The EC and Japan: ECC Report

HL Deb 15 November 1989 vol 512 cc1343-84

Debate resumed.

4.31 p.m.

Lord Butterworth

My Lords, returning to the Community and Japan, I should like to congratulate the noble Lord, Lord Kearton, on producing for us such an important and in many respects novel report. As a member of his committee I should like to thank him for the masterly way in which he revealed to us the excellent evidence in a series of really splendid and enjoyable meetings.

I should like to begin by a reference to the difficulties which have arisen between the United States and Japan because they in some sense anticipated some of the problems now arising in the relations between Japan and the Community. The United States Administration were restrained by the principles of free trade and could only intervene in matters of trade if either national security was threatened or the commercial activities of other countries were deemed to be "unfair". Yet the Japanese industrial and economic attack on the States could have been withstood only if the American Government had included trade as an integral part of economic and national security policy. Their failure to do so resulted in American industry being eroded by Japanese infiltration, industry by industry, to such an extent that commentators compared the United States to a developing country, importing high technology and capital from Japan and, apart from aeroplanes and certain parts of mainframe computers, exporting to Japan commodities such as soya beans and unfinished manufactured goods.

It was Clive Prestowitz, one of the chief American negotiators with Japan, who in his book asked a question which could become relevant here: If we become a kind of fourth world country with all our assets owned abroad, won't our political, economic and even leisure decisions tend to be made abroad? What are the hazards of our becoming a colonial territory? Or, are we entering a new era of economics which tends to break down natural barriers, customs and allegiances?". The American negotiators fell into the trap of assuming that conditions in Japan could be altered by simple Western remedies. International economic health may require the opening of Japanese markets and finance to Western interests, but any request simply to open Japanese markets and accept the principles of free trade is not understood in an economy which is built not to consume. The plea, "You must behave like us", is to the Japanese a sign of weakness, for their whole system is an extremely complex structure with its keiretsu and jinmyaku and is incompatible with free trade.

As Van Wolferan has pointed out, the structure of the Japanese system is so complex that perhaps no one is in ultimate control —a melancholy, not to say a terrifying, possibility. But in any case Japanese administrators cannot afford to accept the principles of free trade, for to do so would be to override this complex scheme of interconnecting formal and informal relations.

In 1981 the Japanese electronics industry declared victory over the American electronics industry, and in the same year the Nikko research centre report stated generally that Japanese industry had overwhelmed most of their United States counterparts. The report's comments on the United States make uneasy reading on both sides of the Atlantic: There are many unfavourable factors rooted deeply in American society, such as the declining work ethic, increases in crime, deterioration of education as well as of social discipline and order. It is wholly essential that this fact is well recognised and understood to its root". The need for the West to make industrial and commercial health a more fundamental part of our national policy should in my view, be a central factor in this debate. We do not consider industry as a matter of national security —Japan does. Yet the continued existence of the United Kingdom as an industrial power is dependent upon our retaining a leading capability in a wide range of industries. Trade must become as fundamental in government as defence and security and I submit that our report is often too complacent.

May I give just one example? Even at the beginning in paragraph 3 we say: With Japan's increasing dominance in several areas of high technology, there is no state with whom good relations are more important". The Japanese would laugh at a plea for good relations. It is not simply good relations that we need with Japan but a proper understanding of Japan if we are to succeed in the commercial and industrial struggle. Unaided, our industrial and financial operations cannot withstand the targeted onslaught of the Japanese with their cheaper capital and the long-term support of a complex national system. Any Western industrialist faced with such full-scale targeted Japanese competition can generally only advise his shareholders that the prudent course is to withdraw from the field.

It is true that our report gives a number of British successes in the Japanese market but for one reason or another they tend to be exceptional and do not, in my view, throw up a general precedent for our average exporter. The report's message on financial services is exceptionally sombre. Once Japanese banks have acquired in our markets the necessary expertise in financial services, they may well withdraw to create another world financial centre in Tokyo. The City, in its evidence, seemed unaware of or at any rate unconcerned about this danger. However, in my view our report does not go far enough. It only recommends, in the words of the report, that Community institutions must make a greater commitment to invest in Japan. If I am right they can never succeed alone against targeted Japanese competition backed by the power of the Japanese system.

Industry and commerce must become central elements in the national policy of European countries and in the policy of the EC. Clearly, in the short time at my disposal I could not begin to work out how this general principle could be applied within the United Kingdom, but I give three quick examples. First, changes in our industrial relations need to go much further. In Japan the bargain is job security for wage and works-rule flexibility. This has proved to be remarkably successful. Here strikes must become less frequent and instead of pricing ourselves out of international markets by irresponsible wage rises, emoluments must generally be tied to productivity and to industrial success. The adversarial nature of our industrial relations must be ended. Employers and employees must recognise their interdependent common interests.

Secondly, our research must be enormously increased, especially the research undertaken by British industry. In my view the Treasury should be instructed to produce a plan which, by tax rebates and other devices, would increase our research to the required levels within, say, the next three years. Instead of the Treasury explaining to us what cannot be done, the Treasury should be given research targets and instructed to achieve them.

Finally, I refer to education. We need much more training in the Japanese language. In universities, polytechnics and other educational institutions our collective effort in the Japanese language can only be described as pathetic. This may in part be due to the poor back-up which we receive from the schools. At Oxford anyone without Japanese wishing to include it in his degree is actually sent for an intensive first year to Sheffield University before embarking for the next three years on the course at Oxford. In short, even Oxford is not self-sufficient in the Japanese language. We therefore need much more teaching in the Japanese language.

More generally, our education must move into Japanese culture. What are the DES and funding councils doing about it? In fact, the most recent move has not come from them but from the DTI which has provided £1.6 million to establish the Japanese language with an emphasis on commercial usage at six universities. Again, heads of departments of Japanese studies find it extremely difficult to raise money to send their students to Japan. I repeat: our education must move into Japanese culture. We must understand the Japanese system as well as they understand ours.

4.44 p.m.

Lord Northfield

My Lords, there is much to praise in this very balanced report and in the introduction of it today by the noble Lord, Lord Kearton. I see two emphases in the report which I very much welcome. The first is that we must learn the real lessons of Japanese success as opposed to the imaginary reasons for Japanese success and we must understand Japan much better. Secondly, we must stop putting all the blame on the Japanese if our exports to Japan do not grow quickly enough. As the noble Lord said, it is now an out of date view to say that it is the fault of the Japanese.

My own experience for the last decade has been, in continuous visits to Japan, recruiting industry —sometimes by quite long visits —for the new town of Telford. It took —this is instructive in the light of what the report says —two or three years to gain the confidence of leaders of companies, not just in Telford but in the UK. It took a lot of persuading by me to make the companies realise the importance of their world role and how they fitted into it. They had very inadequate ideas about the United Kingdom, all of which had to be corrected in those first two or three years.

The breakthrough —I am delighted that the noble Lord, Lord Jenkin, is here —was when he was Minister for Industry and we managed to get on the hook the first of our big companies for Telford —Maxell, or Hitachi-Maxell as it is often called. That has been followed by equally big companies like Ricoh, Seiko-Epson and NEC, all of which have made Telford their European headquarters on quite vast sites in that town. We now have no fewer than 16 Japanese companies in Telford. Exactly as I forecast, great changes are taking place because it is now not the first wave of Japanese companies that are arriving —the big manufacturers —but the secondary suppliers who make up the 16 and beyond, as I expect the number will grow.

A lot of this, as the report indicates, is based on what the report calls personal relationships and confidence. Japan was new to its world role —vastly new, desperately new —and feeling it; way during this decade. Later I shall appeal for patience in understanding the processes that are needed. As an immediate indication of the way they feel on being established in Britain let me say how glad I am —and I know the noble Lord, Lord Jenkin, will also be glad —that I have today in front of me, to sign as chairman, the trust deed of a vast educational foundation which Maxell is setting up in Telford to thank the local community for the success of its first five years in this country. This will do a great deal of good for the young people of Telford.

I come to this debate, therefore, not having had the good fortune of being with the committee in Japan, but being on a separate circuit of my own for quite a long time with many visits. The report says that Japan's, rise in economic importance has been spectacular, but is still not adequately recognised". I have made several speeches in your Lordships' House in trying to get this point across, perhaps without success, but the greater effort in the report we are now discussing will possibly have more success.

I made a forecast based on Japanese figures which the Secretary of State for Trade and Industry pooh-poohed about a year ago. I make it again today and I challenge the Minister to say whether he still disagrees with it. In 1960, as the report says, Japan's proportion of gross domestic product of the world was 2.8 per cent. Today it is well over 10 per cent. I forecast that by the year 2000 —on the basis of Japanese publications and based on a growth rate of only 4.4 per cent. per annum, which will easily be achieved —Japan's output will equal that of the UK, France and Germany put together. Our combined populations are 180 million; Japan's will be 120 million, but it will equal our gross domestic product in the year 2000. But more importantly, based on present figures, the prospect facing us is that by the year 2020 the output of Japan with its 120 million people will equal the output of the whole of the EC countries with their 350 million people. That is the size of the colossus that is now growing and, as the report said, we should be taking a great deal more notice of it.

As the report indicates, there is no obvious single reason for this success and for what the report calls the emergence of an economic superpower. Thank goodness it is no longer said that this success is due to rice-standard wages, because Japanese wages are now higher than those in the United Kingdom. If some of your Lordships are still unconvinced on this matter, it is important to note the amount of spending that Japanese tourists —not the rich ones, but young working people from factories—undertake when they go on holiday to Hawaii. It has been calculated through the local economy, that the Japanese tourists, by their tens and hundreds of thousands, are spending somewhere between five and nine times per day more than American tourists. The Japanese are not people with rice-standard wages and nothing to spend and with a low standard of living.

I believe the report is slightly mistaken in stating that the Japanese success is due to overlong working hours. In recent years there have been significant reductions in those hours and in big companies they are very little different from our own. However, for the 30,000 or so in the small companies which are the suppliers to the huge motor car industry, there are longer hours and lower wages, which is part of the reason for the price advantage when dealing with motor car assembly. The Japanese are now taking holidays. It is not true to say that they are still workaholics. They are taking on very readily indeed some of the benefits of our Western way of thinking in these matters. They are Westernising very rapidly.

What should have been more clearly expressed in the report is the extent to which the principles behind their industrial system have wider application. After the Second World War the Zaibatsu, the big one-family owned companies that had been behind the fascist regime of the 'thirties, were forcibly split up by the occupying powers and made into smaller units. This enabled the new managers and employees to realise that they had much in common in the new industrial system. It has led to a sense of community in industry and even to a new concept of the private sector company. Mr. Morita, the head of Sony, has even gone so far as to talk of, the sense that a company is the property of the employees and not of a few top people". There is a totally different non-confrontational approach to industrial relations behind that phrase. There is an egalitarianism inside the great factories between blue and white collar workers and management generally. People who work in big Japanese companies are partners or members and not workers. They have a sense of participation in management. You see factory floor management, and not management by people away somewhere else in an office and never seen. There is low labour turnover, low absenteeism and sick-outs.

When one speaks to the representatives of Japanese companies one hears that they have extraordinary figures as regards their allowances for such matters in this country when compared with their own. It is all based on the success of their partnership inside the industrial enterprise. It is also based more securely than that on Japanese philosophy; namely concentration on the family, harmony, hard work and loyalty. They are the four characteristics to which most Japanese people feel that they should offer obedience.

These are very important factors that have formed the basis of Japanese success, but they are not alone. The noble Lord, Lord Kearton, mentioned a string of reasons for their success, including growth behind trade barriers, low defence spending, high savings, expanding world trade, a stable political system and the small firm sector. The noble Lord, Lord Butterworth, spoke of the education system.

There are still other points concerning their industry. There was a correct choice of investment. When we were investing in heavy industry in the `fifties and 'sixties, the Japanese took the high road to high technology; and how right they were. We still have not learnt that lesson, or perhaps we are learning it too late. There is a partnership between Japanese industry and government. It is not a private enterprise economy running itself, but a partnership between government and industry. Government winds down industries when necessary and helps to wind them up when others should take their place.

There is also emphasis on quality and investment for the long term. A Japanese slogan says: "The higher the quality the lower the price". In Japanese companies based at Telford they are working to, for example, reduce the expenditure on correcting defects after sale from 8 per cent. or 6 per cent. to a Japanese level of 2 per cent. That illustrates the slogan: "The higher the quality the lower the price". There are all those factors which add together to make the success of the Japanese system.

I am not uncritical; neither am I unaware of the way in which Japanese industry has penetrated other countries. But I have greater hopes for the future than the noble Lord, Lord Butterworth. I believe that Japan is now going through a vast adaptation to its world role. We of all people should be patient about that. We had 200 to 300 years to adapt, but we are asking the Japanese to adapt to a world role in a couple of decades. We must understand the speed at which, in historical terms, we are asking them to move.

That is the first point. Secondly, we should look at the prospects for Japanese industry in helping us even further to compete with it. MITI, the Japanese Ministry for Trade and Industry, estimates that instead of investing overseas in order to produce 2 per cent. of their output, within 10 years the large Japanese manufacturers will be producing 20 per cent. of it offshore. That is a very important figure giving us room to recruit much more Japanese industry, for it to teach us some of its lessons and for their industry to learn from us as well, as part of the growth of the world economy.

Thirdly, we should have patience with Japan as regards trade barriers. It is not only a question of adapting to their world role. Who are we, in our glasshouse of the common agricultural policy, to throw stones at Japan, which does not want to import foreign beef? It has a vast problem in adapting a partly rural society to a more industrial one. One cannot expect the ruling party to throw away votes and perhaps power on a precipitate change in its agricultural import policy.

Again, it is wrong for the report to say too clearly, openly or directly that the Japanese want to dominate. The vast change that I see in Japan today is that Japanese industry is becoming international in thinking and in action. I know of one great Japanese company which is moving its headquarters to New York because it considers itself no longer Japanese but now a world company. That trend will grow as Japan realises its place.

In local terms this trend can be seen in the number of Japanese managers who come when an enterprise is set up overseas. If they have 50, 100, 150 or 200 employees, perhaps only six are Japanese and very rapidly English managers are trained to take their place. So in every way they become part of the local community. As I have said, they are now not only becoming good citizens in the wider sense but, in relation to the educational trust that I mentioned a moment ago, they are anxious to show their thanks for their reception in this country.

Lastly, we should be careful about a recommendation in the report that the Community should be tougher about local content. The quality of local content when Japanese manufacture over here is our responsibility. Very often they cannot find the quality in components. Telford Development Corporation employs a member of staff whose job it is to try to find quality components for Japanese companies. It is difficult finding British companies that have the same confidence to invest and to improve their working methods so as to give the quality of components that the Japanese want.

The EC, contrary to what the committee says, has it about right. The 1987 regulations, about which I negotiated in Brussels at the time because I objected to the early drafts on behalf of Japanese companies, mean that 40 per cent. is the approximate barrier. Every case is taken on its merits. Companies have to show their willingness to rise to 40 per cent. and above in local sourcing. The anti-dumping duties are not then imposed on them. A careful study case by case, rather than blanket decisions and phrases in the report about being tougher, is the right way to proceed. We have to understand the problem as well as being fairly tough about it.

Baroness Phillips

My Lords, will my noble friend answer this question honestly? Would the Japanese be interested in bringing industry here if it were possible for them to enter the Common Market in any other way?

Lord Northfield

My Lords, the answer is that they would be interested for all kinds of reasons. Japan today does not produce only on its own land. It invests all over the world. Companies such as NEC have plants in dozens of countries. There is no reason to think that they would refuse to invest here if there were no EC. Of course they would. They see themselves as having a new world role. They realise that if they do not invest and produce overseas the barriers will one day go up anyway. They are sensible enough to realise that.

I welcome the report. I am a student of Japan. I like Japan. I have learnt a good deal from my close Japanese friends and from leaders, managers and young people throughout the industrial system there. I am not uncritical. I have not given vent to my criticisms today because I think too many people do that. I have tried to some extent to put the other side of the picture. That does not prevent my welcoming very much the positive and sensible tone of the report.

5.3 p.m.

Lord Greenhill of Harrow

My Lords, this is indeed an important and somewhat disquieting report. It has already provoked an interesting debate. Before proceeding, I pay a special tribute to the noble Lord, Lord Kearton, whose remarkable physical and intellectual effort enabled us to cover a very wide field and to do so, as the noble Lord, Lord Butterworth, said, in very agreeable meetings. The noble Lord has characteristically and effectively summarised the report. I do not want to go over it all again. But I should like quickly to make one or two points.

During the past spring and summer when, between 8 and 8.30 a.m. I have driven past the Albert Hall, the scene has always been exactly the same. Several coaches have been parked in the courtyard and a stream of excited Japanese tourists of both sexes has been hurrying across the road to view and photograph the Albert Memorial. No tourists of other nationalities were to be seen. I asked myself why the Japanese were so interested in the monument. I concluded that there were two reasons. First, it expresses Victorian confidence in the education of the mind and in the propagation of knowledge. Secondly, it is the symbol of British imperial dominance in the last century. For these reasons I imagine that it strikes a chord in modern Japanese whose purpose since the catastrophe and shame of the last war has been to dominate the world in ever more sectors of industry, finance and technology.

This Japanese ambition, not everywhere fully recognised, is perfectly legitimate. Their success has been well planned and well deserved. No one can talk down to them and they have no need to take the advice of itinerant statesmen; nor can they be expected to change their culture at the behest of others. They may change this culture slowly and move more closely to our type of life. But for the moment they seem destined to go on to further success unless they are met by better organised competition. Such competition need not destroy the possibility of friendly relations.

The economic rise of Japan has been accompanied wisely by a low political profile. It sheltered under an American defence umbrella while benefiting without risk from the dangers of the Korean war. How long will this continue? One cannot view without some anxiety the increasing American congressional hostility towards Japan and speculate whether the low Japanese profile will have to be abandoned and a more prominent international role justified by economic strength adopted. But that is for the future to reveal.

The report which we are discussing today has immediate messages for the Community and particularly for this country. They are set out clearly in the report and are based on evidence from carefully selected and qualified people with first hand experience of modern Japan and indeed from Japanese witnesses. First and foremost, the Community must place the formulation of policy towards Japan among its highest priorities. I mentioned this recently to a senior Brussels bureaucrat. He laughed and said, "In the present circumstances, and with the present events in Europe, it is impossible to get attention paid to these Japanese problems".

The threat of Japanese enterprise does not seem to be fully understood; it is pushed aside by other greater interests arising from the present situation. Nevertheless greater efforts must be made to identify how the combined strength and weight of the Community can be brought to bear in trade relations with the Japanese. No industrial country in the Community can afford to neglect the Japanese market or fail to defend itself against the overwhelming volume of Japanese products. The machinery exists in the Commission to co-ordinate Community action. The United Kingdom is well equipped to play a prominent part in that machinery and should indeed do so.

The report refers, as the noble Lord, Lord Butterworth said, to some of our failings, especially in the teaching of the Japanese language, in co-operative research and in other means of drawing closer together. The report goes so far as to say that limited protection for some of our infant or sensitive technological European industries is appropriate. The Community must remember that it may find that Japanese industry will quickly take advantage of developments in Eastern Europe if it provides an opportunity for the outlet of Japanese products and investment. The report is, of course, primarily addressed towards 61e Community, but I hope that it will be given special attention by our Government in the context of our domestic economic position and our industrial performance.

As the report points out: There is no secret to Japanese success. It is based on high quality, painstaking service … excellent management", and corporate loyalty. It continues: The Japanese have rigorously applied the best western management precepts". It is often remarked that such precepts are the same as those which were taught for many years at the Army staff college at Camberley. One of the best teachers in 1939 was Colonel Montgomery. The man management and communication between all ranks which he so successfully applied to his troops during the war is what our managers should long ago have copied with their workforces.

The evidence, not least that given to the committee by trade union leaders like Mr. Jordan, showed that the best British firms are just as good as their Japanese competitors. But there are far too few of them. As a general rule, our standards of management are lower and must be raised. British personnel and British unions have shown themselves willing to accept Japanese methods and, sometimes, to improve upon them.

I asked a leading Japanese industrialist, whose products are used, I am sure, by the majority of people, which were his most productive factories worldwide. He replied, without hesitation, "Those with Japanese managers and American workers," I said that I could understand Japanese managers, but why American workers? It was he said, because their education was good and their initiative better.

The standard of education and training for the workforce and management here in the United Kingdom has been discussed many times in this House. I make no apology for returning to the subject again, as the problem was often mentioned in evidence given to the committee. I very much hope therefore that the committee's report will be studied not only by those who are interested in Community matters, or in Japan, but also by those who are worried by the decline of our manufacturing industry and our consequent lamentable balance of payments deficit.

5.14 p.m.

Lord Jenkin of Roding

My Lords, I shall wish to comment later in my speech upon one or two points which have been made in the debate. However, I should like to begin by thanking the committee and its chairman, the noble Lord, Lord Kearton, for producing a most interesting report. But what is perhaps as important as the report itself is the volume of evidence which is published with it. It takes a little time to read through this, but I must tell the House that my reaction on dipping into large amounts of the evidence —I do not confess to having read it all —was that I wished I had been a member of sub-committee A. Those concerned must have had a most interesting time. There was certainly a great deal of interesting discussion.

I was grateful to hear the remarks made by the noble Lord, Lord Northfield. He referred to our joint success in attracting Hitachi-Maxell to Telford. He has played a most notable part in the attraction of Japanese industry to that new town in the Midlands.

I think that members of sub-committee A will probably agree —I do not mean this in any derogatory sense —that no startling revelations emerged from their lengthy discussions. The committee has provided an extremely effective restatement of some of the basic truths which those who have addressed these problems over the years have tried to get across to the country. Japan is itself a very competitive market. It competes fiercely within itself, quite apart from the question of imports. Therefore if a European firm wishes to penetrate the Japanese market, it is a long haul and requires a great deal of perseverance. As one witness said, "When you go for a customer in Japan you are not just getting a customer; you are building a relationship and it takes a long time".

My next point is most important. It is one which has been made in the Opportunity Japan campaign to which I shall refer presently. Japan is now a very much more open market than it was. The stereotype of high protective barriers and a closed system is simply no longer true. Of course there are certainly exceptions and I shall turn to these in a moment. The opportunities are there, but they must be worked for.

I have heard Mr. Anthony Sleight's account as regards the progress of his firm. His evidence greatly impressed the committee. I took the chair for him when he spoke at a conference organised by The Economist. The way his firm took the long view over the years and established itself in Japan is an example which needs to be imitated by many more companies.

People are inclined to hold up their hands in despair when they compare Japanese success with our own. I think it was the DTI witnesses who reminded the committee that we actually export twice as high a percentage of our GDP as do the Japanese. The Japanese figure is 13 per cent. of GDP against 26 per cent. for the UK. The difference is that we import a great deal more. That has been a very long habit in this country. It has been a matter of pride for a British shopkeeper to be able to say, "Goods from all over the world on sale here". The Japanese are only just beginning to learn to do so. The Japanese consumer will always take some persuasion in the matter: if there is a perfectly good Japanese product, why should he or she buy a foreign one?

EC exports to Japan are now rising strongly. Figures published yesterday about the declining trade surplus make encouraging reading, although one must not read too much into information about one month. However, what is clear is that if we are to achieve an overall better balance in the long term, this will require a much faster growth in European exports to Japan —that is, faster than we are at present achieving. That aim poses formidable problems.

My interest in the matter has increased more recently, for not only was I involved as Secretary of State for Trade and Industry but I have also been chairman for four and a half to five years of the UK-Japan 2000 Group. This is a body which was set up in 1984 with the blessing of both Prime Ministers, Mrs. Thatcher and Mr. Nakasone. The idea was to try to broaden understanding, to improve relations and to widen and deepen contacts between the two countries. The group sees itself as part of Europe in so doing. Therefore I warm to what the committee said about the US-EC-Japan triangle and the need to strengthen the European/Japanese arm of that triangle. Three years ago we used the phrase, "the skewed triangle". There is a great need to carry out this work.

It so happened that many of the witnesses who appeared before the Select Committee were prominent members of the 2000 Group. I refer to Sir Jeremy Morse, Sir Hugh Cortazzi, Professor Dore, Professor Epstein, Mr. Michael Perry, who has carried out a tremendous job as head of Japan Trade Advisory Group, the noble Viscount, Lord Trenchard, and Nicholas Wolfers. We are proud to count among our members the present Japanese Prime Minister Mr. Kaifu who has attended our conferences every year. We are also proud that the committee's special adviser Sir Michael Wilford is a distinguished member of our group. I was also a member of His Royal Highness the Duke of Kent's Opportunity Japan campaign and I have chaired a number of its excellent seminars.

Perhaps through my noble friend or the Front Bench I could pay a warm tribute to the staff of the DTI for the amount of care and skill they put into that effective campaign. I single out David Cockerham, who appeared before the committee with the DTI team. His conduct of that exercise has been exemplary. I should perhaps also declare an interest. I am an adviser on 1992 to the Sumitomo Trust and Bank Limited, but that is a minor activity.

I should like to offer three comments. One of them was dealt with in the report and has been mentioned by other speakers, but two of them do not appear to have been explored and they constitute part of the picture.

Two years ago the 2000 Group had a fascinating discussion on our comparative education systems with especial reference of course to language. The Japanese side was led by Mr. Kaifu and our side by Mrs. Angela Rumbold. The discussion showed that the reforms taking place in both countries are converging. We have paid too little attention to standards and have had too much diversity and flexibility and altogether too much local option. They have had far too rigid and centralised a system which they now recognise has its disadvantages. They are now moving towards a more flexible system, just as we are seeking to impose national standards, a core curriculum and so on. That is a discussion of which one needs to take account.

One pays tribute to the Japanese education system, and many Japanese do not recognise its advantages. They say that it does not generate creativity and there is no education in human values and so forth. They admire much of what our education system has produced. However, overall, they achieve a higher standard of competence, literacy and numeracy. I agree with everything that has been said in the debate about that subject.

We also paid attention to language training. The noble Lords, Lord Butterworth and Lord Greenhill, mentioned that topic. There are faults on both sides. I said that I had heard that 10 per cent. only of Japanese teachers of English can carry on a conversation in English. I was immediately howled down by the Japanese who said that that figure was far too high. English is learnt in the schools as a dead language and so the Japanese are now concerned to improve spoken English. It is to be hoped that we shall have a growing stream of Japanese English teachers coming to this country for three or six months to improve their spoken English.

We have a scheme (the Japanese English Teachers' Scheme) whereby British graduates go to Japan for six months, a year or in some cases two years to teach English in Japanese schools. Since the inception of that scheme some years ago, the numbers going each year have doubled and now run into some hundreds of young people a year. It is regarded by the Japanese school system as a valuable experience for them, as it is for our people. It opens their eyes to Japan. That is the type of activity that we want to encourage.

Fewer than 100 people a year come out of our universities with a four-year degree in Japanese studies. Many of them have spent far too much time studying the history of Japanese art and literature and insufficient time becoming fluent Japanese speakers. The report is right when it says that it is far better to take scientists, engineers, managers and social scientists and teach them to speak Japanese in a crash course than to try to turn Japanese scholars into business men.

I therefore welcomed the announcement made by my noble friend Lord Young of Graffham, the former Secretary of State for Trade and Industry —the noble Lord, Lord Butterworth, referred to this point —of the provision of 1.6 million to improve the teaching of Japanese, mainly for business men. The professors call it "operational Japanese". I welcome that phrase. The scheme is a valuable start. It is to be matched pound for pound by industrial contributions. My latest information is that the scheme has been oversubscribed, which is welcome because it means that business is at last recognising that one cannot buy Japanese speakers; one has to breed them by training them. The committee has asked for "a great expansion" in that area. I hope that industry, commerce, the financial world and the Government will all listen to that. The Japanese ask one another what is the most important commercial language in the world, which invites the immediate response, "Perhaps English", but that is not the Japanese answer. The Japanese say that the most important language is the language of one's customer. That is what we must understand.

I shall deal briefly with the two points that were not mentioned in the report. We want to broaden contacts. That means students, academics, scientists, business men and tourists travelling in far greater numbers than at present. The barrier to that is air fares. I have given my noble friend notice that I was going to raise that matter. If one compares the cost of an economy return flight from New York to Tokyo or London to Tokyo (it is the same for Paris, Frankfurt and Rome) one finds that the European fares are nearly twice as much per passenger mile. The reason for that is that on the American routes there is a great deal more competition and deregulation. We must have deregulation of our flights to and from Japan.

British Airways and Virgin, which has recently obtained a licence to fly direct with new Boeing 747–400s, are in favour of a deregulated system. The British Government are in favour of a deregulated system and have been negotiating hard. The obstacle is at the Japanese end. I am told that the latest ministerial round of talks made no progress. One needs what is called double disapproval: if an airline wishes to introduce a special fare or new route, the disapproval of both governments is required before that can be refused. At the moment the rule is that one government only need disapprove and that blocks the change. That is something to which we need to pay a great deal more attention. The 2000 Group will return to that subject, as it has each year, at our next conference in March. I have already warned our Japanese friends that we are looking for action. It does not help when we cannot achieve that deregulation within the Common Market. This country has been pegging away for years to try to achieve a deregulated air system in Europe and we should be pressing for it with Japan.

My final point is about construction. Whatever one may say about the Japanese market being open now to goods and services (including consultancy services, because a good delegation from the British Consultants' Bureau had a successful mission there last year), it is not true of construction. The Japanese market is virtually closed to foreign construction firms. The problem is primarily a cultural one. A delegation went to Japan from the Export Group for the Constructional Industries. It included some practical people who wanted to discover the opportunities. I shall read two or three paragraphs of its summary: 1. The Japanese construction market offers few opportunities for foreign contractors to secure profitable contracts at the present time. 2. The complicated registration and classification procedures are not the main obstacle. 3. Japanese minds are on the whole closed to the idea of foreign participation by contractors or even by developers". The report concludes: It would be in the interest of Japanese project sponsors to open up development possibilities to foreign developers/constructors. They are probably buying their development too expensively at the moment, and losing imaginative contributions to their developments". That is well spelt out in the report and it seems to me that something needs to be done about it. Governments have been trying for a long time.

This morning I met a deputation from Osaka, where they are building a new offshore airport, the Kansai airport. Where the bridge comes ashore there is to be a new, what they call "Aeropolis", a city connected with the airport, to provide a whole range of services linked to the airport. This will be Rinku Town. I asked what "Rinku" meant and was told that it simply meant "view of the airport". It is to be built on reclaimed land on mainland Osaka, close to the airport. It has all the hallmarks of a tremendous Japanese project. It is huge, spectacular and comprehensive. It will be filled with state-of-the-art information technology, all in a `space city' style. It has the backing of the Osaka Prefecture and its finance appears to be assured by a large consortium of financial organisations led by Japan's largest insurance company, Nippon Life.

I put to the deputation the complaints that we have made about the exclusion of foreign contractors. "Oh, yes", they say, "we have some foreign consultants —architects, engineers and so on". However, I have to tell the House that in regard to construction there was blank incomprehension. It was nothing to do with them; they were not in the construction industry. When I pointed out that they were the developers who would hire the construction firms and asked whether there would not be an advantage in broadening competition and obtaining a wider range of skills, I received a completely blank response. They were very polite, friendly people and we had a good meeting, but there was no response at all.

I pointed out to them, "You drive around London and you see Kumagai Gumi, Obayashi and other Japanese firms involved in major developments. I am sure that that is true in cities outside London as well. Why are there no foreign construction firms in Japan?" They said, "You must talk to the Government about that". My Lords, Her Majesty's Government and the European Commission have been talking to the Japanese Government about it for a very long time. The EGCI report suggested that we should abandon the fight, but I disagree. I think that we should take a leaf from the Japanese book, persevere and keep pegging away. We should not take no for an answer. Most of the major British and many of the Community contractors maintain offices in Japan at considerable expense. They deserve all the support from the Government and the Commission that they can get.

I shall make a positive suggestion because I tried this out on a group of very senior Japanese the weekend before last. We went to a conference at, of all places, Avignon, but it was well worth while. Here in Britain we have a very successful Invest in Britain Bureau. We suggested to our Japanese friends that it might be a good idea if the Japanese, who say they want to encourage foreign investment in Japan, set up an Invest in Japan Bureau as a tangible measure of their expressed desire to see more foreign investment. The flow of direct investment between countries is as much part of the open world trading system as the flow of goods and services. I think this is an argument which they would find difficult to rebut.

We need to press ahead with a number of these actions while taking note of what we have to do. The report has made many valuable points about that. I shall end with a short quotation. I was a member of a small seminar which took place at Chatham House a few months ago. It was about our images of each other and what we think of each other. We became very frank on this and one Japanese said, "We will tell you exactly. America is the place where you go to do business. Europe is the place where women come to shop and sight-see". They have their stereotypes. We must both increase our understanding so that these stereotypes give way to the reality.

5.34 p.m.

Lord Roll of Ipsden

My Lords, I wish to join other noble Lords in thanking my noble friend Lord Kearton for introducing this debate. The report was prepared by a sub-committee which he chaired and in which I had the privilege to participate. He has covered the ground of the report so well that I wish only to make some general comments on points, many of which have already been touched upon by previous speakers.

Before doing so I must declare an interest. The financial services group to which I belong has been doing business with Japan for over a quarter of a century. It now has a very important subsidiary company operating there which has a full securities licence and a seat on the Tokyo stock exchange.

I myself have been visiting Japan regularly, including in previous incarnations, for the past 30 years or more. I have had many opportunities to see the remarkable progress which that country has made since the war. The report which we are debating today deals with the relations between Japan and the European Community. Japan's position in the world is of course well known and well assured. It is the second leading economic power today.

The Community is at this moment engaged, at a pace far more accelerated than in the past 25 years of its existence, in creating a more integrated monetary and economic entity. If the process is successful many of us believe that that will give it the opportunity of ranking alongside the first two of the leading powers. It is quite clear therefore that the relations between the Community and Japan are of immense importance for the future of the world economy, including the position and 'welfare of the people of this country as a member of the European Community.

The report sets out very clearly the economic achievements of Japan which have secured its outstanding place in the world economy. The report examines the many reasons, which have also been touched upon in the debate tonight, for its success. These are of a very remarkable and almost bewildering variety. One Japanese friend of mine —a very distinguished economist —some years ago concluded that the single most important factor in securing the industrial, and particularly the exporting, supremacy of Japan was the original choice of the exchange rate some 40 years ago.

That may well be true, but we all know that in undervalued exchange rate brings benefits which are short lived, largely because of the inflationary tendencies which it tends to generate. It may well be that in the case of Japan this is not en1irely the case because that country has a very low propensity for inflation for a variety of cultural and economic reasons. Therefore the advantages of that original choice of the exchange rate and its management thereafter may be much more long-lasting than they would be in another case. It may well be that, once established, this superiority could continue, even though the original cause which gave rise to it has disappeared. Perhaps I may mention parenthetically that the effects of over valuation can also be long-lasting, as is the case I believe for some of the effects on our export markets created by the over valuation of sterling in the years 1979 to 1982.

All observers of the Japanese economic miracle agree on one thing; that is, the cultural factors deeply embedded in the way that Japanese society has developed have played a major part in the country's success. These include social cohesion and discipline, the universal acceptance of a high work ethic, a highly efficient education system, a high, and until recently very high, savings ratio, the shunning of ostentation and so on, and perhaps most important of all, as the noble Lord, Lord Kearton, pointed out, the strong and ubiquitous pressure to secure consensus. That is a word and perhaps a concept that is not always popular elsewhere.

On the last point, I shall never forget a conversation which I had some years ago with a friend of mine who has held very high ministerial office in Japan. I congratulated him on the successful outcome at that time of the "spring offensive", as it is called —the annual bout of wage bargaining. He said to me, "You know, I fear that we may have been too successful". His words were, "I fear that we may be accused of having pulled a fast one, as the inflation rate may turn out to be somewhat higher than we assumed in our negotiations". I must confess that I have never heard, and I never expect to hear, that kind of statement in Western countries.

The noble Lord, Lord Northfield, made many valid points on this theme in his thoughtful remarks. I should like to add another point which again concerns a cultural factor. Japan has been notoriously free from the takeover fever which has been so marked on both sides of the Atlantic. There is little doubt in the minds of anyone who has studied this matter that that is due to the fact that a Japanese company is not regarded as a commodity which its owners, the shareholders, let alone the management, can sell freely as they wish. It is regarded as something which belongs to the combined management and workforce. Your Lordships may take a different view as regards whether that consideration is desirable, but at any rate it is a factor which explains the extraordinary solidity and cohesion of the Japanese industrial system.

It is, I think, idle to try to evaluate separately each one of all the factors that I and other noble Lords have mentioned in the debate, including a factor which has been mentioned once this evening, which is the beneficial effect of the lower impact on the economy of defence expenditure since the war. However, it is enough to accept that a very complex synthesis of all the factors has produced Japan's present economic superiority which is most strikingly demonstrated by a very large and continuing payments surplus. That is all the more striking in a country which is so heavily dependent on imports of raw materials and energy.

If, as is undoubtedly the case, cultural factors have played an important part, it is legitimate to ask whether, if these are eroded or were to disappear altogether, the economic balance, particularly between Japan and her trading partners, would change. It has been suggested in some quarters —some analysts have pointed this out —that recent tendencies could be significant in this regard. I believe that the noble Lord, Lord Northfield, also made reference to this factor. One observer has strongly argued that the low consumption, high saving economy is giving way to a high consumption, lower saving and less work-concentrated pattern of life. There is probably truth in that. Certainly I and, I am sure, many other observers have noticed a much greater emphasis on consumption, including that of luxury goods imported from abroad, and on a greater use of leisure as shown in the difficulty of securing accommodation in favourite weekend resort places. My colleagues who live in Tokyo assure me that that is the case.

In general there is a much more leisure-orientated economy based on higher consumption and a greater enjoyment of life. The Japanese Government have made efforts to transform economic patterns in this direction, including reports on restructuring the Japanese economy produced under the direction of that most distinguished central banker, Maekawa, who died recently. I think we should acknowledge the powerful import drive. Over time we may confidently expect that these tendencies will affect the economic balance. However, in my view, it would be highly unrealistic to expect the imbalances to continue and with them the sometimes difficult and bitter negotiations, multilateral within GATT and bilateral between Japan and the United States —the noble Lord, Lord Butterworth, referred to that —between Japan and the United Kingdom, between Japan and the Community and others and the tensions to which these give rise.

It is a situation which could easily degenerate into a kind of generalised, undiscriminating hostility, where motes are constantly taken for beams and where those beams that exist are hailed as proof of a stubborn resistance to recognise the needs or rights of others. Japan-bashing becomes all too easily the consequence of either genuine grievance or of frustration at the inability to equal Japan's real achievements or simply a result of fear and envy. However, bashing is hardly the method for dealing with this major problem of a dynamic world economy. Americans who fear that Japan is buying up America should remember similar fears which American companies aroused in Europe and elsewhere in the earlier post-war period. In the light of our own very large overseas investment in recent years, we could hardly blame Japan for her efforts through foreign investment and aid to help to correct her surplus position.

All this is not to say that one's genuine interests should not be energetically defended and pursued in negotiation, especially in such matters as the continued liberalisation of the Japanese economic and trading system, including, for example, in financial services and reciprocity of treatment. I am sure the noble Lord, Lord Northfield, would not deny that. However, I think it is absolutely essential that this must be accompanied by a much greater readiness to acknowledge those Japanese industrial, commercial and financial aspects and methods which have proved superior to our own, to learn from them and to adapt them, as the committee's report shows it is possible to do, to Europe's circumstances and problems.

I refer in this connection to the statement of the noble Lord, Lord Jenkin of Roding, about language. I entirely agree with him. I hope the House will allow me to mention in this connection the recent setting up of an Anglo-Japanese foundation, of which I have the honour to be chairman. It is based on the most generous gift of£15 million by one of the leading Japanese security houses and its extremely farsighted, internationally minded chairman, Mr. Chino. The foundation is particularly designed to help improve Anglo-Japanese relations. The emphasis in its earlier programmes will almost certainly be placed on removing the language barrier by increasing interchange and provision of language teaching not only in universities but also in schools. I believe some beginning has already been made in that respect in a number of schools.

The report has much to say about recognising, accepting and adapting certain Japanese methods. That is of great importance. The report also draws attention, although perhaps not quite as much as it might have done, to the special co-operation in Japan between the public and private sectors and the relative freedom from ideological constraints in that regard as they are subsumed under a general imperative of national success which is identified particularly with the success of the economy. That makes the latter factor very important.

Much that is so striking in the industrial and financial success of Japan seems to be due to a totally pragmatic view of where and how collective action —that is to say, state or public sector action —can be of help, and indeed sometimes of decisive importance, in assuring the success of private enterprise working through the market. There is perhaps no highly industrialised country, with the possible exception of France, which has even begun to manage this fusion without what I might call ideological hang-ups.

The report before us strikes the right balance. Above all, it should leave no one in any doubt as to the present and possibly even greater future strength of Japan, particularly if she were to abandon the self-restraint that she seems to have shown in a number of areas, particularly the financial. The report rightly stresses the lack of a clear trade policy towards Japan on the part of the Community, despite the imminence of the completion of the single market and the steps, which I hope are being taken energetically by all concerned, towards further monetary and economic integration. To use the report's words: it is essential that the Community pursue common policies and present a common front to Japanese competition". That, the report argues, is essential, not only because of the present confusion but also, and worse, because of a certain complacency on the part of those sectors of the European (including the UK) economy which are most vulnerable.

The report is thus a warning, not, it is important to stress, out of any basic hostility to Japan, but out of a recognition of the challenge which her success presents and which only those who are unwilling to meet it could regard as a threat.

5.50 p.m.

Baroness Elles

My Lords, with other noble Lords I very much welcome the report. Today's debate is also very welcome. As the noble Lord, Lord Kearton, reminded us, the common external policy of the European Community is in the hands of the Commission and the Council of Ministers. So far as is ascertainable, no study or debate has taken place in any other Parliament, including the European Parliament, on the very important document which is now before your Lordships. Therefore, with the expert guidance of the noble Lord, Lord Kearton, we in this House have been able to perform a democratic role which I hope will be appreciated by the European Commission and others interested in what is a most important subject for the prosperity not only of the United Kingdom but also of the European Community.

Among other points, I should like to draw attention to the recommendation in paragraph 98 in the summary of conclusions, which are strongly to be recommended. It is stated that the export promotion programme of the Commission should be extended. That programme is, however, under threat.

Many noble Lords have spoken of the necessity of learning the Japanese language. I go much further, and I shall mention specific details, of which I have given notice to my noble friend on the Front Bench. In its preliminary draft budget the Commission requested a miserly sum of 7.2 million ecus, increasing by a minimal 1.3 million ecus last year's figure of 5.9 million ecus, for the export promotion programme run by the European Community. Seventy per cent. of that money is spent on the executive training programme, which sends young Europeans to Japan not only to learn the language but to work in Japanese firms for a period of 18 months.

Over the past nine years 315 young people have been sent from the European Community, including 49 British young people who received sponsorship of up to 50 per cent. from the private sector. As the noble Lord, Lord Kearton, adumbrated in his opening speech, compared with the number of young Japanese who come to this country and other parts of the European Community to study our system, language and culture, that is a pitifully small number.

I took a cutting from one of those magazines which we all receive, about relations between Japan and the Community. Clearly, the industrial and business ethos of Japan is very different from our own and has to be learnt and understood by our people who go to Japan. The article states that one should, Study the market intensively. What was successful at home is no guarantee. Business relationships are nurtured over a long growing period, and patience allied to confidence usually wins in Japan. Perseverence, too". It also advises: Wearing down resistance with repeated calls or new proposals produces results in Japan". That is something that our people doing business in Japan have to learn. They only learn by practical experience.

Therefore, I hope very much that your Lordship's will support unanimously the proposal that the British Government should support strongly the very modest increase of 1.3 million ecus in the programme which has been proposed by the Commission. It has been supported by the European Parliament and will be raised at the Second Reading of the Budget shortly. I mention that point specifically because only yesterday the Council turned down the proposal for the additional 1.3 million ecus and agreed only to maintain the figure of 5.9 milliion ecus.

That seems a very small point to raise in this major debate on policy. However, if one does not pay attention to detail one may as well not have a policy. Too much has been said about learning to speak Japanese and Japanese customs. When a simple sum of about £500,000 would create a programme which would increase the number of executive trainees from 50 to 60 a year, surely we could give it our support. I hope that the Government will take note of that urgent request.

Within the same context, there are many business opportunities that have been missed. Two or three years ago when I happened to be in Japan I visited the Tsukuba exhibition on high technology for the year 2000. Anyone who had been into the great pavilions of Marsushita, Sony or other big Japanese firms would no doubt have been appalled when they went into the miserable pavilions of the United Kingdom and the European Community. If one is ever subject to a feeling of shame, which fortunately one is not often, shame would have overcome one. It was a very poor performance. I do not attach blame to any one in particular, but there we had the opportunity to show our best goods for the future interests of Britain in Japan. We should not have refused to spend a little more money to make that exhibition worth while. We had the opportunity and we failed to use it. As we all know, penny-pinching does not get us anywhere.

I turn now to paragraph 105 in the excellent summary. Recent studies have shown that measures designed to protect industrial sectors from effective competition from foreign sources, including Japan, may reduce the ability of those sectors to innovate and grow in the domestic economy and to compete internationally. The memorandum which was submitted by the International Motor Company confirms that view. On page 225 it reads: In some areas, protective measures would be advisable during a limited period. Indeed, let us keep in mind the unfortunate example of the European Motor Industry, which after decades of protection is less competitive now than it was 20 years ago". Of course there are other reasons besides the protective measures that were taken. Nevertheless, that is an indication that the kind of protective measures that are sometimes advocated by this country and by the Community have not achieved the results they set out to achieve. I refer specifically to the anti-dumping measures which have led not only to increasing costs to consumers but in many cases have not achieved their industrial objective.

The situation has been particularly aggravated in the sphere of business equipment. The first thing that every small company starting up in this country will do is to buy a personal computer. Most are of Japanese origin. Most electronic typewriters are of Japanese origin. They all bear very high tariffs in order to protect European industry. But where are those European goods which compete in excellence and standing with those Japanese goods? All that happens is that the small businesses have to put in capital far in excess of that of their competitors elsewhere outside the Community.

It may be that there should be grounds for having a fall-back position. Nevertheless, I believe that that is a matter which should be taken into account in GATT when revising the anti-dumping rules. I should add that the methodology being used to define dumping and the price mechanism certainly needs to be reviewed in the light of some of the cases that have come before the European Court of Justice. Again, I plead with the Government to give strong consideration to putting a fair and objective case in the GATT negotiations to strengthen the hand of the Commission representatives in arguing for better methods. If one is to have some form of protectionism let it be effective and not to the detriment of the European consumer.

I should like to add that it has been the success of the Japanese economy —together with that of the USA —which has led the European Community to hasten the completion of the single European market, which had originally been evisaged in the Treaty of Rome. In order for the Community to become more competitive in the world market —let us remember that 34 of the top 50 companies in the world are either Japanese or American —the programme must be completed regardless of external political events. The noble Lord, Lord Greenhill, mentioned that point. Whatever happens —and there are major political considerations in Eastern Europe and in regard to the situation in the USSR and our relations with EFTA —I do not believe that the European Community can afford to delay the completion of its 1992 programme and opening up the single European market.

That is in the interests not only of the European Community but of all those countries which trade with us, including Japan. The concept of a "Fortress Europe" is certainly not in the interests of the European Community itself when the volume of our exports represents 20 per cent. of our GDP within the Community. If one includes the EFTA countries, the figure rises to 38 per cent., far exceeding those of the United States or Japan. So clearly we must carry on with that programme in order to create that one market and unite 320 million consumers.

It is perhaps worth mentioning also that the reciprocity clause which caused so much concern both to the United States and to Japan has been considerably amended in the Council's common position on the draft second banking directive. The directive has not yet been adopted but it is clear that the Commission and, I believe, the Council will stand by that much modified reciprocity clause. It does not impose considerable obligations on the Commission when dealing with other countries wishing to set up subsidiaries of banks within the European Community, which so far as I can see is not to the benefit of either the Community or third countries.

While putting our own house in order, there is much that we can learn from the Japanese, including, for example, the commitment of all in a firm —employers and employed —to the success of their company. Many noble Lords have mentioned education and training standards as well as opportunities for continued training throughout the life of the workers. We have slowly learnt about that and are beginning to put those ideas into practice. They should automatically be part of the best practice of British industry.

When I visited the Marsushita training company in Osaka, one of the most impressive things I was told was that, after a new entrant had spent four or five weeks learning how the company worked, he was sent for three months to a retail outlet to learn what it means to be in contact with a customer, that it was the customer who was right and that customer demand led to the success of the company. Those of us who shop in the United Kingdom would be thankful if trainees here had had such experience.

In conclusion, I should like to think that Europe is beginning to take up the challenge that we are being set by the United States and Japan in order to be more competitive on the world market in international trade. But member states will need to co-operate more closely and must give the Commission the necessary support for it to be able to negotiate trade procedures which will work to the benefit of both competitive suppliers and satisfied consumers, be they European or Japanese.

6.3 p.m.

Lord Benson

My Lords, there is always a danger in a debate of this character that many of us repeat the same points in different language. I am bound to transgress to some degree in that respect. However, I should prefer to speak not so much about Japan, but about what we in the United Kingdom can learn from Japan.

Forty-five years ago, Japan and Germany were defeated nations ravaged by war and merciless bombing. Both nations are now economically and politically a great deal stronger than we are. The report explains to some degree why that is so in Japan. I am sure that, if there were a similar report on Germany, it would say much the same in different language.

In 1988, the gross domestic product expressed per capita in thousands of dollars was 23.3 in Japan, 19.6 in the United States and 14.1 in Britain. Between 1980 and 1986, the increase in the GDP on average each year in Japan was 6.6; in the United States it was 3.2; and in Britain it was 2.3. A short time ago the Office of Fair Trading reported that in many sectors of our industry import penetration, despite the enormous increased costs of transport and handling, was as high as 50 per cent. Total import penetration, it said, amounted to 17 per cent. of our manufacturing capacity. The report added that no less than 20 per cent. of our total manufacturing capacity was represented by overseas operators carrying on business in this country. All those figures may become more adverse to the United Kingdom in 1992.

We have watched the pound steadily weaken. I do not believe that the pound can be held steady by keeping interest rates high and drawing on the reserves of the Bank of England. We shall maintain a firm pound only by reducing the heavily adverse balance of payments. That can be done only by increasing the volume of our industrial output and its quality. In the last 25 years there have been 23 different Secretaries of State looking after industry in this country. It is not surprising that we cannot hold a consistent or dynamic industrial policy.

Perhaps we may now consider why Japan has been forging ahead. Its economic machine has grown steadily year after year and is sustained by continuity in national policy. In industry the creed in Japan is quality of product, quality of presentation of goods and punctuality of delivery. In every project and enterprise in which Japan engages, its penetrating analysis is extremely thorough and well done. Japan's expenditure on research and development is very large and relatively much stronger than it is in this country. In every enterprise in industry, Japan is prepared to take a long-term view. In this country, partly due to the attitude of fund managers, we require industry to show a much shorter period of pay-off.

Japan's personnel management is extremely good. The Japanese take immense pains over the selection of the workforce and over their training. They have the capacity to motivate staff. Their labour relations are good. To that extent, the traditional functions of the trade unions as they operate in this country are much less significant. When we went to see the Nissan factory in Sunderland, we: were told that membership of the unions is entirely optional and that only 18 per cent. of the total workforce there belonged to a trade union.

The education policy in Japan breeds production line workers of high quality. The House will have noticed in The Times yesterday that 6 million of our workforce are either innumerate or illiterate. By reason of the country's economic strength, Japanese banks are immensely wealthy. We were put on notice by witnesses who came before the Select Committee that by the end of the century Japan intends to overtake London as a financial centre.

I have admiration for the Government's achievements in the last 10 years in giving this country a sense of purpose but it is nowhere near sufficient to overtake our once vanquished enemies. There is one bright note of encouragement in the report; namely, that the best in Britain is as good as anything in Japan. Where we fail is that, in the great mass of our activities, the quality below the best is nowhere near adequate. Until that is raised we shall continue to lag behind the nations which are competitors in the way that I mentioned.

In the light of that dismal recital, I wonder whether I can ask the noble Lord, when he replies to the debate, to address himself to two questions. Are the Government willing to put before the nation the reasons why this country is unable to match the achievements of Japan and indeed of Germany —not only to do so once but again and again until it is borne in on the public exactly what we must do to keep our end up and to keep the word "Great" in Great Britain?

Secondly, do the Government have policies, in which case I should like to know what they are, to enable us to overcome this difficulty? It would take at least a generation to achieve even were policies to be set in hand tomorrow. For that reason it would be interesting to hear from the Opposition Benches what they have in mind for this long period when we have to revive our fortunes. In their turn, how would they do it?

6.11 p.m.

Lady Carnegy of Lour

My Lords, I should like to say a few words about a very much more limited aspect of the matters under discussion than those addressed by the noble Lord. I want to talk about part of what my noble friend Lord Jenkin of Roding referred to as "the long haul", and the efforts of one sector of the European Community's industry working hard to penetrate the Japanese market. I refer to the European whisky industry and in particular the Scotch whisky industry, which makes a most important contribution to the United Kingdom economy and the UK balance of payments.

In their evidence to the committee (at question 94, on page 19 of the report) the Department of Trade and Industry underlined the importance of the Community speaking with one voice in making representations to Japan on commercial matters. That point was picked up in the debate. To illustrate its point the department gave an example of the recent success of the concerted effort by the Community and Her Majesty's Government in persuading Japan that imported whisky should carry the same level of tax as Japanese-produced whisky. As your Lordships will remember, imported whisky had been taxed at two to seven times the level of the home product in Japan.

That change, which took effect from 1st April this year, has been important to all whisky producers in the UK and the Community. Indeed doubtless it is a major factor in the increase in the exports of Scotch whisky to Japan this year. I am advised that to the end of September this year, compared with the same period last year, total exports of Scotch whisky to Japan increased 40 per cent. in volume and 89 per cent. in value and "bottled in Scotland" exports have increased 45 per cent. in volume and 73 per cent. in value.

The success of that concerted effort by the Community and Her Majesty's Government followed years of external pressure, including a GATT judgment against Japan. It has to be said that if the GATT judgment is to be fully implemented and the taxation of whisky is to be fair, a number of important steps still have to be taken. In Japan whisky, whether imported or Japanese, is still taxed at a rate some three times as high as other spirits such as gin, vodka, rum and shochu. The effect of that, as well as inhibiting the sale of whisky, has probably been noticed by those of your Lordships who have lately been in Japan.

Appearing on the Japanese market are what are known as whisky-like products —drinks which are like whisky but which are not in fact whisky. Those drinks are taxed at the lower rate for spirits other than whisky and people in Japan are being misled into drinking what they think is whisky at a bargain price when in fact they are not drinking whisky at all. Representations about this matter and the weak Japanese government guidelines which allow it have been made at the highest level by our Government in co-operation with the rest of the Community. We have all read in the press of the efforts made personally by the Prime Minister and the Secretary of State for Scotland on their respective visits to Japan. It seems however that so far no changes in the guidelines about whisky-like drinks have been made and Japan, as yet, has given no indication of when it plans to honour the GATT judgment in full and reduce the tax difference between competing spirits to de minimis levels.

Therefore I should like to ask my noble friend on the Front Bench two questions. Are the Government satisfied that the Japanese Government have taken the necessary steps to deal with the misleading sale of whisky-like products which are taxed at a lower rate than genuine whiskies? When do the Government, in conjunction with the Community, plan to insist that Japan honours the GATT obligations in full?

My third question relates very briefly to the fairness of import duty. Import duty on bottled Scotch whisky entering Japan is six times as high as the duty on Japanese whisky entering the Community. Moreover, Scotch whisky is subject to higher rates of import duty than other whiskies imported into Japan. So finally I ask my noble friend what steps the Government and the Community are taking to bring about a reduction in these unfair rates of duty levied on imported whisky and, above all, on imported Scotch whisky entering Japan.

We all appreciate the careful and skilled work that has gone into this report. If one of its effects will be to speed up progress in further improving the conditions for fair competition for European whisky exported to Japan, it will be a most valuable result for the Community, for Britain and above all for Scotland.

6.17 p.m.

Lord MacLehose of Beoch

My Lords, as a Scot it gives me great pleasure to follow the noble Baroness, Lady Carnegy, in her plea for Scottish whisky, which certainly has been grossly badly done by in Japan. As a member of the Select Committee I should like to congratulate the noble Lord, Lord Kearton, on his chairmanship of that committee and on his splendid introductory speech, which did not leave very much more for the rest of us to say. At this stage in the debate I find that fellow members of the committee have covered all the points and I shall confine myself to a slight emphasis or enlargement of just one or two matters.

In seeking reasons for Japan's success, I noticed that all speakers tonight referred to some non-economic reason such as consensus or harmony and those sorts of things. I should like to put it in my own way. While Japanese success has been in Western business and Western technology, in fact it is deeply rooted in a society that is totally different from that of the West. The Japanese cult of harmony has served it very well and, as several noble Lords have said, has encouraged a single mindedness of purpose and harmony of industrial, commercial, bureaucratic and political relationships which are enviable to those in the West. It has greatly assisted continuity and predictability in the political, industrial, commercial and educational policies on which success has been based. Our committee concluded that Japan thus represented not just competition but a philosophical and stimulating challenge to some Western practices.

We set out our suggestions for responses in a wide number of fields. I should like to touch upon two. The first is the need for an improvement in our knowledge of Japan. This has been most eloquently referred to by the noble Lords, Lord Jenkin and Lord Butterworth, and others. However, the fact is that for over a century Japan has invested heavily in the study of the languages, laws, technology and business methods of the West. In due course this has led to successful operation in Western countries and investment in them.

However, no comparable effort has yet been made by the West, although I realise that some beginnings are now being made. I would therefore draw your Lordships' attention to our committee's proposal that it is in businesses' own interests to help fund a great expansion in the teaching of the Japanese language and Japanese business methods. Perhaps I should declare an interest as the chairman of the School of Oriental and African Studies.

As have other speakers, I welcome the Government's excellent Opportunity Japan campaign and the similar smaller campaigns organised by the Commission to which the noble Baroness, Lady Elles, referred. But these require expansion and much greater complementary action by the private sector.

I should like to emphasise one other point that I do not think has been made. In promoting their interests in Japan, members of the EC appear to be in danger of falling between two stools. As national units, they lack the clout that the European Community might have, but as a Community it has as yet scarcely developed a habit of action or a sufficient Commission representation in Japan. As many witnesses pointed out, Japan is not a country in which occasional national high level missions can achieve much in themselves, welcome though they can be. Results have to be negotiated patiently and at many political, bureacratic and commercial levels. There is no short cut. At present embassies of member states are equipped to do that. But obviously they can speak only for themselves. The Commission's representation is small in comparison and, according to witnesses, inadequately supported by Brussels.

It was against that background that the committee concluded: Formation of a trade policy towards Japan and assertion of the Community's effectiveness in pursuing it, should be one of the Community's highest priorities". I hope that in reply the Minister will have something to say about the Committee's suggestion that in this aspect the United Kingdom should take a lead.

The United Kingdom's relationship with Japan has been one of political and cultural friendship. This bilateral relationship is of great value and certainly should continue. However, in the economic field we have to accept that Japan has now become one of the great and most powerful rapidly growing economies of the world. In our own interests it is time so to organise the Community that where and when necessary it can assert its position as also one of the three great economies of the world and deal with Japan as it should, on a basis of equality and strength as well as one of respect and co-operation.

6.25 p.m.

Lord Murray of Epping Forest

My Lords, I hope that noble Lords will forgive me if I intervene briefly. I am sure that it is some dreadful error on my part that has led to my name being inadvertently omitted from the list. If it is any consolation to noble Lords, as it is to me, many of the points that I would have made have been made —and much more effectively —by previous speakers.

I shall repeat one point. It is the debt which both the committee and the House owe to the fine leadership of the noble Lord, Lord Kearton, as chairman of the sub-committee, r ot only for the report but for the entire period of his service as chairman.

I wish to concentrate in particular on Japanese investment overseas and on some of the implications that exist for the United Kingdom. However, first, we must keep this in proportion. Between 1985 and 1988 Japan invested overseas less than 3 per cent. of its gross fixed capital formation. West Germany and the US each invested a little over 4 per cent. of their gross fixed capital formation, In those same years Britain invested over 18 per cent. of its gross fixed capital formation. Whether that is a mark of lack of confidence, or more of a lack of confidence in our economy than the Japanese have in theirs, is not a matter for debate on this occasion.

I wish to examine Japanese investment in Europe. The principal reason given by my noble friend Lord Northfield is that it is seen by Japan as a means of getting past European tariff walls. I do not complain about that; it is perfectly reasonable. It is also perfectly reasonable that in Europe we should establish minimum reasonable conditions to access in this way, for example, with regard to the participation of European firms in construction in this country. We have heard about some of the problems concerning participation by European firms in Japanese construction. There is also a propensity by some Japanese firms establishing themselves in this country, to use Japanese rather than British construction firms. I heartily endorse the need to attract not only the main manufacturers and assemblers, but also Japanese manufacturers of components. We also need to develop R&D capacity.

We can expect Japanese firms to engage in good industrial relation practices. On that score I have no complaint. I do not talk about setting down conditions as a covert means of excluding Japanese investment; quite the contrary. I value the contribution of Japanese firms to the UK's industrial performance and, to a growing extent, to UK industrial relations also.

The noble Lord, Lord Harmar-Nicholls, asked about restrictive practices in shipbuilding. I shall come to that. However, perhaps I may emphasise that industrial relations in Japanese firms, as in British firms, have to be seen in the total context in which they operate. The context in which Japanese industrial relations have developed has been described. I need not expand on it.

The Civil Service —not so much the politicians, but the civil servants —the financial institutions, the unions and the press have got together, and continue to do so, to reflect on their common future, to promote detailed and comprehensive market research, to finance collectively industrial research and to identify products and processes that will be needed. They bring all these considerations to the point where they become a commercially practicable activity. At that point they leave the firms to compete tooth and claw for market share.

I emphasise the fact that through their unions Japanese workers have invariably been involved in this process at national level and, more importantly, in their firms. Japanese industrial relations are based on consensus and the principle of neutrality. That is in sharp contrast with many firms in the UK, although not all, and in marked contrast with the attitude of the present Government towards workpeople and their unions.

The noble Lord, Lord Roll, reminded us that the Japanese company is seen as a family and, to a large extent, as the property of its employees. For better or for worse the central purpose of the Japanese company is seen by its management as the provider and protector of employment. Hence, there are no predatory takeovers. The Japanese say that you do not sell your kith and kin; you do not sell your family into servitude. Employees are treated as responsible people and therefore they act in a responsible way.

There are exceptions. Often, in firms manufacturing components —those who must produce their goods just in time at the door of the assembly unit —there are deplorable conditions and a lack of continuity and security of employment. However, one is talking in this debate about the larger firms; those which are household names in this country, which invest here and which can set a pattern for us.

The noble Lord, Lord Kearton, was asked by the noble Lord, Lord Harmar-Nicholls, about restrictive practices in shipbuilding. I do not pretend to try to explain those away; they happened. The TUC spent a great deal of time trying to abolish them, often with success. However, they must be seen in the context in which they happened. The Japanese do not need to impose such restrictions.

I should like to give an illustration by describing an incident which happened during my first visit to Japan in the early 1980s. I visited a Nissan plant and spoke to a number of the shop stewards following a most impressive tour. I asked what redundancy agreements they had. Although he spoke English extraordinarily well one of the stewards looked blank. I said, "What arrangements do you have if people are being laid off or sacked because there are problems in production or because there is no work?" He said, "We do not have any such agreements. We do not need them. If there is going to be a problem our management expect to be able to identify it some time ahead, come to us and tell us that we shall have problems in the sale of this article or the manufacture of another. We must think about what we are going to do two, three or four years ahead in order to meet this. We sit down together, discuss and argue. We give our opinions and views and through that process we find ways of solving the issue before it becomes a problem. So there is no question of people being laid off. The managers know that they are stuck with us and that they are expected to find employment for us. They and we together will make it possible to maintain that situation."

Any talk of restrictions and restrictive practices becomes nonsensical. That is the great secret of the Japanese success in industrial relations. It is interesting to see how British workpeople have responded and how they have produced results which evoke praise from Japanese management. We hear of no-strike and pension agreements—the outward visible signs of an inner state of industrial grace. These are the consequences and not the causes of good industrial relations. The causes lie much deeper in the attitude of Japanese management and its willingness to treat its employees as responsible people.

I do not suggest for one instance that we should slavishly copy Japanese methods and practices. In British factories —in Telford, Sunderland and elsewhere —they adapt to the local situation. However, I suggest that we can reflect and learn from experience. The Government should not dismiss as co-operatives or as creeping socialism the suggestions that UK industry, industrial performance and industrial relations might benefit from mutuality and consensus.

6.35 p.m.

Lord Bruce of Donington

My Lords, first, I apologise to your Lordships and particularly to the noble Lord, Lord Kearton, for being absent during his opening speech. That was due to my having to examine the Chancellor's Autumn Statement before venturing to make my observations upon it to the Government.

In our view, the report is a good example of the excellent and thorough work carried out by Select Commitees of your Lordships' House. We should bear in mind that it is the result of the dedicated work of noble Lords who sat on the committee for long hours and after considerable research into the documents which they received. In our view, it reflects most creditably upon them.

As the noble Lord, Lord Jenkin, pointed out, the noble Lord, Lord Kearton, appears to have an encyclopaedic knowledge of trade and industry. It is clear that he was able to subject witnesses to a pretty severe cross-examination based on a detailed knowledge of the subjects upon which they gave evidence. Before the committee's deliberations began there had for some time been grave misgivings within the European Community —and to some extent within the United Kingdom —about two aspects of Japanese trade with the EC. The first was the apparent difficulty of EC countries to gain access to the Japanese market. The second was the dangers, as they were then apprehended, of Japanese penetration into EC markets. The report states at page 5 that in its report the European Commission spoke of tensions between the Community and Japan.

Therefore, it is worthy of note that after hearing all the evidence which initially bore upon those points the net result is a brief mention in the report to those two aspects. Indeed, as the noble Baroness, Lady Elles, has already said, the really important mention is in the words at paragraph 105 on page 27: In certain circumstances, limited protection for threatened or infant high technology industries is approporiate. The Community should seek to pursue such remedies in GATT". That is the only substantial comment in the committee's report on the matters that were originally the course of tension, or thought to be the source of tension, between Japan and the Community, although I was very happy to note as an expatriate Scot the battle fought by the noble Baroness, Lady Carnegy of Lour, on behalf of Scotch whisky, which has a few friends in this House.

The real problem to which the committee ultimately had to address itself was to ask, perhaps sometimes unconsciously, how it was that Japan had managed to get to her existing position of pre-eminence. As the noble Lord, Lord Benson, pointed out to us, in a speech which fortunately reproduced a number of statistics which I was going to inflict upon your Lordships, here we have a country, an offshore island in very much the same way that Britain has by some faint hearts here at home been regarded as offshore the Continent of Europe. Although its population is double ours, Japan stands in the same offshore position to large continents, and yet it somehow has not found it necessary to take shelter in a larger organisation.

We have been discussing today how the great Continent of Europe, with 320 million population occupying a vast area, is to bring itself into a position where it can match Japan. There must be some reason for this. Here we have a country defeated in war, some of its territories devastated —and devastated in a manner that none of us at the time really apprehended —which has little or no oil resources, very little indigenous fuel, and certainly has not had the benefit of £73 billion which Britain has derived from its North Sea oil resources. How is it, therefore, that these people and this nation of Japan have attained a position of such great eminence?

I shall offer a view which I think will find echoes in, and indeed may itself echo, the remarks made by the noble Lords, Lord Butterworth and Lord Roll, and in particular by my noble friend Lord Northfield and others. There is such a thing as Japanese society. Would some members of the Government, whose Prime Minister has said that there is no such thing as society, ponder the truth in that statement?

The fact of the matter is that the real reason Japan and the Japanese people have made such progress is that they have not been subjected to the harsh, divisive and often cruel treatment of part of their population at the hands of a government who should know better, who do not believe in consensus and in fact despise consensus as wet and sloppy; who believe in competition in its rawest form and who are prepared to leave the entire fate of a country and all its people, the wealthy and the very poor, to plain, impersonal market forces.

Japan is the precise opposite of that, because it has a mixed economy. Japan has substantially the same political parties as the United Kingdom, and there are conflicts between them as to the rights, duties and benefits of various types of its citizens. There is the normal democratic party conflict in Japan. Indeed, just as in this country of ours, there are the occasional financial scandals that hit the headlines. We in this country are not entirely exempt from them. But above all Japan has a consensus and is able to plan forward over a period of as long as five or 10 years. They believe in long-termism as distinct from short-termism. They believe in long-term and sustained prosperity in preference to the quick buck.

The way that it is done, which is brought out admirably in the report, is through MITI, the Ministry of International Trade and Industry, which does forward planning in conjunction with leading firms, in conjunction with trade unions, in conjunction with banks and in conjunction with government itself. It prepares a plan of general trend —not in detail, but the broad targets that are required and the conditions that are needed to meet them.

It is not done by diktat or by regulation. From what I have been able to read of the evidence and from the information I have gathered by listening to some of it, it is done by a process of leaning. If MITI wants something done, it leans on the people to get its own way. Ultimately a consensus emerges, and ultimately also the will to carry it out emerges, because one thing the Japanese people have which is abundantly clear —the noble Lord, Lord Kearton, and other noble Lords who have participated in this debate made reference to this —is a sense of purpose. That sense of purpose reflects itself not in holding back assistance, such as the assistance of taxpayers where industry and the implementation of a plan requires assistance. It is a forthcoming co-operation, particularly, for example, in the field of research and development to which many noble Lords have referred.

There are lessons in this for Britain. The lessons surely are there. We are a sophisticated nation from the point of view of having a long history and culture. Surely by this time we ought to be able to establish in peacetime the same kind of consensus that appears naturally to us in time of war. We ought to be able to establish a national purpose equivalent to that which has been the mainspring of Japanese success. We can learn from their example and many instances have been given today showing that workers in Japan are not regarded as digits or statistics, or collected together in one impersonal title under the heading "labour market". They are treated as human individuals with human problems rather than being of little or no account.

Such indeed is the case in many of the larger firms in this country which also follow those precepts, but unfortunately it is not the same for the bulk of those great conglomerates over which people preside and give themselves increases in salaries of around 20 per cent. to 60 per cent. and yet insist on everybody else tightening their belts at or below the inflation rate.

There is the individual concern which is not artificial —the concern by Japanese managers. We have had it in this country —the noble Lord, Lord Murray, has already referred to it —where there is a genuine regard for the people who work there. There is a genuine feeling that they are part of the same enterprise and the same family; a genuine appreciation of the fact that some security is of necessity required by those who work there.

These are matters to which we in this country must address our attention after all our history and all the work that has been done by Britons overseas in establishing a great empire, and later in the Commonwealth. We must consider the whole momentum of British culture and its effect upon the world, not only linguistically but in terms of legal systems and other works. We should never become Weary Willies and Tired Tims regarding ourselves as a mere appendage to the Continent of Europe. We have to establish a sense of national purpose. We have to establish a sense of consensus and we have to carry it into effect.

I do not know about the European Community, but I know that, as regards my own country, we in Britain will ignore the example of Japan at our peril.

6.54 p.m.

Viscount Ullswater

My Lords, I should first congratulate the noble Lord, Lord Kearton, on bringing this Motion before your Lordships, and the other members of the sub-committee for their thorough and, if I may say so, perceptive report on relations between the Community and Japan. That report and the debate we have had this afternoon demonstrate the importance which the United Kingdom attaches to close and positive relations between the Community and Japan, to an informed understanding of Japan as a political and economic partner and to the lessons for the Community in the commercial and technological successes of the Japanese people.

Your Lordships would not expect me to agree with every detail of such a wide-ranging document. However, its general thrust accords with the Government's views and policies, and those policies have won wide support within the Community. That is reflected in the Commission paper which was the starting point of the committee's work.

In answer to the noble Lords, Lord MacLehose of Beoch and Lord Greenhill of Harrow, I confirm that the Government will continue to work to ensure a co-ordinated, vigorous and effective Community trade policy towards Japan and the effective representation of that policy in Japan.

I should add that the Government have consistently and successfully advocated to our Community partners a vigorous policy towards Japan, pressing the Japanese to remove obstacles to our business men encouraging our exporters to take advantage of the enormous opportunities in the Japanese market and resisting the short-term appeal of protectionism. This policy is firmly based on the principles of that open and multilateral world trading system which has been the essential foundation for the tenfold growth of world trade since 1950.

If I may draw out some of the key propositions in the Report, they seem to me to be: first, that Japan is an enormous and still vigorously growing economic and technological force in the world; secondly, that there is no secret to this Japanese success. As the report says: It is based on high quality, painstaking service to customers, excellent management, thorough research and patient investment". I believe that the noble Lord, Lord Benson, emphasised this in his interesting speech. The report goes on to say: the methods of Japanese business are the methods of successful business worldwide". Indeed, if that were not the case and if many British firms did not show similar qualities, it would not be possible for the United Kingdom itself to export the 24 per cent. of output of goods and services which we now achieve. The comparable figure for Japan is 11 per cent.

Thirdly, the overall competitive advantage in many sectors is with Japan at present. That is why a number of companies rightly told your Lordships' committee that any firm which aimed to be globally competitive should have a close awareness of circumstances in Japan, preferably through a permanent presence there. As one witness put it, ignoring Japan is "not an option" for a successful business.

Finally, both the United Kingdom and the Community as a whole need clear and informed policies to provide the best possible environment for our companies to match and strive to surpass their Japanese competitors worldwide as well as in Japan itself.

There have been two important developments within Japan itself. The first is the progressive removal of trade barriers to the point at which there are now very few of any significance to British business. Much of that progress has been achieved as a result of concerted Community action over a number of years, as recommended by the noble Lord, Lord Greenhill of Harrow. The second is the strong expansion of domestic demand in Japan in recent years which has been accompanied by some movement from exports to domestic-led growth. I believe that the noble Lord, Lord Roll of Ipsden, was even concerned about a possible upset in the cultural balance.

Taken together, these two developments have substantially increased the opportunities for foreign exporters to Japan; and my noble friend Lord Jenkin of Roding has told us about the opening up of the market. Japan's imports of manufactured goods increased by over 90 per cent. in dollar terms between 1986 and 1988. Japan's current account surplus fell by 7 billion dollars to 89 billion dollars in 1988 and by a further 6 billion dollars during the first half of this year.

Community and UK exports have benefited from this; in the case of the UK, growing by 45 per cent. between 1986 and 1988 and by a further 28 per cent. in the first nine months of this year. As recently as 1986 Japan was only our fifteenth largest export market. In the first nine months of this year it stands in tenth place.

An important example of a belated but nonethless welcome dismantling of a significant obstacle to trade is the recent reform of the Japanese liquor tax. As the direct result of a GATT investigation Japan now taxes imported whisky on the same basis as domestically produced whisky whereas previously the tax on the imported product was several times greater.

My noble friend Lady Carnegy raised some important questions on that issue. In reply I should say that we have welcomed the action taken by the Japanese authorities on the liquor tax while making it clear that we would keep its impact under close review. We have reserved the possibility of further recourse to the GATT since the recommendation of the GATT panel has not been implemented to the extent of removing the differential between the tax charged on whisky and on other spirits. In addition we will press for reductions in the rates of import duty through the current GATT negotiation which is due to be completed in December next year.

We are very conscious of the importance of Scotch whisky exports and the potential problem they face in Japan from new products which qualify for the lower rate of tax but look like whisky.

During her recent visit to Japan my right honourable friend the Prime Minister received assurances from the Japanese Prime Minister, Mr. Kaifu, that his Government appreciated the need to ensure that genuine whisky and these new products were perceived by the consumer as different. He assured my right honourable friend that action would continue to be taken to prevent any deception of the consumer. In the first three months since April this year when the new liquor tax arrangements were implemented the sterling value of our exports of whisky to Japan has more than doubled compared with the same period a year before, as my noble friend told us.

Similar if less spectacular improvements in trading conditions have been made as the result of long-running negotiations between the Commission and the Japanese authorities on safety standards and testing requirements for a wide range of products. For example, in the case of pharmaceuticals, a sector of particular importance to the UK, the Japanese authorities have given undertakings on the acceptance of foreign clinical test data which when implemented should significantly ease the difficulties which our business men have faced so far.

There is still room for improvement in access in certain sectors. The tariff quotas en leather and leather footwear and, the high tariffs on certain confectionery products and certain testing rquirements for medical equipment are still unacceptable obstacles to certain British products. On the services side there has been a long drawn-out negotiation to secure membership of the Tokyo stock exchange for all the British firms which seek it. Access is limited in certain other areas of Japan's investment and insurance markets, and foreign lawyers are, as in some other countries, subject to restrictive conditions of work.

I can assure your Lordships that the Government will continue to press for a satisfactory resolution to all these remaining difficulties. The Community also continues to encourage Japan to undertake structural reform of its domestic economy: such action could contribute to a further reduction in Japan's global current account surplus by stimulating domestic consumption. Points for action were agreed by OECD Ministers in June this year and at the summit meeting of the major industrialised countries in Paris in July.

During her visit to Japan in September my right honourable friend the Prime Minister emphasised that it was in the interests of Japan it self as well as of the international community as a whole for Japan to undertake such structural reforms. This is increasingly recognised in Japan where I understand that there is a growing debate on what measures of deregulation could contribute to reducing land prices and improving the system for the distribution of goods. A reform of Japan's extremely high levels of agricultural support and protection would also reduce a substantial distortion of Japan's domestic economy to the benefit of consumer and importer alike. We are seeking this on a multilateral basis in the current GATT Uruguay round negotiations.

Nevertheless the need to maintain this pressure should not obscure the fact that for the vast majority of manufactured goods Japan is already an open market and potentially an extremely profitable one.

I would say to my noble friend Lord Jenkin of Roding that the Government agree that the air services and fares area is a very important one where there is a need for significant further liberalisation. My right honourable friend the Prime Minister raised this matter during her recent visit to Japan. The Secretary of State for Transport and other members of the Government will continue to press the Japanese Government on the need for more liberal arrangements with respect to capacity, the routing of air services and more flexible arrangements for approving air fares to allow the airlines to become more market responsive.

As regards construction, it has to be recognised that construction business is unlikely to be won in Japan by foreign firms except as a result of a lengthy period of local commitment. Only then can Japanese assertions that its construction market is open be fully tested. The Department of Trade and Industry strongly advises leading British construction companies with trans-national operations to consider seriously the case for a permanent presence in Japan both as a source of intelligence and as a means of developing business with Japanese companies in the longer term in third markets as well as in Japan itself. As my noble friend said, we must persevere and not take no for an answer.

Our responsibility to maximise the opportunities in Japan for our business men is matched by our determination to ensure that those business men are aware of the opportunities which already exist and to assist them in responding to the challenge of this important and demanding market. The noble Lord, Lord Kearton, welcomed the Department of Trade and Industry's initiative in launching the Opportunity Japan campaign early in 1988 to alert British industry and commerce to the greatly improved conditions for trading in Japan and to encourage more effective long-term engagement in the market. My noble friend Lord Jenkin of Roding also paid due tribute to the DTI in setting up this campaign. In 1988 some 750 business leaders attended campaign meetings throughout the country at which they were briefed on the broader strategic issues. By the end of this year, a similar number will have attended a series of sectoral seminars at which they are being briefed in greater depth on current opportunities in their own fields. Feedback from campaign events indicates that the campaign is succeeding in having a positive influence on firms' export strategies for Japan as well as providing useful market intelligence.

The report rightly drew attention to the paramount need for British business to have at its disposal staff who not only have a solid commercial and technical background but also a good knowledge of the language and culture of the market in which they operate. I am not speaking about the provision of academic specialists in the Japanese language or culture, important though those are, but of business people who have a capability in Japanese in addition to their other professional skills.

In order to help fill this gap the DTI has offered to share with the private sector the cost of increasing the number of Japanese language speakers with commercially relevant skills. My noble friends Lord Butterworth and Lord Jenkin of Roding welcomed that in their concern for training in the Japanese language.

The DTI is making available over £1.6 million to British educational institutions over a period of four years for this purpose. I am pleased to report that their response has shown an encouraging degree of interest in developing suitable commercially-oriented courses. To assess the many proposals received the DTI is assisted by an expert and senior advisory committee of linguists and business men chaired by Sir Peter Parker.

The committee invited interested institutions to propose courses which would, without compromising very high language standards, present those language studies either alongside other subjects in an undergraduate course, or as an intensive postgraduate course for graduates of other disciplines. Five institutions have now been selected to provide such courses, subject to the satisfactory outcome of detailed negotiation—the Universities of Essex, Sheffield, Stirling and Warwick and London University's School of Oriental and African Studies, of which the noble Lord, Lord MacLehose, is the chairman of the governors.

Lord Northfield

My Lords, did the Minister give a figure of £1.6 million over four years? If he did, is that not a grossly inadequate figure, given the challenge?

Viscount Ullswater

My Lords, I can confirm that the figure I gave was the correct figure. I do not think I should comment on whether or not it is adequate. When fully operational this scheme will double the output of Japanese speaking graduates from about 70 to 140 a year.

The Government also support similar efforts at Community level, such as the excellent Community Executive Training Programme, for executives nominated by Community firms, which offers one year of intensive language training in Japan followed by a secondment of six months to a Japanese company.

I am grateful to my noble friend Lady Elles for raising the subject of the Community's budget for trade promotion in Japan. The figure of 5.9 million ecu which she quoted is for a wide range of trade promotional activities. There is no reason why the executive training programme should not be maintained, or indeed increased, within that amount of money, if necessary at the expense of other, less well focused and useful, activities. In our view, the executive training programme is the most valuable of the Commission's promotional activities of which we are aware and we are pressing the Commission to maintain expenditure on it, and to increase that expenditure if there is sufficient demand from business.

Baroness Elles

My Lords, can my noble friend confirm that the Government will be prepared to press for the increase to 7.2 million ecu, which was what the Commission demanded in order to have a slightly more realistic programme? With the present sum there are only 50 executive trainees per year. The Commission wants to increase that number to at least 60. Even 60 is a minimal number when one considers the overall problem which faces the United Kingdom and the Community vis à vis Japan. Will the Government support this demand for the increase? It is demanded both by the Commission and by the European Parliament. About 70 per cent. of the sum goes entirely on the executive training programme. Only 30 per cent. is used for other promotional assistance, coming out of the export promotion programme. The majority of the money goes to trainees and sends them to Japan. So far as I can make out, it is the only relevant programme to send trainees to Japan to work in Japanese firms, over and above just learning the language.

Viscount Ullswater

My Lords, I have said that we will press the Commission to maintain expenditure and to increase this expenditure if there is sufficient demand from business. I shall certainly bring the remarks of my noble friend to the attention of the Secretary of State for Trade and Industry.

An important part of the evidence taken by the committee related to the question of "matching Japan"; that is, what we can learn from Japan's successes and the appropriate policy response to them, a point brought out by the noble Lord, Lord Bruce of Donington, in his remarks. The report rightly observes that one important foundation of Japanese success has been, as the noble Lord, Lord Kearton, said, a willingness to adapt and learn from other countries, identifying the best and then seeking to improve on it. That is a sensible approach for us to adopt in relation to Japan. As one British exporter has put it: the important issue is to recognise that Japan will play an increasingly important role in the development and application of new technologies and, therefore, is of fundamental strategic importance in the formulation of future objectives". The fact is that, if one is not closely monitoring commercial and technological developments in Japan—and competing in the Japanese market itself—one is very likely before very long to be at a serious disadvantage against Japanese competition in markets in the rest of the world.

Science and technology co-operation between the Community and Japan is already quite extensive. Although there is room for further improvement, the United Kingdom is second only to the United States among the developed economies in the number of its researchers now working in Japan. This enables them to build up their contacts within, and understanding of, the Japanese system, and keeps them abreast of Japanese scientific and technological ideas.

The report rightly emphasises the importance of industry's own funding of R&D, which is an important foundation of Japan's success. In the United Kingdom this has grown rapidly over the four years to 1987, increasing by about 30 per cent. in real terms. As a percentage of GDP, the position in the United Kingdom is now comparable to the United States, and better than in France or Italy. Since our company sector is now in a very strong position—profitability is at record levels, as is industrial investment—the Government look forward to further real increases in industry funding of R&D.

We are also strongly committed to the European Community's current framework programme for the promotion of science and technology. United Kingdom organisations obtain between 18 and 20 per cent. of the funding available from this —3.7 billion programme.

No discussion of "learning from Japan" would be complete without mentioning the increase of Japanese direct investment in the Community. The United Kingdom continues to be the preferred location for Japanese investment, with well over 30 per cent. of the European total. We have been particularly encouraged by a number of substantial investment decisions announced during the past year, including the Fujitsu and Toyota projects, and, most recently, the decision by the Murata company. The noble Lord, Lord Northfield, told us about the success of Telford in attracting 16 Japanese companies.

Investment from Japan represents only a small proportion of all foreign direct investment in the United Kingdom. I know that my noble friend Lord Butterworth has indicated clearly his concern about the level of investment. Up to the end of 1987, only 3.5 per cent. of our stock of foreign direct investment had come from Japan, compared with 50 per cent. from the United States. We would welcome more.

The sub-committee has recommended that more should be done to ensure that Japanese companies site high-technology and research and development operations within the Community. It has also advocated the imposition by the Community of minimum local content requirements for inward investment. The Government agree wholeheartedly about the importance of attracting high-tech and R&D projects—the benefits of technology transfer can be considerable. We particularly encourage this type of investment. But we are firmly opposed to the idea that local content requirements should be made a condition of inward investment. Such an arrangement would be incompatible with the GATT, as I think my noble friend Lady Elles would agree, which, greatly to our advantage, prohibits this kind of discrimination.

It would also be contrary to the Government's objective of encouraging freer flows of international investment from which we benefit as both a major exporter and importer of investment. Moreover to impose restrictions on inward investment would be inconsistent with the objective, alike of the Community and the United Kingdom, of securing a more liberal investment regime worldwide. We see this as an important corollary to the open-world trading system to which all GATT signatories are already committed.

Nevertheless, while the Government give a warm welcome to all inward investment from Japan, we naturally wish to maximise the benefits to the economy. In a number of cases inward investors have recognised this and have volunteered to source at least a substantial percentage of their components from within the Community. Such undertakings are welcome. They are not legally enforceable. However, for any product to enjoy the benefits of Community origin, the basic rule is that "the last substantial manufacturing process" must have been carried out in the Community. This means that inward investors already have a strong incentive to carry out a significant local manufacturing process.

So far as concerns trade measures, the sub-committee has recommended that in certain circumstances protection for threatened or infant industries is appropriate, and that the Community should seek to pursue remedies in GATT. The Government welcome the emphasis which the sub-committee has placed upon the need for trade policy measures to be consistent with the GATT. It also takes the view that any resort to protective measures under the GATT must be fully justified in economic terms, including the consumer interest to which my noble friend Lady Elles drew our attention.

The report also drew attention to the importance of fostering the global competitiveness of our economy. The evidence taken by the committee included a variety of opinions about the role of so-called "industrial policy" in Japan.

In learning from abroad the Japanese have had the wisdom to look at the basic principles and, in applying those principles, to do so through their own institutions and in the light of local circumstances. Perhaps nothing is so futile as transplanting the empty shell of a policy or an institution rather than the underlying principle which gave it vigour in its original home.

The sub-committee's report clearly indentifies the basic ingredients of Japanese success as diligence, a willingness and capacity to learn and to improve, close attention to quality and the desires of the consumer, and, I would emphasise, a strong competitive spirit and will to succeed. The key question posed by that success is not which "magic formula" we can adopt but which policies, adapted to our own circumstances, will foster those same basic qualities.

The Government agree that commercial success depends on the ability to identify and to satisfy consumer tastes. In the UK, at any rate, this has to be the responsibility of individual firms: they know their products and their markets and their survival and growth depends on getting these decisions right. The involvement of government in a more collective approach to commercial decisions has been tried in the past. I understand from the remarks made by the noble Lord, Lord Bruce of Donington, that he would like to see a return to that situation. However, it was not a success; it merely demonstrated the limitations of Ministers and civil servants as commercial decision-takers and the dangers of fudged responsibility.

The approach of this Government has been to leave to individual businessmen the specific decisions which they are uniquely qualified to take and to concentrate on fostering an environment in which businesses can most easily prosper. The Government are happy for the merits of their approach, and of the corporatist alternative, to be judged on the facts. Manufacturing output and investment now stand at record levels; growth in manufacturing productivity was higher in the UK than in any other major industrial country in the 1980s and profitability in manufacturing is now at its highest level for 20 years.

The Japanese themselves are in no doubt about the business climate in Britain. We regularly win a higher proportion of Japanese investment in the Community than any other member state.

We are grateful to the sub-committee for its excellent report and to noble Lords for their contributions to the debate today. As the committee's report acknowledges: There is no secret to Japanese success". However, I felt that the noble Lord, Lord Benson, wanted to unlock that secret. There are lessons for the Community, and not least for Community companies as well as for Community governments. I would suggest that the first is the benefit which Japanese companies have derived from taking the long-term view. The second lesson is that many Japanese companies are conscious of a need to plan their development in terms of the global market. They also take care to study and learn from the best of international practice.

The third lesson is that the best Japanese companies are driven by the desire to excel at a global level and to out-compete both their Japanese and international competitors on the basis of thorough preparation and assiduous research. Finally, it must be noted that their efforts are directed towards achieving the highest quality and the greatest level of consumer satisfaction.

The best of our companies already apply those principles successfully. The Government are determined to continue to foster an environment in which even more of them will be encouraged to do so in the future.

7.27 p.m.

Lord Kearton

My Lords, in winding up the debate I should like first to thank all noble Lords who took part. I think it has been a most interesting debate. All of the speeches were profound. They were illuminated by great wisdom and in many cases by great personal experience of Japanese as well as of world affairs. I should also like to thank the Minister for his very comprehensive reply to the points made in the report. Perhaps I may also respectfully congratulate him on the way in which he delivered his speech.

On the other hand, I did not feel that the Minister's speech dealt with some of the overarching worries which came through from so many of your Lordships' contributions. I do not always share the views of the noble Lord, Lord Bruce of Donington, but one senses that the Government look into a mirror of their own devising and are absolutely dazzled by their reflection.

I thought that the Minister dismissed the speech of the noble Lord, Lord Benson, as "interesting". In my view it was far more than interesting; it was a warning to this country in the most sombre terms imaginable. When I was drafting the notes for my speech I thought of concluding by saying that the situation was sombre but I crossed that word out and put "challenging" in its place. However, after hearing the speeches from all sides of the House today I wish that I had stuck to "sombre".

Moreover, much as I respect the way in which the noble Viscount replied to the debate, and although his remarks were very constructive as regards some of the detailed points set out in the report, I do not think for one moment that either he or the Government have fully taken on board the fact that in the next century Britain may be a major has-been. Unless there is a vital change in the way we run our affairs, that will be an inevitable outcome.

In asking the House to take note of this report I can only say that I am extremely pleased and gratified by the attention which it has received. Finally, I should like to express my thanks to everyone concerned.

On Question, Motion agreed to.