Japan lagging behind EU in setting de facto global business standards

by Takashi Kitazume

Japanese firms should recognize and respond to the European Union’s growing power as a de facto setter of global business standards, because failure to do so would seriously affect the future of their overseas business, experts told a recent seminar in Tokyo.

Regulations and business models set by the 27-member bloc have a global reach because of the growing importance of the EU market and its impacts on neighboring regions, they said.

Experts from the business and legal fields were speaking at the March 27 seminar organized by Keizai Koho Center and the Japan Business Federation (Nippon Keidanren) under the theme, “How should Japan cope with the global reach of European Union regulations and standards?”

Global standards come in various forms, including formal regulations as well as voluntary standards set by several key players in industry. But one common feature is that these standards set the rules of the market and framework for competition, said Takao Suami, a law professor at Waseda Law School in Tokyo.

One recent example of EU regulations effectively turning into international standards, Suami noted, is the cap-and-trade system on greenhouse gas emissions, under which each individual company is given the right to emit a certain amount and trade surplus rights.

The Japanese government — notably the Ministry of Economy, Trade and Industry — and the business community were earlier reluctant to introduce a similar system.

But they have reportedly eased their opposition after it became clear that the EU system is fast becoming the international standard, following an agreement in October between the bloc and several states in the U.S. to create a common market for emissions rights trading, he said. If such a system becomes the global standard, countries that have not joined in the early stage will face disadvantages, he warned.

The EU has established the knowhow of setting multinational standards through its experience in harmonizing regulations among member states when it created the single common market, Suami said.

Behind the EU’s aggressive standard-setting strategy is its belief that markets are created not by natural forces but by the artificial process of setting rules and regulations, and the EU is constantly weighing systems and regulations to enable the bloc to take the initiative in competition, he said.

This is in sharp contrast to the traditional views in Japan that better technology and better products hold the key to competitiveness — that excellent products sell anywhere in the world, he added.

Yoshio Utsumi, a visiting professor at Waseda University and former secretary general of the International Telecommunication Union, said Japanese tend to believe the United States sets the rules in international business and do not pay enough attention to the EU-led global standard-setting process.

The history of efforts to set common international standards on telecommunications systems in recent decades clearly shows the strong influence of Europe — and Japan’s failure to take the initiative in standard-setting on many occasions, Utsumi noted.

One example, he said, is the second-generation mobile phone, in which the European format known as GSM accounts for most of the cell phones used worldwide except in Japan. Japanese products based on the format developed by the NTT group do not sell in the overseas markets dominated by European makers and South Korea’s Samsung, which quickly adopted the GSM format, he added.

And while an international common format was later agreed on for third-generation mobile phones like NTT DoCoMo’s FOMA service, much of the rest of the world still uses second-generation cell phones, Utsumi pointed out.

Utsumi said Japan is very poor at the international standard-setting process. He also said he fears many Japanese firms — once famous for their aggressive efforts to explore overseas markets — have in the past decade or so become inward-looking, focused only on the domestic market.

Fumiaki Shono, general manager of chemical management at the Japan Chemical Industry Association, said new comprehensive EU regulations on chemicals introduced last year will also have an effect on the business of Japanese firms.

REACH, or Regulation, Evaluation, Authorization and Restrictions of Chemicals, took effect in June as new EU rules on the management of chemicals and products using chemical materials. This could turn into a de facto standard for chemical industries worldwide because they export to Europe and because the standard could be adopted by countries or regions with close links to the EU, Shono said.

Kiyoshi Ishizaka, secretary general and general manager of the standardization division of the Japan Machinery Federation, also said Japan lags behind in creation of internationally compatible safety standards on industrial machinery, which has led to emergence of double standards in safety rules on machines for export and those for domestic use.