JAPAN TOBACCO SECTION 301 CASE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01117R000702280005-7
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 3
• Document Creation Date: December 23, 2016
• Document Release Date: April 4, 2011
• Sequence Number: 5
• Publication Date: September 5, 1986
• Content Type: MEMO

Declassified and Approved For Release 2013/05/08: CIA-RDP88G01117R000702280005-7
THE UNITED STATES TRADE REPRESENTATNE
WASHINGTON CLASSIFIED By ~~~ ___--
20506
DECLASSZFt~ro ox o R~R _-----
September 5, 1986
MEMORANDUM
To: Economic Policy Committee
From: Ambassador Yeutter
Subject: Japan Tobacco Section 301 Casa
Summary
The TPRG recommends that the EPC recommend to the President that
he determine that: (1) certain current Japanese practices concern-
ing manufactured tobacco products are unfair within the meaning of
Section 301, and (2) the U.S. will retaliate if Japan does not
remedy these practices by October 6 (the date the President is
statutorily required to decide what action, if any, to take). The
TPRG also recommends that instead of assigning a value to the
retaliation at this time, the EPC authorize the Section 301
Committee to continue to work on retaliation methodology and
value. The next round of negotiations will take place September
8 and 9. If we resolve these issues in our negotiations with the
Japanese before September 15, we will recommend that the President
accept the resulting agreement.
Status of Case
The Trade Representative's non-public recommendation to the
President is due September 15; the President must decide within
21 days thereafter (October 6) what action, if any, to take. The
President's determination (including the reasons for it) must be
published in the Federal Register.
We met with the Japanese in Hawaii and Tokyo earlier this month,
and in Washington August 28 and 29. They are scheduled to return
September 8 and 9. While we made some progress on various
impediments to distribution of American cigarettes in Japan, the
Japanese have been intransigent on the mayor issue--the barrier
to access caused by the combination of a manufacturing monopoly
and a high effective tariff.
Background
In the TPRG all agencies except CEA support an unfairness deter-
mination. The TPRG concluded that four aspects of Japan's
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CC~FIUtN~IAL
practices were unfair within the meaning of Section 301. Viewed
together, these practices appear designed to insulate an
inefficient manufacturing monopoly from competition and to shift
the costs of maintaining an uncompetitive domestic tobacco leaf
industry from the Japanese treasury to imports and Japanese
consumers.
1. Tariff. Tax and Monopoly
Japan's 20~ tariff (ad valorem equivalent) compounded by a high,
largely ad valorem excise tax imposes a severe price premium on
imported cigarettes compared to Japanese domestic brands.
Although tariffs and excise taxes on cigarettes are not unusual
or unreasonable in themselves (we have both), and many countries
have a manufacturing monopoly, Japan is the only industrialized
country that has all three. All industrialized countries except
Japan provide foreign cigarette producers the alternative to
manufacture locally (or, in the EC, to ship duty free within the
customs union); Justice notes that U.S. cigarette producers are
unenthusiastic about local manufacture in Japan. Japan prohibits
cigarette manufacturing except by its domestic monopoly. So,
foreign firms have no means to avoid the tariff/tax barrier.
The TPRG, with CEA and OMB dissenting, believes the combination
of a significant trade barrier (the tariff and tax) and an absolute
investment barrier is unreasonable within the meaning of Section
301. OMB believes that we should not retaliate under Section 301
against mutually agreed, GATT-legal tariffs under any circum-
stances.
2. Excise Tax Payment Deferral
Japan currently provides its tobacco monopoly (JTI) with an
extended grace period--six months now and three months in 1987--
on the payment, of excise taxes. In 1988, the period will become
roughly the same as that for imports, one month. This extended
tax deferral, which the Japanese admit is discriminatory, confers
a benefit of between $130 and $150 million on JTI according to the
U.S. industry.
The TPRG believes the deferral is an unjustifiable and discrimi-
natory policy within the meaning of Section 301. CEA notes that
the discrimination will end by 1988.
3. Price Approval System
All changes in cigarette prices in Japan must be submitted
sixty days in advance of the proposed effective date to the
Ministry of Finance (MOP) for approval. The actual period for a
change to take effect can stretch up to five months due to
additional requirements imposed by the monopoly-owned distributor,
Tobacco Haiso. Although MOF has never rejected a price change
coNFm~ria~
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CONFIDENTIRL
request, it refuses to shift to a simple notification system,
since it maintains the need to prevent "unduly low prices."
The TPRG, with Justice dissenting, believes this system is
unreasonable within the meaning of Section 301. All agencies
conceded that this was not a major issue.
4. Distribution
A subsidiary of the Japanese tobacco monopoly discriminates
against imported cigarettes with respect to their distribution.
We have made progress on most of these issues, and the TPRG
assumes the remaining problems can be resolved. If they cannot,
though, all agencies believe they could be called discriminatory
or unreasonable within the meaning of Section 301.
Retaliation
The TPRG, CEA dissenting, recommends that the President determine
to retaliate in principle and direct the Trade Representative to
develop the retaliation list. In the interim the TPRG believes
the Section 301 Committee should continue its work on methodology
for, and value of, retaliation. We would inform the Japanese
that a determination had been made, but that it would not be
made public until October 6 (the statutory deadline for the
President's determination).
CEA objects to retaliation because Japanese cigarette tariffs are
now among the lowest in the industrialized world and U.S. exports
enjoy a higher penetration than in other comparable markets and
are continuing to gain market share. Moreover, CEA believes that
American consumers should not be penalized by retaliation simply
because U.S. firms are precluded from directly investing in
Japan, an action not prohibited by GATT.
CONFI~ENiINL
Declassified and Approved For Release 2013/05/08: CIA-RDP88G01117R000702280005-7