Japan Won the Film Battle, but It’s Losing the War

The World Trade Organization made the right decision this month when it rejected allegations by Eastman Kodak that archrival Fuji Photo Film conspired with the Japanese government to concoct nontariff barriers limiting sales of foreign film in Japan.

Evidence in Kodak’s case was weak. The American company’s complaint, originally filed with the U.S. trade representative’s office in 1995, relied too heavily on decades-old articles from the Japanese trade press describing government-industry collusion. Kodak had no smoking gun.

But the WTO ruling was a pyrrhic victory for Japan, because the substance of Kodak’s claim is essentially true. A delayed reckoning with this truth about embedded protectionism in the Japanese economy can only prolong a painful process of badly needed free-market reform. The much ballyhooed “big bang” reforms of Japan’s sclerotic financial system may be doomed to whimpering paralysis.

The Japanese government actively cooperated with major industries in the postwar period to boost their capabilities and insulate them from international competition. As global pressure forced an increasingly affluent Japan to reduce tariffs on imports in the 1970s, so-called liberalization countermeasures were put in place to limit the damage to domestic players. Strategic bonds were developed between manufacturers and distributors; major corporations closed ranks with cross-shareholdings; powerful industry associations lobbied and schemed; bureaucrats flouted maddening red tape.

An exasperating list of American products has collided against these nontariff barriers over the years--semiconductors, rice, metal baseball bats, cell phones, shoes and insurance, to name a few. In each case, the Japanese market had to be crowbarred open in stormy bilateral trade negotiations, often under the threat of punitive sanctions.

Kodak’s complaint is a textbook case in how an amorphous resistance to foreign imports can persist long after official “administrative guidance” has been withdrawn from the marketplace. Since Japanese bureaucrats rule informally, without a transparent administrative procedure, no documents can be found spelling out an anti-Kodak strategy. The Ministry of International Trade and Industry can now accurately disclaim overt interference in free-market capitalism.

But Kodak’s trade lawyers contend that state protectionism has been “privatized” to the point where many markets--the one for color photo film in particular--remain difficult to penetrate because of the long-lasting effects of past government policies. Proving that allegation, however, is tantamount to nailing a cube of soft tofu to the wall.

The film-war story is further clouded by Fuji’s counterargument that it faces barriers in the U.S. market, where Kodak is the consumers’ preference and enjoys a 70% share, roughly equivalent to Fuji’s position in Japan. Kodak responds that its piece of the pie in Japan has remained stagnant at about 10% while Fuji has gained ground in the United States, which does not protect itself with an anti-competitive distribution system.

The charges and countercharges have multiplied over the past two years to the point where it’s hard to imagine any panel of trade experts digesting the thousands of pages of reports and documents and adjudicating the case rationally.

For Kodak, certain damning facts ring out from this morass of public relations hyperbole: The U.S. film giant clearly made grave errors in the effort to expand its share of the Japanese film market before it went whining to the U.S. trade representative.

The real loser in this trade dispute, however, is Japan itself. While Kodak is beset with a host of problems, mostly unrelated to Fuji and its protective home market, the U.S. economy is still in pretty good shape. Yet Japan continues to flounder in search of its future. Its financial system is sitting on a time bomb of bad debt, which some analysts think could make the world’s second-largest economy the next victim in the financial crisis that is spreading like wildfire through Asian markets. An honest appraisal of economic policy failures will be essential before market-opening reforms can succeed, and Fuji’s triumph at the WTO only sweeps a damaging legacy of latent protectionism under the rug.