Arizona Journal of International and Comparative Law, Vol. 16, p. 185, 1999

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This article concerns the avoidance and settlement of trade disputes between Japan and the United States. There are three aspects to the question of dispute settlement and avoidance between Japan and the United States that deserve close attention.

First, the Agreement Establishing the World Trade Organization (WTO) and its related agreements move the General Agreement on Tariffs and Trade 1947 (GATT) system along the continuum from a soft law to a hard law system. There is an increased level of detail in the WTO legal instruments, and dispute settlement procedures are redesigned to reduce political influence in the outcome of proceedings. The WTO legal instruments are intended to channel trade disputes into the WTO dispute settlement forum. The evolution of the GATT legal system should attract Japanese and U.S. trade officials to the WTO dispute settlement forum, and compel its use, in a large number of contexts.

Nevertheless, there are important gaps in the WTO rule system, and these gaps are not always filled by alternative bilateral and minilateral trade instruments. These include the absence of minimum rules on the maintenance of competitive domestic markets, the absence of adequate sectoral coverage among members to the General Agreement on Trade in Services (GATS), the absence of rules on the treatment of foreign investors (including with respect to corporate governance), the absence of adequate scope of coverage of the plurilateral WTO Government Procurement Agreement, the absence of adequate rules governing civil offset arrangements, and so forth. Many of the trade disputes between Japan and the United States involve these "gap" areas. Though such disputes might in theory be resolved under a non-violation nullification or impairment action in the WTO Dispute Settlement Understanding (DSU), the lack of clarity of the WTO system in applying the non-violation rules makes such solutions problematic on all sides.

Improvement in the system for the avoidance and settlement of trade and investment disputes between Japan and the United States may be brought about gradually through the enlargement and refinement of the rule system governing relations between the two countries. This enlargement and refinement will not necessarily take place in the WTO. There are a variety of bilateral, minilateral and multilateral fora in which more complete systems may be negotiated, including the North American Free Trade Agreement (NAFTA), Asia Pacific Economic Cooperation (APEC) forum and the Organization for Economic Cooperation and Development (OECD), and the choice of forum will vary according to context. The enlargement and refinement of the rule system will be affected by limitations arising out of system incompatibilities.

Second, there are good faith differences between Japan and the United States concerning the desirable level of government intervention in the domestic and international marketplace. These good faith differences lead to disputes concerning whether actions by governments are taken in order to protect against foreign competition, or are taken instead to promote desirable national domestic policy goals, such as stability in employment. In addition, some differences between Japan and the United States involve the behaviors of consumers, enterprises and political parties which are deeply entrenched. Even assuming that trade officials in both countries can adequately identify ways in which economic practices of Japan and the United States could be made more compatible, and even assuming that such changes were on both sides concluded to be desirable, it is not necessarily within the power of trade officials to mandate such changes.

When system changes are impracticable, and system incompatibilities lead to an imbalance in trade relations, some form of adjustment mechanism may be desirable as a means of diffusing trade friction. Identifying entrenched system incompatibilities and creating an adjustment mechanism present a challenge to trade officials.

Third, the trend of Japan-U.S. relations over the past several decades has been to solve trade disputes through market access agreements that are either explicitly or implicitly enforced by governments. Such agreements are anticompetitive, in effect promoting market allocation by potential private competitors. These solutions are suboptimal from a competitive market standpoint, though they may be preferable to a closed market alternative. This criticism of managed market access arrangements assumes a preference for open competitive international markets. Whether Japanese and U.S. trade officials in fact share this preference on a theoretical basis is an important question.

It should be clear ab initio that there is no "magic bullet" solution to trade and investment conflicts between Japan and the United States. These conflicts may in fact become more intense as the "China problem" more directly affects bilateral Japanese-U.S. relations. An incomplete rule system cannot be made complete overnight. Major macroeconomic policy differences cannot be dismissed by each side as aberrational thinking. Suboptimal market allocation solutions must be replaced with better solutions. If this were easy or convenient, it would already have been done.