Cablegate: Readout of Us-Japan Trade Forum

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FM AMEMBASSY TOKYO
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UNCLAS SECTION 01 OF 08 TOKYO 005355

SIPDIS

STATE PASS TO USTR FOR AUSTR WCUTLER

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECONETRDEAGRJA

SUBJECT: READOUT OF US-JAPAN TRADE FORUM

1. (SBU) SUMMARY: An array of bilateral trade
issues were addressed and policy discussions on FTAs
held in the fourth meeting of the U.S.-Japan Trade
Forum in Tokyo on October 18. Assistant U.S. Trade
Representative Wendy Cutler led the U.S. delegation,
while Director General for Economic Affairs Yoichi
Otabe led the Japanese side. In the talks, both
sides agreed to continue their information exchanges
on free trade agreements (FTAs) with third countries
and engaged in candid discussions of U.S. and
Japanese approaches and policies with respect to
FTAs with other countries. Bilateral issues
covered included Japan's continuing restrictions on
exports of U.S. beef; a review of an Expert Level
dialogue on public works, barriers to trade in Japan
for marine craft; and impediments to U.S. rice cake
flour exports to Japan. Japan raised U.S. import
and labeling procedures for organic products and
meat extract from Japan, as well as highlighted its
concerns with the 100 percent cargo scanning
provisions established in the recently enacted so-
called "9/11 Act." END SUMMARY.

----------
BACKGROUND
----------

2. (U) On October 18 the United States and Japan
held their fourth set of Trade Forum talks in Tokyo.
The Trade Forum was established under the 2001
Economic Partnership for Growth (EPG). Assistant
U.S. Trade Representative (AUSTR) Wendy Cutler led
the U.S. delegation and MOFA Director-General for
Economic Affairs Yoichi Otabe led the Japanese side.
Immediately prior to the start of the Trade Forum,
Cutler and Otabe exchanged recommendations under our
bilateral Regulatory Reform Initiative, which the
two governments carry on a separate track under the
EPG.

---------------
OPENING REMARKS
---------------

3. (SBU) Otabe congratulated Cutler on the
successful conclusion of the Korea-U.S. Free Trade
Agreement. He asked that Cutler now refocus her
energies on Japan, joking that this year, unlike in
years past, the Japanese Government could honestly
say that it was pleased by her visit to Japan.
Otabe expressed satisfaction that this year's
Regulatory Reform Initiative agenda included a
number of new items, reflecting the evolution that
the process has undergone. He later stated that
success of this Initiative has led Japan to
implement a similar dialogue with the European Union
(EU) and possibly launch another such dialogue with
Canada. He emphasized the importance of U.S.
Government action on zeroing, which he said had been
judged to be inconsistent with U.S. obligations
under the World Trade Organization (WTO).

4. (SBU) Cutler agreed the U.S.-Japan relationship
was changing and improving. Noting that a number of
items in our Regulatory Reform Initiative took on
"urgent significance," she emphasized the following
three areas: 1) the importance of valuing
appropriately and rewarding innovative medical
devices and pharmaceuticals; 2) ensuring a level
playing field for the banking, insurance, and
express delivery sectors during the privatization of
Japan Post, and 3) the liberalization of bank sales
of insurance products. She said she also was happy
to be discussing new issues under the Initiative.

-------------------------------------------
REPORT ON PUBLIC WORKS EXPERT-LEVEL MEETING
-------------------------------------------

5. (SBU) The Japanese delegation described as
"productive" the July 31 bilateral public works
expert-level meeting. A representative from the
Ministry of Land, Infrastructure and Transportation
(MLIT) announced that his ministry had advanced

TOKYO 00005355 002 OF 008

recommendations concerning licensing for
construction work in the United States. On U.S.
concerns regarding bidding practices in Japan, he
said that his delegation explained Japanese thinking
as much as it could during the meeting.

6. (SBU) Cutler expressed her disappointment that
the U.S. market share in Japanese public works is
still less than one percent. She said she was
pleased that the July 31 technical meeting produced
progress on several issues and the hope that we can
see the U.S. market share break the one percent
level through continued work. She noted three areas
where she wished to see more progress and urged
Japan to publish all definitive criteria in
procurement notices as per the action plan so that
U.S. firms could bid on projects. She also asked
that MPA procedures be used for all procurements
associated with the Chubu airport, which although
completed is still awarding contracts. She urged
the GOJ ensure design firms are compensated
appropriately for their work.

7. (SBU) Commerce Department Japan Office Director
Nicole Melcher noted progress since the 2005 Trade
Forum in: streamlining of foreign engineers'
registration requirements, increasing the use of
mixed-type procurements, addressing unreasonably
high business evaluation scores, simplifying
documentation requirements for Public Invitation
Proposal Procedures, providing information on Toshi
Saisei and PFI projects, and increasing efforts to
implement Construction Management procurements. She
also outlined two additional areas of concern: the
Okinawa Institute of Science and Technology, and the
three-company rule for joint ventures.

8. (SBU) Otabe thanked Melcher for her report and
said that in the wake of any progress made with the
United States to open market access to public
procurement, Japan experiences strong pressure from
South Korea to receive the same treatment. He
emphasized the importance of regulatory transparency
to foreigners. Otabe described the classification
of the Chubu airport as a future project, which may
have had an impact on how the procurement procedures
were implemented. The MLIT representative suggested
a lack of mutual understanding still remains in
certain respects and looks forward to adding on the
improvements that have already been made.

9. (SBU) Cutler urged Japan to be more flexible
regarding the timing of future Expert-Level Meetings
on Public Works and noted that MLIT and the
Department of Commerce would hold informal
consultations the next day to discuss some of the
topics raised in the day's session.

-----------------
U.S. AGENDA ITEMS
-----------------

-- Marine Craft:

10. (SBU) With respect to marine craft, Cutler
expressed strong frustration with having discussed
this issue for nine years and urged Japan to adopt
more transparent and less burdensome regulations
that would still ensure the safety of vessels and
engines imported to Japan. She said she was pleased
with Japan's adoption of certain International
Standards Organization (ISO) standards and expressed
the hope that Japan would adopt future international
standards without modification.

11. (SBU) Melcher highlighted better understanding
of regulations that had been achieved through a
digital video conference (DVC) with MLIT, and that
there was agreement to continue holding DVCs at the
rate of three to four per year. The topics agreed
upon for the next DVC focus included ISO standards
adopted by Japan and steps Japan has taken to ensure
the consistent application of regulations at all
ports. She said the USG had also agreed to include
MLIT's request to discuss U.S. adoption of ISO

TOKYO 00005355 003 OF 008

standards during the next DVC to be held in November
or December -- with exact dates would be worked out
soon. Cutler said we welcomed the agreement to
continue DVCs and encouraged both sides to approach
this issue with renewed energy and a commitment to
solve problems in this area.

12. (SBU) Otabe said Japan's view that the
discussion at the working level had covered seven
areas and had solved most issues, including plastic
fuel tank procedures. He noted the U.S.
delegation's references to ISO standards, quipping
that it had been his impression that the United
States did not attach a great deal of importance to
such standards. He said that Japan had tried to
incorporate as many ISO standards as possible into
its regulations, noting that 40 such standards had
been incorporated already. Otabe concluded by
pointing out that Japanese imports of marine craft
from the United States were growing.

-- Beef:

13. (SBU) Noting the upcoming visit of USTR Special
Envoy Richard Crowder and Deputy Undersecretary of
Agriculture Ellen Terpstra on October 22, Cutler
underscored the U.S. expectation that Japan reopen
its beef market consistent with World Animal Health
Organization (OIE) standards and implement trade
policies that were based on science.

14. (SBU) Otabe asserted that the Government of
Japan fully shared the U.S. view on the importance
of resolving this issue. He also emphasized that
Japan would work to resolve this issue in a manner
that was consistent with "science," as Former Prime
Minister Abe promised President Bush in September.
He noted the need to find a practical way of moving
the issue forward, stating that the Government of
Japan hoped soon to finalize the draft Technical
Working Group report on the issue.

15. (SBU) Cutler raised concern that when Japan ends
its BSE age restrictions and permits all imports of
U.S. beef, the resulting increase in imports would
likely trigger Japan's beef import safeguard,
raising tariffs from 38.5% to 50%. These safeguards,
which are intended as a means to mitigate the
effects of particularly dramatic import surges,
would be inappropriate in the case of U.S. beef
because normal market conditions do not currently
exist in Japan given its import restrictions.
Cutler asked that when the fiscal year regulations
are drafted (over the next month or two), import
safeguard measures be established in a manner that
allows trade to return to its pre-2004 levels
without triggering the safeguard. Shiro Inukai,
Deputy Director, Meat Marketing and Trade Policy
Division, MAFF and MOFA's Otabe assured Cutler that
her point, as well as several other factors, would
be taken into consideration. In fiscal years 2006
and 2007, Japan established a more lenient safeguard
calculation to account for an increase in imports.
Cutler pressed them several times for more
affirmative language ("positively"), to which they
settled on "in a fair manner".

-- Rice:

16. (SBU) Cutler expressed exasperation that she had
raised this issue at the last Trade Forum two years
ago in Seattle but had since seen little progress.
She noted when the Japanese rice stock release
program was approved, Japan had promised that it
would not disadvantage imports of U.S. rice cake
flour mix. However, she commented that trade data
to date showed that it was hurting rice cake flour
mix imports, not only from the United States, but
from other countries as well. Noting the exchange
of letters from Deputy USTR Bhatia/USDA U/S Keenum
with MAFF Vice Minister Murakami, she took issue
with Murakami's insistence that higher U.S. prices
for rice cake mix due to higher prices for sugar and
California rice are the factors leading to a decline
in U.S. rice cake imports into Japan. In contrast,

TOKYO 00005355 004 OF 008

she said, imports had declined because Japan was
flooding the domestic market with its release of MMA
rice stocks that were priced significantly below
what the product would otherwise cost in Japan.
USDA officials passed out data to demonstrate these
trends.

17. (SBU) Otabe responded with three points. First,
he asserted MAFF's policies were necessary to manage
the balance of supply and demand of a product that
is seen as having a "special nature" in Japan. He
noted the overall decline in consumption of rice and
processed rice products in Japan. Second, Otabe
stated the MMA system is a key component of Japan's
effort to balance supply and demand. He commented
the release system expands the domestic consumption
of MMA rice and that because this was the best use
of it, the U.S. Government should be happy with the
policy. Third, Otabe referenced Murakami's letter
and its explanation of prices as affecting Japanese
import levels. He also commented that high Chinese
and Indian consumption of commodities are causing
rising costs in general -- and are causing decreased
import levels as a result, and not exclusively for
rice flour cake mix.

18. (SBU) MAFF International Affairs Director
Tomaoki Uemura cited four factors as the primary
culprits behind the drop in U.S. rice cake flour mix
imports: 1) changes in foreign exchange rates that
have weakened the Japanese yen; 2) poor rice
harvests in California that have driven upwards the
cost of U.S. rice; 3) the increased cost of ocean
freight services; and 4) the increase in the price
of sugar in the United States. Uemura assured the
U.S. delegation that he would continue to watch
these trends.

19. (SBU) Tokyo Senior Agricultural Attache Spencer
noted prices for wheat, rice, corn, barley and other
commodities have also risen dramatically, but there
has not been a decline in Japanese imports.
Furthermore, information USDA had received from
traders indicated the price of released MMA rice was
the determining factor. An increase in unit prices
does not necessarily translate into corresponding
decreases in imports and that freight costs should
affect commodities equally, he said. He also
asserted Japan was confusing two of its WTO
obligations: first, its imports of MMA rice due to
the Uruguay Round negotiations, and second, the
status of rice flour cake mix as a bound tariff. He
noted MAFF's role as a state trader was impairing
market access, clarifying that he was referring to
Article XXIII of GATT.

20. (SBU) Otabe agreed Japan needs to honor its WTO
commitments and wondered about the demand elasticity
of other agricultural products. He commented on
MAFF's efforts to preserve traditional rice-based
products during an age of changing tastes. He asked
the USDA representative if his reference to Article
XXIII was implying a possible nullification and
impairment of U.S. market access rights, to which
the USDA representative responded affirmatively.
This sparked a few minutes of debate between Otabe
and Uemura that was not translated and seemed
moderately heated. Finally Uemura commented on the
impact of inflation on other commodities and said he
would have to look into why the effect of reduced
imports was only seen in imports of rice flour cake
mix. (NOTE: At a reception Otabe commented privately
he thought the rice cake flour issue presented WTO
problems for Japan. End Note.)

---------------------
JAPANESE AGENDA ITEMS
---------------------

-- Organic Farm Products

21. (SBU) Otabe commented on the fact that U.S.
regulators have not yet acted on Japan's application
for equivalent recognition with respect to organic

TOKYO 00005355 005 OF 008

product labeling practices. Agricultural products
had been identified as having high export growth
potential in Japan, he said, and the export of
organic products represented one of Japan's highest
priorities. He reminded the U.S. delegation that
Japan first submitted its application to U.S.
regulators in early 2006. He noted Japan had
already granted equivalency to U.S. labeling
procedures in this area.

22. (SBU) Cutler responded that this was a win-win
issue for both parties. Unfortunately, she had been
informed regulators in the U.S. have been very busy
making revisions to the United State's own organic
rules. Cutler acknowledged both sides were
frustrated and urged the Japanese delegation to
discuss this issue further within the Regulatory
Reform Initiative to try and seek a solution. The
Japanese responded that they would.

-- Meat-related Substitute

23. (SBU) Otabe introduced Japanese concerns that
U.S. import regulations with respect to meat extract
products, which are used as seasoning for processed
foods, are unnecessarily strict and inconsistently
applied. Occasionally imports of these products
from Japan are not authorized, Otabe said, but
sometimes they are. He asked for more clarity and
consistency with respect to U.S. import regulations
in this area. A MAFF representative noted this was
the most common complaint his agency heard from
Japanese importers in the United States. He said it
was his understanding beef extract products were
banned in the United States due to BSE concerns.

24. (SBU) The USDA representative responded Japan's
request was reasonable and promised to obtain more
information regarding import procedures for these
products. The USDA representative noted more
specific information on the products involved would
be needed and suggested the USG should be able to
review the request through the same channels as
those used to review Japan's beef exports to the U.S.

-- Other Issues (One Hundred Percent Cargo Scanning)

25. (SBU) Otabe raised the 100 percent scanning
requirements set out in the recently-enacted
"Implementing Recommendations of the 9/11 Commission
Act of 2007" ("9/11 Act"). He highlighted Japanese
cooperation with the U.S. on a variety of security-
related fronts since 9/11, such as the priority
given by PM Fukuda to ensuring the extension of the
law authorizing Japanese support to the Operation
Enduring Freedom mission in Afghanistan. He
reminded the U.S. delegation of Japanese concerns
with respect to the 100 percent scanning
requirements in the 9/11 Act, as were laid out in a
letter from Japanese Ambassador Kato to various U.S.
Cabinet-level Secretaries and Members of Congress.
Specifically, he said, the Japanese worry
implementation of the provisions would create severe
and unnecessary disruptions to global trade.

26. (SBU) Cutler responded by recognizing the
importance that the Japanese attach to this issue.
She said that U.S. agencies were in the process of
preparing a response to Ambassador Kato's letter,
and promised to relay Otabe's concerns to the
Department of Homeland Security and other key
players in the U.S. Government.

----------
FTA ISSUES
----------

-- Next Steps on FTA Information Exchanges

27. (SBU) Cutler and Otabe turned to discuss next
steps in the exercise to exchange information our
respective Free Trade Agreements with other
countries, an undertaking endorsed at the December
2006 Sub-Cabinet Economic Dialogue meeting and
reflected in the Bush-Abe April 2007 Summit joint

TOKYO 00005355 006 OF 008

statement. Otabe said so far exchanges of
information had been held on eight FTA chapters.
These exchanges had gone well and should continue
until all relevant chapters were covered, something
he considered a priority. The two governments had
some differences in their respective approaches, but
also shared many commonalities. Japan has engaged
in the model measure exercise in Asia-Pacific
Economic Cooperation (APEC), Otabe said, but the
country's bilateral exchanges with the United States
were of far more importance to Japan.

28. (SBU) Otabe then proposed broadening the
exchanges to cover specific issues or countries as
opposed to the chapter-specific exchanges that had
been conducted to date. He noted that Japan was
currently engaged in negotiations with certain
developing countries, such as India and Vietnam, and
that these talks had produced new types of
difficulties as these countries appeared to "care
more about their status as developing countries"
than did other trading partners with which Japan had
previously negotiated. It would be interesting,
Otabe said, to hear the United States' experience
addressing such problems. Japan was also very
interested to hear about the United States'
experience negotiating with Korea. He proposed we
report on our experiences to date during the
upcoming Sub-Cabinet dialogue scheduled in December.

29. (SBU) The U.S. Government had also found the FTA
information exchanges useful, Cutler told Otabe, and
agreed they should continue. She added that she
would like to see information exchanges on chapters
that the U.S. includes in its FTAs but that are not
present in the Japanese Economic Partnership
Agreements (EPAs, the preferred Japanese lexicon for
their agreements). Cutler listed as examples the
U.S. chapters on labor, environmental issues, and
pharmaceuticals and medical devices.

30. (SBU) Otabe agreed there was no reason to
exclude such chapters. Japanese EPAs may not
include specific chapters devoted to these issues,
but they are addressed in some manner, including
labor and environment. It would be interesting to
hear the U.S. experience in these areas, he said,
since they are likely to gain importance over time.
If the U.S. side was interested, Otabe proposed
sharing the Japanese experience with providing
environmental and labor cooperation within the
context of the Association of Southeast Asian
Nations (ASEAN).

31. (SBU) Cutler emphasized the importance of
deciding "how to report on our work." She said the
immediate concern was reporting to the Sub-Cabinet,
but expressed concerns such a report would not be
finished in time for its next meeting in December,
particularly given past experiences where such
documents had required protracted negotiations on
both sides. Both Cutler and Otabe agreed given time
constraints the best option would be to prepare a
short, factual paper (rather than a lengthy
analytical piece) identifying the similarities and
differences in our FTAs. Cutler suggested the
report could be even more ambitious, to which Otabe
agreed. Cutler said she would need to discuss the
proposal with her colleagues and provide an official
response at a later date. With respect to
developing countries that attempt to leverage their
developing status to obtain special and differential
(S&D) status, Cutler said that we look at metrics on
whether a trading partner is developing or developed.

32. (SBU) Otabe pointed out the U.S. had initiated
some FTA discussions with South Africa, a country
where Japan has had poor experience in negotiations.
He also noted one of Japan's current priorities is
in the development of activities in energy-rich
countries, an area where he would be interested to
hear the U.S. experience. A Ministry of Economy,
Trade and Industry (METI) representative pointed out
that the U.S. and Japan had both negotiated with
Malaysia, and it would be useful to compare and

TOKYO 00005355 007 OF 008

contrast their respective experiences there. With
respect to the report, she emphasized that she and
Otabe would need to be personally involved to ensure
that the draft does not become held up due to
procedural differences. She also noted no U.S. FTA
beyond NAFTA had included energy security issues.

-- Updates on FTAs with Third Countries

33. (SBU) Otabe began with an update on the status
of Japan's ongoing EPA negotiations. He noted two
new EPAs came into effect in 2007: one with Chile
and another with Singapore. (The Singapore EPA was
actually a revision of a prior EPA with that trading
partner; the revision grants additional tariff
concessions to Singapore in return for more
concessions from Singapore with respect to financial
services.) So far in 2007, Japan has signed EPAs
with Thailand, Brunei, and Indonesia. The EPA with
Thailand was approved by the Diet, but further
action remained on hold pending more progress
towards democracy in that country. Japan would like
to submit the Brunei and Indonesia EPAs to the Diet,
but the legislative priority at the moment remains
renewal of Japan's OEF mission. Those EPAs will
need majorities in both Houses of the Diet, but
Otabe noted this probably will not be difficult
because both political parties tend to support
Japan's negotiation of EPAs.

34. (SBU) Japan has started negotiations with
Vietnam and India, but the talks have encountered
problems. The two countries are insisting that, due
to their developing status, they can offer no more
than 80 percent trade liberalization (though they
are happy to accept Japan's 90 percent). Cutler
asked how Japan defines "substantially all trade"
for the purposes of GATT Article 24. Japan replied,
"[trade liberalization of] 90 percent and above."
Because India and Vietnam were offering only 80
percent trade liberalization, there were some
questions about whether Japan could continue
negotiations with those parties.

35. (SBU) With respect to Australia, Otabe indicated
two rounds of talks have taken place since their
launch, with the third round scheduled for November.
Otabe said his government had encountered strong
resistance from farmers and some Diet members, who
were pressuring MOFA not to proceed with the
negotiations given their strong agricultural
components. As such, Otabe said he was "not
optimistic" about the prospects for a speedy
conclusion.

36. (SBU) Japan has also begun EPA negotiations with
Switzerland, though Otabe admitted he was not sure
why that country was chosen as a partner.
Negotiations with Korea have been suspended since
March 2004. Japan successfully negotiated a
collective goods plus services agreement with ASEAN,
but Japan will now be required to negotiate
individually with each member country because ASEAN
lacks collective bargaining power. In response to a
question from Cutler, Otabe conceded the negotiation
with ASEAN included Burma. However, because most of
Burma's products already enter Japan duty-free due
to Burma's Least-Developed Country (LDC) status,
Otabe did not anticipate the agreement would yield
many further gains for Burma.

37. (SBU) With respect to the potential of an
FTA/EPA with a "large economy," Otabe said since the
successful conclusion of the Korea-U.S. FTA
negotiation, business associations such as Keidanren
have urged The GOJ to pursue EPAs with similar
"large economies." However, as a practical matter,
the Japanese Government recognizes it is not in any
position to pursue such negotiations at this time.
In response to a question from Cutler, Otabe said
discussions with the EU are being undertaken within
separate business sector study groups in Japan and
the EU, and are not to be considered government-to-
government.

TOKYO 00005355 008 OF 008

38. (SBU) Cutler then offered an overview of the
status U.S. FTA negotiations. Among other issues,
she discussed the successful conclusion of the
Korea-U.S. FTA. During this segment Otabe
interrupted her to ask whether non-tariff barriers
were a problem in Korea. Cutler responded there was
a whole range of barriers that had to be addressed
in the talks. In this respect, the U.S. - Japan
Regulatory Reform dialogue had been instructive in
advancing the KORUS agenda.

39. (SBU) Otabe then said he had heard German
Chancellor and EU President Merkel had wanted to
initiate FTA negotiations with the U.S, but had
found little support from her colleagues to do so.
He asked as well about the U.S.-EU Transatlantic
Economic Council and the work the U.S, and EU are
doing to remove regulatory barriers to economic
engagement. Embassy Tokyo EMIN reviewed the
development of the Transatlantic Economic Council
over the previous year. Otabe appreciated hearing
what the U.S. and EU had done to revitalize efforts
to remove barriers to economic engagement, to boost
transparency and find ways U.S. and EU regulators
could be aware of each other's work and goals, and
to improve the overall business climate to expand
transatlantic ties and prosperity. EMIN noted there
may be lessons to draw into the work between the U.S.
and Japan.

---------------
CLOSING REMARKS
---------------

40. (SBU) Cutler thanked Otabe and the Japanese
delegation and suggested using the Trade Forum as a
venue to discuss other cross-cutting trade policy
issues in the future.

41. (SBU) Otabe responded he too would like to see
the Trade Forum used to discuss other types of
issues such as intellectual property rights (IPR),
China, and climate change. In a theme he returned
to several times during the day, he said that in
contrast with the trade wars of the past Japan and
the United States today shared many interests and
objectives. He reiterated Japan was very pleased by
Cutler's visit, and expressed his hope that she
would come to Japan more often now that the Japan-
Korea FTA had been concluded.

This cable was cleared by USTR, Commerce and USDA.
SCHIEFFER

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