Country Risk Assessment on Japanese Imports of Dru Essay

This essay has a total of 3422 words and 17 pages.

Country Risk Assessment on Japanese Imports of Drugs

Japan, being the world’s most dynamically competitive nation, is facing an ironic balance
in trade with the U.S. The Japanese economy relies too heavily on exports, especially to
the U.S., causing increasing trade surpluses. They have been in a repetitive cycle for
the last 25 years in which the government allows the yen to fall against the dollar to
boost exports and restrict domestic growth to dampen imports. The Japanese government has
set too many trade restrictions on U.S. imports, trying to compete against and keep out
American imports.

This all began during the postwar period when Japan imposed heavy import barriers.
Virtually all products were subject to government quotas, many faced high tariffs, and the
Ministry of International and Trade Industry (MITI) had authority over the allocation of
foreign exchange that companies needed to pay for any import. These policies were
justified at the time by the weakened position of the Japanese industry and the country’s
chronic trade deficits. By the late 1950’s, however, they had regained balance and could
not justify their payment system. Despite Japan's rather good record on tariffs and
quotas, it continued to be the target of complaints and pressure from its trading partners
during the 1980s. These complaints revolved around non-tariff barriers other than quotas,
which included standards, testing procedures, government procurement, and other policies
that were be used to restrain imports.

Import Policies
In 1984 the United States government initiated intensive talks with Japan on four product
areas: forest products, telecommunications equipment and services, electronics, and
pharmaceuticals and medical equipment. The Market Oriented Sector Selective (MOSS) talks
were aimed at routing out all overt and informal barriers to imports in these areas. The
negotiations lasted throughout 1985 and achieved modest success.

Supporting the view that Japanese markets remained difficult to penetrate, statistics
showed that the level of manufactured imports in Japan as a share of the gross national
product was still far below the level in other developed countries during the 1980s.
Frustration with the modest results of the MOSS process and similar factors led to
provisions in the United States Trade Act of 1988 aimed at Japan. Under the "Super 301"
provision, nations were to be named as unfair trading partners and specific products
chosen for negotiation, as appropriate, with retaliation against the exports of these
nations should negotiations fail to provide satisfactory results. Japan was named an
unfair trading nation in 1989.

The new talks, known as the Structural Impediments Initiative, focused on structural
features in Japan that seemed to impede imports in ways outside the normal scope of trade
negotiations. Issues that were raised in the Structural Impediments Initiative, and by the
Japanese themselves, in domestic discussions, included the distribution system and
investment behavior that made it very difficult for foreign firms to acquire Japanese
firms. These discussions highlighted some of the fundamental differences in the Japanese
and United States economies.

Export Policies
For many years, export promotion was a large issue in Japanese government policy.
Government officials recognized that Japan needed to import to grow and develop, and it
needed to generate exports to pay for those imports. After the war, Japan had difficulty
exporting enough to pay for its imports until the mid 1960s, and resulting deficits were
the justification for export promotion programs and import restrictions.

Relation to the United States
The relationship between Japan and the United States were more uncertain in the early
1990s than at any time since World War II. As long-standing military allies and
increasingly interdependent economic partners, Japan and the United States cooperated
closely to build a strong, multifaceted relationship based on democratic values and
interests in world stability and development. The Japan/United States relationship
improved enormously in the 1970s and 1980s, as the two societies and economies became
increasingly intertwined. In 1990 their combined gross national product totaled about one
third of the world's GNP. Japan received about 11 percent of United States exports (a
larger share than any other country except Canada), and the United States bought about 34
percent of Japan's exports. Japan had $148 billion in direct investment in the United
States in 1991, while the United States had more than $17 billion invested in Japan. Some
$100 billion in United States government securities held by institutions in Japan helped
finance much of the United States budget deficit. Economic exchanges were reinforced by a
variety of scientific, technical, tourist, and other exchanges. Each society continued to
see the other as its main ally in Asia and the Pacific. Certain developments in the late
1980s damaged bilateral relations. Nevertheless, public opinion surveys continued to
reveal that substantial majorities of Japanese and Americans believed that the bilateral
relationship was vital to both countries.

Three sets of factors stand out as the most important in explaining the challenges facing
Japan-United States relations. They are economic, political-military, and domestic in
nature. The economic issues tended to stem from the ever-widening United States trade and
payments deficits with Japan, which began in 1965 when Japan reversed its imbalance in
trade with the United States and, for the first time, achieved an export surplus.

Pharmaceuticals and Medical Devices

The close government-industry relationship in Japan often works to the disadvantage of
foreign firms trying to participate in the Japanese market because the relationship favors
domestic companies. Several aspects of the relationship are of particular concern.

The United States concluded an agreement on medical technology with Japan on October 1,
1994, under the Framework to improve market access and transparency for U.S. medical
device manufacturers in the government procurement market. The agreement also contains
both a comprehensive complaint mechanism and procedures for dealing with unfair bids. The
agreement and accompanying exchange of letters represent an important step forward in the
ability of foreign firms to sell medical technology products and services to Japan's
public sector. The agreement establishes fair and transparent procedures that must be
used by national medical institutions in procuring major medical equipment and services
for Japan's $2.6 billion government procurement sector. Also, for the first time, the
agreement requires government hospitals in Japan to make procurement information public,
regardless of value. Each hospital will publish, on an annual basis, information on the
top ten medical technology products it plans to purchase during the upcoming year.
Previously, this important information had not been readily available.

U.S. firms are highly competitive in medical technology, and hold a global market share of
52 percent. In the Japanese market, however, the U.S. industry' share is 26 percent,
reflecting the existence of substantial market access barriers in this sector. The 1994
agreement calls for the Framework goal of a "substantial" increase in access and sales of
foreign competitive products and services. It specifies a set of five quantitative and
five qualitative criteria to assess the implementation of this agreement, including:
yearly measurement of the number of Japanese entities procuring foreign products and
services; the number and value of contracts awarded each year as a result of a decrease in
single tendering; and the results of reviews conducted by the procurement review board.

A key element of the agreement is the requirement that procurement decisions for certain
procurements, including purchases above a specified threshold be made on the basis of the
Overall Greatest Value Method (OGVM), instead of the current minimum price system. The
threshold will be reduced in value over a three-year period from 800,000 Special Drawing
Rights (SDRs) on April 1, 1996, to 385,000 SDRs on April 1, 1998. For the first time,
equipment costs of these items will be calculated on a life-cycle basis. This means that
the highly sophisticated medical technology products manufactured by U.S. and foreign
firms will not be excluded automatically because of initial price. The technical
excellence of those products, and the value they provide over the long term, will now be
taken into account.

The U.S. Government is pleased that the national government hospitals are using OGVM in
selecting medical equipment valued above the established thresholds, and that they have
found the methodology to be very effective in procuring the kinds of equipment they need
to provide quality medical care to their patients. U.S. firms are concerned, however,
that prefectural and municipal hospitals continue to use the lowest-bid procedure of
evaluation in procurement of advanced technology products. Under the medical technology
agreement, the Japanese Government is required to encourage prefectural and
local/municipal governments to utilize measures similar to those adopted by the central
government entities. The fact these entities do not use OGVM hinders the ability of U.S.
companies to sell in this significant portion of the market, as U.S. equipment is usually
innovative and/or high-end equipment offering special features or extraordinary
performance. This equipment may have a higher initial price, but provides significant
cost savings over the life of the product. The United States continues to actively
encourage the Japanese Government to have local and prefectural governments adopt this

The U.S. Government could clearly identify only 21 percent of the market as being held by
foreign firms, although this figure almost certainly undercounts the foreign share since
sales of U.S. products by Japanese distributors are particularly difficult to track.

The Administration continues to pursue improved medical and pharmaceutical product market
access in the context of the Market-Oriented Sector-Selective (MOSS) Medical Equipment and
Pharmaceutical talks. One issue of regular discussion is the reimbursement process and
schedule under Japan's national health insurance system for U.S. medical equipment and
pharmaceutical products. Reimbursement prices in Japan often do not adequately, or in a
timely fashion, compensate firms for the costs inherent in developing and marketing new,
innovative equipment and pharmaceutical products in Japan. The United States is
monitoring this issue through consultations with industry and through the MOSS.

At the February 1997 MOSS meeting, Japan announced a possible reduction of the "R zone"
for medical devices from the current 15 percent. If implemented, this action will make it
even more difficult for U.S. firms to sell their products in Japan at reasonable prices.
At present, the U.S. Government is working to resolve this issue. In addition, the U.S.
Government is concerned with a variety of other obstacles facing U.S. pharmaceutical and
medical equipment manufacturers when they seek to market their products in Japan. These
range from a slow and sometimes non-transparent approval process to regulations that
prevent certain products from being sold in hard gelatin capsules in Japan. In addition,
the U.S. Government advocates greater industry access to policy-making councils from
which they are presently excluded.

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