3)
In method 3, we expand the gravity model in method 2 with an NTM index collected
through a large scale global survey. We have supplemented this survey with data for Japan
in five sectors (pharmaceuticals, medical devices, motor vehicles, processed foods and other manufacturing). For pharmaceuticals, motor vehicles and other manufacturing the additional data confirm the result from the Ecorys data. For medical devices and processed foods, our survey resulted in higher NTM indices than the Ecorys data.
Using the NTM indexes in the gravity model yi elds estimates of the trade costs. For phar-
maceuticals and chemicals, this indicates a trad e cost of around 30 percent for imports into
Japan, and a trade cost above 60 percent for cosmetics. The cost of NTMs on processed
food imports into Japan is estimated at arou nd 25 percent. For some sectors (medical de-
vices, motor vehicles and machinery) the meth od did not yield significant estimates, cf.
Table 5.4.
Table 5.4 NTM index and imputed trade costs in Japan
Sector ECORYS survey
NTM Index
0 to 100New survey
NTM Index
0 to 100 Imputed trade costs
from
method 3 results
Chemicals 58 – 32,4
Pharmaceuticals 41 44 30,0
Cosmetics 74 – 61,1
Machinery 48 – –
Electronics 11 – 11,6
Medical 38 67 –
Motor Vehicles 43 52 –
Aerospace (other transport) 58 – 25,0
Food and beverages 29 60 24,9
Iron 38 – 55,3
Textiles 42 – 21,3
Paper 53 – 11,6
Other manufacturing 50 54 15,4
Note: The imputed trade costs in the table are based on method 3. For more information refer to annex 1.
Source: Copenhagen Economics’ calculations based gravity model using NTM index from Ecorys (2009).
5.5. COMPARISON OF TRADE COST EQUIVALENTS FOR GOODS
To compare the direct costs estimates with the gr avity results, we have also calculated grav-
ity based TCEs from Method 2.
The TCEs using the gravity model approach are generally higher than the direct cost esti-
mates provided by the companies, cf. Table 5. 5. To be conservative, we therefore use the
direct cost estimates in our CGE simulations for the sectors where these are available. The
argument is further strengthened by the fact that the gravity model approach (irrespective
of whether we use the importer dummy approach as applied in this study or the NTM in-
dex from the EU-US study) captures the impact of all barriers to trade and not only the
impact of NTMs.
65
Table 5.5 Trade cost estimates for goods in EU and Japan
Japan barriers against EU EU barriers against Japan
Sector Method 1 Method 2 Method 3 Method 2 Method 3
Food and beverages 25 59 25 43 –
Pharmaceuticals/chemicals 22 32* 30 32* 18
Electrical machinery – 39 12 16 4
Motor vehicles 10 – – – 16
Other transport equipment 45 – 25 – 19
Metals and metal products – 30 21 18 6
Wood and paper products – 31 15 22 11
Other machinery (medical) 30 – – – –
Note: The table shows percentage of trade cost equi valents of NTMs in goods. The estimates shown in bold are
those we use for the subsequent modelling. Results ar e reported for CGE-model sectors.*) Estimate per-
tain to chemicals.
Source: Copenhagen Econ omics gravity estimates.
The sectors without direct cost estimates re present smaller trade flows and the aggregate
results of the assessment are insensitive to th ese TCE estimates. We use the most conser-
vative gravity results based on Method 3. Th e TCEs from the gravity models can overesti-
mate the impact of NTMs. For this reason we use conservative reduction scenarios in these
sectors.
5.6. GRAVITY ESTIMATES FOR SERVICES
Conceptually, the approach followed for services NTM estimation is the same as for goods
and drawn from gravity modelling of bilateral services trade. However, there are severe
data limitations, and differences in the nature of services markets opening. Indeed, while
data for trade with services are available from balance of payments statistics, primary data
on detailed bilateral trade are available only from the OECD, Eurostat, and limited na-
tional sources. These data have been comb ined in a composite dataset that takes advan-
tage of OECD reported trade with non-OE CD countries to construct non-OECD imports
based on mirror flows.12 In addition, these data are limited to direct cross-border trade.
Data on sales through affiliates is even more limited. We work here with cross-border
trade data. Our regression work on the serv ices sectors with these data, reported here,
shows that there are significant effe cts of NTMs on services trade.
Data for service sector estimates
For the services sectors, the OECD (2007) FDI restrictiveness indexes are used, and com-
bined with a survey-based NTM index from Ec orys (2009) and theoretical work by Fillat,
12 See Francois, J., O. Pindyuk, and J. Woerz (2009). “Int ernational Transactions in Services: Data on Interna-
tional Trade and FDI in the Service Sectors,” University of Linz, Institute for International and Development
Economics discussion paper 20090802.
66
Francois & Woertz (2008). These indexes are different from the PMR indexes produced
by the OECD. They are produced as part of the OECD reporting on FDI regimes, and
are designed to quantify levels of regulatory discrimination against foreign service firms
across different service markets.
The OECD restrictiveness indices show that Ja pan is more restrictive than the EU in rail
services and air transport. Rail services refe r to foreign management and operation of rail-
based transport in Japan. Foreign businesses in Japan also consider the air transport sector
in Japan as being closed
13. In other sectors, the picture is more balanced, with Japan ap-
pearing slightly less restrictive than the EU average.
Estimation of gravity model for services
Using a panel data set covering bilateral trade in many services sectors between most OECD countries, we estimate the impact of the NTM indexes for cross-border service
trade. The model includes partner dummies and time dummies, as well as the set of vari-
ables like per capita income, GDP, current account (% GDP), distance and FDI stocks.
From the basic regression results we are able to estimate an importer effect variable or in-
dex that measures the systematic variation at country level of imports, after controlling for
the variables in our gravity equation.
Results from the estimates shows that sector se rvice barriers in Japan range from 2 to 24
percent additional trade costs. Barriers in the EU27 range from 2 to 14 percent additional
trade costs. The estimations for the EU and Ja pan reveal a picture not significantly differ-
ent from that in the restrictiveness index abov e. As such, Japan is slightly less restrictive
than the EU – i.e. has slightly lower trade cost estimates than the EU. The exception is
telecommunications. In telecommunications, ou r estimates show that supply into Japan is
twice as costly as the supply of telecommunica tion services into the EU. These estimates
correspond to the tariff equivalent explaining the amount of trade reflected by the OECD
indexes, beyond what can be explained by the traditional gravity variables (GDP, distance,
common border and common language). However, not all of these barriers can realistically
be removed.
13 Air transport services are governed by bilatera l agreements that fall outside GATS and FTAs.
67
Table 5.6 Trade cost estimates for services in EU and Japan
Service sector Japan barriers against EU EU barriers against Japan
Finance 15,8 11,3
Insurance 6,5 10,8
Business and ICT 2,5 14,9
Communications 24,7 11,7
Construction 2,5 4,6
Personal, cultural, other services 6,5 4,4
Note: The table shows percentage of trade cost equivalents of NTMs in services. Data for water transport and air
transport did not allow for country specific estimates and are omitted.
Source: Francois gravity estimates. See Appendix 2.
To assess the number of service barriers which could potentially be removed through new
EU-Japan trade and investment liberalisation, we have looked at internal-EU service trade
and internal-ASEAN + Japan service trade. We fi nd that services are traded within the two
“blocs” much more than between them. Service trade between EU-members is much
higher than between any EU-member states and Japan (or ASEAN) even when controlling
for size of GDP, common border and lang uage. Similarly, Japan’s service trade with
ASEAN is higher than with the EU after contro lling for the traditional gravity factors. We
apply estimates from a recent EU-US trade st udy, cf. Ecorys (2009) to determine the scope
for possible reduction to identify maximum potential barrier reductions. These are lower
than total estimated barriers, as not all source s of trade costs are deemed to be candidates
for elimination in FTA negotiations.
Table 5.7 Reduction potentials for services in EU and Japan
Service sector Japan barriers against EU EU barriers against Japan
Finance 8,7 7,0
Insurance 1,2 5,6
Business and ICT 2,5 4,3
Communications 19,2 8,2
Construction 1,9 2,6
Personal, cultural, other services 3,7 2,5
Note: The table shows how many percentage-points each tr ade cost equivalent of NTMs in services can be re-
duced in the maximum potential.
Source: Francois gravity estimates.
68
In this chapter we present the results from th e CGE simulations that quantify the effects of
removing tariffs and reducing non-tariff measures on cross-border trade between the EU
and Japan. Firstly, we quantify the impacts on the two economies from the combined tariff
and NTM scenarios. Secondly, we decompose th e results to show how much of the impact
is related to the reduction of non-tariff measures.
Both tariff reductions and NTM reductions ar e beneficial to economic welfare. In the
most ambitious scenario, we show that tw o-sided NTM reductions between the EU and
Japan yield two times more welfare to the EU th an bilateral tariff reductions do to the EU.
For Japan the effect is even stronger. Reduci ng EU-Japan NTMs can yield up to six times
more welfare to the Japanese economy than b ilateral tariff reductions with the EU. Thus
both partners, particularly Japan, should ha ve a strong incentive to include NTM reduc-
tions in a bilateral trad e liberalisation scenario.
6.1. THE MODEL AND THE SCENARIOS
We have evaluated the effect of trade liberalisation between the EU and Japan using a
CGE-model of global trade (see Box 6.1).
We have used this model to simulate two scen arios. Both scenarios aim at quantifying the
potential for bilateral trade liberalisation, ta king the NTM estimates from Chapter 5 as well
as the identified NTM reduction possibilities in to account. Since there is some uncertainty
about the size of the possible NTM reductions , we model two scenarios, providing a lower
bound and upper bound quantification of the likely potential.
Scenario 1 – Lower Bound
Bilateral tariffs between EU and Japan are reduced to zero in all sectors
Manufacturing NTMs are reduced as in the minimum reduction scenario
Barriers on cross-border service trade are reduced as in minimum scenario
Scenario 2 – Upper Bound
Bilateral tariffs between the EU and Japan are reduced to zero in all sectors
Manufacturing NTMs are reduced as in the maximum reduction scenario
Barriers on cross-border service trade are reduced as in maximum scenario
The two scenarios differ only by the size of the NTM reductions in manufacturing and on
the reduction of barriers to cross border serv ice trade. In the first scenario, we use the
most modest assumptions for NTM reductions and in the second scenario we use the up-
per bound estimate of the NTM reduction potential.
The reduction potentials for NTMs in Japan are derived from our questionnaire to EU
exporters in Japan for those sectors covered by the questionnaire (pharmaceutical, medical
devices, motor vehicles, food and beverages, financial services and communications ser-Chapter 6 MODEL SIMULATIONS
69
vices). In the questionnaire, EU managers in these sectors have been asked to assess how
the identified barriers can be reduced, and how much of the imposed trade cost they ex-
pect it to be possible to reduce. Of course th ere is no single objective answer, but rather a
range of possible reduction potentials. As a consequence, the responses for each sector
also vary within a range. We use the range fr om the lower end estimate to the higher end
estimate from the questionnaire to defi ne the minimum and maximum NTM reduction
scenarios.
In the sectors, where there is only limited EU export to Japan, and which are thus not cov-
ered by our questionnaire, we have applied the so-called actionability assumptions as ap-plied in Ecorys (2009). These are assumptions about how much of a given barrier estimate
can be deemed to be reduced in a policy sc enario. The rates are shown in appendix 1.
Ecorys (2009) have separated the barrier estimates into a cost creating and a rent creating part, and we use the cost creating part as the minimum scenario, and the combined cost
and rent creating barrier estimate as the maximum scenario.
In the following we describe the scenarios in more detail (the sectors covered by our ques-
tionnaire are also described in annex 6-12). Firs t we look at the tariffs that are assumed to
be removed, we then analyse the NTMs in manufacturing, and finally we asses the as-
sumed reductions in service barr iers to cross-border trade.
Bilateral tariffs are reduced to zero in both scenarios
Both scenarios include full bilateral tariff removal between the EU and Japan, and the sce-
narios do not differ regarding ta riff reductions. The starting point (the so-called baseline) is
the position without the implementation of the Doha-round14. The Doha-round will reduce
tariffs in the EU and Japan by a significant am ount. Our simulations estimate the effects of
reducing the pre-Doha tariffs. However, sensit ivity analyses, as reported towards the end of
this chapter, shows that the results of the EU -Japan trade liberalisation scenarios are unaf-
fected by the inclusion of the Doha Round in the baseline.
Some non-zero tariffs will remain after the comp letion of the Doha-round, most notably in
food and beverages. Japan’s trade-weighted average MFN tariff on European food and
beverage exports will be 34.7 percent, and the EU’s average external tariff on Japanese
food and beverages will be 12.4 percent, cf. Tabl e 6.1. Note that the EU imports very little
food and beverages from Japan, whereas Japa n imports large amounts of European food
and beverages. Japan will also have higher tari ffs on agricultural products, with an average
MFN tariff against EU imports of 6.7 percen t, against the EU tariff of 4.8 percent.
The EU will have higher tariffs than Japan in all non-agriculture manufacturing (NAMA)
sectors in our model. This is notably true for motor vehicles, where the EU will have a tar-
14 We have also run simulations with alternative baselines, in particular one with the Doha round in the baseline,
and scenarios with the EU-Korea agreement in the baseli ne. The isolated effect of EU-Japan liberalisation is
largely the same, whether or not the Doha round or EU -Korea FTA or both are included in the baseline.
70
iff of 8.7 percent, while Japan’s motor vehicle tariffs are expected to drop to zero if the
Doha agreement comes into force, cf. Table 6.1. Note that the EU is importing large
amounts of motor vehicles from Japan, whereas the EU’s export of motor vehicles is lim-
ited.
Table 6.1 Post-Doha MFN tariffs (percent)
Sector Japanese tariffs
on EU import EU tariffs on
Japanese import
Primary agriculture 6.70 4.82
Other primary 0.13 0.22
Food and beverages 34.71 12.36
Chemicals 1.08 2.60
Electrical machinery 0.00 2.32 Motor vehicles 0.00 8.66
Other transport equipment 0.00 4.04
Other machinery and equipment 0.10 1.87
Metals and metal products 0.83 2.30
Wood and paper products 0.93 0.52
Other manufactures 3.12 3.45
Note: The table shows bilateral trade weighted tariffs on goods trade from EU to Japan and vice versa (percent).
The table shows post-Doha tariffs. For pre-Do ha tariffs, please refer to chapter 3.
Source: Own calculation based on GTAP and on Doha-round tariff scenario from German Agricultural Institute.
Our scenarios include the reduction of these tariffs to zero on a bilateral basis, i.e. the EU
reduces the tariffs in Table 6.1 to zero vis-à- vis Japan, but keeps tariffs unchanged against
other non-FTA partners. Likewise, Japan will redu ce its tariffs, as shown in Table 6.1 vis-à-
vis the EU, but keep tariffs unch anged vis-à-vis other partners.
NTMs are reduced in both Japan and the EU
The trade cost equivalents of NTMs in goods sectors, as shown in chapter 5, are double
digit and range from 10 percent for motor vehicles to 45 percent for other transport
equipment. Most tariff rates are single digit, all NTM estimates show double digit trade
cost equivalents. Service barriers are low in some sectors (e.g. estimated at 2 percent in air
transport), while others are higher (e.g. 25 percent in telecommunications).
NTMs are reduced in Japan and the EU in both scenarios. We assume that NTMs are re-
duced bilaterally, i.e. that Japan lowers its NTMs vis-à-vis the EU, but keep the initial
NTM level vis-à-vis other trading partners, and similarly that the EU only lowers its NTMs
for Japanese exporters, but keep NTMs towards others.
In the lower bound scenario, the NTM reduct ions are modest, and in the upper bound
scenario the reductions are larger. Both scen arios are ambitious and measure the size of
the full NTM potential. Both scenarios require the reduction of all the identified barriers
in each sector. The difference between the lo wer and upper bound estimates pertain alone
to the uncertainties as to how large a share of the barrier can actually be reduced. Both
71
scenarios assume that all NTMs that are identified as re movable are removed, but in the
minimum NTM scenario we apply the lower end estimate for this reduction, while in the
maximum scenario, we apply the higher estima te for how much of the barrier can be re-
moved by policy. If less than all NTMs are re duced, the impact will fall accordingly. The
NTM estimates are derived as described in Chapter 5, and they match model sectors15 as
indicated, cf. Table 6.2.
Table 6.2 Scenarios of reduction of non-tariff measures affecting EU exports to Japan
Trade Cost for exports to Japan
Baseline
Trade Cost
Estimate
(%TCE) Lower bound
Min. reduction
scenario
(%-point change) Upper bound
Max, reduction
scenario
(%-point change)
Food and beverages* 25.0 -6.0 -9.0
Chemicals (incl. pharmaceuticals)* 22.0 -15.0 -20.0
Electrical machinery 11.6 -2.6 -3.9 Motor vehicles* 10.0 -1.2 -3.8 Transport equipment (incl. aircraft and rail)* 45.0 -33.8 -41.0 Metals and metal pro ducts 21.3 -4.3 -6.5
Wood and paper products 15.4 -7.1 -10.6
Other machinery (incl. medical devices)* 30.0 -2.9 -3.9
Air transport 2.0 -0.9 -1.3
Water transport 8.0 -3.5 -5.2 Finance* 15.8 -5.8 -8.7 Insurance 6.5 -0.8 -1.2
Business and ICT 2.5 -2.5 -3.7
Communications* 24.7 -12.8 -19.2 Construction 2.5 -1.2 -1.9 Personal, cultural, other services 6.5 -2.5 -3.7
Note: Sectors marked with * are based on sector studies. Sectors without stars are ba sed on gravity estimates.
Source: Own estimates
NTMs on the European side are also assumed to be reduced in the scenarios. We do not
have detailed assessments available for how Ja panese exporters perceived barriers in the
EU. Instead we to use the results from an other DG Trade study, Ecorys (2009), as the
source of the estimates on the European side . The advantage is that these estimates are
based on a similar method (Method 3 with spec ific NTM indices in the gravity equation),
and they rely on similar data. Furthermore, the same CGE-model applied in this study was
also applied in Ecorys (2009).
15 Since some of the model sectors are more broadly define d than our sector studies, we need to make a match
between the sector studies and the sectors in our model. For most sectors there is a perfect match. Motor vehi-
cles, transport equipment and processed foods match the mo del sectors very precisely. For chemicals, we use the
NTM estimates for pharmaceuticals to represent the whole sector. Pharmaceutical products constitute about one third of the exports within the chemicals sector. Other pr oducts are cosmetics and chem ical products. Gravity es-
timates of chemical products and cosmetics showed simi lar restrictiveness as pharmaceuticals, and use the NTM
estimate for the pharmaceutical sector as a valid NTM estimate for the whole chemicals sector. Medical devices exports belong to the model sector “other machinery”. For EU exports to Japan, medical devices represent 24
percent of the sector export to Japan in the model. Since other parts of the sector are ranked equally or less re-
strictive, we have not assumed any changes for other parts of the sector than medical devices.
72
We know from our analysis of Japanese expo rts to the EU (see Chapter 2) that they are
very concentrated in a few sectors. We theref ore pay specific attention to six sectors which
drive the result of our assessment, namely chem icals, electronics, motor vehicles, transport
equipment, metal and wood and paper products. These sectors account for over 75 per-cent of the EU’s import from Japan. Servic e imports from Japan are small and the overall
assessment of economic benefits to the Euro pean and Japanese economies are insensitive
to the trade cost estimates on Japa nese service exports to the EU.
The results in Ecorys (2009) for the six manufa cturing sectors indicate that TCEs into the
EU are higher than TCEs into Japan. The res ult also shows that the potential for reducing
the barriers on the EU side is generally smalle r than on the Japanese side. For chemicals,
Ecorys (2009) estimates a NTM trade cost of 18 percent and that between 7 and 12 per-
cent-points can be reduced. For Electronics (Electrical machinery) the EU NTM estimate is low, at 4.5 percent, and it is assessed th at this can be reduced by between 1.7 and 2.8
percentage-points. For motor vehicles, Ecorys (2009) have estimated an EU NTM related
trade cost of 16.3 percent, and with a reduct ion of between 3.5 and 5.3 percentage points
being possible. Transport equipment has the hi ghest NTM estimates of the six industries
with a TCE of 18.8 percent, but with a limite d reduction potential of 3.1 to 5.6. Metal
products have, according to Ecorys (2009), a ba rrier estimate of 6 percent, which can be
reduced by between 1.9 and 5.2 percentage-poi nts, cf. Table 6.3. Finally, for other ma-
chinery, we have no reliable trade cost estimate.
73
Table 6.3 Non-tariff measures affecting Japanese exports to the EU
Trade Cost for exports to EU
Baseline
Trade Cost
Estimate
(%TCE) Lower bound
Min. reduction
scenario
(%-point change) Upper bound
Max, reduction
scenario
(%-point change)
Food and beverages n.a. – –
Chemicals 18,0 -7,3 -12,1
Electrical machinery 4,5 -1,7 -2,8
Motor vehicles 16,3 -3,5 -5,3
Transport equipment 18,8 -3,1 -5,6
Metals and metal pro ducts 6,0 -1,9 -5,2
Other machinery n.a. – –
Air transport 2,0 -0,4 -1,1
Water transport 8,0 -1,4 -4,5
Finance 11,3 -2,9 -7,0
Insurance 10,8 -2,8 -5,6
Business and ICT 14,9 -2,5 -4,3
Communications 11,7 -4,3 -8,2
Construction 4,6 -1,9 -2,6
Personal, cultural, other services 4,4 -1,0 -2,5
Source: Ecorys (2009), Study on Non-Tariff Measures to EU-US Trade and Investment.
The model
The CGE model used is based on Francois, Van Meijl, and Van Tongeren (2005), and is
similar to the model used in the Ecorys ( 2009) EU-US study on non-tariff measures. By
design, the model incorporates a number of key characteristics specifically for the study on
the removal of EU-Japan NTMs. The model is a standard multi-region computable gen-
eral equilibrium (CGE) model, with imperfect competition features using product varieties,
see Francois and Roland-Holst (1997) and Francois (1998). For more details on the
model, see appendix 5.
International trade is modelled as a process that explicitly involves trading costs, which in-
cludes both trade and transportation services. To reflect the NTMs, frictional trading costs
are imposed on trade flows. These costs repres ent real resource costs associated with pro-
ducing a good for sale in an export market instead of the domestic market.
74
Box 6.1 The applied CGE model
General equilibrium models help us answer “what if” que stions. They are simulation models that can simulate
market equilibriums on markets under different assumpti ons. The “baseline” for the model is the equilibrium
before the policy change, and the “scenario” is the equilibrium after the policy change.
Baseline 2018 Scenario
Simulating the model will yield estimates of the economic impact in terms of trade and incomes in the EU and
Japan of removing the remaining tariffs and reducing NTMs.
For each scenario, we run the model for both short and long run. The short run does not take the dynamic ef-
fects of the economy into account, e.g. realloca tion of resources. These estimates provide an immediate impact
assessment of removing the NTMs on the globa l economy from the 2018 projected baseline.
However, in the long run scenarios we include pr o-competitive effects and allow for productivity gains
through more efficient allocation of investments across sectors. Thus, these long run estimates provide the
view of a 2018 global economy where dynamic links be tween NTM reductions and i nvestments levels have
worked through the economy. The long-run estimates rev eal the total economy-wide potential of the NTM re-
ductions, and they provide insights to the likely dynamic e ffects that take a longer ti me to be fully realised.
The model is calibrated using social accounting data ba sed on the most recent version of the GTAP database.
The data includes the data on Ad-Val orem Equivalents (AVEs) of border protection across the world. For the
purpose of this study, the 58 sectors in the GTAP data base are re-arranged and re-aggregated to 20 sectors.
Furthermore, barriers to trade in services draws on the estimation of a gravity equati on using panel data as de-
tailed in Francois, Hoekman and Woerz (2007).
The model is projected to 2018 using the IMF growth projections of the world economy, and assumes a suc-
cessful implementation of the D oha round’s proposed initiatives.
Note: See Appendix 5 for more details.
6.2. IMPACTS ON BILATERAL TRADE
We first discuss the impact of the removal of tariff and reduction in NTM’s on trade flow.
The next section examines their economic impact.
Table 6.4 show the impact of the scenario sim ulations on EU exports to Japan. The first
column shows baseline trade volumes, i.e. tr ade in 2008. The second column shows the
long-run increase in trade due to a removal of Japan's import tariffs on goods. Long-run ef-
fects are computed over a sufficiently long time period (up to 2018) to allow all price, in-
come and resource allocation effects to work their way through the economy. The third
and fourth columns show the increase in trade due to a minimum and maximum reduc-
tion in NTMs. The last two columns add up the tariff and NTM effects.
European exports to Japan could increase by between €27.8 billion and €43.4 billion de-
pending on whether one assumes the lower or upper bound scenario for NTM reductions.
This corresponds to an increase of between 46 percent and 71 percent of the EU’s 2008
baseline exports of €61 billion to Japan. Removal of bilateral tariffs is estimated to result in Policy change
Economy before
trade policy change
Economy after
trade policy change
Difference between the two is attributed to policy
75
€14.1 billion additional exports, and the increas e in exports due to NTM reductions is es-
timated at between €13.7 billion and €29.4 billion. The export gains from NTM reduc-
tions are comparable or larger compared to the trade effect of tariff reductions. NTM re-
ductions lead to just as much trade as tari ff removal in the lower bound scenario. In the
upper bound scenario the impact of NTM reduction will be double as high.
Looking at sectors, we find largest increase for European chemicals export to Japan – of
€6.3 to €11.0 billion – which includes pharmaceutical exports, cosmetics and chemical
products. Tariffs are only responsible for €1.0 billion increase in exports, while NTM re-
ductions are the vastly dominating source of the increase in the sectors exports to Japan.
Processed foods are responsible for the second largest increase in sector exports of be-
tween €5.1 and €5.9 billion additional exports. He re, the increase is mainly a result of tariff
removal rather than NTM reductions. For mo tor vehicles, EU exports could increase by
up to €5.4 billion and NTM reductions are the main source of the increase. EU exports of
transport equipment, machinery, metals and wood products each increase by around €3
billion and are mainly driven by NTM reductions, cf. Table 6.4.
The services sectors, taken collectively, contri bute with an increase of €1.4 billion to €2.6
billion in additional EU exports to Japan. Thou gh there are no tariffs on services, trade in
services benefits from tariff removal in good s through indirect price, income and competi-
tiveness effects on services sectors.
Table 6.4 The impact of the scenarios on EU exports to Japan (billion €)
Note: The table shows the long-run effects on bilateral trade. Without Doha and EU-Korea FTA in baseline.
Data in € billion. 2008 trade data. Sectors with no or little change are included in ‘other sectors’.
Source: CGE model simulations.
Japanese exports to Europe could increase by between €35.3 billion and €53.8 billion, de-pending on whether one assumes the lower or upper bound scenario for NTM reductions.
This corresponds to an increase of between 40 percent and 61 percent of Japan’s baseline
exports of €87 billion to the EU in 2008. Removal of bilateral tariffs is estimated to result
in €25.2 billion additional exports, and the in crease in exports due to NTM reductions is Baseline
trade
volume Removing
Tariffs Reducing NTMs
Min. NTM Max. NTM Combined scenario
Lower Upper
Processed foods 4,3 4,8 0,3 1,0 5,1 5,9
Chemicals (incl. pharma) 9,1 1,0 5,3 10,0 6,3 11,0
Motor vehicles 5,6 0,6 1,8 4,7 2,4 5,4
Transport equipment 0,7 0,1 1,6 2,8 1,7 2,8
Machinery (incl. medical) 6,1 0,4 1,6 3,1 2,0 3,5
Metals and metal products 1,4 0,4 0,9 2,6 1,3 3,0
Wood and paper products 1,9 0,3 1,0 2,5 1,3 2,7
Other sectors (incl. agri.) 10,8 6,1 0,2 0,5 6,3 6,6
Services 21,2 0,4 1,0 2,2 1,4 2,6
Total EU exports to Japan 61,0 14,1 13,7 29,4 27,8 43,4
76
estimated at between €10.1 billion and €28.5 billion. The export gains from NTM reduc-
tions in the maximum scenario are comparable to the trade effect of tariff reductions.
NTM reductions lead to just as much trade as tariff removal in the upper bound scenario,
and to half as much trade as tariff remova l in the lower bound scenario, based on the
minimum NTM reduction scenario.
Looking at sectors, we find that motor vehicl e exports indicate by far the largest increase,
where exports could increase between €20.1and €27.2 billion. Tariffs reductions are re-
sponsible for €15.9 billion increase in exports, while NTM reductions in the EU in motor
vehicles could increase Japan’s motor vehicle export by a further €4.2 to €11.3 billion. Half of Japan’s increase in exports in the scenar ios stem from the motor vehicles sector.
Reduction of EU tariffs and NTMs for chemical s could lead to increases in Japan’s export
to the EU of between €4.3 billion and €9.1 billion, with NTM reductions being the main
source. Export of electrical machinery is also one of the sectors with large increases. We
estimate a possible increase of between €3.7 and €6.2 billion of Japan’s export to Europe.
Japanese exports of transport equipment, mach inery and metals also increase, cf. Table
6.4. It is interesting to note that machinery exports from Japan to Europe could decline as
a result of NTM liberalisation. The reason for this is the expansion of exports in other sec-
tors such as motor vehicles and chemicals. Th is expansion of Japan’s most competitive sec-
tors will pull production factors such as labour and capital from other less competitive sec-tors in Japan, including machinery and serv ices. Since production factors can be used
more effectively in other sectors, sectors like services and machinery will lack the capital
and labour to benefit from the increased op enness of the EU market for their products.
Moreover, because of the constraint on production factors, production and exports will
subsequently decline as a result of these in direct mechanisms via the factor markets.
It is important to note that these results ar e assuming a starting point for EU-Japan trade
liberalisation without Doha round and withou t implementation of the EU-Korea FTA. If
the Doha round is included in the starting po int (i.e. the baseline) some tariff concessions
will already be absorbed through the Doha conc essions. For some sectors this difference is
small, while for others, such as motor vehicles, the Doha round would provide substantial
tariff reductions, and thus leave less tariff reduct ions to EU-Japan bilateral liberalisation. In
the case of motor vehicles, the inclusion of the Doha round in the baseline would reduce
the impact of EU-Japan tariff liberalisation by half. Impacts of NTM reductions are still
large.
The services sectors, taken as a whole, contribute with a limited increase of €0.2 billion to
€1.0 billion in additional EU exports to Japan. There is a small negative impact on Japan’s service exports in the tariff only scenario. This is due to the fact that as goods exporting
sectors expand in response to the tariff remo val, goods sectors will draw resources (labour
77
and capital) away from the services sector, an d their production capacity will fall, and so
will their exports.
Table 6.5 The impact of the scenarios on Japan's exports to the EU (billion €)
Note: The table shows the long-run effects on bilateral trade. Without Doha and EU-Korea FTA in baseline.
Data in € billion. 2008 trade data. Sectors with no or little change are included in ‘other sectors’.
Source: CGE model simulations.
From the evidence provided in the scenarios on the impact of tariffs and non-tariff meas-
ures, we conclude that non-tariff measures (N TMs) are the most important factor hinder-
ing trade between the EU and Japan, and that NTMs reduce trade more than twice as
much as tariffs. Also, NTMs have larger impa ct on reducing trade than the combined ef-
fect of distance and language. Based on ou r assessment, some NTMs could be reduced
through trade negotiations and such NTM redu ction will increase trade substantially, even
if some NTMs remain, and without assuming reduced impact of distance, language and other fixed factors.
6.3. GLOBAL TRADE EFFECTS
EU-Japan trade liberalisation is trade creating
Our scenarios show that further integration between the EU and Japan is creating more
trade in total for the two partners. The expans ion of trade between the two is not just a
question of shifting trade with other partners to become EU-Japanese trade. Europe’s total
exports to all partners go up by 0.7 percent in the maximum scenario (of which 0.3 percent
is from tariff removal and 0.4 percent is fr om NTM reductions), and Europe’s total im-
ports from all partners increase by 0.6 percent (of which 0.2 percent is from tariff removal
and 0.4 percent is from NTM reductions). Th e aggregate trade balance for Europe is con-
sequently slightly improved in the scenarios, cf. Table 6.6.
For Japan, trade liberalisation with the EU will lead to much larger percentage increases
because of the sheer size of the European mark et. Japan’s total export will increase by 6.4
percent (of which 2.5 percent is from tariffs and 3.9 percent is from NTMs), while Japan’s
total imports will increase even more in perc entage terms, namely with 7.9 percent (of
which 3.1 percent is from tariffs and 4.8 percen t is from NTMs). The result of trade liber- Baseline Tariffs Min. NTM Max. NTM Combined scenario
Lower Upper
Chemicals 9,0 1,5 2,8 7,6 4,3 9,1
Electrical machinery 8,8 2,2 1,5 4,0 3,7 6,2
Motor vehicles 20,2 15,9 4,2 11,3 20,1 27,2
Other transport equipment 4,4 1,5 0,9 2,8 2,4 4,3
Other machinery 25,0 3,2 -0,3 -1,5 2,9 1,7
Metals and metal products 1,3 0,7 0,2 2,5 0,8 3,1
Other sectors (incl. agri.) 3,5 0,7 0,3 0,6 0,9 1,2
Services 16,4 -0,3 0,5 1,3 0,2 1,0
Total Japan exports to EU 88,6 25,2 10,1 28,5 35,3 53,8
78
alisation will thus lead to increased openne ss of the Japanese economy, and imports into
Japan will increase than exports from Japan again, cf. Table 6.6.
Table 6.6 Global trade impact for EU and Ja pan in combined tariff and NTM scenarios
Combined effect,
Maximum scenario Tariffs Min. NTM Max. NTM
Value of Exports, percent above baseline
European Union -> world 0.7% 0.3% 0.2% 0.4%
Japan -> world 6.4% 2.5% 1.6% 3.9%
Value of Imports, percent above baseline
European Union <- world 0.6% 0.2% 0.2% 0.4%
Japan <- world 7.9% 3.1% 2.0% 4.8%
Note: Long run effects in the scenarios in % change fr om baseline values (without Doha and EU-Korea FTA).
Source: CGE model simulations.
Small negative impact on main trading partners
EU-Japan trade liberalisation will have a small negative impact on some of their trade part-
ners, notably China and S. Korea who will see their aggregate export to world decline by
0.26 percent and 0.39 percent respectively as a result of bilateral trade liberalisation be-
tween EU and Japan. Results are reported for the long-run effect of the maximum scenario
including both tariff removal and maximum NTM reduction. China and S. Korea are
mainly affected because they lose ground to Japanese exporters in the European market.
The U.S. will also be slightly negatively affe cted in the scenario (-0.15% less exports), and
this is mainly because they lose ground to European exporters in the Japanese market, cf.
Table 6.7.
Other trade partners will be slightly positively affected, namely Mexico (+0.06% more ex-
ports), Russia (+0.02%) and Canada (+0.01%). These are very small effects, and barely
measurable, and they arise due to the extra de mand effect created by EU-Japan liberalisa-
tion, whereby demand for imports increases in both the EU and in Japan. Since none of
these three trading partners are neither close competitors to European exporters in Japan,
nor close competitors to Japanese exporters to Europe the demand effect will dominate,
and these countries could see a slightly positive impact on their export volumes, cf. Table
6.7.
79
Table 6.7 Impact on trade partners from EU -Japan combined tariff and NTM scenarios
Trade partner Combined effect of tariff re moval and max. NTM reduction
Value of Exports to world (percent change from baseline)
Japan +6,40%
European Union +0,65%
Mexico +0,06%
Russia +0,02%
Canada +0,01%
India -0,06%
Brazil -0,07%
United States -0,15%
China -0,26%
S. Korea -0,39%
Other OECD -0,08%
Rest of the world -0,04%
Note: The table shows the long run effects in the scenarios in percentage change from baseline values.
Source: CGE model simulations.
EU-Japan trade liberalisation is globally welfare enhancing
Looking at the impact on global welfare, we conclude that bilateral trade liberalisation be-
tween EU and Japan as in our scenario will be positive.
The combined loss for the rest of the world will be small (approximately €5.8 billion)
compared with the combined welfare gain for EU and Japan of €51.5 billion. Global wel-
fare will increase as a result of EU-Japan in tegration. A sum of €45.7 billion in welfare
gains will still be available to the EU and Japan. EU-Japan trade liberalisation is clearly a
net benefit for the world.
Welfare effects on trading partners will be small. Korea and China will be the most nega-
tively affected trading partners. For Korea, th e negative welfare effect of EU-Japan trade
liberalisation is €0.4 billion, which is a very small welfare decrease of 0.06 percent. For
China, welfare will decline by €1.6 billion, bu t compared to the size of the Chinese econ-
omy this only represents a 0.03 percent decr ease in welfare. The remaining welfare losses
are spread across many countries, with none r eaching an impact higher than 0.01 percent.
6.4. OUTPUT EFFECTS
The reduction of trade barriers between the EU and Japan will imply small changes in the
composition of output between sectors, and a ggregate economic output measured in fixed
prices will increase slightly. Productivity enha ncing reallocation of production factors will
take place between sectors as a result of the trade liberalisation scenario. Sectors which see
their competitiveness being enhanced by trade liberalisation will expand their output and
sectors which have benefited from protection from more competitive foreign suppliers will
contract relative to the expanding sectors. The net result will be a small positive effect on
aggregate output, which according to our esti mates could increase by 0.14 percent in the
80
EU and by 0.31 percent in Japan. The effects on output are relatively small, which obvi-
ously reflects the fact that, in the scenario, Europe is after all only reducing trade costs
marginally with a trading partner representing less than three percent of extra-EU exports.
For the European economy, the productivity enhancing reallocation of output will lead to
an increase in the sector’s share of total EU-wide value added in: processed foods (+0.01
percent), machinery (+0.02 percent), wood an d paper (+0.01 percent) and other goods sec-
tors (+0.02 percent). The services sectors will also increase their share of total output, but
this will largely be an indirect effect of tr ade liberalisation, since as the above mentioned
goods sectors expand their output and as co nsumers increase their purchasing power, de-
mand for services will increase.
The only sector that will see a declining shar e of aggregate output is motor vehicles, which
will decline its share by 0.05 percent. Measured in terms of sector output at fixed prices,
motor vehicles will decline by 3 percent. Still, the expansion of other sectors will be more
than large enough to ensure a net positive effe ct on aggregate EU output, although only of
0.14 percent in total, cf. Table 6.8.
Table 6.8 Composition of output in the EU in scenario
Baseline Max. scenario Change in pct.
Goods
Processed foods 2,73 2,74 0,4%
Chemicals (incl. pharmaceut icals) 2,66 2,66 0,0%
Motor vehicles 1,59 1,54 -3,1%
Transport equipment 0,46 0,46 0,0%
Machinery (incl. medical de vices) 3,18 3,20 0,6%
Metals and metal produc ts 1,54 1,54 0,0%
Wood and paper products 2,12 2,13 0,5%
Other sectors (incl. agriculture) 10,77 10,79 0,2%
Services
Finance & insurance 3,53 3,53 0,0%
Transport service 1,05 1,06 1,0%
Business services 18,17 18,20 0,2%
Communications 2,08 2,08 0,0%
Construction 6,12 6,14 0,3%
Personal services 3,70 3,71 0,3%
Other services 40,29 40,34 0,1%
Total 100,00 100,14 0,1%
Note: The table shows value added shares by sector in the baseline and in the long-run maximum scenario.
Changes compared to a baseline without Doha and without EU-Korea FTA.
Source: CGE simulations
For the Japanese economy, changes in the sector composition will larger as a result of trade
liberalisation because they will be integrating with a larger economy. The sectors which can
foresee increasing shares of total Japanese va lue added are: motor vehicles (+0.26 percent),
electrical machinery (+0.09 percent), and tr ansport equipment (+0.03 percent). As in
81
Europe, Japanese services sectors will also increase their share of total output, mostly
through indirect effects from trade liberalisatio n. Measured in terms of sector output at
fixed prices, Japanese motor vehicle output will increase by 12.5 percent, electrical ma-
chinery will increase by 5.8 percent and transp ort equipment output will be up by 7.1 per-
cent.
A few sectors in Japan will see a declining share of aggregate output in the scenario. The most prominent of these will be the Japanese machinery sector, which includes the medical
devices sector, which will be under pressure from EU competitors. Their share will decline
somewhat, and output measured in fixed pric es will decline by 5.8 percent in the maxi-
mum long-run scenario. A small decline could also be possible in Japan’s metal industry
and in other goods sectors, including wood and paper. Still, the expansion of other sectors
will be more than large enough to ensure a net positive effect on aggregate output in Japan,
and a gain of 0.31 percent in total, cf. Table 6.9.
Table 6.9 Composition of output in Japan in scenario
Baseline Max. scenario Change in pct.
Goods
Chemicals 2,56 2,57 0,4%
Electrical machinery 1,56 1,65 5,8%
Motor vehicles 2,16 2,43 12,5%
Other transport equipm ent 0,42 0,45 7,1%
Other machinery 3,54 3,34 -5,6%
Metals and metal produc ts 1,91 1,90 -0,5%
Other sectors (incl. ag ri.) 9,82 9,72 -1,0%
Services
Finance & insurance 5,39 5,40 0,2%
Transport service 1,13 1,13 0,0%
Business services 9,72 9,74 0,2%
Communications 2,34 2,34 0,0%
Construction 5,67 5,71 0,7%
Personal services 3,45 3,45 0,0%
Other services 50,33 50,50 0,3%
Total 100,00 100,31 0,3%
Note: The table shows value added shares by sector in the baseline and in the long-run maximum scenario.
Changes compared to a baseline without Doha and without EU-Korea FTA.
Source: CGE simulations
6.5. OVERALL WELFARE EFFECTS
We provide two sets of estimates for overall ou tput and welfare effects in the tables below.
These include the change in GDP and the change in real income. The tables also include
both a short-run effect (where capital stocks are fixed), and a long-run estimate which in-
cludes the cumulative impact of changes in co nditions for returns to investment on capital
stocks (where capital stocks adjust).
82
In the longer run, increased investment drives a 0.31 percent increase in Japan’s GDP (in-
clusive of the short-run effects), while for th e European Union we then estimate a 0.14
percent increase in GDP, cf. Table 6.10. Th e short-run effects imply no measurable
change in GDP from a full agreement for either the EU or for Japan.
Table 6.10 Change in GDP (quantity index) 2018 baseline, percent
Country Lower bound scenario
(tariffs + min. NTM) Upper bound scenario
(tariffs + max. NTM)
Long-run effects
European Union 0.10 0.14
Japan 0.20 0.31
Note: We use a fixed-weight GDP index. Compared to a baseline without Doha and EU-Korea FTA.
Source: CGE simulations
Measured in welfare terms, these effects transl ate into a long-run gain in real income of
€9.7 in the lower bound scenario and a long-r un gain of €18.2 billion in the upper bound
scenario. For the EU the estimated long-run gain in real income is between €20.5 and
€33.2 in the lower and upper bound estimates respectively, cf. Figure 6.1.
Figure 6.1 Potential welfare benefits from EU-Japan trade liberalisation
9,718,220,533,2
05101520253035
Lower Upper
LONG-RUN€ billions
Japan European UnionJapan Japan EU EU
Note: National real income effects (€ billions 2018 ba seline).We measure real income effects as changes in
equivalent variation. Compared to a ba seline without Doha and EU-Korea FTA.
Source: CGE simulations
Our welfare measure is the so-called equivalent variation (EV)16, which is commonly used
to translate consumer welfare or utility into mo netary values. This is different from measur-
ing welfare in GDP terms. GDP is based on qu antities and measured as output at fixed
prices. Real income changes, however, are wh at matters for the consumer, since they also
reflect changes in both consumer prices and in wages. From the consumer’s point of view,
16 EV is a single summary statistic to ascertain the net be nefits from a policy change. The EV tells us how much
money should be given to a consumer to compensate him/her for a change in the consumption pattern arising
from a change in prices.
83
trade liberalisation has two important long-run e ffects. First, prices of imported goods and
services decline as a direct result of the re duction of trade costs. This is reflected in
cheaper products and a wider variety of products to choose from. This implies direct bene-
fits for the consumer. Second, the productivi ty enhancing reallocation of resources be-
tween sectors leads to long-run increases in wa ges. This also improves the situation for the
average household. On the negative side, we need to take account of the loss of tariff reve-
nues and other losses incurred as a result of the liberalisation scenario. The national real
income measure incorporates all thes e effects into one single measure.
Looking at the sources of real income gain in the maximum scenario in the long-run, we
see that one third of the gain to the European economy – €11.2 billion – is due to tariff re-
ductions, and two thirds – €22.1 billion – of the real income gains are a result of NTM re-
ductions.
For Japan, only around 15 percent of the welfar e gain (€2.8 billion) can be attributed to tar-
iff reductions, while the remaining 85 percent (€15.4 billion) of the potential for welfare
gains to Japanese consumers stem from NTM reductions. In other words, NTM reduc-
tions yield five times more welfare to the Ja panese consumer than tariff reductions. If
Japanese policy makers care about real inco me improvements for their households, they
should be more interested in seeking to re duce NTMs than reducing tariffs. Both are
beneficial from a consumer perspective, bu t the potential gain from NTM reduction is
much bigger, and Japanese consumers are payi ng the price for the Japanese NTM restric-
tions.
Table 6.11 Decomposition of the long-run welfare effects
Combined effect,
Maximum scenario Tariffs Min. NTM Max. NTM
National Income Effects, billion € above baseline
European Union + €33.2 bn + €11.2 bn + €9.4 bn + €22.1
Japan + €18.2 bn + €2.8 bn + €6.9 bn + €15.4
National Income Effects, percent above baseline
European Union 0.20% 0.07% 0.05% 0.13%
Japan 0.48% 0.07% 0.19% 0.41%
Note: National real income effects (in percentage change from 2018 baseline). We measure real income effects
as changes in equivalent variation. Compared to a baseline without Doha and EU-Korea FTA.
Source: CGE simulations
As reported in the table below, real wages w ill also increase. What we report are perma-
nent long-run improvements in real wages, i. e. wage changes adjusted for changes in the
price level. For the EU, real wages will increase by 0.25 percent for both skilled and un-
skilled labour. For Japan, the impact is stronger . We estimate a long-run rise in real wages
of 0.72 percent for skilled labour and 0.68 pe rcent for unskilled labour, cf. Table 6.12.
84
Table 6.12 Decomposition of Change in Real Wages – 2018 baseline, percent change
Combined effect,
Maximum scenario Tariffs Min. NTM Max. NTM
Real wages for skilled workers, percent above baseline
European Union 0.25% 0.11% 0.06% 0.14%
Japan 0.73% 0.30% 0.19% 0.43%
Real wages for less skilled workers, percent above baseline
European Union 0.25% 0.12% 0.05% 0.13%
Japan 0.68% 0.26% 0.19% 0.42%
Note: Changes in real wages in percentage from 2018 baseline without Doha and EU-Korea FTA.
Source: CGE simulations
6.6. ALTERNATIVE BASELINES
In the scenarios analysed above we have assu med that there is no Doha round and no EU-
Korea FTA as part of the baseline. As we show in this section, the results above are not
significantly affected when we introduce a Do ha round and the Korea FTA in the baseline
The results we showed earlier in this chapte r remains unchanged. The percentage change
in welfare in the long-run maximum scenario is the same under all four baseline assump-tions, and thus we conclude that our results are insensitive to the exclusion of the Doha
round and the Korea FTA in the baseline.
Table 6.13 Impacts of alternative base lines on the long-run welfare effects
Standard Baseline
no Doha or Korea Korea
agreement in
baseline Doha in
baseline Korea and
Doha in
baseline
National Income Effects, percent change from baseline
Japan +0.48% +0.48% +0.47% +0.47%
Euro pean Union +0.20% +0.20% +0.20% +0.20%
Rest of World
OECD members -0.01% -0.01% -0.01% -0.01%
Non-OECD Members -0.02% -0.02% -0.02% -0.02%
Note: National real income effects (per centage change from 2018 baseline).
Source: CGE simulations
Looking at the effects on trade of the same al ternative baselines, we come to the same con-
clusion: the inclusion of the Doha round an d the EU-Korea FTA in the baseline has little
or no influence on the size of the isolated impact from EU-Japan trade liberalisation. The
percentage increase in Japan’s exports to the world from EU-Japan trade liberalisation is
slightly higher with Doha in the baseline (+6. 8 percent) than without the Doha round in the
baseline (+6.4 percent). The reason for this res ult is logic. With the general tariff reduc-
tions assumed in the Doha round, bilateral trade liberalisation will have less trade diverting
effects and more trade creation effects. When ta riffs are lowered to start with, negative im-
pacts of diversion are outweighed by trade creation.
85
Table 6.14 Impacts of alternative baselines on exports
Standard Baseline
no Doha or Korea Korea
agreement in
baseline Doha in
baseline Korea and
Doha in
baseline
Change in global exports, percent change from baseline
Japan +6.4% +6.4% +6.8% +6.8%
Euro pean Union +0.7% +0.6% +0.7% +0.7%
Note: Global export changes (perce ntage change from 2018 baseline).
Source: CGE simulations
While the inclusion of the Doha round and th e EU-Korea FTA in the starting point does
not change the results at the aggregate level, it does imply changes at the sector level. In-
cluding the Doha round in the baseline implies that some tariff concessions will already be
absorbed through the Doha concessions. For sectors such as motor vehicles, the Doha
round would reduce in EU tariffs and the impact of EU-Japan bilateral liberalisation will be
smaller. In the case of motor vehicles, the inclusion of the Doha round in the baseline
would reduce the impact of EU-Japan tariff liberalisation by half. Including the Doha-
round in the baseline would not alter the impact of NTM liberalisation.
6.7. SYSTEMIC CONSIDERATIONS
In this study we have identified NTMs in th e EU and in Japan and quantified their impact
on trade costs. We have also simulated th e possible impacts of reducing the NTMs be-
tween EU and Japan based on an assessment of how various instruments may possibly con-
tribute to the reduction of the additional trade costs associated with these NTMs.
The scenarios have assumed that NTMs can be re duced on a bilateral basis, i.e. that Japan
can lower its NTM costs only for European ex porters, while keeping the higher baseline
NTM levels for other trading partners. This may be true for some instruments, for exam-
ple if Japan adopts an EU-only conformity as sessment procedure, or if Japan and the EU
agree on a common set of rules in a certain area, which are shared with no other partner.
However, many of the identified instrument s available for reducing the NTMs are multi-
lateral in nature. If for example, Japan adopts international standards in an area where Ja-
pan-only standards existed, then this change w ill not only benefit EU exporters, but also all
other exporters who use this specific intern ational standard. Such instruments are often
mentioned and would, in many cases, be the preferred solution, for example in the motor
vehicles sector. Compared to the assessments made in this report, such instruments would
water down the bilateral preferences granted be tween the EU and Japan, which we have as-
sumed in our simulations.
Another systemic aspect is the situation whe re the EU and Japan find a common ground
for going ahead of other advanced nations in sh aping future international standards. In this
case, the advantages for both partners will be su bstantial, if they succeed in setting the stan-
86
dards for other trading partners. This aspect of EU-Japan trade cooperation has not been
addressed in this study.
6.8. CONCLUSION : THE MERITS OF EU-J APAN TRADE LIBERALISATION
From our quantification of trade liberalisat ion scenarios between the EU and Japan it
seems clear that there is a win-win situation for both the EU and Japan in pursuing future
bilateral trade liberalisation. The majority of the gains are found in manufacturing, and
both tariffs reductions (inclu ding food and agriculture tariffs) and NTM reductions would
be required to provide a win-win package for both partners. Services do not contribute
much in comparison with manufacturing.
The potential of NTMs in delivering welfare gains to the EU and indeed to Japanese con-
sumers is significantly higher than the impact of tariffs (although tariff reductions are still
welfare enhancing). Japanese consumers are payi ng the price for these measures. Non-tariff
measures imply higher prices for imported good s, and reduce the variety of products being
offered to the consumers.
In the more ambitious scenario, called the “upper bound scenario” for NTM reductions,
NTMs between the EU and Japan are reduced in both directions. In this scenario, we find
potential for gains in consumer welfare of up to €33.2 billion in the EU (long run), and
welfare gains for the Japan consumers of up to €18.2 billion. This is much higher than the
€11.2 billion welfare gain from tariff removal in the EU and the €2.8 billion welfare gain in
Japan.
By way of comparison, we can conclude that the EU’s welfare gain from NTM reductions
with Japan is almost twice the welfare gain fr om tariff reduction. For Japan, the importance
of NTM reduction is even greater. Full NTM reductions yield 5.5 times more welfare to
Japan than removing bilateral tariffs. The so -called lower bound scenario is roughly yield-
ing half the benefits of the full scenario.
Our results clearly show that there are possib ilities for revitalising EU –Japan trade. The
main obstacles are the so-called non-tariff m easures (NTMs). EU exports to Japan could
increase by over 70 percent if non-tariff measures in Japan were reduced and tariffs re-
duced to zero. Conversely, Japan’s export to the EU could increase by more than 60 per-
cent as a result of a reduction in the EU’s no n-tariff measures and tariffs vis-à-vis Japanese
exporters.
Efforts must be made to stre ngthen the EU-Japan economic relationship. This could be
done by negotiating a bilateral agreement to help stimulate bilateral trade and investments.
Our analysis shows that this would be bene ficial to consumers in both economies.
87
There will, however, be difficulties associated with achieving this win-win situation. Japa-
nese industry will mainly benefit from lower tariffs, but would perhaps dislike changes to
their domestic regulatory environment, such as those relating to conformity assessment
procedures. Changes in the regulatory enviro nment will be needed on the European side
as well, even though our results show a clear asymmetry, with the impact of NTMs being
much more pronounced in Japan. EU produc ers would of course welcome tariff reduc-
tions on their exports to Japan, but Japanese NTMs must be reduced to ensure sufficient
EU gains from an EU-Japan trade liberalisatio n scenario. Tariff reductions will be required
in exchange for non-tariff reductions.
This poses some challenges. First, tariffs are measurable whereas NTMs are debatable.
Second, tariffs are bilateral whereas reductio ns of NTMs are often multilateral. Third,
NTM reductions are difficult without domest ic reforms and NTM reduction could entail
issues that are not normally negotiated within a bilateral framework. It will require political
will and administrative creativity to agree on NTM reductions that are bilateral as opposed
to multilateral, and to concede concrete tariff reductions in exchange for intangible and dif-
fuse NTM reductions.
88
As mentioned in the first chapter of this report, we have adopted a broad definition of
non-tariff measures. In this chapter, we look at three aspects: firstly, public procurement,
secondly, competition issues and finally, intellectual property rights (IPR). We present
these three issues in the order of priority, star ting with public procurement as the most im-
portant of the three and finalising with IPR and a summary of the potential for economic
gains from further liberalisation.
7.1. PUBLIC PROCUREMENT ISSUES IN JAPAN
The public procurement market in Japan is an area where European firms report difficul-
ties. The main sectors affected by these diffi culties are the construction sector (including
building materials, e.g. windows) and the tr ansport equipment sector (e.g. railway equip-
ment including trains and other urban transport equipment), but service sectors (e.g. water
treatment) are also affected by diffic ulties related to public procurement.
The difficulties faced by EU firms in Japan in the public procurement market can be split
in two categories:
a) Problems of market access (i.e. that the sector in question is not part of Japan’s
WTO Government Procurement Agreement commitments or likely to be below
thresholds, and therefore excluded for EU bidders).
b) Problems of rules (i.e. that while the sector in question is in fact covered by the
WTO Government Procurement Agreement and in principle eligible for EU
bidders, they are still facing difficulties because of the specific rules related to the procurement).
One example of a problem related to the rules is the so-called "operational safety clause" in
the WTO GPA Agreement that is systematica lly invoked in the procurement of railway
equipment of JR entities and urban transport operators. While Japan has the right to im-
plement this clause for the legitimate objective of safety, the implementation of that clause
is
de facto hindering foreign suppliers’ access to such contracts in Japan because of its sys-
tematic use. Most of the 17 issues listed in the NTM inventory for Japan on public pro-curement also relate to the latter category – i.e. problems with the rules, cf. Table 7.1.
Chapter 7 OTHER NON-TARIFF MEASURES
89
Table 7.1 Public procurement issues in the NTM inventory
Issue Sour ce Page
Aerospace and space industry
Procurem ent decisions are ma d e on a non-com petitive basis EBC 81
Construction services
Public procurem ent system s (Com prehensive Evaluation Bidding
System ) are not always used EBC 87
Computer and informa t ion services
Widespread vendor liabilities USG 4
Uncompetitive rules in governm ent IT procurem ent bidding rules USG 4
Lack of transparency in governm ent IT procurem entsU S G 4
Backdating of governm ent IT procurem ent contracts is allowed USG 4
Automotive industry
Japan-specific requirem ents in procurem entsE B C 7 9
Green procurem ent rules do not follow international practices EBC
General government procurem ent
Too mu c h focus on rigid technical specifications (green
procurem ent)E U 2 8
Restrictive qualifications in (open) tendering EU 67
No real difference between an open and com petitive procedure
and selective tendering EU 26
We a k imp lem entation of public procurem ent regulations EU 21
Long evaluation process prior to tendering, lack of min. required
for each specific capabilityE U 2 8
Lacking a single point of access equivalent to EU's centralised
tender database EU 27
Com pulsory com pany registration on public work contracts every
two yearsE U 2 8
Com plex legal fram ework for public procurem ent and lack of
English versions EU 28
Limited info exchange on legal and technical choices in e-
procurem ent EU 27
Note: The column “page” in the above table indicates th e page number in the original source where more in-
formation can be found. For these source s, please refer to the NTM inventory.
Source: Copenhagen Economics’ inventory of Japanese NTMs.
There are, however, also market access proble ms facing EU firms in Japan’s public pro-
curement market. One important market access problem is the difference between the EU
and Japan regarding the threshold for constructi on works. In the EU, this threshold is 5
million SDRs, meaning that contracts above this level are open to foreign bidders. In Ja-
pan, only construction works above 15 million SDRs are open to foreign bidders.
Both Japan and the EU are signatories to the WTO Government Procurement Agreement
(GPA).
17 The EU and Japan differ in their commitm ents and the derogations that they have
17 Foreign access to public procurement is exempted from the general rules of GATT/GATS, cf. GATT Article
III:8(a), GATS Article XIII:1. Instead a number of WTO members have signed a plur ilateral agreement that ex-
tends the principles of the GATT (non-discrimination, national treatment and transparency) to specific areas of public procurement. There is no MFN clause in the GPA. Therefore, signatories to the GPA can grant more ac-
cess for one party to the agreement, without being obliged to grant the same access to all signatories.
90
offered under the GPA. The EU (and most other signatories to the GPA) has offered a
commitment giving GPA members access to a ll five annexes of the GPA. The commit-
ments are generally granted under the provision that the partners grant similar access to
their procurement market. Japan has only offere d access to parts of the five annexes of the
GPA. As a response, most other GPA signatories, including the EU, have limited Japan’s
access to their home markets in a similar way.
Size of the public procurement market in Japan
According to a study by the Europ ean Commission, DG Internal Market18, the total market
for public procurement in Japan has been estimated at €565 billion in 2007. This corre-
sponds to around 18 percent of Japan’s GDP. This is similar to the ratio of public pro-
curement to GDP seen in the EU, which is 19 percent. More than 83 percent, or €469 bil-
lion, of the total public procurement market is estimated to fall below the GPA thresholds
and hence consist of small contracts awarded to domestic suppliers. The remaining part of
the total market is split in two, cf. Figure 7.1.
The “open” part is the smaller part of the pu blic procurement market in Japan that is al-
ready open for foreign suppliers under Japan’s current GPA commitments, and this
“open” part is valued at €22 billion or 23 percent of the above-thresholds public procure-ment market (or 3.8% of the total public pr ocurement market). Whether EU firms are re-
stricted in being awarded contracts in this € 22 billion market is hard to quantify, but the
problems related to rules and procedures for aw arding contracts, as listed above, indicate
that EU firms are facing difficulties in getting
de facto access to the open part of the mar-
ket. The “open” procurement market in Japan is relatively small compared to the overall
size of the market, and the 3.8 percent is lo w compared to other parties to the GPA. The
high threshold for construction works is a majo r part of the explanation for the relatively
small share of the “open” part compar ed to the “potentially open” part.19 The exclusion of
procurement contracts by local entities is anot her reason. Finally, many large buyer entities
are excluded from Japan’s GPA commitments and for this reason, EU suppliers of rail-
road equipment cannot offer their products and services in Japan, for example.
The “potentially open” aspect is the part of the procurement market where Japan has
made general derogations from the coverage of the GPA. This part constitutes a potential
of €74 billion or 13 percent of the total market. When compared to the €22 billion value of the “open” market, we see that the “potentia lly open” market is 3.4 times larger than the
“open” market. The “potentially open” market comprises contracts, that in principle could
be covered by the GPA, and thereby be eligib le for EU bidders, but have been excluded
from foreign competition as a result of the derogations Japan has listed under the current
GPA.
18 Commission (2008), ”Comparative analysis of the size of public procurement in the EU and the main GPA par-
ties (US, Japan, Canada and Korea)”, D(2008) MARKT/C1/OC-ARL D(2007).
19 In all but one sector, the EU and Japan have similar thre sholds for the size of individual contracts open under
the GPA. The exception is construction contracts, where the threshold in Japa n is three times as high as in the
EU.
91
Not all parts of the “potentially open” market are equally interesting for the EU. The rea-
son is simple: some of these contracts are de fence contracts, for example. If the EU was
asking Japan for access to bid for these contract s, it would expect the same openness in the
EU market, and this could be labelled the “le ss desirable part”. The “desirable” parts of
the “potentially open” market are those part s of the Japanese procurement market cur-
rently not open to foreign competition, an d in which the EU has already made commit-
ments to other parties to the GPA, but not to Japan, for reasons of reciprocity with the
Japanese offers.
It is worth noticing that, in spite of the reci procity clauses, Japan still benefits from a much
greater access to the EU public procurement market. The "open" part of EU procurement
open to Japanese companies amounts to some 260 billion EUR, or 70% of the above-
thresholds public procurement mark et (or 13% of total procurement).
Figure 7.1 Size of public procurement market in Japan in 2007, € billion
Size of Public Procurement Market in Japan
bi ll i on euros
46922
0100200300400500600
Japan 2007Total public
procurement
market =
€565 bn Part of public procurement
market not under GPA
= €469 bn"Open" : Current commitments under GPA = €22 bn
"Potentially ope n" : Deroga tions f rom the GPA = €74 bn"desirable"
"undesirable"
Source: Commission (2008) .
92
Box 7.1 Case of EU service firm providing public procurement in Japan
[An EU firm in Japan] currently provides water treat ment services to Japanese towns. The drinking water
market is not open to foreigners. Only designated citie s over a certain threshold – prefectures (as in Japan’s
commitment in WTO GPA) – are open for competition. Municipal markets are excluded for foreign suppliers.
[The EU firm] is facing 3 difficulties:
1) Local references are required in bids (not possible when you enter as a foreign firm).
2) Pre-registration is required in every little town (m ore than 2000 entities) and n eeds frequent up-dating.
Very time consuming and costly.
3) Headquarter must be in the town itself (cannot suppl y services from HQ in Tokyo). Must register com-
pany in many towns (however not required in all towns).
[The EU firm] has partly overcome these difficulties by buying smaller local companies and merging them
into a national network of firms, but keeping their lo cal registrations and staff. It generally works well.
The Japanese water treatment market has many small ope rators. They deliver very high quality, but also at
very high costs. [The EU firm] can bring expertise in the operation and bring higher efficiency, while preserv-
ing high quality.
Finding ways to remove the three difficulties above and making Japan open for foreign access in the GPA for
drinking water and for access to munici palities will provide more opportunities.
Note: Anonymous firm kn own to consultant.
Source: Personal interview with General Manager, January 2009.
7.2. COMPETITION ISSUES IN JAPAN
Our assessment is that:
Competition in the Japanese service sect ors seems to be weak compared to the
EU and to most other countries.
Competition in Japanese manufacturing indu stries seems to be about as strong as
in the EU.
Competition enforcement in Japan generally ranks poorly.
Our analyses show that competition is relative ly weaker in Japan in service sectors like fi-
nancial services, telecommunications, postal services, air transport, energy and business
services. The OECD has also pointed to lack of foreign participation in the retail and
whole sector in Japan.
We have limited information about the degree of competition in Japan’s manufacturing
sectors and therefore cannot draw firm conclusions here.
The relatively weaker competition and state aid rules in Japan limits market access for
European businesses as it raises new barriers to substitute for tariffs or traditional non-tariff
barriers. The EU has a strategic interest in developing international rules and cooperation
on competition policies to ensure European firm s do not suffer in third countries from un-
reasonable subsidisation of local companies, new entry barriers or anti-competitive prac-
tices. There is much to be done in this area in Japan. In Japan, as in many countries, there
is little transparency over the granting of st ate aid and the entry barriers formed by regula-
tion are de facto a barrier for foreign competit ion, as is the case in for example telecoms,
postal services and many financial services. In all these areas, transparent, effective and re-
93
spected rules are essential. The proper enfo rcement of competition rules with the same
rigour as in Europe, should be seen as the foundation for further trade liberalisation with
Japan. Europe could insist to work with Japa n to ensure their rules and standards are of
similar quality and to ensure that markets fo r key service sectors of general economic in-
terest are opened for foreign competition.
Competition in services
Comparing Japan with other countries shows that the competitive pressure from interna-
tional trade and FDI in Japan’s service sector is surprisingly weak, and that Japan’s trade in
services is underdeveloped when co mpared to other OECD countries.
More international competition seems to be re quired to boost productivity growth in the
Japanese service sector. What is much less evident is how to increase foreign competition
in Japan’s service sector and, in particular, how to identify the policy instruments available
for opening up key service sectors in Japan to European service suppliers.
There is a lack of foreign competition in Ja pan’s service market. In the OECD (2008) eco-
nomic survey, Japan ranks lowest on service import penetration amongst the OECD coun-
tries and ranks as one of the lowest on shares of service trade relative to GDP. Japan also
has a very low share of foreign affiliate sales in total services turnover and the lowest share
of services turnover in total turnover of fo reign affiliates in the OECD, cf. Figure 7.2.
These are all solid indicators of lacking fo reign competition in Japan’s service sector.
94
Figure 7.2 International competition in the service sector, 2005
0 2 04 06 08 0 1 0 0LUX
IRL
HUN
SVK
CZE
NLD
AUT
OECD
DNK
SWE
CHE
KOR
ISL
CA N
PRT
FIN
NZL
DEU
POL
ESP
MEX
GBR
GRC
FRA
ITA
AUS
USA
JPNA. Import penetration
rates for services¹
0 2 04 06 08 0 1 0 0LUX
IRL
DNK
ISL
AUT
BEL
NLD
CHE
NOR
SWE
FIN
GBR
DEU
NZL
GRC
ESP
HUN
FRA
PRT
CA N
ITA
CZE
KOR
SVK
AUS
JPN
POL
USA
MEX
TURB. Service trade
(per cent of GDP)
0 2 04 06 08 0 1 0 0IRL
HUN
BEL
LUX
POL
CZE
SWE
NLD
NOR
FIN
GBR
AUT
ITA
ESP
PRT
DNK
FRA
DEU
USA
JPNC. Share of foreign affiliates²
in total service turnover
0 2 04 06 08 0 1 0 0PRT
DNK
LUX
GRC
AUT
NLD
NOR
FIN
USA
SWE
GBR
CZE
BEL
ITA
DEU
FRA
POL
HUN
JPND. Share of services turnover in
turnover of foreign affiliates ²
Note: 1 As percent of domestic demand, data is for 2003. 2 Majority-owned affiliates un der foreign control, data
is from 2002 and is in percent of total service turnover). 3 Majority-owned affiliate s under foreign control,
data is from 2002 and is in percent of total service turnover)
Source: OECD (2005).
We note that large countries tend to be at th e lower end of these indicators, reflecting that
import penetration is generally lower in large countries, and we note that Japan ranks
higher than the U.S. on service trade as a sh are of GDP (panel B), and right after the U.S.
on import penetration (panel A) and the share of foreign affiliates in total service turnover
(panel C). On the last indicator, namely the sh are of services in total foreign affiliate sales
(panel D), the U.S. ranks in the middle, while Ja pan is at the lower end. Should size be the
only explanation for these positions, Japan sh ould rank consistently above the U.S. Since
this is not the case, and as Japan is consistently ranking very low on all indicators, we (as
well as the OECD who performed the original analysis) conclude that there is a specific
Japanese issue regarding services and that th ere is a pronounced lack of foreign competi-
tion in Japan’s services markets.
Competition in the Japanese service sectors s eems to be weak compared to the EU and to
most other countries. Comparing the degree of competition between countries is difficult
and more than one indicator is needed. One crude and indirect indicator allowing for
cross country comparisons of the degree of comp etition is the ratio of earnings to turnover.
The ratio of earnings to turnover is a proxy for mark-ups.
95
Competition is rather weak in Japan’s service industries compared to the same sectors in
the EU, cf. Figure 7.3. Sectors below the diagon al have higher mark-ups in Japan than in
the EU, for example in financial services and in air transport.
Figure 7.3 Gross earnings to turnover in services
Note: The diagram shows the ratio of earnings to turnover as a proxy for mark-ups and thus provides indications
of weak competition for the EU and Japan respectively.
Source: Copenhagen Economics’ calculations based on data from the OECD STAN database.
Competition seems to be weaker in services compared to manufacturing. Japanese mark-
ups in manufacturing are generally low. Japane se mark-ups in services are generally high
according to OECD calculations, cf. Figure 7.4. Japan 0,0010,0020,0030,0040,0050,0060,00
0,00 10,00 20,00 30,00 40,00 50,00 60,00Electricity, gas and water supply
Business sector servicesWholesale and retail trade
– Hotels and restaurants
Transport and storage
Water transport
Air transportFinance, insurance,
real estate,and business services
Post and telecommunicatios
Services overallEU
96
Figure 7.4 Comparing mark-ups in manufacturing and services in Japan
0510152025303540
LUX J PN BEL DNK G B RSWE FRA KO RUSA DEU NL DNORESPAUT C AN ITA FINManuf act uring
Per centPer cent
0510152025303540
GBRSWE USA BEL CA NLUX NL DDEUDNK FRA J PN NO RFIN AUT KO RITAServices
Per centPer cent
Note: Mark-ups are calculated for individual two-digits ISIC sectors and aggregated over all sectors using coun-
try-specific final sales as weights.
Source: OECD (2007a).
Productivity growth in the retail sector in Ja pan is one the lowest in the OECD. Japan has
an exceptionally high number of sma ll stores, but a lack of large stores.20 According to the
OECD (2008), domestic regulation is the reas on for the current situation in Japan. The
20 According to OECD (2008), Japan has around 100 stores per 10.000 inhabitants. EU has 73 and the UK only
has 43 stores per 10.000 inhabitants. The aver age size of these stores in Japan is 832 m2, around 1/5th of the size
in the US. This comparison is not meant to imply that bi gger stores are necessarily better. The point is that the
Japanese retail sector seems to function ve ry differently from the EU retail sector.
97
Large-scale Retail Store Law in Japan was changed in 2000 and this created uncertainties
and put foreign retail stores at a disadvantage . Some large European retail chains were es-
tablished in Japan but have now left. The retail sector is further limited by regulations on
construction (building permit and environment) and by price controls which remain re-strictive (Conway
et al., 2006). The result is that the turnover of foreign affiliates as a share
of wholesale and retail trade in Japan is the lowest in the OECD: Japan is 2 percent against
e.g. 25 percent foreign participation in Sw eden and 9 percent in the US (OECD, 2005).
The OECD has published a collection from various service sector estimates, see McGuire
(2003). The OECD collection is mainly based on work completed at the Australian Pro-
ductivity Commission in late 1990s and early 2000s led by Professors P. Dee and C.
Findlay. One interesting feature in these studie s (although not very recent), is the distinc-
tion between a domestic index and a foreign in dex. In their set-up, the foreign index meas-
ures de jure discrimination, i.e. systematic and cumb ersome research to filter through ac-
tual sector regulation and find the practical r ules and regulations stating specific additional
requirements for foreign suppliers not applicab le to domestic suppliers. If the foreign in-
dex is higher than the domestic index, it implies that there is de jure discrimination. If the
foreign and domestic indices are equal, there may still be a de facto barrier, and a high
domestic index may imply that prices for fore ign suppliers are higher than for domestic
suppliers.
This distinction seems to tell us something about Japan (which also corresponds well with our earlier observations). While there is little direct discrimination, restrictive domestic
regulation (as measured by the domestic in dex) may still imply higher costs for foreign
suppliers. In the comparison between the EU (a veraged) and Japan, this shows that both
discrimination and domestic regulation are at play in Japan’s banking sector, while the do-
mestic effect is zero in the EU, and the fore ign index only has one third of the impact of
the foreign index in Japan. It also shows the la rge impact of domestic regulation in Japan’s
retail sector, cf. Figure 7.5.
98
Figure 7.5 Price impacts of barriers on foreign service suppliers in the EU and Japan
Price impact
percent
5,3
0,03,12,31,61,05,1
2,415,3
10,0
2,36,8
0,3 0,36,6
2,2
02468101214161820
Foreign Domestic Foreign Domestic Foreign Domestic Foreign Domestic
Banking Distribution Telecommunications Business Service
(Engineering)
EU average Japan
Note: Results are compiled by OECD.
Source: Kalirajan (2000), Kalirajan et al. (2000), Nguyen-Hong (2000) and Warren (2000).
Competition in manufacturing
Competition in the Japanese manufacturing indust ries seems to be about as strong as in the
EU. Analysing the degree of competition measured by the ratio of earnings to turnover and
comparing Japan with the EU shows no system atic differences in the indicator across sec-
tors. It means that Japan has higher earnings to turnover ratios, and perhaps weaker com-
petition than in the EU, in those industries below the diagonal, but there are equally many
sectors above and belo w the diagonal line.
99
Figure 7.6 Gross earnings to turnover in manufacturing
Note: The diagram shows the ratio of earnings to turnover as a proxy for mark-ups and thus for sign of weak
competition for the EU and Japan respectively.
Source: Copenhagen Economics’ calculations based on data from the OECD STAN database.
Competition policy in Japan
Japan generally ranks poorly in competition policy and enforcement. Japan ranked only
21st in terms of both the legal framewor k and enforcement in 2003 according to the
OECD indicator (OECD, 2007a), as illustrated by Table 7.2. 0,005,0010,0015,0020,0025,0030,00
0,00 5,00 10,00 15,00 20,00 25,00 30,00
JapanEUEnergy producing
activitiesOverall
Manufacturing
Food products,
Beverages and tobaccoPulp, paperChemicals, rubber,
Plastics and fuel products
Basic metals
Fabricated metals
MachineryElectrical and optical equipment
Transport equipmentConstruction
100
Table 7.2 OECD ranking of major economies on competition policy and enforcement
Japan EU US Canada
Competition law and policy indicators 2.8 1.3 1.4 1.8
Antitrust framework 2.0 1.3 1.4 1.7
Network sector regulation 5.3 1.6 2.2
Scope of law and enforcement 2.4 1.3 1.4 1.6
Legal framework and rules 2.6 1.8 2.9 2.8
Exemptions 1.0 1.0 3.4 2.7
Merger regimes 1.3 1.7 0.3 0.0
Enforcement 3.4 0.8 0.3 1.5
Independence of Competition Authorities 0.5 1.4 1.5 1.8
Institutional design 1.0 1.7 3.0 3.5
Accountability 0.0 1.2 0.0 0.0
Independence of Sector Regulations, Telecommunica-
tions 6.0 1.9 0.7 2.0
Institutional design 6.0 1.2 0.0 1.5
Accountability 5.1 0.9 0.0 2.4
Powers 6.0 3.6 2.0 2.0
Independence of Sector Regulations, Energy 6.0 2.1 0.9 1.5
Institutional design 6.0 1.2 0.0 0.0
Accountability 1.0 0.0 2.4
Powers 4.0 2.7 2.0
Network Access 3.5 2.1 2.4 2.3
Entry restrictions 1.8 1.6 1.7 1.1
Vertical Integration 6.0 2.8 3.5 4.0
Source: OECD (2007a).
Competition policy in Japan is improving, but anti-trust regulation and merger control are
still not at a level comparable to the EU. There are many reasons for this, and Box 7.2 be-
low highlights the most important ones.
Improvements to Japanese competition policy would have further repercussions for many
of the underlying difficulties encountered by EU firms in Japan. In a trade policy context,
the EU could always encourage more co-operati on and co-ordination of cases, but this is
already taking place, and is not going to chan ge the general picture of weak antitrust en-
forcement in Japan.
To make an impact on many of the underlying causes for the difficulties EU firms are fac-
ing in Japan, the EU could stress that strong competition policy and enforcement is neces-
sary to foster free trade between major deve loped partners like Japan and the EU. Ensur-
101
ing that the Japanese competition authority, JFTC, is independent enough within the GoJ
(especially from METI) to deliver powerful competition policy should be an important
precondition for the EU to negotiate with Japan.
For this reason, we see competition an import ant area that can deliver important economic
impacts from bilateral trade liberalisation.
Box 7.2 Competition policy in Japan
The Japan Fair Trade Commission (JFTC) has increased its efforts against anti-competitive practices. The
JFTC’s role was enhanced by the 2005 revision of th e anti-monopoly act (AMA), which strengthened its en-
forcement power and increased the penalties fo r anti-competitive activities in several ways:
1. The surcharge rate on large manufacturing enterpri ses was increased from 6% to 10% of firms’
sales of the affected product for up to three years fo r violations such as price fixing and output re-
strictions.
2. The JFTC was granted stronger criminal investig ative power – compulsory search and seizure –
which should improve its capacity to investigat e cases that may call for criminal penalties.
3. A leniency programme was introduced in 2006.
4. The “recommendation system” was abolished to facilitate administrative measures.
However, there is still a possibility to strengthen the legal framework and enforcement of competition policy
in Japan. In particular, legal measures by the JFTC in response to M&As have been rare with only one merger
being formally rejected in more than 35 years. Mo reover, the JFTC has taken no legal actions regarding
M&As since 2000, even though nearly 100 mergers per year were reported to the JFTC from 2003-05.
For comparison, The European Commission received a reco rd number of merger no tifications in 2007, break-
ing the 400 mark for the first time. The Commission pr ohibited one proposed merger considered during 2007,
Ryanair's proposed acquisition of Aer Lingus, the s econd prohibition decision of Competition Commissioner
Kroes's term. However, the Commission's approach to mergers continues to be ge nerally non-interventionist,
arguably in part due to several judgments of the Europ ean courts criticising the rigour of its analysis and over-
turning its decisions further to appeals by both notifyi ng parties and complainants. The decision of the CFI to
award partial damages to Schneider Electric for losse s stemming from the Commission's 2002 prohibition of
its merger with Legrand will have done little to encourag e a more interventionist attitude by the enforcer. The
Commission has blocked only two mergers since 2002, and only 20 out of some 3,600 cases since 1990.
There are still three major competition issues in Japan:
1. The deterrent effect of surcharges and criminal penalties is still inadequate and needs to be
strengthened further. International comparisons also suggest that the surcharge rate in Japan is still
low.
2. Reducing exemptions from the AMA that are aimed at achieving other polic y goals is a prerequi-
site for achieving enforcement of competition po licy. Although the number of exemptions has
been reduced from 89 in 1996 to just above 20 in recent years, the exemptions cover a wide range
of areas such as insurance and the liquor business.
3. The role of trade associations sh ould be limited to norm setting, information sharing and provision
of administrative information. When the activities of the trade associations interfere with the op-
eration of firms, there is a risk th at they will curb competitive forces.
Source: OECD (2008) and Global Competition Review.
7.3. INTELLECTUAL PROPERTY RIGHTS ISSUES IN JAPAN
The question at hand is whether IPR issues co nstitute a non-tariff barrier to trade with Ja-
pan. The overall situation on IPR in Japan is quite positive, when including both legislative
and enforcement issues. The major concerns are imports of counterfeits (mainly trade-
marks infringement) coming from China and Ko rea (for details see the 2008 IPR report by
the Japanese Customs and Tariff Bureau). Th e EU and Japan share a common interest in
fighting against counterfeits in third countries and co-operation in this field is progressing
well. The Agreement between the Government of Japan and the European Community in
102
Co-operation and Mutual Administrative A ssistance in Customs Matters was signed in 30
January 2008.
The area which needs to see further progress is Geographical Indications (GI), which is be-ing dealt with in the WTO framework.
There are also examples of IPR issues affectin g export transport equipment. IPR rights of
Shinkansen are owned by JR Tokai which selects (Japanese companies) to build new
trains. As a consequence, no competition is possible.
Intellectual Property strategy in Japan
That said, Japan has a well developed IPR sy stem. In 2002, then Prime Minister Koizumi
called for a national IP Strategy in his polic y speech, aiming to promote economic growth
by leveraging IPR. Since then, the IP Strate gy Headquarters were established in 2003, and
an annual national IP Strategic Programm e has been issued. Phase I (FY 2003-2005) fo-
cused on the development of basic framewor ks for the IP strategy and Phase II (FY 2006-
2008) of the Programme aimed to make Japan th e most advanced IP-based nation in the
world.
EU-Japan relations
In April 2008, DG TRADE sent out questionna ires on “IPR Enforcement Survey” to ma-
jor delegations, including Japan. The results of the survey, on the basis of responses by
Embassies and business, confirmed the commen ts in the mission report of the March
2008 EU-Japan Dialogue: “excellent quality an d standards are noted in Japan” (see Euro-
pean Commission, 2008b).
The EU and Japan started bilateral dialogue on IPR in 2003. This dialogue takes place be-
tween DG Trade and the Japanese Ministry of Economy Trade and Industry (METI) an-
nually. The Japan-EU Joint Initiative for the En forcement of Intellectual Property Rights in
Asia was announced in June 2004 at the EU-Japan Summit in Tokyo. Japan and the EU
have agreed to renew this Joint Initiative, ex panding their collaborative efforts to protect
and enforce IPR worldwide both in a bilateral as well as multilateral framework. At the 16
th
EU-Japan Summit in June 2007 in Berlin, th e EU and Japan adopted the Japan-EU Action
Plan on IPR Protection and Enforcement.
The 17
th EU-Japan Summit in April 2008 in Tokyo co nfirmed an agreement to continue to
strengthen their co-operation on IPR at both bilateral and multilateral levels, and by im-
plementing the initiative of the Japan-EU Ac tion Plan on IPR Protection and Enforce-
ment, including acceleration of the negotiat ions on the Anti-Counterfeiting Trade Agree-
ment (ACTA).
For these reasons we see no value added from special attention the IPR issues within Japan
in a bilateral framework.
103
7.4. SUMMARY OF OTHER NTM S IN JAPAN
Of the NTMs analysed in this chapter, comp etition issues and public procurement issues
appear to be the most important from an econ omic point of view. All three are, of course,
vital to European business interests, and progress can be made in all three areas. However,
compared to other difficulties faced by EU fi rms in Japan, the protection and enforcement
of IPR policies in Japan is not the most signif icant problem. In fact, IPR protection and en-
forcement is judged to be of very high qualit y in Japan. Both Japan and the EU are consid-
ered to be strong global partners on many IPR issues having common objectives and ap-
proaches.
From a policy point of view, improving access to the public procurement market in Japan
will be beneficial to ensuring access for EU exporters. Finding appropriate policy options
for improving competition policy and enforcement in the Japanese market will also be an
important step, which, in the long run, will improve possibilities for EU firms to compete
freely in the Japanese market.
104
According to the UNCTAD World Investment Report 2008, Japan enters the matrix of
inward FDI performance and potential as having a high FDI potential but a low FDI per-
formance. FDI into Japan thus remains the lowe st in the OECD cf. Figure 8.1. The stock
of FDI in Japan was two percent of GDP in 2007, compared to 14 percent in US and over
37 percent in Canada. Therefore, the potential to increase FDI into Japan appears to be
enormous.
Figure 8.1 FDI into Japan is the lowest in the OECD
73%
58%
37%
34%33%
29%27%
21%21%
15%14 %
11%10 %9%8%8%7%7%6%6%5%4%3%3%3%2%
0%10 %20%30%40%50%60%70%80%
IC E
NZL
CA N
AUS
HUN
NHL
IRL
GBR
CHE
DENUSA
PRT
FRAAUT
NOR
ESP
DEU
CZE
TUR
POLSLR
KOR
ITA
FIN
GR C
JPNFDI/ G DPInward Ext ra- EU27 st ock FDI/ GDP
Source: UNCTAD (2008).
One important explanation for the low level of FDI is the low number of M&A deals in
Japan when compared to other OECD countries cf. Figure 8.2. In 2007, 169 Japanese
firms were sold to foreign buyers, while Japa nese buyers purchased 186 foreign firms. The
low number of total M&A transactions suggests that the restructuring process of the Japa-
nese economy has not started. The result is an inefficient business structure.
Chapter 8 BARRIERS TO FDI IN JAPAN
105
Figure 8.2 There are not many cross-border M&A deals
4081
6072040
16 94081
6002100
18 6
05001 000150 0200025003000350040004500
EU C anada US J apanInt ernat i onal M&A deal s i n 2007
Sales
Purchase s
Note: “Sales” are sales of domestic companies to a fore ign buyer. “Purchases” are purchases of foreign compa-
nies by domestic buyers.
Source: UNCTAD (2008).
8.1. IDENTIFIED BARRIERS TO FDI IN JAPAN
Worries expressed by investors in a large-scal e survey of Japan’s competitive positioning
within Asia cf. Figure 8.3. Among the obstac les perceived by investors regarding the Japa-
nese market, language and cost-related criteria (such as taxation and labour costs) appear to
be the main barriers to be overcome. Language is cited by 30 percent of investors as the
main obstacle, followed by taxes (24 percent) and labour costs (13 percent).
106
Figure 8.3 Main obstacles to investing in Japan
7%8%10%12%13%24%30%
0% 5% 10% 15% 20% 25% 30% 35%Lack and cost of land – real
estateComplexity of adm inistrative
procedures -Particularity of the ma rket
closed ma rketCultureLabour costsTaxes – high business costsLanguage
Note: The survey results are based on telephone intervie ws with 209 senior executives of US, European and
Asian companies. The project was commissioned by the Japanese Ministry of Economy, Trade and In-
dustry.
Source: Ernst and Young and JETRO (2008).
The barriers are not equally distributed across sectors, cf. Table 8.1. Overall, 52 percent of
investors from the information and telecommunication (ITC) sector cite language as the
main obstacle, versus an average of 30 perc ent. Conversely, investors from the chemical,
pharmaceutical and medical equipment manufact uring – life science sector and those from
wholesale and business-to-business services tend to be less hampered by language difficul-
ties (17 and 20 percent citation rate, respectively).
Many of the obstacles identified in the study ar e specifically related to the Japanese market
(language, culture and particularities of the market) and these issues are difficult for the
GoJ to tackle in the short and medium term. The closed character of the Japanese market,
for example, is related to Keiretsu-affiliated companies and personal contacts. The very in-
tegrated buyer-supplier relationship in Japan, with suppliers (e.g. auto parts) receiving in-
vestments from main firm (e.g. automaker) against a long-term commitment and a price-
premium, creates challenges for foreign compet itors. However, this system is deeply
rooted in Japanese culture and its dismantlement is not easily handled. It is outside the scope of this study to assess if it s dismantlement is even desirable.
107
Table 8.1 Breakdown of obstacles by sector
Total ITC Busi-
ness
ser-
vices Life
sci-
ence Auto-
motive Elec-
tron-
ics
Language 30% 52% 20% 17% 36% 26%
Taxes – high business costs 24% 14% 20% 26% 41% 17%
Labour costs 13% 10% 9% 11% 9% 24%
Culture 12% 14% 11% 17% 14% 4%
Particularity of the ma rket – closed market 10% 10% 11% 13% 5% 11%
Complexity of administrative procedures 8% 8% 11% 13% 5% 4%
Lack and cost of land – real estate 7% 6% 11% .. 9% 7%
Note: The survey results are based on telephone intervie ws with 209 senior executives of US, European and
Asian companies. 29 percent of the respondents alre ady operate in Japan. 70 percent operate in Asia.
The project was commissioned by the Japanese Minist ry of Economy, Trade and Industry. ICT is infor-
mation and telecommunication technology. Business services include wholesale, distribution, logistics and
other business-to-business services. Life science in cludes chemicals, pharmac eutical and medical equip-
ment manufacturing. Electronics include manufacturing of electronics, electrical instruments and high-
tech equipment.
Source: Ernst and Young and JETRO (2008).
The complexity of administrative procedures, on the other hand, is more readily accessible
for the GoJ. Such procedures are related to approval of licenses, legal regulations and
standards, and lengthy inspections of products. As an example, Japan is one of the latest
countries to launch new medical devices, and some Japanese companies launch their
products outside of Japan in the first instance . In this way, the regulatory reform process
does not foster competition, cf. Table 8.2. The score 6 for telecommunications and energy
suggests that the sectoral regulator cannot be considered to be independent from the po-
litical process. It is almost always the case that Japan has a higher score than the EU, which
suggests that the Japanese market is less comp etitive than the EU market. One exception is
the Japanese competition authorities who turn out to be more protected from political
pressure than their EU counterparts.
108
Table 8.2 The regulatory reform and competition
Japan EU US Canada
Competition law and policy indicator 2.8 1.3 1.4 1.8
Antitrust framework 2.0 1.3 1.4 1.7
Network sector regulation 5.3 . 1.6 2.2
Scope of law and enforcement 2.4 1.3 1.4 1.6
Legal framework and rules 2.6 1.8 2.9 2.8
Exemptions 1.0 1.0 3.4 2.7
Merger regimes 1.3 1.7 0.3 0.0
Enforcement 3.4 0.8 0.3 1.5
Independence of competition authorities 0.5 1.4 1.5 1.8
Institutional design 1.0 1.7 3.0 3.5
Accountability 0.0 1.2 0.0 0.0
Independence of sector regulations, telecommunication 6.0 1.9 0.7 2.0
Institutional design 6.0 1.2 0.0 1.5
Accountability 5.1 0.9 0.0 2.4
Powers 6.0 3.6 2.0 2.0
Independence of sector regulations, energy 6.0 2.1 0.9 1.5
Institutional design 6.0 1.2 0.0 0.0
Accountability . 1.0 0.0 2.4
Powers . 4.0 2.7 2.0
Network access 3.5 2.1 2.4 2.3
Entry restrictions 1.8 1.6 1.7 1.1
Vertical integration 6.0 2.8 3.5 4.0
Note: EU includes Austria, Belgium, Czech Rep., Denm ark, Finland, France, Germany, Greece, Hungary, Ire-
land, Italy, Luxembourg, the Netherlands, Norway, Po land, Portugal, Slovak Rep., Spain, Sweden and the
United Kingdom. Individual policies are scored agai nst a benchmark of generally-agreed best practices in
the area of competition enhancing policies. Low (high) scores are indicative of a high (low) level of compe-
tition. Scores lie between 0 and 6. "Network Access" focuses on regulations affecting market access and
vertical separation of network sectors.
Source: OECD (2007a).
8.2. WHAT IS BEING DONE TO INCREASE FDI INFLOWS ?
As a response to the low level of foreign capital, the Government of Japan (GoJ) has initi-
ated several initiatives to accelerate FDI in flows. In 2003, the Japanese government an-
nounced as a goal that the FDI stock in Ja pan should double over the period 2001-2006.
The Japan Investment Council (JIC) subsequently formulated the “Program for the Pro-motion of Foreign Direct Investment in Ja pan”, which established a strategic plan to
achieve that goal. This go al was almost realised (
cf. Figure 8.4) with the FDI stock increas-
ing from 6.6 trillions of Yen in 2001 to 12.8 trillions of Yen in 2006.
109
Figure 8.4 The Japanese government’s FDI target
Trillions of Y e n
6.69.49.610 . 111. 912. 815. 1
051015202530
2001 2002 2003 2004 2005 2006 2007 2008 2009 201 0Accelerat ionOriginal target to double FDI
i n 5 years f rom 2001 was
al most achi eved¥2.3 t ri l l i on yen
increase over last year (The bi ggest
i ncrease i n 5 yearsTarget set by the G overnment.
Aiming 5 % FD I inc re a se ,
doublin g GDP
Source: US Japan Economic Partnership for Growth (2008).
In 2006, the GoJ set a new goal of increasing FDI stock by raising it to the level of about 5
percent of GDP by 2010. The goal by 2010 is s lightly more ambitious than the original tar-
get since it implies an acceleration of the growth rate in FDI inflows. However, the goal still
does not seem to be very ambitious. From Fi gure 8.1 we see that achieving a ratio of FDI
to GDP of 5 percent would only just allow Japan to pass the 2007 level of Korea.
In response to the GoJ’s 2010 FDI target, the JIC established the “Program for Accelera-
tion of Foreign Direct Investment in Japan” in 2006. This program was revised in 2008. In
the same year, the Expert Committee on FDI Promotion was established to discuss meas-
ures to increase FDI further, and the Comm ittee submitted “Five Recommendations to-
ward the Drastic Expansion of Foreign Direct Investment in Japan” (see Box 8.1). The
Chairman of the European Business Council is a member of the Expert Committee, which
therefore provides a forum for setting out the vi ews of European investors interested in en-
tering or expanding their activi ties in the Japanese market.
110
Box 8.1 Recommendations from the Expert Committee on FDI Promotion
The five recommendations include:
1. Enhancement of the system for the facilitation of M&A
Corporate M&A activities in Japan (boost th e predictability of the M&A process)
Sort out and clarify takeover rules without delay
Promotion of studies for the f acilitation of cross-boarder M&A
Elimination of allergy toward s M&As by foreign companies
2. Comprehensive studies on FDI regulations
Clarification of the scope and grounds of cas es where FDI regulations are necessary as
exceptions to the principle of non-discrimi nation between domestic and foreign inves-
tors)
Japan’s open investment policy should be shown to the rest of the world
3. Establishment of priority strategies by sector
Bringing the world’s most advanced medicines to Japan
Selection of sectors and formulation of ac tion programs (in partic ular medical devices
and pharmaceutical products)
4. Reduction of business costs and improvement of system transparency
Reduction of the corporate tax rate
Improvement of the “no-action letter” syst em and written reply procedures for taxes
Evaluation of regulations and administrative burden survey
Revision of hearing procedures etc. under the Antimonopoly Act
Promotion of utilisation of private-sector dynamism in public service by government
5. Regional revitalisation by foreign capital
Strategic attraction of foreign capital in wi de-area economic zones (“local to local”)
Activities to attract foreign capital centre d on former private-sector personnel
Building on living environmen ts suitable for foreigners
Facilitating continuation of business of sm all and medium-sized companies through
foreign capital M&As
Strengthening of appeal that FDI in Japan is welcome
Source: Expert Committee on FDI Promotion (2008).
Overall, 45 percent of investors demand measur es to reduce taxation and 38 percent hope
for a reduction in labour costs (cf. Table 8. 3). Japan actually has the highest combined
corporate tax rate among the OECD countries (c f. Figure 8.5). Furthermore, 25 percent of
respondents would like the government to impl ement simpler, more flexible administrative
procedures. This is demanded particularly in the automotive and manufacturing of elec-
tronics, electrical instruments and high-tech equipment. Investors in the ITC sector feel
particularly frustrated by the lack of flexib ility in the labour market – 48 percent request
measures to improve labour flexibility, compared with an average of 29 percent.
111
Table 8.3 Priority measures to be taken by the Japanese government
Total ITC Busi-
ness
ser-
vices Life
science Automo-
tive Elec-
tronics
Reduce taxation 45% 50% 44% 39% 50% 43%
Reduce language barriers 40% 42% 33% 35% 45% 46%
Reduce labour costs 38% 42% 33% 39% 32% 43%
Make labour regulation more flexible 29% 48% 24% 26% 18% 26%
Implement simpler, more flexible
administrative procedures 25% 24% 20% 17% 32% 33%
Improve the country 's image abroad 17% 16% 16% 17% 23% 11%
Improve quality of life 15% 20% 16% 15% 9% 13%
Improve the education system 11% 8% 22% 9% 5% 11%
Improve transport and
communication infrastructure 8% 6% 13% 11% 5% 4%
Improve innovation and R&D 7% 12% 7% 7% 5% 4%
Note: The survey results are based on telephone intervie ws with 209 senior executives of US, European and
Asian companies. 29% of the respondents already oper ate in Japan. 70% operate in Asia. The project was
commissioned by the Japanese Ministry of Economy, Trade and Industry. ICT is information and tele-
communication technology. Business services include wholesale, distribution, logistics and other business-
to-business services. Life science includes chemical s, pharmaceutical and medical equipment manufactur-
ing. Electronics include manufacturing of electronic s, electrical instruments and high-tech equipment.
Source: Ernst and Young and JETRO (2008) .Japan’s Attractiveness Survey 2008.
112
Figure 8.5 Japan has the highest combined income tax rate
051015202530354045Jap anUni t ed St at esFranceBel gi umC anadaGer m an yAustraliaNew Zeal andSpai nLuxembourgMexicoNorwayUnited KingdomItalyPort ugalSweden FinlandNetherlandsAustriaDenmarkGr eeceKoreaSwi t zerl andC zech RepublicHungaryTurkeyPol andSlovak RepublicIcel and Irel andCombi ned corporat e i ncome t ax rat e
Note: The figure shows basic combined central and sub-ce ntral (statutory) corporate income tax rate given by
the adjusted central government ra te plus the sub-central rate.
Source: OECD (2009) at www.oecd.org/dataoecd/26/5 6/33717459.xls also available in Hodge (2008).
It is too soon to evaluate whether the initiatives and programmes implemented by the GoJ are actually effective in attrac ting FDI into Japan and ease the entry of European firms into
the Japanese market. However, what we can say is that the programmes do not seem to be
overly ambitious and that further actions will be required if Japan wishes to reach its inward
FDI potential.
8.3. EFFECTS OF REDUCING BARRIERS TO FDI
The decision to enter a market through trade or direct investment is interrelated. FDI of-
ten occurs after a firm enters a market thro ugh trade but trade barriers may also stimulate
“tariff-jumping” FDI. On balance, however, the removal of obstacles to trade has been
found to boost FDI inflows (see Nicoletti et al., 2003). Given the complementarity of trade
and investment, easing barriers to trade should encourage FDI inflows. Similarly, liberalis-
ing barriers to FDI should promote trade. The observations and recommendations pro-
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tion about how to boost FDI into these sectors.
113
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The estimates of EU NTMs used in this stud y rely on Ecorys (2009). The methodology for
the estimates is summarises below. For mo re details we refer to Ecorys (2009).
Step 1: Survey indexes from the business survey
Responses to a survey question on how businesses perceive the EU market as export market gen-
erate exporter-importer specific i ndexes of NTMs with a country-pai r specific NTM variable. Compa-
nies were asked about the restrictiveness of the EU market on a scale from 1 to 100. NTM indices
valued between 0 (completely open) and 100 (complet ely closed) were generated by combining re-
sponses from all exporters to a specific destinati on into one single variable per sector measuring the
average perceived NTM for each country.
Step 2: From survey indexes to trade and FDI restrictions
The survey index,that ranges from 0 – 100, is tr ansformed into a log scale conform OECD best prac-
tice: Trade/FDI level of restrictiveness = ln (1 + 0. 01 * survey index). For se rvices a combination of
OECD and survey indexes is used.
Step 3: From level of restrictiveness to the coefficient of the gravity regression variable By multiplying the NTMj index with the dummy-variables for tr ading block membership (Transatlantic
dummy, EU dummy or NAFTA dummy, generating t he effects described above) a variable with a bi-
directional dimension (exporter an d importer) is obtained. This va riable is used in the regression
analyses. The coefficient on the NTM variable generat ed by running the gravity regressions, specifies
the effect of the NTM-transatlantic, NTM-EEA and NTM-NAFTA measures on trade and investment
flows.
Step 4: From variable coefficient to specific trade cost estimate
The coefficients on the NTM-EEA variables can t hen be changed into trade cost estimates. The trade
cost estimate (in percent) is the estimated incr ease in trade costs as a consequence of the existence
of NTMs and regulatory divergence in the EEA.
Step 5: From specific trade cost estimates to the aggregate trade cost estimate at the sectoral
level
Knowing the individual EEA trade cost estimates, they are aggregated (assuming intra-EEA preferen-
tial treatment is extended to potential trade partner s) into one single trade cost estimate at the sec-
toral level.
The article by Anderson and van Wincoop ( 2003) forms the basis of the formulation of
the empirical model for goods sectors. Based on this model, trade cost equivalents are es-
timated using the NTM indices as descri bed in the five step methodology.
Below we report the key data going into the barrier estimate for the EU, namely the NTM
indexes and the assumptions abou t actionability. The resulting gravity estimates are shown
in the report. APPENDIX 1: METHODOLOGY TO QUANTIFY EUROPEAN NTM S
120
Average NTM indexes
The Ecorys (2009) survey generated 5.445 data points. Of these 5.445, 3.518 data points
relate to NTM indexes in trade. The NTM index is calculated on a 0 – 100 scale with 0
meaning there is not one NTM or any regula tory divergence and 100 meaning there are
prohibitively high NTMs and levels of reg ulatory divergence. The table below shows the
perception of firms regarding the overall levels of restrictiveness in terms of NTMs as an
outside exporter to the EU.
Table 8.4 NTM index for the EU by sector
Trade EU NTM index
Travel 17.6
Transport 26.3
Financial services 21.3
ICT 19.3
Insurance 39.3 Communication 27.0
Construction 37.3
Other business services 20.0
Personal, cultural and recreational services 35.4
Chemicals 53.2
Pharmaceuticals 44.7 Cosmetics 52.2
Biotechnology 50.2
Machinery 36.5 Electronics 40.0
Office, information and communication equipment 32.3
Medical, measuring and testing appliances 44.5
Automotive industry 31.6
Aerospace and space industry 55.1
Food and Beverages 33.6
Iron Steel and Metal products 24.0
Textiles clothing and footwear 48.9 Wood & paper, paper products 47.1
Source : Ecorys (2009)
121
Actionability
Realising that not all of the estimated trade co sts can necessarily be reduced, Ecorys (2009)
have assessed the so-called ‘Actionability’ of the NTMs in each sector. Actionability is de-
fined as “the degree to which an NTM or regulatory divergence can potentially be reduced
by 2018, given that the political will exists to address the divergence identified.” According
to the assessment, between 40 and 70 percent of th e trade cost per sector is actionable, i.e.
can be reduced through trade policy negotiatio ns. This information has been aggregated by
Ecorys into a sector level of action ability as presented in Table 8.5.
Table 8.5 Actionability of EU NTMs per sector
Potential NTM reduction
(percent)
Aerospace & space 59
Automobile 67
Chemicals 63 Communication services 70 Electronics 64 Cosmetics 58 Financial services 49 Insurance services 52 Food & beverages 53 OICE 52 Pharmaceuticals 42 Transport services 56 Biotechnology 41 ICT 35 Construction services 38 Machinery 55 Medical equipment 45 Other business services 51 Personal, recreational services 37 Steel 62 Textiles 50 Wood & paper products 60 Travel services 40
Note: The table shows the percentage of the NTM index are expected to be ‘actionable’, i.e. the possible per-
centage reduction of the barrier.
Source : Ecorys (2009)
122
A2.1 G RAVITY MODEL FOR MANUFACTURING GOODS
We run gravity model estimations for the time period 1996 to 2005 in 13 manufacturing
sectors. Since the focus is on external barrier s to trade, we exclude intra-EU trade flows
from the study. Here, bilateral import to country i from country j in sector k at time t will
depend on time-varying sector-specific bilateral tariffs ( lnT), a set of time-invariant bilateral
gravity factors including border, language and distance ( gravity ), time-varying importer
GDP and GDP per capita ( GDP and GDP/pop ), time-invariant importer dummies ( D i)
and, finally, time-varying exporter dummies ( D jt) and a time trend ( t). The specification is:
),,, / , , , (ln ln tDD pop GDP GDP gravityTf Mjt i it it it ij ijkt ijkt=
Parameter estimates can be seen in Table A11.1.21 All variables generally enter with the ex-
pected sign: low tariffs, common language, co mmon border and a short distance have a
positive impact on trade. As expected, the elas ticity of import with respect to importer’s
GDP is around one, whereas the elasticity of import with respect to GDP per capita unex-
pectedly turns out to be negative.
The gravity model has typically forms the basis for a quantification of NTMs by interpret-
ing the residual (the difference between actual and predicted trade) as missing trade be-
tween two trading partners.
22 This is the residual approach. One important criticism of the
residual approach is that the residual capt ures a broad range of factors where some of
these factors are trade-related but where others are rooted in structural, institutional and regulatory factors in the domestic economy. To get a more precise estimate of how open
the Japanese economy is, we use the Japanese importer dummy variables. Since we control
for factors that affect trade and that vary ov er time by including the importer country’s
GDP and GDP/capita in the gravity model, the Japanese importer dummy will therefore
capture Japan-specific non-tariff factors that ha ve an impact on trade and that do not vary
over time.
If the Japan dummy is negative in a particular se ctor, it means that there are barriers in the
Japanese market that hinder foreign exporters from penetrating the market in that particu-
lar sector. Likewise, if the Japanese dummy is larger than the EU dummy (in absolute
terms) it means that the Japan-specific non-tar iff factors hinder foreigners from penetrating
the Japanese market to a greater extent than the EU-specific NTMs limit imports to the
EU markets. The size of the dummy variable will thus be more directly related to trade
barriers. The importer dummies are listed in Table A2.2
21 We have also included the importing country’s revealed comparative advantage in the particular sector and the
current account balance to control for importer-specific structural characteristics. When we rerun our gravity
model estimations, we find that this does not change the sign or the size of the importer dummy variables.
22 The gravity model approach was originally developed by Leamer (1998). See also Begh in and Bureau (2001) for
a discussion of the various method s to quantify NTMs and Harrigan et al. (2003) for an application of the gravity
model for Japan. APPENDIX 2: GRAVITY MODEL METHODOLOGIES AND RESULTS
123
Table A2.1 Estimation results from gravity model
VARIABLES Chemicals Pharmaceuticals Cosmetics Machinery Electronics Office Medical Automotives Aerospace Food Iron Textiles Paper
Tariffs -3.315*** -1.516 -0.639 -0.208 -5.461*** -2.193*** -3.250*** 3.640*** -0.737 -1.352*** -6.386*** -3.058*** -5.993***
[-5.252] [-1.609] [-1.328] [-0.344] [-7.480] [-2.812] [-4.518] [7.949] [-0.477] [-7.120] [-10.00] [-8.031] [-8.748]
Distance -1.319*** -1.397*** -1.641*** -1.463*** -1.312*** -1.375*** -1.313*** -1.737*** -1.411*** -1.223*** -1.307*** -1.063*** -1.305***
[-99.37] [-79.79] [-83.78] [-108.1] [-71.29] [-80.27] [-91.85] [-100.7] [-50.28] [-82.56] [-94.00] [-87.31] [-83.41]
Language 0.358*** 0.773*** 1.054*** 0.230*** 0.606*** 1.059*** 0.505*** 0.140* 0.853*** 0.408*** 0.216*** 0.094* 0.153**
[5.637] [9.603] [16.41] [4.605] [9.096] [14.42] [8.347] [1.849] [8.278] [6.364] [3.997] [1.679] [2.317]
Border 0.249*** -0.485*** 0 -0.091 -0.098 -0.732*** -0.284*** 0.281** -0.746*** 0.218** 0.361*** 0.574*** 0.773***
[3.172] [-3.706] [0.00240] [-1.012] [-0.885] [-6.279] [-2.769] [2.184] [-3.955] [2.521] [4.472] [6.811] [7.125]
Importer GDP 1.152*** 0.943*** 0.878*** 1.032*** 1.052*** 1.072*** 1.156*** 1.114*** 1.202*** 1.033*** 1.226*** 1.112*** 1.122***
[64.21] [37.50] [43.28] [62.69] [62.44] [54.00] [74.53] [51.01] [33.86] [49.51] [78.60] [64.61] [57.13]
Importer GDP/pop -0.394*** -0.231*** -0.363*** -0.201*** -0.176*** -0.231*** -0.308*** -0.267*** 0.451*** -0.205*** -0.242*** -0.384*** -0.090*
[-9.584] [-3.996] [-7.099] [-5.322] [-4.471] [-4.959] [-8.473] [-5.440] [4.610] [-4.293] [-6.780] [-9.913] [-1.891]
Time trend 0.007 0.088*** 0.115*** 0.048*** 0.048** -0.083*** 0.051*** 0.091*** -0.080** -0.034* 0.011 -0.049** 0.070**
[0.352] [3.642] [4.518] [3.032] [2.538] [-4.032] [3.045] [3.368] [-2.046] [-1.650] [0.437] [-2.171] [2.539]
Constant -53.402 -213.222*** -269.419*** -135.318*** -135.564*** 125.169*** -142.814*** -229.948*** 105.878 34.226 -63.699 63.488 -182.303***
[-1.310] [-4.406] [-5.313] [-4.300] [-3.559] [3.025] [-4.233] [-4.248] [1.358] [0.819] [-1.259] [1.410] [-3.314]
Observations 9860 8973 8245 9790 9769 9008 9614 9164 6543 9744 9888 9991 9448
R-squared 0.8 0.693 0.727 0.832 0.793 0.767 0.807 0.751 0.603 0.721 0.798 0.807 0.733
Note: All variables are in logs. GDP and GDP per capita are in constant $US. *** p<0.01, ** p<0.05, * p<0.1. Source: CE gravity model.
124
Table A2.2 Importer dummies from gravity model
Country Chemicals Pharmaceuticals Cosmetics Machinery Electronics Office Medical Automotives Aerospace Food Iron Textiles Paper
ARG 0.152 -0.474*** -1.293*** -0.872*** -0.162 -0.875*** -0.875*** -1.630*** -2.120*** -1.769*** -0.389*** -1.576*** -0.775***
BRA -0.142 -0.573*** -2.150*** -1.266*** -0.376** -1.283*** -1.273*** -1.936*** -0.517* -1.746*** -1.190*** -2.554*** -2.021***
CAN -0.775*** -1.367*** -1.670*** -1.003*** -1.130*** -1.036*** -1.278*** -1.472*** -0.567*** -0.532*** -0.625*** -0.197*** -1.551***
CHE -1.200*** -1.372*** -2.803*** -2.301*** -1.866*** -1.663*** -1.263*** -2.240*** -2.080*** -1.455*** -1.323*** -0.600*** -1.996***
CHN -1.290*** -2.395*** -3.355*** -1.868*** -1.025*** -2.027*** -2.221*** -3.695*** -0.579 -2.112*** -1.229*** -2.249*** -1.124***
EEU -1.292*** -1.418*** -2.076*** -1.663*** -0.975*** -1.102*** -1.289*** -1.673*** -0.676*** -1.202*** -1.283*** -0.688*** -1.523***
IDN -0.653*** -1.810*** -2.247*** -1.393*** -1.739*** -2.321*** -2.702*** -3.044*** 0.979*** -1.354*** -0.750*** -2.234*** -0.518***
IND -1.254*** -2.216*** -3.952*** -2.513*** -1.608*** -2.753*** -2.448*** -5.200*** -0.264 -3.589*** -0.336 -3.063*** -1.313***
ISL -0.716*** -1.095*** -0.950*** -1.005*** -0.433*** -0.206 -0.614*** -0.360* -0.573* 0.057 0.762*** 1.199*** 0.163
JPN -1.296*** -1.680*** -1.713*** -2.914*** -2.665*** -2.054*** -2.127*** -2.500*** -3.971*** -0.767*** -2.241*** -1.419*** -2.233***
KOR 0.047 -1.079*** -1.356*** -1.315*** -0.581*** -1.420*** -0.950*** -2.027*** -1.070*** -0.467*** 0.002 -0.949*** -1.254***
MEX -0.559*** -0.803*** -1.770*** -0.938*** -0.091 -0.922*** -0.923*** -1.994*** -1.467*** -1.336*** -0.336*** -1.313*** -1.247***
MYS 0.436*** -0.368* -0.492*** -0.2 1.164*** 0.719*** -0.360* -2.344*** 2.268*** -0.677*** 0.985*** -1.267*** 0.606***
NOR -1.271*** -2.531*** -2.182*** -1.931*** -1.251*** -0.993*** -1.708*** -1.645*** -2.520*** -1.362*** -0.615*** -0.03 -1.539***
NZL 0.686*** 0.236 0.596*** 0.421*** 0.588*** 0.394*** 0.608*** 0.622*** 1.032*** 0.356*** 0.820*** 0.700*** 0.710***
RUS -1.929*** -1.103*** -1.578*** -2.008*** -1.932*** -2.748*** -1.917*** -3.121*** -1.196* -0.538** -1.401*** -2.233*** -1.486***
THA 0.293* -0.441* -1.079*** -0.942*** 0.603*** -0.617*** -1.108*** -3.187*** -0.098 -0.288 0.788*** -0.685*** 0.035
TUR -0.618*** -2.045*** -2.767*** -1.968*** -1.486*** -2.312*** -2.251*** -2.311*** -1.169*** -1.961*** -0.988*** -1.354*** -1.623***
USA -1.261*** -1.725*** -1.601*** -1.484*** -1.356*** -1.160*** -1.589*** -1.766*** -1.144*** -1.299*** -1.517*** -0.739*** -2.174***
Note: To avoid multi-colinearity we include a constant we let Australia by the omitted country. Source: CE gravity model.
125
A2.2 G RAVITY MODEL FOR SERVICES
Conceptually, the basic approach followed for services NTB estimation is the
same as for goods. This means our esti mates of services trade barriers are drawn
from gravity modeling of bilateral services trade. However, while the core estimat-
ing equation is the same, we have had to make allowances for severe data limita-tions, and also for the different nature of goods and service market integration in Europe and North America. Due to severe data limitations, gravity es timates for services are often based on to-
tal trade with world (See for example Fr ancois, Hoekman, Woerz 2007; Francois
2001; Francois, van Meijl and van Tong eren 2005; Francois and Wignarajan
2008). An example of a gravity model with bilateral services trade is Francois
(1993), while Sapir and Lutz (1981) and Sa pir (1981) offer early examples of the
gravity model applied to balance of paymen ts-based (total) trade data. Park (2002)
extends the Francois (2001) method, which was based on total trade in the GTAP
database, to bilateral trade. However, the Park estimates rely on early GTAP ser-vices trade flows, which were themselves generated by a gravity model. As such,
his estimates actually provide no more in formation than provided by the aggregate
data, as in Francois (2001).
Data
NTMs
Our primary source for NTMs for servic es FDI come from the OECD (2007) and
our firm survey. To maximize country co verage, we work with a composite index
based on the OECD indexes, supplemented with additional information from the
surveys.23 The OECD provides indexes ranging from 0 to 1. The index itself
measures regulatory barriers and restrictio ns limiting foreign access in the service
sector linked to investment, operation of firms, and movement of persons neces-
sary for firms to operate. The survey da ta range from 0 to 100. We scale both the
indexes as a log indexes fo r regression analysis, where index=ln(1+.01*index).
Trade
Recently, access to improved bilateral data sets makes it possible to develop esti-
mates from bilateral trade flows instead. This offers the advantage of isolating the impact of bilateral agreements, and also of allowing more observations per ex-
porter and importer so that general openne ss (based on importer effect variables)
can be better quantified. In the present context, we work with the pre-release ver-
sion of a dataset of bilateral trade flows organized by balance of payments service
sectors (BOPs). This dataset combines data from multiple sources: bilateral trade
data, aggregate trade data, service sector FDI stocks, and servic e sector FDI flows
from the IMF, OECD, EUROSTAT, BEA, an d national sources. (See Francois
23 The OECD indexes cover 43 countries. By regressing th e OECD index on our survey results, and using this to
calculate indexes for country outside the core OECD sample , we obtain estimates by sector for up to 51 unique
importers.
126
et al 2008). The dataset is under develo pment, and is currently being extended
on the basis of national source data. It offers better coverage for aggregate trade
categories (all trade, transport, travel , and other commercial services) than for
more detailed sectors.
We work with the recent trade data in the data cube, from 2004-2006. At one ex-
treme, for Total Trade in Services (B OPs 200) we have observations on 5,153
trade flows between 2004 and 2006, of which 3,162 are non-zero. In contrast, for Personal, Cultural, and Recrea tional Services (BOPs 287) we have observations on
4,536 bilateral flows, of which only 800 ar e non-zero. The dominance of zeros in
the data means we rely on selection model-based econometrics to derive estimates of trade barriers. This also means we will rely on sector spec ific selection models
(i.e. Heckman selection modeling) rather than pool the sample as is the case in this study with trade in goods.
Econometrics
Working with BOPs-based bilateral trade data, we have estimated a standard basic gravity equation for bilateral services tr ade in the form of a selection model:
PrMi,j,t>0 ( )=′ G Z +ei,j,t
lnMi,j,t() =′ B X +εi,j,tPrMi,j,t() >0
Where M is imports by country j from country i in period t, and Pr(M)>0 is the
probability that we have non-zero imports. The first equation is estimated as a probit function, while from this we calculate a variable known as the Mills-ratio that is include in the second stage regr ession. This approach (technically a
Heckman selection model) corrects for samp le selection bias by including zero
trade flows in the estimation process. The vectors G and B are the sets of coeffi-
cients to be estimated, while Z and X are the sets of explanatory variables. For the
probit, Z this includes distance, FDI stocks , GDP and per-capita income, and re-
gional agreement dummy variables. Fo r trade values in the second stage, X in-
cludes includes country and time dummies as appropriate (fixed effects), interac-
tion of the NTB index with an intra-RTA (regional trade agreement) dummies, distance, common language, and shared borders. As such, the core estimating
equation maps to the formulation used for goods. However, there is a critical dif-
ference. We do not have tariff data for se rvices, and so there is not a direct way to
estimate price elasticities. What we have done is employed a third-stage estimator.
After the second stage fixed-effect regressions, we have decomposed the estimated importer fixed effect coefficients (which are a measure of multilateral propensity to
export), including a regression against ou r NTB index. The resulting coefficient
provides and NTB elasticity – the observed % change in imports in response to %
changes in the NTB index. We use these NTB elasticities to make the trade cost calculations reported in the service se ctor discussion in this report.
Regression results are reported in the tables below. Note that the intra-EU coeffi-
cients are trade diversion elasticities (analo gous to a trade tariff elasticity in gravity
modeling for goods). They would only be the same if we had full elimination of
127
NTBs within the EU. Otherwise, we expect the EU coefficient to be smaller than
the overall NTB elasticities (or technically, at most to be statistically the same al-lowing for standard errors in the estimates).
Linkages between modes
Data limitations preclude formal scenar io-modeling of how NTBs interact across
modes in the context of FTAs. However, we do have evidence (Fillat, Francois,
Woerz 2008) that over the long-run, ther e is a complementarity between FDI re-
strictions and trade restrictio ns. In particular, over the long-run, we see that trade
follows FDI penetration in the service sector s. This is illustrated in the figure be-
low, taken from the Fillat et al paper. In the paper, they employ dynamic panel es-
timation methods to examine the long-run joint evolution of services trade and FDI flows. These results support the noti on that market access in services is a
function of joint mark et access across modes.
128
Services Imports – Heckman 2-stage selection model with NTB elasticities
Bilateral services imports 2004-2006
All ServicesBusiness
and ICTCommuni-
cationsPersonal,
cultural,
recreationa lConstructio n Transport Travel
BOPS: 981 (200,
less 205,236)GTAP: 54 obs
BOPS: 268,269,
less 262GTAP: 51, cmn
BOPS: 245GTAP: 55, ros
BOPS: 287GTAP: 46, cns
BOPS: 249GTAP: 48, otp;
49, wtp; 50, atp;
44, gdt
BOPS: 205GTAP: N/A
BOPS: 236
First stage probit, Pr(trade)
distance -0.429*** 0.144*** -0.136*** -0.049 -0.204*** -0.478*** -0.633***
(-12.23) (5.259) (-4.578) (-1.527) (-6.221) (-15.06) (-20.72)
importer FDI stocks 0.000 -0.000*** 0.000 -0.000*** 0.000 -0.000 0.000
(1.006) (-3.871) (0.608) (-3.265) (0.480) (-0.978) (0.185)
importer PCI 1.676 -10.273* -3.173 -4.249 -11.358 4.289 -2.056
(0.284) (-1.911) (-0.479) (-0.537) (-1.466) (0.757) (-0.389)
exporter PCI 0.369*** 0.133*** -0.005 0.118*** -0.031 0.224*** 0.147***
(14.34) (6.107) (-0.220) (4.432) (-1.133) (9.414) (6.641)
importer GDP -1.605 10.142* 2.016 2.839 10.055 -3.266 3.090
(-0.271) (1.889) (0.303) (0.360) (1.305) (-0.573) (0.580)
exporter GDP -0.029 0.318*** 0.153*** 0.208*** 0.175*** -0.095*** -0.321***
(-0.831) (10.87) (4.840) (5.977) (5.041) (-2.912) (-10.48)
EU 0.313*** -1.038*** -0.881*** -0.851*** -0.665*** -0.159*** 0.079
(4.840) (-18.67) (-14.49) (-12.87) (-9.985) (-2.600) (1.389)
NAFTA -0.177 -0.604*** -0.289** -0.221* -0.812*** -0.315** 0.497***
(-1.294) (-5.475) (-2.477) (-1.836) (-6.290) (-2.180) (4.212)
Observations 5153 5161 4714 4536 4604 5055 5315P r > 0 0000000Chi-Sq 2534 2137 1667 1372 1374 2628 2741
Second sta
ge: value of im ports as de pendent variable, fixed effect estimates
distance -1.118*** -1.184*** -1.336*** -0.660*** -1.222*** -0.944*** -1.126***
(-26.73) (-23.69) (-14.64) (-6.492) (-8.587) (-20.08) (-22.27)
border 0.484*** 0.275* 0.686*** 0.692*** 0.730*** 0.658*** 0.647***
(4.326) (1.676) (3.791) (2.971) (2.739) (5.837) (6.072)
language 0.680*** 0.358*** 0.072 0.417* 0.263 0.626*** 0.659***
(6.723) (2.844) (0.319) (1.710) (0.595) (5.464) (6.470)
EU interaction with NTB index 0.803** 0.956** 0.017 -0.929 2.761 -0.670*** 0.070
(2.458) (2.500) (0.0358) (-0.468) (1.596) (-2.891) (0.506)
NAFTA interacted with NTB index 2.078*** -0.119 2.045* -4.762 7.138 1.425* 0.588
(2.765) (-0.159) (1.881) (-1.172) (0.782) (1.807) (1.409)
ATLANTIC interacted with NTB index -1.758** 1.792** 0.079 3.228 -14.089** 0.583 -0.294
(-2.503) (2.085) (0.101) (0.863) (-2.510) (1.153) (-1.135)
inverse Mills ratio 0.173 1.001*** 0.054 1.464*** 0.475 -0.372** -0.691***
(1.181) (3.842) (0.105) (2.813) (0.650) (-2.287) (-4.621)
Observations 3162 2134 1116 800 780 2960 2794R-squared 0.834 0.829 0.813 0.753 0.753 0.792 0.818
Post-Selection Model: fixed effect decomposition for NTB elasticities
NTB trade elasticity -1.983* -3.178** -0.577 -8.712*** -4.205** 0.253 0.051
(-1.771) (-2.490) (-0.701) (-2.763) (-2.108) (0.312) -0.0825
Number of importers 38 49 43 39 41 44 44
Robust t-ratios and z-ratios given in parentheses.
*** p<0.01, ** p<0.05, * p<0.1
Note: NTB elasticities are based on GLM regression analysis of importer fixed effects, including the NTB index. As both trade and NTBs are in logs, this gives us an elasticity.
129
Correlation between alternative modes of services delivery by sector,
average 2001-2004
130
Total Services
02468101214
05 1 0 1 5
log (FDI inw ard stock)log (cross-borde r
imports)
Transportation Services
024681012
02 46 8 1 0 1 2log (FDI inw ard stock)log (cross-borde r
imports)
Travel Services
024681012
024681 0 1 2
log (F DI inward s tock)
Communication Services
0246810
0 5 10 15
log (FDI inw ard stock)log (cross-border imports
Construction Services
0123456789
-2 0 2 4 6 8 1 0
log (FDI inward s tock)
Financial Services
0246810
0 5 10 15
log (FDI inw ard stock)log (cross-border imports
Insurance Services
024681012
02 46 81 0 1 2 1 4
log (FDI inward st ock)
Other Business Services
024681012
0 5 10 15
log (FDI inw ard stock)log (cross-border imports
Source: Fillat, Francois, and Woerz (2008).
131
REFERENCES
Fillat, C., J. Francois and J. Woerz (2 008), “Cross-Border Trade and FDI in Ser-
vices,” forthcoming CEPR discussion paper.
Francois, J.F. (1993), “Explaining the Pa ttern of Trade in Producer Services,"
In-
ternational Economic Journal , Autumn 7(3), pp. 23-32.
Francois, J.F.,
THE NEXT WTO ROUND: North-South stakes in new market
access
negotiations , CIES Adelaide and the Tinbergen Institute, CIES: Adelaide,
2001. ISBN: 0-86396-474-5.
Francois, J., B. Hoekman, and J. Wo erz (2007), “Does Gravity Apply to Non-
Tangibles: Gravity Estimates of Trade and FDI Openness in Services,” plenary
paper, European Trade Study Grou p meetings, Athens September 2007.
Francois, J., H. van Meijl and F. van Tongeren (2005), “The Doha Round and
Developing Countries,”
Economic Policy .
Francois, J., O. Pindyuk, and J. Woerz ( 2008), “International Transactions in Ser-
vices: Data on International Trade and FDI in the Service Sectors,” Institute for
International and Development Economics.
Francois, J. and G. Wignarajan (2008), “E conomic Implications of Asian Integra-
tion,”
Global Economy Journal .
OECD (2006), “Product Market Regulation In The Non-Manufacturing Sectors of
OECD Countries: Measurement And High lights,” Economics Department Work-
ing Papers No. 530 (by Paul Co nway and Giuseppe Nicoletti).
OECD (2007) , International Investment Perspect ives: Freedom of Investment in a
Changing World 2007 Edition , ISBN 978-92-64-03748-9.
Park, S.C. (2002), “Measuring Tariff Eq uivalents in Cross-Border Trade in Ser-
vices,” Korea Institute of Internationa l Economic Policy discussion paper.
Sapir, A. (1981), “The Political Economy of Services Trade Liberalization: A Case
for International,” Journal of Development Economics , 1981, 9, (2), 149-181
Sapir, A., Lutz, E., (1981), “Trade in se rvices: economic determinants and devel-
opment related issues.” Worl d Bank Staff Working Paper 480.
132
The inventory is based on a four-step methodology that was developed with the purpose of
identifying Japanese NTMs across sectors. Not all issues raised by business or policy mak-
ers would qualify as an NTM according to ou r definition. We have applied the following
four steps in order to identify NTMs in Japan:
Impact: We assess that the issues has an impact on trade
Problem: There is a clearly identifiab le problem underlying the NTB
Solvability: There reasons to believe that the NTB is solvable
Instrument: We can identify instruments to remedy the damage created by the NTB
Impact. In the first step, the impact of the NTM fa cing the different sectors is qualitatively
assessed in two dimensions: extent and magnitud e. The first dimension, the extent, is ana-
lysed in terms of the size of the sector whi ch is affected by the NTM. We determine
whether the whole sector or part of the sector is affected. Some NTMs are, however, not
restricted to specific sectors. In these cases, we classify the extent of the NTM as cross-
sectoral. In the second dimension, the magnit ude, we analyse the impact of NTM on the
trade volume in the sectors. We distinguish be tween NTMs that have no or limited impact
on trade and NTMs that have some impact on trade.
Problem. In this step, we identify the problems of the NTMs. The problems facing firms
in each sector are classified to facilitate co mparisons across sectors and to reach an overall
view of the problems of the NTMs. Some co mmonly cited problems are: “costly approval
procedures”, “lack of harmonisation with intern ational standards” and “differences in regu-
lation”.
Solvability. In those instances where we find that a NTM gives rise to a non-negligible im-
pact on trade, we assess the solvability of the problem caused by the NTM. We assess
whether the problem can be solved by i) a trade policy instrument, ii) a trade policy in-strument in combination with domestic reform s or iii) by domestic reforms only. We fur-
ther assess whether the problem should be solv ed on a bilateral basis or whether an open
solution involving more trade partners is appropriate.
Instrument. In this final step, we identify the proposed instruments which are potentially
available to solve the NTM. The choice of instruments is sometimes dependent on
whether the underlying problem should be solved on a bilateral basis or if a multilateral
approach is called for.
APPENDIX 3: THE INVENTORY OF JAPANESE NTM S
133
Sources used for the inventory
A list of all Japanese NTMs in inventory according to sector and type can be found below.
The sources are (page references included below):
EBC = European Business Council Japan (2008), Economic Integration: The New Reform Paradigm .
http://www.ebc-jp.com/downloads/2008-WP-E.pdf
EU = European Commission (2007, 2008a), EU Proposals for Regulatory Reform in Japan .
European Commission (2008), EU Proposals for Regulatory Reform in Japan ,
http://www.mofa.go.jp/region/europe/eu/overview/dereg0810.pdf
European Commission (2007), EU Proposals for Regulatory Reform in Japan ,
http://www.mofa.go.jp/region/europe/eu/overview/dereg0710.pdf
USG = US Department of State (2008), Annual Reform Recommendations under the US-Japan
Regulatory Reform and Competition Policy Initiative .
http://www.ustr.gov/sites/default/files/asset_upload_file751_13383.pdf
WTO = World Trade Organisation (2007), Trade Policy Review – Japan .
http://www.wto.org/english/tratop_e/tpr_e/tp276_e.htm
134
Table 3.1 Inventory of Japanese NTMs
Original sec-
tor NTB TYPE Issues Source Page
Aerospace and space
industry Not trade barrier Limited academic cooperation EBC
Limited industrial cooperation (compared with North America) EBC 82
Public procurement Procurement decisions are made on a non-competitive basis EBC 81
Technical barriers to trade Mutual Japanese and European export control procedures should be recognised
EBC 82
Agriculture Not trade barrier Limited capacity for cooling facilities at Narita airport EBC 67
SPS Plant quarantine regulations are not in line with GATTs Sanitary and Phytosanitary chapter
EBC 67
Technical barriers to trade High fumigation costs EBC 67
Low tolerance regime for insects common in Japan EBC 67
No regulatory complian ce with CODEX standards for organi c crop imports, safe food addi-
tives and testing regimes for pre- and post-harvest pesticides
USG 7
Air transport Not trade barrier EU not included in Haneda airport plans EU 55
Limitations to flexibility of aviation infrastructure EU 55
Service barriers Burdensome fare filing procedure EBC 37
High fees on air service such as landing, navigation etc EU 55
Regulations on distribution, pricing and settlement of air fares EU 55
Restriction by bilateral air services agreements EU 53
Animal health Technical barriers to trade Costly translation of technical reports written in English EBC 53
Domestic regulations are not completely harmonised with international standards
EBC 53
The seed-lot system is not aligned with internationally recogn ised requirements
EBC 53
Time consuming product approval and registration procedures EBC 53
Delays due to different review processes by different ministries involved in the regulation EU 88
Listing compound system favours generic producers EU 88
Automotive industry Not trade barrier Heavy tax on the purchase and ownership of motor vehicles EBC 77
Limited information exchange EBC 79
Public procurement Green procurement rules do not follow international practices EBC
Japan-specific requirements in procurements EBC 79
Technical barriers to trade Burdensome procedure for demonstrating compliance with ECE Regulation
EBC 77
Burdensome procedure to get approval of advices that complies with an UN-ECE Regulation EU 58
Cumbersome and non-transpar ent Technical Guidelines EU 60
Incomplete adoption of UN-ECE vehicle regulations EU 58
No standard testing procedure for SCR catalysts EU 60
Regulatory and fiscal privileges for kei cars distort competition EBC 77
Restrictive allowance and harmonisation of radar technology EU 60
Unaligned vehicle ce rtification systems EBC 77
FDI Need to reform Japan’s legal system to encourage cross-border M&A USG 6
135
Commercial law and
legal systems reform
Other Need to strengthen go od corporate governance USG 6
Service barriers Need for legal system reform (lawyers, gaiben) USG 6
Communication ser-
vices Custom border procedure Need to apply equivalent customs clearance procedures for private and public express carri-
ers (incl. duty declarations)
USG 8
Other Closed flow of information and a non-transparent communication structure
EBC 42
Limited flow of information to foreign press and the restrictive kisha club system
EBC 42
Limited transparency and stakeholder participation in policymaking and regulation
USG 4
Service barriers Absence of a clear separation between the Government's roles as both owner and regulator in
telecommunications
EBC 46
Ensure the new postal financial institutions meet the same tax, legal and regulatory obliga-
tions and are subject to the same supervisory standards as private firms
USG 8
Heavy regulatory supervision and control in telecommunication EBC 46
Inefficient use of spectrum USG 4
Lack of competition in markets for wire line and mobile interconnection
USG 4
Lack of facilities-based competition across different broadband platforms
USG 4
Lack of transparency and compet ition in the advertising industry EBC 42
Licensing regime is not technology-neutral USG 4
New regulatory framework is not always transparent and made to minimise burdens on op-
erators while promoting new entry and competitive opportunities
USG 4
Risk of anticompetitive behaviour by carriers with market dominance as telecom services
move to IP-based networks
USG 4
Unreasonably high interconnection fees in telecommunications EBC 46
Weak competitive safeguards against the abuse of dominance in telecommunications
EBC 46
Competition policy Competition Need to address bid rigging USG 6
Need to improve antimonopoly compliance and deterrence USG 6
Need to improve fairness and transparency USG 6
Computer and in-
formation services IPR Approaches in IPR protection and enforcement should be harmonised with international best
practices
USG 4
Contractors are not allowed to own the IPR to software they develop USG 4
Insufficient copyright enforcement USG 4
Need to further promote strong IPR protection and enforcement with a focus on the asia-
Pacific region USG 4
Need to streamline patent procedures USG 4
Not trade barrier Missing communication and collaboration between relevant ministries and private sector in
IT-related financial reform
USG 4
Other Insufficient incentive to use innovative information-sharing in health IT
USG 4
Public procurement Backdating of government IT procurement contracts is allowed USG 4
Lack of transparency in go vernment IT procurements USG 4
Uncompetitive rules in government IT procurement bidding rules USG 4
Widespread vendor liabilities USG 4
136
Service barriers Lack of alternative non-bank paymen t services in electronic payments USG 4
Technical barriers to trade No harmonisation with international standards in health IT USG 4
There is no technology neutrality and interoperability in health IT USG 4
Construction services Public procurement Public procurement systems (Comprehensive Evaluation Bidding System) is not always used EBC 87
Technical barriers to trade Environment friendly and safe constructions are not ensured EBC 87
Tests for building materials standards are not harmonised EBC 87
Cosmetics Additional claims for cosmetics that are within the existing scope of currently approved
claims are not allowed USG 5
EU-validated alternativ e methods to animal testing is not accepted EU 74
Regulations on ingredients are not harmonised EBC 65
Restrictive allowabl e efficacy claims EBC 65
Slow validation process of testing on Cosmetics EU 74
Unclear and time consuming application process for quasi-drugs EBC 65
Customs Custom border procedure Unclear approach to the bilat eral mutual recognition of EC-Japan Customs Cooperation
Agreement
EU 63
Need to increase the Custom Law's de minimis level to improve efficiency
USG 8
Service barriers Need to allow post mort em declaration of exports and more flexibility for ex press carriers to
select the customs office for customs declarations
USG 8
Financial Services Service barriers Differences in the issues of insurance and reinsurance solvency regulation in EU/Japan EU 41
Discrimination between foreign and domestic bank branches wanting to engage in trust and
banking business
EU 38
dissimilarities between International Financial Reporting Standards and Japans "General ac-
cepted accounting principles"
EU 45
Dissimilarities of the regulatory systems of au dit firms, eg. JFSA not accept inspections car-
ried out by the EU EU 43
Early access to pension funds is not allowed in special circumstances USG 5
Excessive, inefficient and non-transparent admini strative burden on regulated firms (e.g. ap-
plications for bank licences)
EBC 31
Extra restrictions on banking sales of Insurance relative to other channels
EU 41
Favoured status of Kyosai EU 42
Firewalls envisaged, restriction on customer info sharing EU 38
Inconsistency in consumption taxation regarding commission on sales of insurance products
EU 39
Lack of published written interpretation of fi nancial laws (limited use of no-action and inter-
pretive letters)
USG 5
Lack of transparency and predictability of ru le interpretation and inspections processes
USG 5
Limited consultation on draft laws and regulations USG 5
Need for a credit bureau system that facilitates more accurate risk pricing
USG 5
Need to create a level playing field before the privatisation of Japan Post
USG 8
Not possible to cross-marketing products by double hat officers and employees
EU 37
Obstacles to sales and service of off-shore funds EBC 28
Restrictive contribution limits in the defined contribution pension system (employee contri-
butions are not allowed)
USG 5
Rules governing asset management are restrictive and inconsistent EBC 28
137
Strict firewall and severe license restrictions result in a costly separation of banking, securi-
ties and asset management operations
EBC 28
138
Food SPS (Worldwide recognised) food additives prohibited EU 75
Legislation on trade in beef and other BSE products not in line with World Organisation for
Animal Health
EU 77
Limited acceptance of scientific evaluatio n by international bodies (JECFA/CODEX)
EU 76
Needs internationally recognised regulatory approach to distinguish food which support
growth of Listeria monocytogenes (different measures)
EU 79
Restrictions on Bovine products from the EU EU 76
Slow approval rate of food additives EU 75
Standard on non-quarantine pests not in line with international standards
EU 79
Weak collaboration on phytosanitary regulation s applied to imports of fruit and vegetables
EU 78
Technical barriers to trade Administrative burdens and financial cost on the European certifying bodies
EU 83
EU organic products within the EU legislation do no t have complete access to the Japanese
market/logo
EU 83
Long processing time for new and revised food additive applications USG 5
Other Categorisation of alcoholic beverages for tax purposes does not use the same categories as in
the EU and the US
EBC 69
Heavy subsidisation in certain sectors (rice, wheat and barley) WTO 65
Limited capacity to receive and adequately ha ndle perishable products at Narita Airport
EBC 74
SPS Regulations in Listeria Monocytogenes in ready- to-eat food products are not aligned with the
"double approach"
EBC 74
Slow approval of additives on priority list EBC 73
There is no mutual recognition of products certified and sold in the other country
EBC 71
Technical barriers to trade Different standards for "best before data" labelling EBC 74
License applications for wholes ale and retail of liquor are complex and not processed in a
clear, transparent and consistent manner EBC 69
Need for supplementary organic certificates EBC 71
Product definition for alcoholic beverages should conform with international specifications
EBC 69
Slow process of examination of the data submitted and the questions to what is necessary for
risk assessment for meat/beef import
EBC 73
Government pro-
curement Public procurement Complex legal framework for public procurement and lack of English versions
EU 28
Compulsory company registration on public work contracts every two years
EU 28
Public procurement Lacking a single point of access equivalent to EU's centralised tender database
EU 27
Limited info exchange on legal and technical choices in e-procurement EU 27
Long evaluation process prior to tendering, specific a lack of minimum level required for
each specific capability
EU 28
Healthcare IPR Non-sufficient data protection EU 65
Not trade barrier Fee-level for drug approval are high EU 65
Need of pricing-policy stimulating investment and research EU 71
Other Favouring of Japanese firms on pricing and re imbursement of blood plasma derived products
EU 68
Technical barriers to trade Guidelines for vaccines development and approval not in line with WHO/EU – non-
transparency
EU 67
139
lack of non-discriminatory policy towards/among fo reign potential entr ants (inc luding ten-
dering process)
EU 67
Limited data on drug application processing time EU 65
Need to align Japan Industrial standards with ISO and IEC standards on medical devices EU 71
Non-acceptance of foreign clinical data delays market entry of medical devices
EU 71
Non-sufficient quality, efficiency and time of the registration process for new drug applica-
tions (pharmaceuticals)
EU 65
Non-transparency of product approval process. Need for harmonisation with trading partners
EU 71
Technical specification for manufacturing and quality control of vaccines not in line with in-
ternational standards
EU 67
Unclear wording of the supply/demand provision of the Blood Law EU 68
ICT Competition Business sensitive info provided by competitors to integrated incumbents not being kept con-
fidential
EU 32
Service barriers Ensure equal access to interconnections according to the standards of transparency, non-
discrimination and cost
EU 32
Technical barriers to trade Additional requirements (e.g. license) of "Suppl iers declaration of conformity" products from
the EU
EU 34
Additional testing/administrative requirements of "Suppliers declaration of conformity"
products from the EU
EU 34
Blanket licensing is a problem for competition and innovation on the market for mobile ter-
minal equipment
EU 33
Limitations to the "self verification of conformity" procedure EU 34
Insurance services Not trade barrier Insufficient incentives to encourage long-term saving EBC 33
Service barriers Guaranteed Minimum Benefits are exclude d for Variable Annuity (VA) products
EBC 33
Ineffectiveness of the bank sales channel for Insurance USG 7
Need to facilitate new opportunities for independent insurance agents USG 7
No requirements that in surance cooperatives meet the sa me obligations as private insurers
USG 7
Risk management and compliances standards in the insurance sector are far from the stan-
dards in the private sector
EBC 32
The FSA product approval process is overly lengthy EBC 33
There are no common rules for solvency calculations (do not follow So lvency II) EBC 32
Unduly restrictive sales controls on bank assurance EBC 32
Iron, steel, metal
products Not trade barrier Arbitrary tariff classifications and revisions with no available appeal mechanisms
EBC 89
Import tariffs on industrial raw materials, in cluding aluminium oxide, silicon carbide and
manganous manganic oxide
EBC 89
Import tariffs on industrial raw materials, including nickel products EBC 88
Maritime affairs Not trade barrier Limited cooperation on oceans management EU 57
Medical, measuring
and testing appli-
ances Other Reimbursement prices for medical equipment to not properly reflect prices
EBC 57
Technical barriers to trade Long medical equipment certification process be cause clinical trial data and GCP guidance
do not follow international standards
EBC 57
Mergers and acquisi-
tions FDI Accounting standards limit cross-shareholding EU 10
Complex triangular merger scheme EU 10
Limitations to the range of vehicles available in Japan for mergers EU 11
140
Restrictions on FDI in sensitive sectors on the basis of national security or public order
EU 10
Restrictive notification ceiling for investment in sensitive sectors EU 10
Tax treatment of triangular mergers is a barrier to market entrant EBC 25
Uncertainty over tax deferral trea tment in triangular mergers EU 11
Office, information
and communications
equipment Technical barriers to trade A Supplier Self Declaration of Conformity regime is not implemented EBC 49
Different technical standards and certification procedures EBC 49
Incomplete harmonisation in Spectrum for IMT EBC 49
Other business ser-
vices Service barriers Discrimination in the rules for registration as a lawyer EBC 23
Lawyers need to register individually rather than as a firm EBC 23
Limited liability status is not available to lawyers in Japan EBC 23
Pharmaceuticals Custom border procedure Burdensome import processes USG 5
IPR Restrictions on selection of brand names EBC 59
The extended re-examination period from six to eight years only applies to drugs containing
a new chemical entity
EBC 59
Not trade barrier Global standard vaccines are not available in Japan EBC 61
The pharmaceutical drug system does not reward innovation and does not reflect the value of
drugs
EBC 59
Other A price reform should improve understanding of price issues USG 5
Insufficient reward of innovation USG 5
Pricing system does not reflect the characteristics of the plasma product industry
USG 5
Vaccines are not incorporat ed into the National Healthcare Insurance System
EBC
SPS Lack of transparency in the development of health food safety regulations
USG 5
Technical barriers to trade Additional claims for cosmetics that are within the existing scope of currently approved
claims are not allowed
USG 5
Burdensome review and clinical trial consultation system USG 5
Clinical development guidelines and biological product specifications are not harmonised
with the EU
EBC 61
Cumbersome labelling rules USG 5
Foreign clinical data are not recognised EBC 61
Japanese GCP rules are not aligned with international ICH-GCP rules EBC 59
Long price and drug approval time USG 5
The mutual recognition agreement does not cover solid products EBC 59
There is no regulatory category that allo w for ingredient-specific health claims
USG 5
Unclear and late direction on licensure requirements to vaccine manufacturers
EBC 61
Vaccine standards and te chnical specifications should be aligned EBC 61
Postal Service Service barriers Lack of transparency in the planned process to further open up the mail delivery sector
EU 50
SPECIAL CASE: First year of a 10 -year privatisat ion process of Japanese postal service. Is-
sues: transparency in process, secure clear an d public access to the network of post offices
EU 50
Regulation FDI Limited No-Action Letter system EU 21
Not trade barrier Too much focus on price compar ed to quality in tendering EU 28
141
Unpredictable regulatory environment EU 21
Other Scarce public consultations/hearings EU 21
Public procurement No real difference between an open and competitive procedure and selective tendering
EU 26
Restrictive qualifications in (open) tendering EU 67
Too much focus on rigid techni cal specifications compared to innovation as an alternative
(green procurement)
EU 28
Weak implementation of public procurement regulations EU 21
Technical barriers to trade Cumbersome bilateral negotiations and evaluations of EU products EU 78
Transparency Competition Need to improve access to advisory groups USG 7
Not trade barrier Need to promote transparency in re -organisation of government functions USG 7
Need to strengthen public comment procedures USG 7
Other Need to ensure transparency of interpretation of regulations USG 21
Transportation ser-
vices Custom border procedure Exceptionally high port costs EBC 10
Foreign shipping lines are not allowed to trans-ship their own overseas cargo and vessels
EBC 45
FDI Discrimination, non-transparency and non-proport ionality in foreign ownership of airports
EU 45
The Operational safety exceptions is difficult to interpret/ limits the access to railway pro-
curements of foreign firms
EU 40
Not trade barrier Political involvement in the air transport sector has resulted in an over-establishment of local
airports outside the Kanto area
EBC 38
Restrictive ETOPS requirements EBC 36
Other High and non-transparent landing and user fees USG 45
Service barriers Competition on the waterfront is stifled by the current system of prior consultation that lacks
transparency and efficiency
EBC 36
Lack of Fixed Base Operators (FBO) EBC 38
Lack of landing and take-off slots in Tokyo EBC 38
Lack of landing slots for business aviation in Haneda and Narita EBC
Prohibitive landing fees, navigation charges, airport terminal rent, airport terminal common
user charges and cargo handling fees
EBC 36
Restrictions on pricing and distribution in a few remaining IATA categories
EBC 36
Rigid clearance procedures and outdated restrictions on foreign-owned companies engaged in
domestic freight forward business
EBC 28
Unfair competition from the newly privatised Ja pan Post that enjoys preferential regulatory
treatment
EBC 27
Wind energy Technical barriers to trade Need to consolidate regulatory processes for construction and operation of wind power pro-
jects
USG 7
Wood Standard Technical barriers to trade Difficult accreditation procedure for testing organisations (Need of documentation in Eng-
lish and internationally appr oved data to be accepted)
EU 84-85
Need of facilitate testing of products imported from the EU to be used in multi-storey build-
ings
EU 85
Non-recognition of EN standards and CE marking of lumber EU 85
Unfair low classification of so me European tree/timber species EU 85
142
The business survey was distributed throug h the Chairmen of the European Business
Council responsible for the selected manufactur ing sectors as well as the Chairman of the
financial service sector. Together 128 firms we re asked and 92 managers participated in
the business survey. The response rate was 72 percent. The two business surveys are listed
underneath. For some questions, the response categories were reformulated to reflect sec-
tor-specific issues.
A4.1 B USINESS SURVEY FOR MANUFACTURING SECTORS
This business survey is to be answered by EU companies that export to Japan in the
manufacturing sectors. The CEO of your operation in Japan is kindly asked to answer the
questions related to your company’s exports to Japan. If the CEO of your Japanese affili-
ate has delegated the responsibility to a manage r, the manager in charge is asked to fill
out the questionnaire.
Purpose of the business survey:
The data collected from this survey is a part of a study on the “Assessment of barriers to
trade and investment between the EU and Japa n” currently being undertaken by consult-
ants from Copenhagen Economics on be half of the European Commission.
The questions are divided in three broad groups:
1. Export information
These questions intend to provide genera l information about your export to Ja-
pan and how your export to Japan is organised.
2. Barriers for trade with Japan
These questions intend to provide inform ation about the barriers you encounter
in Japan and how they can be eliminated or reduced. Here, you are asked about
the cost of the most important barriers.
3. Barriers to introducing new products on the Japanese market
These questions intend to provide information about which barriers limit your
company’s ability to launch new products on the Japanese market and in which
way the most important barriers could possibly be eliminated or reduced.
1 Export information
1.1 What is your main export sector?
Pharmaceuticals
Motor vehicles
Processed foods
Medical device
Other (please specify) ): ________________________________ APPENDIX 4: BUSINESS SURVEYS ON JAPANESE NTM S
143
1.2 What share of your export value going outside the EU went to Japan in 2008?
0-10 %
10-20%
20-30%
30-40%
40-50%
50-60%
60-70%
70-80%
80-90%
90-100%
I don’t know
1.3 What share of your export volume going outside the EU went to Japan in 2008?
0-10 %
10-20%
20-30%
30-40%
40-50%
50-60%
60-70%
70-80%
80-90%
90-100%
I don’t know
1.4 Where are the products you export to Japan produced?
Mainly in production facilities in the EU
Mainly in production facilities in Japan
Mainly in production facilities in third country outside EU
I don't know
Other production facilities (please specify): ____________________
1.5 How does your company distribute its products on the Japanese market?
Mainly through own distribution facilities
Mainly through local partner
I don't know
Other distribution channels (please specify):____________________
144
2 Barrier information on current export products
2.1 How do you find market access for expo rt to Japan, compared to exporting to
other countries?
Much more difficult
Somewhat more difficult
Equally difficult
Somewhat less difficult
Much less difficult
I don't know
2.2 Consider exporting to Japan, keeping in mind your domestic market. If 0 repre-
sents a completely ‘free trade’ environmen t, and 10 represents an entirely closed
market due to barriers, what value betw een 0 – 10 would you use to describe
the overall level of restrictiveness of the Japanese market to your export?
2.3 Please give the following non-tariff measures a score between 0 and 5 in terms
of the degree to which they rest rict your export to Japan:
Regulatory environment (e.g. costs and complexity of doing business)
Price control measures (e.g. anti-dumping measures, countervailing meas-
ures)
Quantity control measures (e.g. quotas, prohibitions)
Government assistance issues (e .g. subsidies, export refunds)
Public procurement issues (e.g. legal framework, contract conditions)
Distribution channels (e.g. seaport an d airport regulations, secondary deal-
ers)
Lack of intellectual property rights (e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures (e.g. customs procedures)
Standards and conformity assessment re quirements (e.g. technical regula-
tions, certification)
Other non-tariff measures (please specify)
145
2.4 Please give the following factors related to border procedures a score between 0
and 5 in terms of the degree to which they restrict your exports to Japan, where
0 represents not at all restrictive, and 5 represents extremely restrictive:
Para-tariff measures (e.g. customs surc harges, additional charges, internal
taxes and charges on imports)
Financial measures (e.g. advance payments, multiple exchange rates)
Automatic licensing measures (e.g. automatic licence, import monitoring)
Monopolistic measures (e.g. single ch annel for imports, compulsory national
services)
General customs procedures (e.g. cust oms valuation, customs classification,
customs clearance, rules of origin)
Customs procedures that are specific for your product (e.g. health inspec-
tions)
Lack of transparency and informat ion sharing when requirements and pro-
cedures are changed
Other factors related to border procedures (please specify)
2.5 Please give the following factors related to public procurement and tenders a
score between 0 and 5 in terms of the de gree to which they impact on your ex-
port to Japan, where 1 represents no restricting impact, and 5 represents a ex-
tremely restrictive impact:
Weak implementation of public procur ement regulations (e.g. no difference
between an open procedure and selective tendering)
Complex legal framework (e.g. company registration)
Lack of English versions of tenders
Lack of single point tender database
Length of evaluation process prior to tendering
Other factors related to public procurement (please specify)
2.6 Is your main export product covered by a Mutual Recognition Agreement be-
tween the EU and Japan?
Yes
No
I don’t know
2.7 Do you use the Mutual Recognition Ag reement for your current export to Ja-
pan?
Yes
No
I don’t know
146
3 Barriers related to standards and technical regulations
The definitions used in this survey follow the WTO definitions of standards and technical
regulations. These are documents approved by a recognised body providing for common
and repeated use, rules, guidelines, or charac teristics for products or related processes and
production methods. This covers both standards with which compliance is not mandatory
(i.e. voluntary standards) and technical regulations with which compliance is mandatory
(i.e., government mandat ed standards, or standards in regulations).
3.1 Please give the following factors relate d to standards and technical regulations a
score between 1 and 5 in terms of the degree to which they impact your ability to export products to Japan:
Product standards
Production standards
Labelling requirements
Marking
Packaging
Other issues related to standards and technical regulations (please specify)
3.2 Which barriers related to standards and technical regulations are of most con-
cern to you?
Product standards
Production standards
Labelling requirements
Marking
Packaging
Not relevant
I don't know
Other issues related to standards and technical regulations (please specify)
3.3 In your opinion, which actions would at least be required in order to reduce the
barriers related to standards and technica l regulations that are of most concern
to you?
Introduction of new standards
Use of international standards
Mutual recognition of confor mity assessment procedures
Harmonisation/convergence of rules and regulations
Suppliers’ declaration of conformity
Review of the functional category system for Special Treatment Materials
Common positive and negative list of additives
Review the pricing and reimbursement systems
Implementation of license system for distribution
Not relevant
I don't know
Other ways to reduce barriers related to standards and technical regulations
3.4 In your opinion, which actions would you prefer in order to reduce the barriers
related to standards and technical regulati ons that are of most concern to you?
147
Introduction of new standards
Use of international standards
Mutual recognition of confor mity assessment procedures
Harmonisation/convergence of rules and regulations
Suppliers’ declaration of conformity
Review of the functional category system for Special Treatment Materials
Common positive and negative list of additives
Review the pricing and reimbursement systems
Implementation of license system for distribution
Not relevant
I don't know
Other ways to reduce barriers related to standards and technical regulations
4 Quantification of standards and technical regulations
Quantifying how barriers affect your company is very important. The following questions
ask how standards and technical regulations affect your costs of exporting to Japan. The
definitions used in this survey follow the WT O definitions of standards and technical regu-
lations.
4.1 Do standards and technical regulations affect your costs of shipment ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.2 Do standards and technical regulations affect your costs of production ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.3 Do standards and technical regulations affect your costs of development ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
148
4.4 Do standards and technical regulations affect your other direct costs ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.5 Do standards and technical regulations delay the process of getting your prod-
ucts approved for the Japanese market compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.6 Do standards and technical regulations delay the entry of approved products for
the Japanese market compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.7 Do standards and technical regulations cause other delays in your export to Ja-
pan compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.8 By how much would you expect your costs per unit of export of exporting to
Japan to decrease if the barriers relate d to standards and technical regulations
were eliminated?
0- 1%
1- 5%
5- 10%
10-15%
15- 20%
More than 20%
Not relevant
I don't know
149
4.9 By how much would you expect your other export costs (i.e. fixed costs not re-
lated to per unit cost of export) of expo rting to Japan to decrease if the barriers
related to standards and technical regulations were eliminated?
0- 1%
1- 5%
5- 10%
10-15%
15- 20%
More than 20%
Not relevant
I don't know
5 Barriers related to conform ity assessment procedures
The definitions used in this survey follow the WTO definitions of conformity assessment
procedures. Conformity assessment procedure is any procedure used, directly or indi-
rectly, to determine that relevant requirements in technical regulations or standards are ful-
filled. They consist of such activities as certif ication, testing, quality system registration, and
inspection. They also comprise procedures fo r sampling, evaluation, verification, and as-
surance of conformity; and registration, accred itation, and approval; as well as their combi-
nations. They are either voluntary (e.g. privat e bodies assessing conf ormity), or mandatory
(e.g. government regulations to ensure th at given technical regulations are met).
5.1 Please give the following factors related to conformity assessment procedures a
score between 1 and 5 in terms of the de gree to which they impact on your ex-
port to Japan:
General certification
Quarantine
Inspection
Other issues related to conformity a ssessment procedures (please specify)
Not relevant
I don't know
5.2 Which barriers related to conformity assessment procedures are of most con-
cern to you?
General certification
Quarantine
Inspection
Testing
Not relevant
I don't know
Other ways to reduce barriers related to conformity assessment procedures
(please specify)
5.3 In your opinion, which actions would at least be required in order to reduce the
barriers related to conformity assessmen t procedures that are of most concern
to you?
150
Introduction of new standards
Use of international standards
Mutual recognition of confor mity assessment procedures
Simplification of certification procedures
Speed up the certification process
Introduce third party certification system
Harmonisation/convergence of rules and regulations
Suppliers’ declaration of conformity
Common positive and negative list of additives
Review the pricing and reimbursement systems
Implementation of license system for distribution
Not relevant
I don't know
Other required actions to reduce barriers related to conformity assessment
procedures (please specify)
5.4 In your opinion, which actions would you prefer in order to reduce the barriers
related to conformity assessment procedur es that are of most concern to you?
Introduction of new standards
Use of international standards
Mutual recognition of confor mity assessment procedures
Simplification of certification procedures
Speed up the certification process
Introduce third party certification system
Harmonisation/convergence of rules and regulations
Suppliers’ declaration of conformity
Common positive and negative list of additives
Review the pricing and reimbursement systems
Implementation of license system for distribution
Not relevant
I don't know
Other required actions to reduce barriers related to conformity assessment
procedures (please specify)
151
6 Quantification of barriers related to conformity assessment
procedures
Quantifying how barriers affect your company is very important. The following questions
ask how conformity assessment requirements a ffect your costs of exporting to Japan. The
definitions used in this survey follow the WTO definitions of conformity assessment pro-
cedures.
6.1 Do conformity assessment procedures affect your costs of shipment ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.2 Do conformity assessment procedures affect your costs of production ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.3 Do conformity assessment procedures affect your costs of development ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.4 Do conformity assessment procedures affect your other direct costs ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.5 Do conformity assessment procedures delay the entry of approved products for
the Japanese market compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
152
6.6 Do conformity assessment procedures delay the process of getting your prod-
ucts approved for the Japanese market compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.7 Do conformity assessment procedures cause delays in other ways for your ex-
port to Japan compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.8 By how much would you expect your costs per unit of export (e.g. costs related
to production) of exporting to Japan to decrease if the barriers related to con-formity assessment procedures were eliminated?
0-1%
1%-5%
5%-10%
10%-15%
15%-20%
More than 20%
Not relevant
I don’t know
6.9 By how much would you expect your other export costs (i.e. fixed costs not re-
lated to per unit cost of export) of expo rting to Japan to decrease if the barriers
related to conformity assessment procedures were eliminated?
0-1%
1%-5%
5%-10%
10%-15%
15%-20%
More than 20%
Not relevant
I don’t know
153
7 Your product range in Japan
These questions intend to provide informatio n about which barriers limit your company’s
ability to launch new product on the Japanese market and in which way the barrier could
possibly be eliminated or reduced. Please answ er the following questions for one of your
main export product to other export destinat ions that is not yet exported to Japan.
7.1 How is your product range when exporting to Japan:
Much smaller than other markets (we offer substantially fewer products on
the Japanese market than other Asian markets)
Somewhat smaller than other markets (we offer fewer products on the Japa-
nese market than other Asian markets)
Similar to other markets (we offer the same product range on the Japanese
market as in other Asian markets)
Larger than other markets (we offer mo re products on the Japanese market
than in other Asian markets)
Much larger than other markets (we of fer substantially more products on the
Japanese market than in other Asian markets)
I don’t know
8 General barriers to launchi ng new products on the Japanese
market
8.1 Why have you reduced your product range on the Japanese market?
The Japanese market is not interesting for my other products
It is too costly/difficult for my comp any to export our other products to Ja-
pan given the structure or strategy of my company
It is too costly/difficult for my comp any to export our other products to Ja-
pan given the existing barriers in Japan for this sector
I don't know
Other reasons (please specify)
9 The impact of non-tariff meas ures on launching new products
in Japan
9.1 Please give the following non-tariff m easures a score between 1 and 5 in terms
of the degree to which they restrict your ability to expand your product range on
the Japanese market:
Price control measures (e.g. anti-dumping measures, countervailing meas-
ures)
Quantity control measures (e.g. quotas, prohibitions)
Government assistance issues (e .g. subsidies, export refunds)
Public procurement issues (e.g. legal framework, contract conditions)
Distribution restrictions (e.g. seaport and airport regulations, secondary deal-
ers)
154
Lack of intellectual property rights (e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures (e.g. customs procedures)
Standards and conformity assessment pr ocedures (e.g. technical regulations,
certification)
Other non-tariff measures (please specify)
9.2 By how much would you increase your product range if barriers to the Japanese
market were eliminated or reduced?
Product range would not increase
Product range would increase a little (stay below levels in other Asian mar-
kets)
Product range would increase a lot (to comparable levels in other Asian mar-
kets)
Not relevant
I don’t know
10 Formalities
10.1 Would you like to make any further comments on the barriers you face in your
exports to Japan? No
Yes
10.2 Would you consider participating in a follow-up interview?
No
Yes
What is your name? ______________________________
What is your position in the company? ______________________________ What is your e-mail address? ______________________________
What is your direct telephone number? ______________________________
155
A4.2 B USINESS SURVEY FOR FINANCIAL SERVICES
This business survey is to be answ ered by EU companies that provide financial services to
the Japanese market. The CEO of your operatio n in Japan is kindly asked to answer the
questions related to your company’s exports to Japan. If the CEO of your Japanese affili-
ate has delegated the responsibility to a manage r, the manager in charge is asked to fill
out the questionnaire.
Purpose of the business survey:
The data collected from this survey is a part of a study on the “Assessment of barriers to
trade and investment between the EU and Japa n” currently being undertaken by consult-
ants from Copenhagen Economics on be half of the European Commission.
The questions are divided in three broad groups:
1. Export information
These questions intend to provide genera l information about your export to Ja-
pan and how your export to Japan is organised.
2. Barriers for trade with Japan
These questions intend to provide inform ation about the barriers you encounter
in Japan and how they can be eliminated or reduced. Here, you are asked about
the cost of the most important barriers.
3. Barriers to introducing new products on the Japanese market
These questions intend to provide information about which barriers limit your
company’s ability to launch new products on the Japanese market and in which
way the most important barriers could possibly be eliminated or reduced.
1 Export information
1.1 Please describe the market segments you service in Japan:
Retail banking, e.g. consumers and small companies
Wholesale banking, e.g. large and mids ized corporate clients, international
trade finance business and institutional customers
Investment services, e.g. asset mana gement and hedge fund management
Financial intermediation services, e.g. letters of credit, lines of credit and
foreign exchange transactions
Auxiliary services, e.g. financial market operations and custody services
Freight insurance
Non-life insurance
Life insurance
Reinsurance
Other financial services (please specify)
1.2 Please describe how your operations in Japan are organised:
My company has established a sales office in Japan
My company provides services through Japanese partner
156
My company has established a full service operation in Japan
Other operation mode (please specify)
1.3 Please specify how you sell and prod uce for each of the market segments
you service in Japan
Retail banking, e.g. consumers and small companies
__________________
Wholesale banking, e.g. large and mids ized corporate clients, international
trade finance business and institutional customers
____________________
Investment services, e.g. asset mana gement and hedge fund management
___________________________________________________________
Financial intermediation services, e.g. letters of credit, lines of credit and
foreign exchange transactions ___________________________________
Auxiliary services, e.g. financial market operations and custody services
___________________________________________________________
Freight insurance
_____________________________________________
Non-life insurance
____________________________________________
Life insurance _______________________________________________
Reinsurance
_________________________________________________
Other selling and production modes used by your company
____________
2 General barrier information
These questions intend to provide informatio n about the barriers you encounter in Japan
and how they can be eliminated or reduced.
2.1 How do you find market access for expo rt to Japan, compared to exporting to
other countries?
Much more difficult
Somewhat more difficult
Equally difficult
Somewhat less difficult
Much less difficult
I don't know
2.2 Consider exporting to Japan, keeping in mind your domestic market. If 0 repre-
sents a completely ‘free trade’ environmen t, and 10 represents an entirely closed
market due to barriers, what value between 0 – 10 would you use to describe the overall level of restrictiveness of the Japanese market to your export?
157
2.3 Please give the following non-tariff measures a score between 0 and 5 in terms
of the degree to which they rest rict your export to Japan:
Intrinsic barriers, e.g. language and culture
Entry barriers, e.g. permits, lic enses and start-up procedures
Barriers to operation, e.g. taxation r ules, solvency rules and regulation of
conduct
Other restrictive factors (please specify)
2.4 Please give the following intrinsic barriers a score between 1 and 5 in terms of
the degree to which they restrict your expo rt to Japan, where 1 represents no re-
stricting impact, and 5 represents a extremely restrictive impact:
Language
Japanese culture
Other intrinsic barriers (please specify)
3 Entry barriers related to financial services
3.1 Please give the following entry barriers a score between 1 and 5 in terms of the
degree to which they restrict your export to Japan:
Barriers related to licenses and permits
Restrictive start-up procedures, e.g. administrative burdens and complexity of
rules
High start-up costs, e.g. fees, land costs and read estate costs
Other entry barriers (please specify)
3.2 Which entry barriers are of most concern to you?
Barriers related to licenses and permits
Restrictive start-up procedures, e.g. administrative burdens and complexity of
rules
High start-up costs, e.g. fees, land costs and read estate costs
Other entry barriers
3.3 In your opinion, which actions would be required in order to reduce the entry
barriers that are of most concern to you? __________________________
158
4 Quantification of entry barriers
Quantifying how barriers affect your company is very important. The following questions
ask how entry barriers at the Japanese market affect yo ur cost of exporting to Japan.
4.1 Do entry barriers affect your costs of selling to the Japanese market?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.2 Do entry barriers affect your costs of producing to the Japanese market?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.3 Do entry barriers affect your costs of development ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.4 Do entry barriers affect your other direct costs ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.5 Do entry barriers delay the process of getting your products approved for the
Japanese market compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
159
4.6 Do entry barriers cause other delays in your export to Japan compared to the
EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
4.7 By how much would you expect your costs per unit of export of exporting to
Japan to decrease if these entry barriers were eliminated?
0- 1%
1- 5%
5- 10%
10-15%
15- 20%
More than 20%
Not relevant
I don't know
4.8 By how much would you expect your other export costs (i.e. fixed costs not re-
lated to per unit cost of export) of expo rting to Japan to decrease if these barri-
ers were eliminated?
0- 1%
1- 5%
5- 10%
10-15%
15- 20%
More than 20%
Not relevant
I don't know
5 Barriers to operation relate d to financial services
5.1 Please give the following barriers to operation a score between 1 and 5 in terms
of the degree to which they impa ct on your export to Japan:
Barriers related to taxation rules, e.g. inconsistency or lack of transparency
Solvency regulation, e.g. incons istency or lack of transparency
Barriers related to product standard s, e.g. restrictive requirements
Regulation of conduct, e.g. advertis ing, form of business or distribution
Anti-trust exemptions, e.g. price regulation
Conduct of public owned firms
Barriers related to access risk information, e.g. sharing rules
Other barriers to operation (please specify)
160
5.2 Which barriers to operation are of most concern to you?
Barriers related to taxation rules, e.g. inconsistency or lack of transparency
Solvency regulation, e.g. incons istency or lack of transparency
Barriers related to product standard s, e.g. restrictive requirements
Regulation of conduct, e.g. advertis ing, form of business or distribution
Anti-trust exemptions, e.g. price regulation
Conduct of public owned firms
Barriers related to access risk information, e.g. sharing rules
Other barriers to operation
5.3 In your opinion, which actions would be required in order to reduce the barri-
ers to operation that are of most concern to you? ________________________
6 Quantification of barriers to operation
Quantifying how barriers affect your company is very important. The following questions
ask how barriers to operation at the Japanese market affect your costs of exporting to Ja-
pan.
6.1 Do barriers to operation affect your costs of selling to the Japanese market?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.2 Do barriers to operation affect your co sts of producing to the Japanese market?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.3 Do barriers to operation affect your costs of development ?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.4 Do barriers to operation affect your other direct costs ?
No
Not relevant
I don’t know
161
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.5 Do barriers to operation delay the process of getting your products approved
for the Japanese market compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.6 Do barriers to operation procedures cause other delays in your export to Japan
compared to the EU?
No
Not relevant
I don’t know
Yes – please specify these costs in the wa y that you find the most appropriate,
preferably as a percentage of the value of your export to Japan
6.7 By how much would you expect your costs per unit of export of exporting to
Japan to decrease if these barriers to operation were eliminated?
0-1%
1%-5%
5%-10%
10%-15%
15%-20%
More than 20%
Not relevant
I don’t know
6.8 By how much would you expect your other export costs (i.e. fixed costs not re-
lated to per unit cost of export) of expo rting to Japan to decrease if these barri-
ers to operation were eliminated?
0-1%
1%-5%
5%-10%
10%-15%
15%-20%
More than 20%
Not relevant
I don’t know
162
7 Your product range in Japan
These questions intend to provide informatio n about which barriers limit your company’s
ability to launch new product on the Japanese market and in which way the barrier could
possibly be eliminated or reduced. Please answ er the following questions for one of your
main export product to other export destinat ions that is not yet exported to Japan.
7.1 How is your product range when exporting to Japan:
Much smaller than other markets (we offer substantially fewer products on
the Japanese market than other Asian markets)
Somewhat smaller than other markets (we offer fewer products on the Japa-
nese market than other Asian markets)
Similar to other markets (we offer the same product range on the Japanese
market as in other Asian markets)
Larger than other markets (we offer mo re products on the Japanese market
than in other Asian markets)
Much larger than other markets (we of fer substantially more products on the
Japanese market than in other Asian markets)
I don’t know
8 General barriers to laun ching new products in Japan
8.1 Why have you reduced your product range on the Japanese market?
The Japanese market is not interesting for my other products
It is too costly/difficult for my comp any to export our other products to Ja-
pan given the structure or strategy of my company
It is too costly/difficult for my comp any to export our other products to Ja-
pan given the existing barriers in Japan for this sector
I don't know
Other reasons (please specify)
9 The impact of barriers on la unching new products in Japan
9.1 Please give the following entry barriers a score between 1 and 5 in terms of the
degree to which they restrict your abilit y to expand your product range on the
Japanese market:
Barriers related to licenses and permits
Restrictive start-up procedures, e.g. administrative burdens and complexity of
rules
High start-up costs, e.g. fees, land costs and read estate costs
Other entry barriers (please specify)
9.2 By how much would you increase your product range if entry barriers to the
Japanese market were eliminated or reduced?
Product range would not increase
163
Product range would increase a little (stay below levels in other Asian mar-
kets)
Product range would increase a lot (to comparable levels in other Asian mar-
kets)
Not relevant
I don’t know
9.3 Please give the following barriers to operation a score between 1 and 5 in
terms of the degree to which they restrict your ability to expand
your product range on the Japanese market:
Barriers related to taxation rules, e.g. inconsistency or lack of transparency
Solvency regulation, e.g. incons istency or lack of transparency
Barriers related to product standard s, e.g. restrictive requirements
Regulation of conduct, e.g. advertisin g, form of business/distribution chan-
nels
Anti-trust exemptions, e.g. price regulation
Conduct of public owned firms
Barriers related to access risk information, e.g. sharing rules
Other barriers to operation (please specify)
9.4 By how much would you increase your pr oduct range if barriers to operation at
the Japanese market were eliminated or reduced?
Product range would not increase
Product range would increase a little (stay below levels in other Asian mar-
kets)
Product range would increase a lot (to comparable levels in other Asian mar-
kets)
Not relevant
I don’t know
10 Formalities
10.1 Would you like to make any further comments on the barriers you face in your
exports to Japan?
No
Yes
10.2 Would you consider participating in a follow-up interview?
No
Yes
What is your name? ______________________________
What is your position in the company? ______________________________ What is your e-mail address? ______________________________
164
What is your direct telephone number? ______________________________
165
In this appendix we outline the broad structure of the computable general equilibrium
(CGE) model used in the main body of the report. We have estimated the broad macro-
economic effects of NTM liberalisation with a CGE model. Due to limits in data availabil-
ity, the sector-structure of the CGE model is mo re aggregated than for some of the detailed
sector analysis in the main report. At the le vel of the model, the estimated total price im-
pact of NTMs identified in the study – the increase in delivered price because of the
NTMs can be broken down in various ways, and this is taken account of in the model. In
particular, we model NTMs that increase costs for serving the Japanese or EU markets, as
well as NTMs that instead limit access and rais e price for imports, creating economic rents
in the process.
The CGE approach detailed here brings together the full set of econometric, survey and
legal analysis through definition of policy sc enarios. The model is based on Francois, van
Meijl, and van Tongeren (2005), and is si milar to World Bank, CEPII and CPB global
models. It is a multi-sector, multi-region model of the global economy. Estimated effects
are based on a projected 2018 baseline. From this baseline, we have estimated the impact, both immediate and medium-term (following in vestment responses) of NTM liberalisation.
The immediate impact (short-run) estimates described in the main report reflect the possi-
ble impact, on the 2018 baseline, if the releva nt trade agreement was only implemented in
2018. The medium-term, in contrast, provides an estimate of how the 2018 baseline would
look if the agreement had been implemented fa r enough in the past (approximately 7 to 10
years) so that the full set of investment im pacts have already been realised. Hence, the
short-run estimates are immediate, while the long-run gives a sense of the difference in
economic activity allowing for investment responses.
A5.1 Technical overview
The core CGE model is based on the assumption of optimising behaviour on the part of
consumers, producers, and government. Consumers maximise utility subject to a budget constraint, and producers maximise profits by combining intermediate inputs and primary
factors at least possible cost, for a given tech nology. The model employed here is based on
Francois, van Meijl, and van Tongeren (2005). It is a standard, multi-region CGE model,
with important features related to the struct ure of competition (as described by Francois
and Roland-Holst 1997). Imperfect competition f eatures are described in detail in Francois
(1998). Social accounting data follow conventi ons for the structure of the GTAP dataset
(www.gtap.org).
The model is implemented in GEMPACK, a software package designed for solving large applied general equilibrium models. The model is solved as an explicit non-linear system
of equations, through techniques describe d by Harrison and Pearson (1994). More infor-
mation can be obtained www.monash.edu.au/policy/gempack.htm. For a detailed discus-sion of the basic algebraic model structure represented by the GEMPACK code, refer to
Hertel (1996). The aim of this appendix is to provide a broad overview of the model and APPENDIX 5: CGE MODEL
166
detailed discussion of mathematical structure is limited to added features, while for the
standard GEMPACK-based structure the reader is referred to Hertel (1996).
Table A5.1 Model sectors
Primary Manufacturing Services
Agricultures, forestry, and fisheries Food and beverages Water transport
Other primary sectors Chemicals and related products Air transport
Electrical machinery Finance
Automotive Insurance Transport equipment Business and ICT services
Machinery Communications
Metals and metal products Construction Wood and paper products Personal, cultural, and recreational ser-
vices
Other manufactures Other services
General model structure
The general conceptual structure of a regional economy in the model is as follows: firms
produce output, employing land, labour, capital, and natural resources and combine these
with intermediate inputs, within each region /country. Firm output is purchased by con-
sumers, government, the investment sector, and by other firms. Firm output can also be
sold for export. Land is only employed in the agricultural sectors, while capital and labour
(both skilled and unskilled) are mobile between all production sectors. While capital is as-
sumed to be fully mobile within regions, land, labour and natural resources are not. Substi-tution elasticities in value added (capital, labour, natural resources) are detailed in the elas-
ticity table below.
Figure A5.1 Nested production structure
S killed Cap i t alLand Import
rsources of importsOutput
Domest ic UnskilledInte r me dia te
inputsEndowments
factorinputsDomestic supply
Exports
CESCES CESLeontief
Source: Francois.
167
Figure A5.2: Consumption structure
Co m p o si t e
Privat e
C onsumptionGo ver n m en t
InvestmentGo ver n m en t
C onsumpt ionPrivat e
Investment
Dom est i c Imported Dom est i c Imported
Dom est i c Imported Dom est i c Imported
Source: Francois.
Trade policy
Trade policy can be represented in the model as direct taxes and subsidies, or as increased
costs of production for export markets dues to non-tariff measures. Trade taxes are a spe-
cial case of the range of taxes that are includ ed in the theory of the model. Trade taxes and
subsidies include both applied most-favored na tion (MFN) tariffs and preferential rates as
appropriate. The full set of tariff vectors are based on WTO tariff schedules, combined
with possible Doha and regional initiatives as specified by the Commission during this pro-
ject, augmented with data on trade preference s. The underlying GTAP data include data
from CEPII on preferential tariff rates (inc luding regional agreements and developing
country preferences), and these are supplemen ted with WTO tariff data as appropriate.
In addition to tariffs, we also model non-tariff measures as a mixture of (i) frictional trade
costs, and (ii) restrictions that operate as ba rriers that limit access and generate economic
rents in the process. Frictional trading costs represent real resource costs associated with
producing a good or a service for sale in an export market instead of the domestic market.
Conceptually, for the model this means we have implemented a linear transformation
technology between producing for domestic an d export markets. This technology is de-
picted in Annex Figure 1 below. The straight line AB indicates, given the resources neces-
sary to produce a unit of goods or services for the domestic market, the feasible amount
that can instead be produced for export to a particular destination using those same re-
sources. If there are no frictional barriers to trade, this line has slope -1. The line AC
represents the NTM-free case. As we reduce NTM-related trading costs, the linear trans-
formation line converges on the free trade line, as indicated in the figure. This approach is
used for liberalisation of non-tariff measures, affecting both goods and services, where they
are modelled as increasing the cost of good s and services sold to trading partners.
In addition to NTMs that generate frictional trade costs, we also model NTMs that do not
raise trade costs per se, but that instead genera te economic rents by limiting market access.
In other words, this case covers restrictions th at do not increase the cost of serving an over-
168
seas market, but that do still limit access to that market. Because they do not limit costs,
but limit access (and so by limiting volume lead to higher prices) they generate economic
rents – a gap between cost and final price. Such NTMs, where they generate rents, are
modelled in the same was as import and export taxes. The allocation of the price impact across these “economic rent taxes” determin es the allocation of the rents involved.
The actual levels of NTMs and their division between frictional and rent-creating barriers
are discussed in the main body of the report. Al so important in this regard is the allocation
of NTMs into those that can actually be a ddressed through dialog and negotiation (those
that are actionable) and those that are not acti onable. For example, assume we have identi-
fied a 50 percent total tariff equivalent for NM Ts in the widget repair sector. Assume fur-
ther that half of the underlying barriers are actionable, so that we want to model a 25 per-
cent reduction in the tariff equivalent of NTMs. Further, assume that of this 25 percent, we
have identified 10 percent as resulting from no n-tariff measures that raise costs, while the
remaining 15 percent generates economic rents that are shared between the importer and
exporter. In the model, the 10 percent trade cost is modelled as in Annex Figure A-1. This
means that if a widget repair service costs $100 to produce and sell in Europe; it now costs
only $90 to produce, once the underlying no n-tariff measures are reduced. At the same
time, with a split of rents (estimated at 15 pe rcent) between the exporting firm and the im-
porting or downstream, firm, we model this a 15 percent NTM trade tax (with a 50-50 split
in rents this means a 7.5 percent import tax and a 7.5 percent export tax equivalent for the
NTM). The resulting liberalisation experiment then involves both the 10 percent reduction
in real costs and the elimination of the market access barriers (modelled as taxes) that gen-
erated economic rents.
It should be stressed that, in the services sect ors, FDI restrictions ar e also important for to-
tal cross-border sales and sales through affiliate s. Indeed, the econometrics used to arrive
at NTM measures for services are based on in dictors of regulatory barriers and discrimina-
tion against FDI in the service sector. As su ch, the NTM barrier estimates in services, as
implemented in the model, also reflect estima ted effects on trade related to FDI restric-
tions.
Transportation costs
International trade is modelled as a process that explicitly involves trading costs, which in-clude both trade and transportation services . These trading costs reflect the transaction
costs involved in international trade, as well as the costs of the physical activity of transpor-
tation itself. Those trading costs related to international movement of goods and related lo-gistic services are met by composite services purchased from a global trade services sector,
where the composite "international trade servic es" activity is produced as a Cobb-Douglas
composite of regional exports of trade and tr ansport service exports. Trade-cost margins
are based on reconciled f.o.b. and c.i.f. trade data.
169
A5.2 Market structure
Demand for imports: Armington sectors
The basic structure of demand in constant re turns sectors is Armington preferences. In
Armington sectors, goods are differentiated by country of origin, and the similarity of
goods from different regions is measured by the elasticity of substitution. Formally, within a
particular region, we assume that demand for goods from different regions is aggregated
into a composite import according to the following CES function:
(1) qj,rM= αj,i,rMj,i,rρj
i=1R
∑⎡
⎣ ⎢ ⎤
⎦ ⎥ 1/ρj
In equation (1), M j,i,r is the quantity of imports in sector j from region i consumed in region
r. The elasticity of substitution between variet ies from different regions is then equal to σM
j ,
where σM
j=1/(1- ρj). Composite imports are combined with the domestic good qD in a sec-
ond CES nest, yielding the Armington composite q.
(2) qj,r=Ωj.M.rqj,rM()βj+Ωj,D,rqj,rD()βj ⎡
⎣⎤
⎦1/βj
The elasticity of substitution between the do mestic good and composite imports is then
equal to σD
j, where σD
j=1/(1- βj). At the same time, from the first order conditions, the de-
mand for import M j,i,r can then be shown to equal
(3) Mj,i,r=αj,i,r
Pj,i,r⎡
⎣⎢
⎢⎤
⎦⎥
⎥σim
αj,i,rσjMPj,i,r1−σjM
i=1R
∑⎡
⎣⎢⎤
⎦⎥−1
Ej,rM
=αj,i,r
Pj,i,r⎡
⎣⎢
⎢⎤
⎦⎥
⎥σjM
Pj,rM()σjM−1Ej,rM
where EM
j,r represents expenditures on imports in region r on the sector j Armington com-
posite. In practice, the two nests can be colla psed, so that imports compete directly with
each other and with the corresponding domestic product. This implies that the substitution
elasticities in equations (2) and (3) are equal.
Imperfect competition
As indicated in Annex Table 1, we model a number of sectors as being imperfectly com-petitive. The approach we follow has been us ed in the Michigan and the WTO assessment
of the Uruguay Round, and many recent studies of the Doha Round (see Francois
et al.
2005). Recent model testing work indicates that this approach works “best” vis-à-vis Arm-
ington models, when tracked against actual tr ade patterns (i.e. Fox (1999) for certain sec-
tors, uses the US-Canada FTA as a natural experiment for model testing).
170
Formally, within a region r, we assume that demand for differentiated intermediate prod-
ucts belonging to sector j can be derived from the following CES function, which is now
indexed over firms or varieties instead of over regions. We have
(4) j
jn
irij rij rj X qΓ
=Γ
⎥⎦⎤
⎢⎣⎡=∑/1
1,, ,, , γ
where γj,i,r is the demand share preference parameter, Xj,i,r is demand for variety i of product
j in region r, and σj = 1/(1- Γj) is the elasticity of substitution between any two varieties of the
good. Note that we can interpret q as the output of a constant returns assembly process,
where the resulting composite product enters consumption and/or production. Equation (4) could therefore be interpreted as represen ting an assembly function embedded in the
production technology of firms that use interm ediates in production of final goods, and al-
ternatively as representing a CES aggregator im plicit in consumer utility functions. In the
literature, and in our model, both cases are sp ecified with the same functional form. While
we have technically dropped the Armington assumption by allowing firms to differentiate
products, the vector of γ parameters still provides a partial geographic anchor for produc-
tion. (Francois and Roland-Holst 1997, Francois 1998).
Firms in different regions/countries compete di rectly on a global level. Firms are assumed
to exhibit monopolistically competitive behaviour. This means that individual firms pro-
duce unique varieties of good or service
j, and hence are monopolists within their chosen
market niche. Given the demand for variety, reflected in equati on (4), the demand for each
variety is less than perfectly elastic. However, while firms are thus able to price as monopo-
lists, free entry (at least in the long-run) drives their economic profits to zero, so that pricing
is at average cost. The joint assumptions of av erage cost pricing and monopoly pricing, un-
der Bertrand behaviour, imply the fo llowing conditions for each firm f i in region i:
(5)
⎟⎟
⎠⎞
⎜⎜
⎝⎛
⎟⎟
⎠⎞
⎜⎜
⎝⎛
⎟⎟
⎠⎞
⎜⎜
⎝⎛−−
∑ ∑PP
XX =
r f, j,r k, j,1
r ,f j,r k, j,n
1=k1
f j,r ,f j,R
1=rf j, j
ij
ii
i σ σ
ααζ
(6)
AC=P i f, i f,
The elasticity of demand for each firm fi will be defined by the following conditions.
(7) ζσ σ ε i f, j, j j i f, j, ) (1 + = −
(8)
εi f, i f,i f, i f, 1=
PMCP
171
In a fully symmetric equilibrium, we would have ζ=n-1. However, the calibrated model in-
cludes CES weights γ, in each regional CES aggregation function, that will vary for firms
from different regions/countr ies. Under these conditions, ζ is a quantity weighted measure
of market share. To close the system for regional production, we index total resource costs
for sector j in region i by the resource index Z. Full employment of resources hired by
firms in the sector j in region i then implies the following condition.
(9) TC = Z f i, j,n
1=fi j,i∑
Cost functions for individual firms are defined as follows:
(10) P )x b + a( = )xC(Z i j, i j, i j, i j, i j,
This specification of monopolistic competition is implemented under the “large group” as-
sumption, which means that firms treat the variab le n as "large", so that the perceived elas-
ticity of demand equals the elasticity of subs titution. The relevant set of equations then col-
lapses to the following:
(11)
X
nn = x n = ] x [ = q
r i, j,
0i j,i j,)/ (1
rij0i j,1
r i, j, rijrij rijR
1=i1
r j,
j jjjj
⎟⎟
⎠⎞
⎜⎜
⎝⎛Γ Γ−Γ−Γ Γ∑
,,,,,, ,,
α γγ
(12) X
ZZ = xi j,
0i j,1i j,)/ (1
ijj j
⎟⎟
⎠⎞
⎜⎜
⎝⎛− ρ ρ
,
In equation (12), n0 denotes the number of firms in the benchmark. Through calibration,
the initial CES weights in equation (12) include the valuation of variety. As a result, the re-
duced form exhibits external scale effects, de termined by changes in variety based on firm
entry and exit, and determined by the substituti on and scale elasticities. For sectors covered
in this study, the underlying gravity model yields estimate tariff or substitution elasticities.
We have used these here, and so then calibrate the implied scale coefficients in equation
(12) from the trade substitution elasticities, cf. Table A5.2.
172
Table A5.2 Key elasticites in the model
Project
sectors
within
the model
sector Model sectors Value added
substitution
elasticity Trade sub-
stitution
elasticity
Agriculture, forestry, and fisheries 0.224 4.766
Other primary sectors 0.200 12.126
20 *Food & Beverages 1.120 2.460
10, 11, 12 *Chemicals and related products 1.260 5.090
15, 16, 17 *Electrical machinery 1.260 9.650
18 *Automotive 1.260 7.140
19 Transport equipment 1.260 7.140
14 *Machinery 1.260 9.710 21 Metals and metal products 1.260 13.910
23 Wood and paper products 1.260 7.990
22 *Other manufactures 1.260 6.556
2 Water transport 1.680 3.800
2 Air transport 1.680 3.800
3 Finance 1.260 2.040 5 Insurance 1.260 3.180
4,8 Business and ICT services 1.260 3.180
6 Communications 1.260 3.180 7 Construction 1.400 4.210
9 Personal, cultural & recreational services 1.260 8.710
Other services 1.420 3.920
Note: * Monopolistic competition sectors.
The composite household and final demand structure
Final demand is determined by an upper-tier Cobb-Douglas preference function, which al-
locates income in fixed shares to current consumption, investment, and government ser-
vices. This yields a fixed savings rate. Gove rnment services are produced by a Leontief
technology, with household/government transf ers being endogenous. The lower-tier nest
for current consumption is also specified as a Cobb-Douglas. The regional capital markets
adjust so that changes in savings match ch anges in regional investment expenditures.24
Capital accumulation and investment
An important feature of the model involves a savings-investment-capital link, whereby the
static or direct income effects of trade liberalis ation induce shifts in the regional pattern of
savings and investment. These effects have be en explored extensively in the trade litera-
ture, including Baldwin and Francois (1999) , Smith (1976, 1977), and Srinivasan and
Bhagwati (1980). Several studies of regional an d multilateral trade agreements have also in-
corporated variations on this mechanism. Such effects compound initial output welfare ef-
fects over the medium-run, and can magnify income gains or losses. How much these "ac-
24 Note that the Cobb-Douglas demand function is a special case of the CDE demand function employed in the
standard GTAP model code. It is implemented through GEMPACK parameter files.
173
cumulation effects" will supplement static effects depends on a number of factors, including
the marginal product of capital and underlying savings behaviour. In the present applica-
tion, we work with a classical savings-investment mechanism (Francois et al. 1996). This
means we model medium- to long-run linkage s between changes in income, savings, and
investment. The results reported here therefor e include changes in the capital stock, and
the medium- to long-run implications of such changes.
The resulting estimates can be viewed as incl uding two sets of effects. Our short-run or
static estimates, as described in the report, correspond to the impact of a reduction in
NTMs as observed in 2018, if the agreemen t was fully introduced and implemented in
2018. The longer-term (dynamic) estimates provid e an overview of the observed impact in
2018, of the agreement had already been in place for several years, such that investment ef-
fects are fully realized. Hence, the estimates with capital accumulation provide a sense of the eventual outcome from dynami c gains linked to NTM reduction.
Annex Figure 1
Trading Costs as Iceberg Costs – cost-raising NTM reductions
S export B C S domestic
A
174
The European pharmaceutical firms produced more than €190 billion worth of products
to the global market in 2008, which is equa l to a 36 percent share of the world market
(more than €525 billion). European pharmaceu tical firms exported more than €70 billion
to destinations outside the EU in 2007 according to Eurostat data.
With an estimated size of €52 billion in 2008, Japan is the world’s third largest pharmaceu-
tical market after the US (€212 billion) an d Europe (€169 billion). The Japanese pharma-
ceutical market is expected to grow at a ra te of one to four percent a year between 2008
and 2013, which is faster than the North Amer ican market, but slower than the European
market, which is expected to grow at three to six percent a year (IMS, 2009).
EU firms are currently exporting pharmaceutica l products to Japan worth between €3 bil-
lion and €4 billion a year or corresponding to a market share of approximately six to eight
percent of the total annual market in Japan.25 Japan only imports about 14 percent of its
domestic consumption of pharmaceutical prod ucts from aboard. A large share (nearly 60
percent) is from the EU. Only around 17 percent is from the US.26 Therefore, the chal-
lenge for European pharmaceutical exporters is to open up the Japanese market, rather
than to win market shares from other exporters in Japan.
A6.1 Major concerns in the pharmaceutical sector
In spite of many efforts to harmonise and st reamline the regulation of the pharmaceutical
sector in international forums, first and foremost in ICH27, EU firms in Japan still encoun-
ter problems that have formally been solved through international harmonisation.
The most important NTMs for EU pharmac eutical export to Japan pertain to:
1. A complex and costly regulatory environment
Foreign clinical data are not recognised.
There are differences in clinical de velopment guidelines and biological
product specifications.
2. A slow approval process result in a Japanese “drug lag”
The review process for approving new medicines for sale in Japan is slow
Burdensome review and clinical trial consultation system.
3. An inadequate pricing and reimbursement system
Japan’s reimbursement system does not reward the development and in-
troduction of innovative medicines.
25 According to Eurostat data for 2008 for the Harmonis ed System’s chapter 30 ‘Pharmaceutical products’ (HS-
02).
26 According to Japanese trade statistics from the Ministry of Finance for the category 507 ’Medicinal products’.
27 ICH is the International Conference on Harmonisation, which brings together the regulatory authorities of
Europe, Japan and the U.S. and encompasses experts from the pharmaceutical industry from all three regions to
discuss scientific and technical aspe cts of product registration. See www.ich.org . APPENDIX 6: PHARMACEUTICALS SECTOR STUDY
175
In sum, these NTMs and other factors result in the so-called “drug lag”. This is the delay
in the access to new pharmaceuticals in Japa n compared to the EU and the US. According
to estimates from our business survey amongs t European pharmaceutical firms in Japan,
approval of new drugs in Japan is delayed by two to three years compared to the EU. This
is confirmed by other studies. For biopharmaceuticals, the approval lag was 53.6 months in
Japan compared to 7.5 months in the EU and 3.7 months in the US.28
For European exporters, the drug lag implies th at the market return from Japan is delayed
for up to three years and that the cost of la unching new drugs on the market in Japan is
higher than elsewhere. For the Japanese users, this does not only imply a delay in access to
the newest medicines, but it also implies hi gher costs for the products. According to one
assessment, a startling 87 percent of import ant new medicines are unavailable in Japan
(Thomas, 2001).
If the review process is streamlined and the drug lag reduced, Japanese users of pharma-
ceuticals will have earlier access to better and cheaper products. Achieving this result re-
quires a number of changes in the administra tive implementation of the regulatory re-
quirements, but it will not require changes in the regulatory requirements in terms of the
safety and efficacy of the products.
According to our estimates, the current regula tory requirements, administrative procedures
for conformity assessment and reimbursement procedures imply an additional cost for
European pharmaceutical exporters of approxim ately 22 percent. In other words, the iden-
tified NTMs have an economic impact corresp onding to a 22 percent tariff on the imports
of pharmaceutical products.
According to estimates provided by European managers in Japan, about 20 percentage
points of these 22 percent extra costs can be avoided through actions aimed at eliminating
Japanese NTMs related to standards, techni cal regulations and conformity assessment pro-
cedures.
A6.2 EU exports to Japan
European pharmaceutical export has increased significantly over the period from 2000 to
2008. Exports to Japan increased by 43 percent over the period, whilst export to other ma-
jor economies outside Europe increased more. Exports to Korea have more than tripled,
while EU pharmaceutical exports to Taiwan only increased by 54 percent cf. Figure A6.1.
28 Based on research from the Graduate School of Pharma ceutical Sciences at the University of Tokyo and the
Japanese Health Care Science Institute as published in Tsuji and Tsutani (200 7). The analysis is based on the 65
new biopharmaceutical products bein g approved between 1999 and 2006.
176
Figure A6.0.1 EU ph armaceutical exports to major non-EU destinations, 2000-2008
1 0 01 0 01 0 01 0 01 0 01 0 01 0 014 315417919 7251308334
05010 0150200250300350400
JA PA N TAIWAN BRAZIL AUSTRALIA UNITED
STATESCANADA SOUTH
KOREAEU-27 pharma export, Index (2000 = 1 00)
2000
2008
Source: Copenhagen Economics calculations ba sed on data from Eurostat, SITC code 54.
Japan’s pharmaceutical import from all partners grew by 59 percent between 2003 and
2008, and EU’s share of Japan’s import of ph armaceutical products from the world kept
almost steady at around 60 pe rcent, cf. Figure A6.0.2.
Figure A6.0.2 Japan’s pharmaceutical impo rt from world and the EU market share
100 107 126 138 151 1590,60 0,61 0,610,58 0,59 0,59
0,000,100,200,300,400,500,600,700,80
020406080100120140160180
2003 2004 2005 2006 2007 2008EU share of
Japanese import
from world (%)Japan import from
world
(index, 2003=100)
Japan pharma imports from world (left axis) EU share Japanese pharma imports (right axis)
Source: Copenhagen Economics calculations based on Japane se trade statistics from the Ministry of Finance in
Japan. Import code 507 in Ja panese customs classification.
177
A6.3 NTMs to the Japanese market
Nearly six out of ten pharmaceutical sector ma nagers in our business survey consider Japan
as being more or much more difficult to a ccess than other markets, cf. Figure A6.0.3.
Figure A6.0.3 Perceived difficulty of exporting to Japan
0%12% 12%41 %
18 %
0%5%10 %15%20%25%30%35%40%45%
Muc h le ss diffic ult
(score=1)Somewhat less
di f f i cul t (score=2)Equally difficult
(score=3)Somewhat more
difficult (score=4)Much more difficult
(score=5)How do you f i nd market access f or export t o Japan, compared t o export i ng t o other
count ri es?
Note: Average score = 3.8.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
There is almost uniform agreement among the responding EU managers in Japan that the
regulatory environment, e.g. the cost and co mplexity of doing business, is considered the
most restrictive barrier to the Japanese mark et, cf. Figure A6.0.4. The second most impor-
tant NTM is related to the pricing and reimbursement rules for pharmaceuticals in Japan.
In the third position, we find standards and conformity assessment requirements.
178
Figure A6.0.4 The importance of non-tariff measures
Average restrictiveness score
(N = 12)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Regulatory environment
(e.g. costs and complexity of doing business)
Price control measures
(e.g. anti-dumping measures, countervailing measures)
Quantity control measures
(e.g. quotas, prohibitions)
Government assistance issues
(e.g. subsidies, export refunds)
Public procurement issues
(e.g. legal framework, contract conditions)
Distribution channels
(e.g. seaport and airport regulations, secondary dealers)
Lack of intellectual property rights
(e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures
(e.g. customs procedures)
Standards and conformity assessment requirements
(e.g. technical regulations, certification)3,3 12345
1,9 12345
2,0 12345
1,9 12345
1,9 12345
2,1 12345
1,6 12345
2,6 12345
1,7 12345
2,2 12345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
Barriers related to standards and technical regulations
The definition of standards and technical re quirements follows th e WTO definition (see
more details in Chapter 1). The barriers related to standards and technical regulations are listed in Figure A6.0.5. Of most importance are issues related to the non-recognition of
foreign clinical data
179
Figure A6.0.5 Barriers related to standards and technical regulations
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Unclear and late direction on licensure requirements
Issues related to Japan’s Good Manufacturing Practices Other issues related to standards and technical regulationsTechnical specification for manufacturing and quality
control not in line with international standardsForeign clinical data are not recognised
Differences in clinical development guidelines and
biological product specifications
Burdensome review and clinical trial consultation system
Issues related to Japan’s Good Clinical Practices (GCP)
Cumbersome labelling rules
Restrictions on selection of brand names
2,3 123453,1 12345
3,1 12345
1,3 12345
2,4 12345
2,4 12345
1,8 12345
1,9 12345
1,9 12345
1,9 12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
Barriers related to conformity assessment requirements
The definition of conformity assessment re quirements follows the WTO definition (see
more details in Chapter 1). The most import ant barriers related to conformity assessment
procedures are ranked in Figure A6.0.6.
Figure A6.0.6 Barriers related to conformity assessment procedures
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Long price and drug approval time
Non-sufficient quality of the registration process for new drug applications
Non-sufficient efficiency of the registration process for new drug applications
Lack of alignment of GCP rules with international ICH-GCP rules
Lack of regulatory category that allow for ingredient-specific health claims
Standards and technical specifications are not aligned
N on-transparency of product approval process
Limited data on drug application processing time
Ban on specific substances
Other issues related to conformity assessment procedures1,9 123453,4 12345
2,5 12345
2,6 12345
2,3 12345
2,1 12345
2,3 12345
2,1 12345
1,8 12345
1,9 12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
The pricing and reimbursement rules also functi on as effective barriers to the Japanese
market. In particular, the respondents attach most importance to the inability of the reim-bursement system to adapt to the characterist ics of their particular product, cf. Figure
180
A6.0.7. Other issues are also considered as so mewhat restrictive, namely the lack of trans-
parency and information about decision s made (and grounds for rejection).
Figure A6.0.7 Barriers related to the pricing and reimbursement system
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Difficulties with the National Healthcare Insurance System
Pricing system does not reflect the characteristics of our product/industry
Other issues related to the pricing and reimbursement systemFavouring of Japanese firms on pricing and reimbursement
2,2 123451,8 12345
2,6 12345
2,5 1 2 3 4 5
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
Figure A6.0.8 Major concerns for EU pharmaceutical managers in Japan
6%6%6%6%13%19 %19 %31%69%
0% 1 0% 20% 30% 40% 50% 60% 70% 80%Issues related to J apan’s G ood C linical Practices (G C P)Techni cal speci f i cat i on f or manuf act uri ng and qual i t y cont rol
not in line with in te rna tion a l sta nda rdsUncl ear and l at e di rect i on on l i censure requi rement sIssues related to J apan’s G ood Manufacturing Practices (G MP)Restrictions on selection of brand namesDi f f erences i n cl i ni cal devel opment gui del i nes and biologi cal
product specificationsO ther issues related to standards and technical regulations
(please specif y)Burdensome revi ew and cl i ni cal t ri al consul t at i on syst emFore ig n c linic a l da ta a re not re c og nise dWhich barriers related to standards and technical regulations are of most concern to you?
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
181
A6.4 Potential solutions
A potential solution to the challenges facing European pharmaceutical exporters in Japan
would naturally need to find a solution to the clinical test data problem. The use of interna-
tional standards is both seen as the preferre d and the minimum required action to reduce
barriers related to standards as well as confor mity assessment requirements. On the latter
point, the streamlining of product approval procedures and more resources in the Japa-
nese administration to deal with these issu es seems to be required. A complete and full
recognition of the product approval from the EU home regulator is seen as the ultimate so-
lution to both reducing the regulatory co sts and the conformity assessment costs.
Efforts are already being carried out by the In ternational Conference on Harmonisation of
Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH), cf.
Box A6.1.
Box A6.1 Efforts to harmonise regulation on product registration
The International Conference on Harmonisation of Tec hnical Requirements for Registration of Pharmaceuti-
cals for Human Use (ICH) has as its main purpose to br ing together the regulatory authorities of Europe, Ja-
pan and the US as well as experts from the pharmaceutical industry in the three regi ons to discuss scientific
and technical aspects of product registration.
The purpose is to make recommendations on ways to ac hieve greater harmonisation in the interpretation and
application of technical guidelines and requirements for product registrati on in order to reduce or obviate the
need to duplicate the testing carried out during th e research and development of new medicines.
The ICH terms of reference outlin es that the objectives are:
• To maintain a forum for a constructive dialogue between regulatory authorities and the pharma-
ceutical industry on the real and perceived differe nces in the technical requirements for product
registration in the EU, USA and Japan in order to ensure a more timely introduction of new me-
dicinal products, and their availability to patients.
• To contribute to the protection of public hea lth from an international perspective.
• To monitor and update harmonised technical requi rements leading to a greater mutual acceptance
of research and development data.
• To avoid divergent future requirements through harm onisation of selected topics needed as a result
of therapeutic advances and the development of new technologies for the production of medicinal
products.
• To facilitate the adoption of new or improved t echnical research and development approaches
which update or replace current practices, where th ese permit a more economical use of human,
animal and material resources, without compromising safety.
• To facilitate the dissemination and communicati on of information on harmonised guidelines and
their use such as to encour age the implementation and inte gration of common standards.
Source: See www.ich.org for more information.
On the Japanese side, these objectives are far from being fulfilled: foreign clinical data are
not recognised and the review and clinical tr ial consultation system is burdensome, differ-
ences in clinical development guidelines and bi ological product specifications continue to
pose problems for European exporters, and th ere remains to be issues related to Japan’s
Good Clinical Practices (GCP).
A6.5 Quantifying impacts on trade
The identified barriers in Japan have severa l negative impacts on European exporters:
182
1. Higher development costs: The non-recognition of foreig n clinical test data in-
creases the development costs, and additional R&D needs to be carried out at the
conception and development phases.
2. High approval costs: The approval process in itself is time-consuming and costly.
Approval of new medicines typically takes two to three years longer than in the
EU, and the process requires mo re resources than in the EU.
3. Delayed sales revenues: Sales revenues from innovations are delayed and thus the
net present value of investments made in R&D is depreciated because of the
lengthy approval process in Japan (the drug lag).
4. Higher production costs: The delay in market entry into Japan also increases the
production costs because, by the time the drug is approved for sale in Japan, the
European production lines have changed to produce the next generation medi-
cines. This increases the production cost s because certain economies of scale in
production cannot be achieved.
5. Higher border and distribution costs: The individual inspections of shipments of
approved products, once they arrive in Japan, add costs to European exporters.
Furthermore, the complex system of deal erships and distribution wholesales in-
serted between the EU producer and the fi nal customer in Japan adds extra costs
and drives up the rents on these products.
6. Fewer product varieties: European exporters market fewer products on the Japa-
nese market as result of the lengthy appr oval procedures. This restrict the Euro-
pean exporters from achieving economies of scope, for example in the sales and
distribution system (e.g. because the same number of sales staff can sell more, if
more products were approved for sale in Japan, or because of synergies for com-
pany marketing and branding can be achieved).
More firms are affected by regulatory costs th an by conformity assessment costs. In both
cases, development costs remain the most affe cted cost category. More than half of the
firms confirm that their development costs are affected by the regulatory requirements in
Japan, cf. Figure A6.0.9.
183
Figure A6.0.9 How various barriers affect co sts of EU pharmaceuti cal export to Japan
13%
27%
53%
20%
14 %
21%
36%
14 %0% 20% 40% 60%
Do standards and technical regulations affect your
cost s of shipment ?
Do standards and technical regulations affect your
costs of production?
Do standards and technical regulations affect your
cost s of development ?
Do standards and technical regulations affect your
other direct costs?
Do conformity assessment procedures affect your
cost s of shipment ?
Do conformity assessment procedures affect your
costs of production?
Do conformity assessment procedures affect your
cost s of development ?
Do conformity assessment procedures affect your
other direct costs? Percent 'Yes'
Note: Many of the respondents have answered “I don’t know” to this question.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
As a result, European exporters are selling less of each of the approved products at a
higher cost. Furthermore, the barriers also im ply a more narrow set of product varieties on
the Japanese market. Seven out of ten respon dents say that their product range on the
Japanese market is smaller or somewhat smalle r than in other markets. The main reason
given is that “it is too costly or too difficul t to export a large share of products to Japan
given the existing barriers in Japan”. This res ult is confirmed by a study from the Japanese
Office of Pharmaceutical Industry Research from 2006 showing that 30 percent of the
world's top selling drugs were not yet launch ed in Japan (Fukuhara, 2006). Furthermore,
the study showed that Japan was one of the co untries where drugs are launched in the last
place among 66 countries surveyed.
For the Japanese consumers of pharmaceuticals , the result is higher prices and fewer
products to choose from. For the European ex porters, the implication is less sales and
higher costs, cf. Figure A6.0.10.
184
Figure A6.0.10 Implications of slow and costly approval in Japan
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Product launch JapanProduct launch EU”drug lag”
Product development
nAdditional
development costsoApproval
costspDelayed
sales revenues due to time lag
qAdditional production costs
rAdditional border and
distribution costs
30 percent fewer
product variants put on the Japanese market
At 20 percent
higher costs
Source: Copenhagen Economics.
Managers of EU pharmaceutical firms in Japan have been asked to quantify the impact of
barriers as a percentage of the export value of their export to Japan. The regulatory re-
quirements in Japan imply higher production co sts than for production in the EU or other
markets. According to estimates by the pharmaceutical companies, this is in the order of 5
to 10 percent, and in some cases up to 20 percent for certain products.
We estimate that the Japanese requirements imply additional 15-
20 pct production cost.
The most significant impact of the regulatory requirements in Japan relates to the devel-
opment costs. The main reason is the need to duplicate costly clinical tests, because of the
non-recognition of foreign clinical data by Ja panese authorities. According to estimates by
the pharmaceutical companies present in Japan, this adds costs corresponding to between
10 and 30 percent of the export value. Estimates by the Tufts Centre for the Study of Drug
Development in Boston indicate that clinical tests make up more than half of the total de-
velopment costs of new drugs (DiMasi, 2003).
Need for specific development (local clinical trials) – By far the big-
gest economic impact/barrier +20%
And
We estimate that the cost of developing products for the Japanese
market is 25-30 pct higher than world average
185
Conformity assessment costs appear to be low. Also, border procedures that delay export
of pharmaceutical products already accepted at the Japanese market are assessed to have a
minor impact of up to 1 percent of the export value.29
Based on calculations of the decrease in net present value of the sales revenues resulting
from a two-year delay in product approval we assess the delay costs as being equivalent to 6
to 11 percent of their total export value. This is likely to be a conservative estimate in that
on responding manager states that
Market entry/launch usually 2-3 years later than Europe. On a 20
year life cycle the cost of laun ching a product 3 years later would
be 15%
In sum, the barrier estimate is between 22 percent and 54 percent based on business sur-
vey responses, cf. Table A6.0.1. We use the lower end estimate of 22 percent in order to avoid overestimating the barriers.
Table A6.0.1 Quantification of barriers
Cost element Low estimate High estimate
Higher production costs 5% 10%
Higher development costs 10% 30%
Other conformity assessment costs 1% 2%
Border costs 0% 1% Depreciation of sales due to delay (approval) 6% 11%
Total cost estimate 22% 54%
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
Not all of these barriers can necessarily be removed. According to the responses from the
managers in Japan, costs corresponding to 9 to 12 percent of the value of sales in Japan can
be avoided by addressing the barriers related to standards and technical regulations, and
costs corresponding to 6 to 9 percent of valu e of sales can reduced by improving the con-
formity assessment procedures (in particular fo r product approvals), cf. Table A6.0.2. This
indicates a barrier reduction potential of 15 to 20 percent of the value of sales if both are
addressed.
According to these estimates, about 20 percen tage points of the 22 percent barrier costs
can be avoided through various actions improv ing the regulatory environment and shorten-
ing the device lag.
29 In the terminology of Djankov, Freund, and Pham (2006) th is translates into less than one days delay given that
pharmaceutical products are characterised as time-sensitive. An estimated trade cost of 1 percent therefore seems to be a very conservative estimate.
186
Table A6.0.2 Reduction potential
Question 4.8 Question 4.9 Question 6.8 Question 6.9
By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated?
Answer options Response percent Response percent Response percent Response percent
0- 1% 18% 18% 27% 56%
1% – 5% 0% 36% 18% 0%
5% – 10% 18% 9% 9% 22%
10% – 15% 18% 0% 18% 0%
15% – 20% 9% 9% 0% 11%
More than 20% 36% 27% 27% 11%
Average 12% 9% 9% 6%
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
Reducing barriers to pharmaceutical exports re quires a mix of policy instruments. No sin-
gle solution is preferred by a majority of the firms in the sector. The most desired solution
to reduce the regulatory burden is throug h harmonisation and convergence between the
EU and Japan regarding rules and regulations in the sector (mentioned 24 percent of the
times), cf. Figure A6.11. The use of internat ional standards is mentioned in 19 percent of
the replies as the second most desired solution . Mutual recognition of the certification pro-
cedure also gets frequently mentioned (19 pe rcent of the items mentioned). Review of the
pricing and reimbursement system is mentioned in 15 percent of the mentioned solutions.
187
Figure A6.11 Quantification of cost reduction potentials
2%20%
0%5%10 %15 %20%25%
NTM estimate for EU pharma exports to J apanTrade cost equivalent, TC E
Remaining barrie r
Reduction potential
24%19%19%15%9%4%10%
Contribution to barrier reductionOther
Common positive and
negative list of additives
Introduction of new standards
Review the pricing and reimbursement systems
Mutual recognition of conformity assessment
Use of international standards
Harmonisation/convergence of regulations
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics, Ques tionnaire to managers of European pharmaceutical firms in Japan.
A6.6 Results and implications
The European pharmaceutical industry faces a challenge in opening up the Japanese mar-
ket. However, the process of launching new prod ucts on the Japanese market is costly and
cumbersome. First, the complex and costly re gulatory environment in Japan leads to ex-
cessive development costs. In spite of the ICH collaboration between the EU, Japan and
the US, foreign clinical data are still not recognised in Japan, and there remains to be dif-ferences in clinical development guidelines and biological product specifications. Second,
the slow approval process has result ed in a significant “drug lag”.
According to managers in the European pharmaceutical industry in Japan, the cost of
NTMs is 22 percent, where barriers related to standards, technical regulations and con-
formity assessment procedures make up as much as 20 percentage points. 60 percent of
the respondents point to the harmonisation/conv ergence of regulations, the use of interna-
tional standards or the mutual recognition of conformity assessment as ways to eliminate
these NTMs. In a CGE modelling framework this cost decrease translates into almost a
doubling of trade from around €4 billion to around €7.4 billion a year.
188
The US, the EU and Japan together account fo r about 90 percent of global production and
consumption of medical devices. EU production of medical devices totalled approximately
€31 billion, whereas apparent EU consumption of medical devices was equal to €27.4 bil-
lion in 2005 (USITC, 2007).
With an estimated size of €23 billion per year, Japan is the world’s third largest medical
device market after the EU (€70 billion) and US (€98 billion).
30 Japan has remained a net
importer of medical devices for many years. Furthermore, demand for medical devices is
increasing since Japan’s population is shri nking and aging. The increased demand for
health care will put pressure on Japan’s healthcare budget.
EU firms are currently exporting instruments and appliances to Japan used in medical,
surgical, dental or veterinary sciences as we ll as orthopaedic appliances worth €2.1 billion a
year. The potential for increasing exports of Eu ropean medical device to Japan is large.
According to our gravity model estimates, the trade could increase with 84 percent if the
level of NTMs was made comparable to the EU (equal to the difference between the EU
and Japan dummies).
A7.1 Major concerns in the medical device sector
The most important NTMs for EU medical device export to Japan pertain to:
1. A complex and costly regulatory environment
Special “Japan only” safety requirem ents adds extra development and pro-
duction costs for European exporters.
The functional category system for Sp ecial Treatment Materials creates dis-
incentives for introducing new products and services.
2. A slow conformity assessment process results in a device lag
The review process for approving new pr oducts for sale in Japan is slow.
The clinical trial consultation is cumbersome and costly.
3. An inadequate pricing and reimbursement system
Japan’s reimbursement system does no t reward the development and intro-
duction of innovative medical devices.
The Foreign Average Price rule regulates the Japanese prices based on an
average of foreign prices on same or si milar product and is criticised for not
reflecting the value of newly developed and advanced medical devices (in-
cluding R&D costs).
To the European exporters, the high cost s of conformity assessment procedures are
mainly related to costs of development because of the need to carry out additional trials to
be in conformity with Japanese requirements . Also, the costs of these testing and product
approval procedures are high in terms of delays.
30 According to information from the European medical device firms’ organisation Eucomed , see
www.eucomed.be. APPENDIX 7: MEDICAL DEVICE SECTOR STUDY
189
In general, standards and technical regulations in themselves are less of a problem in the
medical device sector. However, one major concern is related to reimbursement pricing is-
sues. The concern is that Japan’s reimbursemen t policies do not sufficiently reward the de-
velopment and introduction of innovative medical devices.31
In sum these barriers result in the so-called “device lag”. This is the delay in the access to new medical devices in Japan compared to the EU and the US. In general, market entry of
new or improved devices is delayed between 18 and 36 months in Japan compared to the
EU and US. For most devices this delay corres ponds to one or two generation of products.
For European exporters, the device lag implie s that the market return from Japan is de-
layed for up to three years and that the cost of marketing devices in Japan is higher than
elsewhere. For the Japanese users, it not only implies a delay in access to the newest medi-cal treatment, but also implies higher costs for the products.
EU producers may be disproportionately affect ed compared to Japanese rivals. This oc-
curs in cases where EU medical device firm s are “innovative frontrunners” having a com-
petitive advantage in higher-risk, more inno vative products compared to their Japanese
competitors. Such innovative medical devices face longer delays in regulatory approvals than more standard medical devices (approval ti mes of up to 3 years in Japan), while at the
same time being characterised by much shorte r product life cycles than most other prod-
ucts (as short as 18 months).
If the review process can be streamlined and th e device lag can be shortened, Japanese us-
ers of medical devices will have earlier access to better and cheaper products. Achieving this result requires a number of changes in the administrative implementation of the regu-
latory requirements, but it will not require changes in the regulatory requirements in terms
of safety and efficacy of the devices.
32
According to our estimates, the current regula tory requirements, administrative procedures
for conformity assessment and reimbursement assessment imply an additional cost for
European medical device exporters of approxim ately 30 percent. In other words, the iden-
tified NTMs have an economic impact corresp onding to a 30 percent tariff on the imports
of medical devices.
According to estimates provided by European managers in Japan, about 12 percentage
points of these 30 percent extra costs can be avoided through various actions requiring ef-
forts from both European and Japanese policy makers.
31 A lot is being done already. For example, the MHLW has increased the frequency of health insurance listings
of devices classified as C” to four times a year.
32 A similar result is found in reports and interviews wi th U.S. manufacturers who state that the most prominent
Japanese trade barriers revolve around regulatory delays , reimbursement policies, and market entry restrictions.
According to a US government report, the regulatory reform pr iority that would most benefit US industry and
government is a faster product approval process in Japan according to a USITC report from 2007.
190
The device lag
The Japanese medical device market is highly regulated which means that product approv-
als are slow and expensive. Japanese standards and regulatory requirements result in a 1-2
years time lag before the newest and most in novative equipment is put on the market in
Japan. Sometimes up to 3 years delay. This “d evice lag” differs from product to product,
but is significant for diagnostic equipment, life-saving equipment and internal-in-body in-
struments (e.g. pacemakers).
Many Asian countries accept global standards, but not Japan. This means that medical de-
vices need to be adapted to enter Japan (somet imes, however, just a Japanese language re-
quirement). One example of the delay is the 3.0 tesla MR scanners, which were delayed
almost four years before entering into Japan, while rapidly accepted in Taiwan, Korea and
elsewhere.
The device lag consists of a “submittal lag” plus an “approval lag”. The
submittal lag is
caused by delays in the period from approval in the EU to submission to the Pharmaceuti-
cals and Medical Devices Agency (PMDA). Th e submittal lag has been reduced from 16.8
to 11 months for Premarket Approval Applic ation (PMA) equivalent products, and the lag
for 510(k) equivalent products is now 14.3 months in Japan compared to 2.2 months in the
US (ACCJ, 2008) (European Commission, 2007). However, it is important to keep in
mind that a large number of medical devices are not even being submitted for approval in
the Japanese market. High reg ulatory costs, insufficient demand and the anticipated time
lag (too much time is required until approval) submittal date, cf. Figure A7. According to
the American Chamber of Commerce in Japa n (ACCJ, 2008), only about half of the
European and US medical devices are available in the Japanese market. By its nature, the
submittal lag only exist for exporting firms, which leads to an asymmetry between EU and
Japanese producers.
191
Figure A7.1 Reasons for not submitting devices for approval in Japan
Source: American Chamber of Commerce in Japan (2008).
The approval lag is the difference in the period from application submission to approval
between Japan and the EU. ACCJ (2008) reports that the average total review period from
submission to approval of PMA equivalent pr oducts has fallen from 26.6 months in 2005
to 21.1 months in 2008. Accordingly, the time lag following approval was slashed from
16.8 months to 11.0 months for PMA equiv alent products and 25.6 months to 12.1
months for 510(k) equivalent products. However, the Japanese device lag remains to be
significant.
There do not seem to be any formal indicati ons of discrimination against foreign medical
device producers that would cause the approval lag to be more pronounced for EU medi-
cal device companies compared to their Japa nese counterparts. There may be some small
advantage due to proximity and no linguistic di fficulties but these are relatively negligible.
However, the fact that EU producers are tech nological frontrunners suggests that the main
bulk of their submissions will be of new and innovative medical devices. Since such medi-
cal devices are characterised as PMA equivalent products, this means that the approval lag is likely to be longer for EU exporters than for Japanese medical device producers.
Also, certification by a third party certificatio n body is rarely possible since such new and
innovative are often rated as higher risk, an d therefore need to undergo the examination
192
process by the PMDA (EBC, 2008a). In light of the limited resources at the PMDA, this
means that the approval lag will have a disp roportionate impact on European producers.
A5.2 EU exports to Japan
The market situation is that there are three Japanese firms with a combined market share
of around 50 percent of the Japanese market (Toshiba, Hitachi and Shimadzu). There are
also three large foreign suppliers, which have a combined market share of another 50 per-
cent in Japan (Philips, Siemens and GE). In other parts of the world, Japanese firms nor-
mally have a combined market share of arou nd 10 percent, while the three foreign firms
(Philips, Siemens and GE) would have a combin ed market share around 90 percent. This
suggests that there are factors in the Japanese market that have a disproportionate impact
of exporting companies compared to Japanese producers.
European medical device export to its main destinations has increased significantly over
the period from 2000 to 2008. Exports to Japa n increased by 21 percent over the period,
but this increase is modest compared to ot her major economies outside Europe. Exports
to the US, Korea, Canada and Australia have more than doubled, cf. Figure A7.2.
Figure A7.2 EU medical device export to major non-EU destinations, 2000-2007
10 0 10 0 10 0 10 0 10 0 10 0 10 011312116 1204223 225235
05010 0150200250
TAIWAN J APA N BRAZIL UNITED
STATESKOREA CANADA AUSTRALIAEU-27 medical device export, Index (2000 = 1 00)
2000
2007
Source: Copenhagen Economics calculations based on Eurostat data, SITC code 54.
A7.3 NTMs to the Japanese market
Close to 80 percent of the medical device mana gers in our business survey consider Japan
as being more or much more difficult to access than other markets, cf. Figure A7.3.
193
Figure A7.3 Perceived difficulty of exporting medical device to Japan
0,0% 0,0%7,1%42,9%
35,7%
0,0%5,0%10 , 0 %15, 0 %20,0%25,0%30,0%35,0%40,0%45,0%50,0%
Muc h le ss diffic ult
(score=1)Somewhat less
difficult (score=2)Equally difficult
(score=3)Somewhat more
di f f i cul t (score=4)Much more diffic ult
(score=5)How do you f i nd market access f or export t o Japan, compared t o export i ng t o other
count ri es?
Note: Average score = 4.3.
Source: Copenhagen Economics, Ques tionnaire to managers of European medical device firms in Japan.
The regulatory environment is perceived as be ing highly restrictive receiving an average
score of 4.7, cf. Figure A7.4. Next come standards and conformity assessment require-
ments closely followed by difficulties related to the Japanese pricing and reimbursement rules. These issues will be covered in more details below.
194
Figure A7.4 The importance of non-tariff measures
Average restrictiveness score
(N = 14)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extreme
Regulatory environment
(e.g. costs and complexity of doing business)
Price control measures
(e .g. anti-dumping me asure s, counte rvailing me asure s)
Quantity control measures
(e .g. quotas, prohibitions)
Government assistance issues
(e.g. subsidies, export refunds)
Public procurement issues
(e .g. le gal frame work, contract conditions)
Distribution channels
(e.g. seaport and airport regulations, secondary dealers)
Lack of intellectual property rights
(e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures
(e.g. customs procedures)
Standards and conformity assessment requirements
(e .g. te chnical re gulations, ce rtification)4,7 1234
2,8 1234
3,2 1234
1,9 1234
2,3 1234
2,9 1234
2,1 1234
3,5 1234
2,3 1234
3,9 1234
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics questionnaire to ma nagers of EU medical device firms in Japan.
Barriers related to standards and technical regulations
The definition of standards and technical re quirements follows th e WTO definition (see
more details in Chapter 1). The barriers related to standards and technical regulations are listed in Figure A7.5.
195
Figure A7.5 Barriers related to standards and technical regulations
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Safety standards
I ssues rel ated to the Two Payment Systems
I ssues rel ated to the Product Pricing Classification System
Sanitary requirements
Marking
Packaging
Other issues related to standards and technical regulationsI ssues rel ated to the functional category system
for Special Treatment Materials
2,8 123453,5 12345
3,6 12345
3,0 12345
2,7 12345
2,7 12345
2,0 123451,7 12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
Of most importance are issues related to the functional category system for Special Treat-
ment Materials (STMs), cf. Box A7.1. The impa ct of price controls on STMs is a down-
ward pressure on prices, which creates disi ncentives for introducing new products and
therapies. This means that the product genera tion gap between the EU and Japan is grow-
ing.
196
Box A7.1 The functional category syst em for Special Treatment Materials
The Functional Category System is used in the Japanese health care sector and categorises different treat-
ments and medical procedures into gr oups of similarity. This serves th e reimbursement system where hospi-
tals are reimbursed by the government for technical proc edures and medical devices. In some cases the reim-
bursement for medical devises lies within the technical f ee paid to the physician. In other cases the price for
the medical devices is fixed separately from the proce dure. These devises are called “special treatment mate-
rials” and are generally used one time at one patient.
The Japanese Two Payment System consist of the following two systems:
1. Special Treatment Materials (STMs) also called “designated insured medical materials” – product
reimbursement price fixed according to a fee schedul e and is separate from other medical service
fees. STMs represent about 1/3 of overall device budget, or about 3% of national healthcare ex-
penditures.
2. The remaining 2/3, including capital equipment, I VDs, commodities, etc, ar e either purchased “by-
brand” or paid out of the “technical fee” associ ated with a medical procedure. Non-STM product
prices are determined through di rect negotiation between buyer and seller, not according to fee
schedule.
The functional category system for STMs was establishe d by MHLW in 1992, adopted in 1994, with the aim
of increasing price competition among products with iden tical or similar function. Today, there are roughly
150 major groupings containing ab out 600 functional categories.
The Ministry of Health, Labour and Welfare (MHLW) in troduced this fixed pricing system as the National
Health Insurance. In 2002 MHLW introduced “Foreign Av erage Pricing” FAP which regulates the Japanese
prices based on an average of foreign prices on same or similar product.
Source: EBC (2005), Barry (2008) and information from Pa cific Bridge Medical on recent changes in the regula-
tory environment in Japan’s medical device industry at www.pacificbridgemedical.com/publications/japan.
Barriers related to conformity assessment requirements
The definition of conformity assessment re quirements follows the WTO definition (see
more details in Chapter 1). The barriers rela ted to conformity assessment requirements are
listed in Figure A7.6.
Figure A7.6 Barriers related to conformity assessment procedures
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
F actors related to the risk categories of medical device
Cumbersome clinical trial consultation and inspections
Slow review process for improved devices
Achieving licenses for marketing
Achieving licenses for manufacturing
Achieving licenses for retail
Achieving licenses for repair
Other issues related to conformity assessment procedures2,9 123454,1 12345
4,4 12345
4,6 12345
3,9 12345
3,9 12345
3,1 12345
1,7 12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
The most important barriers related to conf ormity assessment procedures are related to
the process of launching new products on the Japanese market. This process consists of
197
several steps, cf. Figure A7.7. The most freq uently mentioned problems related to launch-
ing new products on the Japanese market are related to the product approval process
(mainly factors related to the risk categories of medical devices and the review process for
improved devices) and to clinical trials (mainly cumbersome clinical trial consultations and inspection). Also, barriers related to achiev ing licenses for marketing and manufacturing
are highly restrictive.
Figure A7.7 The process of launching new medical devices on the Japanese market
Safety and Technical
approval
”Shonin”Reimbursement
approvalBorder
approval
Source: Copenhagen Economics.
Almost all EU medical device firms interviewed for this study, including subsidiaries of EU
in Japan, suggest that their sales and exports are adversely affected by the more demanding
and lengthier Japanese product approval process.
Two agencies regulate medical devices in Japan. First, there is the Mi nistry of Health, La-
bour and Welfare (MHLW) which is in charge of approving product applications. Second, there is the Pharmaceuticals and Medical Devices Agency (PMDA) which is a non-
governmental agency that is in charge of reviewing product applications. PMDA reviews
devices in the highest risk categories. Third pa rty can review lower-risk devices, cf. Figure
A7.8.
Figure A7.8 Approval and licensing system for medical devices
Source: MHLW (2008) available at www.mhlw.go.jp/english/wp/wp-hw2/part2/p3_0035.pdf.
Since EU medical device firms are “innovative frontrunners” having a competitive advan-
tage in higher-risk, more innovative products compared to their Japanese competitors, cer-
tification by a third party certification institute is rarely possible. In most cases, EU medical
devices need to undergo the ex amination process by the PMDA.
198
A major factor in explaining the problems relate d to the clinical trials and the slow product
approval process is the discrepancy between international standards and Japanese guidance
related to Good Clinical Practices (GCP) an d international Quality Management Systems
(QMS). Clinical investigation data from the outside are not always accepted by the Japa-
nese authorities. This causes significant additi onal delay and the incurrence of expenses for
having to conduct a new clinical investigation in Japan.
Conformity with the QMS is obligatory and form s the basis for ensuring the quality, safety
and performance of medical devices. The EU analogue to the QMS is the Good Manufac-
turing Practices (GMP). Since the QMS an d the GMP systems are unaligned exporters
face significant costs and delays in meeting both requirements.
The remaining issues are related to achieving licences for the Japanese market. An EU ex-
porter of medical devices is required to be accredited by the MHLW as an “Accredited
Foreign Manufacturer”, cf. Figure A7.9. When an exporter intends to apply for a new ac-
creditation, they cannot apply for multiple categories in one accreditation application. They need to submit an accreditation applicat ion for one category and, at the same time,
submit additional applications for the other ca tegories. A target peri od to complete admin-
istrative processing (standard administrative process time) of accrediting a foreign manufac-
turer is not specifically set.
Examination fees for the accreditation differ between on-site and document examinations.
A medical certificate and the other required do cuments for accreditation can be written in
any language, but their Japanese translations ar e required. This imposes significant costs of
translation on EU exporters.
199
Figure A7.9 The process of establishing business in Japan
Source: PMDA, Application for Accreditatio n of Foreign Manufacturers available at
www.pmda.go.jp/english/service/acc_foreign.html.
Pricing and reimbursement rules
In particular, the respondents find that the reimbursement system does not reward the de-
velopment and introduction of innovative me dical devices, and that the Foreign Average
Price (FAP) rule does not reflect the value of advanced medical devices, cf. Figure A7.10.
Figure A7.10 Barriers related to the pricing and reimbursement system
Answer Options Rati ng Average
Reim bursem ent system does not reward the developm ent and
introduction of innovative m edical devices3,2
The Foreign Average Price rule does not reflect the value of
advanced m edical devices3,1
Functional categories do not reflect differences am ong products 2,6
Other issues related to the pricing and reim bursem ent system 2,5
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics inventory of Japanese NTMs.
FAP has a disproportionate impact on importer s to Japan. For instance the system ignores
the higher cost of bringing advanced techno logies to the market in Japan from foreign
countries and thereby weakens competition for companies from foreign countries.
Barriers related to the distribution channels
Barriers related to distribution channels are al so relatively important, which is reflected by
the fact that almost 80 percent of the resp onding medical device companies have estab-
lished their own distribution facilities in Japan. In light of this, the EU has initiated the EU
200
Gateway Programme which, among others, has as an objective to facilitate contact between
EU and Japanese actors in health care, cf. Box A7.2.
Box A7.2 The EU Gateway Programme
The EU Gateway Programme is managed by the Euro pean Commission and helps EU companies to succeed
in Japan and Korea. The Programme focuses on provid ing assistance in technological sectors with a high
market potential as well as in the design sectors. Health care and medical technologies is one of the targeted
sectors. The programme offers severa l benefits for EU companies that are directed towards overcoming the
entry barriers to the Japanese and Korean market. In lig ht of the importance of having a local distributor in
the Japanese market, the Programme assists EU compan ies in developing a collabora tive platform with Japa-
nese and Korean companies, and facilitates meetings with potential Japanese and Korean business partners.
Source: For more information, please consult www.eu-gateway.eu.
Japan’s complex distribution system makes it difficult for the industry to remain competi-
tive. The system is characterised by various distribution layers employing numerous inter-
mediary agents between manufacturers and end users, cf. Figure A7.11. More than 80 per-
cent of foreign or domestic manufacturers’ medical device sales are filtered through a se-
ries of regional agents (who often serve rura l areas), specialist dealers (who possess highly
technical training, such as for cardiac-related medical devices), intermediary dealers (whose
purpose and business dealings are ill-defined), an d/or hospital-linked dealers (who directly
service hospitals by monitoring daily inventor y records and matching hospital needs with
other dealer offerings). Additionally, foreig n manufacturers usually also sell through Ja-
pan’s import distributors, who are considered the most expensive intermediary dealers by
Japanese industry analysts interviewed.
Figure A7.11 Japan’s distribution system for medical devices
Source: Japan External Trade Organisation; and industry an alysts, interviews by Commission staff, Japan, July 31–
August 9, 2006. See www.usitc.gov/pu blications/docs/pubs/332/pub3909.pdf.
Japan’s larger number of intermediary agents along typical supply routes is a key difference
in its distribution system comp ared with the distribution sy stems in other advanced coun-
201
tries. An in-depth report by the USITC from 2007 suggested that Japan’s relatively com-
plex distribution system has in creased supply inefficiencies and prices, since product train-
ing and price mark-ups are added at each le vel of the distribution chain (USITC, 2007).
Public procurement issues
The total value of public procurement in medical device is relatively high compared to
other sectors of interest, and the foreign share is more than 40 per cent cf. Table A7.0.1.
Table A7.0.1 Procurement by product and by origin, 2002 and 2004
2002 2004
Product Total
value Foreign
share Total
value Foreign
share
Products from agriculture, and from agricultural and food
processing industries 0.9 0 1.9 49.5
Medicinal and pharmaceutical products 288.5 30.7 315.2 31.1
Road vehicles 325.2 0.8 279.2 0.3 Medical, dental, surgical, and veterinary equipment 536.5 42.4 333 41.1
Total in all sectors 6,874.1 17.1 6,189.9 13.1
Note: Numbers from the selected industries have been extracted from Table III.3 in WTO (2007). Numbers
are in 100 million Yen and percent).
Source: WTO (2007).
The survey data also confirm that public pr ocurement rules do not seriously limit Euro-
pean producers’ engagement in public proc urement in medical device. The most impor-
tant issue listed is the complex legal framewor k for public procurement, cf. Figure A7.12.
Figure A7.12 Barriers related to public procurement
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Complex legal framework (e.g. company registration)
Lack of English versions of tenders
Lack of single point tender database
Length of evaluation process prior to tendering
Other factors related to public procurementWeak im plem entation of regulation
2,1 12345
2,6 12345
1,9 12345
2,0 12345
2,1 12345
1,2 12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
A7.4 Potential solutions
There are many way for the Japanese government to reduce the device lag. One way to re-
duce the barriers related to the long and cumbersome product approval process is to
shorten the medical device certification process. This could be done by accepting clinical
trial data produced in the EU and by harm onising its GCP guidance with international
202
standards. In this way, it would ensure that products certified in one market would be
automatically accepted in the other market.
The use of international standards is listed by European medical device producers as both
the preferred and the minimum required action to reduce barriers related to standards as
well as conformity assessment requirements.
Supplier’s Declaration of Conformity
(SDoC) is another tool av ailable for simplifying the
conformity assessment process and which also features prominently in discussions on
NTMs. Under SDoC the supplier himself (this can be the manufacturer, distributor, im-porter, assembler, etc) provides written assura nce of conformity to all required Japanese
technical regulations of a market. Allowing th e supplier himself to declare compliance of a
product removes the regulatory need for obta ining certification from a recognised third
party, usually located in the export market. Ma nufacturers have described SDoC as saving
costs (e.g., certification fees) as well as valuable time.
SDoC was introduced for medical devices (low-risk Class I) in the EU in 1995.
33 which
gives the possibility in Europe to market Cla ss I MD without involving a notified body in
the conformity assessment. This system has b oosted the intra-EU trade intensity of medical
device by 35 percent and has also had a positive impact on trade with other OECD coun-
tries although the effect is less pronounces (around 20 percent). Adopting the EU SDoC is
therefore likely to boost trade in medical devi ce even further. Since the Japanese authori-
ties have already opened up for certification by third party certification institutions for cer-
tain medical devices, adopting the EU SDoC will not require deep changes to the Japanese
system. It is worth mentioning that an EU-Jap an SDoC will at the same time give Japanese
medical device companies a competitive advant age compared to other exporters in the EU
market.
The Japanese authorities are already putting se rious effort into reducing the barriers re-
lated to conformity assessment procedures, cf. Box A7.3.
Box A7.3 Efforts to reduce barriers related to conformity assessment procedures
The New 5 Yearly Clinical Trial Activation Plan , developed jointly by the Ministry of Education, Culture,
Sports, Science and Technology (MEXT) and MHLW , has been implemented since 2007. The purpose of the
plan is to secure timely patient access to new medici ne as well as to keep the uptake level of new medical
technologies through improving clinical trial infrastructure in Japan.
The five-yearly plan lays down the five essential challenges
1. Establishment of Core Centre s of Excellence (CCE) and Clinical Trial Centres (CTC)
2. Human resource development
3. Education and encouragement to volunteers
4. Trial efficiency improvement a nd reduction of sponsor’s burden
5. Appropriate regulation and human subject protection.
33 See Fliess, Gonzales and Schonfeld (2008) for detailed information about the functioning of the EU SDoC in
medical devices.
203
Also, the MHLW, MEXT and the Ministry of Econo my, Trade and Industry (METI) have adopted a 5-Year
Strategy for Creating Innovative Drugs and Medical Devices to support the entire process from research
through to practice. The overall goal of this strategy is to boost the pharmaceutical/medical device industry to
become the driving force of Japan' s growth and swiftly provide the Ja panese population with access to the
best pharmaceuticals/medical devices in the world.
One important objective of the strategy is a drug pricin g and medical fee system that allows for the optimal
assessment of innovative products as well as the latest domestic/overseas therapies while maintaining the bal-
ance with the healthcare insu rance system. The plan also involves a re view of reimbursement pricing system.
Furthermore, to cope with patients’ needs for advan ced medical services, an advanced medical care assess-
ment system was established in April 2008. In this system advanced medical t echnologies using pharmaceuti-
cals or medical devices that are yet to be approved under the Pharmaceutical Affairs Law can be combined
with insurance provided that they meet certain requirements.
Advanced medical care research facilities have also been selected in establishing “s pecial zones for advanced
medical care development” for promoting the developm ent of state-of-the-art re generative medicine, pharma-
ceuticals, and medical devices in parallel consultations between the MHLW who controls the research fund
and the independent administrative organisation of the PMDA.
Source: MHLW (2007, 2008).
Also, Japan participates in the Global Harm onisation Task Force (GHTF), cf. Box A7.4.
If effective, the GHTF has the potential to convey important impacts on European medical
device companies’ export opportunities in th e Japanese market since its primary purposes
of minimising regulatory barriers related to safety, facilitating trade and improving access to
new medical devices are very much in line with the worries expressed by EU medical de-
vice managers.
Box A7.4 Global Harmonisation Task Force
The Global Harmonisation Task Force (GHTF) is a vol untary effort established in 1993 by government and
medical device industry officials of Australia, Canada, Japan, the EU and the US. The primary purpose of the
GHTF is to harmonise medical device standards to mi nimise regulatory barriers related to the safety, per-
formance, and quality of medical devices and equipment; facilitate international trade; and improve access to
new medical technologies.
The work of the GHTF is accomplis hed principally through publicati on and dissemination of harmonised
guidance documents on basic regulatory practices, which are developed by four different GHTF study groups.
These documents may then be implemented or adopted by the regulatory authorities of members. The GHTF
also serves as an information exchange forum for count ries in the process of developing medical device regu-
latory systems so they can benefit from the experience of countries with existing systems.
Source: Global Harmonisation Task Force (2008).
However, a qualitative assessment of the task fo rce’s activities over the past 15 years finds
that the GHTF’s most successful achievements have been developing guidance documents,
providing a forum for information exchange and dialogue, and extending training. Fur-
thermore, there is the perception that Foundi ng Member jurisdictions are slow to adopt
GHTF guidance and that there is limited aw areness of the GHTF beyond regulators and
technical experts. There is also an expressed desire for GHTF leadership on policy related
to medical device regulation, especially on issues arising from emerging technologies.
A7.5 Quantifying impacts on trade
The identified barriers in Japan have severa l negative impacts on European exporters:
204
1. Higher development costs: The “Japan only” requirem ents in the regulation
(mainly related to the need for additional clinical tests) increases the development
costs, and additional R&D shall be carried out at the conception and develop-ment phase of the product life cycle.
2. High approval costs : The approval process in itself is time consuming and costly.
Approval of medical devices typically takes 18 to 36 months longer than in the EU, and the process requires mo re manpower than in the EU.
3. Delayed sales revenues: Sales revenues from new innovations are delayed and
thus the net present value of investments made in research and development is depreciated because of the lengthy approval process in Japan (the device lag).
4. Higher production costs : The delay in market entry into Japan also increases the
production costs because, by the time the device is approved for sale in Japan, the European production lines have changes to produce the next generation medical
devices. The device lag in Japan, for some unexplained reason, corresponds al-
most exactly to the length of a product improvement cycle. Th erefore, European
exporters often have to keep an old produc tion line running specifically to Japan.
This increases the production costs becaus e certain economies of scale in produc-
tion cannot be achieved.
5. Higher border and distribution costs: The advance payment system makes border
procedures costly for European exporters. Also, a lack of transparency and in-
formation sharing when border requiremen ts are changed makes export to Japan
more uncertain. Finally, since more than 80 percent of the responding medical
companies have established their own distri bution facilities in Japan, this means
that European exporters miss out on potent ial economies of scale in distribution.
6. Fewer product varieties: European exporters market fewer product varieties on
the Japanese market as result of the leng thy approval procedures. This restrict the
European exporters from achieving econom ies of scope for example in the sales
and distribution system (e.g. because th e same number of sales staff can sell
more, if more products were approved for sale in Japan, or because of synergies
for company marketing and branding can be achieved).
More firms are affected by standards and tech nical regulations than by conformity assess-
ment costs. Standards and technical regulations mainly affect costs of shipment and costs of
production, whereas conformity assessment procedures impact mainly on costs of devel-
opment, cf. Figure A7.13.
205
Figure A7.13 How various barriers affect costs of EU medical device export to Japan
40%
40%
30%
50%
20%
20%
30%
10 %0% 20% 40% 60%
Do standards and technical regulations affect your
cost s of shipment ?
Do standards and technical regulations affect your
costs of production?
Do standards and technical regulations affect your
cost s of development ?
Do standards and technical regulations affect your
other direct costs?
Do conformity assessment procedures affect your
cost s of shipment ?
Do conformity assessment procedures affect your
costs of production?
Do conformity assessment procedures affect your
cost s of development ?
Do conformity assessment procedures affect your
other direct costs? Percent 'Yes'
Note: Many of the respondents have answered “I don’t know” to this question.
Source: Copenhagen Economics, Ques tionnaire to managers of European medical device firms in Japan.
As a result, European exporters are not only selling less of each of the approved products
at a higher cost, they also market fewer produc t varieties on the Japanese market as result
of the lengthy approval procedures. Seven ou t of ten respondents say that their product
range on the Japanese market is smaller or somewhat smaller than in other markets. The
reason is that “it is too costly or too difficult export a large share of products to Japan given
the existing barriers in Japan”. This result is confirmed by a US Chamber of Commerce study comparing the availability of medical devices in the EU and US to the situation in Ja-
pan. This shows that there are more than 40 percent fewer medical devices available in Ja-
pan compared to in the EU and the US (ACCJ, 2008).
For the Japanese consumers of medical devices the result is higher prices and fewer prod-
ucts to choose from. For the European export ers, the implication is less sales and higher
costs.
Other economists have also noted the impact of regulatory decisions on the amount and cost of innovation for both firms and consum ers. For example, differences in regulatory
decision times directly affect the time to ma rket, which, in turn, affects the return on in-
vestment in product development.
206
Figure A7.14 Implications of slow and costly approval in Japan
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Product launch JapanProduct launch EU”Device lag”
Product development
nAdditional
development costsoApproval
costspDelayed
sales revenues due to time lag
qAdditional production costs
rAdditional border and
distribution costs
40 percent fewer
product variants put on the Japanese market
At 30 percent
higher costs
Source: Copenhagen Economics.
Based on the gravity results we get a TCE meas ure of 29.4 percent in a scenario where the
Japanese level of restrictiveness in the medical device sector reaches a level comparable to
that of the EU. The quantification of barriers is confirmed by the responses from EU ex-
porters of medical device, cf. Table A7.2. The findings in the previous sections clearly
show that the main barriers to the Japanese medical device market are related to the prod-
uct approval process as well as the pricing re imbursement system. We do not have quanti-
tative data on the latter.
Table A7.2 Quantification of barriers
Cost element Low estimate High estimate
Higher production costs 5% 7%
Higher development costs 10% 15%
CA costs 7% 10%
Border costs 2% 3%
Depreciation of sales due to delay 6% 11%
Total cost estimate 30% 46%
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
Costs related to conformity assessment requir ements increase costs by 7 to 10 percent.
These numbers are estimated on the basis of responses from the medical device sector.
207
Based on calculations of the decrease in net present value of the sales revenues resulting
from the two-year delay in product approval we assess the delay costs as being equivalent to
6 to 11 percent of their total export value.
In addition, we estimate that standards and technical regulations cause additional produc-
tion costs (e.g. post-sterilisation aeration) an d additional development costs (e.g. repetition
of processes) of 10 to 15 percent of the total export value. Border procedures are assessed
to have a minor impact of around 2 to 3 pe rcent of the export value. The impact of con-
formity assessment procedures on shipment co sts, costs of production and costs of devel-
opment is negligible. In sum, the barrier estimate is between 30 percent and 46 percent
based on the business survey responses.
Not all of this barrier can necessarily be re moved, Table A7.3. According to the responses
from the managers in Japan, costs correspondin g to 5 to 8 percent of the value of sales in
Japan can be avoided by addressing the reg ulatory environment, and costs corresponding
to around 4 percent of value of sales can reduced by improving the conformity assessment procedures. This indicates a barrier reduction potential of 9 to 12 percent of the value of
sales if both are addressed.
Table A7.3 Reduction potential
Question 4.8 Question 4.9 Question 6.8 Question 6.9
By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated?
Answer options Response percent Response percent Response percent Response percent
0- 1% 25% 25% 22% 33%
1% – 5% 13% 25% 56% 44%
5% – 10% 25% 38% 11% 11%
10% – 15% 25% 13% 0% 0%
15% – 20% 0% 0% 0% 11%
More than 20% 13% 0% 11% 0%
Average 8% 5% 4% 4%
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
In sum, these estimates inform us that about 12 percentage points of the 30 percent barrier
costs can be avoided through various action s improving the regulatory environment and
shortening the device lag. If such cost redu ctions were achieved, European exports to Ja-
pan could increase above current export levels.
208
To achieve this kind of reduction will most likely require a multitude of actions. There
does not seem to be one single solution pref erred by a majority of respondents. The pre-
ferred solution to reducing the regulatory burd en is through the use of international stan-
dards (mentioned in 21 percent of the replies) , cf. Figure A7.15. The second most desired
solution is to see harmonisation and conver gence between the EU and Japan regarding
rules and regulations in the sector (mentioned 18 percent). Simplification of the certifica-
tion procedure and speeding up the certificatio n process also gets frequently mentioned.
Introduction of a SDoC is also mentioned by some exporters as their preferred solution.
Review of the pricing and reimbursement system appear as the least frequently mentioned
solution.
Figure A7.15 Quantification of cost reduction potential
18 %12 %
0%5%10 %15 %20%25%30%35%
NTM estimate for EU medical device exports to J apanTrade cost equivalent, TC E
Remaining barrier estimate
Reduction potential
21%18%12%11%11%9%7%5%7%
Contribution to barrier reduction
Other
Review the pricing and
reimbursement systems
Introduce third party certification system
Simplification of certification procedures
Suppliers’ declaration of conformity
Speed up the certification process
Mutual recognition of conformity assessment
procedures
Harmonisation/convergen
ce of rules and regulations
Use of international standards
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to manage rs of European medical device firms in Japan.
A5.6 Results and implications
The potential for increasing exports of European medical device to Japan is large. Japan is
a net importer of medical devices, and demand for medical devices is increasing. However, the process of launching new products on the Japanese market is costly and cumbersome.
First, excessive Japanese standards and regulato ry requirements result in a significant de-
vice lag, and a large number of medical devi ces are not even being submitted for approval
in the Japanese market. Second, the pricing and reimbursement system, and particularly
price controls on STMs, create disincentives fo r introducing new products on the Japanese
market.
Both of these issues are being targeted by the MHLW
New 5 Yearly Clinical Trial Activa-
tion Plan although tangible results are yet to be seen. Also, efforts by the GHTF so far
have not been successful in reducing en try barriers to the Japanese market.
A major factor in explaining the problems relate d to the clinical trials and the slow product
approval process is the discrepancy between international standards and Japanese guidance
209
related to GCP and international QMS. One way to speed up and streamline the medical
device certification process is by accepting clinical trial data produced in the EU and by
harmonising its GCP guidance with internat ional standards. Alternatively, Japan could
adopt the EU SDoC. Likewise, a review of th e Foreign Average Price rule would improve
access to the Japanese market. It is important to notice that neither of these steps will re-
quire changes in the regulatory requirements in terms of safety and efficacy of the devices.
According to managers of European medical device exporters, the cost of NTMs is 30
percent, where barriers related to standards, technical regulations and conformity assess-
ment procedures make up 12 percentage points. In a CGE modelling framework this cost decrease translates into an increase in trade from €2.1 billion to €3.2 billion or by up to 51
percent. By comparison, Fliess, Gonzales an d Schonfeld (2008) find that medical device
import increased by 35, 20 and 79 percent for intra-EU, extra OECD and extra non-OECD countries, respectively, by introd ucing an SDoC for medical devices.
210
Japan’s food market ranks second in the worl d. Japan’s food retail market is worth about
€240 billion, and the food processing industry is estimated to have a value of about €19 bil-
lion. Japan is a major importer of food, and its self-sufficiency ratio is just below 40 percent
(EBC, 2008). Japan’s import of food from the EU is low compared to world import: the
EU world market share is 21 percent but only 16 percent of Japanese food import comes
from the EU, cf. Figure A8.1.
Figure A8.1 Geographic distribution of Japan’s and the world’s food import, 2005-2006
USA
25%
Ch i n a
18 %
EU
16 %Austra lia
10 %Tha ila nd
7%C anada
5%Ot her
19 %J apan's import
EU
21%
USA
14 %
C anada
9%Ch i n a
9%Australia
7%Brasi l
6%Ot her
34%World import
Note: Numbers are expressed as a percent of Japan’s and the world’s total food import.
Source: FAOSTAT.
On the other hand, the US holds a strong po sition in the Japanese market (25 percent
market share) compared to its world market share of 14 percent. Since Japan is extremely
open to food imports, the challenge for Europ ean food exporters is to gain a market share
that matches its comparative advantage in the global markets rather than opening up the
Japanese market.34 However, Japan maintains high tariffs on a number of food products
that are important for the EU , including meat from swine, wine and cheese (EBC, 2008b).
Also, EU producers have an unfulfilled export po tential of beef (traditionally an important
EU export product) since there is a ban on import of beef from the EU. The ban on US
beef was lifted more than two years ago.
A8.1 Major concerns in the processed food sector
The most important NTMs for EU f ood export to Japan pertain to:
1. Standards and technical requirements
The absence of a common list of perm itted additives and compositional
standards increase costs and hinder economies of scale in production.
Safety standards and strict sanitary re quirements impose cost of compliance
where standards are incompatible.
Packaging and labelling requirements (e.g . re-dating and nutrition labelling)
impose additional work and costs.
34 The large degree of openness in the Japanese food sector is confirmed by our gravity model estimates, where we
find that Japan is actually more op en to food import than the EU. APPENDIX 8: PROCESSED FOODS SECTOR STUDY
211
2. Conformity assessment requirements
Rigorous border inspection and quarantine regulations cause delays at the
port of entry, which reduces reduce sh elf life and imposes costs of storage.
This also means that there is a higher probability of rejection which increases risk.
The Japanese authorities do not accept evaluations made by EU or interna-
tional bodies which imposes duplicat ive costs on European exporters.
3. Regulatory environment increases the co sts and complexity of doing business
Food safety is extremely highly prioritised in Japan which has resulted in a
heavy and non-transparent regulatory system.
4. Burdensome border procedures
General border procedures (e.g. cust oms valuation, customs classification,
customs clearance, rules of origin) and product-specific customs procedures
(e.g. health inspections) impose co sts and delays on food exporters.
Changing requirements and procedures make the Japanese business envi-
ronment more uncertain.
The overall impact is that there are significant threshold effects in the access to the Japa-
nese market. Entry barriers are high but once these barriers have been tackled to the satis-
faction of the Japanese authorities, there is a great potential to export significant volumes to
the Japanese market. Such threshold effects mi ght provide an explanation of the strong po-
sition of US companies that have a long er history of exporting food to Japan.
A8.2 NTMs to the Japanese market
In the processed food sector, 80 percent of th e responding managers consider Japan as be-
ing more or much more difficult to access than other markets, cf. Figure A8.2.
212
Figure A8.2 Perceived difficulty of exporting processed food to Japan
0,0% 0,0%20,0%60,0%
20,0%
0,0%10 , 0 %20,0%30,0%40,0%50,0%60,0%70,0%
Much less difficult
(score=1)Somewhat less
difficult (score=2)Equally difficult
(score=3)Somewhat more
difficult (score=4)Much more
difficult (score=5)How do you f i nd market access f or export t o Japan, compared t o export i ng t o other
count ri es?
Note: Average score = 4.0.
Source: Copenhagen Economics Questionnaire to manage rs of European processed food firms in Japan.
There is almost uniform agreement among th e responding EU exporters that the main
NTMs to the Japanese market are related to standards and conformity assessment re-
quirements, cf. Figure A8.3. Such restrictions are typically laid down for sanitary require-
ments, permitted additives, maximum residue levels for veterinary drugs, general food la-
belling requirements and nutrition labelling requirements.
213
Figure A8.3 The importance of non-tariff measures
Average restrictiveness score
(N = 12)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Regulatory environment
(e.g. costs and complexity of doing business)
Price control measures
(e.g. anti-dumping measures, countervailing measures)
Quantity control measures
(e.g. quotas, prohibitions)
Government assistance issues
(e.g. subsidies, export refunds)
Public procurement issues
(e.g. legal framework, contract conditions)
Distribution channels
(e.g. seaport and airport regulations, secondary dealers)
Lack of intellectual property rights
(e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures
(e.g. customs procedures)
Standards and conformity assessment requirements
(e.g. technical regulations, certification)3,6 12345
12345
2,4 12345
1,6 12345
1,212345
2,6 12345
1,8 12345
1,012345
3,4 12345
3,8 12345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Qu estionnaire to managers of EU processed food firms in Japan.
Barriers related to standards and technical regulations
The definition of standards and technical re quirements follows th e WTO definition (see
more details in Chapter 1). The barriers related to standards and technical regulations are listed in Figure A8.4.
214
Figure A8.4 Barriers related to standards and technical regulations
Permitted additives
Organic product standards
Compositional standards
Sanitary requirements
Safety and health standards
Nutrition labelling requirements
"Best before" labelling requirements
Marking
Packaging1,4 123452,4 123453,8 12345
2,8 12345
3,2 12345
2,4 12345
2,6 12345
2,6 12345
3,0 12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European processed food firms in Japan.
The most important barriers related to standa rds and technical requirements are permitted
additives and compositional standards. In this context, one respondent points out that
Loss of economies of scale as cust omised recipes have to be devel-
oped only for the Japanese market
There has been a growing concern and distrust of food safety among the Japanese public,
triggered by various problems involving the occurrence of BSE (“mad cow disease”) in
2001. Therefore, the Government of Japan has enacted the Food Safety Basic Law, a comprehensive law to ensure food safety for the purpose of protecting the health of the
public, as well as developing related laws, cf. Box A8.1.
215
Box A8.1 Legal framework for food imports to Japan
The legal framework for food imports to Japan is defined by the Ministry of Health and Welfare. The work is
carried out under the Food Safety Basic Law (enacted in May 2003) and related laws including the Food
Sanitation Law, the Abattoir Law, and the Poultry Slaughtering Business Control and Poultry Inspection Law.
In addition, other related laws incl ude the Law of Temporary Measures for Enhancing the Control Method of
the Food Production Process and the Health Promotion Law.
The Food Sanitation Law lays down general sanitary re quirements as well as specific requirements for par-
ticular food products, including methods of production, permitted food ad ditives, compositional standards,
packaging etc.
Sanitation-controlled manufacturing processes are la in down under the Food Sanitation Act for many food
products. All food processing plants are required to be li censed at the prefecture level. Before a license is
granted, the plant is inspected to ensure it complies with the requirements of the Food Sanitation Law and the
Plant Protection Act.
Detailed compositional standards are laid down for indi vidual dairy products coveri ng chemical composition,
permitted additives, moisture content, microbiological quality etc. There are also detailed standards for per-
mitted packaging and food labelling. For some food produc ts, there are certain quarantine regulations that
must be complied with, cf. the Quarantine Act.
Source: OECD (1999), An Assessment of the Costs for In ternational Trade in Meeting Regulatory Requirements,
updated documents can be found at www. jetro.go.jp/en/reports/regulations/.
Food safety is extremely highly prioritised in Japan. Strict sanitary requirements that cover
methods of production, end-product quality, etc., can impose cost of compliance to EU
exporters where Japanese and EU standard s are incompatible. In December 2002, the
MHLW prepared a list of 46 food additives that should be approved in Japan. In 2008, 20
out of the 46 additive still require approval (EBC, 2008b).
In the wake of the development of these laws , Japan has introduced a risk analysis ap-
proach to food safety work, cf . Figure A8.5. The approach is to scientifically assess risks
(expressed as the probability and degree of adverse health effects) and develop necessary
measures based on the risk assessment.35 This process is costly and, since even small lots
need certification, the standards effectively re duce supply and variety of supply. The over-
all impact is that there are significant threshol d effects in the access to the Japanese market.
Entry barriers are high but once these barriers have been overcome, there is a great poten-
tial to export significant volum es to the Japanese market.
35 The risk analysis consists of three components: risk assessment-assess risk scientifically; risk management-
implement necessary measures based on risk assessme nt; and risk communication-exchange information and
opinions among related people representing the pe ople including public, government, and academia.
216
Figure A8.5 The role of the Food Safety Commission
Source: The Food Safety Commission.
Once the product has been imported into Japan it can only be legally offered for sale if it
complies with labelling, packaging and other requirements. Japanese regulations require all
imported food to be re-date-coded which imposes additional work and costs. Also, one re-spondent states that
Simply the use of Euro pallets is not common in Japan. Each de-
livery has to be packed again by hand
Together these requirements prevent producers from benefiting from economies of scale.
Since many food products cannot be stored ov er long time periods, these requirements
pose an additional threshold ba rrier to the Japanese market.
Barriers related to conformity assessment requirements
The definition of conformity assessment re quirements follows the WTO definition (see
more details in Chapter 1). The barriers relate d to conformity assessment requirements are
listed in Figure A8.6.
217
Figure A8.6 Barriers related to conformity assessment procedures
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictiv e
Acceptance of evaluations by EU or international bodies
Organic certification
Quarantine regulations
Achieving licences at the prefecture level
Achieving licences for wholesale sales
Achieving licences for ret ail sales
Delays in inspection
2,8 123453,0 12345
2,3 12345
2,5 12345
1,012345
1,012345
12345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European processed food firms in Japan.
Barriers related to conformity assessment proc edures do not receive a high score in terms
of the restrictiveness on exports to Japan. The lack of acceptance of evaluations by EU or
international bodies scores the highest. Also, there is an issue regarding delays in inspec-
tion and quarantine regulations.
Barriers related to border procedures
The system of border procedures is the third most limiting factor for EU export to Japan.
General customs procedures (e.g. customs valua tion, customs classification, customs clear-
ance, rules of origin) receive the highest sc ore followed by customs procedures that are
specific for the particular export product of the respondent (e.g. health inspections), cf.
Figure A8.7. Also, lack of transparency an d information sharing when requirements and
procedures are changed imposes diffi culties for European exporters.
218
Figure A8.7 Barriers related to border procedures
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Para-tariff measures
(e.g. customs surchar ges, additional char ges,
internal taxes and charges on imports)
Financial measures
(e.g. advance payments, multiple exchange rates)
Automatic licensing measures
(e.g. automatic licence, import monitoring)
Monopolistic measures
(e.g. single channel for imports, compulsory na-
tional services)
General customs procedures
(e.g. customs valuation, customs classification,
customs clearance, rules of origin)
Customs procedures that are specific for your
product
(e.g. health in-spections)
Lack of transparency and information sharin g
when requirements and procedures are changed
Other factors related to border procedures2,8 123451,6 12345
1,4 12345
1,4 12345
1,6 12345
3,2 12345
3,2 12345
1,012345
Note: The figure shows the average restri ctiveness for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European processed food firms in Japan.
The border procedures also im pose logistic challenges for European food exporters. One
responding manager writes that
One extra part time employee must be used to deal with specific
Japanese logistics and quality issues
A8.3 Potential solutions
There are several aspects that need to be co nsidered when looking for ways to reduce bar-
riers related to standards and technical regula tions in the processed food sector. The most
important issue raised is the use of additives in processed foods, where progress in approv-
ing already agreed upon additi ves, extending the list of addi tives and harmonising the usage
level of approved additives is needed.
Managers in the food sector point to the us e of international standards and the agreement
on a common positive/negative list of additives as the most realistic ways to reduce barriers
related to standards. This would have a potent ial to increase EU export of food on the in-
tensive margin (increasing the import of food products that are already being sold at the
Japanese market) since costs per unit of export will be reduced. Moreover, there is a large
potential to increase EU export on the extens ive margin (introducing new food products
on the Japanese market) since entry barriers to the Japanese market will be reduced.
The European Commission has raised the issue of regulatory obstacles in the Sanitary and
Phytosanitary (SPS) area in bilateral negotiatio ns with Japan. In the Japan-EU Regulatory
Reform Dialogue as well as in the WTO SP S meetings in Geneva, the European Commis-
sion especially points to those obstacles where Japan does not follow international stan-
dards (in particular food additive re strictions and ban on EU beef).
219
The strict Japanese regulation in the food sect or is based on safety issues. However, it is
important to notice that many of the requirements related to labelling and packaging stan-
dards can easily be harmonised to EU or inte rnational standards without compromising on
food safety.
The Japan-EU Regulatory Reform Dialogue a ddresses improved market access for organic
agricultural products. This issue is moving toward resolution by mutually recognising the
equivalence between the organic standard and the EU organic product certification stan-
dard. Market penetration of organic food is very low in Japan compared to other OECD
countries. Leading EU countries has organic shares of 3-5 percent of packaged food,
whereas in Japan it is only 0.5 percent.36 There is therefore a large export potential on the
extensive margin (introducing new organic food products on the Japanese market).
A8.4 Quantifying impacts on trade
The identified barriers in Japan have severa l negative impacts on European exporters:
1. Higher production costs : The lack of a common list of permitted additives in-
creases the production costs since scale e ffects are prohibited. High costs of com-
pliance with safety and sanitary requir ements also increase production costs.
2. Higher shipment costs : The re-dating of products and nutritional requirements
increase the shipment costs (both in terms of money and time) and makes it im-possible to sell products intended for other of destinations at the Japanese mar-
ket. Also, the logist ic costs are higher.
3. Conformity assessment costs : Duplicative costs on European exporters because
Japanese authorities do not accept evaluations made by EU or international bod-
ies.
4. Border costs : Delays at the port of entry (e.g. due to health inspections) reduces
reduce shelf life and imposes costs of storage.
5. Costs of uncertainty : The non-transparent and unpredictable legal system in-
creases the uncertainty that EU expo rters face in the Japanese market.
More firms are affected by standards and tech nical regulations than by conformity assess-
ment costs. 60 percent of the respondents repo rt that standards and technical regulations
affect their costs of shipment and costs of deve lopment. In addition, half of the responding
managers state that conformity assessment proced ures affect their costs of development, cf.
Figure A8.8.
Once we take the threshold effects of expandin g trade on the extensive margin in addition
to the intensive margin we would expect that th is potential will be more than realised if the
36 Information provided by respondents of the business survey for the food sector.
220
Japanese government used international standards for additives and usage levels. Solving
the labelling issue will also make a contribution.
Figure A8.8 How various barriers affect costs of EU food exporters to Japan
60%
60%
40%
60%
25%
25%
50%
25%0% 20% 40% 60% 80%
Do standards and technical regulations affect your
cost s of shipment ?
Do standards and technical regulations affect your
costs of production?
Do standards and technical regulations affect your
cost s of development ?
Do standards and technical regulations affect your
other direct costs?
Do conformity assessment procedures affect your
cost s of shipment ?
Do conformity assessment procedures affect your
costs of production?
Do conformity assessment procedures affect your
cost s of development ?
Do conformity assessment procedures affect your
other direct costs? Percent 'Yes'
Note: Many of the respondents have answered “I don’t know” to this question.
Source: Copenhagen Economics, Ques tionnaire to managers of European processed food firms in Japan.
The threshold effects described above ar e also confirmed by the fact that all responding
managers report that their product range is mo re limited in the Japanese markets than in
their other export markets. Border procedures as well as standards and conformity assess-
ment procedures are listed as the main causes of the reduced variety of food products ex-
ported to the Japanese market.
For the Japanese food consumers the result is higher prices and fewer products to choose
from. For the European exporters, the impl ication is less sales and higher costs.
The gravity model estimations confirm the noti on that Japan is extremely open to food
import. The Japanese dummy variable is sm aller than the European dummy variable,
which suggests that there is less missing trad e in Japan compared to the EU. As a conse-
quence we do not obtain a TCE from the gr avity model using dummy variables. However,
the gravity model based using the NTM index re ports a striking TCE of 118.5 percent. Al-
though we expect that figure is greatly overesti mates it nonetheless reflects that the there is
a large unfulfilled export potential in the Japanese market.
221
Instead of relying on the gravity model estima tes we quantify the costs of NTMs by using
the information obtained from EU exporter s of processed foods, cf. Table A8.1.
Table A8.1 Quantification of barriers
Cost element Low estimate High estimate
Higher production costs 5% 10%
Higher shipment costs 5% 15%
Conformity assessment costs 10% 15% Border costs 3% 25% Costs of uncertainty 2% 5% Total cost estimate 25% 70%
Source: Copenhagen Economics Questionnaire to manage rs of European processed food firms in Japan.
The higher costs of adopting production to Japanese standards and the foregone scale ef-
fects are estimated to lie between 5 and 10 perc ent. The shipment costs of 5 to 15 percent
are mainly due to Japanese labelling and packing requirements. Costs related to conformity
assessment requirements increase costs by 10 to 15 percent and mainly cover costs of extra
quality assurance. Delays at the border cause costs of storage and foregone sales. This is
not a problem for all types of products but when delays take place, the costs are extremely
high since such food products are often high ly time-sensitive goods (Djankov, Freund and
Pham, 2006). The costs of uncertainty are diffic ult to quantify and we therefore provide
very conservative estimates of these costs.
In sum, the barrier estimate is between 25 percent and 70 percent based on business sur-
vey responses. We take the conservative a pproach and use a TCE of 25 percent in the
CGE simulations.
Not all of this barrier can necessarily be re moved. According to the responses from the
managers in Japan, costs corresponding to 5 to 7 percent of the value of sales in Japan can
be avoided by addressing the regulatory en vironment and costs corresponding to 1 to 2
percent of value of sales can reduced by im proving the conformity assessment procedures,
cf. Table A8.2.
222
Table A8.2 Reduction potential
Question 4.8 Question 4.9 Question 6.8 Question 6.9
By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated?
Answer options Response percent Response percent Response percent Response percent
0- 1% 0% 0% 33% 67%
1% – 5% 0% 50% 67% 33%
5% – 10% 100% 50% 0% 0%
10% – 15% 0% 0% 0% 0%
15% – 20% 0% 0% 0% 0%
More than 20% 0% 0% 0% 0%
Average 7% 5% 2% 1%
Note: Data is based on responses to question 6.3, 6.4, 8.3 and 8.4.
Source: Copenhagen Economics Questionnaire to manage rs of European processed food firms in Japan.
According to these estimates, about 9 percenta ge points of the 25 percent barrier costs can
be avoided through various actions aimed at re ducing NTMs related to standards, techni-
cal requirements and conformity assessment. To achieve this kind of reduction will most likely require a multitude of actions, cf. Figu re A8.9. 30 percent of the respondents find
that the introduction of international standards will be an effective tool to reduce barriers
in the Japanese food sector. Also, a common posi tive and negative list of additives is on the
European exporters’ wish list. Harmonisation/ convergence of rules and regulations is listed
as an alternative.
223
Figure A8.9 Cost reduction potential in the processed food sector
16 %9%
0%5%10 %15 %20%25%30%
NTM estimate for EU processed foods exports to J apanTrade cost equivalent, TC E
Remaining barrier
Reduction potential
30%23%18 %18 %5%5%3%
C ontribution to barrier reduction
Ot h er
Review the pricing and
reimbursement systems
S implific a tion of certification procedures
Harmonisation/ convergence of rules and regulations
Mutual recognition of conformity assessment procedures
C ommon positive and negative list of additives
Use of int ernat ional st andards
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to manage rs of European processe d food firms in Japan.
A8.5 Results and implications
Japan is a major importer of food but the Euro pean import penetration is low compared to
its world market share. One reason is that Japa n maintains high tariffs on a number of food
products that are important for the EU. Moreov er, food safety is extremely highly priori-
tised in Japan which has resulted in a heavy and non-transparent regulatory system. The
overall impact of Japan-specific standards an d technical requirements as well as burden-
some border procedures is that there are si gnificant threshold to the Japanese market.
The most important issues raised by European exporters relate to the use of additives in
processed foods. Managers in the processed f ood sector point to the use of international
standards and the agreement on a common posi tive/negative list of additives as the most
realistic ways to reduce barriers related to standards. This would have a potential to in-crease EU export of food on both the intensiv e and the extensive margin. It is important to
notice that many of the requirements related to labelling and packaging standards can eas-
ily be harmonised to EU or international st andards without compromi sing on food safety.
According to managers of European processe d foods exporters, the Japanese NTMs trans-
late into an additional cost of 25 percent ou t of which 9 percentage points can be removed
by targeting the most important barriers relate d to standards, technical regulations and con-
formity assessment procedures. In a CGE mo delling framework, reducing Japanese NTMs
result in an increase in trade from €4.3 billion a year to €5.3 billion a year. If tariff are also
reduced, the increase would be to €10.2 b illion a year, or by up to 137 percent.
224
Europe is the world's largest motor vehicle producer. Of the 71 million motor vehicles
produced in the world in 2008, almost 26 perc ent were produced in the EU, compared to
18 percent produced in the NAFTA and 16 percent in Japan.37 Output from the EU motor
vehicle producers dropped 7 percent in 2008 compared to 2007 and dropped further by
35 percent in the first quarter of 2009 compared to the previous quarter.38
The domestic market for motor vehicles in Japan is approximately €280 billion based on
2004 GTAP data.39 This makes it the third largest market in the world after the EU (€900
billion) and the US (€590 billion). China comes in fourth having a domestic market worth
of €120 billion. Japan imported around 200.000 units in 2008, down from a level of ap-
proximately 250.000 units on average over the pr evious ten years. The import penetration
in Japan is remarkably low, especially given th e tariff-free import of cars to Japan. Only
seven percent of the domestic market (passeng er cars excluding Kei cars) was served by
imports, compared to an import penetration of 28 percent in the EU (defined as EU15
and EFTA) and 53 percent in the US.40
EU producers exported €5 billion worth of moto r vehicles to Japan in 2008, down from €6
billion in 2007. European car producers make up almost 95 percent of the entire imported
car market in Japan. Most of the imported cars are in the upper 10 percentile price seg-
ment of the market (cars priced above 3.5 million yen or approximately €33.000). The im-
port penetration in this segment is about 50 pe rcent and is almost entirely European cars.
41
According to estimates provided by European motor vehicle exporters in Japan, NTMs in
Japan pose a barrier for export and add a cost of around 10 percent of the exported value
of European motor vehicles sold in Japan.
A9.1 Major concerns in the motor vehicle sector
The most important NTMs facing EU motor ve hicle manufacturers in Japan pertain to a
unique regulatory and certification environment regarding:
1. Emissions standards
2. Noise standards
3. Safety standards
Common of these elements is the lack of ha rmonisation between the Japanese legislation
and EU or UN-ECE regulations. Such differe nces cause delays and add extra development
and production costs for European exporters when launching new vehicles to the Japanese
market. This put the European automobile manu facturers at a disadvantage, both in terms
37 See production statistics from the International Orga nisation of Motor Vehicle Ma nufacturers at www.oica.net.
38 European Automobile Manufactures Association (2009).
39 GTAP version 8. The GTAP data base uses baseline data from 2004 and projects the data to 2008 according to
estimates from the World Economic Outlook, among others.
40 Numbers are from Europe ACEA, Japan: MLIT, JAIA.
41 Numbers are from Europe ACEA, Japan: MLIT, JAIA. APPENDIX 9: MOTOR VEHICLE SECTOR STUDY
225
of introducing the latest technologies in cars, as well as delivering automobiles at competi-
tive prices compared to domest ic Japanese manufacturers.
Streamlining the certification processes on emissi ons, safety and noise, e.g. adhering to in-
ternational standards where these have not yet been implemented, Japanese users of cars
would have earlier access to better and cheaper automobiles from Eu ropean manufactur-
ers. Since these certifications are not inferior to the Japanese regulations, such harmonisa-
tions will not put the safety of Japanese consumers at risk.
A9.2 NTMs to the Japanese market
Around 70 percent of the motor vehicle managers in our business survey consider Japan as
being more or much more difficult to access than other markets, cf. Figure A9.1.
Figure A9.1 Perceived difficulty of exporting motor vehicles to Japan
0,0%10 , 0 %
0,0%40,0%
30,0%
0,0%5,0%10 , 0 %15, 0 %20,0%25,0%30,0%35,0%40,0%45,0%
Much less difficult
(score=1)Somewhat less
difficult (score=2)E qua lly diffic ult
(score=3)Somewhat more
difficult (score=4)Much more
difficult (score=5)How do you f i nd market access f or export t o Japan, compared t o export i ng t o other
count ri es?
Note: Average score = 4.1.
Source: Copenhagen Economics, Ques tionnaire to managers of European motor vehicles firms in Japan.
Issues related to the regulatory environmen t, standards and conformity assessment proce-
dures are the most important NTMs facing the European motor vehicle firms in Japan, cf.
Figure A9.2. These NTMs will be covered in more details in Section A9.3.
226
Figure A9.2 The importance of non-tariff measures
Average restrictiveness score
(N = 12)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Regulatory environment
(e.g. costs and complexity of doing business)
Price control measures
(e.g. anti-dumping measures, countervailing measures)
Quantity control measures
(e.g. quotas, prohibitions)
Government assistance issues
(e.g. subsidies, export refunds)
Public procurement issues
(e.g. legal framework, contract conditions)
Distribution channels
(e.g. seaport and airport regulations, secondary dealers)
Lack of intellectual property rights
(e.g. copyright, trademark, patents)
Pricing and reimbursement rules
Border procedures
(e.g. customs procedures)
Standards and conformity
assessment requirements
(e.g. technical regulations, certification)
Other non-tariff measures3,5 12345
1,5 12345
2,0 12345
1,4 12345
1,5 12345
1,9 12345
1,4 12345
2,0 12345
1,7 12345
2,5 12345
1,112345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European motor vehicle firms in Japan.
Also, access to the distribution network is diffi cult for European motor vehicle exporters in
Japan, cf. Figure A9.3. In particular, the high costs of establishing sales sites prevent Euro-
pean motor vehicle exporters from settling down in Japan. Zoning laws make it practically impossible to obtain permission to open a ne w service shop in such regions as the Tokyo
metropolitan area, while domestic manufactur ers already have access to operate service
and showroom facilities. The competitive issues related to the Japanese distribution net-work are not directly related to NTMs and th ese issues therefore do not enter the NTMs
reduction scenarios applied in our simulations. In the final model simulations, such im-
pacts are taken into account through the lowering of general wholesale/retail mark-ups.
227
Figure A9.3 Access to the Japanese distribution network
Average restrictiveness score
(N = 12)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
The secondary dealers system
High costs of establishing sales sites
Other issues related to distribution channels2,0 12345
3,5 12345
1,1123 4 5
Source: Copenhagen Economics, Ques tionnaire to managers of European motor vehicle firms in Japan.
Public procurement issues are generally not pe rceived as being very restrictive, but one
European exporter states that
As the assumption is that import ed cars are anyway more expen-
sive than local ones we are – in fact and not by regulation – ex-
cluded from such procurements
A9.3 NTMs related to standards and conformity assessment
Prior to marketing and sales of motor vehicl es, automotive systems and their components
need to undergo type approvals according to the official regulation s of their destination
countries. For the European market, two sy stems for vehicle homologation co-exist:
European Union (EU) directives: Since 1998 the European Whole-Vehicle-Type-
Approval (WVTA) has progressively been replacing the individual national type
approvals of the EU member states. This allows manufacturers to have a vehicle
"type" approved in one member state and th en be able to market the vehicle in all
other member states without further tests.
United Nation Economic Commission for Europe (UN-ECE) regulations: ECE is
an organisational part of the United Na tions. Members are EU member states as
well as many other countries including Ja pan. Thus, testing according to UN-ECE
regulations opens the gate to the worldwide markets because of a broader accep-
tance of approved components.
In Japan, the UN-ECE regulations co-exist in pa rallel with the Japan-specific regulations. In
the motor vehicle sector, NTMs often arise whe n Japanese regulations are different from
EU directives or UN-ECE regulations. NTMs related to standards and technical require-
ments are particularly serious with regard to emission standards, cf. Figure A9.4. Also,
noise and safety standards impose significant costs on European motor vehicle firms in Ja-
pan.
228
Figure A9.4 Barriers related to st andards and technical requirements
Average restrictiveness score
(N = 9)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Emission standards
Exhaust heat standardsSafety standards
Noise standards
Other issues related to standards and technical regulations3,1 12345
1,212345
2,3 123451,8 12345
2,0 12345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Ques tionnaire to managers of European motor vehicle firms in Japan.
Of the barriers related to conformity assessm ent procedures, translation of documentation
is rated as being the most restrictive, cf. Figure A9.5.
Figure A9.5 The most important elements of conformity assessment procedures
Average restrictiveness score
(N = 7)
Not restrictive at al Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Factors related to crash testing
Factors to emission testingSafety certificationLaboratory testing (e.g. noise and quality)
Translation of documentation
Unaligned vehicle certification system2.2 12345
2.5 12345
2.3 12345
2.2 12345
2.2 123452.8 12345
Source: Copenhagen Economics, Ques tionnaire to managers of European motor vehicle firms in Japan.
Most of the remaining factors are related to certification. One responding manager of an
European motor vehicle firm in Japan state that
3 out of 60 total headcount of the Japanese subsidiary are fully oc-
cupied with certification procedures
Overall, we conclude that the barriers enco untered by the European motor vehicle pro-
ducers in Japan are mainly TBTs related to emission, safety and noise standards. We will discuss each of these issues individually underneath.
229
Emissions
According to the Japanese TRIAS, the exhaust regulations require special testing on emis-
sions and durability of exhaust systems. These tests have to be conducted on Japanese gov-
ernment approved facilities and can be very time-intensive. The norms are not different
than in the UN-ECE, but the testing procedures differ and are often unique to Japan. This
causes additional development and producti on costs for European exporters to Japan
(while not for Japanese producers in Europe ). As reported by EU managers in Japan
Japan has unique emission regulati on even for imported vehicles,
that means, unique developmen t work and cost are needed
And
Japan has unique emission regulati on even for imported vehicles,
so as a result, it affects our production cost
One problem related to testing of emi ssion requirements in Japan is the 2009 Exhaust
Emission Regulations on Emission Durability Requirements , especially for Diesel Particu-
late Filters (DPF). The testing and certification process is labour intensive and takes more than one week to conduct. According to industry officials, it would be desirable to establish
streamlined and harmonised procedures for te sting periodic control correction (KI correc-
tion) on those vehicles equipped with DPF.
Another issue relates to the test method on Plug-In Hybrid Electric Vehicles (HEV). In-
dustry sources inform us that Japan is in th e process of adopting a unique testing method
for Plug-In HEVs. The adoption of such testin g method will impede the import of Euro-
pean manufactured Plug-In HEV to Japan. Fr om the view point of EU motor vehicle ex-
porters, and to the extent possible, the te st method for Plug-In HEV should be harmo-
nised globally.
A third example of emission-rel ated problems relate to a vertical content-of-norm TBT
which is related to the new test driving cycle for light duty vehicles (WLTP). Japan uses a
unique test cycle to measure emissions and fuel efficiency for such vehicles. EU car manu-
factures use a different test cycle, and EU pr oducers optimise the emissions and fuel effi-
ciency performance of their vehicles in accord ance with the EU test cycle. European pro-
duced vehicles therefore do not perform opti mally under the Japanese test cycle. Conse-
quently, they do not qualify for tax incentiv es in Japan based on environmental perform-
ance.
In this case, the Japanese norm does not only cause additional costs for the testing, but it
also adversely affects the sales of EU vehicles in Japan. Introducing tests according to UN-
ECE standards in Japan would accelerate sales of fuel-efficient vehicles in Japan through
more competition from EU producers.
Noise
The Japanese regulations on steady running nois e and proximity stationary noise levels (in-
cluding limit values) are not harmonised with the UN-ECE standards. In Europe, compli-
230
ance with these norms is tested according to the UN-ECE Regulation R51, while Japan’s
testing methods are unique to Japan. The levels required by the Japanese standard is no
less stringent as set down by the UN-ECE stan dard so the unique Japanese requirements
result in time consuming and costly extra noise testing of all imported cars to the Japanese market.
Safety
Regarding safety standards, Japan is introducing new regulations not present in the UN-
ECE. Two examples of such regulations are mandatory Pedestrian Leg Protection for lar-
ger vehicles and Collision Mitigation Brakes for heavy-duty vehicles (e.g. engineering ma-
chinery).
There are also several horizont al-norm TBTs in place for pyro technic safety devices (e.g.
devices using explosives such as air bags) an d for cars running on compressed hydrogen.
For explosives, each device type has to be approved separately regardless of earlier ap-
proval of similar devices. A generic exemption from the explosives law for safety devices,
subject to a limit of explosive amount, could mitigate this TBT. For cars running on com-
pressed hydrogen, the Japanese technical requir ements are unique, and there is no mutual
recognition for cars approved for Europe.
A9.5 Other barriers
The introduction of advanced information techno logy software to vehicles (e.g. car naviga-
tion, traffic signals, congestion reporting and proximity radars) spurs a whole range of regu-
latory issues regarding certification of automo biles. The fast pace of technological innova-
tion means the regulatory authorities have diffi culties in keeping up with defining the re-
quirements for certification of these systems.
Certain automotive products (accessories, additional optional
equipment) allowed by EU regulations cannot be sold in Japan
Especially introducing completely new technologies requires thorough and burdensome procedures for approval. Also, the new technology is affected by regulation from areas not
normally bound to automobiles. For example, Japan does not allow the use of the radio
frequency for proximity radars that are approv ed for such use in the EU and the US. One
manager reports that the costs of launching i nnovative products in Japan are high due to
Technical Guidelines for advanced technologies, and in case of no
regulation corresponding to new features the guidelines must be es-
tablished first
A9.6 Potential solutions
More specifically the following items could be addressed:
231
Adaption of international or UN-ECE standards, in particular with regards to emission,
noise and safety.
Streamlining and simplifying the certification process.
Define procedures for revisions of standa rds and technical guidelines to better ac-
commodate innovative products.
Japan is very active in the UN-ECE, and both the EU and Japan are in favour of mutual
recognition and international standards. Ho wever, the Japanese adoption of UN-ECE
Regulations is only a third way through. Out of 127 regulations, only 38 have been adopted
by Japan. The remaining areas are covered by domestic Japanese regulation and certifica-
tion with various diverging norms and standard s. This maintains extra costs. The adoption
of the remaining regulation and a speedier ad option of new regulation will reduce the
Japanese NTMs greatly. In particular, the foll owing actions are listed by the automotive in-
dustry:
Japan could speed up the adoption of UN-E CE regulations (in particular harmonisa-
tion of noise regulations in Japan with those present in the UN-ECE Regulations).
The test-method for Plug-In HEV should be harmonised globally.
Regarding Pedestrian Leg Protection, the date of compliance could be harmonised
with the date of introduction in the European legislation.
Explosives used in automobiles could be given a generic exemption from the Explo-
sives Law, subject to a limit on the am ount of explosives that may be used.
In line with the EU and the US, Japan could permit the use of the radio frequencies
used for automobile safety devices.
Regarding revisions of guidelines with respec t to approval of new technology for safety
devices, the process could be much improv ed and thereby removing obstacles for the
introduction of new and better technology.
Streamlining the procedures for periodic cont rol correction on vehicles equipped with
Diesel Particulate Filters.
A9.7 Quantifying impacts on trade
The identified barriers to trade with Japan in crease certification and approval cost for ex-
porters. In the end, this will increase the pric e paid by the final consumer and delay the in-
troduction of new cars and technology in Ja pan. As a consequence, the barriers distort
consumption of motor vehicles toward the domestic Japanese manufacturers who do not carry these costs.
Three out of four managers report that stan dards and technical regulations impose signifi-
cant costs of production and costs of develo pment on the EU motor vehicle producers, cf.
Figure A9.6. The same picture arises for the costs of conformity assessment requirements.
Costs of shipment, on the other hand, do not seem to be significantly affected by NTMs.
232
Figure A9.6 How various barriers affect costs of EU automobile exports to Japan
13%
75%75%
63%
29%
71%71%
71%0% 20% 40% 60% 80%
Do standards and technical regulations affect your
cost s of shipment ?
Do standards and technical regulations affect your
costs of production?
Do standards and technical regulations affect your
cost s of development ?
Do standards and technical regulations affect your
other direct costs?
Do conformity assessment procedures affect your
cost s of shipment ?
Do conformity assessment procedures affect your
costs of production?
Do conformity assessment procedures affect your
cost s of development ?
Do conformity assessment procedures affect your
other direct costs? Percent 'Yes'
Source: Copenhagen Economics, Ques tionnaire to managers of European motor vehicle firms in Japan.
The gravity model gives a TCE of 12.5 percent which lies in the lower end of the TCE in-
terval we get from the direct TCEs estimate s from our business surv ey, cf. Table A9.1. The
difference between the low and high estimates is large, and we take this into account by ap-
plying the low estimates in our simulations.
Table A9.1 Quantification of barriers
Cost element Low estimate High estimate
Higher production and ce rtification costs 2% 15%
Higher development costs 8% 30%
Border costs 0% 2% Costs of delay 0% 4%
Total cost estimate 10% 51%
Source: Copenhagen Economics Questionnaire to managers of European motor vehicle firms in Japan. Numbers
in brackets are unlikely to be achievable on a bilateral basis.
233
The high production and development costs are mainly due to NTMs related to differ-
ences between Japanese and European standard s. For example, one manager states that
development costs are particularly high since
One sample car is needed per new model
Conformity assessment costs are mainly high due to the costly and cumbersome certifica-
tion process in Japan. Border costs and cost s of delay are generally not highly rated.
Not all of the NTMs can necessarily be remo ved. According to the responses from the
managers in Japan, costs corresponding to ar ound 9 percentage points of the 10 percent
can be reduced by reducing barriers related to standards and technical regulations, cf. Ta-ble A9.2. In addition, 7 percentage points can be reduced by eliminating barriers related to
conformity assessment requirements. If both ty pes of NTMs are eliminated it would there-
fore be possible to stimulate EU export to Japan even more than our simulation results
predict.
Table A9.2 Reduction potential of NTMs
Question 4.8 Question 4.9 Question 6.8 Question 6.9
By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to standards
and technical regula-
tions were eliminated? By how much would
you expect your costs
per unit of export of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated? By how much would
you expect your other
export costs (i.e. fixed
costs not related to per
unit cost of export) of
exporting to Japan to
decrease if the barriers
related to conformity
assessment procedures
were eliminated?
Answer options Response percent Response percent Response percent Response percent
0- 1% 0% 0% 0% 0%
1% – 5% 14% 29% 14% 14%
5% – 10% 43% 43% 71% 71%
10% – 15% 29% 14% 14% 14%
15% – 20% 14% 14% 0% 0%
More than 20% 0% 0% 0% 0%
Average 9% 8% 7% 7%
Source: Copenhagen Economics Questionnaire to mana gers of European motor vehicle firms in Japan.
The majority of respondents call for an increas ed use of international standards as a tool
for lowering the barriers in the Japanese motor vehicles industry related to standards, cf.
Figure AFigure A9.7. Alternatives could be the harmonisation/convergence of rules and regulations or the mutual recognition of conformity assessment procedures.
234
Figure A9.7 Quantification of cost reduction potentials for standards
1%9%
0%2%4%6%8%10 %12 %
NTM estimate for EU automobile exports to J apanTrade cost equivalent, TC E
Remaining barrier
Reduction potential
40%28%23%5%3%3%
C ontribution to barrier reduction
Don't know
Implementation of license
syst em f or dist ribut ion
S uppliers’ declaration of conformity
Mut ual recognit ion of
conf ormit y assessment
procedures
Harmonisat ion/ convergence of rules and regulations
Use of international st andards
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to mana gers of European motor vehicle firms in Japan.
A speedier certification process is listed by re sponding managers as a means to reduce bar-
riers related to conformity assessment requiremen ts, c.f. figure A9.8. Next come the use of
international standards and the simplif ication of certification procedures.
Figure A9.8 Quantification of cost reduction potentials for conformity
3%7%
0%2%4%6%8%10 %12 %
NTM estimate for EU automobile exports to J apanTrade cost equivalent, TC E
Remaining barrier
Reduction potential
22%20%20%17%15%4%2%
C ontribution to barrier reduction
Introduce third party
certification system
S uppliers’ declaration of
conformity
Harmonisation/ convergen
ce of rules and regulations
Mutual recognition of
c onformity a s se s s me nt
procedures
S implification of certification procedures
Use of international st andards
Speed up t he cert if icat ion process
Note: Data is based on responses to question 4.8, 4.9, 6.8 and 6.9.
Source: Copenhagen Economics Questionnaire to mana gers of European motor vehicle firms in Japan.
A9.8 Results and implications
The EU holds a strong position in the Japane se market for imported motor vehicles but
the Japanese import penetration is low compared to other OECD countries. The barriers encountered by the EU motor vehicle produc ers in Japan are mainly TBTs related to
emission, safety and noise standards. These barriers cause extra conformity assessment,
development and production costs for EU exporters. First, the Japanese TRIAS regulation
235
requires special testing on emissions and durab ility of exhaust systems. This causes delays
in approvals that are particularly serious fo r innovative products. Second, the Japanese
regulations on steady running noise and proximity stationary noise levels are not harmo-
nised with the UN-ECE standards. Third, the costly and cumbersome certification process
in Japan causes delays and extra costs.
According to our survey estimates, EU exporter s of motor vehicles pay an extra cost of 10
percent. EU producers therefore face a seriou s disadvantage since the costs of TBTs fall
disproportionately on exporters compared to Japanese producers. To reduce these barri-
ers will require the Japanese authorities streamline and simplify the certification process and find procedures for revising standards an d technical guidelines to better accommodate
innovative products. Most importantly Japan should adopt international or UN-ECE stan-
dards, in particular with regards to emission , noise and safety. In many cases Japan has
agreed to do so but has not yet implemented mu ch of the necessary legislation. If the full
NTM reduction is achieved, EU exports of moto r vehicles to Japan will increase from €5.6
billion to €10.3 billion, or by up to 84 percent.
236
In this section we address the possible increase in exports of transport equipment to Japan.
In broad terms the definition of transpor t equipment encompasses any equipment for
transportation other than motor vehicles. Ex amples of such products are commercial air-
crafts, spacecrafts, vessels, motorcycles, railw ay locomotives along with replacement parts.
In this chapter, we focus on the two larges t EU export items within transport equipment:
aircraft and rail-transport equipment making up 45 percent and 7 percent of total extra-
EU27 exports of transport equipment in 2008.
EU exports of transport equipment to Japan are depressed because of derogations in Ja-
pan’s commitments under the Government Pr ocurement Agreements (GPA); Japanese
additional requirement to foreign suppliers can be extremely severe. We assess that im-
ports have the potential to increase by more than 300 percent or €2.6 billion if these barri-
ers were addressed. In this chapter, we look at the pattern of bilateral trade and estimate the potential gains in these two sectors if trade barriers were removed.
A10.1 Aircrafts
On a global scale, the Japanese market for co mmercial aircrafts is one of the largest in the
world and is estimated to be around €10.7 billion.42 Traditionally, the US has been Japan’s
preferred trade partner. Japan’s import of ai rcrafts and parts amounted to more than €4
billion in 2007 and has increased by 37 perc ent during the period from 2003 to 2007,
while market shares for EU aircrafts has rema ined stable at around 10 percent and without
much decline in the U.S. airc rafts market shares, which has been around 85 to 90 percent
of the Japanese import.
Figure A10.1 Japanese imports of aircrafts and parts
12 % 13 %
8%16 %
11%87 %91 %88%
84% 84%
0%10 %20%30%40%50%60%70%80%90%1 00%
-500 1 .000 1 .500 2.000 2.500 3.000 3.500 4.000 4.500
2003 2004 2005 2006 200 7Share of total J apanese
imports of aircrafts a nd
partsB illion E uros, re a l va lue
Tot al J a panese im port of aircrafts and parts Imports from EU27 Imports from US A
Source: UN Comtrade and Eurostat HS02 product code 88.
42 The market size is an unofficial estimate based on in formation obtained from the Ministry of Finance and the
Society of Japanese Aerospace Companies. So urce: www.buyusa.gov/asianow/jaircraft.html. APPENDIX 10: TRANSPORT EQUIPMENT SECTOR STUDY
237
The import shares depicted in Figure A10.1 are not easily explained and are contrasted by
the fact that global market sh ares for aircrafts are roughly sh ared fifty-fifty between Euro-
pean and US suppliers. Excluding import of parts would make the market share even
more unbalanced. Increased competition and di versification of suppliers will in general
benefit efficiency and lower buyi ng cost, but so far Japan has kept the USA as its main pro-
vider despite high efforts of the European co mmunity to establish co-operation and trade
relations. According to the Aerounatics, Space and Defense Committee of the EBC, the
problem is not related to quality or price. Furthermore, the legal framework does not con-
stitute a fundamental problem as the differe nces between European and Japanese rules
and regulation are not considerable.
If the removal of the current constraints will allow export competition between all aircraft
suppliers, we would assume a change in the EU market share in the direction of the global
fifty-fifty balance. One plausible scenario coul d, therefore, be that the current Japanese
import shares of the EU27 and the USA of respectively 11 percent and 84 percent would
change towards a fifty-fifty bala nce in the future. We, therefore, estimate the export poten-
tial from a scenario where the EU27 exports of aircrafts would increase from the current
level of €0.7 billion to a future level of €2.7 billion, corresponding to a 50 percent share of
the current market value. This will imply an increase by €2.0 billion a year or a 285 per-
cent increase on current levels of European aircraft exports to Japan.
A10.2 Rail-transport equipment
The Japanese market for railway equipment is of a significant size. The worldwide market
for railway equipment is estimated at around €36 billion per year and out of this, the Japa-
nese domestic market was worth approximately 5 percent or €1.9 billion in 2006.43
Production of railway equipment and parts pr imarily takes place in the EU, where the in-
dustry is estimated to make up 60 percent of total world production (European Commis-sion, 2007). With a production share represen ting around 10 percent of total world pro-
duction Japan is a net-exporter. Still, Japan is importing a small share, €148 million or
about 8 percent of its domestic demand from abroad. Of this EU27 exports of €66 mil-
lions only make up 3 percent of the total do mestic market in Japan, cf. Figure A10.2.
43http://ec.europa.eu/enterprise/rail_guided_transport/rai l/index.htm and Japanese Association of Rolling Stock
Industries.
238
Figure A10.2 Japanese domestic market size and imports of rolling stock, 2006
19 0 0
14 8
66
020040060080010 0 0120 014 0 016 0 018 0 02000
Domestic market size Tot al imports EU27 i mport sMio. euros
Source: Eurostat and UN Comtrade HS06, product code 66 and Japanese Association of Rolling Stock Indus-
tries.
The incumbent operator (Japan Rail) has been privatised, but still falls under the WTO Government Procurement Agreement. Therefor e, market access is constrained not only
by industry structure, but also by the lack of transparency of the Japanese government pro-
curement system.
To a large extent, the low import penetration can be explained by barriers concerning pub-
lic procurement:
1) When Japan signed the WTO Agreement on Procurements (GPA) in 1994, the
country gained dispensation to deny a pplications for reasons of “operational
safety”. This prevents foreign firms fr om bidding on procurement contracts as
only 2 percent of the rail-transport equi pment market is open to international
procurements contracts compliant with the GPA.
2) Complex customer-suppliers relations required in procurement contracts can be
an additional barrier to foreign suppliers. Local suppliers involved in long-
standing dealings with the customers are favoured and additionally, to win a con-
tract, the producers are sometimes comm anded to demonstrate work already car-
ried out in the local market in addition to previous experience of work with local
partners.
3) Out of the 2 percent of the rail-transport equipment market open to international
procurements only 15 percent is awarded to non-Japanese firms summing to only
0.3 percent of the total market (European Commission, 2007).
239
Furthermore, unique Japanese safety standards create a hurdle to exports. Together, it is
clear that world distribution of production is not reflected in trade of railway products in
the Japanese market. Noting that the Europe an companies Alstrom, Bombardier and Sie-
mens respectively hold world rolling-stock market shares between 14 percent and 25 per-cent (European Commission, 2007), a Japanese market share of 10 percent would not be
an overly optimistic assumption for each of these major producers if the market was open
to international competition. Given an estimated Japanese market size of €1.9 billion in 2006, the total potential gain for these Euro pean companies would amount to €600 million
per year if they jointly gained a market shar e of 30 percent of the Japanese railway equip-
ment market. This would constitute almost a te n fold increase of the current export levels.
A10.3 Results and implications
Summing up, there is a large potential in the transport equipment sector for bilateral trade
gains on EU exports of aircraft and railway products to Japan. While there are several ex-
planations for barriers to trade in the railway se ctor, the reasons for lack of bilateral aircraft
trade between the EU and Japan are less clear.
Improving the Japanese bilateral trade relation on air and rail products could potentially
increase the total EU27 export revenue of th e transport equipment sector by around 340
percent since the EU27 revenue of €1.1 billion in 2007 could potentially increase to €3.7
billion provided the implementation of the necessary regulatory reforms in Japan.
The gains from equalising the percentage of Japanese imports from the EU and the USA
on aircraft equipment are, however, obvious as the export revenue could increase by ap-
proximately €2 billion per year. Additionally, opening the Japanese market of railway products to foreign companies e.g. by public procurement contracts is likely boost the
Japanese imports of railway products from the EU by approximately €600 million. The to-
tal export potential is thus €2.6 billion.
Given the trade elasticity of the transport eq uipment sector we have calculated the trade
cost equivalent corresponding to this potent ial. This corresponds to a trade cost of
45percent and a reduction potential of 75 to 90 percent, with the maximum scenario im-
plying a realisation of the €2.6 billion increase in exports.
240
Cross-border trade in financial services cove rs financial intermediation services and auxil-
iary services conducted between residents and non-residents in a particular country. Our
business survey, in line with other studies, id entifies three major barriers to cross-border
trade between the EU and Japan:
• A complex and costly regulatory environment
o The Japanese licensing system requires costly product modifications. A lack
of transparency as to regulation makes it difficult to foresee the results of in-vestments in innovation and development.
• Firewalls between business entities prevent synergies
o Business entities within a company have to be separate from each other in
terms of staff and other resources.
• Excessive administ rative burdens
o Duplicated inspections add to the administrative burden.
Although progress is already being made with respect to the barriers described above re-
spondents and trade and business organisations suggest that these barriers could be re-
solved by the measures listed below:
• Dropping the firewall regulation would improve efficiency for EU-based firms as well
as for Japanese firms.
• The introduction of a new licensing regulation would take care of the most restrictive
barrier and also provide more opportunities for Japanese banks to export to the EU.
• Increased regulatory transparency would incr ease the presence of foreign providers of
financial services and thereby increase comp etition on the Japanese market to the
benefit of Japanese firms and consumers.
Lastly, the business survey validates the quantita tive results from the gravity model. We de-
cide to look at two scenarios where the barrie rs are reduced by approximately one half and
two thirds respectively.
Introduction
Cross-border trade in financial services cove rs financial intermediation services and auxil-
iary services conducted between residents and non-residents in a particular country. Finan-
cial intermediation services include commission s and fees for letters of credit, lines of
credit, financial leasing services and foreign exchange transactions. Auxiliary services in-
clude financial market operational and regulato ry services and security custody services
(IMF, 2008). It is only commission, fees and other compensation for services that is in-
cluded in the measures of cross-border trade in financial services. Financial services should
not be confused with international capital mo vements which are not services, for example a
deposit in foreign savings account does not count as financial service but the fee for the
deposit does.
By trade, in this context, we refer to mode 1 trade. Mode 1 trade is cross-border supply of
a service that does not require the physical mo vement of supplier or consumer. In financial APPENDIX 11: FINANCIAL SERVICES SECTOR STUDY
241
services, cross-border trade predominantly ta kes place at a wholesale and interbank level
and less at the retail level. The typical cross-bo rder customer is also more sophisticated in
the sense that they demand complex services (OECD, 2000).
An EU based firm that provides financial se rvices has essentially two different ways to
reach a Japanese customer; either operate in Ja pan while keeping it’s juridical residence in
EU or by entering the Japanese market thro ugh establishment of a branch. Establishing a
branch would be a direct investment and bu siness generated by such investments is ex-
cluded from the concept of cross-border trade. In the remainder of this chapter we discuss
both barriers to entry and barriers to operatio n. While many of the barriers apply both to
entry and operation, we only consider cross-bo rder trade, and therefore, our interest is
mainly directed towards barriers to operatio n since such barriers are often also encoun-
tered by firms of foreign residence wish ing to sell to Japanese customers.
The total exports of financial services from EU to Japan was about €1.2 billion in 2004
which makes EU the largest exporter to Japan. Furthermore, Japan was EU’s second larg-
est export market in 2004.44 To our knowledge there are no available statistics regarding
how much of the exports is mode 1 trade in financial services. The quantity referred to
above also includes trade where either suppli er or consumer physically moves, for example
when an investment advisor travels to a represen tation office in Japan to meet with his cli-
ents.
This chapter draws on the survey data based on how EU managers in financial service
companies perceive barriers to the Japanese market. Here, we highlight the most impor-
tant findings and explain how the quantitative da ta collected in the survey are used to refine
the trade liberalisation scenario for the financial services sector.
A11.1 Major concerns in the financial services sector
The most important NTMs for EU financia l services export to Japan pertain to:45
1. A complex and costly regulatory environment
The Japanese licensing system requir es costly product modifications.
A lack of transparency as to regulation makes it difficult to foresee the results
of investments in innovation and development.
2. Firewalls between business entities prevent synergies
Business entities within a company have to be separate from each other in
terms of staff and other resources.
3. Excessive administrative burdens
Duplicated inspections add to the administrative burden.
The regulatory framework is perceived as rigid and its im plementation lacks transparency.
A rule-based regulatory approach rather than principle-based approached results in a regu-
44 The largest is the US, Source: GTAP.
45 These concerns are also expressed in EBC (2008b).
242
latory framework that is not conducive to servic es and in a structure that does not fit into
predetermined categories and prescriptions. Fi nancial products that are sold on the Japa-
nese market, therefore, often require costly product modifications. Furthermore, the rigid
regulatory framework hampers innovation since it is not worth developing products that do
not fit in the predefined categories.
71 percent of the respondents state that their product range in Japan is somewhat or much
smaller in Japan than in other countries. The reason for reducing the product range is that
it is too costly and/or too difficult to export a number of products to Japan given the exist-
ing barriers in Japan. 80 percent state that their product range would increase a lot if barri-
ers were removed.
The firewall regulation in Japan requires each business enti ty to maintain certain separate
functions and organisational structures, which could otherwise be shared on a group basis.
Such duplications create ineffici encies and extra costs and make it very difficult to integrate
Japan operations into the global business.
Excessive administrative burdens make it costly to export to Japan. Duplicated inspections
by the Financial Services Agency (FSA), Se curities & Exchange Surveillance Commission
(SESC), Tokyo Stock Exchange (TSE), Japan Securities Dealers Association (JSDA), Min-
istry of Finance (MOF) and Bank of Japan (B OJ) impose an excessive administrative bur-
den on regulated firms.
Issues in the banking and insurance sectors are also frequently listed in the NTM inven-
tory. Here, the differences between the EU and the Japanese risk assessments play a
prominent role (for example the differences in the insurance and reinsurance solvency
regulation in Japan or the lack of common rules for solvency calculations, because Japan
does not follow Solvency II).
Costly product approval procedures also affect the on-going operations of a financial ser-
vice firm in Japan. The admini strative burdens for financial service firms are, in compari-
son with their EU home countries, consid ered to be excessive, inefficient and non-
transparent. This also extends to issues affe cting establishment (e.g. applications for bank
licences). Another issue in the financial service sector is the lack of harmonisation with in-
ternational standards (e.g. the dissimilarities between International Financial Reporting
Standards and Japan’s "Generally accepted accoun ting principles"). Finally, a lot of the chal-
lenges for European financial service firms in Japan relate to the on-going process of priva-
tisation of Japan Post – one of the worlds larg est financial institutions offering banking, in-
surance as well as postal services. The competition from Japan Post is stated to be particu-
larly troublesome in the insurance industry where their product range expands and they
compete directly with private companies. Re garding banking, the competition from Japan
Post is lesser since they provide less complex products than the typical cross-border cus-
tomer demands.
A11.2 EU export to Japan
243
Japan is EU’s second largest export market fo r financial services. In 2004 it stood for close
to 6 per cent of the total EU exports, cf. Figure A6.0.1.
Figure A11.1 EU’s financial services exports
16 %
6%5%
4%4%
2%
0%2%4%6%8%10 %12%14 %16 %18 %
USA Japan Canada Rest of
Ameri casHong Kon g EFTAEU’ s f i nanci al servi ces export s, share of t ot al export s 2004
Note: EU denotes EU25.
Source: Copenhagen Economics based on data from GTAP.
In total, Japan imported nearly €2.5 billion of financial services in 2004. Exports from EU
constituted almost half of thes e imports, cf. Figure A6.0.2.
244
Figure A11.2 Japan’s financial services imports
48%
26%
7%
3% 3% 2%
0%10 %20%30%40%50%60%
EU USA EFTA Tai wan Rest of Nort h
AfricaHong KongJ apan’s financial services imports, share of total imports 2004
Note: EU denotes EU25.
Source: Copenhagen Economics based on data from GTAP.
A11.3 NTMs to the Japanese market
On the overall level, more than 90 percent of the interviewed managers stated that it is
more difficult to export to Japan than to other countries, cf. Figure A6.0.3.
Figure A11.3 Perceived difficulty of exporting to Japan
0,0% 0,0% 0,0%75,0%
16 , 7%
0,0%10 , 0 %20,0%30,0%40,0%50,0%60,0%70,0%80,0%
Much less difficult
(score=1)Somewhat less
difficult (score=2)Equally difficult
(score=3)Somewhat more
difficult (score=4)Much more
diffic ult ( sc or e =5 )How do you f i nd market access f or export t o Japan, compared t o export i ng t o other
count ri es?
Note: Average score = 4.2.
Source: Copenhagen Economics, Qu estionnaire to managers of European financial firms in Japan.
245
We have divided NTMs into three categories; intrinsic barriers (e.g. language and culture),
barriers to enter the market and barriers to operate in the market. There is no category
that stands out as much more restri ctive than others, cf. Figure A11.4.
Figure A11.4 The most restrictive barriers to exports of financial services to Japan
Average restrictiveness score
(N = 17)
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Intrinsic barriers
Entry barriers
Barriers to operation3,3 12345
3,5 12345
3,4 12345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Qu estionnaire to managers of European financial firms in Japan.
Entry barriers and barriers to operation cannot, however, be completely separated. Many
barriers restrict both entry and operation, e.g. the important issue of product licensing and
approval of product modifications is a barrier both to entry and to operation. Below we rank the importance of each category and after that we discuss the relationship between the
categories.
Barriers to entry
The most restrictive entry barriers are relate d to licenses and permits. Specifically, the
need for pre-approval for each product and each product modification is listed as an im-
portant barrier. In addition, administrative burdens and other restrictive start-up proce-
dures are perceived as major barriers to entering the market, cf. Figure A11.5.
Figure A11.5 Ranking of entry barriers
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Barriers related to licenses and permits
Restrictive start-up procedures
High start-up costs
Other entry barriers3.8 12345
3.8 12345
3.7 12345
3.4 12345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Qu estionnaire to managers of European financial firms in Japan.
Barriers to operation
The most severe barriers to operation in the fina ncial sector in Japan are barriers related to
product standards and lack of transparency of solvency regulation. The firewalls between
banking, securities and insurance businesses ar e also perceived to be an important barrier
246
to operations. Anti-trust exemptions and barrier s related to risk information are, however,
less of a problem, cf. Figure A11.6.
Figure A11.6 Ranking of barriers to operation
Not restrictive at all Somewhat restrictive Restrictive Very Restrictive Extremely restrictive
Barriers related to taxation rules
Solvency regulation
Barriers related to product standards
Regulation of conduct
Anti-trust exemptionsConduct of public owned firms
Barriers related to access risk information
Other barriers to operation3.3 12345
3.4 12345
3.6 12345
3.0 12345
2.0 12345
2.4 12345
2.6 12345
2.7 12345
Note: The figure shows the average sc ore for each response category.
Source: Copenhagen Economics, Questionnaire to ma nagers of European financial firms in Japan.
A11.4 Potential solutions
Several suggestions have already been made an d initiatives have been undertaken in order
to reduce the barriers to the Japanese market . The “Better Market Initiative” and the “Bet-
ter Regulation Initiative” are aimed at reducing some of barriers pointed out in this chap-
ter, cf. Box A11.1 and Box A11.2. In additi on, the European Commission has proposed
several measures to reduce barriers, cf. Box A11.3.
In conclusion, the survey together with stat ements from the Japanese FSA as well as the
European Commission suggests that three to pics of significant importance are:
Dropping the firewall regulation would im prove efficiency for EU-based firms as
well as for Japanese firms.
The introduction of a new licensing regulati on would take care of the most restric-
tive barrier and also provide more opport unities for Japanese banks to export to
the EU.
Increased regulatory transparency would increase the presence of foreign provid-
ers of financial services and thereby incr ease competition on the Japanese market
to the benefit of Japanese firms and consumers.
Box A11.1 FSA’s four pillars of “Better Regulation Initiative”
“The first pillar: “The optimal combination of rule s-based and principles-bas ed supervisory approaches”
“The rules-based approach” involves es tablishing detailed rules and applying them to individual cases. On the
247
other hand, “the principles-based approach” is a framew ork where several key principles are explicitly stated
so as to encourage voluntary efforts by financial institutions in line with such principles. It is important to en-
sure the effectiveness of the entire financial regulation through an optimal combination of these two ap-
proaches. We [the FSA] are open to discussion with rele vant parties as to find out how to combine these two
approaches.
The second pillar: “P rompt and effective responses to high-prior ity issues” (risk-focused, forward-looking
approach)
This approach requires the recogniti on of the areas where potential risks exist in the financial system as
quickly as possible, and the effective allocation of our re sources to these areas so as to address such signifi-
cant issues. In order to do this, it is necessary to monitor economics and markets and to understand as accu-
rately as possible the strategies and activities of fina ncial institutions, in addition to conducting intensive
communications with financial institutions and market participants.
The third pillar: “Encouraging voluntary efforts by fi nancial institutions, and placing greater emphasis on
incentives for them ”
Our approach toward more incentive-compatibility and greater empha sis on voluntary efforts has already
been incorporated to a significant ex tent in our regulatory framework, su ch as the Financial Inspection Rating
System, Basel II and the Relationshi p Banking framework for regional banks . Voluntary efforts of financial
institutions are becoming more crucial as the financial se ctor is shifting into a new phase, so we intend to pay
continuous attention to the eff ectiveness of such frameworks.
The fourth pillar: “Improving the transparency and predictability of regulatory actions”
The FSA has compiled and published its inspection manua ls and supervisory guidelines, which clarify check-
points in inspection and supervision. The inspection and supervisory polic ies are also published for each op-
erational year. In addition, we have published criteri a for our administrative actions, upgraded our No Action
Letter System, and posted Q & As about the interpretation of rules. Thus we have taken various measures to
improve the transparency and predicta bility of our actions. We intend to continue our efforts and examine,
whether there is any room for further improvement by listening to the opinions of interested parties.”
Note: Quote from FSA website.
Source: FSA website, www.fsa.g o.jp/en/policy/iqfrs/br1.html.
Box A11.2 Four pillars of the “Better Market Initiative”
1. Creating markets for professional investors; dive rsifying exchange-traded funds (ETFs); reviewing
the administrative monetary penalty system in accordance with the Financial Instruments and Ex-
change Act (FIEA).
2. Revamping the firewall regulati ons among banking, securities and insurance businesses; broaden-
ing the scope of businesses permitted to banking and/or insurance groups.
3. Enhancing dialogue with the indus try; increasing transparency and predictability of regulation and
supervision.
4. Improving the broader environment surrounding th e markets by nurturing and securing financial
experts; upgrading urban functions as an international financial centre.
Source: FSA website, www.fsa.go.jp/en/policy/bmi/index.html.
248
Box A11.3 EU proposals for regulatory reform in Japan
The EU requests the GoJ to consider the following proposals:
a) To implement, in an internationally coordinated way, the recommendations of the Financial Stability
Forum (FSF) as a response to the financial turmoil;
b) To implement on a larger scale its policy of Better Regul ation in the financial services area, that is to
say to promote principle-based regul ations and ensure that the fina ncial industry applies the rules;
c) To share experience with the EU on progress of im plementing the Better Regulation approach in the fi-
nancial services;
d) In the context of the elimination of firewalls envisa ged, to implement the opt-out system in a way that
will actually ease the restrictions on customer information sharing;
e) To authorise financial services firms to appoint a country manager and to carr y out cross-marketing of
products;
f) As regards prevention of conflicts of interest, to leave detailed criteria, modalities and application to the
best practices of the financial industries, as it is the case in Europe. The EU is open to share its experi-
ence with Japan in this regard;
g) To ensure that discrimination between foreign and domestic bank branches interested in engaging in
trust and banking business concurrently be suppressed at short notice. In this regard, Article 1 of the
Law concerning Concurrent Management of Trust Busi ness by Financial Instituti ons should be revised;
h) To encourage the Japan Investment Trust Association and the Japan Securities Investment Advisers As-
sociation to merge as soon as possible;
i) To ensure that the revamp of the firewall regulation is also a pplied to investment advisors;
j) To avoid duplication of regulatory roles played by th e Japan Investment Trust Association and by the
FSA;
k) To keep universal banking as a governmental priority.
Source: EC (2008) EU Proposals for Regulatory Reform in Japan.
The respondents find that the regulation and th e application of regulation needs to be re-
formed and simplified in order to reduce th e most concerning barriers, cf. Box A11.4.
249
Box A11.4 Suggested actions from survey
Answers to the question “In your opinion, which actions would be required in order to reduce the entry
barriers/barriers to operation that are of most concern to you?”
Entry barriers
• Transparent application of existing regulations
• Further deregulation of licensing system and more administrative transparency
• Recognition of EU basic rules and principles for funds
• Simplification of Rules and Regulations
• Legal cost is very expensive.
• Further deregulation and admi nistrative simplification
• Deregulation towards a universal ba nk type of financial institution
• More transparency in FSA regul ation, less capricious action by the regulator, better balance of
rules-based and principles-based regulation.
• Convince Japan government to reduce the barriers related to licences and permits
• Simplified, more flexible pr oduct approval Clearer guidelines
Barriers to operation
• Strict and transparent application of existi ng rules would already be a big step forward
• Introduction of universal banking and add itional administrative transparency
• Clarification of Rules and Regulations
• Regulatory simplification
• More adoption by FSA of global standa rds in approaching product approvals.
• Revise solvency regulation
• Clearer guidelines and m ore flexibility
Source: Copenhagen Economics, Qu estionnaire to managers of European financial firms in Japan.
A11.5 Quantifying impacts on trade
Cost of entry barriers
The respondents state on average that if en try barriers were removed, costs of exports
would decrease by 19 percent.46 The costs increase is due the regulatory environment in
general and due to the licensing procedure in pa rticular. Costs of entry barriers are mainly
related to costs of selling and costs of produc tion and product development, the costs of
selling are more commonly perceived as a problem, cf. Figure A11.7.
46 Based on the answers to the question” By how much would you expect your costs, per unit of export, of export-
ing to Japan to decrease if these entry barriers were eliminated?”
250
Figure A11.7 How entry barriers affect costs of EU financial services exporters to Japan
33%56%67%
0% 1 0% 20% 30% 40% 50% 60% 70%Do entry barriers affect your costs of development?Do entry barriers affect your costs of production?Do entry barriers affect your costs of selling?
Note: Many of the respondents have answered “I don’t know” to this question.
Source: Copenhagen Economics, Qu estionnaire to managers of European financial firms in Japan.
Costs of selling are affected predominantly by the fire wall regulation that forces many firms
to duplicate sales resources, some respondents state that their costs of selling increases 30-
50 percent due to entry barriers which suggests th at the costs of selling is the main driver of
the cost increase.
Costs of production and product development also increase due to regulatory require-
ments. Especially burdensome are the licensi ng system which requires product modifica-
tions and the duplication of resources due to firewall regulation. Product development for
Japan often has to be done separate from ot her jurisdictions to meet FSA requirements
and practice, which introduces extra costs of development. Firewalls between banks and
securities lead to a duplication of resource s also in the case of product development.
Cost of barriers to operation
The respondents stated on average that the ba rriers to operation increase costs of exports
by 12 percent.47 The primary reasons for the increased costs are the firewalls which makes
necessary a duplication of many resources. Co sts due to barriers to operation are mainly
related to costs of selling and costs of produc tion and product development, the costs of
selling are more commonly perceived as a problem, cf. Figure A11.8.
47 Based on the answers to the question” By how much would you expect your costs, per unit of export, of export-
ing to Japan to decrease if these barr iers to operation were eliminated?”.
251
Figure A11.8 How barriers to operation affect costs of EU financial services exporters to
Japan
25%38%63%
0% 1 0% 20% 30% 40% 50% 60% 70%Do barriers to operation affect your costs of development?Do barriers to operation affect your costs of production ?Do barriers to operation affect your costs of selling ?
Note: Many of the respondents have answered “I don’t know” to this question.
Source: Copenhagen Economics, Qu estionnaire to managers of European financial firms in Japan.
Costs of selling are, like costs of selling as a barrier to entry, affected predominantly by the
firewall regulation that forces many firms to duplicate sales resources. High printing costs
are also reported as barrier to operation.
Costs of production and product development due to barriers to operation are in many
ways the same as the costs due to entry barr iers. The licensing system requires product
modifications, and the firewall regulation re quires a duplication of both production and
development resources. In addition, the product approval takes a long time which in-creases the payback time on investments in pr oduct development. This in turn makes such
investments less profitable since future income is worth less than immediate income be-
cause of lost rents.
As mentioned above, entry barriers and barriers to operation cannot be completely sepa-
rated. Some of the barriers faced by a new ma rket entrant turns into a barrier to operation
once he has entered the market, e.g. the impo rtant issue of product licensing and approval
of product modifications is both a barrier to entry and a barrier to operation. Likewise, the
firewalls add both to the costs of entering th e market and to operating on the market since
the duplicated organisation have to firs t be established and then sustained.
The barriers to operation are also often shared by firms that do not reside in Japan but
merely sell their products to Japanese resi dents. For example, the Japanese FSA (2006)
states that:
“As to the foreign financial institutions, the FSA… will examine their compliance with the
laws and regulations in Japan and the overall risk management of their financial group.
252
The FSA will also examine whether they proper ly manage their new business such as pri-
vate banking from the view point of customer protection.”
In many cases a company is required to regi ster, apply for permission or to acquire a li-
cense in order to sell and advertise to the Japanese market. For example, any advertise-
ment for financial instruments mu st indicate a registration nu mber of the advertising firm.
Operation in some fields, such as investment trust management businesses, requires a li-
cense which is often costly to acquire, cf. Figure A11.9 .
Figure A11.9 Requirements for operating in the Japanese market
Source: FSA (2006).
A11.6 Results and implications
We estimate the trade cost equivalent (TCE) to be equal to the barriers to operation, 12
percent. The gravity model estimate provides a TCE of 15.8 percent. The two estimates
seem to be approximately in line with each ot her and we view the survey results as a valida-
tion of the gravity model estimate.
253
We do not have sufficient quantitative data to estimate the effects of each of the potential
solutions. Instead we look at one scenario where the TCE is reduced by 8.7 percentage
units and one scenario where the TCE is reduced by 5.8 percentage units.
254
The purpose of this chapter is to assess the ec onomic impact of barriers on cross-border
trade in communications services between th e EU and Japan. We are particularly inter-
ested in barriers hindering the export from the EU to Japan, and we aim at quantifying how
much the current flow could increase in the ev ent that some of the key barriers were re-
moved or significantly reduced.
First, we provide an overview of the situatio n in the Japanese telecoms sector. Then we
look into the cross-border flow of telecommunication services which is in fact what we
model, and then we look into the problems of establishment and lack of competition in
the Japanese telecommunications market.
Overview of the situation in Japan’s telecom sector
In 1999, the telecommunications monopoly, NT T, was reorganised into multiple compa-
nies. However, the three resulting companies are wholly owned subsidiaries of a holding
company, so that no actual deconcentration was achieved. NTT has a monopoly over net-
works and initially charged prohibitive collocat ion fees. This was addressed through regula-
tion requiring NTT to lease its unused network capacity at cost to other carriers. Neverthe-
less, serious concerns remain regarding the tr ansparency of NTT's cost structure, in par-
ticular the cost of interconnection, and th e terms and conditions of network access.
Problems encountered in the telecommunications sector include cross-subsidisation, using
data obtained from competitors, and not maki ng available technical data and other infor-
mation required to adequately provide services.
The requirement to price interconnection char ges at cost may provide insufficient safe-
guards for competitors, due to the lack of tr ansparency in the cost structure of the incum-
bent. This is due to insufficient structural an d accounting separation, which also facilitates
cross-subsidisation. Similarly, charges imposed on operators for the financing of its univer-
sal service obligation are not transparent enough.
Insufficient regard to the principle of non-discri mination is a concern in the case of a verti-
cally integrated undertaking such as NTT EAST/WEST. This may limit competition in
the downstream market. Specific problems that have been mentioned include the timing of
information about changes in NTT's access ne tworks, which does not adequately allow
competitors to adjust their investment strate gies. In addition, NTT may delay competitors'
access to networks. Finally, close attention must be paid to ensure that customer informa-
tion obtained from competitors is not shared among different parts of the incumbent.
An additional problem is posed by the contro l operators have over the market for mobile
telephony terminals. Operators usually bundle handsets with their services, so that compe-
tition in the terminal market is limited.
It seems clear that significant competitive di sadvantages for foreign companies persist in APPENDIX 12: COMMUNICATION SERVICES SECTOR STUDY
255
the telecoms sectors of Japan. The incumbent fr equently retains a dominant position in the
market and is able to establish high barriers to entry. Regulation in the sector is insufficient
to constrain incumbents’ market power and un lock the full benefits of competition. A
greater emphasis on competition law principles is therefore necessary, in order to ensure
that European companies can compete on an equal footing.
A12.1 Cross-border trade in telecomm unication between EU and Japan
The current cross-border export from EU to Japan of communications services amount to
€0.3 billion a year or a 20 percent share of Japan’s total import of communications services
(€1.6 billion).48 This is mainly telecommunications services, but it also includes postal ser-
vices. Before proceeding, we need to explai n which telecommunications services are actu-
ally traded across the border. This is importan t because the vast majority of sales revenues
for European telecom operators outside Euro pe would not generally come from cross-
border sales, but rather from foreign affiliate sales by EU firm’s establishments in the for-
eign markets. As we will show, EU firms have very little of both when it comes to Japan.
Cross-border trade in telecommunications servic es is captured in the balance of payments
statistics, and it covers among other, payments for interconnection charges. Thus, the flow
we register as cross-border exports of EU firm s to Japan is the income from calls originat-
ing in Japan and connected or terminated in the European telephone network: when a
person in Japan makes a call to a person in the EU, this call is being connected to the EU
operators’ network. The receiving operator in the EU will charge the Japanese operator an
interconnection fee for terminating the call. This can be considered wholesale telecommu-
nications trade. The income from these intern ational connection charges (which may also
include some minor international transit charge s) is what constitutes cross-border exports
from Europe to Japan.
Definition of cross-border trade
Cross-border trade in telecommunication servic es is defined as the transaction of tele-
communication services between residents of EU and residents of Japan. The services
could for instance be regular calls, MMSs, em ails etc., cf. Box A12.1 below. Thus, cross-
border flows will for instance capture all calls between EU to Japan and international roam-
ing, i.e. when consumers with European mobile subscriptions make a phone call from
their mobile in Japan, and vice versa.
48 Based on GTAP7 data.
256
Box A12.1 Cross-border trade in telecommunication services
Cross-border trade in telecommunication enters as a se rvice in the balance of payments and consists among
other things of:
• The transmission of sound
• The transmission of images
• Other information by telephone
• Telex
• Telegram
• Cable
• Broadcasting
• Satellite
• Electronic mail
• Facsimile services, etc.
And includes business network services, teleconferencing and support services.
Source: IMF (2008), paragraph 253.
The financial flow underlying cross-border trade in telecommunication
The trade flow is based on a survey among na tional telecommunication operators. In this
survey the foreign traffic data and correspon ding interconnection fees are collected, and
the total amount of cross-border trade is estima ted. Cross-border trade is thus the invoiced
revenues and expenditures between a resident operator and its non-resident counterparts.
Cross-border trade will thus cover both regular foreign calls and roaming. Take for in-
stance a regular call. If a phone call is made from Japan to Denmark, then the Japanese
telephone operator will pay a Danish telephone operator for the call. This is a case of Dan-
ish export. Import is the opposite. Another exam ple is the case of roaming, which also en-
ters the statistics. If a Danish resident for instance, travels to Japan and makes a phone call
to Denmark with his Danish mobile subscripti on, then the Danish telephone operator will
pay the Japanese operator for the use of the Japa nese operators’ net. This is classified as
Danish import of telecommunications services.
More cross-border trade
The current cross-border export from EU to Japan of communications services amount to
€0.3 billion a year or a 20 percent share of Japan’s total import of communications services (€1.6 billion).
49 This is mainly telecommunications services, but it also includes postal ser-
vices. Overall, this trade flow is less than ex pected, which could be due to Japanese barriers
reducing Japanese consumers’ demand for connecting to EU operators’ networks.
Based on gravity estimations, the barriers in Japan reduces Japanese demand for interna-
tional communications services equivalent to prices on such services being 24.7 percent
higher than in the absence of barriers (T rade Cost Equivalent), cf. Table A12.1.
49 Based on GTAP7 data.
257
Table A12.1 Trade costs and reduction potential
Total trade costs Max NTM reduction Min NTM reduction
Communications 24.7 percent 19.2 percent 12.8 percent
Note: Max NTM reduction is how much the barriers wo uld be reduced in an optimistic scenario. Min NTM
reduction is how much the barriers as a minimum would be reduced if addressed.
Source: Copenhagen Economics.
One way to overcome these barriers is by im plementing better regulation. As telecommu-
nication is an industry with very high entry ba rriers, regulation is particularly important in
order to promote the public interests, e.g. by avoiding abuse of market power, fostering
competition and creating a favourable investme nt climate. Today, however, the Japanese
telecommunication sector is not subject to much regulation. Box A12.2 provides an over-
view of the Japanese te lecommunication sector.
Box A12.2 Description of the Japanese telecommunication sector
There are four large mobile operators in Japan. The incumbent, NTT DoCo Mo (has a 50% market shares) and
the new entrants KDDI (~25%), Softbank (~ 18%) and newcomer e-mobile (~ 7%).
Technologically, Japan is running ahead of the rest of th e world and it is running fast. Today, mobile televi-
sion and mobile payments are widespread and required fo r all handsets. However, there are problems with in-
ter-operability. SMS services between subscribers at NTT (the incumbent) and other operators are for in-
stance not allowed from NTT (while technically feasible ) and number portability is available, but not very
used due to a high “stickiness” factor to the operators.
In regard to handsets, the market is dominated by four domestically oriented handset producers. This is NEC,
Panasonic, Sharp and Hitachi. Handsets and subscriptio ns are tied with low upfront payments and long bind-
ing periods (24 months). Operators are in the driver’s seat on services and on ha ndset requirements. Handsets
from one operator cannot be used with another operator. Every operator ha s specific technical requirements to
handsets. These have very little market shar e outside Japan, but a huge share at home.
The situation of the Japanese market, with “mobile silo s”, means that EU producers must make adaptations to
their products for each operator. This means that they have only a very small market share. Nokia has decided
to leave the mobile market after onl y realising a 0.4% market share.
Source: Interviews conducted by Copenhagen Econ omics in Japan with Nokia and Nippon Ericsson.
A12.2 FDI in telecommunications
Even in the light of lower NTMs, and in turn higher cross-border flows, the revenue will
still be relatively small. The reason is that cr oss-border flows is just about €0.3 billion. In
fact, the great potential is in making it po ssible for European telecommunication operators
to establish themselves in Japan and provide telecommunications services to the Japanese producers. In comparison to the €0.3 billion that EU firms current receive from cross-
border trade, the Japanese telecommuni cation market approaches €140 billion.
258
The combined annual revenue of Japan's telecom operators is on
the order of US$ 200 billion, indica ting the large size of Japan's
telecommunications sector. [..] Therefore Japan is extremely inter-
esting for European and US tele communications and IT solution
companies, including start-up companies50
However, the poor regulatory environment in Japan would tend to increase barriers for
EU telecommunications operators. In fact, an OECD rapport shows that Japan scores
highest of all OECD countries when it comes to poor of regulation within telecommunica-
tion, cf. Figure A12.1.
Figure A12.1 Poor regulation in the telecommunications sector, 2003
0123456
Australia
Italy
Denmark
C zech Republic
Uni t ed St at es
United Kingdom
Spai n
Port ugal
B e lg ium
Pol and
France
Finland
Hungary
C anada
Netherlands
Irel and
Luxembourg
Gr eece
Sweden
Austria
Korea
Turkey
Icel and
Norway
Ger m an y
Mexico
New Zeal and
Slovak Republic
Swi t zerl and
Jap anN e twork polic ie s
Note: The network policy indicator above consists of independence of sector regulators and network access. In
Japan sector regulators are missing altogether.
Source: OECD, www.olis.oecd.org/olis/2007doc.nsf /LinkTo/NT00002ED6/$FILE/JT03230825.PDF.
According to the EU Commission, good reg ulation is often a necessary condition for
strong competition and performa nce, cf. Box A12.3 below.
50 See http://eurotechnology.co m/industries/telecoms.shtml.
259
Box A12.3 Quotes on regulation within telecom can foster competition
“Competition in the liberalised market is seen as the key to promoting t echnological progress. It brings re-
wards and provides opportunities for innova tive companies, particularly in a sector that has experienced in-
tense technological convergence in recent years. However, market forces are not always sufficient to generate
growth, protect consumers and ensure a level playing fiel d for new entrants in the telecoms sector, where im-
perfect competitive conditions exist due to the le gacy of national, often state-run monopolies.
For that reason, the European Commission sees continue d regulation as essential in order to counterbalance
the significant market power of former monopolies, ensu re universal service and protect consumers, espe-
cially those social groups that may otherwise face exclus ion. To ensure that telecoms markets benefit from
continued market regulation, the European Commissi on oversees the correct implementation and enforcement
of the Directives.”
Source: http://ec.europa.eu/information_society/polic y/ecomm/implementation_enforcement/index_en.htm.
This is generally supported by studies showing a link between pro competitive regulation and higher productivity on the one hand and lower prices on the other hand, cf. Table
A12.2.
Table A12.2 Link between price and productivity and competitive regulation
Study Effect on telecommunication performance from in-
troducing competitive regulation
Price Productivity
Boylard and Nicoletti (2000) Pushing down prices Pushing up productivity
Copenhagen Economics (2005b) Pushing down prices Pushing up productivity
Note: Both studies find statistically significant estimates.
Source: Boylard and Nicoletti (2000): Trunk voice services (table A.4), Copenhagen Economics (2005b): Fixed
and mobile voice services.
So what are the concrete barriers making it difficult for European operators to provide
telecommunications service to Japanese consum ers in Japan? Based on three interviews
with European telecommunication operators, who have experience with the Japanese mar-
ket (namely Vodafone, Deutsche Telecom and British Telecom) and reports conducted by
the US Government and EBC Telecom Carriers Committee, we identify the most promi-
nent of these barriers.
Independent regulator and antitrust laws
Japan could strengthen its regulatory stance by setting up an independent, well-resourced
and empowered telecommunications regulatory authority with pro-competitive mandate.
Similarly, Japan could strengthen its antitrust laws. Better antitrust laws would make it pos-sible for carriers to affect sector regulation through an antitrust law suit against dominant
operators.
Transparency in information sharing
Transparency is very important for a new entr ant as they need to obtain knowledge about
the market and the applied regulation in or der to compete. Japanese authorities could
therefore consider increasing transparency (inc luding when it will intervene) and make sure
that access is granted to operators on transpar ent and fair terms. But also that information
is available on the dominant carriers cost structure, how its rates are calculated and on the
260
funding mechanism in regard to interconnect ion and universal service obligation, so to
avoid potentially unfair cross-subsidisation.
Equal access
NTT dominates Japan’s fixed line market through its control over almost all ”last-mile”
connections. This could be a sign of poor access regulation, which Japanese authorities
could consider addressing. For example, NTT could be obligated to publish network in-terconnection terms, conditions and prices on a suitably unbundled basis, using a forward-
looking cost methodology. This also entails account separation, so that NTT provides ser-
vices to competitors at the same rate using sa me procedures as those services are available
to their own retail operation.
Privatisation
Japan has an unclear separation between the Go vernment’s role as both owner and regula-
tor in telecommunications. Japan could therefore abolish the legal requirement that the
government own one-third of the dominant carrier NTT.
Technology and consumer demand
Adding to this list of barriers is a couple of other challenges that makes it difficult for a
European telecommunication operator to tran sfer technology from Europe to Japan.
These are differences in technology and differences in consumer demand.
The different technology used in Japan implies that European firms cannot just copy the
technology they use in Europe. According to on e EU manager of a financial firm in Japan,
this reduces their ability to reap important economies of scale.
A long time ago Japan started on a different technology path. The
Japanese spectrum is standardised around different standards than
the one used in EU. This means that one cannot just copy the
European technology and use it in Japan. This means that even a
pan-European or cross US operator cannot make easy use of their
economies of scale, making it more difficult to compete with
DoCoMo
And
Japan has different technical standards. The Japanese telecommu-
nication industry is ahead in terms of technology. However, it is
not only in the development they make their advantage, but also in
bringing the technology very aggr essively to the market. Japan was
for instance the first in the world with video telephony. You could
say that Japan is a Galapagos Island. It is an odd disadvantage to be
261
the first, but not being able to compete and to use that advantage
outside of Japan
In addition to this, there seems to be a strong tradition for close co-operation between tele-
communication operators and suppliers of hardware and software. This makes it more dif-
ficult for EU operators to enter the market. In addition, the advanced technology is not al-
ways available from non-Japan suppliers, which reduces competition among supplies, and the possibility for EU operators to make use of non-Japan suppliers.
Another barrier is consumer demand . The consumer demand in Japan seems different
than in Europe. EU managers state that this ma kes it difficult just to take European prod-
ucts to the Japanese market.
…the consumer demand in Japan is different than in Europe. The
expectations are high and specific. You would have to develop spe-
cial devises for the Japanese market
The Japanese market is different. You have to understand the cul-
tural differences and deal with this market in a different way. You
cannot, for instance, outsource a helpdesk to China. Japan is an at-
tractive market – the third biggest economy in the world – but it
needs special treatment
The NTMs identified in NTM inventory for th e communications sector mostly relate to
telecommunication services, but barriers are also hindering market entry and increasing
on-going costs for foreign postal operators an d express delivery operators in Japan. Here,
the dominant position of Japan Post is the key issue. The barriers identified in telecom-
munications can be grouped in four: competition-hostile regulation, weak antitrust en-forcement, government ownershi p and lack of transparency.
The
competition-hostile regulation is mainly due to a lack of regulated third party access
which results in unreasonably high intercon nection fees. The consequence is a lack of
competition in markets for both fixed line and mobile services. There is also a lack of fa-cilities-based competition acro ss different broadband platforms. Furthermore, the licensing
regime is not technology-neutral and there is an inefficient use of spectrum. Therefore,
much of the regulation is poorly equipped to foster competition from new entrants, not least from abroad. The
weak antitrust enforcement is problematic given the relati ve high market share of the
incumbent operator. Because of a weak antitr ust law and a weak enforcement, competitors
will have limited safeguards against the abuse of dominance and there is a high risk of anti-
competitive behaviour by carriers with market dominance.
The
government ownership of the incumbent is problematic because there is no clear
separation between the government's roles as owner and as regulator in telecommunica-
262
tions. This results in a closed loop of in formation and a non-transparent business envi-
ronment.
The
lack of transparency is particularly problematic for foreign operators since it adds to
the already high information asymmetry. Combined with a heavy regulatory supervision
and government control in the telecommunicati on sector, the regulatory framework is not
always transparent and adds burdens on oper ators while discouraging new entry and weak-
ening competition.
Potential solutions
Japan is aware of their regulatory issues and a ttempts have been made in order to make re-
forms that include better regulation. In Octobe r 2007, Japan's Ministry of Internal Affairs
and Communications issued a revised "New Competition Promotion Program 2010" in an
effort to address competition concerns as suppliers increasingly offer telecommunications
services over IP based networks. However, according to the US Government and EBC
Telecommunications Carriers Committee the Ja panese attempt is not good enough.
EBC concludes that the New Competition Pr omotion Program 2010 has not made clear
reference to some of the basic competition principals such as transparency and equal
treatment. Furthermore, in October 2008 the US Government urges that:
Japan ensures fair market opportun ities for emerging technologies
and business models, develop a regulatory framework for con-
verged and Internet-enable services, and strengthen competitive
safeguards on dominant carriers . The US Government also con-
tinues to request that Japan improve transparency in rulemaking
and ensure the impartiality of its regulatory decision making, in-
cluding by abolishing the legal requirement that the government
own one-third of the dominant carrier, Nippon Telegraph and
Telephone (NTT)
A12.3 Results and implications
The current cross-border export from EU to Japan of communications services amount to
€0.3 billion a year. This is mainly telecommunica tions services, but it also includes postal
services. However, not all telecommunication services are actually traded across the bor-
der. The flow we register as cross-border ex ports from EU to Japan are primarily the in-
ternational connection charges.
Based on gravity estimations, the barriers in Japan reduces Japanese demand for interna-
tional communications service equivalent to pr ices on such services being 24.7 percent
higher than in the absence of barriers. One way to overcome these barriers is by imple-
menting better regulation. As telecommunication is an industry with very high entry barri-
263
ers, regulation is particularly important in order to promote the public interest. Today,
however, the Japanese telecommunication sector is not subject to much regulation.
Even in light of lower barriers of lower barriers, and in turn higher cross-border flows, the
revenues will still be relatively small. In fact, the great potential is in making it possible for
European telecommunication operators to esta blish themselves in Japan and provide tele-
communications services to the Japanese producers. In comparison to the €0.3 billion that EU firms current receive from cross-border tr ade, the Japanese telecommunication market
approaches €140 billion. The barriers of FDI ar e lack of an independent regulator and an-
titrust laws, lack of transparency in informatio n sharing, lack of equal access and a lack of
privatisation. Furthermore, Japan uses a diffe rent technology which implies that the Euro-
pean firms cannot just copy the technology an d the Japanese consumer demand is also dif-
ferent.
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