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THE NOMOS CORPORATION
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eJ^E>^N ' S S T=^T ~ G :I C REDID ~ C ONT=O~ S
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Introduction
For nearly 35 years, Japan's administration of strategic trade
controls and participation in COCOM were carried out effectively,
albeit usually out of the public eye. Both the formulation of
strategic trade policy and the day-to-day administration of high
technology export controls were only occasionally mentioned in the
public press and were rarely matters of public debate. Indeed,
even within the Japanese Government responsibility for the
formulation of strategic trade policy and the administration of
export controls rested principally within specialized offices of
the Ministry of International Trade and Industry (MITI) and the
Ministry of Foreign Affairs (MOFA).
In their adherence to export control regulations Japanese
firms were guided not only by the letter of the published laws and
procedures, but also by established understandings with these
authorities based on formal and informal guidances. These
guidances often reflected the shared Allied objectives of
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maintaining technology security while still guaranteeing an
environment which would promote the development of high technology
industries and stimulate economic and industrial growth.
The relationship between government and industry was based
largely on -trust. The regulating authorities placed trust in
Japanese firms to file their export license applications
truthfully, while the firms trusted Tokyo to administer the
controls quickly, fairly and effectively. Although there had been
occasional unofficial accusations that Japan had become a fertile
feeding ground for Soviet Bloc technology collection efforts, the
system had worked without major controversy for over three decades.
This trust was strained in 1987 with the revelations that
Toshiba Machine Company had conspired to evade Japanese authorities
in the illegal sale of high precision machine tools to the Soviet
Union. The incident not only caused severe conflict in Japan's
relations with its closest strategic ally, the United States, but
thrust Japan's strategic trade control system into a public
spotlight it had never known.
Japan consequently set out to implement fundamental reforms
to its system of strategic trade controls. The ensuing months saw
amendments made to the underlying legal structure to Japan's export
control system along with extensive changes to the administrative
2
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structure and regulatory procedures. More importantly, the issue
of strategic trade controls emerged for the first time as a major
public concern. In effect, Tokyo had been called to demonstrate
to broad based audiences both at home and abroad, that Japan's
commitment to technology security and administration of
multilateral strategic trade controls was both responsible and
effective.
- Now, nearly three years after the Toshiba incident, Tokyo
appears committed to administering and enforcing a far more
rigorous and visible system of strategic trade controls than at
any previous time. Ironically though, Japan and other COCOM allies
are also now having to consider the implications of events in
Eastern Europe which seem to question much of the underlying
rationale for maintaining the COCOM system.
Japan's Export Controls
In Japan, exports are regulated under the Foreign Exchange
and Foreign Trade Control Law (Control Law), and through export
agreements and cartels created under the Export and Import
Transactions Law. Export control is used in Japan for a variety of
purposes: to preserve supplies of rare materials; to prohibit the
export of narcotics, weapons and pornography; to carry out orderly
marketing agreements and voluntary export restraints with foreign
3
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governments; and to observe international commitments such as the
export restrictions on strategic and militarily critical equipment
and technology required by Japan~s participation in COCOM.
Controls on strategic high technology trade and adherence to
COCOM commitments are administered solely under provisions of the
Foreign Exchange and Foreign Trade Control Law, and through a
series of related implementing ordinances. These regulations and
a description of their hierarchical relationships are described in
Appendix A.
Unlike the United States, which views exporting as a
privilege, in Japan exporting is construed as a fundamental right.
Article 47 provides that the "export of goods will be permitted
with such minimum restrictions thereon as are consistent with the
purpose of this Law." Export restriction, including that required
by COCOM, is allowed for under the Control Law through Articles 47-
51. (Restriction of technology transfer is allowed for under the
Control Law through Articles 25 - 25.2.) The key sections of the
law are Article 47, which sets forth a general principle of free
export, and article 48, which, by providing for approval of
exports t restricts that principle.
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While the Law has been amended more than twenty times since
its enactment in 1949, the most significant changes came in 1987
as a consequence of the Toshiba incident. The amendments
effectively redefined the circumstances under which MITI could
regulate exports by adding provisions which enabled MITI to
restrict exports for international security reasons in addition to
its established authority to limit exports for economic reasons.
A new Export Control Order was issued by MITI specifying the
products and countries to which trade restrictions apply in order
to enforce the trade embargoes set by COCOM. Currently Japanese
law allows restricting exports for any of the following types of
goods or technologies:
o Items of excess competition (textile goods,
binoculars, and other items of excess competition whose
export may invoke import restrictions in the foreign
countries of destination;
o strategic co D odities and technologies based on the
agreement of COCOM, Missile Technology Control Regime
(MTCR), Australia Group, etc.;
o items which require export restrictions in order to
secure a stable supply-and-demand equilibrium in the
domestic market (rare materials such as tungsten);
5
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o items of embargo ~ arms, weapons, counterfeit money,
obscene literature, narcotic drugs, national treasures,
etc. );
0 - items which may inf range upon intangible property
rights in the destination country.
Japan's list of controlled commode ties is contained in a
series of attachments to the Export Trade Control Order ~ Export
Order ), one of the implementing ordinances of the Foreign Exchange
and Foreign Trade Control Law. The commodities control list is
made up cuff two parts (Annex I and Annex II to the Export Order ):
o Annex I, which establishes 217 classes of commodities
whi ch are contra ~ ~ ed f or s ecuri ty reasons;
~ Annex lI, which specif ies 4 2 items which are
controlled for other reasons;
~ Japan's list of controlled technologies is attached to the
Foreign Exchange Control Order (Exchange Order) as an Annex;
o Annex to the Foreign Exchange Order, which specifies
38 categories of technologies which are controlled for
security reasons.
6
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Japan's authority to regulate strategic high technology
exports was not always so clear. In 1969 MITI's authority to
restrict exports based on COCOM guidelines was not only questioned,
but was declared illegal by the Tokyo District Court.
In what has become known as The COCOM Case (Pekin-Shanhai
Nihon Kogyo Tenrankai v. Japan), the sponsoring association for the
1969 Peking-Shanghai Industrial Exhibition applied to MITI for
approval to export nearly 3,000 items to be displayed at the
exhibit in the People's Republic of China. MITI disapproved export
of nineteen of the items, claiming that their export would conflict
with COCOM guidelines. Consequently, the association brought suit
against MITI in the Tokyo District Court.
The Court held that MITI's disapproval was illegal since it
did not fail within one of the limited exceptions to the general
principle of free trade specified in the Control Law. In its
decision the Court stated:
The meaning of Article ~ of the Export
Control Trade Order is that since the freedom
of export is a fundamental human right, its
restriction by MITI can be permitted only if
such restriction is deemed purely and directly
necessary for the sound maintenance of the
balance of international payments and the
sound development of international trade or
the national economy.
7
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The government contended that to deviate from the COCOM
agreement would disrupt friendly relations with the United States
and other allies as well and could possibly lead to economic
retaliation. The government argued further that any retaliatory
measures would seriously undermine the sound development of Japan's
international trade and domestic economy, and therefore, the
restriction based on COCOM criteria was consistent with the spirit
of the Control Law and the Export Trade Control Order. In
response, the Court declared that if Japan had chosen to
participate in COCOM for political or strategic reasons (as it
had), export controls, which are enforced for economic reasons,
would have to be based on other domestic laws. The court held
We must conclude that export restrictions
imposed for other than economic reasons are
not encompassed by Article I of the Export
Trade Control Order, even if such restrictions
have an indirect economic effect.
In the long term, the Court's finding proved to be almost
irrelevant. Despite the negative finding of the Court on MITI's
authority to restrict exports for strategic and national security
reasons, the Ministry continued to impose controls based on COCOM
guidelines. MITI's authority and procedures were accepted by
Japanese exporters who rarely questioned the Ministry's decisions.
8
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New and Improved
In order to prevent further recurrences of illegal sales like
the Toshiba Machine case, the Government of Japan embarked in the
early fall of 1987 upon a wholesale improvement of its export
control system. Having its system of export controls thrust into
the public spotlight forced Tokyo to demonstrate a more
conscientious and effective system of strategic trade controls not
only to domestic audiences, but to its allies as well.
The changes made by the Government of Japan addressed all
elements of strategic trade controls. Legislative amendments
strengthened significantly the legal underpinnings of the system,
while substantial additions were made to the administrative and
regulatory structures as well. Enforcement and compliance were
improved dramatically through the establishment of more effective
interagency coordination mechanisms as well as through the
institution of new requirements. Exporters themselves were, for
the first time, to be given clear responsibility for complying with
strategic trade controls through adoption of internal corporate
security procedures.
Among the most dramatic changes made to Japan's export control
system were amendments made to the Foreign Exchange and Foreign
Trade Control Law which fundamentally improved the legal standing
of COCOM controls in Japan. In many respects they eliminated the
9
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potential loopholes and ambiguities posed by the 1969 COCOM case,
and set the stage for the more visible and firmly based system of
administering export controls.
As mentioned above, the new law goes beyond the limitations
of the previous statute which limited MITI's authority to regulate
exports to instances in which restrictions were necessary to either
maintain the balance of payments or provide for the sound
development of international trade and the national economy. The
new statute now contains provisions authorizing Japanese
authorities to restrict exports for reasons to maintain
international peach and security. This has, from a legal
standpoint, legitimized Japanese participation in COCOM and erased
any ambiguity surrounding Japan's ability to fulfill its COCOM
obligations that may have been created by the 1969 COCOM case.
The new provisions are contained in amendments to Article 48,
which regulates exports of goods, and to Article 25, which
regulates exports of technology, technical data and other
"services" by requiring MITI approval as follows:
Article 48~: Those who intend to make exports of
specific kinds of goods to a destination in specified
areas which are recognized as an obstacle to the
maintenance of international peace and security, as
stipulated by government ordinance, must obtain
authorization from the Minister of International Trade
and Industry;
10
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Article 25~1.1~: A transaction which is intended to
provide to certain specified areas the design of goods
of specified kinds or technology related to manufacturing
or usage of a specific kind (henceforth described as
specific technology) which are recogni zed in government
ordinances as obstructions to the preservation of
international peace and security.
Further amendments to the law addressed concerns that
surfaced during the Toshiba Machine affair over whether Japanese
enforcement measures were an adequate deterrent to potential
violators. Under the new law the penalties for violations had been
raised substantially as follows:
o Administrative sanctions were strengthened from the
previous one-year revocation of export privileges to a
maximum of three years. Fines were increased from the
previous limits of 1 million yen or three times the value
of the shipment to maximums of 2 million yen or 5 times
the value of the shipment.
O Criminal penalties were also increased from a maximum
period of three years to five years, and the statute of
limitations was also extended from three years to five
years.
Another important amendment to the law was the addition of
penalties for attempted diversions of goods. Previously, only
infractions which had actually been completed could be prosecuted
under the law. There were Do penalties for attempts or proven
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procedures and obligations. The pamphlet, entitled "Never Again"
describes the Japanese export licensing requirements, company
procedures to ensure compliance, and the necessity of compliance
for contributing to Japanese and overall Western security. It was
distributed to each member of the company.
An Awakening in COCOM
As a result of the Toshiba Machine incident the Japanese
government also pledged to take a more active role in COCOM
affairs. Since deciding to participate in COCOM in 1952, Japan had
been its most conspicuous wallflower, even as Japanese
technological prowess and industrial strength grew. Japanese
authorities are now quick to point that a more visible and forceful
Japanese presence at COCOM would be commensurate with the
responsibilities Japan has assumed for guaranteeing Western
technology security through its development as a leading world
technological power.
While the precise details of COCOM deliberations are secret,
there are some indications that Tokyo is serious about its
commitment. First and foremost is the formation of CISTEC, noted
above, to assist government authorities in preparing detailed
initiatives and negotiating positions on issues such as
streamlining of the COCOM control lists.
24
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Within COCOM sessions Japan has already demonstrated a greater
willingness to take the lead in substantive discussions. For
example, during recent debates concerning liberalization of the
controls on advanced machine tools, an initiative entered by Tokyo
was used to break a stalemate by offering a compromise between
proposals entered previously by the United States and West Germany.
Japanese authorities have indicated that Japan will now be more
willing to present concrete proposals containing specific technical
parameters to COCOM discussions on liberalizing the control lists.
In other ways, too, Japan has sought to support the COCOM
objective of harmonizing participating countries' licensing and
enforcement systems. Changes to licensing procedures have been
made which have brought the Japanese system more in line with that
of the United States and other COCOM partners. For example, in
April 1989 Japan instituted its first distribution license system.
To date approximately 25 firms in Japan have received distribution
~ icenses . In order to qualify for a distribution license an
exporter must show that:
o At least twenty-five export licenses must have been
approved for the same recipient during the previous year;
0 The exporter must have an adequate and approved
internal control program;
25
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o Importers in non-COCOM member countries must also
demonstrate adequate internal control programs;
o An importer in a non-COCOM member country must
demonstrate that it is subject to control by the exporter
through any of the following relationships:
o An overseas subsidiary
exporter must have greater
interest; or
o An overseas subsidiary in which the
exporter has a greater than SO% interest; or
o An overseas subsidiary in which a company
in a COCOM-member country has greater than a
~0% interest and that company has a greater
than SON interest in the exporter.
Only certain specified commodities and technical data are
eligible for export under a distribution license. As can be
expected, many more articles are eligible for export to the COCOM-
member countries under the distribution license than to the
specified non-COCOM member countries, which include all non-
con~unist countries plus China. While distribution licenses can
be granted for shipments to China, to date none have been approved.
26
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~ second area where Japan has moved to make its licensing
procedures reflect those currently in use by the United States and
other COCOM partners is in issuance of its first general license.
MITI began issuing its version of the US's G-COM or G-COCOM general
licenses during April of 1990. The new license, called General
Bulk License, will facilitate exports of controlled commodities to
other COCOM-member countries.
The New View Towards East Europe
The disintegration of communist rule in East Europe and the
continuing thaw in relations with the Soviet Union are now posing
new challenges to the COCOM membership. Ironically, the calls for
liberalization of the COCOM regime are coming at a time when Japan
now sports its most effective strategic trade control apparatus
since entering COCOM. Japan's response, from both official and
business circles, can be characterized as conservative and
deliberate. What is most striking about Japan's positions is the
unanimity of opinion among foreign policy officials, trade
policymakers and the business community.
Japan states that it is clearly important to streamline the
COCOM list. However' many Japanese trade of f icials and corporate
leaders have taken a rather conservative view and claim to share
many of the same strategic interests as the United States.
27
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Japanese officials are quick to point out that while political
events in Eastern Europe and the Soviet Union have greatly altered
the strategic scene in Europe, the picture in the Eastern parts of
the Soviet Union and the Pacific have not been changed
significantly.
In the strategic context, Japanese officials continue to view
the Soviet Union as a potent military threat in the Pacific. There
have been no reductions on Soviet naval forces nor have there been
any indications of troop withdrawals from Soviet bases.
From the political perspective, there remain major outstanding
questions of Japan's relations with the USSR. First and foremost
is the continuing question of Japan's Northern Territories which
the Soviets have thus far refused to discuss with Tokyo.
Continuing Soviet intransigence on this issue is a convincing
signal to most Japanese political and business leaders that Soviet
strategic objectives in the Pacific remain unchanged. Furthermore,
a Soviet crackdown by force of arms in the Baltic or other
dissident states would only reassure outside observers that the
Soviet military is alive and capable of defending and perpetuating
Soviet territorial claims. Nonetheless, a breakthrough on the
Northern Territories issue is also possible, especially given
Gorbachev's flair for the dramatic. We doubt, however, whether
Gorbachev is prepared to meet Japanese expectations completely with
an unconditional return of the islands. Instead, any moves by
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Gorbachev to address the issue are likely to do little more than
remove some of the cumbersome political draping to expanding Japan-
Soviet trade ties, and focus attention instead on the question of
their economic merits.
The economic hurdles facing any significant renewal of
Japanese trade relations with the Soviet Union remain rather
substantial. There are, as yet, few compelling economic factors
for changes Japan's positions vis-a-vis strategic trade with the
soviets and East Europe. East Bloc markets remain only of minor
interest to most Japanese firms. Even the largest trading
companies continue to limit their exposure in Eastern European
markets to only 2-4~ of total sales with few incentives to increase
that share substantially in the near term. respite the monumental
changes underway in the political fabric of Eastern Europe and the
soviet Union many business leaders reflect official concerns and
continue to regard the Soviet and East European markets as too
unstable for major investment.
Therefore, in the near term most Japanese officials and
outside observers expect Japan's positions on COCOM and strategic
trade issues to remain closer to those of the United States than
to those of the European members calling for greater and more rapid
liberalization. Some officials have even gone so far as to comment
privately that Japan will undoubtedly continue take its lead in
COCOM affairs from the US.
29
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Outlook
In the wake of the Toshiba Machine episode, Japan's moves to
improve its system of strategic trade controls have had far-
reaching implications for future Japanese positions in both the
domestic and international arenas.
First' and most obvious, is Japan's emergence as a more
prominent player in multilateral policy issues. Through the almost
complete renovation of its export control and export licensing
system, Japan has taken a major step in demonstrating its
willingness to accept both the responsibility for safeguarding
Western strategic interests along with the economic benefits of
its technological and industrial development. Japan can now boast
of a system of strategic trade controls in which greater
accountability and more extensive and thorough administration place
it on a par with export control regimes in any COCOM-member
country. Through the improvements in licensing and enforcement and
its commitment to a more active role in COCOM, Japan has
demonstrated that it can and will be an active, responsible and
responsive member of the Western industrial alliance.
Secondl y , Japan has established a strong foundation on which
to build independent positions on strategic trade control issues.
Formation of industry groups such as CIS.TEC, and the increased
30
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resources devotee] to strategic trade policy formulation,
administration and enforcement within the government show that
Japan will no longer accept either the prevailing consensus in
COCOM , or even US proposals at face value. Instead, Japan appears
prepared and willing to offer its own interpretations, representing
both its unique strategic concerns and economic interests. As a
result, both the Europeans and the United States will now face the
first strong representation of a uniquely Asian-Pacific perspective
in the formulation of COCOM policies.
Lastly, while opening the door for a more outspoken and
independent Japan on strategic trade issues, both the Toshiba
Machine incident and the events in East Europe, have also
reemphasized common strategic interests between Japan and the
United States. A Japan which is more active in COCOM and other
fore for strategic trade issues will undoubtedly provide many
challenges to US positions in the months and years ahead. However,
the shared overall objectives of maintaining peace and security in
the Pacific will most likely outweigh any disagreements which are
likely to arise on specific technology control issues. Outside of
serious, and now less likely, lapses in the administration or
enforcement of Japan's strategic trade controls, such as the
Toshiba Machine incident, there are few issues which would
undermine or weaken this shared strategic objective.
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In the end, Japan's heightened sensitivity towards strategic
trade controls comes at a very opportune time. It comes at a
period when the entire fabric of East-West relations is being
rewoven, and the basic rationale behind the current strategic trade
control structure is being questioned throughout the Western
alliance. Indeed, Japan's more vigorous positions on technology
security issues almost guarantee a more challenging but stronger
system of strategic trade controls, which is more responsive to the
political and economic demands of a rapidly changing East-West
environment.
In theory, at least, Japan should be ideally positioned to
react to the changing events in a timely manner. The government
and business communities have proven capable and receptive to
fundamental changes in strategic trade policies and procedures.
Furthermore, the issue of technology security and East-West
relations continues to enjoy a high public profile. Japan may very
well become a leader in the formulation of new Western policies
towards trade with the East 310c and redefining strategic
technology controls. The question which remains is to what degree
will Japan's unique Pacific-oriented strategic perspective and
shared strategic concerns with the United States limit Tokyo's
decision making.
32
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The risk Japan now faces is one of perhaps having come too
late to the party. Japan's conservative view of Soviet strategic
ob jectives, which Japan has only just recently institutionalized
in a stronger export control system, could be rendered obsolete by
political- developments in East Europe and the USSR. Japan could
possibly be left alone with the United States in holding onto a
restrictive trade policy whit e European allies move forward in
f orging new economic alliances in East Europe .
Unlike the United
States, an in some ways because of the United States as well, Japan
is probably less likely to change its course suddenly and deem that
political liberalizations in East Europe and the USSR now warrant
a significant and rapid liberalization of strategic trade controls.
33
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o Importers in non-COCOM member countries must also
demonstrate adequate internal control programs;
o An importer in a non-COCOM member country must
demonstrate that it is subject to control by the exporter
through any of the following relationships:
o An overseas subsidiary
exporter must have greater
interest; or
o An overseas subsidiary in which the
exporter has a greater than SO% interest; or
o An overseas subsidiary in which a company
in a COCOM-member country has greater than a
~0% interest and that company has a greater
than SON interest in the exporter.
Only certain specified commodities and technical data are
eligible for export under a distribution license. As can be
expected, many more articles are eligible for export to the COCOM-
member countries under the distribution license than to the
specified non-COCOM member countries, which include all non-
con~unist countries plus China. While distribution licenses can
be granted for shipments to China, to date none have been approved.
26
Representative terms from entire chapter:
export control
