Speeches & Presentations

The Next Stage in Japan-U.S. Economic Relations: The Case for Bilateral Integration

Sidney Taurel

Chairman - Eli Lilly and Company December 12, 2008

August 31, 2006

Remarks to the American Chamber of Commerce in Japan — Tokyo, Japan

Thank you, Mr. Wolf, for your kind introduction.

I also would like to express my appreciation to Shimada-sensei. You are very gracious to join me today, and you have superbly presented both the nature of the recent Japanese reforms and the unique importance of Japan’s economic partnership with the U.S. in mastering national challenges.

It is my privilege to speak here today on what I believe is a subject of great importance to Japan and to the United States: namely, the future of our trading relationship. I am grateful to the American Chamber of Commerce in Japan for its sponsorship of this luncheon, and I am honored by the interest that all of you have shown by attending.

The case that I will put before you can be summarized very quickly:

  • Japan and the United States are alike in many ways -- large, industrialized democracies with similar interests, goals, and principles regarding international trade.
  • We already enjoy relatively open trade relations. But Japan and the U.S. could achieve important new benefits by negotiating an Economic Integration Agreement that removes many of the remaining barriers to our bilateral commerce and investment.
  • We face similar challenges with regard to the health of our economies -- challenges that arise from aging populations, from new global competitors in key sectors, and from geopolitical instability.
  • The benefits that Japan and the U.S. could achieve through a trade agreement will be crucial to our mastery of these 21st century challenges.

I look forward to elaborating on each of these points.

For me, it is always a pleasure to return to Japan, which I have been doing for more than 20 years as an executive of Eli Lilly and Company. If such affection and longevity entitle me to share some observations about your country and our bilateral relationship, then allow me to exercise that privilege right now.

Japan is one of the greatest success stories in world economic history, ranking among the wealthiest and most productive societies ever to exist. But this should not be true, according to traditional understandings of economic power.

Japan has only a small territory and almost no endowments of natural resources. And you have not encouraged immigration or, until recently, foreign direct investment as a source of economic development.

Instead, Japan stands among the world’s most powerful economies for one major reason. It is because the highly educated and hard-working Japanese people have demonstrated constant innovation, as required by the relentless disciplines of international trade.

More than anything else, the determination of Japanese manufacturers to compete for the world’s most demanding and value-conscious consumers -- in the automobiles, electronics, and machine-tools sectors most notably -- allowed Japan to overcome its apparent disadvantages.

Viewed against Japan’s circumstances in the middle of the 20th century, the earlier rise of the United States to the status of an economic superpower seems almost effortless. Nevertheless, there is an important common denominator to the economic rise of our nations. As in Japan, America’s greatest comparative advantage is our commitment to innovation -- to discover, develop, and commercialize the high-end, value-added products and services demanded by consumers.

This commitment to innovation, driven by a desire to compete globally, is the major reason that Japan and the U.S. remain the world’s two largest economies in terms of output, together accounting for fully one-third of global GDP.

Japan and the U.S. have succumbed to protectionism in certain sectors, but our governments generally aspire to encourage competition within free markets. They have secured intellectual-property protection at a high level and adopted strong safety and quality standards while greatly reducing tariffs and barriers to market entry in most sectors of the economy.

For all of these reasons, Japan and the U.S. represent a very important model of economic relations, and we have a particular responsibility to lead in the liberalization of trade globally. Indeed, I believe that Japan and the U.S. must do everything they can to revive the troubled Doha round of multilateral negotiations.

You may be listening to this and thinking, “Yes, Japan and the U.S. are generally like-minded trading nations with few obstacles to their economic relations. And multilateral trade negotiations may still reach a satisfactory conclusion. So there is little need to invest scarce political and diplomatic energy in deepening an already strong bilateral relationship.”

I agree with that sentiment, but only to a point. It is certainly true that our bilateral trade relationship is one of the most robust in the world, totaling nearly $200 billion in 2005. That said, our bilateral trade has barely increased over the last decade, while U.S. and Japanese trade with other Asian countries, especially China, has grown significantly.

It is also true that the successful conclusion of a Japan-U.S. Economic Integration Agreement -- or a Free Trade Agreement-Plus, as we Americans like to call it -- would require political will and a large commitment on the part of our diplomats and trade negotiators. It would be difficult, even painful at times.

But I submit to you that the benefits would greatly outweigh the costs of our investment.

The benefits would begin, in my view, with the mere fact of our negotiations. I am honored that a number of Japanese and U.S. government officials are in attendance today. You play a vital role in keeping our relationship strong. Unfortunately, the circle of officials who have similarly deep, hands-on experience with Japan-U.S. ties is growing smaller. A large-scale, bilateral negotiation of the kind needed to integrate our economies would foster new personal relationships and expertise to expand and strengthen the next generation of public servants.

Measured in yen and dollars, the potential benefits of deeper integration are also quite large. Yes, the improvements would come at the margins of an already strong relationship. But with a denominator of $200 billion, improvements at the margins of Japan-U.S. trade would result in very significant numbers.

Simply put: economic integration would increase the competitive potential of Japanese and U.S. businesses because integration encourages innovation, our great comparative advantage. If businesses are subject to the rigorous expectations of the global market, then they will constantly look for ways to improve, adapt, and change. The businesses themselves will benefit, along with consumers.

In Japan, if one uses patent filings as an indicator of innovation, then there are many sectors of great strength. Japan files twice as many patents as the U.S. or any other nation. But these have been heavily concentrated in the information technology, electronics, and telecommunications sectors.

In contrast, Japanese patents filed in the life-sciences and medical industries -- and in the food and agriculture sectors -- account for only 6 percent of the total. Imagine the growth that could be achieved if the competitive potential of these industries were unleashed through free trade. Agriculture interests are known to be obstacles to free trade. In truth, they too could benefit from trade in the longer term if it leads them to innovate.

The new chairman of Keidanren, Mitarai-san, is correct to emphasize innovation, throughout the economy, as the key to Japan’s 21st century prosperity. I understand that senior officials at METI and other ministries also agree with this view. For our purposes today, the key point is that innovation is driven by free trade.

So the Japanese and U.S. economies have much to gain, but our pursuit of economic integration would not be purely driven by self-interest.

Some experts argue that the proliferation of bilateral trade agreements -- the majority of them quite rudimentary in their aspirations and scope -- threaten the World Trade Organization’s efforts to liberalize global trade at a high level. They fear that a “noodle bowl” is emerging -- to borrow a vivid analogy -- containing dozens of individual strands that are intertwined but do not reinforce one another. Asia is viewed as a prime example of such a “noodle bowl.”

Recognizing the great popularity of noodles in Japan, let me accept that analogy but carry it further. The key question is whether the noodle bowl of trade agreements remains a bland dish, with no inventiveness or appeal, or whether a new ingredient could improve the entire creation.

I believe that an Economic Integration Agreement between Japan and the U.S. should be much more than another noodle in the bowl. By establishing the highest standard, going beyond tariff reduction to create what some have called a “barrier-free economic relationship,” a Japan-U.S. integration pact could serve as the bowl’s crucial ingredient.

If, one day, a robust system of free trade links the ASEAN nations, northeast Asia, and most of the Pacific Rim, then it will surely be traced to a clear demonstration at the outset -- a successful recipe, to return to our analogy -- of the sort that others could not ignore.

A more deeply integrated economic relationship between Japan and the U.S. would have a broadly positive impact throughout the Pacific Rim, certainly including China. It is important that we talk explicitly about the impact of a bilateral agreement on China, and on other Japanese and U.S. trading partners, so that narrow understandings of free trade are not perpetuated.

One of the essential benefits of free trade and integrated economic relationships is to encourage optimal economic decision-making -- focused squarely on the long-term interests of customers, employees, and shareholders -- which improves the competitiveness of the industries involved. With regard to an increasing number of R&D, manufacturing, and procurement requirements in numerous industries, the optimal decision is often to partner with firms in China, India, and other emerging industrial economies.

Greater bilateral trade and integration between our two nations would not interrupt this trend. On the contrary: a Japan-U.S. Economic Integration Agreement could be expected to accelerate the pursuit of partnerships with third countries that make our individual companies and industries more competitive.

The arguments in favor of a Japan-U.S Economic Integration Agreement are, in my view, just as compelling when one takes a long-term societal perspective. The ultimate responsibility of leaders in government and business is to prepare for the future -- ideally, for a future that is secure and prosperous. Greater economic integration between Japan and the U.S. would, in my view, help us to fulfill this responsibility.

Consider four major challenges shared by Japan and the U.S. as we look deeper into the 21st century:

  • First, our nations must sustain and extend their global competitiveness across a wide spectrum of economic activity.
  • Second, we must preserve open and robust trading relationships, even in the midst of geopolitical tensions that will continue to arise.
  • Third, we must manage the profound implications of human aging for government finances and for the rest of society, turning this phenomenon, if possible, from a burden into an advantage.
  • Finally, and this is related to the third challenge, we must realize more fully the promise of the biomedical revolution -- the next great technological frontier after the proliferation of information technology. If biomedical breakthroughs allow people not only to live longer but also to remain vigorous and productive at advanced ages, then the aging of our populations will be much less worrisome and costly.

As Shimada-sensei clearly reminded us, Japan has implemented important structural reforms to prepare for the future, quite apart from the requirements of free trade. However, as I enumerate these four challenges, I am struck by the extent to which a deeper economic relationship between Japan and the U.S. would improve our circumstances in every case.

Let’s start with the challenge of sustaining global competitiveness: An Economic Integration Agreement would increase the number of industries subject to the disciplines of free trade, which would, in turn, improve the performance of such industries. I could cite several examples, but let me focus on the pharmaceutical industry in Japan, with which I am most familiar.

At present, pharmaceutical innovation is not sufficiently encouraged or rewarded in Japan. Globally, the average time and cost of bringing a new drug to market now exceed 12 years and $1 billion. Yet, Japan-specific clinical trial requirements further increase the time and cost of development, while Japan’s National Health Insurance system fails to allow a significant price premium when the resulting products finally are made available in this country.

These impediments certainly make the Japanese health care market less attractive to U.S. companies, but they do even more serious harm to Japan’s own pharmaceutical industry.

Without a home market that rewards breakthrough R&D, Japanese firms enter global competition at a distinct disadvantage. Japanese pharmaceutical companies are some of the most innovative in the world, yet there is not a single Japanese firm in the list of Top Ten global pharmaceutical companies. The global market share of Japanese pharmaceutical companies remains under 10 percent, compared with about 50 percent for their U.S. counterparts.

And so, one goal of bilateral trade negotiations should be to reduce artificial constraints on pricing and market access for biopharmaceuticals in Japan. As a result, one would expect to see faster access to medicines for Japanese patients; greater investment in life-sciences R&D in Japan; better integration of Japanese research with academic, medical, and industry networks around the world; significant increases in employment in Japan; and, of course, much greater exports of Japanese biopharmaceutical products to markets worldwide.

Perhaps I am foolish to call for an onslaught of Japanese competition in my own industry, but I believe that the result will be to make all of us more creative and productive. That is the beauty of free trade and economic integration.

Turning to the second of our common challenges, I believe that if we are not moving forward in our economic relationships then we are, in effect, moving backwards. This is a key insight on the question of how to sustain strong global trading networks in the face of geopolitical uncertainty.

It appears that the simmering crisis on the Korean peninsula will not be resolved soon. The possibility of a nuclear-armed North Korea and the unpredictable nature of the regime in Pyongyang will continue to generate anxiety and distrust throughout northeast Asia and beyond. At times, Japan may feel particularly isolated and vulnerable. By the same token, the U.S. needs a reliable ally in the Asia-Pacific region.

The further integration of the Japanese and U.S. economies will help to ease this sense of isolation and will strengthen the U.S.-Japan alliance, on which stability in northeast Asia rests.

A similar mindset, I believe, is also sustaining the current negotiations between South Korea and the U.S. on a free-trade agreement, which is why I urge you not to assume that the negotiations will fail, as difficult as they may seem. Both sides understand the symbolic as well as the practical benefits of what they are trying to accomplish.

Finally, I want to reflect on the connection between economic integration and the challenge of human aging. You have indulged me on diplomacy, noodle bowls, and geopolitics in the past several minutes, so perhaps it is time that I return to the more traditional purview of a pharmaceutical company CEO: human health.

With regard to government policy, there are two ways of looking at the aging of the population -- the increase in the number of older people while the ranks of the young grow smaller.

The first perspective might be called the “cost perspective,” in which health care for our aging fellow citizens is viewed almost exclusively as a financial burden on society. Governments that look at aging from the cost perspective try to minimize current expenditures on health care. Innovative treatments and medical devices are resisted in particular, since these items tend to be more expensive, in the short term, than traditional forms of health care.

The second perspective on aging might be called the “investment perspective,” in which the substantial cost of improving human health is believed to pay even greater economic and social dividends. When taking this perspective, governments and other health-care customers encourage newer forms of health care if the products or services are more effective, easier to use, or capable of eliminating the need for other medical treatments.

The higher cost of innovative health care is tolerated in the investment perspective, based on evidence that such care brings about long-term savings and extends the period of productive and happy life for older adults.

The Japanese government has tended to follow the “cost perspective” -- controlling short-term health-care expenditures rather than investing in the most innovative drugs and other therapies.

Not surprisingly, I favor the investment perspective in responding to the challenge of our aging populations, though not unconditionally.

Recent scientific breakthroughs, particularly in the fields of genomics and biotechnology, point to new therapies that may ease or even eliminate such maladies of old age as diabetes, Alzheimer’s disease, and many forms of cancer in the coming decades.

If governments and private payers of health care are willing to sustain the necessary investments in advanced therapies, then I am hopeful that increasing numbers of older Japanese and Americans will remain healthy and productive members of their communities. Indeed, I intend to be one of them.

But I also believe that the investment perspective imposes large responsibilities on the life-sciences industries, certainly including the pharmaceutical business. We cannot expect governments, taxpayers, and other businesses to subsidize our inefficiencies or to exempt our products from reasonable calculations of value. Instead, we must exhaust every opportunity to increase our productivity and the resulting cost-effectiveness of our products.

In the case of Eli Lilly and Company, for example, we have set the goal of reducing our average cost of R&D per new drug by fully one-third, about $400 million, over the next five years.

This analysis brings me back squarely to the importance of removing trade barriers and improving economic integration with Japan, America’s closest “peer” in the global economy.

To illustrate what we can achieve together, I will conclude by describing a recent Lilly experience in Japan.

Late last month, several of my Lilly colleagues met with officials of the Pharmaceuticals and Medical Devices Agency, the regulatory authority that oversees clinical trials of new health-care products in Japan. The Lilly people were delighted to learn that we would be allowed to add several clinical research sites in Japan to a global trial of one of our products. Previously, Japanese regulators have not regarded global trials, even with Japanese participation, as sufficient basis for approval of a new drug in Japan.

If our recent experience signals a new approach by Japanese regulators, then we believe this could reduce by 40 percent the cost of completing clinical research in Japan for new drug approval and also allow us to eliminate the current long delays in bringing new drugs to Japanese patients.

This is just one story.

If we multiply such improvements in R&D efficiency across hundreds of products and companies, then it will help us enormously to master the challenge of our aging societies.

Now, go further in your imaginations: Multiply such breakthroughs in economic integration across dozens of industries, for years to come, and you will begin to appreciate the positive impact that a comprehensive Japan-U.S. agreement could have on our future.

Even before our governments might get involved in negotiating an economic integration pact, there is much that businesses, industry groups, academic experts, and other private organizations can do to explore and to prepare.

For example, private groups can study the potential economic benefits of a trade agreement in detail, outline many of the negotiating topics, and analyze public opinion and the views of influential groups in Japan and the U.S.

Our people may be getting older, but we need not be timid or turn inward. By moving to the next stage in our economic relationship -- true integration -- Japan and the U.S. can help to secure their prosperity for decades to come and inspire many other nations to follow our example.

Thank you for your interest and attention.

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