18 November 1987

TABLE OF CONTENTS

1. INTRODUCTION

2. FACTUAL ASPECTS

3. MAIN ARGUMENTS

4. SUBMISSIONS BY OTHER CONTRACTING PARTIES

5. FINDINGS

6. CONCLUSIONS

1.1 The United States held consultations with Japan under Article XXIII:1 regarding restrictions on imports of certain agricultural products on 11 July 1983 and 8 and 9 September 1983 (L/6037). As no satisfactory settlement was reached, the United States requested the CONTRACTING PARTIES to establish a panel to examine the matter. The Council agreed to establish the Panel on 27 October 1986, and authorized the Chairman to draw up its terms of reference and to designate its Chairman and members in consultation with the parties concerned (C/M/202).

1.2 On 27 February 1987 the Council was informed of the terms of reference and composition of the Panel (C/145):

1.3 The Panel met with the parties on 7 and 8 May, 23 June and 5 October 1987, and with interested third parties on 8 May 1987. It submitted its report to the parties to the dispute on 30 October 1987.

2.1 General

2.1.1 The case before the Panel concerned import restrictions maintained by Japan on certain products contained in the following lines in the Japanese tariff:

2.1.2 Article 52 of Japan's Foreign Exchange and Foreign Trade Control Law (Law No. 228, 1949) requires importers to obtain import licences where the Government has so provided by Cabinet Order. The Import Trade Control Order (Cabinet Order No. 414 of 1949, as amended) implements this authority and establishes administrative responsibilities. It provides that the Minister of International Trade and Industry shall designate and publish items and countries of origin of goods for which advance authorization of import must be obtained. However, before designating a product, he is to obtain consent of the Minister concerned with jurisdiction over that product; in this case, the Minister of Agriculture, Forestry and Fisheries. The list of categories under import quota is published in MITI Notification No. 170 of 1966 (as amended), and also published in "KANPO" (Government Notification), "MITI Notification" and "TSUSHOKOHO" (Trade Bulletin) of JETRO, respectively. Imports of all the products in this dispute are subject to import quotas under the Import Trade Control Order and this Notification. Procedures for import licensing are set forth in the Import Trade Control Regulation (MITI Ordinance No. 77 of 1949, as amended).

2.1.3 The Control Order and the Control Regulation provide that, for products on the import quota list, the importer must apply to the Ministry of International Trade and Industry (MITI) for allocation of the import quota. MITI carries out this allocation in consultation with the Minister with jurisdiction over the product and issues a certificate of import quota allocation. Within four months thereafter, the importer must forward the certificate of quota allocation to an authorized foreign exchange bank which automatically issues a certificate of import approval. The import approval is valid for six months. Import quota allocations are not transferable.

2.1.4 Japanese import quotas are classified into the categories of Planned Import Quota, Miscellaneous Import Quota, Special Quota for Okinawa, and Other Quota for Specific Purpose. The import announcements published every half year specify which type of quota is applied to each item.

2.1.5 The Planned Import Quota is the quota system most commonly used for agricultural products. The size of the quota is determined on the basis of supply/demand estimates for each item. The size of each import quota is set in principle twice a year, and the announcement of the quota is made in each half of the fiscal year when the demand/supply estimates become available. The timing of the announcements differs depending on the item involved and may vary from year to year for any one item. Following announcement of the quotas, applications are accepted for two weeks, then simultaneously reviewed. Quota allocations are generally made within two to four weeks after the deadline date for applications, and are given either to traders or users.

2.1.6 Allocation to users is generally for semi-processed items imported by industrial users for further processing. The quota is mainly allocated to manufacturers or their associations, based on their processing capacity and other factors. Allocation to traders is made for consumer products and other items whose end-users are difficult to identify. The quota is allocated to trading companies with a record of importing agricultural and marine products, based on their past import performance, and to newcomers for some items. For some products, if there is quota remaining after allocation to historical importers, new importers and users, the residual quota is allocated on a first-come-first-served basis. In this situation, applicants must present a contract with a foreign exporter. Failure to import will not necessarily result in loss of the allocation the subsequent year. The first-come-first-served allocations are made whenever an application has been received, generally following a two-week processing period.

2.1.7 The Miscellaneous Import Quota covers all items to which the methods of the Planned Import Quota are not considered applicable. This quota includes a range of items which consist of miscellaneous sorts of articles, items whose commodity categories have not been explicitly established, or items whose import quantity is minimal. For this quota only the total value in US dollars is announced, not the volume nor the amount of quota for each product in the Miscellaneous Import Quota. The size of the quota is determined and published twice a year, in May and November but the volume or value of imports to be permitted for individual items within the quota is not published. At various times in the past the Government of Japan has moved items from the miscellaneous quota to a planned quota.

2.1.8 Import licences are issued either to end-users, including wholesalers and retailers, or to trading companies receiving orders from end-users. Most allocation is to trading companies. Allocation is made on an individual application basis. If the importation of the product is not considered to pose problems for the existing demand-supply relationship, allocation of the requested amount is made. In other cases, the amount deemed adequate to meet the demand-supply situation for the product is allocated, with consideration taken of the import performance of the applicant. Licences are issued to newcomers for most of the products under this category of quota; for corned beef, other prepared and preserved meat or meat offals, and single strength juices, licences are not issued except to existing importers of that product.

2.1.9 A Special Quota for Okinawa has been established based on the particular circumstances of that prefecture, and the quota is determined on the basis of the supply/demand situation of Okinawa. The products imported under the Special Quota for Okinawa have to be consumed in that prefecture. The allocation methods and procedures for the Okinawa quota are the same as those for the planned quota, with the quantity for each quota item announced twice annually, in June and November. The quota is allocated to traders for most items, but some raw materials for processing are allocated to users. Newcomers are eligible to apply for allocation of most quota items. A special quota for specific purposes has been established for such uses as international shipping, airlines and hotels for foreign tourists. It is generally allocated to trading companies with prior import experience and with requests from end users. Table 2.1 indicates which type of quota applies to each item under consideration.

2.1.10 The following is a brief description of the relevant domestic production programs of Japan and of the import restrictions applied to the specific items of this dispute. The various items have been grouped according to their relevant product categories. Prepared and preserved milk and cream (04.02) , processed cheese (04.04 ex), lactose (17.02 ex), and food preparations, not elsewhere specified, mainly consisting of dairy (21.07 ex), are grouped as "dairy products". Starch and insulin (11.08); glucose and other sugars and syrups, with the exclusion of lactose (17.02 ex); and food preparations, not elsewhere specified, mainly consisting of sugar (21.07 ex) are considered under the heading of "starch and sugar products". Fruit puree and pastes (20.05 ex), fruit pulp (20.06 ex) and fruit juices (20.07 ex) are grouped as "fruit products", whereas prepared and preserved pineapple is discussed separately. Tomato juice (20.07 ex) and tomato ketchup and sauce (21.04 ex) are considered as "tomato products". The other products of the dispute, i.e. dried leguminous vegetables (07.05 ex), groundnuts (12.01 ex) and prepared or preserved bovine meat (16.02 ex), are each considered individually.

2.2 Dairy Products

2.2.1 The 1965 Law Concerning Temporary Measures on Deficiency Payments for Manufacturing Milk Producers provides for deficiency payments to producers of manufacturing milk and for a National Ceiling Quantity on ** manufacturing milk eligible to receive this deficiency payment. The deficiency payment is not paid for milk produced in excess of the National Ceiling Quantity, which is determined annually by the Ministry of Agriculture, Forestry and Fisheries (hereinafter "MAFF") on the basis of supply and demand estimates. MAFF provides the funds for the deficiency payment to the Livestock Industry Promotion Corporation (hereinafter "LIPC"), which pays it through the prefectural designated milk producers organizations to the individual farmers based on the use for which the raw milk has been sold. The actual unit amount of the deficiency payment, or producer compensation grant, received by any producer is the difference between the "guaranteed price" and the "standard trading price" of the milk used for manufacturing the specified milk products (butter, skimmed milk powder, sweetened condensed whole milk, sweetened condensed skimmed milk, whole milk powder, sweetened milk powder, evaporated milk and skimmed milk for calf feed. The government sets both the "guaranteed price" and the "standard trading price" (as well as the "stabilization indicative prices" for the so-called "designated products" i.e. butter, skimmed milk powder, sweetened condensed whole and skimmed milk) each fiscal year. The guaranteed price for manufacturing milk is set so as to maintain production in districts where a majority of the milk produced is directed towards manufacturing. In essence, the production costs in Hokkaido, with some adjustments regarding farmers own labour costs and land costs, are used as the base for the calculation. The standard trading price for manufacturing milk is based on the value of the sale price of major milk products (or stabilization indicative price for the designated products), with the average manufacturing and handling costs deducted. The unit value of the deficiency payment was 15.08 yen/kg in FY 1987, reflecting the difference between the guaranteed price of 82.75 yen/kg and the standard trading price of 67.67 yen/kg. The deficiency payment system does not cover milk used for producing "fresh products" such as yogurt or cream; these are included in the "drinking milk" system.

2.2.2 Since 1979, MAFF has also instructed the Central Dairy Council, a national organization composed of all prefectural designated milk producer organizations, to set a National Target Quantity for raw milk production and to determine the measures to enforce the limitations on milk production. The target quantity for raw milk is then allocated through the prefectural designated milk producers organizations to individual farmers. The dairy farmers deliver their raw milk to the prefectural organizations, which then sell it to manufacturers for processing and distribution as either liquid "drinking milk" or processed dairy products. The same measures on manufacturing milk apply to production in Okinawa, and the national target amount for raw milk as set by the Central Dairy Council includes raw milk produced in Okinawa. However, the production of raw milk in Okinawa is not sufficient to meet the prefecture's demands for drinking milk, and there is actually no excess for manufacturing purposes. The raw milk National Target Level, the National Ceiling Quantity (manufacturing milk), as well as the actual production levels of raw milk and manufacturing milk are given in Table 2.2.

2.2.3 The Central Dairy Council imposes a penalty of 40 yen/kg on raw milk produced in excess of the national target quantity and reduces the quota allocated to the offender in the following year. In addition, milk produced in excess of the target quantity is disposed of either for stockfeed or used in the school lunch program. Therefore, a farmer who produces milk in excess of his allocated target quantity, in addition to paying the 40 yen/kg penalty and having his production quota subsequently reduced, receives only a price of 20/30 yen/kg for his excess milk. This is in contrast to the approximately 100-110 yen/kg price (including deficiency payment) the farmer receives for drinking milk and manufacturing milk within the National Ceiling Quantity.

2.2.4 The "designated products", i.e. butter, sweetened condensed whole milk, sweetened condensed skimmed milk, and skimmed milk powder, are subject to a price stabilization system. LIPC conducts buying and selling operations of these products in order to ensure stable prices at the stabilization indicative price levels established by MAFF. When the prices of these products exceed or are likely to exceed the set levels, LIPC also has the exclusive right to import and sell these products and others (whole milk powder, whey powder, butter milk powder) under state trading procedures. However, imports of skimmed milk powder for stockfeed or school lunch programs, as well as whey powder for feed use, can be imported by traders other than LIPC within the import quota system.

2.2.5 There are no government measures applied directly to the production of dairy products other than raw and manufacturing milk. Japanese production of evaporated milk, sweetened condensed milk, skimmed milk powder, whole milk powder, prepared whey, whey powder, natural and processed cheese, and dairy food preparations is given in Table 2.2.

2.2.6 Imports of preserved, concentrated or sweetened milk and cream (04.02), except prepared whey, evaporated milk and sweetened condensed milk, are subject to a planned quota and some to a special quota for Okinawa. Prepared whey powder for processing into prepared milk powder for infants is included in the Miscellaneous Import Quota (hereinafter "MIQ"). Quotas permit the importation of evaporated milk only into Okinawa and for special use in hotels and shipping vessels; imports of sweetened condensed whole milk are limited to the latter special use quota. The import quota levels (permitted quota allocation under the MIQ) are established for various products within this category and are indicated on Table 2.2. N° import quotas have been allocated in recent years for whole milk powder. Quota allocations are made to LIPC and end-users under the planned quotas, to end-users and trading companies under all other quotas. Allocation to newcomers is permitted for all such products. The quotas are usually announced in June and November.

2.2.7 Processed cheese (04.04 ex) imports are permitted only under a special quota for Okinawa and a quota for specific purposes and are not permitted for the general Japanese market. The quota for specific purposes has two categories, one for international shipping vessels travelling between Japan and foreign countries, and the other for international tourist hotels. The volume of the special quota is usually announced in June and November. Allocation of import licenses is made to trading companies for both types of quota; allocation to newcomers is permitted.

2.2.8 Lactose, not containing added sugar and less than 90 per cent by weight of lactose (17.02 ex), otherwise known as "crude lactose", is included in the MIQ. Allocation of quota for this product is made primarily to manufacturers, and import levels are indicated in Table 2.2. There is no Japanese production of "crude" lactose. Imports of refined lactose (more than 90 per cent by weight of lactose) are not restricted. Food preparations not elsewhere specified, mainly consisting of milk ingredients (21.07 ex), referred to as dairy food preparations, are imported under the MIQ. Quota allocations are made to end-users and to trading companies; allocation to newcomers is permitted. Permitted import quantities in recent years are indicated on Table 2.2.

2.3 Dried Leguminous Vegetables

2.3.1 Measures concerning production of dried leguminous vegetables have been in force since 1960. Production has declined since 1960, although cultivation increased from 1981 to 1983. In 1984, MAFF, acting under the authority provided by the Agricultural Basic Law to adjust supply and demand, issued a directive on Planned Production of Legumes in Hokkaido to the governor of that prefecture. Hokkaido produces 80 per cent of total domestic production and ships 90 per cent of total domestic shipments. MAFF establishes target cultivation area for total dried leguminous vegetable production in Hokkaido for five consecutive years, based upon the draft target plan of cultivation submitted by Hokkaido in cooperation with the cooperatives and taking account of short and long-term supply and demand estimates and price trends of legumes. The initial target area is reviewed and revised every year in light of the previous year's production level. The cooperatives then apportion targeted cultivation area to individual farmers, and are responsible for reporting any excess cultivation and generally for marketing farmer is dried leguminous vegetables. The MAFF directive establishes that farmers whose cooperatives report them in two consecutive years as exceeding target area may be penalized by removal from the list of those eligible to receive subsidies or loans from the government or from Hokkaido prefecture. Small red beans account for over half of dried leguminous vegetable production in Japan; French beans are also produced in significant quantities. Table 2.3 indicates target and actual cultivated acreage in Hokkaido and in Japan, and actual production of dried leguminous vegetables.

2.3.2 Imports of dried leguminous vegetables, excluding green beans (07.05 ex) are subject to planned quotas and to a special quota for Okinawa. The planned quotas are established for each of four categories of dried leguminous vegetables: small red beans, peas, broad beans, French beans and others. The quota for Okinawa is not divided into categories. The planned quotas are calculated in volume, then converted and published in terms of dollars. A minimum level equivalent to 120,000 tons for the quota, including the Okinawa quota, was established in FY 1984. Quota allocations are made to trading companies; newcomers may receive allocations only of the Okinawa quota. Established quota levels and actual imports under each quota are indicated in Table 2.3.

TO CONTINUE WITH RESTRICTIONS ON IMPORTS OF CERTAIN AGRICULTURAL PRODUCTS