U.S. State Department Geographic Bureaus: East Asia and Pacific Bureau

U.S. Department of State
95/07/20 Remarks/Briefing on US-Japan Investment Arrangement
Office of the Spokesman

REMARKS BY
ACTING SECRETARY OF STATE
STROBE TALBOTT
AND
JAPANESE AMBASSADOR TAKAKAZU KURIYAMA
AT THE SIGNING CEREMONY
FOR THE U.S.-JAPAN INVESTMENT ARRANGEMENT
July 20. 1995

ACTING SECRETARY TALBOTT: Good morning to all of you. I'm very pleased to join Ambassador Kuriyama today in marking the successful conclusion of the U.S.-Japan Investment Arrangement. This Arrangement is the result of 18 months of intensive negotiations and a great deal of hard work, including by quite a number of people here this morning. It sets forth a strong joint commitment by the U.S. and Japanese Governments to promote a hospitable environment for foreign direct investment.

Each government makes clear that foreign investors should have fair access to domestic markets, regardless of nationality. Through this Arrangement, the Government of Japan has explicitly made several of its economic development programs available to non-Japanese firms. It has also announced policies and measures that will reduce the time and cost of investing in Japan, improve the climate for mergers and acquisitions, and encourage further deregulation.

To arrive at this arrangement, U.S. negotiators relied heavily on the expert counsel of members of the American business community located here and in Japan. Leaders of some of those key industries are with us today. On behalf of President Clinton, I would like to thank these forward- and outward-looking entrepreneurs for their advice and assistance. Those of us who sit behind what Secretary Christopher calls "the America Desk" here at the State Department will work to ensure that this investment arrangement -- and other like it -- make a tangible difference to American businesses.

This Arrangement is a splendid example of what the United States and Japanese Governments can accomplish when we work together in pursuit of mutual interests.

Both of our nations can look forward to shared benefits. Greater U.S. direct investment will support American exports to Japan. It will make a wider range of high-quality goods and services available to Japanese customers, and it will create more and better in jobs in both economies. These are worthy goals in and of themselves, but they are also part of an emerging pattern of cooperation that offers a better future for peoples everywhere.

As the world's two largest economies, the United States and Japan share a unique responsibility to uphold the open world trading and investment order. Through APEC, with Japan in the Chair this year, we can encourage high standards of investment liberalization and protection throughout the Asia-Pacific, the world's fastest growing market. Through the OECD, we can achieve a state-of-the-art agreement to liberalize investment regimes globally. Through GATT and the World Trade Organization, we can expand international trade on a world-wide basis.

Achieving these goals in full will of course take time and require that we overcome many obstacles; but as we work together to put these multilateral structures in place, Japan and the United States must also lead by example. We must lead by harmonizing our polices and priorities to the greatest extent possible. Strengthening, deepening, broadening our bilateral relationship through a common agenda is important not only to our two nations, but to the world as a whole. In that spirit, it is an honor for me to ask Secretary Christopher's good friend, my good friend, and the United States' good friend, Ambassador Kuriyama, to say a few words on behalf of the Government and people of Japan.

AMBASSADOR KURIYAMA: Thank you very much, Mr. Secretary. For me this is a very happy occasion, almost as happy as the day when Nomo pitched for the National League in the All Star game. (Laughter) It gives me real pleasure to join you, Mr. Secretary, in this happy occasion which is, I think, another significant step forward in our joint endeavor to strengthen our economic partnership across the Pacific under the Framework Agreement of two years ago.

First of all I would like to pay a special tribute to Ambassador Larson and his colleagues, who engaged with their Japanese counterparts in highly constructive and friendly discussions in the Working Group to produce the report on inward direct investment and business-supplier relationships.

I think the Working Group deserves our most sincere appreciation for what it has achieved.

What makes this report so significant is that it affirms our common recognition of the importance of inward direct investment in both Japan and the United States in further promoting the growth of our respective economies and expanding consumers benefits and in strengthening the economic ties between the two countries in a mutually beneficial manner. One proof of it is that Japanese direct investment in the United States has contributed to the American economy by creating - according to Department of Commerce statistics -- creating more than 700,000 jobs; and its share in U.S. global exports is now close to 10%.

In Japan also inward direct investment has grown over the past decade, particularly in the late '80, although, unfortunately, in more recent years the pace has flattened, reflecting the prolonged recession or stagnation of the Japanese economy. We hope to see this trend resume at a more vigorous pace in the coming years as it will surely help the revitalization of the Japanese economy and its integration with the global economy.

The report contains various measures to be taken by both sides to encourage and promote the two-way flow of capital and technology by providing a better investment environment for business opportunities both in Japan and the United States. In Japan, for example, JETRO has been providing foreign companies with a variety of supportive measures. The Japan Development Bank also makes available low-cost financing to foreign investors. We would like to make the Japanese market more attractive to foreign investors by such measures and many others, including de-regulation, which are included in this report.

Alexander Graham Bell said many years ago, "Sometimes we stare so long at a door that is closing that we see to late the one that is opening." In my view there has been so much talk in this country about the closing door in Japan, I think it is about time that American businessmen recognize the door that is opening in Japan; and I sincerely hope that today's report will help them see the new opportunities that are opening up in my country. That is why I'm so encouraged by the presence of a number distinguished American representatives of the private sector this morning. I'm confident that the measures we both take will be matched by your entrepreneurship and your determined efforts which together can build a solid bridge of partnership between Japan and the United States. Thank you very much. (###)

[Following are excerpts from the July 20, 1995, State Department daily press briefing on US-Japan Investment Arrangement] BRIEFING BY UNDER SECRETARY OF STATE FOR ECONOMIC, BUSINESS AND AGRICULATAL AFFAIRS JOAN SPERO JULY 20, 1995

MR. JOHNSON: Good afternoon, ladies and gentlemen. We're going to start our briefing today with Under Secretary of State for Economic, Business and Agricultural Affairs, Joan Spero. She's going to talk to you about the U.S.-Japan Investment Arrangement which was signed earlier this morning by Acting Secretary of State Strobe Talbott and Japanese Ambassador Kuriyama.

The Investment Arrangement, concluded under the U.S.-Japan Framework, is designed to facilitate foreign direct investment in Japan as well as increased foreign business presence and greater market access for U.S. suppliers.

Once Mrs. Spero has concluded her presentation and answered all your questions, we'll proceed with other topics.

UNDER SECRETARY SPERO: Thank you, David. Good afternoon. I'd like to just read an opening statement and then be happy to take your questions.

Today, Acting Secretary Talbott, as David has said, and Japanese Ambassador Kuriyama signed and exchanged letters formalizing a U.S.- Japan Investment Arrangement designed to facilitate foreign direct investment in Japan.

Foreign direct investment issues are an important component of the economic harmonization basket, which is part of our economic framework with Japan. That basket has been led by the State Department.

In this basket, we have concluded an understanding on intellectual property rights and are working toward a shared agenda for improving access to technology. The investment arrangement signed today, we think, is a win-win proposition for the U.S. and Japan. It will support the efforts of U.S. and other non-Japanese firms to establish a larger presence in Japan's market and a greater role as suppliers to Japanese firms. This is critical to U.S. exports which are increasingly channeled through U.S. affiliates abroad.

The arrangement will bring new talent and resources to Japan's market and also a wider range of goods and services.

This comprehensive joint arrangement on investment is a product of over 18 months of intensive negotiations between both governments. Throughout this process, the U.S. interagency team, which I want to mention especially, was led very ably by Deputy Assistant Secretary of State, Al Larsen.

His team benefited greatly from the input and counsel of the U.S. business community. They advised us on key problems they face in Japan and helped us devise solutions to those problems. Our team also reached out to exchange views with members of Japan's private sector who made very useful contributions.

The Investment Arrangement creates significant new opportunities for U.S. firms to establish or expand their presence in Japan, the world's second largest national market.

Japan accounts for 16 percent of the world's GDP, but hosts only one percent of its investment. By comparison, the U.S. accounts for 27 percent of global GDP, and we have 30 percent of world foreign direct investment.

This arrangement lays out in detail financing programs and incentives available to foreign investors and provides a blueprint of the supportive role to be played by relevant agencies of the Government of Japan.

In it, the Government of Japan has explicitly agreed that U.S. and other foreign firms will be eligible for many of Japan's economic development programs on a non-discriminatory basis.

The Investment Arrangement specifically provides the foundation for, first, expanded financing for foreign direct investment by the Government of Japan, potentially in the billions of dollars annually, through programs of the Japan Development Bank and other Japanese institutions. It provides for more active government facilitation of foreign direct investment into Japan through the support of the Japan Investment Council, the Japan External Trade Organization, and the Foreign Investment in Japan Development Corporation.

That facilitation will include, first, support and fair treatment of foreign participation in mergers and acquisitions in Japan. Second, improved access for foreign investors in Japan to skilled labor, land, and facilities. Third, ongoing efforts to deregulate Japan's investment regime and to ensure non-discriminatory treatment of foreign investors, and steps by the two governments to support the building of closer ties between U.S. and Japanese firms at the design in and other key stages of the commercial process.

Reaching agreement on the policies and measures each government intends to take is just a first step to enhancing conditions for U.S. investors in Japan. The bulk of our work lies ahead in the implementation of these understandings.

We put mechanisms in place, including semi-annual consultations at the outset for active and effective implementation to assure that these policies and measures provide effective support for our firms. We intend to step up active implementation of the policies and measures in our investment arrangement by holding joint consultations in the early fall.

The Government of Japan will have a critical role in encouraging foreign presence in Japan's market and supporting full internationalization of the Japanese economy, and they've taken a very positive step in signing this agreement.

At the same time, we're committed to working with our firms to get the word out about the Government of Japan's programs and policies. We think in this way we can assure that the arrangement will yield positive results, greater U.S. direct investment that will support our exports to Japan, and making available a wider range of high quality goods and services available to the Japanese customers, and providing more and better jobs for workers in both countries.

I will stop there. Happy to take your questions.

Q Joan, I have two questions. First, with regard to the Japan Development Bank, has the JDB in the past discriminated against foreign investors? And have U.S. companies actively sought such financing?

And, secondly -- I don't mean to sound cynical, but given the keiretsu system, given the very high cost of land in Japan, aren't these barriers, non-tariff though they are, sufficient enough to blunt any attempts by U.S. companies to get in there even this agreement notwithstanding?

UNDER SECRETARY SPERO: Keith, let me start by giving a general comment. We are not claiming that this agreement is going to change the entire investment climate in Japan. As I said, Japan has a very minimal amount of total foreign world direct investment. A lot of that stems from the days when Japan had specific exclusions and heavy regulation of foreign investment.

So we're not going to turn that agreement around overnight nor are we going to change keiretsu practices, nor are we going to change the value of the yen nor are we going to change land prices overnight. So I'm not trying to oversell what we've done.

At the same time, what we did was to consult our industry about what problems there were that might be susceptible to change. This is going to be a long-term effort. One of the things they did tell us was that they wanted a better environment, more access to finance; the kind of financing that is available to Japanese firms now.

For example, in the past, the Japan Development Bank and other financing has not been available for creating import infrastructure. So now they have broaden the categories which will be available for lending to foreign firms.

There will be no question that the Japan Development Bank and other financial institutions, there is a thing called the private participation program, which puts in equity finance and other finance. All of this will now be open to foreign firms.

There were other areas that our firms have mentioned. I can go over those -- tax problems. On the land issue, Keith, we're not going to change the price of land or the value of land, but there are a couple of things that can be done through this agreement -- again, as first steps.

The Japanese have agreed to set up something called "foreign access zones" around major commercial areas. That will provide physical facilities. It will also provide certain financial support for investment in those foreign access zones. So I don't want to oversell it; I don't want to undersell it either.

Q Did the Japanese ask that the United States change any of its barriers -- tariff or non-tariff?

UNDER SECRETARY SPERO: The Japanese asked that we confirm our support for foreign investment. Their main concern was our so-called Exon-Florio provisions which give us a review on certain investment in the United States that might challenge U.S. national security. But the main emphasis of this negotiation really was on opening up the Japanese market.

Q You had mentioned in your opening comments that Japan hosts one percent of the foreign investment in the world economy -- a much smaller portion than its overall share of GDP in the world economy.

Is there a particular target or goal that you have in mind to try to get that up to?

UNDER SECRETARY SPERO: No. This agreement does not have any target. Obviously, the more that Japan can move toward the OECD norm, the better. But there is no target involved.

Q What is the (inaudible)?

UNDER SECRETARY SPERO: I don't have the answer offhand. It varies from country to country. The Europeans actually have a higher level of foreign direct investment overall than we do. But if you think that we're about 27 percent and Japan is one percent, there's a lot of room for movement there.

Q Which companies or industries pressed most for this agreement and might be most interested in moving in?

UNDER SECRETARY SPERO: There was actually a very broad range of companies that we work with, including a number of the business coalitions -- the U.S.-Japan Business Council, the National Council for Foreign Trade. There weren't any particular ones that -- I can't really categorize them as the "big guys" or the "little guys." There was very broad interest, and frankly we actively solicited their advice.

We wanted to know where the companies saw barriers, and, as I say, they identified problems of high cost of entry, whether it's finance or tax issues. We tried to address those in the agreement. They talked about access to personnel.

I know, having been in business and having dealt in the Japanese market, the ability to hire local personnel or the cost of sending in expats. So we have made sure, for example, that our firms will have access to the various employment and training programs of the Japanese Government. They've agreed to do things like support foreign schools for the expats.

M and A was a big issue, because it's very difficult. One of the traditional ways you enter a new market is through mergers and acquisitions. That's been very difficult in Japan. In the process of this negotiation, the Japanese changed some of their corporate governance practices -- more transparency, more disclosure, more shareholder rights.

So there was a very broad consultation with the business and a sort of a broad approach in the agreement.

Q Could you expand on that? You said financing for foreign direct investment could go up potentially billions of dollars, I think you said, a year. Can you -- is this stuff that will be earmarked for foreign investment --

UNDER SECRETARY SPERO: No.

Q -- or this would be just foreigners getting a bigger piece of stuff that's already --

UNDER SECRETARY SPERO: Yes. It's really foreigners having access to the Japan Development Bank. As I said, to this private participation program, which is money that came from the privatization of NTT, and it's a fund that is used to put equity in, to put other forms of financing.

(TO STAFF) Ann, is it largely for smaller firms?

STAFF: No. In fact, it's financed sometimes by (inaudible).

UNDER SECRETARY SPERO: Okay. So it is really the pools of funds that are available in those institutions.

Q Of the billions of dollars, is this a figure that Japan --

UNDER SECRETARY SPERO: This is a figure that's available in these institutions. I'm not claiming that billions of dollars -- that U.S. firms are now going to get billions of dollars of financing and take over the bulk of financing from those firms. What I'm saying is they have access to that pool of capital now.

They also will benefit again from changes that were implemented in the process of this negotiation on loss carry forward. The Japanese have increased the period from seven to ten years. This is another way to facilitate payback in Japan.

Q What about the prospects for the civil aviation talks between the two countries to be concluded successfully during this round of talks?

UNDER SECRETARY SPERO: As you know, those talks are going on even as we speak today and tomorrow in Los Angeles. They'll be meeting at Vice Minister level today, and then at Ministerial level presumably starting tomorrow. I don't know. We hope that there will be a successful conclusion to those talks.

As you know, the sticking point has been that the Japanese Government has not yet recognized that we have rights under our treaty, and we insist that those rights must be honored.

Q You mentioned that the negotiations on this investment treaty took 18 months. What was so difficult about it? Why did it take that long?

UNDER SECRETARY SPERO: I have to say it wasn't a contentious negotiation, but it was actually one that initially you had to get a handle on. We spent a lot of time consulting the business community and saying, well, how do you promote investment? We want it to go beyond simply another commission or simply another ombudsman, although we've expanded the role of the ombudsman here.

We wanted to target specific sectors, so we had to work through the financing mechanisms. We had to work through the corporate governance. We had to work through the tax issues, and we tried to devise techniques that would improve and address some of these buyer/supplier issues.

For example, we're going to have -- the Japanese Government has agreed to set up co-location facilities or business incubators, and the Keidanren has agreed to admit foreign firms more to its training and seminars. Each of those things just required a lot of work, but it wasn't as though there was a sort of an intractable issue. I think probably the most difficult issues were really the tax issues.

Q You said that the bulk of the work ahead lies in the implementation. Will specific implementing agreements be required for any of this?

UNDER SECRETARY SPERO: No. We don't have implementing agreements, but what we do have is a consultative process, both with the Japanese Government and with our own business community to see if they are following through on their commitments and if the agreements are working.

What we said to our business community is let us know. Is this helping or not; and, if it's not helping, is it because the Japanese Government is not implementing, or is it because these aren't the right techniques, and do we need to adjust the techniques.

I have to say that in this situation, the Japanese Government was very interested in working with us. It isn't that we necessarily agreed easily on financing or tax reform or other things, but they very much want more foreign investment. So I think it will be open - they will be open, I expect, to ongoing work about how we can facilitate that. But there is a consultative process built into this agreement. I think you had a question, and then there and there

Q Was there much, was there any discussion of macro-economic issues as part of this, because, I mean, is there much incentive for U.S. companies to, say, invest in Japan if the Japanese economy remains in the dumps because consumers aren't spending?

UNDER SECRETARY SPERO: Well, this is not an agreement for this week or next month. It's an agreement for the long haul. And again I don't want to say that immediately the investment picture is going to turn around. Companies will go into Japan, both when the macro-economic situation looks good and when they think they need to be there for their own business purposes.

I mean, what companies are increasingly finding is that in order to get into a market you have to be there. You have to have a physical presence, either to develop your products, to provide services in the after-market, or simply because the Japanese are significant competitors.

So this is not something that is designed for any particular cyclical situation. It really is an effort to begin to get at a structural problem in Japan. But given the recession right now in Japan, given exchange rates, these are obviously not incentives; they are disincentives. These other problems are offsetting factors. In the back.

Q You said this was kind of the economic harmonization basket. What's left in that basket, and what's the status of the framework?

UNDER SECRETARY SPERO: Well, the framework now -- we've made significant progress in a lot of the areas of the framework. If I may refresh your memory, the framework included -- for those of you who don't have that on the tips of your tongue -- the framework had a macro- economic component. It had a component that had to do with various sectoral problems. It had a component that had to do with structural problems. And then it also had this common agenda, which was a cooperative mode dealing with the environment and health and other kinds of global issues.

On the macro-economic environment, we continue to have a dialogue with Japan. Japan continues to try to seek the key to stimulating its economy, and so that effort goes on. On the sectoral side, we've reached a huge number of agreements, the most latest one being the automotive agreement. So in many of the sectoral issues, we've accomplished our goals in the first two-year period of the framework.

On the structural issues, we've reached an agreement on financial services. I guess you could call that structural or sectoral. We've reached an agreement on patents, on investment.

What we have ahead -- a couple of big issues we have ahead are competition policy. That was one that was on our list, not for the first two years but ongoing, and we want to complete this technology agreement that we have been negotiating.

So many of the issues that are left in the framework -- and we and the Japanese agreed at the Halifax summit that we would continue the framework -- many of the issues fall in the category of the structural agreement -- what I would call structural change in Japan. We need to keep - another very important factor is that we need to keep monitoring the agreements that we have reached. We don't just want to reach an agreement and walk away. We want to make sure that those agreements are implemented, and so we have to make sure that the automotive agreement, that the glass, all of the other agreements are followed through on, which is why in our investment agreement we had this built-in follow-up process. Let's see, yes.

Q Many U.S. companies cite keiretsu system as a reason for the difficulty to trade with Japan or invest there, and yet you said earlier you didn't expect this agreement to have a substantial impact on dismantling the keiretsu system. Does it touch -- will it have any impact at all on the keiretsu, and do you expect these future talks on competition policy to pick up that area of difficulty with Japan?

UNDER SECRETARY SPERO: Regarding keiretsu, you're not going to change that system overnight. In fact, many U.S. companies have discovered that there are certain advantages of buyer/supplier relationships -- the design-in process. So the question is not trying to overthrow the system but how can you reduce its impact on foreigners and how can you encourage relationships to develop between foreign firms and Japanese firms.

There is no silver bullet here. We've tried several things. First of all, the Japanese Government has agreed to set up, as I said, these collocation facilities. These will be opportunities for American firms to invest to do research in Japan and for other Japanese firms to be present. So there will be opportunities, if you will, for them to develop work jointly.

There is a proposal for an incubator facility. I don't know if you're familiar with these. These are sort of research development zones. If you think of something like the triangle in North Carolina or sort of trying to model the Silicon Valley, where you create environment for research facilities in the hope that firms will not only come but find partners there.

Keidanren has agreed to open its doors much more to foreign firms. They will be included in seminars. They will be allowed to attend meetings. I am not saying that any of these is a silver bullet or even, added up, that they are the answer.

But what we're trying to do is to find techniques that will begin to change the system and open it up. I think that answers the question. There was a question back here, yes?

Q I guess this sort of follows what he was just asking. What are the main impediments to entry now that we haven't addressed in this agreement, and did we not address them because they're outside the framework of what the government can do, or are they just things that we and the Japanese couldn't agree on, and we put them off for later?

UNDER SECRETARY SPERO: You know, some barriers -- non-tariff barriers or business practices -- are much harder to get at than simply sort of reducing tariffs or changing intellectual property laws. Our dilemma in this negotiation, and one of the reasons it was conceptually very difficult, was to try to figure out what the access points were, where we could try to change things that would open the system.

And when we consulted U.S. business, we found a big problem with the high cost of entry financing -- land, taxation. So we tried to devise techniques in those areas. Again, I'm not saying we solved all of the answers, but we've tried to chip away at it.

Secondly, regulatory policies; and, third, the whole environment for mergers and acquisitions. As I said, we've tried to push for changes in corporate governance laws so that it will be easier to do mergers and acquisitions -- more shareholder rights, more transparency, more financial disclosure. It's not going to change it overnight, but it will move in that direction.

Huge issue of personnel -- hiring qualified Japanese personnel and the high cost of having EXPAT personnel there -- again, opening government programs, access to hiring or labor policy -- excuse me -- the Japanese Government employment policies, Japanese Government training. Then these buyer/supplier relations that I mentioned.

And then, you know there's a whole category of problems that I would call attitudes or perceptions about the desirability of foreign investment. And here, the best that you can hope for, I think, is that the Japanese Government sends messages that it wants foreign investment, and it can do that by setting up institutions like this -- the Foreign Investment Development Organization -- I forget, it's called FIND -- which is an ombudsman that is there to try to help foreign investors navigate their way through the Japanese system. You can do that by signaling that the Japan Development Bank is open for foreigners. You can do it by having JETRO promoted.

So you can begin to get that message out. So in all of those areas, we tried to define and devise solutions that would begin to address the problems. None of them is completely solved. There is a lot more work to be done, but I think we're going to try this first step. Yes?

Q We do have the so-called priority area in the future -- the framework talks -- I mean, sectoral talks -- sectoral issues.

UNDER SECRETARY SPERO: Well, we have not sat down -- we did with our Japanese colleagues at the beginning of the framework. We sat down and identified a whole series of priority areas, and I guess I would say the priority areas now are the ones that we have not completed. So, as I said, particularly in the structural -- competition policy, technology policy, continuing with financial deregulation will be very high on the agenda.

But I want to emphasize one of the baskets of the framework was implementation of agreements under the framework and past agreements. And I think you can look to heavy focus on actual implementation in the future.

MR. JOHNSON: Is there a final question? (None) Thank you very much.

UNDER SECRETARY SPERO: Thank you.

(###)

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