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Firms, Governments, and WTO Adjudication: Japan's Selection of WTO Disputes

Published online by Cambridge University Press:  13 June 2011

Christina L. Davis  and
Yuki Shirato
Christina L. Davis
Affiliation:
University and the Woodrow Wilson, [email protected]
Yuki Shirato
Affiliation:
University of California, Berkeley, [email protected]
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Abstract

What explains the selection of cases for WTO adjudication? This article explores the business conditions under which industries lobby their home government to use the WTO adjudication process and the political factors that influence government decisions. It explains the industry pattern of selection for international trade disputes as a function of the velocity of the business environment. While WTO adjudication is seen as costly and slow, a positive ruling brings broad benefits in terms of deterrence against future discrimination. Firms in static industries will invest in WTO dispute settlement to achieve these benefits, but firms in industries shaped by dynamic competition have high opportunity costs that make them less willing to pursue adjudication. This argument accounts for why there are fewer WTO cases about electronics industry issues than there are likely incidences of protectionist measures. Since Japan is a leading exporter and provides a government report with unique data on potential WTO disputes, it was chosen to test the argument in greater depth. Interviews with Japanese business officials and statistical analysis of an original data set provide support for the argument. The authors conclude that the passive attitude toward WTO adjudication by Japan's largest export industry, electronics, and the sensitivity of Japan's diplomatic relations with China have constrained the cases that Japan files. These findings suggest that the effectiveness of the WTO for dispute settlement is conditional upon the time horizon of the industry and the political relations among members.

Type
Research Article
Information
World Politics , Volume 59 , Issue 2 , January 2007 , pp. 274 - 313
Copyright
Copyright © Trustees of Princeton University 2007

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49 Office and telecom equipment, typical electronics-industry products, comprised 14 percent of world merchandise exports in value in 2004. WTO, International Trade Statistics 2005.

50 Unlike the Japanese report, the U.S. report does not select cases on the basis of WTO consistency, so some items included are not potential WTO disputes.

51 Henrik Horn, Petros Mavroidis, and Hakan Nordstrom, “Is the WTO Dispute Settlement System Biased?” Discussion Paper, no. 2340 (Washington, D.C.: Center for Economic Policy Research, 1999). In an innovative study to generate potential disputes as a function of bilateral product-market pairings (PMPS) over S1 million, Horn, Mavroidis, and Nordstron find that for the first four years of the WTO and for the 113 members for which trade data was available, there were over one hundred thousand PMPS relative to 146 WTO disputes filed. The U.S., EU, and Canada initiated more disputes than predicted by their trade interests model. Lack of effective representation is suggested as one reason why developing countries initiate relatively fewer disputes than their share of trade.

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59 Author interviews with METI officials, Tokyo, June 3, 2003, and August 23, 2005.

60 We omit cases related to primary goods, services, and horizontal cases that do not mention a specific industry.

61 Japan's top-fifteen trade partners were routinely included in the reports: Australia, Canada, China, EU, Hong Kong, India, Indonesia, Korea, Malaysia, Mexico, Philippines, Singapore, Taiwan, Thailand, and the United States. In addition, reports occasionally listed trade barriers for Argentina and Brazil, which we have included.

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71 Ibid.

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73 We coded HHI for the product at the closest level of aggregation to the products specified in the trade barrier.Japan FairTrade Commission, Statistics of Cumulative Production and Shipment Concentration in MajorIndustries, http://www.jftc.go.jp/ruiseki/ruisekidate.htm (accessed October 30,2006).

74 Kanpo (fn. 58).

75 GDP data is from World Bank Development Indicators, reported in 2000 constant U.S. dollars. The import penetration and employment share data is from the OECD/sTAN database, www.oecd.org/ sti/stan (accessed October 30,2006).

76 Since the multinomial logit model assumes independence of irrelevant alternatives, in some cases the multinomial probit model is more appropriate. However, the data are not very informative about the correlation among the underlying latent variables. Using the Bayesian multinomial probit estimation of Kosuke Imai and David A. van Dyk, the estimation of the correlation parameter is found to be sensitive to its prior distribution. Nevertheless, when we conduct sensitivity analyses using various priors, e.g., strong positive correlation, independent, and strong negative correlation, the coefficient for R&D is consistently negative with substantive impact. Imai, Kosuke and van Dyk, David A., “A Bayesian Analysis of the Multinomial Probit Model Using Marginal Data Augmentation,” Journal of Econometrics 124 (February 2005CrossRefGoogle Scholar); idem, “MNP: R Package for Fitting the Multinomial Probit Model,” Journal of Statistical Software, 14, no. 3 (May 2005Google Scholar).

77 The results are consistent when clustering standard errors for seventeen two-digit ISIC industry categories or when clustering standard errors for thirteen trade partners. The results are also consistent when using rare events logit to estimate model 1 with a dichotomous dependent variable. For example, the estimated R&D coefficient using rare events logit is -2.116 (p-value of 0.025). King, Gary and Zeng, Langche, “Logistic Regression in Rare Events Data,” Political Analysis 9, no. 2 (2001CrossRefGoogle Scholar).

78 We used the software CLARIFY. See Michael Tomz, Jason Wittenberg, and Gary King, “CLARIFY: Software for Interpreting and Presenting Statistical Results, Version 2.1,” (Stanford University, University of Wisconsin, and Harvard University, January 5,2003). Available at http://gking.harvard. edu (accessed June 1,2005).

79 Keidanren announces an annual policy assessment for the LDP and the Democratic Party of Japan (DPJ), which evaluates the two parties' consistency and performance on ten priority policies (most members contribute to the LDP). This assessment provides the basis on which 1,662 member corporations make political contributions to political parties. Tax reform, social security system reform, and regulatory reform were listed as the top three items in 2006, whereas promotion of appropriate trade and investment policies was listed as the ninth item. Available at http://www.keidanren.or.jp/english/policy/2006/067table.pdf (accessed October 30, 2006).

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81 Author interview with METI official, Tokyo, August 23, 2005.

82 Japan has joined as a third party for two complaints against China; one initiated by the United States (DS309 Value-added Tax on Integrated Circuits, filed in 2004) and one initiated by the U.S, EU, and Canada (DS339, 340,342 Measures Affecting Import of Auto Parts, filed in 2006). A METI official said that the affected Japanese industry associations did not request a complaint in these cases. Author interview with METI official, Tokyo, August 17,2006.

83 Eight of Japan's eleven WTO cases have additional complainants (see Appendix), as indeed most WTO disputes involve more than one complainant. It is not clear, however, whether Japan piggybacks on the actions of other countries in terms of legal work and diplomatic relations in these eight cases, since Japan prepares an independent legal case and represents itself in the WTO adjudication.

84 Omitted cases are expected to be few and of little significance. As discussed in Section IV in the subsection “Identifying Potential WTO Cases,” the government gathers information through every available channel and aims to be comprehensive in its compilation of the list. Firms have little reason not to disclose that they face a trade barrier.

85 Rosendorff (fn. 18).

86 World Trade Analyzer data set, compiled by International Trade Division, Statistics Canada. Information available at http://www.statcan.ca/bsolc/english/bsolc?catno=65F0016X (accessed October 30,2006).

87 Textiles represents another low-velocity industry, but would not be expected to take an active role advocating WTO cases given low exports. The chemical industry competes in a low-to-middle velocity business environment and has substantial exports, but the industry faces fewer trade barriers. It may also have less demand for WTO dispute resolution because it has another forum option. Chemical industry trade issues are routinely addressed at the International Council of Chemical Associations (ICCA), which was established by developed countries' national chemical associations during the GATT Uruguay Round negotiations. Author interviews with officials of Sumitomo Chemical and Japan Chemical Industry Association, Tokyo, January 23, 2004, and February 23, 2004.

88 We categorize ISIC 30–33 as electronics.

89 The pattern of activity to address IPR infringement in China, which is a major problem for Japanese firms, shows a preference for settlement by administrative procedure over litigation. Administrative procedure is used more (4,263 requests) than formal legal claims (192 cases totaling civil and criminal procedures). METI, Field Survey for Infringement of Intellectual Property Right in China (June 2005). Available at http://www.meti.go.jp/english/report/data/050623ChinaIPR.html (accessed October 30, 2006). Primary reasons cited for prevalent use of administrative procedure are expedited process and direct benefits through confiscation and disposal of counterfeit goods. In the report, twenty-one of the 134 companies that responded were electronics firms; of those twenty-one, 95 percent suffer from IPR infringement. Other industries include machinery (thirty-five respondents, 71 percent suffer from IPR infringement); chemical (twenty-seven respondents, 63 percent suffer from IPR infringement); automobile (eight respondents, 100 percent suffer from IPR infringement); and miscellaneous industrial goods (twenty-seven respondents, 78 percent suffer from IPR infringement).

90 Author interview with METI official, Tokyo, January 13, 2004.

91 Author interviews with officials of Sony, Tokyo, December 4,2003, and January 25,2005; author interviews with officials of Matsushita, Tokyo, November 28,2003.

92 Author interview with Sharp official, Tokyo, January 15, 2004; author interview with Ricoh official, Tokyo, February 12, 2004.

93 Author interview with Matsushita Electric official, Tokyo, November 28,2003; author interview with Mitsubishi Electric official, Tokyo, January 21,2004.

94 Journalof'Commerce, (January 15,1999).

95 The DOC determined that Fujitsu and NEC had sold vector supercomputers at less than fair value. It calculated a dumping margin of 173 percent for Fujitsu and 454 percent for NEC. Department of Commerce, “Notice of Final Determination of Sales at Less than Fair Value: Vector Supercomputers from Japan,” Federal Register, vol. 62, no. 167 (August 28,1997), 45623–45627.

96 Journal of Commerce, (March 4,1999).

97 Author interview with NEC officials, Tokyo, March 10, 2004. According to the officials interviewed, one of the reasons they wanted to take this case up to the Supreme Court was to defend NEC's corporate reputation of not giving in to unfair trade practices.

98 Author interview with NEC officials, Tokyo, March 10,2004.

99 Author interview with Hitachi official, Tokyo, January 29, 2004.

100 Author interview with Sony official, Tokyo, December 4, 2003.

101 Author interview with METI official, Tokyo, August 23,2005.

102 Author interview with NSC official, Tokyo, January 13,2004. Metal-related industries composed only 3 percent of the total FDI outflows ofJapan in 2003, compared with 14 percent for the electronics industry and 8 percent for the transportation industry. See http://www.mof.go.jp/english/fdi/ 2004a_3.htm (accessed October 30, 2006). Metal includes both ferrous and nonferrous industries. Transportation includes automobiles, motorcycles, and other vehicles as well as components.

103 Process development and quality improvement of existing products are more important than rapid new-product development. Author interview with NSC official, Tokyo, October 29, 2003.

104 The practice of having the industry beneficiary pay the litigation fees, at least partially, is fairly common among WTO members, including the United States and the EU.

105 Author interview with NSC official, Tokyo, October 29, 2003.

106 Author interviews with NSC and JFE officials, Tokyo, October 29, 2003, January 9, 2004, and January 13,2004.

107 Author interview with NSC official, Tokyo, October 29, 2003. “United States-Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea” (DS202, June 13, 2000).

108 Author interview with NSC official, Tokyo, October 29, 2003.

109 Before 2000, Toyota and Nissan shared the chairmanship. Author interview with JAMA official, Tokyo, October 29, 2003.

110 Yano Research Institute, Market Share in Japan (Tokyo:Yano Research Institute, 2005Google Scholar).

111 The ratio of exports in domestic productionforToyota is 53 percent, Nissan 51 percent, and Honda 41 percent. Available at http://www.jama.or.jp/stats/stats_news.html (accessed October 30,2006).

112 Author interview with officials of Nissan, Tokyo, December 19, 2003; author interview with officials of Honda, Tokyo, December 22, 2003; author interview with officials of Toyota, Tokyo, February 20, 2004. Industry officials said they chose bilateral venues over others, especially WTO adjudication, because of fear of direct retaliation from the Chinese government and anticipation of the Japanese government's reluctance to bring a case against China. In 2001, China imposed a 100 percent tariff on Japanese auto imports as retaliation after Japan imposed safeguard measures on agricultural imports from China.

113 Nikkei Shimbun (March 19, 2004); Inside US-China Trade, vol. 4, no.6 (February 11, 2004).

114 Iida (fn. 54).

115 Author interview with JAMA official, Tokyo, October 29, 2003.

116 Author interview with METI official, Tokyo, June 3,2003; author interview with Nissan official, Tokyo, December 19, 2003.

117 Iida (fn. 54), 135.

118 Author interview ofJAMA official, Tokyo, October 29,2003; author interview with METI official, Tokyo, August 25, 2005.

119 Author interview with Toyota official, Tokyo, January 16,2004.

120 Bayard, Thomas O. and Ann Elliott, Kimberly, Reciprocity and Retaliation in U. S. Trade Policy (Washington, D.C.:Institute for International Economics, 1994Google Scholar).

121 Schoppa, Leonard, “The Social Context in Coercive International Bargaining,” International Organization 53, no. 2 (1999CrossRefGoogle Scholar).

122 Author interview with officials of JAMA, Tokyo, October 29,2003; author interview with officials of Nissan, Tokyo, December 19,2003; author interview with officials ofToyota, Tokyo, February 20,2004.

123 Japan Automobile Manufacturers Association, U.S.-Japan Trade Relations-Myth and Reality-The Case of the Automobile Negotiations (November 10, 1995). Available at http://www.jama.org/ library/positionl 11095.htm (accessed October 30, 2006).

124 Nikkanjidosha Shimbun (May 1995).

125 Author interview with officials ofJAMA, Tokyo, October 29,2003; author interview with officials of Toyota, Tokyo, February 20, 2004.

126 Author interview with Toyota official, Tokyo, January 16, 2004.

127 Davey (fn. 28).

128 Economic and Social Research Institute, Business Statistics, http://www.esri.cao.go.jp/jp/stat/ (accessed October 30,2006).

129 Asahi Shimbun (August 1, 2005), 5. In another article, Nissan and Toyota officials lamented about the shortening cycle of new products. Nikkei Shimbun (July 1,2005).

130 Author interview with Nissan representative, Tokyo, December 19, 2003. 131 Author interview with Toyota official, Tokyo, January 16,2004.