GLOBE

US-Japan Fairness Issues in the
Kodak-Fuji Case


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by Doug Daniels
January 1998

On December 5, 1997 the US lost its first major trade dispute in the newly formed World Trade Organization(WTO). The high-profile case pitted photographic paper and film giants Kodak and Fuji against one another along with their respective governments, the US and Japan. Kodak claimed that Japan's photographic market & distribution structure, "deny[ed] [Kodak] fair and equitable market opportunities."1 Essentially, Kodak was arguing that it could not penetrate the Japanese market beyond a certain level due to structural restraints, government intervention, and back-room policies that favored Fuji.8 On the other hand, Fuji & the Japanese government contended that Kodak's poor showing in Japan was due to deficient marketing, management, and investment in the Japanese market. Fuji and the Japanese government refused to enter into negotiations with Kodak because they perceived Kodak's allegations as groundless.

This refusal to even discuss Kodak's complaint prompted a May 1995 Kodak filing with the US Trade Representative's office under Section 301, which allows the US to use unilateral action against unfair trading practices. This was viewed to be Kodak's best chance to pry open the Japanese market. To Kodak's jeopardy, the case was turned over to the WTO's Dispute Settlement Body in June of 1996. On December 5, 1997 the WTO ruled against Kodak and the US saying it had found no evidence that, "Japan rigged its domestic markets to favor Fuji Photo Film Co. over Kodak."3

This decision against the US has renewed debate among American lawmakers in using Section 301 to punish Japan for its presumably closed and restrictive domestic markets. Senator John Ashcroft summed up American feelings on the WTO's decision in saying that, "a failure by the Administration to use US law [Section 301] to secure American rights would be an outrage."3 Kodak termed the ruling "totally unacceptable" and, "a complete loss for the US."3 Fuji issued a statement saying that the WTO had, "proved its mettle by ruling on the facts," thus implying that its practices were indeed fair and open.3 That such fervored remarks persist among lawmakers and business people on both sides of the debate reflects the fundamental role that fairness plays in this argument.

Issues of fairness in trade abound in the Kodak-Fuji case. Both sides think that their actions are perfectly fair and thus, by extension, that the other party is somehow acting unfair. By examining the issues on both sides of this debate in a positive manner we can perhaps tease out the underlying manifestations which cause both sides to use terms of equity, justice and fairness in explaining their behavior.

Underlying Fairness Issues in US-Japan Trade Relations

At the heart of this debate on the US side is the larger indictment of overall Japanese business and trade practices that are deemed unfair. Indeed, the USTR's office charged that, "Japan's entire retail system puts foreign competition at an unfair disadvantage."2 Allegations such as these have been a common theme in US-Japanese trade relations over recent years and are usually explained in terms of a closed & non-transparent Japanese domestic market. This allegation has some historical fact. After WWII the Japanese economy was largely closed to, and protected from, US exporters as the security considerations of the time encouraged a strong and stable Japanese domestic economy. A central element of this policy was allowing full Japanese access to US export markets. As Japan emerged on the world economic scene in the early 1970's American firms began to press for entry into this new and relatively rich market. Many US firms found it difficult to get a foothold in this Keiretsu dominated market and have since cried to the US government for help in prying open the door.6

Thus, Americans term the overarching argument of Japan's unfair trade policies as one of Equality Fairness, specifically Non-Discrimination Fairness.5 American firms such as Kodak feel that they are discriminated against in Japan because they are American. Discrimination of this type is indeed deemed unfair by international treaties. WTO rules provide for a National Treatment Clause which obligate countries to treat foreign firms the same as domestic firms.5 Thus, what's fair is fair, and since we don't discriminate against your firms because you are Japanese you shouldn't discriminate against ours because we are American. Proponents of this view would argue that while Japanese firms face relatively few impediments in the US market, American firms face a startling number in the Japanese domestic market. Thus this argument is seen to be one in which American firms are discriminated against by Japanese suppliers, distributors, and retail centers on the very fact that they are American.

Delving a bit further into the American psyche we find that Japan has perhaps violated Americans' sense of Positive Reciprocity Fairness.5 Many Americans believe that Japan owes the US a favor, although it is quite apparent that most Japanese would disagree. Most Americans know that the US spent considerable resources, often at the detriment to its own economy, to help Japan rebuild after WWII. Furthermore, the US allowed the Japanese access to its vast market to export and gain valuable dollars--again to the hindrance of domestic producers. Since many Americans lost jobs to Japanese industries that America helped rebuild, such as steel, some would argue that Japan owes the US, at the very least, access to its markets in return. To some it thus seems that Japan has now recovered but she doesn't want to reciprocate the favor and allow US firms to participate in the lucrative Japanese market. Japan is thus viewed as abusing a historical mutually beneficial(positive reciprocity) relationship by discriminating against US firms and setting up barriers to market access.

Conversely, the Japanese position also reflects an over-riding concern about US trade practices in general. World-wide economic competition has produced a negative reaction against unilateral US trade policies. One EU diplomat recently claimed that, "American readiness to impose unilateral sanctions makes the US prosecutor, judge, and jury on any action they deem unfair."7 Japan, and indeed much of the world, view contradictory US trade policies in the light of Golden-Rule Fairness.5 Section 301 ignores WTO rules that call for trade disputes to be resolved multilaterally. Thus, what the world deems fair, the US might not, and may proceed to take action even though this is against WTO rules that the US helped create. Breaking the rules of the game, especially rules which one authored, is at the heart of Japanese concern over the inequity of Section 301.

Further exacerbating each side's position is the propensity of Japanese consumers to display elements of Positive Reciprocity Fairness toward Japanese firms. Japan Inc. is the manifestation of this phenomenon to the outside world. But the Japanese wouldn't call this discrimination. Rather, they would couch their feelings in terms of loyalty to Japanese firms which provide the country with jobs and international prestige. Just as Americans believe that buying a Chevy is good for their economy, so too do the Japanese practice this consumerist form of loyalty.

Fairness Issues in Kodak-Fuji Case

Specific facets of the Kodak-Fuji case are couched in terms of fairness and equity. The Japan-Fuji side has largely defended its position by using a Distributional Fairness argument. Fuji argues that it has only 12% of the US market share for film & photographic paper sales which is perfectly in line with Kodak's 10% market share in Japan.3 Japan and Fuji thus argue that the distribution of customer base is well defined and equitable since each company dominates in its home market and has a similar proportion in the export market of its competitor. Perhaps more telling is the case of the American firm Polaroid which enjoys a 70% market share in Japan for instant photo film. Polaroid far outstrips Fuji in this segment of the Japanese domestic market--a fact which has led Fuji to repeatedly claim that Kodak's Japanese failure is, "hardly a case of denied access."7

Kodak also employs arguments of Distributional Fairness in this case. Kodak argues that its products are available in only 15% of Japanese retail outlets and that this is due not from a lack of investment in Japan, which was $750 million in the past decade, but rather due to restricted distribution channels & government regulation.8 Kodak furthermore claims that its 10% market share in the Japanese market is sharply lower than in other Asian nations. Kodak thus feels that its poor performance in Japan is entirely inconsistent with its performance elsewhere and that reasons beyond market conditions--Japanese government exclusionary practices--are to blame.

Distributional arguments such as these that are supported with hard numbers represent a valuable tool in influencing opinions of fairness. Both sides employ end results and statistics to add merit to their claims of equity or inequity. Market share is the measure being used in both cases to define fairness. Kodak believes that an inequity exists because it has less market share in Japan than elsewhere in the world. Kodak asks how Japanese business practices can possibly be fair since its product is on only 15% of Japan's shelves despite heavy investment. Fuji believes that a similar distribution of market share(or lack of it in the Polaroid case) between the firms in their respective nations proves fair business practices beyond the shadow of a doubt. Fuji wonders how Kodak could claim inequity when another American firm, Polaroid, not only competes in, but dominates, an entire sector of the Japanese photography industry. Thus, the final outcome, in this case market share, is central to a positive analysis of fairness couched in a distributional light and leads each side to believe in the validity of their stance.

Calls for renewed Section 301 action demonstrate US sentiments concerning Negative Reciprocity Fairness. Given an unfair trading practice, Americans are willing to respond in kind. American lawmakers might continue the Kodak-Fuji battle by imposing unilateral sanctions on Japan. Possible action might be to cap Fuji's market share, through a system of tariffs, at 10% in order to mirror Kodak's position in Japan. Such an action would indicate that US lawmakers still deem Fuji's practices and the WTO's response as unfair to Kodak's complaint and US interests.

Obviously, any such renewed action would once again be viewed from the outside world as unfair under the Golden Rule. Section 301 action for Kodak would give the Japanese ammunition to claim this was just one more instance of arbitrary, unilateral US trade policy. Since the WTO has already ruled on the case, Section 301 action would be viewed as a blatant pursuit of US interests in the face of world opinion. Proponents of such a stance would argue that the US is acting unfairly by disregarding the rules of the game which were decided by a multinational body. The US could respond in kind that the WTO's ruling(and world opinion) is unfair & unlawful under the auspices of Privacy Fairness since it undermines US sovereignty to use Section 301.

Conclusions

The debate between Kodak and Fuji illustrate the inherent problems in assessing issues of fairness. Admittedly, I leave this argument with no real consensus as to which side is correct. It seem in the first instance that Kodak has a point, but the Polaroid factor leaves one with a different view. If Polaroid can compete in Japan then why can't Kodak? Furthermore, it seems that Distributional Fairness exists on each side since both firms maintain similar market shares in each others domestic markets. This gives the debate a sense of equity concerning both firms; since they both dominate their home markets what's the reason to cry unfair? On Kodak's side, however, it is apparent that Japan needs to liberalize its markets in all sectors to allow market forces to work their wonders. Indeed, Japan's(and Asia's) current problems are merely a symptom of protected, inefficient markets. In the end, however, one can see how fairness is played by both sides with some validity. Exacerbating the complexity of fairness is the quality of one issue of fairness to seemingly lead to another and yet another, ultimately opening a Pandora's box of fairness issues. For example, Section 301 leads to issues of Privacy Fairness, Negative Reciprocity Fairness, and Golden Rule Fairness. No wonder definitions of fairness are in such short supply! Ultimately, it seems that the only concrete principle found in fairness in trade is that fairness is dependant on where one is standing.


Bibliography/Endnotes

1 Section 301 Developments (Jan 95- Jun 96). Online. Internet. Available: http://usis.intnet.mu/business/ustr/NA6.htm

2 Nelson, Emily. The Wall Street Journal. "Presentation of Data in Kodak's case agaisnt Japan and Fuji delayed by US" Sep. 20, 1996 Sec B, p.4

3 Reuters Limited. "US loses WTO case over Japan film Market" Online. Internet. Available: http://cnn.com/world/asiapcf/9712/06/RB002207.reut.html

4 Abbot, Kenneth W. (1996) "Defensive Unfairness: The Normative Stucture of Section 301" in Jagdish Bhagwati and Robert Hudec (eds), Fair Trade and Harmonization: Prerquisites for Free Trade?, V.2--Legal Analysis, MIT Press, Cambridge MA.

5 Suranovic, Steven M. "A Positive Analysis of Fairness with Applications to International Trade." Oct. 1997.

6 Lincoln, Edward J. Japan's New Global Role. 1993: Brookings Institute, Washington, D.C.

7 Cooper, Helen and Wendy Bounds. The Wall Street Journal. "Kodak Chief and Capital Lawyer, Heavy Hitters on Trade Matters, May Strike Out in Fuji Case" May 24, 1996. Sec:A p.12.

8 Kodak Press Release. "Kodak Petitions US Government Under Section 301 of Trade Law." Online. Internet. Available:

http://www.kodak.com/aboutkodak/co/pressreleases/pr19950518-1.shtml


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