Introduction

Mr. Chairman and other distinguished committee members. Thank you for the opportunity to appear before you today. My name is Peter Walters. I am Group Vice President of Guardian Industries Corp. of Auburn Hills, Michigan. My responsibilities include overseeing the company's international business efforts, its public and governmental affairs, and its purchasing activities. During the past two decades, Guardian has been the fastest-growing of the major worldwide manufacturers of flat glass products. Our products are used in the construction, automotive, furniture and appliance industries. We also manufacture injection-molded plastic exterior trim systems for the automotive industry.

You and your colleagues are to be congratulated, Mr. Chairman, for holding this hearing. For many U.S. companies involved in foreign markets, the problem of foreign anticompetitive behavior is a tremendous one. Our success in eliminating trade barriers around the world means very little if competition laws do not exist or are not enforced.

To that end, we commend Senator Abraham for introducing S. 2252, a bill that would codify -- and therefore strengthen -- the authority of the U.S. antitrust enforcement agencies to intervene when foreign anticompetitive conduct harms U.S. exporters. In our view, this legislation is a very useful first step in addressing the problems that are at the heart of today's hearing -- anticompetitive conduct in the international arena.

From the perspective of U.S. businesses like ours, more work is needed to strengthen the authority of our antitrust enforcement agencies to investigate and prosecute anticompetitive conduct abroad. We recognize that it is not always necessary for our antitrust enforcement agencies to bring legal action to achieve their objectives. In some instances, it may be productive for them to work with the Office of the U.S. Trade Representative (USTR), the Department of State or other U.S. agencies to find a resolution to endemic anticompetitive practices. However, such efforts are much more likely to succeed if foreign authorities understand that without a negotiated resolution, the United States will vigorously investigate foreign anticompetitive conduct that harms U.S. exporters.
Guardian's Experience in Japan

I would like to tell you about my company's experience in attempting to break into Japan's flat glass market in the face of concerted efforts by our local competitors to keep us out. Our lack of success, despite extraordinary business efforts and intensive trade negotiations, is instructive, and highlights the need for vigorous antitrust enforcement abroad.

Guardian has worked extremely hard for a decade to achieve access to the Japanese market. Despite those efforts, we still account for barely 1 percent of Japan's flat glass market. Our lack of success in Japan is remarkable in light of our performance in other markets around the world -- even those where we compete head-to-head with Japanese companies. In most other major foreign markets, Guardian typically has a market share that is 10 to 20 times greater than what has been achieved in Japan.

Guardian's initial market-entry strategy in Japan was one that had been successful for us throughout North America, Latin America, Europe, and the rest of Asia. We won customers the old-fashioned way -- by providing reliable delivery of high-quality glass products at competitive prices. In most markets, we have found that flat glass passes through far too many hands in the distribution system, and we have achieved significant efficiencies by shortening and simplifying the distribution chain.

Even at the outset, our experience in Japan was atypical. With minor exceptions, neither glass distributors nor glass fabricators would agree to handle our products, despite price quotes at least 30 to 50 percent below domestic prices. We soon learned that Japan's distribution system was at the heart of the problem.

Since the 1950s, there have been three manufacturers of flat glass in Japan -- Asahi Glass Company, Nippon Sheet Glass Company, and Central Glass Company. For nearly five decades, the domestic market shares of these companies have remained steady at 50, 30 and 20 percent respectively, despite changes in economic conditions and aggressive foreign competition. This apparent lack of domestic competition is facilitated by the fact that these companies control the only effective means of distribution in Japan. Specifically, the overwhelming majority of glass distributors work exclusively with a single manufacturer because they either are encouraged or coerced to do so.

The distributors politely refer to this vertical arrangement as a way to avoid "confusion." But, it is clearly more than that. Through agreement or otherwise, distributors are rewarded by their patron manufacturer for declining to do anything but a minimal amount of business with foreign glass manufacturers and penalized if they ignore such lucrative incentives.

Initially, Guardian was not deterred by the roadblocks the manufacturers erected. Guardian created a sales subsidiary in Japan and opened a network of warehouses to minimize delivery time. We fully expected that those measures, combined with aggressive pricing and our high-quality products, would produce steady gains in market share. That was not the case, however. Despite these time-consuming and expensive efforts, Guardian has yet to make significant inroads into the Japanese market and does not expect the situation to change in the near future.

In retrospect, it is no surprise that Guardian has met with such limited success in Japan. A June 1993 study by the Japan Fair Trade Commission (JFTC) confirmed that Japan's flat glass industry is dominated by historical vertical restraints that effectively bind manufacturers and distributors. Further, the study found that manufacturers exert unparalleled influence over distributors through expedients such as equity ties, preferential pricing, personnel exchanges, and other incentives designed to limit outside competition. Although the JFTC acknowledged these problems, it declined to impose penalties because the manufacturers had agreed to reform measures as a result of pressure from U.S. trade negotiators. Unfortunately, these reform measures proved weak and ineffective and did virtually nothing to remedy the structural problems that prevented U.S. glass manufacturers from competing in Japan.
Efforts to Open the Market through Trade Negotiations

After years of unsuccessful efforts to penetrate the Japanese market, Guardian turned to the U.S. government for help. It has worked hard to break down the obstacles to market access in Japan. The Bush Administration was the first to tackle the issue. In the 1992 Bush-Miyazawa action plan, the Japanese government acknowledged the problem in the flat glass sector and undertook to substantially increase market access for competitive foreign firms. Unfortunately, during the election period that intervened there was little consistent follow-up to the action plan. Thus, the Japanese failed to implement key elements of the agreement.

In January 1995, after long and complex negotiations, then-U.S. Trade Representative Mickey Kantor concluded a bilateral flat glass agreement with then-MITI minister Ryutaro Hashimoto. The five-year agreement spelled out the responsibilities for all parties to create an open flat glass market. Japanese flat glass manufacturers and distributors released public statements that the market was open on a non-discriminatory basis for competition by all suppliers, foreign and domestic alike. The government of Japan endorsed these statements and agreed to survey the industry annually to ensure that the goal was being met. The data required to be collected in the annual survey was spelled out in great detail in the agreement. The Japanese government also agreed to strengthen building standards to require greater use of energy-efficient glass products and safety glass. We believed at the time that this agreement, if properly implemented, would be helpful.
The Current Competitive Climate

We are now nearly eighty percent through the five-year life of the flat glass agreement, and I must report that results have been disappointing. In its most recent survey, USTR concluded that the Japanese glass distribution system remains closed to foreign glass producers. It seems that trade negotiations achieved only fleeting success while the Japanese manufacturers were under tight government scrutiny. Specifically, for the first six months following the Agreement, Guardian's sales in Japan increased about 50 percent -- albeit from a very low base. Following that period there was a very pronounced downturn. Despite aggressive sales efforts on the part of U.S. firms, sales in Japan steadily eroded, then plateaued at pre-agreement levels, where they remain today. Evidently, manufacturers reinstituted the vertical restraints that had proven so successful for them in the past.

All available evidence suggests that this pattern will not change. This year's survey by MITI reported that 80 percent of the Japanese distributors who responded said that they either planned to handle the same amount of foreign glass or decrease the amount they handled.
DOJ/USTR Efforts to Open the Market

We now recognize that trade negotiations alone are unlikely to resolve this problem. The Japanese market is effectively closed to U.S. manufacturers due primarily to lax enforcement by Japan of its own antimonopoly laws. Although the U.S. government cannot make the Japanese enforce their own laws, there are steps that we can take.

As a first step, last spring we began working closely with the Antitrust Division at the Department of Justice and the USTR to develop a proposed antitrust compliance plan -- modeled on U.S. compliance plans in force at many major U.S. corporations -- that the Japanese manufacturers could adopt. The goal was for Japanese companies to implement a robust and accountable effort to comply with their own antimonopoly laws.

This effort built on the U.S.-Japan enhanced de-regulation initiative. And, we commend Assistant Attorney General Klein and Ambassador Barshefsky for putting forward this innovative approach to address anticompetitive practices in Japan's flat glass sector. Unfortunately, Japan flatly rejected this proposal at the annual review session held last May. Apparently as a consolation prize, the JFTC agreed instead to take a new look at the flat glass market in Japan. Frankly, that "look" is unlikely to yield any results.

As a second step, Guardian began to discuss with members of Congress and other business leaders how the U.S. antitrust laws, particularly the Foreign Trade Antitrust Improvements Act (FTAIA) could be made to work better to address foreign anticompetitive conduct that harms U.S. exporters. The approach of strengthening the Sherman Act and other related U.S. authorities to deal with foreign anticompetitive conduct has as least two advantages. First, as the Kodak case demonstrated, certain foreign anticompetitive conduct falls outside World Trade Organization disciplines. This means that there are no effective trade remedies unless the United States acts unilaterally. Strengthening the U.S. antitrust laws directly addresses the underlying problem, which is the need for effective regulation of anticompetitive conduct in an increasingly integrated global economy. Absent effective multilateral disciplines, which could be decades away, the U.S. antitrust agencies need the tools to investigate, prosecute and punish foreign anticompetitive conduct. Otherwise, the United States is powerless to deal with anticompetitive practices that threaten our economic interests and our stake in an open and competitive marketplace. That is almost precisely what the U.S. antitrust authorities concluded in 1994, when they brought a case against Pilkington PLC, a British company that used restrictive patent and licensing agreements to limit competition from U.S. firms. The U.S. antitrust authorities hailed the Pilkington case as a "paradigm for how U.S. antitrust enforcement can...open export markets previously closed by anticompetitive practices."

Senator Abraham's bill and its counterpart in the House, H.R. 4453, sponsored by the Chairman and the Ranking Minority Member of the House Judiciary Committee, are commendable and worthwhile steps toward strengthening U.S. authorities. The bills permanently correct a misinterpretation of the FTAIA that required U.S. exporters victimized by foreign anticompetitive conduct to show that U.S. consumers were harmed as well. The misinterpretation, found in footnote 159 of the 1988 Antitrust Guidelines for International Operations (Guidelines) was corrected in 1992, during the Bush administration. James Rill, who served as Assistant Attorney for Antitrust at the time announced "Congress did not intend the antitrust laws to be limited to cases based on direct harm to consumers." That interpretation has been embraced by all of the Assistant Attorneys General that followed Rill, including Assistant Attorney General Klein. Footnote 62 of the current Guidelines affirmatively permits the antitrust authorities to enforce "our antitrust laws against anticompetitive practices that harm U.S. commerce." S. 2252 would strengthen the position of the Justice Department by removing the possibility that its current policy could be challenged in court.

Beyond the scope of S. 2252 and even the FTAIA is the perplexing question of what can be done to bolster the ability of U.S. antitrust authorities and U.S. antitrust plaintiffs to investigate foreign anticompetitive conduct, particularly to discover evidence when it is located abroad. The problem is one that has been recognized and talked about for many years, but to our knowledge no workable solution has been proposed. We are not suggesting that we have the solution. However, we are anxious to work on the problem and believe that there are others in the business community that would join in that effort. We urge the Committee to take the lead in working with the federal antitrust agencies and the business community to find a solution to this vexing problem, so that U.S. antitrust enforcement can achieve the results hoped for when the FTAIA was enacted.
The Need for Action Now

Some have suggested that this is not a good time to take steps to encourage Japan to open its markets because its economy is in recession. That view may underestimate the effect that decades of artificially stymied growth in the flat glass and other domestic industries has had on the Japanese economy. Market opening is clearly in Japan's best economic interest, even if it is painful for the manufacturers in the short run.

The Japanese people are embracing de-regulation and change, despite resistance from politicians and bureaucrats. Industrial policies orchestrated by "enlightened" bureaucrats arguably assisted Japan's post-war recovery. But today excessive regulation, closed markets, prohibitively high taxes, and ineffective enforcement of its antitrust laws represent a crippling drag on Japan's international competitiveness. Japanese consumers, not Guardian, would be the main beneficiaries of an open and competitive glass market that expands access to new energy-saving glass technologies, provides incentives for innovation, and provides more choice at competitive prices. But, as long as Japan's distribution system is locked up by vertical restraints, its glass cartel has little incentive to innovate and respond to consumer demands.

Thank you, Mr. Chairman, for allowing me to appear before you today. I would be pleased to respond to any questions you may have.