[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                           ASIA TRADE ISSUES

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 24, 1998

                               __________

                             Serial 105-67

                               __________

                     U.S. GOVERNMENT PRINTING OFFICE
55-502 cc                    WASHINGTON : 1999



         Printed for the use of the Committee on Ways and Means




                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Trade

                  PHILIP M. CRANE, Illinois, Chairman

BILL THOMAS, California              ROBERT T. MATSUI, California
E. CLAY SHAW, Jr., Florida           CHARLES B. RANGEL, New York
AMO HOUGHTON, New York               RICHARD E. NEAL, Massachusetts
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
WALLY HERGER, California
JIM NUSSLE, Iowa


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of January 30, 1998, announcing the hearing.............     2

                               WITNESSES

Office of the U.S. Trade Representative, Hon. Charlene Barshefsky     7
U.S. Department of State, Hon. Stuart E. Eizenstat, Under 
  Secretary for Economic, Business, and Agricultural Affairs.....    51
U.S. Department of Treasury, Hon. David A. Lipton, Under 
  Secretary for International Affairs............................    61

                                 ______

American Electronics Association, William J. Hudson..............    76
American Farm Bureau Association, David Waide....................    86
American Forest & Paper Association, Hon. W. Henson Moore........    73
AMP, Inc., William J. Hudson.....................................    76
Bergsten, C. Fred, Institute for International Economics.........    42
Chemical Manufacturers Association, Frederick L. Webber..........    82
Gadbaw, R. Michael, US-ASEAN Business Council, and National 
  Foreign Trade Council..........................................    36
Grocery Manufacturers of America, Hon. Mary C. Sophos............    91
Hudson, William J., AMP, Inc., American Electronics Association, 
  National Association of Manufacturers, and U.S. Pacific Basin 
  Economic Council...............................................    76
Institute for International Economics, C. Fred Bergsten..........    42
Mississippi Farm Bureau Federation, David Waide..................    86
Moore, Hon. W. Henson, American Forest & Paper Association.......    73
National Association of Manufacturers, William J. Hudson.........    76
National Foreign Trade Council, R. Michael Gadbaw................    36
Sweeney, John P., Heritage Foundation............................    28
Sophos, Hon. Mary C., Grocery Manufacturers of America...........    91
US-ASEAN Business Council, R. Michael Gadbaw.....................    36
U.S. Pacific Basin Economic Council, William J. Hudson...........    76
Waide, David, American Farm Bureau Association, and Mississippi 
  Farm Bureau Federation.........................................    86
Webber, Frederick L., Chemical Manufacturers Association.........    82

                       SUBMISSIONS FOR THE RECORD

Boeing Co., Arlington, VA, Phil M. Condit, statement.............   101
IPSCO Steel Inc., Muscatine, IA, Joseph D. Russo, statement......   105
National Cattlemen's Beef Association, Mark Armentrout, statement   107
Pharmaceutical Research and Manufacturers of America, Shannon 
  S.S. Herzfeld, statement.......................................   109
Semiconductor Equipment and Materials International, statement 
  and attachments................................................   113
Semiconductor Industry Association,, George Scalise, statement...   121


                           ASIA TRADE ISSUES

                              ----------                              


                       TUESDAY, FEBRUARY 24, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                     Subcommittee on Trade,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 11 a.m., in 
room 1100, Longworth House Office Building, Hon. Philip Crane 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

January 30, 1998

No. TR-21

                       Crane Announces Hearing on

                           Asia Trade Issues

     Congressman Philip M. Crane (R-IL), Chairman, Subcommittee on 
Trade of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on trade issues with Asia, including 
the progress of the Asia-Pacific Economic Cooperation forum as well as 
the effects of the Asian financial crisis on U.S. trade. The hearing 
will take place on Tuesday, February 24, 1998, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 11:00 
a.m.
      
    Oral testimony at this hearing will be from both invited and public 
witnesses. In addition, any individual or organization not scheduled 
for an oral appearance may submit a written statement for consideration 
by the Committee or for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Asian Pacific Rim has been our second fastest growing export 
market in recent years. U.S. exports to the area were over $200 billion 
in 1996, representing nearly one-third of U.S. exports, and imports 
totaled over $312 billion.
      
    The Asia-Pacific Economic Cooperation (APEC) forum, an association 
of 18 economies bordering the Pacific Ocean working cooperatively to 
reduce barriers to trade and investment, has declared its intention to 
establish free trade and investment in the region by the year 2010 for 
industrialized members and 2020 for others. In November 1997, APEC 
members held a Joint Ministerial Meeting and Leaders Summit in 
Vancouver, at which they identified 15 areas of trade for further 
liberalization. Members are to finalize plans in the first half of 1998 
to cut tariffs and other barriers to trade, with implementation of 
market-opening initiatives to begin in 1999, in the following 9 
sectors: environmental goods and services, medical equipment, 
chemicals, energy, forest products, fish and fish products, toys, gems 
and jewelry, as well as a Mutual Recognition Agreement for 
telecommunications products and systems among APEC members. APEC 
members will continue to develop proposals for review by Ministers in 
June, for possible action by APEC Leaders next November, in the 
following 6 sectors: oilseeds and oilseeds products, food products, 
natural and synthetic rubber, fertilizers, automotive and civil 
aircraft.
      
    As 1997 ended, many of the economies of East Asia faced a 
significant financial crisis, manifested in plummeting currency values, 
declines in the stock markets of those countries, and bankruptcies. 
That crisis has continued into 1998. The International Monetary Fund 
has developed financial support packages for several of these countries 
containing a number of conditions, including measures to increase trade 
liberalization.
      
    Observers have noted that the crisis will have an impact on the 
U.S. economy and on U.S. businesses and workers. Although the effects 
of this crisis have not yet been reflected in the U.S. trade deficit, 
concerns have been raised that the deficit will increase as exports 
from Asia continue to increase and U.S. exports to Asia decline as a 
result of currency devaluations and slowdowns in the Asian economies. 
The continued crisis also raises concerns about unresolved trade and 
market access issues with these countries.
      
    In announcing the hearing, Chairman Crane stated: ``Free and open 
trade and investment policies have become an important pillar in the 
foundation underlying world peace, security, and economic stability. 
Asia continues to be a major market for U.S. goods, services, and 
investment. I have been greatly encouraged by the developments within 
APEC, which will increase our access to those markets and knock down 
trade barriers. We must view the Asian financial crisis as an 
opportunity to continue to work towards trade liberalization in these 
markets, to make systemic changes that will open markets and increase 
transparency, and increase confidence through the power of free 
trade.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on recent developments in trade with Asia, 
including: (1) the results of the APEC summit held in Vancouver in 
November; (2) the impact of the Asian financial crisis on trade with 
the United States, on the U.S. economy overall, and on particular 
sectors; (3) U.S. efforts to ensure that Asian countries pursue further 
liberalization of trade and investment barriers; (4) the extent to 
which market access issues for U.S. goods, services, and investment are 
being addressed during the crisis; (5) the likelihood that the 
countries undergoing the crisis will undertake the necessary systemic 
reforms and whether they seek to alleviate the situation by increasing 
exports to the United States; and (6) the impact of the crisis on other 
U.S. trading partners in the region.
      

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Traci Altman or Bradley Schreiber at (202) 225-1721 no later than the 
close of business, Monday, February 16, 1998. The telephone request 
should be followed by a formal written request to A.L. Singleton, Chief 
of Staff, Committee on Ways and Means, U.S. House of Representatives, 
1102 Longworth House Office Building, Washington, D.C. 20515. The staff 
of the Subcommittee on Trade will notify by telephone those scheduled 
to appear as soon as possible after the filing deadline. Any questions 
concerning a scheduled appearance should be directed to the 
Subcommittee on Trade staff at (202) 225-6649.
      
    In view of the limited time available to hear witnesses, the 
Subcommittee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing. All persons requesting to be heard, whether they are scheduled 
for oral testimony or not, will be notified as soon as possible after 
the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
      
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Subcommittee are required to submit 200 copies of their 
prepared statement and an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format, for review by Members prior to the 
hearing. Testimony should arrive at the Subcommittee on Trade office, 
room 1104 Longworth House Office Building, no later than 5:00 p.m., 
Friday, February 20. Failure to do so may result in the witness being 
denied the opportunity to testify in person.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address, and hearing date noted on a 
label, by the close of business, Tuesday, March 10, 1998, to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Trade office, room 1104 Longworth House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS or 
WordPerfect 5.1 format. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS __MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                


    Chairman Crane [presiding]. The Subcommittee will now come 
to order, and before we start with our first witness, Ms. 
Barshefsky, I would like to alert everyone to the fact that Mr. 
Matsui and I, unfortunately, owing to longstanding prior 
commitments, will be gone from roughly noon, sharp, until 1 
p.m. However, the Subcommittee meeting will continue and will 
be presided over by other Members of the Subcommittee, and so 
we apologize to those that we may miss during that hour.
    But we are pleased today to welcome to the Ways and Means 
Trade Subcommittee hearing on trade issues with Asia, as I 
indicated earlier, our distinguished friend and advocate of the 
advancement of U.S. trade interests. The purpose of this 
hearing is to examine the results of the Asia-Pacific Economic 
Cooperation, or APEC, summit in Vancouver last November. In 
addition, we'll examine the impact of the Asian financial 
crisis on trade with the United States, the economy overall, 
and particular sectors.
    The Asian financial crisis has proven that the fate of our 
companies and workers is closely liked to their Asian 
counterparts. This interdependence does not make us vulnerable 
but instead increases opportunities and maximizes efficiency 
for Americans. A solid U.S. trade policy in which we continue 
to seek the elimination of trade barriers to our goods and 
services is the solution to the crisis.
    The crisis is likely, at least in the short term, however, 
to increase our trade deficit. But, we should not be overly 
concerned because our economy is fundamentally strong and much 
of the deficit is generated not by an excess in U.S. 
consumption of imports, but by wise investment in growth 
opportunities abroad.
    I do worry that misplaced concern about the deficit will 
paralyze our trade policy and make protectionist legislation 
tempting. We must resist the urge to close our market at this 
delicate time. Shutting our doors through protectionism would 
set a bad example for Asia and for the rest of the world that 
closed trade is an acceptable policy in difficult economic 
times.
    Instead, we must pursue trade liberalizations abroad by 
bilateral action and by encouraging developments within APEC to 
increase our access to Asian markets. We should be on the 
lookout for increased Asian trade barriers. We should not 
tolerate policies that limit imports of our goods and services, 
and we should not permit Asia to increase United States-bound 
exports excessively to the detriment of our companies and 
workers.
    We must also encourage Japan to open its market to absorb 
some excess capacity from its neighbors. We must urge China to 
continue its structural reforms and strengthen its currency. 
And we must keep a careful eye on Hong Kong and Taiwan.
    In short, we have to do everything we can to get the Asian 
region back to health so that its consumers may continue to 
purchase our goods and services and create opportunities for 
our companies and workers. The Asian financial crisis is an 
opportunity to foster trade liberalization in these markets and 
make systematic changes that will open markets that will 
increase transparency and bolster confidence through the power 
of free trade.
    Free trade is not to blame for the crisis. It is the 
solution.
    [The opening statement follows:]

Opening Statement of Hon. Phil Crane, a Representative in Congress from 
the State of Illinois

    Good morning, and welcome to the Ways and Means Trade 
Subcommittee hearing on trade issues with Asia. The purpose of 
this hearing is to examine the results of the Asia-Pacific 
Economic Cooperation (or ``APEC'') summit in Vancouver last 
November. In addition, we will examine the impact of the Asian 
financial crisis on trade with the United States, the economy 
overall, and particular sectors.
    The Asia financial crisis has proven that the fate of our 
companies and workers is closely linked to their Asian 
counterparts. This interdependence does not make us vulnerable, 
but instead increases opportunities and maximizes efficiencies 
for Americans. A solid U.S. trade policy in which we continue 
to seek the elimination of trade barriers to our goods and 
services is the solution to the crisis.
    The crisis is likely, at least in the short term, to 
increase our trade deficit. However, we should not be overly 
concerned because our economy is fundamentally strong, and much 
of the deficit is generated, not by an excess in U.S. 
consumption of imports, but by wise investment in growth 
opportunities abroad. I do worry that misplaced concern about 
the deficit will paralyze our trade policy and make 
protectionist legislation tempting. We must resist the urge to 
close our market at this delicate time. Shutting our doors 
through protection would set a bad example for Asia, and for 
the rest of the world, that closed trade is an acceptable 
policy in difficult economic times.
    Instead, we must pursue trade liberalization abroad by 
bilateral action and by encouraging developments within APEC to 
increase our access to Asian markets. We should be on the 
lookout for increased Asian trade barriers. We should not 
tolerate policies that limit imports of our goods and services, 
and we should not permit Asia to increase U.S.-bound exports 
excessively to the detriment of our companies and workers.
    We must also encourage Japan to open its markets to absorb 
some excess capacity from its neighbors. We must urge China to 
continue its structural reforms and strengthen its currency, 
and we must keep a careful eye on Hong Kong and Taiwan.
    In short, we have to do everything we can to get the Asian 
region back to health so that its consumers may continue to 
purchase our goods and services and create opportunities for 
our companies and workers. The Asian financial crisis is an 
opportunity to foster trade liberalization in these markets, 
make systemic changes that will open markets and increase 
transparency, and bolster confidence through the power of free 
trade. Free trade is not to blame for the crisis. It is the 
solution.
    I now recognize our distinguished Ranking Member, Mr. 
Matsui, for any statement he would like to make.
      

                                


    Chairman Crane. I now recognize our distinguished Ranking 
Member, Mr. Matsui, for any statement he would like to make.
    Mr. Matsui. Thank you very much, Mr. Chairman, and thank 
you for holding these hearings today. I think they are 
extremely important and extremely timely. I have a statement 
that I would like to submit for the record for time reasons, if 
I may.
    Chairman Crane. Without objection, so ordered.
    Mr. Matsui. Thank you. I would like to reiterate what you 
just said in terms of the issue the potential trade deficit 
that may occur or increase as a result of the financial crisis 
in Asia. I really hope, as you have stated, that we don't 
preoccupy ourselves with that and become immobilized or perhaps 
paralyzed with a focus on this trade deficit issue because 
certainly it's important, it's a factor in terms of the U.S. 
economy, our strength. On the other hand, it will, in fact, 
keep interest rates down, inflation down and, to some extent, 
it may even point out the strengths of the U.S. economy. As all 
of us know, the trade deficit in and of itself is not 
necessarily the only relevant factor in the entire discussion 
of one's economy and one's relationship with their trading 
partners--investment patterns, the budget deficit, savings 
rates throughout the world, and particularly in the United 
States, all these are critical elements.
    I appreciate the fact that the Chair has indicated that we 
must not preoccupy ourselves with the trade deficit in and of 
itself.
    Thank you, Mr. Chairman.
    [The opening statement follows:]

Opening Statement of Hon. Robert T. Matsui, a Representative in 
Congress from the State of California

    Mr. Chairman, it is important and timely that the 
Subcommittee is holding this hearing today on United States 
trade relations with Asia. Nearly one-third of our total trade 
is with East Asian countries, which are our second fastest-
growing export market. The United States and Asian economies 
are inextricably linked. Therefore, the impact of the Asian 
financial crisis on our trade and overall economy, the impact 
on other economies, and the nature and timing of our response 
to that crisis are of crucial importance for our businesses and 
workers.
    I Support the administration's request for congressional 
approval of $18 billion in additional funding for the IMF as 
soon as possible in order to promote economic stability in Asia 
and to prevent the effects of the crisis from spreading 
globally. But it is essential as a condition for IMF support 
that the Asian economies undertake the fundamental structural 
reforms necessary to ensure that the current problem does not 
become a recurring one, including measures to liberalize their 
trade regimes. It is also important that the sector market-
opening initiatives launched at the Vancouver Summit of the 
APEC last November proceed as planned toward the goal of 
eventual free trade and investment in the region.
    I welcome Ambassador Barshefsky back to the Subcommittee 
and look forward to the testimony of all the witnesses 
regarding the impact of the Asian crisis on our trade and 
economy and the prospects for future trade liberalization in 
the region.
      

                                


    Chairman Crane. Thank you, Mr. Matsui. Today we'll hear 
from a number of distinguished witnesses, and in the interests 
of time, I ask that you try to keep your oral testimony in the 
neighborhood of 5 minutes, and we'll include all the longer 
written statements in the record. And our first witness is our 
dear friend, and distinguished Ambassador, Charlene Barshefsky, 
the U.S. Trade Representative. Because of scheduling problems, 
she'll be followed by Mr. Bergsten and Mr. Sweeney. Under 
Secretaries Eizenstat and Lipton will follow at roughly 1 
o'clock. And now we yield the floor to our distinguished 
Ambassador.

       STATEMENT OF HON. CHARLENE BARSHEFSKY, U.S. TRADE 
                         REPRESENTATIVE

    Ms. Barshefsky. Thank you very much, Mr. Chairman, Mr. 
Matsui, Mr. McDermott, Ms. Dunn. I'm pleased to appear before 
you to discuss the implications of the financial situation in 
Asia for United States trade policy, and the importance of 
rapid congressional action on the administration's request for 
the IMF quota subscription and the augmented backup facility, 
the New Arrangements to Borrow.
    By any measure, the Asian economy has experienced a 
dramatic reversal of fortune these last 6 months. Countries 
which had high rates of growth over the past decade, 7 to 10 
percent, now face minimal or even negative growth in 1998 and 
perhaps beyond. The financial crisis has also resulted in a 
dramatic currency depreciation.
    Before turning to a discussion of the crisis, let me make a 
few preliminary observations. First of all, as the Chairman has 
pointed out, the U.S. economy is as strong as it has been in 
almost 30 years. Our ability to weather this storm in Asia is, 
therefore, better than at any time.
    Second, U.S. prosperity is no small part the result of the 
export opportunities we've created in Asia and around the 
globe, including through the negotiation of some 245 trade 
agreements since 1993. Today, exports support an estimated 12.1 
million higher paying American jobs. Our economic interests at 
home demand that we continue to open foreign markets and lead 
in the global economy.
    The causes of the Asian financial crisis are, of course, 
complex and multifaceted. But in each country and across the 
region, we find a common web: inadequate supervision of 
financial institutions; speculative real estate and equity 
booms; excessively close times between governments, banks, and 
corporations.
    These relationships and, in some countries, a deep-seated 
resistance to competition, including open trade and investment, 
resulted in a misallocation of capital. Many investments that 
led to insolvency would never have been made under more 
competitive conditions. Investments flowed into the region as 
if on autopilot, quadrupling in less than a decade to expand 
capacity well in excess of current or projected global demands 
with no basis in market reality. You then have a fundamental 
mismatch between short-term bank funding fueled by foreign 
investments, and long-term lending transactions for projects of 
dubious merit, a phenomenon that Federal Chairman Alan 
Greenspan called ``a pattern of conspicuous construction.'' 
This broad combination of factors proved combustible.
    In response to the crisis, the IMF moved quickly to 
stabilize the economies and create the conditions for 
stabilized currencies in the affected countries. While these 
measures were taken to restore financial stability and an early 
return to sustainable growth, a stable Asia is also the most 
important policy objective we can have.
    The region is a principle United States customer supporting 
millions of United States jobs, about 28 percent of our exports 
went to Asia last year. We cannot sell to Asia if Asia cannot 
buy. The IMF is, therefore, critical in trade terms for this 
most basic and fundamental reason, and that is to stabilize the 
Asian economies and to create the conditions for stabilized 
currencies. Not doing so only further undermines our export 
opportunities and a return to sustainable economic growth in 
Asia. Not doing so also puts additional pressure on our 
domestic industries that must compete with cheaper imports. But 
beyond this, structural reform must be put in place to build a 
longer term foundation for economic stability in Asia.
    The stabilization program for the IMF reflects this goal 
and includes measures to strengthen financial sectors, 
rationalize business-government linkages, improve transparency, 
open markets to foreign investors, and reduce trade barriers. 
If effectively implemented, these programs complement and 
reinforce longstanding U.S. trade policy goals.
    In this regard, let me review for you briefly the broader 
systemic trade policy issues that have arisen in Korea and 
Indonesia in particular, and the intersection of these issues 
with the IMF structural adjustment program.
    First let us examine Korea, which is one of our most 
important markets. In Korea, the relationship between 
governments, banks and commercial enterprises resulted in a 
misallocation of capital to economic ventures of questionable 
merit, nonetheless being central to industrial policy goals. 
This misallocation of capital fueled the expansion of the 
chaebols--the conglomerates--into lines of business of dubious 
value, in routine overproduction, and in excessive exports in 
such targeted industries as autos, steel, semiconductors, and 
ships. This misallocation exacerbated, in turn, market excess 
problems in Korea, including import clearance and certification 
hurdles, import licensing procedures, anticompetitive 
practices, and other barriers to market access.
    The Korean stabilization package negotiated by the IMF 
should help to open and expand competition in the Korean 
economy. Indeed, Korea is moving forward strongly and 
decisively to implement the IMF Program. It still faces many 
challenges but the incoming President, Prime Minister Kim Dae 
Jung, has demonstrated a strong commitment to market opening 
and economic restructuring that are at the heart of the reform 
program.
    The IMF reforms will put a stop to government-directed 
lending for industrial policy goals, will ease restrictions on 
foreign investment, and will simplify regulatory requirements 
to allow greater competition from imported goods. Other more 
specific IMF reforms will reinforce and expand upon Korea's 
commitments in the WTO and the OECD, including the elimination 
of trade subsidies and preferential tax treatment, opening 
further the financial services sector, and liberalizing rules 
on import licensing and certification--all longstanding U.S. 
trade policy concerns.
    Let me turn for a moment to Indonesia. As in Korea, the IMF 
stabilization program, if faithfully implemented, should move 
the country in the direction of more open markets, 
transparency, and increased competition. Additionally, the 
structural focus of the package that the IMF has put together 
goes to the heart of some of the most vexing trade problems. 
Key elements of that program include the immediate elimination 
of special tax privileges to the national car project; the 
removal of foreign investment restrictions on wholesale and 
retail trade; the reduction of custom duties and border 
nontariff measures on imports and exports, including in the 
agricultural sector; the elimination of commodity import and 
export monopolies for sugar, wheat, and other commodities; the 
removal of certain internal marketing arrangements and export 
quotas. These commitments address practices that have long been 
the subject of the administration's bilateral trade policy.
    In the short term, as you've pointed out, Mr. Chairman, and 
as Mr. Matsui pointed out, the forces unleashed by the 
withdrawal of capital from the Asian market reflected in part 
from depreciating currencies and a slowdown in economic 
activity in the region, will, of necessity, result in increased 
exports from the region and import contraction in Asia. Because 
the United States today is the strongest economy in the world, 
and the most open, we can expect a short-term increase in 
imports from the region, and our exports will decline. The 
expected short-term deterioration in the trade balance must 
not, however politically appealing, open the way to 
protectionism or isolationism. To go down this path would 
immediately undermine our primary goal which is to stabilize 
the immediate crisis and minimize its negative effects on the 
U.S. economy. We would also jeopardize the real possibility of 
longer term structural reforms of these economies. We will keep 
our markets open, but we must also see other countries respond 
by opening their markets and stimulating domestic demand, and 
in this regard, Japan, as the second largest economy in the 
world, has an especially crucial role to play.
    We see the need for action by Japan in three areas. First, 
we strongly agree with the view of the IMF that fiscal stimulus 
is needed to support Japan's economy and make it a potential 
source of confidence for the region. Second, it is crucial for 
Japan to act clearly and decisively to strengthen its financial 
system with the infusion of public money. Finally, it is 
equally important that Japan deregulate financial and other 
sectors to open up the Japanese market.
    The United States cannot be the only engine of global 
growth. The United States cannot be the sole buyer of goods to 
absorb the tremendous production capability of Asia. Japan must 
act in the interest of the region and the global economy.
    This administration has spent the past 5 years, and this 
Subcommittee has spent the past 5 years and many years before 
that, focusing considerable attention on the Asian markets, 
particularly the substantial barriers to market access, the 
lack of procompetitive mechanisms, the need for comprehensive 
deregulation, and greater transparency. Systemic reforms of 
these economies through implementation of the IMF structural 
measures will only intensify the benefits of an already 
aggressive trade policy aimed at opening these markets.
    I outline in some detail in my testimony the market opening 
measures that the administration with the Subcommittee have 
taken with respect to Japan, China, Korea, the other Asian 
economies, bilaterally, as well as in APEC and the WTO. And I 
also outline in my testimony the enforcement efforts we have 
undertaken with respect to the agreements we've negotiated--
some 75 enforcement actions since 1993.
    But let me turn, instead, for this last minute, to U.S. 
monitoring of the IMF packages themselves. Monitoring the 
implementation of the commitments made to the IMF is central to 
ensuring a reformed Asia. Only with full and faithful 
implementation will the causes of the immediate crisis be 
addressed and long-term stability restored. This monitoring 
will occur in several contexts, including through the IMF, the 
administration, U.S. industry, and the WTO. Let me take each in 
turn.
    First, the IMF monitors and ensures implementation of the 
conditions in its stabilization packages through periodic 
reviews. A failure to adhere to the commitments may result in 
the withholding of disbursement of further funds. Even after 
full disbursement, evidence suggests very little backsliding on 
IMF commitments, and that's because countries don't want to 
jeopardize or impair their relationship with the IMF. Market 
pressures also effectively avoid a retreat from the commitments 
made because any such retreat could again erode investor 
confidence.
    Second, the administration is coordinating its monitoring 
efforts. Specifically, USTR and Commerce have units charged 
with monitoring and implementation to ensure compliance with 
agreements made. It is through these units that we are actively 
monitoring compliance with the IMF trade-related commitments. 
The State and Treasury Departments are also actively involved. 
Through the Treasury representative to the international 
financial institutions, the administration will provide the 
information it collects on recipient country's implementation. 
We will be particularly sensitive to ensure that the credit the 
financial institutions provide to these countries is not being 
used to provide export incentives or subsidies, particularly 
those that are WTO inconsistent. Additionally, when the 
commitments made by a recipient country overlap with 
commitments it makes to the WTO or the OECD or in our trade 
agreements, we will use the means available in these 
traditional fora for ensuring implementation. The 
administration's continued pursuit of the WTO case concerning 
Indonesia's national car project is illustrative, as is our 
pending action against Korea Autos.
    Third, we're working closely with the U.S. business 
community, both through our formal advisory boards and through 
the Commerce Department, to obtain the benefit of their 
experiences in the relevant countries.
    And, last, the WTO has substantial existing mechanisms to 
compliment and reinforce IMF and administration efforts. I will 
be meeting with the director general of the WTO next week on 
this very issue. This comprehensive monitoring effort will help 
to ensure that the commitments made are fully and faithfully 
implemented.
    Let me conclude by saying that the administration will 
continue to set an aggressive agenda for U.S. engagement in 
Asia through the twofold strategy of stabilization and broad 
structural and market-opening reforms. Financial stabilization 
is an inseparable objective from deregulation, transparency, 
and competition. IMF replenishment, broad trade negotiating 
authority for the President, and an insistence that Japan also 
undertake fundamental economic reform, stimulate domestic 
demand and open its market, remain our highest priority. In 
both the long run and in the short run, our approach recognizes 
that a strong global economy is fundamentally in the U.S. 
domestic interest.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Charlene Barshefsky, U.S. Trade Representative

    Thank you, Mr. Chairman, for this opportunity to discuss 
the implications of the financial situation in Asia for U.S. 
trade policy and the importance of rapid Congressional action 
on the Administration requests for a commitment for our IMF 
quota subscription and an augmented back-up facility, the New 
Arrangements to Borrow (NAB).
    The starting point for a discussion about trade with Asia 
is necessarily very different than it would have been just six 
months ago. Today, we begin by asking how economies that have 
seen impressive economic growth for three decades could 
experience such economic difficulties so quickly? Is this the 
end of the Asian miracle? And, what does this mean for the 
United States?
    By any measure the Asian economies have experienced a 
dramatic reversal of fortune. Countries which had high rates of 
growth over the past decade--7 to 10 percent annual growth in 
many cases--now face minimal or even negative growth in 1998, 
and perhaps beyond. The financial crisis has also resulted in a 
dramatic depreciation in the value of the currencies of many of 
these countries. Before turning to a discussion of the crisis, 
let me make a few preliminary observations.
    First, the U.S. economy is strong--as strong as it has been 
in almost 30 years. Our ability to weather the storm in Asia is 
therefore better than at any time. U.S. employment is up 14.7 
million jobs since the President took office; 3.3 million jobs 
in just the last twelve months. Importantly, interest rates 
have come down so significantly that American homeowners are 
re-financing their homes in record numbers, realizing 
significant purchasing power which otherwise would have been 
eaten up by mortgage payments. Real industrial production is up 
28% since 1992, and 7.0% in just the last twelve months. 
Inflation is of little concern. Economic growth in the U.S., 
which has been remarkably robust, will continue in 1998, along 
with continued job creation.
    Second, U.S. prosperity is in no small part the result of 
the export opportunities that we have created in Asia and 
around the globe, including those gained through the 
negotiation of some 245 trade agreements since 1993. Today, 
exports support an estimated 12.1 million American jobs. As 
President Clinton has said, the only way we can sustain our 
standard of living at home--as four percent of the world's 
population--is to sell our goods and services to those ninety-
six percent of the consumers beyond our borders. Exports not 
only grow this economy, but shift the locus of job creation to 
higher wage jobs--employment supported by goods exports pay 13-
16% higher than the U.S. national average wage.
    Even in a period of sustained prosperity, however,--and to 
date, minimal impact from the Asian financial crisis--we cannot 
isolate ourselves from the global economy. In 1970, trade as 
measured in imports and exports had a value of about 13% of 
U.S. GDP. Today the value of our trade has reached the 
equivalent of more than 30% of our economic activity. Our 
economic interests demand that we continue to open foreign 
markets and lead in the global economy.

                       The Asia Financial Crisis

    As Treasury Secretary Rubin and others have noted, the 
causes of the Asian financial crisis are complex and multi-
faceted. However, in each country and across the region, we 
find a common web--inadequate supervision of Asian financial 
institutions, speculative real estate and equity booms, 
excessively close ties between governments, banks and 
corporations. These relationships--and in some countries--a 
deep-seated resistance to competition, including open trade and 
investment practices, resulted in a misallocation of capital. 
Many investments that led to insolvency would never have been 
made under more competitive conditions. Investment flowed in as 
if on auto pilot, quadrupling in less than a decade, to expand 
capacity well in excess of current or projected global demand 
with no basis in market realities. The result was a fundamental 
mismatch between short term bank funding (fueled by foreign 
investment) and long term lending transactions for projects of 
dubious merit--a phenomenon Fed Chairman Alan Greenspan called 
a pattern of ``conspicuous construction.'' This broad 
combination of factors proved combustible, as Secretary Rubin 
has said, and the consequences have played out in on-going 
front page news.
    In response to the crisis, the IMF moved quickly to 
stabilize the economies and create the conditions for 
stabilized currencies in the affected countries. While these 
measures were taken to restore financial stability and promote 
an early return to sustainable economic growth, a stable Asia 
is also the single most important trade policy objective. The 
region is a principal U.S. customer, supporting millions of 
U.S. jobs. In 1997, Asia accounted for 28% of total U.S. 
exports. We cannot sell to Asia if Asians cannot buy. The IMF 
is, therefore, critical in trade terms for this most basic and 
fundamental reason. The immediate objective must be to 
stabilize Asian economies and create the conditions for 
stabilized currencies. Not doing so only further undermines our 
export opportunities and a return to sustainable Asian economic 
growth. Not doing so also puts additional pressure on our 
domestic industries that must compete with cheaper imports.
    But, beyond this immediate and most critical objective, 
structural reform must be put in place to build a longer-term 
foundation for economic stability in Asia. The stabilization 
programs that the IMF is financing in Asia reflect this goal; 
they are more heavily focused on structural reforms than on 
adjustment to macroeconomic policies. Such reforms include 
measures to strengthen financial sectors, business-government 
linkages, improve transparency and open markets to foreign 
investment and reduce trade barriers.
    The IMF concluded that microeconomic barriers to 
competition helped to worsen the financial problems. The seeds 
of the Asian financial crisis find their parallel in the trade 
realm. Structural reform leading to systemic change, including 
greater competition engendered by market opening measures, 
transparency, and economic deregulation all intersect with the 
broader goals of market stabilization.
    It is thus not surprising that many of the structural 
reform components of the IMF packages will contribute directly 
to improvements in the trade regimes of these countries. If 
effectively implemented, these programs will complement and 
reinforce our trade policy goals. For all of these reasons, it 
is imperative that the IMF funding requests now before the 
Congress be approved as soon as possible.
    Let me review for you briefly the broader systemic trade 
policy issues previously identified with respect to Korea and 
Indonesia and the intersection of these issues with IMF 
structural adjustment. I intentionally omit Thailand because, 
unlike Korea and Indonesia, misdirected trade policy and 
industrial promotion were not seen as among the primary causes 
of Thailand's economic crisis. Nonetheless, Thailand has made 
commitments to restructure public enterprises and accelerate 
privatization of certain key sectors--including energy, 
transportation, utilities and communications--which will 
enhance market-driven competition and deregulation. We expect 
these structural reforms to create new business opportunities 
for U.S. firms.
Korea

    Korea is one of our most important markets: it is the fifth 
largest purchaser of U.S. products and the fourth largest 
purchaser of U.S. agricultural commodities. That said, Korea is 
one of the toughest places in the world to do business.
    In Korea, the relationship between government, banks, and 
commercial enterprises resulted in a misallocation of capital 
to economic ventures of questionable merit, nonetheless deemed 
central to industrial policy goals. Under the Korean system, 
for example, banks provided preferential financing to 
industries judged to be of ``strategic'' importance regardless 
of internal or world market conditions.
    Such misallocation of capital fueled the expansion of the 
chaebols into lines of business of dubious value, and into 
overproduction and excessive exporting of targeted industrial 
products, including autos, steel, semiconductors, and ships. 
This misallocation, in turn, exacerbated the market access 
problems in Korea and impeded U.S. companies' ability to sell 
products in third country markets.
    Policy-driven, rather than market-driven economic activity, 
also meant that U.S. industry encountered many specific 
structural barriers to trade, investment, and competition in 
Korea. For example, Korea maintained restrictions on foreign 
ownership and operation, and had a list of market access 
impediments that included:
     import clearance and certification hurdles;
     restrictive import licensing procedures, 
particularly for agricultural products;
     anti-competitive practices, such as Korean 
industry associations controlling the entry and distribution of 
imports; and
     other barriers to market access, including in the 
financial services sector.
    The Korea stabilization package, negotiated by the IMF in 
December 1997, should help to open and expand competition in 
Korea by creating a more market-driven economy. Korea is moving 
forward strongly and decisively to implement the IMF program. 
Korea still faces many challenges but, if it continues on the 
path to reform there will be important benefits not only for 
Korea but also for the United States. The incoming President 
Kim Dae Jung has demonstrated a strong commitment to market 
opening and economic restructuring that are at the heart of the 
economic reform program. We look forward to working with him in 
this effort.
    The reforms will put a stop to government-directed lending 
for industrial policy goals, will ease restrictions on foreign 
investment, and will simplify licensing and certification 
requirements to allow greater competition from imported goods.
    The IMF-directed restructuring of the Korean financial and 
corporate systems to make them more sound, transparent, and 
efficient already is addressing the systemic problem of 
government-prompted loans to non-economic uses, including those 
to the chaebols.
    The financial sector reforms, coupled with tighter rules on 
corporate governance and transparency, will force banks to 
assess the creditworthiness of potential borrowers and their 
commercial viability. The banks are now under pressure to 
increase their capital asset ratios and thus, are unlikely to 
be an easy source of new financing for already overextended 
conglomerates. This, in turn, should provide incentives to 
scale back business lines and to tailor capacity, production, 
and export decisions to market cues.
    Korea's agreement to liberalize foreign ownership rules 
should expose the Korean economy to more outside influence, 
thereby offsetting the Korean penchant for providing 
preferences to ``strategic'' domestic industries.
    Furthermore, more specific, structural reforms in Korea's 
IMF package will complement the U.S. trade agenda by 
reinforcing and expanding upon Korea's commitments in the WTO 
and in the OECD. Specifically, Korea has agreed to:
     accelerate implementation of its commitments to 
WTO members on the elimination of trade-related subsidies and 
its import diversification program;
     bind in the WTO, the commitments it made in the 
OECD on financial sector market access; and
     liberalize its rules on import licensing and 
certification, which could help alleviate entry and 
distribution barriers for agricultural commodities, food, 
distilled spirits, and industrial products including autos, 
pharmaceuticals, and cosmetics.
    In sum, the financial, corporate, and foreign investment 
conditions in Korea's IMF package, along with the specific 
trade-related commitments, should help to (1) improve market 
access in Korea, and (2) correct the overcapacity and 
aggressive exporting patterns of the Korean chaebols. Our 
companies will be better able to compete with their Korean 
competitors on a more level playing field.

Indonesia

    Indonesia is also an important U.S. trading partner and was 
an export destination for approximately $4.5 billion in U.S. 
goods exports in 1997. But in Indonesia, too, market access for 
U.S. goods and services is limited by a host of barriers that 
distort competition.
    U.S. trade policy concerns have centered on:
     Indonesia's ``interventionist'' automotive 
policies involving trade distorting subsidies and 
discriminatory tax and tariff benefits granted in exchange for 
meeting levels of local content;
     restrictions on internal distribution and retail 
marketing arrangements;
     excessive tariff levels on certain products;
     commodity import and marketing monopolies, 
domestic cartels, licensing and other non-tariff measures; and
     the national aircraft project.
    Like the Korean stabilization package, the IMF 
stabilization program for Indonesia contemplates far-reaching 
changes to Indonesian policies and practices which, if 
faithfully implemented, should move the country in the 
direction of more open markets, transparency, and increased 
competition. Additionally, the package contains trade and 
investment provisions that go to the heart of some of the most 
vexing trade problems I just mentioned.
    Key elements of the IMF program include:
     the immediate elimination of special tax, customs 
or credit privileges granted to the ``National Car'' project;
     implementation, ahead of schedule, of the WTO 
panel ruling on the National Car project and elimination by 
2000 of tariff preferences tied to local content levels for 
auto producers;
     the immediate elimination of any budgetary and 
extra-budgetary support and credit privileges for the 
``strategic'' national aircraft project;
     the removal of foreign investment restrictions on 
wholesale and retail trade by March 1998;
     the reduction of customs duties and border non-
tariff measures on both imports and exports, including 
agricultural and food products;
     the elimination of local content requirements on 
dairy products;
     domestic market deregulation in the form of the 
elimination of commodity import and marketing monopolies for 
sugar, wheat, wheat flour, soybeans and garlic (leaving only 
rice so restricted);
     the removal of restrictive internal marketing 
arrangements for such products as cement, paper and plywood; 
and
     the removal of export quotas for cement, plywood, 
sawn timber, processed wood and the abolition of wood shipping 
cartels.
    These commitments address practices that have long been the 
subject of this Administration's bilateral trade policy as 
reflected in the Administration's National Trade Estimates 
Report on Foreign Trade Barriers, which has identified many of 
the barriers that are addressed in the IMF package. Most 
notable in this respect is the commitment by Indonesia to 
eliminate the tax, tariff and credit privileges provided to the 
national car project. We have challenged this very program in 
the WTO. Additionally, the IMF program seeks broad reform of 
Indonesian trade and investment policy, like the aircraft 
project, monopolies and domestic trade restrictive practices, 
that stifle competition by limiting access for foreign goods 
and services.

                       Impact on the Trade Agenda

    In the short term, the forces unleashed by the withdrawal 
of capital from the Asian markets, reflected in part in 
depreciating currencies and a slowdown in economic activity in 
the region, will of necessity, result in increased exports from 
the region and import contraction in Asia. Because the United 
States is today the strongest economy in the world, and the 
most open, we can expect a short-term increase in imports from 
the region and a decline in our exports. We will keep our 
markets open, but we need to see other countries respond by 
opening their markets and stimulating demand as well. In this 
regard, I will say more about Japan in a moment.
    The expected short-term deterioration in the trade balance 
must not, however politically tempting, open the way to 
protectionism or isolationism. To go down this path would 
immediately undermine our primary goal which is to stabilize 
the immediate crisis. We would also jeopardize the real 
possibility of longer-term structural reform of these markets.
    The U.S. has critical economic and national security 
interests in a stable and reformed Asia. The region is a 
principal U.S. customer, supporting millions of U.S. jobs. 
Beyond Asia, more than 40% of US exports go to emerging 
markets. Any further contagion effect of the crisis will only 
exacerbate the negative impact on our own domestic economic 
health. And, of course, our national security interests in Asia 
are very well understood. Political, social, or economic 
instability in Asia will affect prosperity and security around 
the world. For these reasons, our broad national interest and 
the interests of American workers, farmers and businesses 
dictate that we adequately capitalize the IMF and participate 
in the New Arrangements to Borrow (NAB). Support for the IMF 
also sends the important message that America will continue to 
lead in the global economy, a message that is particularly 
critical today.

                  Administration's Asian Trade Policy

    The Clinton Administration has spent the past five years 
focusing considerable attention on the Asian markets: the 
substantial barriers to market access for U.S. and foreign 
goods and services, the lack of pro-competitive mechanisms, and 
the need for comprehensive deregulation and greater 
transparency. Systemic reform of the Asian economies through 
the implementation of the IMF structural measures will 
intensify the benefits of an already aggressive trade policy 
and it is to that policy that I will now turn.
    The Administration has applied and will continue to 
exercise a full range of tools to achieve constructive market 
opening results in Asia through bilateral, regional, and 
multilateral means. Quite apart from but complementary to the 
IMF reform, new trade agreements and the enforcement of 
existing agreements play a part in a more stable and secure 
Asia. Let me briefly take each in turn:
    We have a large array of bilateral agreements in Asia aimed 
at the goals of deregulation, market access and transparency.
    Japan: We have negotiated 34 trade agreements with Japan 
under which we have achieved important and substantial market-
opening results. From 1993 to 1996 exports increased by 41% to 
Japan, reaching in excess of $67 billion. The growth rate of 
exports to Japan over this period exceeded the still strong 
growth rate of U.S. exports to the world by nearly one quarter. 
In 1997, however, exports to Japan declined by 3 percent, while 
our exports to the rest of the world grew by nearly 12 percent. 
We are naturally concerned about this drop off in our exports 
to Japan. The Japanese economy which enjoyed a single year's 
growth spurt of 4 percent in 1996, fell back to a bare 0.6 
percent increase in 1997 and, on current policies, is widely 
believed to be facing a growth rate well under one percent this 
year.
    Japan, the second largest economy in the world, has an 
especially crucial role to play. We see the need for action in 
three areas. First, we strongly agree with the view of the IMF 
that fiscal stimulus is needed to support Japan's economy and 
to make it a potential source of confidence for the region. 
Second, it is crucial for Japan to act clearly and decisively 
to strengthen its financial system with an infusion of public 
money. Finally, it is equally important for Japan to deregulate 
financial and other sectors to open up the Japanese economy.
    The U.S. cannot be the only engine of global growth or the 
sole buyer of goods to absorb the tremendous productive 
capacity of the Asian region.
    The Administration has consistently sought a range of 
market access and deregulation measures to open Japan's market 
and spur domestic demand in Japan, and we will continue to do 
so. We have an immediate deregulation agenda with Japan 
affecting critical areas of the Japanese economy--financial 
services, telecommunications, housing, medical equipment and 
pharmaceuticals--where we are aiming for decisive action on the 
part of the Japanese government in the first half of this year.
    China: U.S. trade policy has been geared to encourage China 
to establish the rule of law, open its economy to imports and 
investment, and reform its trading regime pursuant to the rules 
and obligations of the World Trade Organization. We have 
pursued a complementary policy that combines bilateral, 
regional (APEC) and multilateral trade initiatives. Embedded in 
our bilateral agreements--in particular a hallmark of the 
intellectual property rights agreements--are broader 
international norms to which China has committed: transparency 
of laws and procedures, access to administrative and judicial 
decision making, and curbs on the arbitrary exercise of 
administrative discretion. Each of our ongoing negotiations--in 
the context of the WTO and bilaterally, on services, market 
access and IPR--is also grounded in international norms and 
practices and in the necessity of adherence to a rules-based 
regime.
    Taiwan: Last week we reached a comprehensive market opening 
agreement with Taiwan which will dramatically open Taiwan's 
markets to U.S. agricultural products, services, and industrial 
goods. U.S. farmers will see new markets for pork, chicken, and 
other meat products that have never been open to any foreign 
imports. U.S. exporters of industrial products will achieve 
levels of market access comparable to those available in other 
developed economies. And, Taiwan will provide broad access for 
the full range of services, including financial and 
telecommunications services. Once all members of the WTO have 
completed their bilateral market access negotiations with 
Taiwan, multilateral negotiations will ensue to work out the 
full range of rules-related commitments Taiwan must make to 
formally enter the WTO.
    APEC: Regionally, we are pursuing initiatives that mark 
concrete progress toward the ambitious APEC goal set out in 
Indonesia three years ago to establish free and open trade 
across the Asia-Pacific region. We have launched a market 
opening agenda across 9 sectors of trade encompassing $1.5 
trillion in global activity, including environmental goods and 
services, energy, medical equipment, scientific instruments, 
and certain natural resources products--all areas where the 
U.S. is a leading competitor. Six additional sectors are to 
follow.
    We have established a working group on biotechnology trade 
to create scientific, timely, and transparent procedures for 
the licensing and importation of new agricultural products. We 
are also working with our APEC partners and others on a global 
electronic commerce initiative to expand Internet access and 
establish the principle of duty-free cyberspace.
    WTO: Multilaterally, the conclusion of the Uruguay Round 
marked strong Asian participation. Recent achievements in the 
WTO sectoral agenda--global agreements on ITA, 
telecommunications and financial services--encompassing tens of 
trillions of dollars in trade could not have been realized 
without the strong participation of Asian countries. The ITA 
covers $500 billion in global technology trade. We are also 
pursuing ``ITA II'' to build upon last year's (December 1996) 
successful Information Technology Agreement, the completion of 
which was largely attributable to APEC leadership. Under the 
telecom agreement, a world-wide industry worth $675 billion 
today will double or triple in size within the next decade. 
And, the financial services package will open tens of trillions 
of dollars of opportunities in banking, securities and 
insurance. Together these agreements represent the foundation 
of the twenty-first century economy. The global agenda ahead is 
equally important: IPR, government procurement, agriculture and 
services.
    We will also seek to expand the global trading system to 
include such major economies as China, Russia and Taiwan, and 
through the disciplines of the international trading system, 
including transparency and the rule of law, expand 
opportunities for U.S. goods and services in these markets.

   Implementation of Existing Trade Agreements and Monitoring of IMF 
                              Obligations

    At the center of the trade agenda is our commitment to 
monitor and enforce existing agreements. The United States has 
taken more than 75 enforcement action on behalf of our goods 
and services providers around the world. We have initiated more 
than 35 cases in the World Trade Organization affecting a broad 
range of industries. We have won or settled on favorable terms 
important cases against Japan on intellectual property rights 
and discriminatory tax policies. In Korea, we gained important 
reforms in agricultural shelf-life restrictions, import 
clearance procedures, and restrictions against 
telecommunications providers. In China, we have applied 
bilateral enforcement measures to achieve an unprecedented 
crackdown against IPR piracy and textile transhipments.
    Our overall enforcement agenda has delivered dollars and 
cents results across the board for U.S. industries. As 
plaintiff in the WTO, our win-loss record is 17-1. And even in 
the Japan film case, in which we did not prevail, we will 
continue to push for aggressive market-opening reform, using as 
the baseline the formal representations made by the Government 
of Japan to the WTO about the operation of its film market.
    Monitoring the implementation of the commitments made in 
the IMF stabilization packages is equally central. Only with 
full and faithful implementation of the commitments will the 
causes of the immediate crisis be addressed and long-term 
stability ensured. This monitoring will occur in several 
contexts including through the IMF, the Administration, U.S. 
industry, and the WTO. In this regard, recipient countries such 
as Korea have welcomed monitoring, as they can tolerate 
backsliding even less than we can.
    First, the IMF monitors and ensures implementation of the 
conditions in its stabilization packages through periodic 
reviews; a failure to adhere to the commitments may result in 
withholding the disbursement of further funds. Even after full 
disbursement, experience suggests that there tends to be little 
backsliding on IMF commitments; countries do not wish to impair 
their relationship with the IMF. Market pressures also 
effectively avoid a retreat from the commitments; any such 
retreat could again erode investor confidence.
    Second, the Administration is coordinating its monitoring 
efforts. Specifically, the existing USTR and Commerce units 
charged with monitoring and ensuring compliance with trade 
agreements are actively monitoring compliance with the IMF 
trade-related commitments. The State Department has instructed 
our Embassies to supplement these efforts in the relevant 
markets. Treasury Department and other Administration 
officials, including we at USTR, have intensified visits to the 
region. Through its Treasury representatives to the IFIs, the 
Administration will provide the information it collects on 
recipient countries' implementation. We will be particularly 
sensitive to ensure that the credit the IFIs are providing to 
the recipient countries' central banks is not being used to 
provide export incentives or subsidies, particularly those that 
are WTO-inconsistent, that would encourage exports from 
sensitive industries.
    Additionally, when the commitments made by a recipient 
country overlap with its commitments in the WTO, OECD, or in 
bilateral trade agreements, the Administration will use the 
means available in these traditional trade fora for ensuring 
implementation. The Administration's continued pursuit of the 
WTO case concerning Indonesia's ``national car project'' is 
illustrative, as is our pending action against Korean autos.
    Third, we are working closely with the U.S. business 
community, both through our formal advisory groups and through 
the Commerce Department, to obtain the benefit of their 
experiences in the relevant market.
    Finally, the WTO has substantial existing mechanisms to 
complement IMF and Administration efforts. The various 
Committees that oversee the WTO Agreements along with the 
country-specific trade policy reviews will work to monitor 
changes in a country's trade regime. We will be working with 
the WTO not only towards effective monitoring, but also to 
explore ways to strengthen the relationship between the WTO and 
the IFIs.
    This comprehensive monitoring effort will ensure that the 
commitments made are fully and faithfully implemented.

                               Conclusion

    The Clinton Administration will continue to set an 
aggressive agenda for U.S. engagement in Asia through the two-
fold strategy of stabilization and broad, structural market-
opening reforms. Financial stabilization is an inseparable 
objective from deregulation, transparency, and competition. IMF 
replenishment, broad trade negotiating authority for the 
President, and an insistence that Japan also undertake 
fundamental economic reforms to stimulate domestic demand 
remain our highest priorities. In both the long run and the 
short run, our approach recognizes that a strong global economy 
is fundamentally in the U.S. domestic interest.
    Thank you for the opportunity to appear before you; I 
welcome your questions.
      

                                


    Chairman Crane. Thank you, Madame Ambassador. What will the 
role of the WTO be in monitoring compliance with the IMF 
package?
    Ms. Barshefsky. There are really two ways in which the WTO 
will become involved. One is that the WTO has a variety of 
Committees that monitor a country's implementation of the 
various commitments made. Those Committees will of course also 
look at the IMF-required commitments in that context. Second, 
the WTO undertakes periodic trade reviews of the countries that 
are members, particularly the major trading economies, 
including Korea. And through those reviews, the WTO will also 
become actively involved in the monitoring process.
    I would add that there is a long and close collaboration 
between many of the international financial institutions and 
the WTO, and, most particularly, between the IMF and the WTO, 
and there will be further discussions between those 
institutions as to further efforts.
    Chairman Crane. In your view, how can the United States 
best pursue trade liberalizations in the countries affected by 
the Asian crisis? I'm bunching some questions here that are 
germane--and to what extent does the Asian financial crisis 
represent a setback to the prospects of trade liberalization in 
the region? And has the crisis already led to any backsliding 
on previously agreed-upon trade measures, especially in the 
financial services sector? And how patient should we be while 
these countries go through their recovery?
    Ms. Barshefsky. Thus far, we've not seen any backsliding by 
the Asian countries. They remain committed to the APEC process 
of opening further their markets in the 9 sectors designated. 
We see, for example, in the case of Korea, it has now agreed to 
go further in its WTO commitments in connection with financial 
services than it was willing to do just several months ago. And 
we think that's a very positive development.
    These economies, I think, recognize that in order to build 
confidence and in order to restore growth, continued trade 
liberalization, and market openings, the introduction of 
competition and deregulation will have to proceed. It is 
painful, it is difficult, but these structural reforms are long 
in coming in many of these countries, and ultimately to the 
good.
    Chairman Crane. Thank you very much, and I now yield to our 
distinguished Ranking Member, Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman. I'd like to thank you, 
Ambassador Barshefsky, for your fine testimony today and 
obviously for being here.
    I just have two general areas. One is--let me say this, in 
my opening statement which I submitted for the record, I 
support the entire $18 billion funding for the IMF. On the 
other hand, I do reserve the right, at any future time before 
the matter comes to the floor, to change my mind depending on 
how well the Asian countries meet some of the conditions that 
we and some of the other countries are laying out. I have to 
say that the Japanese, particularly, have not been forthcoming. 
Perhaps their economy and their government is a basket case at 
this particular time, but nevertheless, they have an 
international obligation, and you mentioned the three areas--
fiscal stimulus, issue of market opening, and, certainly, the 
restructure of their financial system. Could you relate, if 
it's possible in an open meeting like this, how much progress 
they're making on all three of these areas? And do we have any 
expectation that by the time this matter is resolved in the 
Congress and with administration, in terms of the funding, that 
they will have reached satisfactory results on the conditions 
of these three areas, or do you feel that this is an ongoing 
situation with them?
    Ms. Barshefsky. I think the situation is ongoing. I can 
certainly make several comments, and I would suspect the 
Treasury panel that testifies later this afternoon might wish 
to make some comments.
    With respect to the question of fiscal stimulus, Japan has 
applied some fiscal stimulus in the form of a one-time tax cut. 
While we applaud that measure, we find it to be inadequate to 
stimulate the economy to the degree needed, and for that 
reason, the IMF and we, as well as Europe and many Asian 
countries, have called for dramatic fiscal stimulus by the 
Japanese Government.
    With respect to reform of its financial sector, there is a 
plan in place. With respect to the use of funds, there is some 
concern that has been expressed whether this will lead to 
financial sector restructuring, which is to say, will it lead 
to a cleaning up of the banking system, or will it simply 
protect not just depositors but also the banks, and that is 
something that is unfolding.
    Third, with respect to deregulation, while Japan has 
undertaken from time to time some important deregulatory 
initiatives, we believe that its deregulation efforts to date 
have been inadequate, insufficient for the degree of 
deregulation needed, and to the extent that deregulation has 
occurred, it has not served the goal of further opening the 
Japanese market to an appreciable degree. We have a very broad 
deregulation agenda with the Japanese Government, and we look 
to them to achieve concrete progress on deregulation by the 
time of the G-7 summit in Birmingham, England, in the spring of 
this year.
    Mr. Matsui. Thank you. If I could just follow up on this, 
it's my understanding, as you stated, that they only intend to 
have a one-time tax cut, and almost every economist in the 
world that is involved with this issue thinks it must be a 
permanent or, at least, a multiyear tax cut for it to make any 
sense at all. In your discussions, and in the administration's 
discussions, do you see any progress in that area? Frankly, if 
it's just a one-shot deal, it probably won't have the kind of 
impact that's required if, in fact, they want to stimulate 
their economy.
    Second, if I may just go on, in terms of their whole issue 
of deregulation, as you well know, it was about 3 years ago 
when you entered into and came up with a rather far-reaching 
market opening agreement with respect to autos and auto parts, 
and I understand that it isn't working particularly well now 
because it's the implementation that's creating this real 
problem for us. And certainly, I think you've stated the 
problem in terms of their lack of effort in the financial 
services area, even though they have a sizable sum of--what is 
it, $57, $60 billion, or in that range--it's going into the 
wrong area, and perhaps you can further discuss that because I 
frankly think if the Japanese aren't going to be forthcoming, 
whatever effort we make will probably not be enough because 
there has to be more than one engine, and that is the United 
States engine, to make this thing work.
    Ms. Barshefsky. Let me, if I can, comment on a couple of 
the items that you raised. Certainly, many countries have 
expressed to Japan that a one-time, relatively modest tax cut 
will not sufficiently stimulate the Japanese economy, and that 
remains our view. Whether Japan will be more forthcoming with 
respect to further fiscal stimulus, we have yet to see, but 
certainly Japan is well apprised of the views of the 
international community and of the United States.
    With respect to autos and auto parts, Japan had undertaken 
some important deregulatory efforts which helped to create 
increased sales of vehicles as well as of parts. On the parts 
side, those sales remain relatively strong, although we have 
registered to Japan our deep concern that deregulatory efforts 
have slowed considerably. This is not acceptable, but I will 
say that exports of auto parts to Japan remain relatively 
strong.
    It's on the vehicle side that United States exports have 
declined appreciably, by about 20 percent, and of course 
Japanese exports to the United States continue at a fairly high 
rate. We've long been concerned about the limited number of 
dealerships in Japan that carry foreign vehicles, and we're in 
the process of working with the Japanese Government on this 
now.
    Mr. Matsui. Thank you. If I may just very briefly turn over 
to the second area, and that is one of the concerns, I think, 
many of us have is to set a precedent--I know this has been 
discussed within the administration, so it's not like it's in 
our interest that we're discussing this--but it seems that 
there are two problems. One was that some really bad lending 
practices in some of the Asian countries occurred--very, very 
bad practices. And, second, obviously, some of the structural 
problems that these countries have had.
    If, in fact, we lend assistance, and I agree strongly with 
your observation that it's in our interest to help and make 
this work, how are we going to prevent these problems from 
coming back again 3, 5, 10 years from now?
    I think Mexico is a unique situation. I don't blame the 
Mexican Government. It was circumstances that put Mexico in the 
problem that they had, so when we gave them assistance in terms 
of shoring up their peso, it was an act that most people, I 
think, realize was in the interest of all countries, and very 
little blame should be put in that situation.
    But in this case, it was clearly a case of Asian nations 
obviously watching out for its own interest by keeping their 
markets relatively closed, having an export strategy, and in 
addition to those bad loans which the people of their country 
benefited from, to some extent, to the loss of the rest of the 
world. How are we going to prevent this from happening again?
    This is somewhat unprecedented given the shape and size of 
the world trading community today, but what I would hate to see 
is 3 or 4 years form now, another region of the world, perhaps 
even Asian countries themselves, coming back, saying, we need 
more from the IMF or the World Bank.
    Ms. Barshefsky. First off, let me start by saying, as 
you've reiterated as well, it is critical that we stabilize 
these economies, and stabilize the conditions for the 
currencies in these economies, and that we minimize, to the 
extent possible, the negative impact of this crisis on the U.S. 
economy.
    Having said that, a number of commentators and you, now, 
have raised this issue of so-called hazard: If these countries 
are bailed out, will other countries just do this again and 
expect to be bailed out later? And let me make three general 
comments.
    One is, these countries are taking a massive hit for their 
interventionist, industrial policy-driven lending practices, 
and for this very close and tight collaboration between 
governments, industries, and the banks. There is no question 
that the pain of adjustment that will be necessitated will be 
long remembered and itself will act as something of a deterrent 
force.
    Second of all, as I said in my testimony, we intend to 
rigorously monitor the implementation of the commitments made 
to ensure that these countries in fact reform per the IMF 
prescriptions. That also sends a powerful message to other 
countries that they should not expect to be let off the hook 
for similar kinds of practices.
    And last, as Secretary Rubin has said, the United States is 
itself working with its G-7 partners and other trading nations 
to determine what architectural changes are needed in the 
current international regime with respect to the international 
financial institutions so that there is burden sharing when a 
crisis of this sort happens, between government and the banks 
and private parties, and to ensure that stronger mechanisms are 
in place, including much better early warning devices, so that 
problems can be corrected along the way, not boil over to the 
extent we've seen here.
    And I think in all those three ways, we should expect to 
see that this crisis will serve to dissuade any other such 
crises in the future.
    Mr. Matsui. Thank you, Ambassador Barshefsky.
    Chairman Crane. Ms. Dunn.
    Ms. Dunn. Thank you very much, Mr. Chairman, and thank you 
again for your analysis of the problem. You do a great job, and 
I think we all appreciate the work you're doing on behalf of 
the country.
    Ambassador, you mentioned and commented on the trade 
deficit and the fact that this crisis is going to exacerbate 
the trade gap, and I'm very concerned about that because I have 
some very, very good pieces on why a trade deficit is not a bad 
thing for our Nation--in a growth economy, we purchase more 
products.
    I would like to know what the administration thinks about 
this. Is this a bad occurrence? And if you agree that a deficit 
is not the worst thing in the world, how will you plan to 
educate the public on this?
    Ms. Barshefsky. I think you're asking the $54,000 question 
with respect to educating the public. The extent of our trade 
deficit now and the fact it might increase is not an adverse 
reflection on the strength of the U.S. economy or on our 
competitiveness, and this contrasts quite sharply with the 
situation in the mid- and late-1980's where our fundamental 
competitiveness was called into question. We were also still 
running very high budget deficits at that time.
    We have here a trade deficit which is the excess of 
investment over what we save. We are pulling in capital at an 
enormous rate in this country. Most of that capital is going 
into productive enterprise rather than real estate; that's to 
the good. And when we are joined in capital of this amount, we 
will run a corresponding trade deficit, that's simply how the 
numbers work. It is not a cause of concern. It is instead, at 
this period especially, a demonstration of how strong this 
economy is relative to that of our trading partners which have 
seen very sluggish growth and, as we see in Asia, investment in 
nonproductive, speculative enterprises. That is to say, a 
misallocation of the savings of its own people.
    Educating the public on this is difficult because it is not 
intuitive that a trade deficit, given the economy that we have, 
is not of particular concern. It's not intuitive to people that 
trade deficits are largely a function of macroeconomic factors 
and have relatively little to do with trade policy or with 
trade agreements. To put it another way, trade agreements are 
particularly helpful to those sectors in which agreements are 
negotiated. We've seen this time and again, including in Japan 
where trade agreements tend to open up sectoral opportunities 
that were not available before. But even if you put all those 
sectoral opportunities together, they don't really move the 
aggregate numbers that much. They are important to the 
industries, important to the workers, important to the jobs 
they create, but don't move the aggregate balances that much 
because those aggregate balances are a function of factors 
totally different from trade policy or trade agreements. That 
message needs to be carefully articulated and formally 
articulated, or else, instead of the right policy prescriptions 
for what economic problems we do have, we end up barking up the 
wrong tree.
    Ms. Dunn. And I hope that's something the administration 
will take advantage of and use its bully pulpit to let people 
know.
    Thank you.
    I wanted to ask you, too, I've heard talk about building 
confidence, I think you've used this term yourself, in the 
Asian economy, and today we'll hear testimony about how the 
administration is proposing to build that confidence, and that 
is, of course, additional funds to the IMF.
    Ms. Barshefsky. Yes.
    Ms. Dunn. There is another way, and that is U.S. trade 
policy, so I'm interested in your evaluation on how U.S. trade 
policy can also play a role in building that confidence.
    Ms. Barshefsky. I think confidence is enhanced as these 
countries embrace market economics, as they embrace 
competition, as they embrace deregulation, as they embrace a 
series of economic policies that are market driven, not crony 
driven. And trade policy can move these countries in that 
direction, whether through sectoral reform and trade 
agreements, or through the APEC process where together we agree 
to open up markets further and reduce certain barriers, or 
through enhanced commitments or accelerated commitments in the 
WTO.
    Confidence is restored when these markets operate on a 
transparent, on a knowable basis. That has not been the case in 
many of these countries, but confidence can certainly be 
restored to the extent that these countries embrace the kind of 
transparency and competition that has helped our own economy 
grow to this tremendous extent.
    Ms. Dunn. Thank you, and last, a specific question on 
Korea. I've been told there are lots of United States companies 
which are in the motion picture industry, who are ready to 
revitalize and expand the commercial film sector in Korea, as 
they have in other Asian countries, but they cannot proceed 
until Korea lifts the quotas it now has that require Korean 
films be shown 146 days out of the year. As you have reported 
in your most recent assessment of foreign trade barriers, this 
requirement imposes artificial limitations on commercially 
attractive film series and films, and it serves as a deterrent 
to the construction of cinema theaters, which we think is 
needed to expand the distribution in Korea. Has any effort been 
made to alter or eliminate the government of Korea's screen 
quotas or to help the government in understanding the effects 
of such policies on foreign investment?
    Ms. Barshefsky. We have had quite extensive discussions 
with Korea on the issue of screen quotas. The industry has been 
very active, including in demonstrating to the Koreans by 
reference to other countries that when these quotas are lifted, 
you tend to see actually an increase in activities among the 
home countries indigenous film producers as well. There tends 
to be a rather creative boost in energy occasioned also in part 
by joint venture arrangements that tend to arise when things 
like screen quotas are lifted. We continue to work with our 
industry on this important issue, and it is one we will keep on 
the front burner with Korea.
    Ms. Dunn. Thank you, and you receive our appreciation. 
Thank you, Mr. Chairman.
    Chairman Crane. Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman. Madame Ambassador, 
I just got back the latter part of January from Japan at which 
time the Japanese opposition party had closed their doors and 
folded up, and so you essentially have LDP and a few small 
parties. And one of the things, I think, the Subcommittee and I 
would benefit from is understanding your perspective on why it 
is that the Japanese to a larger level have this need for a 
stimulus package for their economy.
    You look at the United States when we used to go over there 
and get lectures on our competitiveness and our savings rate 
and other things, we don't hear that anymore when you go to 
Japan. You look at Korea where the new prime minister is 
responding to this crisis very strongly, but you look at 
Indonesia where it's very unclear whether they're going to 
respond to what needs to be done. Why is Japan, which is such a 
large economy, why are they not responding more adequately?
    Ms. Barshefsky. I think that's a difficult question to 
answer. Certainly, I would expect that if it were the Japanese 
Government here rather than me, they would indicate to you they 
have responded. And they might indicate they would consider 
further response at an appropriate time, but they would not 
delineate what that further response might be or when the time 
might be appropriate.
    Japan has for some time focused on what it views as perhaps 
one of the most important social policy problems, and that is 
an aging population. It is loathe to engage in deficit 
spending. It wishes to shore up its economy in a way that can 
handle an aging population, and this has been a priority for 
Japan now for some time. It is further a priority that Prime 
Minister Hashimoto has underscored at every opportunity.
    Beyond that, it is hard for me to comment, except to say 
that as the world's second largest economy, as an economy that 
holds the majority of global savings, Japan is most assuredly 
in a position to do much more than it is doing now. We see a 
significant rise in its global current account surplus at a 
time when other countries are baring the burden. That is simply 
not right, and Japan needs to do more.
    Mr. McDermott. The natural followup question to that is, 
What kind of levers do we have to, I suppose the strongest word 
we'll use is, encourage them to take a more active role as the 
second largest economy in the world? It seems as though the 
mentality is one that says, we're worried, and yet they are the 
second largest economy in the world. What avenues do we have 
besides sitting at the table and saying, You ought to do 
better.
    Ms. Barshefsky. As you know, the administration has let its 
views be known to Japan in very strong terms. Secretary Rubin, 
Secretary Albright, Secretary Cohen, and others, including 
myself, have underscored to Japan the necessity for action.
    What is significant most recently, is that Europe has come 
forward and has said to Japan that it is simply not in a 
position to absorb increased Japanese exports, particularly in 
light of Japan's failure to further deregulate and open its 
economy. Other Asian countries have communicated to Japan that 
it must open its markets and be a buyer, a purchaser of first 
resort for the Asian countries that, after all, live in its 
neighborhood.
    This is very unusual. That is to say, to have an emerging 
global view that Japan is not doing enough. You'll recall over 
the years it is typically the United States that has let its 
views with respect to the Japanese economy be known, often to 
the disagreement by Europe or other Asian nations. This is a 
unique situation that we have now and one that we hope can 
create sufficient pressure on Japan to move forward in a more 
constructive manner.
    Mr. McDermott. The other part of the Asian puzzle that 
you've not commented on very much is the Chinese. The Chinese 
have so far not devalued their currency. Where do we stand with 
respect to recognizing that as being a responsible participant 
in the global economy, and how does that affect our view about 
whether or when they get into the WTO?
    Ms. Barshefsky. Certainly, we think that the actions of the 
Japanese Government in not devaluing----
    Mr. McDermott. You mean the Chinese Government?
    Ms. Barshefsky. The Chinese Government. I'm sorry. The 
actions of the Chinese Government in not devaluing its currency 
are very constructive and very positive, and the 
representations and commitments that it has made are extremely 
encouraging in that regard. China, of course, faces its own 
difficult problems, particularly in connection with state-owned 
enterprise reform and in connection with banking reform. 
China's banks hold an awful lot of bad debt, much of which is 
from poorly performing state-owned enterprises. China is now 
undertaking some banking reform, moving more to a federal-type 
system, trying by that to separate financial lending decisions 
from the authority of provincial governments so that those 
lending decisions are less politicized than they otherwise 
would be. As you know, China has also embarked on a fairly 
massive reform of its state-owned enterprises--that's the good 
news. The news of concern is that they may also be moving to a 
chaebol-type system, that is moving to a system that given a 
weak financial underpinning, has now been largely discredited. 
We will obviously be watching that.
    With respect to its WTO accession, that accession has to 
stand or fall on its own merits. We have made, I think, some 
important progress with China on it, particularly in the case 
of goods, market access, as well as certain other WTO rules. We 
have a long way to go with respect to additional market access 
issues including services and agriculture, and with respect to 
additional rules commitments. We would like to see China in the 
WTO, but the terms have to be the right terms. We're not there 
yet, but we're working with them.
    But that accession will rise or fall on its own, and is not 
in any way bound up with the question of state-owned enterprise 
reform or financial reform in China, or with their commitment 
with respect to their own currency.
    Mr. McDermott. May I ask one other question which is a 
little bit, maybe, off the point but not exactly. One of the 
criticisms of the African trade bill is that the textile people 
say that because of the Asian crisis, all of this textile 
production in Asia is going to move to Africa and it will be 
used as a transhipment point. What is your view of the Asian 
crisis in terms of what it does to the textile market, 
generally?
    Ms. Barshefsky. As you know, we have in place quotas for 
most of the major textile exporting, producing, and exporting 
nations, including two quotas among the African countries, 
Mauritius and Kenya. Those quotas are fixed. There are growth 
rates that will mean that we don't expect to see a surge of 
textile exports or apparel exports from Asia.
    With respect to the question of transhipment, we have, I 
think, strong rules in place, as does our customs service. On 
the question of transhipment, particularly where there is a 
question of circumventing quotas. We will keep a sharp eye.
    Mr. McDermott. Thank you.
    Chairman Crane. Thank you. Just on quickie followup on 
that. Do you feel confident, because I've had the same input 
that Jim was just referring to, about transhipment through 
African countries? We're going to be bringing the African trade 
bill up tomorrow before our Full Committee, and I know there 
are other colleagues that are worried about the supervision of 
any effort at transhipment from Asian through expanded African 
country opportunities. Can we monitor that?
    Ms. Barshefsky. I think we feel very good about the 
transhipment rules and procedures that are currently in place, 
and of course, let me just add that the bill could always be 
clarified to ensure that transhipment is not an acceptable 
outcome. I think we feel pretty good about where we are right 
not.
    Chairman Crane. Very good.
     Mr. Nussle.
    Mr. Nussle. Thank you, Mr. Chairman. And I want to thank 
you, Ambassador, for your testimony today and most especially 
for the clarity of your testimony. I've had a chance to speak 
to a number of different experts on the topic of what is 
happening over in Asia with our Asian markets and I complement 
you on the clarity of your comments and the matter-of-factness. 
You don't pull any punches, you never have, and I, for one, 
appreciate that.
    I would like to be parochial for a moment on the issue of 
agriculture. There's going to be a witness testify later on 
today on another panel who represents the Farm Bureau in 
Mississippi, and while I'm not familiar with agriculture in 
Mississippi, I think his comments are very pointed and actually 
over the last 24 hours or so, may be even outdated, which is 
what concerns me.
    He says the Asian-Pacific region is becoming the most 
important growth market, as well as one of the major economic 
regions of the world, particularly in agricultural. In 1996 the 
total trade across the Pacific was estimated to be more than 75 
percent greater than that across the Atlantic. He goes on to 
say the Asian market accounts for over 40 percent of our 
agricultural exports worldwide. This totaled over $23 billion 
in export sales in 1997. I know you're familiar with these 
figures, but I wanted to amplify one point in particular. He 
says that current USDA estimates show that a reduction of $500 
million in sales to Asia so far this year, the total impact may 
exceed $1.5 to $2 billion before the crisis is over. And just 
today in a local paper back home in Iowa, it was reported 
through the U.S. Department of Agriculture that U.S. 
agricultural exports will fall $2.5 billion below projections 
made only a few weeks ago for 1998, and the drop is obviously 
largely a result of the worsening Asian crisis. Corn and pork 
will be, probably, the major commodities to suffer.
    What I'm getting at here, and you mentioned it in your 
testimony, are two things. One is, Could you please amplify for 
myself and my constituents the concerns for agriculture in this 
crisis, number one. And number two, what, if anything, we can 
do about that, either from an administration standpoint or from 
a congressional standpoint. What is the impact and what can we 
do about that?
    Thank you.
    Ms. Barshefsky. I think we don't yet know fully the impact 
except to say that we know as a general matter, exports will 
decline to Asia as those economies contract sharply, and as 
their currencies have depreciated, making imports into those 
countries very expensive. We know also that agricultural 
exports will fall. The extent of the fall is very, very 
difficult to estimate and the reason for that is, we aren't yet 
sure what the full extent of the slowdown in the Asian 
economies will be; we're not sure fully of the effect of the 
depreciation of the currencies; we are not sure how quickly 
these economies will turn around and will begin to recover.
    We know, generally speaking, that as we look at an increase 
in our trade deficit, the deficit will increase more because of 
lowered export performance than it will because of increased 
imports. But I would simply caution that it is very difficult 
to predict at this juncture the extent of the shifts in the 
trade balance, including in agriculture.
    What can we do? Number one, stabilize these economies and 
the currencies. If the economies don't stabilize, if the 
currencies further depreciate, that will simply further 
decrease our export opportunities; it will increase the price 
of our goods, including agricultural products, that we send to 
Asia. So step one, as I said in my testimony, the most 
important trade goal arising from the Asian crisis is precisely 
the goal of the IMF which is to stabilize the economies and to 
stabilize the currency condition in these countries.
    Second, we have to continue to pursue bilateral market-
opening agreements with these countries, including in the 
agriculture sector. The APEC process will help as we look at 
commodities like fish, but apart from that, we've just 
concluded a further market access agreement with the 
Philippines on pork. We have just concluded, last Friday, a 
very comprehensive market access agreement with Taiwan, which 
will form part of its eventual WTO accession. It covers 
industrial goods, government procurement, services, and 
agriculture. And in the agriculture sector, we will gain 
immediate, upfront access beginning now, with respect to pork, 
poultry, and beef. We'll also gain market access for rice, as 
well as, of course, for a number of other agricultural 
commodities we export to Taiwan. These are areas where we've 
had problems in the past which this agreement will now rectify. 
We will continue to pursue those market-opening agreements, and 
we intend to do just that.
    Mr. Nussle. I thank you for that, and part of the struggle 
for all of us, I think, is that this is such a complicated 
issue for so many, including me, including all of us, to 
understand and get our arms around, often times when you're out 
getting ready to plant this spring and you're not really sure 
how it impacts you, every once in awhile it helps to amplify 
that. And I'm glad one of the things you mentioned in your 
testimony was that this expected short-term deterioration of 
the trade balance must not, however, as politically tempting as 
it may be, open the way to more protectionism or isolationism. 
I would agree with that and I hope that this continues to be a 
lesson for more work in the area of expanding trade and not--
and recognizing that interdependence that we have, and not pull 
back. So, I appreciate your comments today and I'll try to 
continue to educate my constituents as to the impact this has, 
and we'll work together to try to get this done, so, thank you.
    Ms. Barshefsky. Congressman, may I add one further point 
which is, as you may be aware, USDA has also begun to utilize 
export credits with respect to the purchases of agricultural 
commodities, particularly from Korea or by Korea, I should say. 
That is yet another way to try to minimize the adverse impact 
on agriculture of the Asian financial crisis.
    [The following question was submitted by Congressman 
Houghton and Ms. Barshefsky's response follows:]

    Question. I understand that the GSP Subcommittee is 
developing a recommendation on whether to grant various Russian 
government petitions to extend GSP (duty free) treatment to 
imports to Russian wrought and unwrought titanium products. 
What is the status of the review?

    Answer. Last October we held a hearing on all of the 
petitions for changes in GSP eligibility that were accepted for 
the 1997 GSP Products Review. The titanium petitions were the 
subject of much discussion to both supporters and opponents. In 
addition, we received many prehearing and posthearing briefs.
    The U.S. International Trade Commission (USITC) prepared a 
report on the probable economic impact of taking the action 
requested in the petitions. Public comments on this advice were 
received in January. The GSP interagency committee is reviewing 
all materials relating to the titanium petitions prior to my 
submitting recommendations to the President.
    The President will announce his decisions in May. They will 
take effect on July 1, 1998.

    Mr. Nussle. Thank you, very much. Thank you, Madame 
Chairwoman.
    Chairwoman Dunn [presiding]. Thank you very much, Mr. 
Nussle. And thank you, Madame Ambassador. As the Chairman 
mentioned earlier, we're going to take our next panel out of 
order so we'd like to call to the table Fred Bergsten who is 
director of the Institute for International Economics and John 
Sweeney who is a policy analysis at the Heritage Foundation.
    We're not finding our next set of witnesses here, so we'll 
declare a recess for one-half hour. We'll meet here again at 
12:35.
    [Recess.]
    Chairwoman Dunn [presiding]. We're going to continue our 
panels this morning. We have John Sweeney who is a policy 
analyst for the international trade and economics with the 
Heritage Foundation. And we also have with us Michael Gadbaw 
who is vice president and senior counsel for international law 
and public policy with the General Electric Co. and chairman of 
the US-Indonesian Business Committee, the US-ASEAN Business 
Council, on behalf of the US-ASEAN Business Council and the 
National Foreign Trade Council. And, gentlemen, if you will 
forgive us, you are being thrown together because you are here, 
and we are eager to hear what you have to say. As you 
understand, we have a continuation of the previous plan at 1 
o'clock, so we are eager to hear your testimony, ask you a few 
questions, and then I'm sure you will be happy to be excused at 
1 o'clock. So why don't we begin the testimony with Mr. 
Sweeney.

  STATEMENT OF JOHN P. SWEENEY, POLICY ANALYST, INTERNATIONAL 
            TRADE AND ECONOMICS, HERITAGE FOUNDATION

    Mr. Sweeney. Madame Chairwoman, thank you very much for the 
invitation to testify today before this congressional 
Subcommittee. I'm not going to speak about the IMF, I think 
there's plenty of people who can talk for and against that 
issue. I want to talk about U.S. trade policy in the context of 
U.S. trade issues.
    First, the United States economy is not showing many signs 
of slowing down despite the deepening financial crisis in 
countries like South Korea and Asia. Many economists, including 
the WEFA group, however, feel that the United States economic 
growth may still slow to below 2.5 percent if the Asian 
economies do not recover quickly, and if they're recovery is 
more dependent than currently expected on trade adjustments 
with the United States.
    I believe American policymakers should be cautious about 
assessing the probable global economic aftershocks of the Asian 
financial crisis until better information becomes available. 
Nevertheless, some general observations can be made about the 
evolution of the Asian crisis during 1998 and how this may 
impact on global trade patterns. First, we believe the Asian 
crisis is a long way from being over. United States 
policymakers should pay close attention to political 
developments in Indonesia where the danger of ethnic violence 
has increased dramatically in recent weeks. Some 40 Indonesian 
towns have already experienced rioting and looting. A social 
and political explosion in Indonesia could easily spill over to 
neighboring Singapore and Malaysia.
    United States policymakers should also follow developments 
in Japan now in its seventh consecutive year of very sluggish 
economic growth. Many Asian countries will be in recession 
during 1998 and 1999. We believe real GDP growth for the 
Pacific region, excluding China, will be close to zero in 1998, 
with Thailand, Indonesia, and South Korea experiencing declines 
of between 2 percent and 6 percent. Growth in 1999 for this 
area is rejected at less than 3 percent.
    We see the Asian crisis lowering expectations for growth 
worldwide, nevertheless, fears that the economic slowdown in 
Asia may lead to a deflationary recession in the rest of the 
world are clearly exaggerated. Based on purchasing power parity 
evaluation, developing Asia, as a whole, accounts for about 
22\1/2\-percent world output according to the WEFA group. 
However, excluding China and India which, so far, have remained 
relatively immune from the Asian currency crisis, the rest of 
developing Asia accounts for only 7.3 percent of global GDP and 
only 4.4. percent of world exports of goods and services. This 
suggests that even a severe recession in the most effected 
Asian economies should have a relatively modest impact on 
global economic growth. Asia will be severely affected by a 
credit crunch, however, and this, in turn, will affect growth 
expectations in Latin America, particular in Brazil and 
Argentina. We see world economic growth in 1998 and 1999 
slowing to around 2.6 percent and 2.9 percent, respectively, 
from over 3 percent in 1997, and we see growth in Latin America 
declining from about 5 percent last year to between 3 and 3\1/
2\ percent in 1998 and 1999, respectively. Lower international 
commodity prices plus increased competition from Asian exports 
will have some negative impact on Latin America's terms of 
trade.
    We see United States exports to Asia falling by at least 10 
percent this year compared to last, while United States imports 
from Asia, including Japan, will increase. However, while the 
U.S. trade deficit will undoubtedly increase above the level 
$133.7 billion reported for last year, we do not believe the 
deficit will climb as high as $200 billion as some critics have 
warned.
    Our greatest concern is the possible response of United 
States policymakers to the Asian crisis. Following last 
November's congressional defeat of President Clinton's request 
for new fast track negotiating authority, it is quite clear 
that American trade policy has stalled, and we are concerned 
that this paralysis may continue for the foreseeable future as 
opponents of free trade in the United States utilize the Asian 
crisis as an excuse to continue chipping away at America's 
global economic leadership.
    America today is the largest exporter of goods and services 
in the world. Last year, we exported over $933 billion in goods 
and services and more than 20.5 million owe their job to these 
exports. America's trade deficit which is always the subject of 
great concern to Congress is minuscule when compared to the 
size of the U.S. economy which, adjusted for inflation, totaled 
$7.1 trillion last year. In contrast, the goods and services 
deficit of $133.7 billion for last year amounted to barely 1.85 
percent of GNP, and that's roughly 18 cents for each $1 million 
of GNP.
    Now, what should the United States be doing in terms of 
helping Asia and, more importantly, helping America. We need to 
get America back on the road to free trade. Specifically, we 
need to renew the executive's fast track negotiating authority. 
Without such authority, the United States is not a player 
anywhere in the world--not in Latin America, not in Asia, not 
in Europe--and without such authority, our ability to influence 
other governments, other countries like those in Asia currently 
in crisis, is severely curtailed and limited. Second, we do 
need to support the accession of the People's Republic of China 
and Republic of China and Taiwan to the World Trade 
Organization on a commercially viable basis. Third, we need to 
demand an end to China's practice of forcing foreign firms to 
transfer technology as a condition of investing. We need to 
expand NAFTA to Chile and other countries. And, most 
importantly, I feel, here in the United States, Congress needs 
to undertake a process of upgrading the capacity of U.S. 
Federal agencies to compile and report trade data at the 
national, State, and local levels. Such capabilities no longer 
exist. They have been defunded progressively over the last 4 
years, and today it is nearly impossible to accurately gauge 
what we are accomplishing in trade in terms of exports, in 
terms of jobs, and how our congressional districts are faring.
    Thank you.
    [The prepared statement follows:]

Statement of John P. Sweeney, Policy Analyst, International Trade and 
Economics, Heritage Foundation

    The U.S. economy is not showing many signs of slowing down 
despite the deepening financial crisis in countries like South 
Korea and Asia. However, the extent to which the American 
economy's growth may slow eventually depends on how quickly the 
Asian economies recover, and on how much their export prices 
fall. Many economists, including the WEFA Group, feel that U.S. 
economic growth could still slow to below 2.5 percent if the 
Asian economies do not recover quickly, and if their recovery 
is more dependent than is currently expected on trade 
adjustments with the United States.
    Many economists expect that the steep devaluations Asian 
currencies have suffered since mid-1997 will led to a rise in 
U.S. imports from Asia and a slowdown in U.S. exports to Asian 
markets, resulting in a steep increase in America's trade 
deficit. However, while a higher U.S. trade deficit can be 
anticipated in both 1998 and 1999, many U.S. importers who 
expected bargain prices on goods from countries like Indonesia, 
Malaysia and South Korea are seeing absolutely the opposite 
effect from what they expected. In Indonesia, for example, 
apparel manufacturers are seeing their production costs 
skyrocket because their devalued currency not only makes 
imported fabric more expensive, but also inflates the repayment 
cost of loans they borrowed in dollars months ago before their 
currencies melted down.
    While this situation involving Indonesian apparel producers 
may not hold true in the coming months for all Asian countries 
exporting goods to the United States, it does suggest that 
American policymakers should be cautious about assessing the 
probable global economic aftershocks of the Asian financial 
crisis until better information becomes available. 
Nevertheless, some general observations can be made about the 
evolution of the Asian crisis during 1998 and how this may 
impact on global trade patterns:
     The Asian crisis is a long way from being over. 
U.S. policymakers should pay close attention to political 
developments in Indonesia, where the danger of ethnic violence 
has increased dramatically in recent weeks. Some 40 Indonesian 
towns have already experienced rioting and looting. A social 
and political explosion in Indonesia could easily spill over to 
neighboring Singapore and Malaysia.
     U.S. policymakers also should follow developments 
in Japan, now in its seventh consecutive year of very sluggish 
economic growth. Although Japan is America's second largest 
trading partner as well as the linchpin of Asia's eventual 
economic recovery, the Japanese government has been exceedingly 
timid in terms of sorting out the crisis in Japan's financial 
system, and in exercising its regional economic leadership.
     Many Asian countries will be in recession during 
1998 and 1999. Real GDP growth for the Pacific region 
(excluding China) will be close to zero in 1998 with Thailand, 
Indonesia and South Korea experiencing declines of between two 
percent and six percent. Growth in 1999 is projected at less 
than 3.5 percent.
     The Asian crisis will lower expectations for 
growth worldwide. Nevertheless, fears that the economic 
slowdown in Asia may lead to a deflationary recession in the 
rest of the world are clearly exaggerated. Based on purchasing 
power parity valuation, developing Asia as a whole accounts for 
about 22.5 percent of world output, according to the WEFA 
Group. However, excluding China and India, which so far have 
remained relatively immune from the Asian currency crisis, the 
rest of developing Asia accounts for only 7.3 percent of global 
GDP and only 4.4 percent of world exports of goods and 
services. This suggests that even a severe recession in the 
most affected Asian economies should have a relatively modest 
impact on global economic growth.
     Asia will be severely affected by a credit crunch, 
however, and this in turn will affect growth expectations in 
Latin America, particularly Brazil and Argentina. World 
economic growth in 1998 and 1999 is likely to slow to around 
2.6 percent and 2.9 percent, respectively, from over 3 percent 
in 1997. Growth in Latin America should decline from about 5 
percent in 1997 to between 3 percent and 3.5 percent in 1998 
and 1999, respectively. Lower international commodity prices, 
plus increased competition from Asian exports, will affect some 
negative effect on Latin America's terms of trade.
     U.S. exports to Asia will fall by at least 10 
percent this year, compared to 1997, while U.S. imports from 
Asia (including Japan) will increase. The drop in U.S. exports 
to Asia could shave about 0.3 percentage points off America's 
GDP growth for 1998. However, while the U.S. trade deficit will 
undoubtedly increase above the level of $113.7 billion recorded 
in 1997, we do not believe the deficit will climb as high as 
$200 billion, as some critics have warned.
     Our greatest concern is the possible response of 
American policymakers to the Asian crisis. Following last 
November's congressional defeat of President Clinton's request 
for new fast track negotiating authority, American trade policy 
clearly has stalled, and we are concerned that this paralysis 
may continue for the foreseeable future as opponents of free 
trade in the United States utilize the Asian crisis as an 
excuse to continue chipping away at America's global economic 
leadership.

    Free Trade Benefits the American Economy, Workers and Consumers.

    America has grown into an industrial giant partly because 
of international trade, which now accounts for nearly one-third 
of the national wealth.\1\
---------------------------------------------------------------------------
    \1\  Exports, plus imports, plus earnings on U.S. foreign 
investments.
---------------------------------------------------------------------------
    With increased reliance on global markets, the U.S. is 
trying to expand its exports by involving itself in agreements 
such as the North American Free Trade Agreement (NAFTA), and 
both global and regional trading organizations such as the 
World Trade Organization (WTO) and the Asia Pacific Economic 
Cooperation (APEC) group.
    While America has been largely a free-trade nation, the 
principles of free trade today are under siege. On one side of 
the argument are those who advocate free trade because it 
creates jobs, promotes economic growth, and maximizes 
efficiency and individual wealth. On the other are those who 
argue that free trade forces American manufacturing overseas, 
and leads to lost jobs in the United States, declining wealth, 
and increased national suffering.
    Proponents of free trade believe that free trade promotes 
economic growth and creates jobs for Americans. Virtually all 
economists argue that free trade increases competition, spurs 
innovation, lowers prices, accelerates economic growth, and on 
balance creates more jobs than are lost to foreign competition.
    Opponents of free trade advocate closed borders and argue 
that cutting off or restricting trade with other nations is in 
America's interest. While they admit that tariffs and import 
quotas raise consumer prices, they believe that such measures 
also safeguard American jobs.
    The outcome of this debate is vitally important to 
America's future. The choice before the U.S. is whether to 
continue or abandon its standard of living and its position as 
the world's leading economy. A false move on the trade front 
could have disastrous consequences for the U.S. economy. It 
should be recalled that the protectionism of the 1930s was a 
major factor in bringing about the Great Depression.
    The challenge for America is whether it will embrace free 
trade as a key to its continuing prosperity. Linked to this 
challenge are such issues as expanding NAFTA to include Chile 
and other countries, expanding free trade in Asia through APEC, 
expanding trade across the Atlantic with Europe, and dealing 
with the entry of the People's Republic of China (PRC) and 
Republic of China on Taiwan (ROC) into the WTO. Generally, free 
traders have been disappointed in President Clinton's handling 
of all these trade issues. They accuse him of dragging his feet 
on expanding NAFTA to include Chile, and of trying to force 
``managed'' trade deals with the Japanese over auto parts.

                               The Facts

     America is the largest exporter of goods and 
services in the world. It exports over $933 billion in goods 
and services each year, and over 20.5 million Americans are 
employed in producing these exports.
     One out of every five American workers owes his or 
her job to international trade.
     America's trade deficit is minuscule when compared 
to the size of the U.S. economy, which--adjusted for 
inflation--totaled $7.19 trillion in 1997. In contrast, the 
goods and services deficit of $113.7 billion for 1997 amounted 
to only 1.85 percent of the U.S. gross national product (GNP), 
or roughly 0.18 cents for each $1 million of GNP.
     The U.S. trades more with Asia than any other 
region in the world. U.S. two-way trade in merchandise goods 
with Asia was over $738.8 billion in 1997, or nearly 47.5 
percent of total U.S. two-way merchandise trade worldwide. 
Merchandise exports to Asia support over 6.54 million American 
jobs.
     Japan is a big customer for the U.S. manufacturing 
industry.Over 60 percent of U.S. exports to Japan are 
manufactured goods, and Japan's purchases of these goods 
support nearly 1 million American manufacturing jobs. Two-way 
merchandise trade between the U.S. and Japan totaled $187.2 
billion in 1997, including $65.6 billion in U.S. exports of 
merchandise goods to that country, which supported over 1.44 
million American jobs.
     The Western Hemisphere is America's second-largest 
export market, after Asia. From 1990 to 1997, U.S. exports of 
merchandise goods to all countries in the Western Hemisphere--
including Canada--more than doubled from $137 billion in 1990 
to over $285.8 billion in 1997. In all, U.S. goods exports to 
all Western Hemisphere countries during 1997 supported over 
6.28 million American jobs.
     Latin America's economies are among the fastest-
growing in the world, and the United States has been one of the 
principal beneficiaries of this growth. Between 1988 and 1997, 
U.S. goods exports to Latin America tripled, rising from $46.4 
billion in 1988 to over $134.4 billion in 1997. U.S. exports of 
merchandise goods to Latin America supported more than 2.95 
million American jobs in 1997.
     Since NAFTA went into effect on January 1, 1994, 
total growth in North American trade has surpassed even the 
most wildly optimistic forecasts, rising from $293 billion in 
1993 to over $475 billion in 1997, an increase of $182 billion 
or 62 percent in just four years. Two-way merchandise goods 
trade between the U.S. and Canada totaled $318.16 billion 
during 1997, including $151.4 billion in U.S. goods exports 
which supported over 3.3 million American jobs. Moreover, two-
way merchandise trade between the U.S. and Mexico during 1997 
totaled $157.29 billion, including $71.3 billion in U.S. 
merchandise goods exports which supported over 1.56 million 
U.S. jobs.
    The expansion of free trade and investment in the Western 
Hemisphere, Asia and Europe has been the core foundation of 
U.S. foreign policy since the end of World War Two. U.S. trade 
policy has advanced American economic interests around the 
world on four parallel tracks, including 1) unilateral 
initiatives such as the Generalized System of Preferences (GSP) 
and Most Favored Nation (MFN) status for eligible countries; 2) 
bilateral initiatives through agreements such as the U.S.-
Israel Free Trade Agreement of 1985, the U.S.-Canada Free Trade 
Agreement of 1988, and the North American Free Trade Agreement 
(NAFTA) with Mexico in 1992-1993; 3) regional initiatives such 
as the Free Trade Area of the Americas (FTAA) in the Western 
Hemisphere and the Asia Pacific Economic Cooperation (APEC) 
group in Asia; and 4) multilateral initiatives at the level of 
the World Trade Organization (WTO), which was created in 
January 1995 by the Uruguay Round trade agreements.
    The overarching goal of these American trade initiatives 
has been to liberalize trade and investment flows around the 
world by eliminating tariff and non-tariff barriers to trade as 
quickly as possible; to establish free-market and open trade 
policies with appropriate regulatory frameworks as the standard 
benchmark for all countries engaged in international trade; and 
to propagate American values of freedom and capitalist 
democracy around the world. The degree to which the U.S. has 
succeeded in achieving these goals is shown by these historical 
facts:
     Over 75 percent of the international trading rules 
in effect today were written fundamentally by U.S. trade 
negotiators over the past 50 years.
     World trade has expanded from less than $100 
billion in the late 1940s to over $6.3 trillion in 1996. 
Moreover, the volume of world trade in merchandise goods and 
services totaled an estimated $6.6 trillion in 1997.
     The Soviet communist empire collapsed in 1989 when 
the Berlin Wall came down, and today even the few remaining 
communist regimes in the world--including the Republic of China 
and Cuba--have been compelled to introduce free-market economic 
policies which, in turn, are gradually raising pressures for 
political freedom in these countries.
    In Latin America, the Enterprise for the Americas 
Initiative (EAI) launched by former President George Bush in 
1989 laid out the goal of creating an American-led, free-trade 
area encompassing the entire Western Hemisphere, from Alaska in 
North America to Tierra del Fuego in South America. The first 
step in creating a Free Trade Area of the Americas (FTAA) was 
taken by the Bush Administration in 1990 with the announcement 
that the U.S. would negotiate a free-trade agreement with 
Mexico. The North American Free Trade Agreement (NAFTA) was 
approved by the U.S. Congress in 1993 and implemented as of 
January 1, 1994. Subsequently, at the Summit of the Americas 
held in Miami, Florida, from December 9-11, 1994, President 
Clinton and all of the democratically elected leaders of Latin 
America, the Caribbean, and Canada pledged unanimously to 
create an FTAA by the year 2005; President Clinton also pledged 
that Chile would become NAFTA's fourth member by 1995, thus 
confirming to the region's leaders that the U.S. was firmly 
committed to hemispheric trade expansion.
    Nine days after the Miami Summit concluded, however, the 
collapse of the Mexican peso derailed NAFTA's expansion to 
Chile and other countries in the Western Hemisphere. Although 
the FTAA negotiating process begun at the Miami Summit has 
continued from 1995 to 1998, the Clinton Administration's 
inability to obtain fast-track negotiating authority in order 
to expand NAFTA to Chile has undermined American influence and 
leadership in the negotiating process. The second Summit of the 
Americas is scheduled to be held in the Chilean capital city of 
Santiago at the end of April 1998, and a hemisphere-wide 
agreement has already been reached to launch formal FTAA trade 
negotiations at the summit with the objective of finally 
establishing the FTAA in 2005. Without fast track negotiating 
authority, however, U.S. leadership at the summit will be 
severely diminished, and prospects for creating an FTAA based 
on NAFTA as the benchmark trade agreement have nearly vanished.
    In retrospect, the Clinton Administration's ambitious 
international trade policy peaked at the end of 1994. Although 
U.S. exports of merchandise goods and services have continued 
to expand rapidly throughout the 1990s--totaling over $933 
billion in 1997--these gains were largely the result of major 
trade liberalization initiatives undertaken by previous 
administrations. Moreover, while President Clinton deserves 
credit for pushing through Congress the approval of NAFTA in 
1993 and the Uruguay Round Agreements in 1994, no major new 
trade liberalization initiatives have been completed by the 
Clinton Administration in more than three years. And the reason 
for this is that President Clinton has been without fast track 
negotiating authority since 1994. Without fast track authority 
to launch new trade negotiations bilaterally, regionally and 
multilaterally, the United States is not a player in the 
continuing fast-paced game of global trade and investment 
expansion.
    President Clinton's lack of fast track trade authority has 
already damaged American economic interests around the world. 
In Latin America, for example, the dynamics of free trade 
expansion have changed dramatically since 1995. Instead of 
accepting the U.S. position that the region's greatest 
prospects lie in accelerated trade liberalization based on an 
expanded NAFTA model, many countries in South America are now 
looking instead towards the South American Common Market 
(Mercosur) as the preferred vehicle for regional trade 
liberalization. Mercosur is a Brazil-led customs union that 
also includes Argentina, Uruguay, and Paraguay. Chile and 
Bolivia became associate members in 1997, and currently 
Venezuela and Colombia are also negotiating their accession to 
Mercosur. In addition, both Mexico and Canada are pursuing free 
trade negotiations with the Mercosur countries. And, moreover, 
Mercosur has announced a formal decision to seek a free trade 
agreement with the European Union before entering into any 
future trade negotiations with the United States aimed at 
establishing a hemisphere-wide FTAA.
    The only country not involved in the expansion of Mercosur 
is the United States, which is subject to the higher tariffs of 
Mercosur's common external tariff (CET) and therefore loses 
competitiveness against goods manufactured inside Mercosur or 
in countries which have free trade pacts with Mercosur. While 
this exclusion may not affect large U.S.-owned multinationals 
who have the financial and technological resources to build new 
production facilities within the Mercosur region, it does 
affect the thousands of small and medium-sized American export 
businesses which cannot re-locate or establish subsidiary 
operations in South America. Similarly, the exclusion from 
Mercosur markets also affects workers at small and medium-sized 
export businesses who may see their employment and wage-growth 
opportunities curtailed by the inability to expand exports to 
South America.
    The Clinton Administration's lack of fast track negotiating 
authority has also affected U.S. economic interests at the 
level of the WTO and APEC. In April 1994, the United States 
signed the Uruguay Round trade agreements creating the World 
Trade Organization (WTO), which went into force on January 1, 
1995. The Reagan Administration initiated these trade 
negotiations in 1986 as part of an ongoing series of talks 
under the General Agreement on Tariffs and Trade (GATT). This 
was the eighth ``round'' of GATT trade talks that started in 
1947. The WTO is a forum in which countries can seek peaceful 
solutions to trade disputes without resorting to trade 
protectionism. Thus, instead of occasional international trade 
negotiations like the eight previous rounds of GATT talks, the 
WTO allows for ongoing negotiations.
    Since the WTO went into effect on January 1, 1995, the U.S. 
has completed and signed multilateral sectoral agreements 
covering Telecommunications, Financial Services, and the first 
stage of an International Technology Agreement (ITA). However, 
the Clinton Administration has exhausted its residual 
negotiating authority at a time when the task of trade 
liberalization is far from being concluded. For example, the 
U.S. needs to pursue further liberalization in 
telecommunications, financial services and ITA issues. 
Moreover, the U.S. also must negotiate sectoral agreements 
within the WTO covering the areas of investment safeguards, 
competition policy and government procurement. Finally, the WTO 
is presently scheduled to launch two major new sectoral 
negotiations at the end of 1999 and the end of 2000, covering 
agriculture and services. All of these sectoral negotiations 
encompass industries and economic sectors where the United 
States is the world's leading competitor, enjoying major 
advantages in terms of technology development, productivity, 
product quality and market share. If the U.S. Administration 
does not have fast track trade authority to participate 
actively in these sectoral negotiations, it runs the risk that 
other groups of countries--such as the European Union--will 
write the rules for tomorrow's global trading system, in 
detriment of U.S. economic and national security interests 
around the world.
    The forum for Asia Pacific Economic Cooperation (APEC) is 
America's institutional link to fast-growing Asian economies. 
Formed in 1989, APEC encompasses Australia, Brunei, Canada, 
Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, 
New Zealand, Papua New Guinea, the Philippines, Singapore, 
South Korea, Taiwan, Thailand, and the United States. The 
leaders of APEC's member economies, including President Bill 
Clinton, in 1994 set as their goal achieving ``free trade and 
investment in the Asia Pacific'' region by 2010 for developed 
members and by 2020 for developing members. Since 1994, 
however, all of the easy unilateral liberalization measures 
that could be accomplished within APEC have been achieved. At 
the most recent summit of APEC's heads of state, held in 
Vancouver, Canada during November 1997, it was agreed that the 
forum would look into future liberalization talks covering a 
number of sectors, including environmental goods, fish and 
related products, gems and jewelry, toys, forest products, 
telecommunications, energy oils and oilseeds, chemicals, and 
food products, among others. Without fast track authority, 
however, America's prospects for advancing these talks will 
fade quickly, particularly in light of the Asian financial 
crisis which threatens to engulf Indonesia in ethnic and 
political turmoil that could spread to other Asian countries. 
APEC began as a promising new regional trade liberalization 
forum, but without strong U.S. leadership backed by a fast 
track authority that provides the U.S. president a clear 
mandate to negotiate trade agreements, APEC runs the risk of 
turning into an irrelevant entity without a purpose. If this 
occurs, American prospects for expanding trade and investment 
more quickly in the Asia Pacific region could be derailed for 
years.

          What Should Congress and the U.S. Administration Do?

    America needs to be put back on the road to free trade. 
Specifically, the U.S. should:
    Renew the Executive's fast track negotiating authority. 
Without fast track authority, no president can initiate and 
complete vital trade negotiations in Latin America, Asia, and 
Europe. Moreover, without fast track, the U.S. will be 
sidelined in vital upcoming WTO negotiations covering many 
sectors in which America today is the undisputed technology and 
market leader. If the U.S. does not remain at the vanguard of 
global trade and investment liberalization, America's economic 
prosperity will suffer. Export growth will slow, new employment 
opportunities will be lost, the nation's competitive technology 
edge will dull, inflation and interest rates will certainly 
rise as economic activity turns more sluggish, and American 
leadership around the world will decline. Congress should grant 
the U.S. president a broad fast track authority to undertake 
trade negotiations in Latin America, Asia and Europe, and 
within the WTO. However, Congress should not include in the 
Executive's fast track negotiating authority any provisions 
unrelated to trade, such as labor and environmental standards.
    Establish free-trade areas between the United States and 
its trading partners. NAFTA should be expanded to incorporate 
Chile and other Latin American countries, and Caribbean nations 
should receive trading parity with NAFTA members. The U.S. also 
should pursue free trade negotiations with countries such as 
Australia, New Zealand and Singapore. The U.S. should cooperate 
with other APEC members and take more concrete steps to 
liberalize trade in Asia. Finally, the U.S. should offer a 
Transatlantic Free Trade Area to interested European countries, 
including the recently freed nations in Eastern and Central 
Europe.
    Support the accession of both the People's Republic of 
China and the Republic of China on Taiwan to the World Trade 
Organization on a commercially viable basis. In 1986, Beijing 
applied to resume China's seat in the General Agreement on 
Tariffs and Trade, the predecessor of the WTO, which the 
Republic of China on Taiwan had abandoned in 1950. In 1990, 
Taiwan also applied to join the GATT. Following Hong Kong's 
example, Taiwan elected to apply as the autonomous customs 
territory of ``Chinese Taipei,'' rather than as a sovereign 
country. This move was intended to finesse Beijing's 
sensitivities over questions of sovereignty. Beijing insists 
that Taiwan not join the WTO before the PRC, but has offered as 
its first act as a WTO member to sponsor Taiwan. Joining the 
WTO is an economic, not political, act. Therefore, Beijing 
should not be allowed to block Taiwan's entry; each application 
should be considered on its own merits. Although negotiations 
with Taiwan have progressed further, neither China nor Taiwan 
has offered sufficient concessions to warrant WTO membership.
    Demand an end to China's practice of forcing foreign firms 
to transfer technology as a condition of investing. The 
leverage that China can exert with its huge market makes it 
difficult even for large industrial firms to resist this form 
of government-sponsored theft. The U.S. must also insist that 
all existing bilateral trade agreements, especially the 1995 
Intellectual Property Rights Memorandum of Understanding, be 
fully enforced before approving China's accession to the WTO.
    Repeal the outdated Jackson-Vanik Amendment to the Trade 
Act of 1975.The Jackson-Vanik Trade Act was designed to 
encourage the Soviet Union and its Eastern European satellites 
to lift restrictions on Jewish emigration to Israel and the 
U.S. It withdraws America's most-favored-nation trading status 
from any country that restricts immigration. Threatening to 
deny MFN status to China because of human rights abuses has 
become an annual ritual in Congress. But maintaining MFN with 
China is clearly in America's economic interest. At stake are 
billions of dollars in trade. It also encourages the 
liberalization of China's political system. Trade forces China 
to open up to the outside world and therefore serves the long-
run cause of human rights.
    Include Chile in NAFTA. Chile has enjoyed the fastest 
economic growth and the greatest economic stability of any 
country in Latin America since the mid-1980s. It is in the 
forefront of economic and democratic reform in the Americas, 
having successfully achieved the transition from military 
dictatorship to civilian democracy. Chile now has bilateral 
free trade agreements in effect with Canada and Mexico, it is a 
member of APEC, and an associate member of Mercosur.
    Submit more accurate trade reports. The United States Trade 
Representative (USTR) produces an annual report on foreign 
trade barriers. This report is important because it identifies 
the barriers that U.S. exporters face when selling their 
products overseas. However, it tells only one side of the 
story. America maintains a host of import restrictions such as 
trade quotas, high tariffs, and import bans that are not 
described in the report. They should be. By including such 
information, the U.S. government would be presenting a more 
open picture of the status of free trade and of where reforms 
are still needed, including within the U.S. Moreover, such USTR 
reports should incorporate a scorecard of the current cost to 
the economy of each of these U.S. restrictions on trade.
    Upgrade the capacity of U.S. federal agencies to compile 
and report trade data at the national, state and local levels. 
Since the early 1990s, budget cuts at the Census, Department of 
Commerce and Bureau of Economic Analysis have caused the 
elimination of important data-gathering programs capable of 
producing credible and accurate statistics--at the national, 
state and local levels--relating to exports, jobs and 
exporters. The U.S. currently has the capacity to generate 
manufactured export data at the national level, and in a 
limited way at the state level. However, the U.S. does not have 
the capacity to compile and disseminate data relating to 
service exports. Moreover, due to budget cuts in federal data-
gathering agencies, the U.S. lacks the capability to compile 
and analyze export-related data below the level of two-digit 
Standard Industrial Classification (SIC) ranking on a state-by-
state basis. American policymakers, state governments, 
exporters and investors are in urgent need of reliable data 
capable of quantifying exports, jobs and exporting firms at the 
level of congressional districts and metropolitan areas.
      

                                


    Chairwoman Dunn. Thank you very much, Mr. Sweeney.
    Mr. Gadbaw.

STATEMENT OF R. MICHAEL GADBAW, US-ASEAN BUSINESS COUNCIL, AND 
                 NATIONAL FOREIGN TRADE COUNCIL

    Mr. Gadbaw. Thank you, very much for this opportunity to 
address the critical policy issues arising from the Asian 
crisis. I'd like to make three basic points.
    First, Congress should support the IMF package that is 
being presented by the administration because it is in the U.S. 
interest.
    Second, Congress should look carefully at the details of 
the economic reforms in Asia and discuss it with companies like 
those represented in the US-ASEAN Business Council and the 
National Foreign Trade Council because you will find that the 
reforms that have been undertaken are fully consistent with the 
objectives of the U.S. Government and the private sector in 
opening those markets for trade, investment, and finance.
    And, third, we must remember that reform is a generational 
process. We would like to work with Congress to improve the 
workings of the IMF and U.S. Government in way s that will 
facilitate the kind of ongoing reforms in Asia and elsewhere 
that will restore growth to that region and preserve the 
healthy growth we have achieved here in the United States.
    Let me start with what I think is the most important issue; 
namely the IMF replenishment package that is before Congress. 
In our view, it is vitally important that Congress move 
expeditiously to approve the $3.5 billion contribution to the 
New Arrangements to Borrow and the $14.5 quota increase.
    First, the IMF, while not a perfect institution, has been a 
key component of stability in global financial markets for the 
past 50 years. We should not forget the reasons for its 
creation, including avoidance of worldwide competitive 
devaluations, a surefire way to global depression. In some 
respects the IMF is to the global monetary system what the 
Federal Reserve is to the domestic financial system; it is also 
what the WTO is to the global trade system. It has served us 
well historically, it would have to be recreated if it did not 
exist, and it has operated at no cost to the American taxpayer 
or U.S. Government.
    Second, it is not fair to reject the IMF package as a 
bailout. The IMF is providing loans to these countries to allow 
time for the economic reforms to take effect. In time, it is 
these reforms that will restore market confidence and encourage 
return to robust prosperity.
    I encourage every Member of the Subcommittee and Full 
Committee to examine the letters of intent which encompass the 
various commitments that have been made by the countries in 
Asia, particularly Korea, Thailand, and Indonesia. As I would 
like to explain in more detail, these commitments are 
completely in-line with reforms American business has been 
pursuing with our regional counterparts.
    Deputy Secretary of Treasury Larry Summers has focused our 
attention on what is new about this crisis: ``Relative to 
nearly all of the crises we have seen in recent years,'' he 
said, ``the problems that must be fixed in Asia are much more 
microeconomic than macroeconomic, and involve the private 
sector more and the public sector less.''
    In 1995 the US-ASEAN Council's Indonesia Committee started 
a bilateral private sector dialog with KIKAS, the American 
Committee of the Indonesian Chamber of Commerce. Each year we 
identified areas of mutual interest which would facilitate 
increased trade and investment, and made recommendations to 
each government for reforms in those areas. In the second year 
we identified privatization and deregulation in three sectors, 
energy, financial services, and agriculture, as our major areas 
of interest.
    Indonesia's deregulation packages over the past several 
months, as well as the reforms committed to in their letter of 
intent with the IMF, address virtually all of the areas we and 
KIKAS had identified for reform. Indonesia is now facing the 
most serious economic crisis in its history. Developments that 
had their origins in economic breakdowns in other parts of the 
region came to focus on some of the weaknesses of the 
Indonesian economic model, particularly in the financial 
sector. In response, Indonesia has agreed with the IMF to 
accelerate and expand its economic reforms. Over the last month 
and a half, more reform has been achieved in Indonesia than in 
the last two decades--all in the direction that United States 
business has supported.
    My experience leads me to believe that if engaged 
appropriately and patiently, the most recent processes of 
reform will be realized. Similar reforms have been undertaken 
in other parts of the region.
    Allow me to make three points with respect to the IMF 
package. We are opposed to imposing additional conditions on 
the IMF in connection to its funding package. I agree with Paul 
Wolfowitz who said last month, the time to reorganize the fire 
department or to question whether fire insurance makes people 
careless about fire prevention is not when the whole 
neighborhood is burning down. We support a healthy debate on 
the conditions involved in the IMF reform packages as they 
relate to these countries and their implications of U.S. 
interests. As we have discussed, we believe the reforms that 
have been embraced by Korea, Thailand, and Indonesia are very 
consistent with initiatives on which we have been working with 
cooperation with our business counterparts, and we would 
support an effort to examine ways to improve the process by 
which the IMF operates and the ways it ensures transparency to 
the market. As IMF officials have recognized in both private 
and public conversations, there are ways to improve this 
process provided that effort does not interfere with the need 
to act expeditiously in the current crisis. Thank you.
    [The prepared statement follows:]

Statement of R. Michael Gadbaw, US-ASEAN Business Council, and National 
Foreign Trade Council

    I am pleased to be here today on behalf of the US-ASEAN 
Business Council (USABC) and the National Foreign Trade Council 
(NFTC). The US-ASEAN Business Council is a private, non-profit 
organization of more than 350 member-companies which works to 
expand trade and investment between the US and the member 
countries of the Association of Southeast East Asian Nations 
(ASEAN). The NFTC, on whose Board I serve, is a broadly based 
trade association of over 550 US companies dealing directly 
with US public policy affecting international trade and 
investment. As you will see, both organizations are solidly 
agreed on the basic message of my testimony on the need for US 
leadership and support for the IMF funding package before the 
Congress.
    Since I last testified before the House of Representatives 
in May of last year, much of East Asia has entered a period of 
economic retrenchment. A great deal has changed in 10 months--
the single most significant development being the financial 
crisis that has swept the region and dramatically reversed its 
historical growth patterns. This is the development that today 
most occupies the observers of the region, US businesses 
operating there, and US policy makers. The impact of this 
crisis on US business and the importance of your support for 
the Administration's IMF funding package, therefore, are the 
focus of my remarks today.
    Let me start with what I think is the most important issue, 
namely the IMF replenishment package that is before Congress. 
In our view, it is vitally important that the Congress move 
expeditiously to approve the $3.5 billion contribution to the 
New Arrangements to Borrow (NAB) and the $14.5 billion quota 
increase. I believe the other witnesses will elaborate at 
length on the many reasons why we should approve the entire 
request this year, so I will be brief in highlighting several 
overall reasons why the request deserves the full support of 
the Congress.
    First, the IMF, while not a perfect institution, has been a 
key component of stability in global financial markets for the 
past 50 years. We should not forget the reasons for its 
creation, including avoidance of worldwide competitive 
devaluations--a sure fire way to global depression. In some 
respects, the IMF is to the global monetary system what the 
Federal Reserve is to the domestic financial system; it is also 
what the WTO is to the global trade system. It has served us 
well historically, it would have to be recreated if it did not 
exist, and it has operated at no cost to the American taxpayer 
or US government.
    Second, it is not fair to reject the IMF package as a 
``bail out.'' The IMF is providing loans to these countries to 
allow time for their economic reforms to take effect. In time, 
it is these reforms that will restore market confidence and 
encourage a return to robust prosperity. It is also wrong in 
that it suggests an act of charity, when in fact, the IMF is 
acting in the interest of international economic stability. It 
thereby acts in the US interest. Moreover, no U.S. taxpayer 
money will be used. The budgetary impact of funding for the IMF 
is zero. And yet, our contribution is leveraged six-to-one by 
other contributors. For a total cost of zero, meeting our 
commitments to the IMF puts the US in a leadership position. 
The IMF increases our leverage by exerting forceful 
multilateral pressure for undertaking otherwise unpopular and 
painful reforms.
    I encourage every member of the Subcommittee and full 
Committee to examine the letters of intent which encompass the 
various commitments that have been made. As I would like to 
explain in more detail, these commitments are completely in 
line with reforms American business has been pursuing with our 
regional counterparts.
    Deputy Secretary of the Treasury Larry Summers has focused 
our attention on what is new about this crisis. ``Relative to 
nearly all of the crises we have seen in recent years, the 
problems that must be fixed (in Asia) are much more 
microeconomic than macroeconomic, and involve the private 
sector more and the public sector less.'' While recognizing the 
important role of macroeconomic stability, microeconomic reform 
is precisely the area where the real work of Asia's recovery is 
to be done. Adopting the right policies to promote structural 
reform and monitoring carefully their impact on the market are 
the keys to restoring economic growth throughout Asia and 
especially in Indonesia, Thailand and South Korea.
    Because I am most familiar with Indonesia, I would like to 
begin with a discussion of that country as a lead in to the 
issues raised throughout the region. I would like to focus this 
portion of my testimony on how the private and public sectors 
can work together toward growth oriented economic reform and 
development.
    For the last several years, I have served as the Chairman 
of the US-ASEAN Business Council's US-Indonesia Business 
Committee. This Committee is comprised of Council member 
companies with a significant stake in trade and investment in 
Indonesia and representing sectors as diverse as oil, mining, 
energy, manufacturing, apparel, high technology and 
agriculture.
    In 1995 the U.S.-ASEAN Council's Indonesia Committee 
started a bilateral private sector dialog with KIKAS, the 
American Committee of the Indonesian Chamber of Commerce. Each 
year we have identified areas of mutual interest which would 
facilitate increased trade and investment, and have made 
recommendations to each government for reforms in those areas. 
In the first year we identified customs reform, distribution 
liberalization and renegotiation of the tax treaty as three key 
priorities.
    Because of the responsiveness of Indonesian business and 
the Indonesian government, we were extremely successful that 
first year and achieved an initial liberalization of 
Indonesia's distribution regime, the signing of a new bilateral 
tax treaty in late 1996, as well as the initiation of a program 
of technical assistance between the U.S. and Indonesian customs 
service.
    In the second year we identified privatization and 
deregulation in three sectors--energy, financial services, and 
agriculture, as our major areas of interest. Indonesia's 
deregulation packages over the past several months as well as 
the reforms committed to in their letter of intent with the IMF 
address virtually all the areas we and KIKAS had identified for 
reform. We have been especially gratified to see a complete 
lifting of all the distribution restrictions, a dismantling of 
Bulog, the local agricultural monopoly, together with an 
elimination of a web of subsidies for the agricultural and 
commodity sectors, restructuring of the financial sector, 
including lifting all restrictions on branching of foreign 
banks, and gradual elimination of key subsidies in the energy 
sector. While there is still work to be done, we are been 
pleased with the process created of bilateral private sector 
exchange and input to the government, and see this as a model 
for continuing to work these issues in Indonesia and throughout 
the region.
    Indonesia is facing the most serious economic crisis in its 
history. Developments that had their origins in economic 
breakdowns in other parts of the region came to focus on some 
of the weaknesses of the Indonesian economic model, 
particularly in the financial sector. In response, Indonesia 
has agreed with the IMF to accelerate and expand its economic 
reforms. Over the last month and a half, more reform has been 
achieved in Indonesia than over the last two decades, all in 
the direction that US business has supported. My experience 
leads me to believe that, if engaged appropriately, and 
patiently, the most recent processes of reform will be 
realized.
    It is impossible to understand the current situation in 
Indonesia without taking a quick look at the historical record. 
Prior to 1997, Indonesia averaged for 25 years an economic 
growth rate of 7%. It had reduced the incidence of poverty to 
14%--this from an average of 70% in 1970. And it has created a 
middle-class conservatively estimated at 20 million. 
Indonesia's economic performance so impressed the world that 
the U.S. Department of Commerce in 1995 named it one of the 
world's ten big emerging markets, and the World Bank just last 
year estimated that it could become the world's sixth largest 
economy by the year 2010.
    The events of the last six months have brought home to the 
Indonesians that the system that provided them so much 
prosperity also contains some fundamental structural 
weaknesses. A victim of its own success, the pace of reform in 
Indonesia simply could not move along fast enough to 
productively accommodate the ever increasing flow of capital.
    Since January 15th when President Suharto pledged a reform 
program unprecedented in Indonesia for its scope, the 
Government of Indonesia has moved to address this situation. 
The reforms now underway tap into issues and interests that are 
deeply entrenched in Indonesian society. To give you an idea of 
the full scope of these reforms allow me to briefly summarize 
the measures President Suharto agreed to last month. They have 
not in my opinion been very well publicized. (1) The 
privatization of state owned enterprises will be accelerated. 
(2) Twelve major infrastructure projects were canceled. (3) 
Funding and credit privileges for Indonesia's state airplane 
projects were canceled. (4) All special tax, customs, and 
credit privileges for the National Car were canceled. (This had 
been an issue of such great concern to Indonesia's trading 
partners, that the US, the EU and Japan had been contesting at 
the WTO for more than a year. The IMF, in consultations with 
the Government of Indonesia, managed to achieve something the 
efforts of three governments and the processes of the WTO had 
thus far failed to resolve.) (5) Accounts once off budget, such 
as the Reforestation and Investment Funds, were brought on 
budget. (6) The government monopoly on the import and 
distribution of sugar and wheat was abolished, leaving only 
rice subject to monopoly. (7) The cement, paper, and plywood 
cartels were slated for dissolution. And (8), the government 
agreed to the removal of all restrictions on investment in 
wholesale and retail trade.
    These are just to mention a few of the changes underway. 
And they are underway. The Government of Indonesia has issued 
more than 30 regulations implementing various parts of its 
agreement with the IMF.
    Similar reforms have been undertaken in the other nations 
most afflicted by the Asian currency crisis and the economic 
tide seems to be turning in a positive direction. Thailand has 
committed to greater privatization, reductions in subsidies, 
and a loosening of limitations on foreign ownership and 
exchange controls. Korea has agreed to eliminate unfair 
subsidies to exporters, relax import licensing and customs 
procedures, and ease foreign ownership restrictions. Perhaps 
most significantly, given the nature of the crisis in Korea, 
the government has agreed to end government-directed 
noneconomic lending. Reform of South Korea's chaebol system is 
something the US has been pursuing for years.
    If these reforms are so dramatic, it is fair to ask why the 
crisis is not over? Every day we read about new developments, 
some of which test our faith in the ongoing commitment of 
governments in the region to stick to their commitments. The 
fact is that with microeconomic reforms of this type, the 
market response is critical and it is essential to have 
accurate feedback on the market implementation and response to 
these measures. That does not mean, however, that we should 
react to every story that appears in the media, I appeal to the 
subcommittee to keep in perspective the unprecedented 
challenges posed by these changes. In the case of Indonesia, 
the bulk of them are only a little more than a month old.
    In the cases of Korea and Thailand, no less than Indonesia, 
we are asking these countries to change practices that 
profoundly affect commercial, economic, social and political 
relationships. We must exercise patience and understanding. A 
more accurate picture of the region's commitment to this new 
phase of economic reform will emerge in the course of the year. 
Mindful of this realistic time frame, we should resist the 
temptation to leap on each anecdote as a sign of rejection. 
Instead, we should monitor the situation and build on our 
record of engagement. When we discover that developments on the 
ground are not in accordance with the promises made by 
authorities, we should take it up with our friends in the 
region and encourage them to move forward.
    Congress is doing its part to monitor the situation. I find 
the number of hearings since Congress returned from its 
Christmas recess reassuring, and I commend the leadership of 
this subcommittee for holding a hearing to help gather the 
facts.
    It also falls to Congress to remain engaged. This can best 
be done by providing the resources needed by the IMF. The IMF's 
capital base is at an historical low, with $10-15 billion 
currently available. Whether we like it or not, we are the 
preeminent world leader and we must lead the way. We are the 
largest contributor to the IMF. This not only means that we 
have the largest amount of influence, but it also means we have 
the largest responsibility. It is essential to preventing the 
Asian flu from spreading into a broader contagion. Do we really 
want to take the chance that there is no danger of the 
situation deteriorating and deteriorating fast? There are, 
moreover, broader strategic and political reasons--the 
countries affected are major allies and security partners of 
the United States. Our Asian partners will remember our actions 
or lack thereof at a time of dire need and encouragement.
    American businesses and the workers they employ have too 
much at stake in Asian prosperity to risk its recovery. 
Companies with business in Asia have seen contracts canceled or 
postponed, our agricultural exports to Asia are declining, and 
other important markets--such as Latin America--appear to be 
slowing down. US financial institutions are also taking their 
fair share of losses.
    GE is, in may ways, a good reflection of U.S. business, 
given that our businesses include infrastructure, consumer 
products, and financial services. Our exports to the Pacific 
Basin last year were $3.176 billion (supporting over 45,000 
jobs), as part of our overall $6.3 billion trade surplus as a 
company. These exports include turbines from Schenectady, NY 
and Greenville, SC, locomotives from Erie, Pennsylvania, 
aircraft engines from Cincinnati, OH and medical diagnostic 
equipment from Milwaukee, WI.
    With Asia's large population and rapidly emerging middle 
class, Asia was and continues to be a key market for GE's 
future. We remain committed to these markets and are pleased to 
see many market reforms which will facilitate our sales over 
the long-term. In the near-term, it is clear that companies 
operating in the region will see an impact on their sales as 
these countries trim their budgets for big-ticket items and the 
middle classes have less discretionary income to spend on 
imported products. In this regard, I would underscore the 
critical need of the US Export-Import Bank and other US 
agencies and government functions which support US exports. 
Export opportunities are down, private commercial trade finance 
is scarce in key markets, and our trading competitors, with the 
strong backing of their governments, will fight aggressively to 
secure the remaining opportunities that exist.
    This year, Indonesia, Thailand, and South Korea are all 
expected to register negative growth rates. I trust that in a 
couple of years, with proper guidance, the region will once 
again become a driving force behind American exports, but the 
region will recover only if we do not undermine it by failing 
to support the international organizations that are critical to 
its recovery.
    Passage of the IMF funding request has also prompted a 
debate over IMF conditionality. In this regard, I agree with 
CRS analyst, Patricia Wertman: ``The Asian crisis has made the 
often sterile debate over IMF conditionality into a debate of 
historic significance with serious consequences.'' In this 
regard, I speak for the broad cross section of USABC and NFTC 
member companies in stating:
     We are opposed to imposing additional conditions 
on the IMF in connection with this funding package. I agree 
with my friend Paul Wolfowitz, who said last month before the 
Banking Committee that ``The time to reorganize the fire 
department or to question whether fire insurance makes people 
careless about fire prevention is not when the whole 
neighborhood is burning down.''
     We support a healthy debate on the conditions 
involved in the IMF reform packages as they relate to these 
countries and their implications for US interests. As we have 
discussed above, we believe the reforms that have been embraced 
by Korea, Thailand and Indonesia are very consistent with 
initiatives on which we have been working in cooperation with 
our business counterparts in the region.
     We would support an effort to examine ways to 
improve the process by which the IMF operates and the ways it 
ensures transparency to the market. As IMF officials have 
recognized in both private and public conversations over the 
last month, there are ways to improve this process, provided 
that effort does not interfere with the need to act 
expeditiously in the current crisis.
    At the same time that we are reviewing the way the IMF 
operates, it would be desirable to examine ways to improve the 
working of the US Government in its approach to this crisis. A 
key lesson is the need for policy integration, particularly as 
it relates to tying together our interests in trade, investment 
and financial sector liberalization. The agencies of the US 
Government working these areas need to develop more effective 
means for obtaining input from the private sector and 
harnessing the leverage market forces can bring in support of 
necessary reforms. The USABC and the NFTC are made up of member 
companies with direct insight into the market response to the 
policy changes being undertaken in Asia. As we move to an 
active phase of monitoring the implementation of these reforms, 
there will be a critical need for real time information on how 
the market is responding and what further policy measures may 
be needed to achieve the objectives of reform.
    Toward this end, the US-ASEAN Business Council commissioned 
last month a report on reforms in Indonesia which analyzes the 
reforms Indonesia has made over the last three years. Because 
of the timeliness of this report, I would ask the Committee 
that the report by attorneys Robert Hornick and Mark Nelson be 
submitted for the record. The Council has also inaugurated a 
series of conference calls with the AmChams in Indonesia and 
Thailand to maintain an on-the-ground private sector 
perspective of the region's compliance. This initiative 
supplements a continuing series of conference calls we have 
conducted with the U.S. embassy in Jakarta over the last two 
years to solicit the Ambassador's views and, most recently, 
focus on the impact of the IMF reforms.
    Finally, I would like to say a word about the role that our 
friends in China and Japan have to play in helping East Asia in 
its recovery. I have been quite encouraged by Chinese 
reassurances that it will not devalue its own currency in an 
effort to compete with the devalued exports of its neighbors. 
They are to be commended for their responsible position.
    With regard to the Japanese, I can only echo the calls for 
Japan to strengthen domestic demand, further liberalize 
imports, deregulate its economy and effectively address its own 
financial difficulties. Its own reform is the most important 
contribution Japan can make to the recovery of its neighbors. 
It is difficult to imagine a full recovery for Asian economies 
with Japan continuing at growth rates of less than 1%. Japan 
must serve as a locomotive of growth in the region. As the 
world's second largest economy and most important trade and 
investment partner throughout Asia, it must share in the 
responsibilities that go along with such status. An export-led 
strategy will not work in resolving the serious economic 
problems in the region and could exacerbate trade tensions 
between our two countries.
    By way of closing, I would like to reiterate my faith in 
Asia's ultimate recovery. Until the crisis diverted attention 
from the long-term picture, the most ardent advocates of the 
region ceaselessly touted the region's economic prospects. In 
the case of ASEAN, we talked about a region by the year 2010 
with a population of 560 million and a trillion dollar GDP and 
two-way trade with the US of more than $300 billion per year. I 
speak for the US-ASEAN Business Council and the National 
Foreign Trade Council when I say that I still believe in that 
vision. It may not arrive as soon as we expected, but with 
proper international leadership, it is not much farther away.
      

                                


    Chairwoman Dunn. Thank you, Mr. Gadbaw. Let's move now to 
the gentleman who has joined our panel, C. Fred Bergsten, who 
is the director of the Institute of International Economics.
    Mr. Bergsten.

    STATEMENT OF C. FRED BERGSTEN, DIRECTOR, INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. Bergsten. Thank you very much, Madame Chairwoman. Let 
me apologize for getting here late. I was in the middle of a 
hot debate on the IMF legislative proposal before some of your 
colleagues at the Joint Economic Committee, and I apologize. 
I'll be very brief. I've given you a full written statement.
    I was asked to address the impact of the Asian crisis on 
United States trade and the outlook for trade policy and I'll 
try to do that, very quickly, across three time horizons: the 
short run, the long run, and, where I think the difficulties 
lie, in the medium run.
    It is too early for the financial crisis, and the policy 
responses to it, to have much impact on trade flow. Korea and 
Thailand have shifted into current account surplus and our 
exports to Korea have fallen sharply in the last couple of 
months. Our own trade balance so far, however, remains on about 
the same plateau of the last 18 months--a merchandise deficit 
of about $200 billion and a goods and services deficit of about 
a $110 billion. So far that has stayed put, although I think 
it's likely to increase in the near future. I'll come back to 
that in a moment.
    The Asian crisis so far, however, has had some very 
positive effects on trade policy. Despite concerns in some 
quarters that liberalization of national financial markets was 
a cause of the crisis, all of the members of the World Trade 
Organization, including all the crisis countries in Asia, 
agreed in December to further opening of that sector. A second 
positive development was the decision of the 18 APEC countries 
at their annual summit meeting in Vancouver in November to 
designate 15 major sectors--including autos, chemicals, energy 
goods and services, environmental goods and services, medical 
equipment--for early liberalization. And they agreed that 
detailed plans for eliminating barriers in nine of those 
sectors totaling over $1.5 trillion of global trade, should be 
agreed by the middle of 1998 and implemented in early 1999.
    Some of the Asian members of APEC are of course the 
countries hit most directly by the crisis. It is thus extremely 
encouraging that they are willing to continue and even 
accelerate their progress toward achieving the agreed APEC goal 
of free and open trade and investment in the region by 2010. In 
fact, APEC's Vancouver pledge to eliminate barriers in nine 
additional sectors this year represents the major progress 
toward free trade that is now being pursued anywhere in the 
world.
    In the long term, I think there is a silver lining on the 
current crisis cloud. That is the considerable further 
liberalization that countries will have to adopt to restore the 
economic prospects and to overcome their crises. It is 
noteworthy that every problem country in Asia has clearly 
indicated its intention to move in this direction, i.e., 
further liberalization, whether with the IMF or to avoid it, as 
in the case of Malaysia. These reforms include increased 
transparency, reductions of impediments to trade and 
investment, and the corresponding domestic measures.
    A key point for the Congress to keep in mind is that the 
international institutions in which we participate, like APEC 
and particularly the International Monetary Fund, insist on 
further trade liberalization and further opening of markets. 
They are therefore very supporting of U.S. interests. We ought 
to be strongly supportive of them, as, for example, at present, 
through further funding for the IMF.
    There may be major problems in the medium run, however, 
both in the crisis countries themselves and in the rest of the 
world as a result of the impact of the crisis on trade flows. 
Over the next year or so, the huge currency depreciations in 
Asia will sharply improve the competitive position of every 
country in the region. As part of the adjustment, those 
countries are going to face recessions, with zero or negative 
growth over the next year or so, which also will dampen their 
imports and increase their zeal to export to the rest of the 
world. This is a natural, inescapable part of the adjustment 
process, but it will lead to some swings in trade balances.
    We've just published a new study at the Institute for 
International Economics that tries to quantify these effects. 
You have to make some guesses where the exchange rates wind up 
but we've done that and we have come to the following 
conclusions: Over the next year or so, there will be an 
increase of about $50 billion in the U.S. trade deficit as a 
result of the Asian crisis. There will be a similar adverse 
swing in the trade position of Europe--they happen to start 
from a surplus, but they'll be hit by about the amount we are. 
On the positive side, Korea will probably get an improvement of 
about $40 to $50 billion, moving it from the large deficit it 
had prior to the crisis to a modest surplus. And there will be 
a pickup of about $50 billion in the trade position of Japan.
    These swings occur at a time when trade policy is already 
under substantial pressure. The Congress did not approve new 
fast track authority last year, despite the good performance of 
our own economy. Europe continues to face high employment and 
is preoccupied with internal matters, so it's not going to do 
much on the trade front.
    The biggest problem is Japan. As the world's largest 
surplus and creditor country, Japan should be reducing rather 
than increasing its surplus to help facilitate the adjustment 
of the other countries in Asia. That would be the major 
contribution Japan could make to the crisis. It has to be 
continually pushed to move in that direction.
    But the bottom line in all this is that the adverse swing 
in our own trade balance and in Europe, exacerbated by Japan's 
further increases, could derail us from the proper course of 
trade policy in this country over the next couple of years. In 
my view, it's essential for us, particularly because of the 
crisis, to reconsider and pass fast track legislation. We have 
to signal that our markets are going to continue to be open if 
we're going to be able to credibly push the Asian countries to 
keep opening their markets. We are going to have to absorb some 
additional imports, given our good economic conditions, to 
enable them to overcome their crisis.
    A particular casualty if we do not move forward could be 
the APEC liberalization program that I talked about above. We 
need new negotiating authority to pursue a number of the 
sectoral initiatives to which APEC has already agreed. The 
program simply cannot proceed without the United States--we 
have to be in it. It would be the height of folly if the United 
States were to let the APEC trade liberalization program 
collapse. American exporters have enormous opportunities in a 
very wide range of sectors that our APEC partners have already 
agreed to liberalize. That's because of the strong competitive 
position of our firms and also because many of the Asian 
countries still have high barriers.
    If Congress were unable to pass full fast track authority, 
which I support, it should still authorize the administration 
to pursue the agreed APEC sectors on a fast track basis that 
would enable us to seize that very real, very tangible 
opportunity that now exists for us to expand our sales and 
recoup our trade position. It would take advantage of the 
willingness of our partners in the Asian countries to open 
their markets further despite the crisis.
    Thank you very much.
    [The prepared statement follows:]

Statement of C. Fred Bergsten,* Director, Institute for International 
Economics

    United States trade with Asia is being significantly 
affected by a series of cross-cutting developments. On the one 
hand, the financial crisis is the region will have a 
substantial negative impact on our trade balance for the next 
year or so. On the other hand, APEC has accelerated the pace of 
its trade liberalization and the IMF programs in the region 
require even faster reduction of barriers in some cases. Hence 
the immediate, medium-term and long-run implications of current 
Asian developments for our economy are likely to differ 
substantially.
---------------------------------------------------------------------------
    * Dr. Bergsten was formerly Assistant Secretary of the Treasury for 
International Affairs (1977-81), Assistant for International Economic 
Affairs to the National Security Council (1969-71), Chairman of APEC's 
Eminent Persons Group throughout its existence (1993-95) and Chairman 
of the Competitiveness Policy Council throughout its existence (1992-
97).
---------------------------------------------------------------------------

      APEC and the IMF: Continued Liberalization in the Short Run

    It is still too early for the financial crisis and policy 
responses to it to have had much impact on trade flows. Korea 
and Thailand have already shifted into current account surplus 
and our exports to Korea have fallen sharply in the last couple 
of months. Our own trade balance remains on the plateau of the 
past eighteen months, however, with the merchandise deficit 
running at an annual rate of about $200 billion and the current 
account deficit at about $160 billion. But major changes in our 
position will show up later this year and I will address them 
below.
    The crisis has had some effects on trade policy, however, 
and to date they have been largely positive. Despite concerns 
in some quarters that liberalization of national financial 
markets was a cause of the crisis itself, the members of the 
World Trade Organization--including all of the crisis countries 
in Asia--agreed in early December to further opening of that 
key sector.\1\
---------------------------------------------------------------------------
    \1\ A comprehensive analysis will be presented in Wendy Dobson and 
Pierre Jacquet, Evaluating the Financial Services Agreement, 
Washington: Institute for International Economics, forthcoming April 
1998.
---------------------------------------------------------------------------
    The crisis in fact seems to have had a favorable impact. 
Weaknesses in financial sectors were a central cause of the 
difficulties in every Asian country. It was universally 
recognized that further reforms, including opening to foreign 
institutions, was a necessary component of adjustment programs 
that would restore confidence in the countries' currencies and 
economies.
    The crisis promoted financial liberalization in two very 
direct ways. The heightened need for foreign investment, to 
finance continuing current account deficits in a sustainable 
manner and to recapitalize weak banking systems, added 
powerfully to the case for liberalization. And the 
International Monetary Fund strongly reinforced the WTO 
agreement, and in a number of instances required reforms that 
went much further in its support packages for the troubled 
countries.
    A second positive development was the decision of the 18 
APEC countries, at their annual summit in Vancouver in 
November, to designate 15 major sectors--including automobiles, 
chemicals, energy goods and services, environmental goods and 
services, and medical equipment--for early liberalization. They 
also agreed that detailed plans for eliminating barriers in 
nine of these sectors, totaling over $1.5 trillion of global 
trade, should be agreed by the middle of 1998 and implemented 
in early 1999. Some of the Asian members of APEC are of course 
the countries hit most directly by the crisis and it is 
extremely encouraging that they were willing to continue, and 
even accelerate, their progress toward achieving the agreed 
APEC goal of ``free and open trade and investment in the 
region'' by 2010/2020.\2\
---------------------------------------------------------------------------
    \2\ It should be noted that APEC has also played a very important 
role in responding directly to the financial crisis. The Vancouver 
summit endorsed the Manila Framework, worked out a few days earlier by 
Deputy Finance Ministers of the bulk of the APEC countries, that 
invented the IMF's new Supplemental Reserve Facility, which was used to 
provide rapid disbursement of a much higher level of IMF resources to 
Korea than would have been available previously, and set up a new 
regional surveillance mechanism that will try to head off future crises 
by generating peer pressure on countries to take preventative action 
when trouble is brewing.
---------------------------------------------------------------------------
    Despite the crisis, APEC thus remains one of the leading 
forces in the world for trade liberalization. Given the fact 
that its members account for half of the world economy, its 
commitment to achieve free trade by 2010/2020 remains 
potentially the most far-reaching trade agreement in history. 
Its creation played a central role in bringing the Uruguay 
Round to successful conclusion in the GAT in 1993. Its 
agreement to eliminate tariffs on a wide range of high-tech 
goods and services galvanized the global Information Technology 
Agreement in 1996. As noted, it played an important role in the 
global agreement on liberalization of financial services in 
1997. APEC's Vancouver pledge to eliminate barriers in nine 
additional major sectors in 1998 represents the major progress 
toward freeing trade that is now being pursued anywhere in the 
world.'' \3\
---------------------------------------------------------------------------
    \3\ For an appraisal of the current status and outlook for APEC see 
C. Fred Bergsten, Whither APEC? The Progress to Date and Agenda for the 
Future. Washington: Institute for International Economics, October 
1997.
---------------------------------------------------------------------------
    To be sure, there has been some modest increase in trade 
barriers as well since the Asian crisis erupted. Most notably, 
Mercosur increased its common external tariff by 25 percent--
from 12 to 15 percent--as part of its effort to avoid greater 
contagion from Asia. The failure of the United States to pass 
fast track legislation last year was also a negative 
development, to which I return later.
    On balance, however, the bicycle of trade liberalization 
has continued to move forward over the past six to eight months 
despite the Asian crisis. APEC has been the most prominent 
factor in the progress despite its region's being the locus of 
the crisis, and continues to deserve strong support from the 
United States. The bottom line is ``so far, so good.''

               A Better Policy Framework in the Long Run

    The potential long-term silver lining on the current cloud 
is the considerable further liberalization that countries will 
have to adopt to restore their economic prospects and thus to 
overcome the crisis.
    It is noteworthy that every problem country in Asia has 
clearly indicated its intention to move in this direction, 
whether with the IMF (Indonesia, Korea, Philippines, Thailand) 
or to avoid it (Malaysia, perhaps China). The reforms will 
include increased transparency and accountability of financial 
systems and corporate governance, reduction of impediments to 
trade and investment, and corresponding domestic measures.
    At the end of the day, the trade and investment climate 
should be considerably stronger throughout Asia as a result of 
the crisis and policy responses to it. As Senator Roth and I 
concluded in our recent op-ed on the topic, ``the crisis will 
accomplish enormously more for trade expansion than decades of 
effort by US negotiators.'' \4\
---------------------------------------------------------------------------
    \4\ William V. Roth, Jr. and Fred Bergsten, ``The (Potential) Asian 
Silver Lining,'' The Washington Post, December 28, 1997.
---------------------------------------------------------------------------
    A word on China is appropriate in this context. China had 
avoided being hit directly by the crisis because its currency 
is inconvertible on capital account and is therefore not 
subject to direct market attacks. Nevertheless, it has clearly 
read the message of the markets and has substantially 
accelerated the pace of its marketization reforms. Premier Li 
Peng has in fact set a goal of full marketization of the 
Chinese economy by 2010.
    China has not yet moved far enough to qualify for 
membership in the WTO. It is making rapid progress in the right 
direction, however, and is in fact the main hero of the current 
crisis by avoiding the temptation to devalue its currency as 
well as speeding its internal reforms. This is another 
beneficial long-term effect of the crisis for the United States 
and for the world trading system.

                       Trouble in the Medium Term

    There may be major problems in the medium run, however, 
both in the crisis countries themselves and in the rest of the 
world, as a result of impact of the crisis on trade flows. Over 
the next year or so, the huge currency depreciations in Asia 
will sharply improve the competitive position of virtually 
every country in the region. These exchange rate swings, along 
with the recessions that are likely to hit every northeast and 
southeast Asian economy in 1998, will produce very large 
changes in national trade balances.
    A new study by my Institute colleagues Marcus Noland and 
Ligang Liu, along with Sherman Robinson and Zhi Wang, uses a 
computable general equilibrium (CGE) model to assess the 
prospects for trade even if the Asian currencies rebound to 
some extent from their present levels.\5\ Their results 
include:
---------------------------------------------------------------------------
    \5\ See Li-Gang Liu, Marcus Noland, Sherman Robinson, and Zhi Wang, 
Asian Competitive Devaluations. Working Paper 98-2. Washington: 
Institute for International Economics, January 1998.
---------------------------------------------------------------------------
     an increase of about $50 billion in the United 
States deficit in dollar terms \6\ and as much as $100 billion 
in real terms;
---------------------------------------------------------------------------
    \6\ The nominal impact will be less because of large favorable 
changes in the US terms of trade, i.e., as the dollar strengthens 
considerably with respect to the Asian currencies and enables us to buy 
more imports with fewer dollars. Changes in the real impact are what 
count for GDP growth and job creation, however, and thus probably for 
trade policy sentiments as well.
---------------------------------------------------------------------------
     a similar reduction in the surplus of the European 
Union;
     an increase of about $50 billion in the surplus of 
Japan; and
     a similar swing of almost $50 billion in the 
position of Korea, converting it from large deficit to large 
surplus.
    These swings will occur at a time when trade policy is 
already under substantial pressure in many countries. The 
Congress of course failed to approve new ``fast track'' 
negotiating authority in 1997 despite the stellar performance 
of the American economy, and the prospects seem dim for 
resurrecting the legislation this year.\7\ Europe continues to 
face very high unemployment and is preoccupied with the 
creation of the euro and the expansion of its membership. As 
noted, Brazil and its Mercosur partners raised their common 
external tariff by a quarter as part of their effort to avoid 
contagion from Asia.
---------------------------------------------------------------------------
    \7\ An analysis that includes the full spectrum of Congressional 
views will appear in Whither Fast Track?, Washington: Institute for 
International Economics, forthcoming April 1998, a special report on a 
conference held on Capitol Hill on February 3.
---------------------------------------------------------------------------
    The largest problem is Japan. As the world's largest 
surplus and creditor country, it should be reducing its trade 
surplus sharply rather than increasing it. In addition to 
proposing new funds that would make more capital available to 
the rest of Asia, it should be importing billions of dollars' 
worth of additional products from the region. China, Taiwan and 
Hong Kong could also afford to run modest deficits, rather than 
their current sizable surpluses, to help the regional 
adjustment process.
    The first trade policy casualty of this process will 
probably be the second Summit of the Americas, in Chile in 
April. Negotiations to create a Free Trade Area of the 
Americas, as agreed at Miami in December 1994, could still be 
launched but nothing serious will happen until the United 
States obtains fast track authority and Mercosur decides to 
extend its liberalization beyond the grouping itself. A second 
casualty could be the WTO Ministerial Conference in Geneva in 
May; the fiftieth anniversary celebration of the GATT/WTO could 
be reduced to nostalgic platitudes rather than commencing 
serious planning for Sir Leon Brittan's proposed Millennium 
Round.
    A third casualty, of particular importance for this 
hearing, could be the APEC liberalization program cited above. 
The United States needs new negotiating authority to pursue a 
number of the sectoral initiatives that were agreed in 
Vancouver. The program cannot proceed without the United States 
and some Asian countries may even retreat from it if the United 
States is unable to participate effectively.
    It would be the height of folly if the United States were 
to let the APEC liberalization program collapse. American 
exporters have enormous opportunities in a number of the 
sectors that our APEC partners have agreed to liberalize, both 
because of the strong competitive positions of our firms and 
because many of the Asian countries still have high barriers in 
these industries. Even if the Congress is unable to pass full 
fast track authority, it should authorize the Administration to 
pursue the agreed APEC sectors on that basis.
    More broadly, the United States and European Union will 
have to accept temporary deteriorations in their trade balances 
to enable the emerging market economies in Asia to successfully 
engineer the needed improvements in their own external 
positions. Congressional rejection of fast track authority 
would signal that the United States may not be prepared to do 
so. This could induce Asian policymakers to reconsider their 
commitment to market-oriented strategies--jeopardizing both 
their prospects for resolving the current crisis and the 
favorable long-term outlook cited above. Indeed, the major 
long-term risk from the current crisis is that some of the most 
important emerging market economies might turn their backs on 
the liberal policy approaches that they need to accelerate 
instead. We certainly do not want to take steps that would 
foster that outcome.
    The World Trade Organization will also be severely 
challenged by the new trade policy threat. It has completed the 
carryover business from the Uruguay Round with its sectoral 
agreements on telecommunications, information technology and 
financial services. New initiatives are now needed to keep the 
bicycle moving forward and the still-new institution from 
becoming moribund for a prolonged period, as its predecessor 
GATT did after completion of the Kennedy and Tokyo Rounds.
    At a minimum, the major industrial countries--the United 
States, the European Union, Japan and Canada--should agree to 
avoid adopting any new trade restrictions in the wake of the 
Asian crisis. The OECD members took a similar ``trade pledge'' 
after the oil shock of 1973 when they realized that it would be 
foolish to try to pass around the resulting deficits among 
themselves. The impact of the Asian crisis could be at least as 
sizable as that initial oil shock and the OECD membership, at 
its upcoming Ministerial meeting, should resolve to avoid 
beggar-thy-neighbor trade responses.
    All this implies a major challenge to the continued march 
of globalization. Anti-globalization forces are mounting in 
both the industrial countries, where they are celebrating the 
defeat of fast track negotiating authority in the United States 
as a ``historic turnaround in attitudes toward international 
integration,'' and in many emerging market economies due to the 
onslaught of yet another financial crisis. Both the 
intellectual underpinnings of globalization, and the policies 
to implement it, are likely to be questioned more severely than 
at any other time in the past two decades. The global outcome 
for several decades ahead will turn on the outcome.

                              Conclusion 

    There are thus a number of potentially significant trade 
implications from the Asian crisis. We will shortly be moving 
into the period where countries both inside and outside the 
region may be tempted to turn to trade restrictions, or at 
least to avoid new trade liberalization, to help them through 
the difficult adjustment period.
    In such a situation, the best defense is a good offense. 
The crisis countries must liberalize further, to restore market 
confidence in their economies and to fulfill their IMF 
programs. The industrial countries need to do so too, to make 
clear that they will accept increased Asian exports and to 
encourage the Asians to maintain their market-oriented 
adjustment strategies. New initiatives to maintain the momentum 
of liberalization are acutely needed, particularly in the WTO 
but in regional contexts such as the FTAA and especially APEC--
which has already made very specific commitments to liberalize 
further--as well.
    The United States must lead this process. For all our 
problems, we have by far the strongest economy in the world. 
Our large trade deficit is in fact a reflection of the strength 
of our economy, compared with the ongoing sluggishness in many 
of our major markets abroad, rather than of American weakness.
    Moreover, some of our major competitors (including Japan) 
have now been weakened substantially by the crisis. Hence 
further trade liberalization is highly desirable from our 
standpoint because it will enable us to fully exploit our 
strong competitive position. Any US backing away from our 
previous commitments, particularly the pursuit of free trade in 
the Asia Pacific region and the Vancouver commitment to reduce 
barriers substantially further in 1998, would send an 
enormously counterproductive signal to weaker economies that 
they too could--and even should--backslide.
    Hence the coming year or two will present both major 
challenges to, and major opportunities for, the trade policy of 
the United States. I urge this Committee to continue its strong 
leadership of a constructive approach that will enable the 
world, as well as the United States itself, to emerge from this 
period in an even stronger position. Rapid passage of fast 
track authority, along with the provision of resources for the 
International Monetary Fund, is the place to start.
      

                                


    Chairwoman Dunn. Thank you very much, Mr. Bergsten.
    Mr. Bergsten and Mr. Sweeney, I want to ask you a question 
about savings. Several, many of these Asian nations that are 
now in crisis have or have had a high domestic savings rate, 
and I am concerned about its effect on the crisis, if it serves 
as a buffer, do they matter, do savings rates matter? Does it 
sends us a lesson about United States policy on savings when 
we're at a point in our history were we considering reforming a 
tax system and replacing the income tax system with one that 
incentivizes savings, when we're looking at personalizing and 
modernizing the Social Security system and that provides us an 
opportunity to increase domestic savings, what would you say?
    Mr. Bergsten. The high savings rates in Asia have been one 
of the great underpinnings of their economic success over the 
past three decades. We cannot let the current crisis obscure 
the fact that this has been the most successful economic 
development story in history, starting with Japan and running 
through the newly industrialized countries into Southeast Asia. 
One of the fundamentals underlying that has been the high 
savings rates. It enabled those countries to invest very large 
amounts of their national product. That enabled them to have 
high productivity growth. That enabled them to have high 
economic growth and rising per capita incomes unparalleled in 
human history.
    They have now had a crisis. What happened? What happened 
was that some small but significant portion of those savings 
got invested in imprudent and noneconomic ways. That was partly 
because their banking systems were not very effective in 
channeling the savings to the most appropriate and profitable 
investment returns. It was partly because their corporate 
structures led some of the lending into unproductive uses and 
crony kinds of capitalism, insider kinds of projects and the 
like, which finally came to a screeching halt. But the high 
savings rates, far from being blamed for the crisis, should be 
giver credit for much of their success. The continuation of 
those savings rates is probably the single strongest reason why 
we can expect the Asian countries to recover from their crisis 
and get back on a rapid growth track within the next few years, 
assuming we, the IMF, and everybody else helps them through 
this difficult adjustment period.
    Mr. Sweeney. I concur with what Dr. Bergsten is saying. I 
would add, by way of contrast, that if you compared the 
situation in Asia today in terms of their savings rates, and 
you compare the situation in Latin American, you find that many 
of the same causes of the Asian crisis were present in Latin 
America when they went through their crisis in the eighties--
imprudent investments, lack of financial transparency, crony 
capitalism, governments intervening too much in the markets, 
lack of deregulation, only in the case of Latin America, they 
had extremely low savings rate and Latin America financed much 
of its imprudent activity with foreign borrowing. Today, Latin 
America, despite all the reforms that have been made, is still 
struggling to get out of the hole. They're way, way behind the 
curve and years will pass before they catch up, and one of the 
reasons is that they have such a low savings rate. So I do 
agree entirely with what Dr. Bergsten is saying.
    Chairwoman Dunn. Thank you, and, actually, that, with the 
exception of Chile, that has a high savings rate and actually 
was well-buffered against that very effect.
    Mr. Sweeney. Which they did by privatizing their Social 
Security system which is something that I'd like to see our 
legislators do.
    Chairwoman Dunn. Exactly.
    Mr. McDermott.
    Mr. McDermott. I just have one question since we have two 
experts, Mr. Sweeney and Mr. Bergsten, here--economist-type 
experts. Most Americans look at the this bailout as being 
similar to the bailout of savings and loans where the U.S. 
Government got stuck for billions of dollars. I would like to 
hear your explanation because Mr. Gadbaw said the IMF has never 
cost the taxpayers a penny and if it's no cost--well, then why 
do we have to put $18 billion into it. You answer my 
constituents, cause I get that question on the stump and I 
think that's the biggest obstacle for getting the support of 
the House of Representatives, is how do you answer to people on 
the stump in your district, well, what's the $18 billion go for 
if I'm not paying for those rotten banks in Indonesia? So, 
right, it's a fair question, and Mr. Gadbaw's right. Let me try 
to explain it. Tell me how it works in layman's language.
    Mr. Bergsten. The IMF money that is lent to Korea enables 
Korea to overcome a cash crunch, a liquidity crisis. Korean 
banks and firms borrowed much more money in foreign exchange--
in dollars--than they had dollars in hand to repay. When 
confidence collapsed and the foreign lenders, rather than 
rolling over those loans, wanted to collect, the Koreans didn't 
have enough dollars. It's a cash crunch and liquidity problem.
    That is totally different from the insolvent situation of a 
lot of Korean banks and companies. Insolvency, meaning 
bankruptcy is not illiquidity. The country Korea is not 
bankrupt. It's not insolvent. It's got tremendous assets, but 
it over borrowed at short maturity and ran into a liquidity 
crunch. So the IMF lends Korea, the country, money to overcome 
its liquidity crisis.
    Korea, the country, meanwhile, is doing with its banks and 
its companies what we did internally with our S&L's. The Korean 
Government is going to have to put up a lot of money to take 
the bad loans off the books of its domestic banks. But that's 
an internal transfer within Korea. All that the external side 
does is help tide it through the liquidity crunch, give it time 
to put constructive, sustainable economic reform measures in 
place so it can come out of the crisis in a reasonably healthy 
way.
    Mr. McDermott. And when do they pay back the money to the 
IMF?
    Mr. Bergsten. They pay back on the IMF schedule which will 
require them to divert some small portion of their export 
earnings over the next 3 to 5 years, like they repay the 
private banks that have lent them money and any other 
foreigner. But, again, that's the country Korea taking some of 
the country's export earnings and channeling them to repay the 
foreign creditors. That's a completely separate set of 
transactions from the internal resolution of their bankruptcies 
and insolvent bank conditions.
    Mr. McDermott. So, basically, you're banking on the fact 
that the Korean economy ultimately will get back up on its feet 
and therefore be able to pay the IMF back at some point.
    Mr. Bergsten. That is correct. The IMF's objective is to 
enable the Koreans to get back on their feet in a healthy way, 
avoiding excessive depression, excessive decline in the 
exchange rate, import controls, and so forth, to do it in a 
healthier and constructive way, reform their banking system, 
reform their corporate governance. All this takes time which 
the IMF liquidity support provides the basis for doing. If they 
didn't have the external help from the IMF or us or anybody, 
they'd have to do something precipitous, and that would mean 
import controls and deep recession--what happened in the 
thirties, and what the IMF was created to avoid.
    Mr. McDermott. Let me go then to the second part of it. One 
of the things that was said was that we shouldn't put 
conditionality on the IMF. What harm would it do for the 
Congress to say to the IMF, If you give money to a country, 
they have to do x, y, and z, in their banking sector?
    Mr. Bergsten. The IMF does that.
    Mr. McDermott. I know they do that, but we're just gilding 
the lily. Why do people oppose us putting that in the language 
when we put the money out there? It makes some Members more 
comfortable to say, I don't want you bailing out any of those 
imprudent Korean banks or whomever. What's the harm in doing 
that?
    Mr. Bergsten. If you look at the IMF program for Korea that 
now exists, it says in three different places Korea has to 
adopt the so-called Basel core principles which are 25 
internationally agreed principles that guide the creation and 
implementation of a sound domestic banking system. It includes 
letting bad banks go bust. It means taking bad loans off the 
books of the good banks. I don't see why anybody would object.
    Mr. McDermott. So what you're basically saying is that most 
Congress people don't understand what the IMF Program is really 
all about, it's already being done. You wouldn't say that, 
right?
    Mr. Bergsten. I didn't say that. [Laughter.]
    Mr. McDermott. Mr. Sweeney, do you want----
    Mr. Sweeney. Well, I don't know if I can give a more 
articulate answer than Dr. Bergsten can give. I will say though 
that we can assume that South Korea is going to do the right 
thing. Certainly, they appear to be moving in the right 
direction. But then, of course, you've got the case of 
countries like Indonesia where there is considerable resistance 
at the government level to implementing with or without IMF 
aid, the kinds of reforms that Dr. Bergsten is talking about 
that are so necessary for the region.
    And I come from a slightly different position. I think the 
Heritage Foundation's position on the IMF bailout and the IMF 
itself is well known; I won't go into that. I brought some 
literature with me that you may read at your convenience, sir. 
But I will point out as a person who has lived for 33 years in 
countries, many of which were candidates for IMF bailouts, the 
problem I have with such bailouts is that they do distort the 
market mechanism; they do delay market-driven reforms and 
solutions to problems that lead to these financial crises in 
the first place.
    A specific case of Mexico, it's been bailed out four times 
in 20 years. I believe they'll be back in Washington in the 
year 2000 or 2001 asking for another bailout. In the specific 
case of Venezuela that took a bailout in 1989, or an IMF 
Program in 1989, there were riots in that country in 1992, 
there were two military coup attempts and the president was 
impeached and removed from office in what amounted to a 
constitutional coup.
    And the issue is that if you accept that the market is 99 
percent psychology, when a country is in crisis, and it goes to 
the IMF and it accepts the IMF Program, these reforms are 
always politically unpalatable, especially in countries which 
aren't very democratic or have weak democratic institutions. 
When the market turns up again, and psychology investor 
confidence recovers, and money starts coming back into the 
country, governments invariably put off carrying out the kind 
of institutional reforms that were needed to prevent these 
crises from occurring in the first place. And what's left are 
populations in these countries that are very impoverished, very 
resentful socially and politically, and which contribute to a 
great extent to political instability.
    That is the case in Mexico today. I think you will see, 
despite the fact that Mexico's been growing quite well in the 
last 2 years, over the next 4 or 5 years a gradual increase in 
political instability in that country. That is the case in 
other countries like Venezuela where I see more problems on the 
horizon.
    That's what concerns me about the IMF bailout. I think that 
by distorting the market, you are basically laying the seeds 
for future disorder and unrest, and that, in and of itself, is 
also not good for investment in these countries.
    Chairman Crane. I want to thank you for your testimony and 
apologize for Mr. Matsui for not being able to be here while 
you guys testified, but we appreciate it and I would now like 
to invite our next panel of witnesses, Hon. Stuart Eizenstat, 
the Under Secretary for Economic, Business and Agricultural 
Affairs at the State Department, and Hon. David Lipton, Under 
Secretary for International Affairs at the Treasury Department. 
And you gentlemen may proceed in order. I know you're on tight 
time constraints too, so fire when ready.

  STATEMENT OF HON. STUART E. EIZENSTAT, UNDER SECRETARY FOR 
 ECONOMIC, BUSINESS, AND AGRICULTURAL AFFAIRS, U.S. DEPARTMENT 
                            OF STATE

    Mr. Eizenstat. Thank you, Mr. Chairman. As I explained to 
you when my time was rescheduled from this morning, I have to 
leave at 1:45, and I appreciate your accommodation.
    It is in our interest to lead and act in the international 
effort to address the financial crisis in East Asia. This is 
not just a test of our leadership in the IMF, or our 
international economic leadership, but it is a test of our 
political leadership in a changing global environment as we 
enter the 21st century.
    Our engagement at this time of financial unease helps 
assure our ability to mobilize support in the future for a 
whole range of issues important to the United States, and 
enhances our capacity to promote greater openness, democracy, 
and support for human rights in Asia.
    If we shrink away from our leadership responsibilities as 
we would be doing if we did not pass the IMF package, other 
forces will fill the vacuum in Asia. Our own security is 
closely linked to peace and stability in East Asia. In a little 
over 50 years, we fought three costly wars. Nearly one-half of 
the Earth's population lives in countries bordering the Asian-
Pacific region, and over one-half of all economic activity in 
the world takes place there. Four of the world's major powers 
rub shoulders in Northeast Asia while some of the most 
important sea lanes on the globe pass through the confined 
waters of Southeast Asia and specifically, next to and through 
Indonesia. And this chart that we have demonstrates the vital 
sea lanes that are involved.
    We are as much a Pacific as we are an Atlantic nation, and 
what happens in this region directly affects and has a profound 
impact on the United States. We have 100,000 troops in the 
Western Asian-Pacific region. Our forward military presence 
helps bolster stability in the region. And this stability has 
been the essential foundation for unprecedented economic, 
political, and social progress in East Asia over the past 
several decades. A part of the world once known for 
authoritarian governments, for internal strife, and 
international tension, is now increasingly characterized by 
viable and exciting democracies in the Philippines, in 
Thailand, in South Korea, and in Taiwan, that are adopting more 
open economic policies, alleviating poverty, and modernizing.
    The current economic difficulties, if not halted, could 
threaten this stability and much of the progress made over a 
generation. The markets are not only looking for economic 
adjustments but also for the political will in these countries 
to implement tough structural reforms. The economic and 
political dimensions of this crisis are closely intertwined. 
The countries hardest hit are among our closest and most vital 
friends and allies.
    South Korea is our fifth largest export market with whom 
we've had a $26 billion trade surplus over the past 3 years. We 
have 37,000 American troops deployed there. A South Korea 
weakened by economic distress would raise the risk of 
miscalculation by North Korea and of conflict on the volatile 
Korean Peninsula. It would make the vitally important efforts 
to dismantle North Korea's dangerous nuclear program more 
difficult.
    Thailand is one of our closest friends in the region and a 
supportive ally for many decades. We've had a treaty 
relationship with Thailand since 1954. We enjoy a very close 
military-to-military relations, and access to strategic 
airbases in Thailand. I think it would be important at this 
time to remind everyone that Thailand provided essential 
overflight clearances and the use of airbases during the gulf 
war.
    Indonesia is the world's fourth most populous country. In 
recent decades, it's played an increasingly constructive and 
influential role in the region. It spans important seaways and 
airways, and possesses rich natural resources. It's provided 
moderate leadership which has allowed ASEAN to prosper and more 
recently has been a driving force within APEC in favor of trade 
liberalization. It has contributed to peacekeeping efforts in 
Bosnia and Angola. And, just as important, it's a moderate 
secular state. It has the world's largest Muslim population. 
More Muslims live in Indonesia than in all the other Middle 
Eastern nations combined. Because security, economics, and 
politics are so closely intertwined, we have repeatedly 
emphasized to the Indonesian Government the importance of full 
implementation of the IMF structural reform program, as well as 
the importance of putting in place a knowledgeable, experienced 
economic reform team which will have the confidence of the 
markets. This is a message that Ambassador Mondale will be 
delivering when he is in Indonesia next week.
    The core countries of ASEAN--whom you see on this map, 
Thailand, the Philippines, Malaysia, Singapore, and Indonesia--
are longtime friends whose prosperity and progress have 
contributed to increasing regional stability. ASEAN, founded 30 
years ago to bolster regional stability, has done just that, 
and it's continued to grow in stature. But we must not take 
that for granted.
    Only a few decades ago, this was an area characterized by 
bloody insurgencies, shooting wars, Indonesia's confrontation 
with its neighbors, and communal killings. The changes since 
then have been astounding, but prolonged economic crisis could 
revive internal instability in these countries and provide 
fertile ground for extremism. Millions of foreign guest workers 
work in these economies. Prolonged instability will generate an 
increased flow of economic refugees. In a region where old 
suspicions and ethnic rivalries persist the risk of instability 
spreading is very real.
    A peaceful and stable Asian-Pacific is a region that will 
remain open to United States influence, ideas, and trade. If we 
appear unengaged, we will cede, however, to the political and 
diplomatic influence of others, and the economic opportunities 
that go with it.
    The economic health of East Asia is also important to our 
prosperity. Since 1993 increases in United States exports have 
accounted for one-third of total United States economic growth 
and created one of every seven new jobs, but almost 20 percent 
of those exports go to the East Asian emerging market. A large 
portion of the exports from the west coast go to East Asia. In 
1996 almost 60 percent from Washington State--almost 60 
percent--almost 60 percent from Oregon, 51 percent from 
California, and States that you wouldn't think of having large 
impacts: 45 percent from Nebraska, 42 percent from Utah, 37 
percent from Louisiana, 26 percent, Mr. Chairman, from 
Illinois.
    Continuing deterioration of the economies will mean lower 
exports and ultimately job loss here at home. We'll see a 
noticeable increase in our trade and current account deficits. 
This will create economic challenges and political problems and 
fuel protectionist pressures. The longer this instability 
persists, the more chance there is that other economies will 
also be pulled down as the contagion spreads increasing the 
global costs. Only the international community and its 
multilateral institutions like the IMF and the World Bank can 
perform the task of stabilizing these economies.
    Most importantly, we have engaged in assisting Asia through 
the IMF. As my colleague David Lipton will explain in more 
detail, these structural programs, if fully implemented, offer 
the best chance for these countries to resume their impressive 
economic growth.
    It's not only in our economic, but also in our political 
and security interests to support the New Arrangements to 
Borrow and the quota increase. Neither will cost the U.S. 
taxpayer a dime over 50 years, indeed, Congressman McDermott, 
in answer to your question, we get back special drawing rights 
as an asset, which ve have used before. In 1978 when I was in 
the White House, we actually borrowed against that.
    If we should appear to turn our back on an institution we 
have created just when the IMF is playing an essential role in 
this recovery, we will send a negative signal to the markets 
and a devastating message about U.S. leadership and engagement 
in this critical area. Many of the measures required by the IMF 
to restructure the economies of East Asia will provide expanded 
opportunities for United States companies, and David Lipton 
will describe in detail how this helps our own security and how 
they are performing what we for decades have tried with less 
success to do. With a stroke of a pen, the IMF has been able to 
open these economies.
    Less tangible but of equal importance is the fact that many 
of the countries in deepest crisis are societies that have been 
opening up not only economically, but politically. Thailand, 
South Korea, and the Philippines are shining examples. Why has 
that happened? It has happened because over the last several 
decades a middle class has been created in these countries and 
that middle class is dedicated to human rights and to the 
protection of democratic institutions. These are the very 
groups most at risk if we allow these countries to go under 
economically.
    The course of development that we prefer--open, more 
democratic societies coupled with open and competitive 
economies--would be jeopardized if the turmoil continued. It is 
critical also that less open countries in this region--China, 
Vietnam, Burma--not draw the wrong conclusions from the 
difficulties of these democracies.
    We have enjoyed many of the benefits of leadership on the 
world stage--the ability to protect our interests, to prosper 
from the global reach of our economic power, and to see the 
values and principles we hold most dear not only endure but 
spread. But leadership is not divisible. We cannot expect to 
lead these countries on security issues, expect Thailand to 
help us with basing rights, and then when they are in trouble, 
turn our backs, abdicate leadership in the more difficult and 
often messy international economic area. As leaders of the 
international system, we have much to gain and they look to us 
to provide leadership.
    To turn from the task at hand would not only risk stability 
abroad but threaten our prosperity at home. It would mean 
resentment from our friends, turning our backs on them at the 
time of their plight. We'd lose credibility and goodwill, 
hurting us not only in terms of pushing needed reforms, but in 
pushing our broader agenda.
    So to sum up, we must be involved in leading this effort as 
our vital security and political, not just economic, interests 
are at stake. We must support the IMF Programs. We must provide 
political support and technical assistance to help with their 
reforms. We must remain committed to opening markets at a time 
when the current account deficit will rise, and recognize that 
an increase in our current account deficit is a natural 
consequence of the crisis, and that the IMF Programs are the 
best way to restore demand for U.S. exports in the affected 
countries. We must continue to promote their openness and 
transparency and accountability. At a time when they are 
saying, Should we continue on this course given this crisis, we 
need to answer with a resounding, Yes.
    We should encourage other countries--the Europeans, China 
and Japan--to join us and do their share. We should welcome 
Chinese assurance that they will maintain a stable exchange 
rate, a very important contribution they are willing to make. 
We should urge Japan to take broader responsibility as the main 
engine of growth in the region. Just as we are willing to do 
our part, Japan must do the same to stimulate domestic-led 
growth and open its market. Most important to this effort is 
trade liberalization, effective deregulation, a genuine tax 
reduction, and resolution of its banking problems.
    Thank you very much, Mr. Chairman. I appreciate your time 
and will defer now to my colleague, David Lipton.
    [The prepared statement and attachment follow:]

Statement of Hon. Stuart E. Eizenstat, Under Secretary of State for 
Economic, Business, and Agricultural Affairs, U.S. Department of State

             Asian Financial Crisis: Broader Implicatiions

    Mr. Chairman and members of the Committee. It is a 
privilege to appear before you today. By including the 
Department of State in a hearing on the Asian financial crisis 
you recognize that for the United States, the ramifications of 
the current economic difficulties in Asia affect much broader 
interests.
    Mr. Chairman, as we consider the United States' proper role 
in confronting this situation and what actions are necessary 
and appropriate for us to take, we must fully understand the 
broad dimensions and implications of this crisis. Vital U.S. 
interests of great importance to the security, the prosperity 
and the values of the American people we all serve are at 
stake. Therefore, we believe strongly that it is in our own 
interest to lead and act in the international effort to address 
the financial crisis in East Asia. In this effort, the 
leadership of the Congress is also crucial and we look forward 
to working with you on this important issue.
    The role of the United States is not just a test of our IMF 
leadership or international economic leadership, but our 
political leadership in a changing global environment as we 
enter the 21st century. Our engagement at this time of 
financial unease helps assure our ability to mobilize support 
in the future for a whole range of issues important to the 
United States and enhances our capacity to promote greater 
openness, democracy, and support for human rights in Asia. On 
the other hand, if we shrink away from our leadership 
responsibilities, other forces may prevail.

                                Security

    Mr. Chairman, our own security is closely linked to peace 
and stability in East Asia--in a little over fifty years we 
have fought three costly wars there. Since World War II our 
security policy in the Western Pacific has stressed stability 
and the deterrence of conflict. Nearly one half of the earth's 
people live in countries bordering the Asia Pacific region and 
over one-half of all economic activity in the world takes place 
there. Four of the world's major powers rub shoulders in 
Northeast Asia while some of the most important sea lanes on 
the globe pass through the confined waters of Southeast Asia 
and specifically, next to or through Indonesia. We are just as 
much a Pacific nation as an Atlantic nation, and what happens 
in the Asia Pacific region directly affects us and has a 
profound impact in the U.S. and throughout the world.
    Today we have 100,000 troops in the western Asia Pacific 
region. Our forward military presence and active engagement in 
the western Pacific has increased and bolstered stability in 
the region. This stability has been the essential foundation 
for unprecedented economic, political and social progress in 
East Asia over the past several decades--progress from which we 
have greatly benefited.
    However, it goes further. Just as increasing peace and 
stability have enabled economic progress, so too have economic 
progress and the better life it has brought to hundreds of 
millions of people reinforced peace and stability. A part of 
the world once known for authoritarian governments, internal 
strife and international tension is one now characterized by 
viable exciting democracies--in the Philippines, Thailand and 
South Korea--that are adopting more open economic policies, 
alleviating poverty and modernizing.
    Mr. Chairman, the current economic difficulties, if not 
halted, could threaten this stability and much of the progress 
made over a generation. The markets are not only looking for 
economic adjustments, but also for the political will in these 
countries to implement tough structural reforms. The economic 
and political dimensions of this crisis are closely 
intertwined--the markets will respond favorably when they see 
the sustained political will to make the reforms work.
    The countries hardest hit are among our closest and most 
vital friends and allies--including South Korea where 37,000 
American troops remain deployed to ensure an uneasy peace in 
the face of the continuing threat from North Korea. A South 
Korea weakened by economic distress raises the risk of 
miscalculation by North Korea and conflict on the volatile 
Korean Peninsula. While we anticipate that the South Koreans 
will stand by their commitments, it makes more difficult our 
vitally important effort through the Agreed Framework of 1994 
and the Korean Peninsula Energy Development Organization (KEDO) 
to dismantle the dangerous North Korean nuclear program, where 
a large contribution from South Korea will be necessary. It 
could well complicate our delicate efforts through the Four 
Party Talks to secure a permanent peace and bring the Korean 
War to a formal end. The economic crisis could also strain the 
ability of countries such as South Korea and Japan to continue 
to share the financial burden of maintaining security in the 
region.
    Thailand is one of our oldest friends in the region and has 
been a close, supportive ally for many decades--from the Korean 
War through the Indochina conflict all the way to the present 
day. We have a treaty relationship with Thailand dating from 
1954. We enjoy very close military-to-military relations and 
access to strategic airbases in Thailand. Thailand provided 
essential overflight clearance and the use of airbases during 
the Gulf War and subsequent actions against Iraq. Our long-
standing friendship has resulted in close cooperation on a 
broad range of issues, including most recently in 
counternarcotics where Thailand has extradited an unprecedented 
11 indicted traffickers to the U.S. since 1996, environmental 
protection, medical research and improved intellectual property 
rights enforcement.
    Indonesia, the world's fourth most populous country, has in 
recent decades played an influential and constructive role in 
the region, which serves our interests as well as those of the 
people throughout the region. Indonesia spans important seaways 
and airways and possesses rich natural resources, which give 
Indonesia broad strategic value. Where its assertive 
nationalism once unnerved its smaller neighbors, in recent 
decades Indonesia has provided the moderate leadership which 
has allowed ASEAN to prosper and more recently has been a 
driving force within APEC in favor of trade liberalization. 
Indonesia has also contributed to peacekeeping efforts in 
Bosnia and Angola, supported nonproliferation efforts such as 
the Comprehensive Test Ban Treaty, and joined KEDO. Just as 
importantly, Indonesia, a land of many diverse peoples, 
languages and cultures, is a moderate secular state--with the 
world's largest Muslim population--more than in the Middle East 
nations combined.
    We want to help Indonesia overcome its social problems--
problems which could exacerbate social tensions and rekindle 
nationalistic excess. Because security, economics and politics 
are so closely intertwined, we have repeatedly emphasized to 
the Government of Indonesia the importance of full 
implementation of the IMF structural reform program, as well as 
the importance of putting in place a knowledgeable, experienced 
economic reform team which will have the confidence of the 
markets.
    The Philippines has not been as hard-hit by the financial 
turmoil as Thailand and Indonesia, but remains vulnerable to 
continued turmoil in the region. The Philippines has been a 
close friend since its independence in 1946 and a treaty ally 
since 1952. In recent years it has achieved remarkable success 
in the difficult task of rebuilding its democracy and economy 
following the final, chaotic Marcos years. We do not want that 
record of success undermined.
    The core countries of ASEAN--Thailand, the Philippines, 
Malaysia, Singapore and Indonesia--are long-time friends whose 
prosperity and progress have contributed to increasing regional 
stability. ASEAN, founded 30 years ago to bolster regional 
stability, continues to grow in stature. Evidence of its 
growing maturity is ASEAN's continuing constructive role in 
Cambodia. Through our bilateral ties with the individual 
members, our participation in the ASEAN Regional Forum, our 
other high-level dialogues with ASEAN and by our active role in 
APEC, the United States has been able to strengthen its overall 
relationship with ASEAN.
    We should not take ASEAN's success for granted. The peace 
and progress it has helped bring to Southeast Asia may seem 
natural. But go back to the mid-1960s--there was tension, there 
were bloody insurgencies, there were shooting wars, such as the 
Indochina conflict and Indonesia's confrontation with its 
neighbors, and there were communal killings. The changes since 
then have been astounding, but prolonged economic crisis and 
the attendant joblessness, impoverishment and despair could 
revive internal instability in these countries and provide 
fertile ground for extremism. Millions of foreign guest workers 
work in some of these economies, while other ASEAN countries 
provide large number of workers to their neighbors. There 
already exists increasing pressure to send them home. Prolonged 
instability will generate an increased flow of economic 
refugees. In a region where old suspicions and ethnic rivalries 
persist, the risk of instability spreading is real.
    With the end of the Cold War the security landscape in East 
Asia is evolving. During this delicate transition period it is 
important that the nations of the region remain strong and that 
confidence in U.S. leadership remain firm. A peaceful and 
stable Asia Pacific is a region that will remain open to 
American influence, American ideas and American trade, if we 
show continued leadership. But if we appear disinterested or 
unengaged, we will cede to others political and diplomatic 
influence--and the economic opportunities that go with this 
influence.

                               Prosperity

    Mr. Chairman, I have begun by discussing security and 
political issues. However, security is not just an end in 
itself but a means of assuring the welfare and prosperity of 
our own citizens, one of the principal duties of any 
government. The economic health of East Asia is important to 
our own prosperity. The dynamism of the region has provided 
increasing trade and investment opportunities to American 
companies, creating jobs here at home. The growth of exports 
has helped fuel our economic expansion. In recent years, our 
participation in the global economy has been fundamental to our 
sustained growth, low unemployment and low inflation.
    Let me share with you just a few statistics, Mr. Chairman, 
which illustrate the importance of trade and exports to our 
economic well-being:
     Last year total imports and exports reached about 
25 percent of our gross domestic product--up from just 8 
percent in 1950 and 11 percent in 1970.
     Since 1993, the increase in U.S. exports has 
accounted for more than one-third of total U.S. economic growth 
and created one in seven new jobs; almost 20 percent of U.S. 
exports go to the East Asian emerging markets (Korea, Thailand, 
Indonesia, Malaysia, Philippines, Singapore, China, Hong Kong 
and Taiwan).
     In global terms, more than eleven million 
Americans now work in jobs supported by exports; these jobs pay 
13-16 percent above the national average wage. The western 
Pacific (the above mentioned countries, Japan, Australia and 
New Zealand) is our most important regional market taking 30 
percent of U.S. exports.
    A look at individual state figures further underscores the 
importance of trade to this region. A large portion of the 
exports from our west coast states goes to East Asia--in 1996, 
nearly 58 percent for Washington, 57 percent for Oregon and 51 
percent for California in 1996, with a total value of some $76 
billion. Even more remarkable are the high numbers in other 
parts of the country--45 percent for Nebraska, 42 percent for 
Utah, 37 percent for Louisiana, 26 percent for Illinois and 21 
percent for New York.
    The benefits of this growing trade have been widely spread, 
and so would be the costs of a downturn. Continuing 
deterioration of the Asian economies, and the further 
depreciation of their currencies which makes their goods 
cheaper and hurts our competitiveness, will mean lower U.S. 
exports, fewer contracts for U.S.-supplied services and 
ultimately job loss here at home. There will be more pressure 
on our balance of payments as Asian economies buy less but seek 
to export more. We will see a noticeable increase in our trade 
and current account deficits. This will create economic 
challenges and political problems as well, fueling 
protectionist pressures.
    A further hazard from the financial crisis lies in the fact 
that the longer the uncertainty and instability persist, the 
more chance there is that other economies will be pulled down 
as well. This contagion factor could spread the crisis beyond 
the immediate region, increasing the likelihood of more severe 
global costs and more severe costs to us. Mr. Chairman, when an 
infectious disease breaks out, counter-action to limit the 
spread of the disease and panic must be swift, determined and 
comprehensive. Only the international community and its 
multilateral institutions can perform this critical task--again 
underscoring the critical importance of Congressional approval 
of the IMF package. Only the United States can provide the 
leadership for this effort.
    In the exercise of this leadership, we are encouraging 
other nations to contribute as well. Working with the G-7, the 
European Union and the Organization of Economic Cooperation and 
Development, we have agreed on the importance of maintaining an 
open global trading and finance system to help the affected 
Asian economies recover. With the G-7, we are putting together 
an initiative to provide urgently needed short-term trade 
finance (described in more detail below). China has made an 
important contribution to regional stability by agreeing to 
maintain its exchange rate at current levels.
    We are also urging Japan to step up its efforts. We 
strongly agree with the view of the IMF that fiscal stimulus is 
needed to support Japan's economy and make it a potential 
source of confidence for the region. Japan is the economic 
engine for Asia. Since the beginning of the Asian financial 
crisis last July, Japan has been in the forefront of countries 
assisting in the IMF-led debt relief and structural adjustment 
programs. However, the most important contributions Japan can 
make to regional economic recovery are to strengthen domestic 
demand, deregulate its economy, open its markets to imports of 
goods and services, and strengthen its financial system.
    Most importantly, we have been engaged in assisting Asia to 
recover through our economic leadership in the International 
Monetary Fund (IMF), in addition to offering a second line of 
defense to Korea and Indonesia, not only because they are our 
customers, but because they are our security partners. The IMF 
structural reform programs, if fully implemented, offer the 
best chance for these countries to resume their impressive 
economic growth--that made them the envy of the world--on a 
more sound, sustainable basis. For this reason, it is not only 
in our economic interests, but our political and security 
interests, to support the IMF New Arrangements to Borrow and 
the Quota Increase--neither of which will cost the U.S. 
taxpayer a dime, but will pay rich dividends over time.
    As a founder and the largest shareholder, our active 
involvement and support is essential to the IMF's efforts to 
solve the East Asia economic crisis. Mr. Chairman, the IMF has 
changed and adapted through the years, and it will continue to 
do so. Indeed, President Clinton has called for a meeting of 
Finance Ministers to consider how the international community 
can better address such challenges. However, if we should 
appear to turn our back on an institution we created just when 
the IMF is playing an essential role in this recovery, we will 
send a negative signal to the markets and a devastating message 
about U.S. leadership and engagement in the post-Cold War era.

                 Benefits for U.S. Trade and Investment

    For years we have argued that open trade and more open 
economies are the path to greater prosperity. There has been 
resistance to this view--the political and economic structural 
reforms needed to accomplish this can be difficult and painful 
for all of us. This crisis has shown the merits of more open, 
transparent and rational economies and the cost of allowing 
distortions to continue. The reforms and corrections required 
in IMF-led programs address these issues and should lead to 
greater trade and investment opportunities for all of us--
including the United States.
    Many of the measures required by the IMF to restructure the 
domestic economies of East Asia will provide expanded 
opportunities for U.S. companies. In the end, their economies 
will be more open, transparent, and predictable. Indeed, the 
IMF has accomplished in a few short months what the U.S. has 
pressed for years, even decades:
     from elimination of trade-related subsidies to 
harmonizing import certificate procedures in accord with WTO 
standards;
     from binding liberalization of financial services 
to increasing opportunities for foreign investment;
     from eliminating import monopolies to reducing 
tariff levels.
     from eliminating restrictive import licensing 
practices to ending directed lending based on political 
factors, which had led to over-capacity in some sectors that 
compete with U.S. producers.
    Recognizing that a lack of financing restricts trade flows 
in the various Asian economies, has a detrimental effect on 
their local economies, and limits the export of goods and 
services to these key markets, the G-7 Export Credit Agencies, 
including the Export-Import Bank of the United States, meeting 
in London on February 21 approved a practical and immediate 
initiative to help stabilize Asian markets. This initiative 
will provide continued and if possible expanded, short-term 
credits to Indonesia, Korea and Thailand to support trade 
financing for critical imports.
    A senior Korean official told me that the inability of 
businesses to secure this vital financing meant that businesses 
could not produce. As a result, in Korea imports had plunged 40 
percent, while exports had increased less than 2 percent. In 
addition, the U.S. Department of Agriculture is providing the 
affected countries this year over $2 billion in commercial 
export credit guarantees for critical food and agricultural 
imports. Our export credit assistance not only helps these 
countries keep their businesses in operation, but also helps to 
maintain the export linkages U.S. companies have established in 
these markets.

                      U.S. Values and Credibility

    Less tangible but of equal importance is the fact that many 
of the countries in deepest crisis are societies that have been 
opening up not only economically but, in many cases, 
politically as well. This is certainly true of Thailand, South 
Korea and the Philippines where major advances in 
democratization have been made. Indeed, I should note that, in 
these three countries, the institutionalization of accountable 
government has given their leaders a clear incentive to craft 
effective responses to their economic distress.
    The downturn in these countries will have its greatest 
impact on the emerging middle class and those struggling to 
climb up from poverty. One of the greatest successes of the so-
called Asian miracle has been to lift tens of millions of 
families out of abject poverty over the past 20 years. These 
groups represent the region's greatest hopes for the 
development of more democratic institutions and greater respect 
for human rights. The course of development we prefer--open, 
more democratic societies coupled with open, competitive 
economies--is jeopardized by the present turmoil. This is true 
not only within these countries, but for others in the region 
as well. It is critical that less open countries such as China, 
Vietnam and Burma not draw the wrong conclusion from the 
current difficulties.
    In this regard the environment, labor standards and human 
rights are critically important issues which we have been 
advancing in many ways. We work with the international 
financial institutions and others throughout the world to 
promote progress in these areas. In themselves, IMF-led 
programs commit governments to increase transparency and good 
governance and promote dialogue within societies, including 
with labor. These measures promote accountability, the wider 
sharing of power and citizen participation and the effects can 
go well beyond the financial realm. The immediate crisis is 
economic and IMF programs must of necessity focus on immediate 
actions to restore economic stability and market confidence. To 
overburden IMF programs with too many goals in other areas 
during a crisis would complicate and delay the process, greatly 
reducing the chance of success.
    We are nonetheless committed to pursuing these other goals 
by other means. We will continue to raise human rights and 
worker rights concerns wherever they arise. In addition, we 
must be sensitive to the social ramifications of these IMF 
programs in terms of increased unemployment and widening income 
inequality, which could lead to political instability. 
Therefore, we believe it essential to work with the World Bank 
and the Asian Development Bank to implement supporting programs 
to establish a social safety net. In this regard the role of 
the World Bank is as large as the IMF on the financial side.
    Mr. Chairman, we have enjoyed many of the benefits of 
leadership on the world stage--an ability to protect our 
interests, to prosper from the global reach of our economic 
power and to see the values and principles we hold most dear 
not only endure, but indeed spread. However, this leadership is 
not divisible. We cannot lead on critical security issues, or 
in opening markets, while abdicating the lead in the sometimes 
messy work of maintaining the international financial system. 
This leadership brings responsibilities and burdens. As the 
leader of an international system from which we gain so much, 
others look to us to provide the leadership and our fair share 
of the resources necessary for the success of the international 
effort underway.
    Early in his Administration President Clinton described his 
vision of a Pacific community of nations, one in which shared 
burdens and shared benefits lift us all. To turn from the task 
at hand not only risks stability abroad, but threatens 
prosperity at home. Moreover, it would also breed resentment 
toward what would be seen as our indifference to the plight of 
friends. With that will be a loss of credibility and goodwill 
that not only hurts our ability to push needed reforms, but 
also can affect our broader interests--economic and political--
including cooperation on security and other important issues in 
the region and beyond.
    This means more than just cooperating in hard times. It 
also means moving forward on goals set at the APEC Leaders 
Meeting in Bogor, Indonesia in 1994--a vision of free and open 
trade and investment in the region by 2010/2020. We have been 
working in APEC to turn this vision into a reality. The 
political support of APEC leaders has been critical to the 
conclusion of the Uruguay Round and the Information Technology 
Agreement, opening up markets worth billions of dollars to U.S. 
businesses and workers. APEC's leadership on the world's trade 
agenda and its goal of regional trade and investment 
liberalization could be jeopardized by a persistent, festering 
financial crisis.

                               Conclusion

    Let me sum up what we are doing, should be doing, and 
should be encouraging others to do to solve the East Asian 
financial crisis:
     We must be involved in leading this effort as our 
vital economic, security and political interests are at stake.
     Support the IMF programs underway and ensure that 
the programs of other international financial institutions, and 
our own bilateral efforts, help to ameliorate the human cost of 
these painful economic reforms.
     Provide political support and, where appropriate, 
technical assistance to help with the necessary reforms.
     Remain committed to open markets at a time when 
the current account deficit will be on the rise.
     Continue to promote greater openness, transparency 
and accountability by governments and the private sector to 
stabilize markets, secure sustainable economic growth, improve 
the quality of life for the people of the region, and avoid 
these crises in the future.
     Recognize that an increase in our current account 
deficit is a natural consequence of this crisis and that the 
IMF programs will prove the best way to restore demand for U.S. 
exports in the affected countries.
     Encourage other nations--the Europeans, China and 
Japan to help us and join these efforts.
     Welcome Chinese assurances that they will maintain 
a stable exchange rate.
     Urge Japan to take broader responsibility as the 
main engine of growth in the region. Just as we are willing to 
do our part, Japan must do the same to stimulate domestic-led 
growth and open its markets. Most important to this effort are 
trade liberalization, effective deregulation, and resolution of 
its banking problems.
    Mr. Chairman, I thank you for the invitation to give 
testimony on this very important issue, and I welcome your 
questions at this time.
      

                                

[GRAPHIC] [TIFF OMITTED] T5502.005

      

                                


    Chairman Crane. Thank you.
    Mr. Lipton.

    STATEMENT OF HON. DAVID A. LIPTON, UNDER SECRETARY FOR 
       INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF TREASURY

    Mr. Lipton. Thank you, Mr. Chairman. I'm pleased to have 
this opportunity to discuss the recent developments in Asian 
financial markets, the effects on our economy, and the role of 
the IMF. As the President said in his State of the Union 
address, the Asians are our customers, our competitors, and our 
allies. Nearly one-third of our exports go to Asia, more than 
we sell to Europe. Already, many small businesses and some 
major Fortune 500 companies are seeing reduced export demand in 
the wake of the instability in Asia. Reduced demand translates 
into fewer new jobs for American workers.
    Fortunately, our economy is in strong shape today so we can 
expect to withstand the likely short-term effects of this 
crisis as it has unfolded so far. But the cost would be larger 
if the Asian economies prove unable to restore stability and 
the crisis spreads to emerging markets in other regions.
    Our approach for resolving the crisis rests on four 
principles. First, the Asian countries bear the major 
responsibility for taking action and overcoming the crisis. 
Second, the international community should offer temporary, 
conditioned financial support to provide breathing space for 
countries carrying out needed actions. Third, the major 
industrialized nations, particularly Japan, must promote 
balanced growth in their own economies to support the return of 
market confidence and help accommodate transitional trade 
imbalances in crisis-affected countries. And fourth, the 
architecture of the international financial system must be 
modernized to make us better able to prevent and manage crises.
    Bearing in mind the strong interest of this Subcommittee in 
the trade aspects of programs for the Asian countries, let me 
turn to that subject. The Asian reform programs contain 
important liberalization steps aimed at openness and 
competitiveness. Indonesia's IMF Program commits the government 
to eliminating a range of officially sanctioned import and 
export monopolies, removing export taxes on resource products, 
reforming the government procurement process, and accelerating 
the pace of privatization. Tariffs on food imports have been 
cut to a maximum of 5 percent effective immediately.
    Similarly, the Thai program includes a greater emphasis on 
privatization, measures to reduce subsidies to state 
enterprises, and the loosening of the limitations on foreign 
ownership and exchange control.
    The Korean program includes pledges to eliminate subsidies 
to Korean exporters, ease export licensing and cumbersome 
customs procedures, end the government directed noneconomic 
lending, and substantially ease restrictions on foreign 
ownership of Korean companies.
    Mr. Chairman, it's worth taking a step back to consider 
what these changes represent. Take the case of Korea. The close 
relationship between the government, banks, and the chaebol 
conglomerates has been one of the salient characteristics of 
the Korean economy for decades. That relationship has been at 
the root of our persistent trade problems with the country 
because it resulted in poor market access, uneconomic 
investments, excessive concentration, and excess capacity in 
key industries. Tackling these practices has been very 
difficult using traditional trade policy tools, and that's 
because those practices could not be changed without altering, 
fundamentally, the relationship between government and 
business.
    Now, President-elect Kim Dae Jung has embraced an IMF 
Program that aims not only to overcome Korea's financial 
crisis, but to break up this preferential relationship once and 
for all. I believe that development is good for America.
    More broadly, our approach to resolving financial crises 
depends critically on the central role of the IMF. That's why 
we ask you to support two requests: An increase in our IMF 
quota subscription, and U.S. participation in an augmented back 
up facility called the New Arrangements to Borrow, which 
supplements ordinary IMF resources.
    Why is the IMF central to resolving the Asian crisis? By 
imposing policy conditions, the IMF supports the right 
policies. By injecting short-term finance, it prevents further 
currency depreciation and supports the return of long-term 
growth. It promotes changes that are in our long-term interests 
such as making these economies more open to foreign trade and 
reducing domestic subsidies. And it provides us maximum burden 
sharing; each dollar we contribute leverages four or five from 
the rest of the world.
    I thought it would be helpful for me to say a few words 
about the financing structure of the IMF. I understand there 
were questions on this in earlier panels. In some ways the IMF 
operates like a credit union. We extend a credit line to the 
IMF which it can draw on. Any drawings by the IMF give us a 
claim, much like a deposit in the IMF, which is of equal value, 
pays interest, and is backed by over 30 billion dollars' worth 
of gold, and which we can withdraw, essentially, on demand, if 
necessary.
    For these reasons, the U.S. participation in the IMF is 
treated as an exchange of financial assets. U.S. transfers to 
the IMF are not scored as budget outlays and do not come at the 
expense of domestic programs. The IMF now needs additional 
resources to be in a position to respond to any worsening of 
this crisis or to deal with any future crises that might arise.
    The likelihood of such developments may be small, but the 
consequences for America would be large and we cannot afford 
that risk. Moreover, failure to provide these resources could 
shake confidence in American leadership in the global economy 
just at a time when confidence in American leadership is so 
important in reestablishing stability in Asia.
    Looking to the longer term, the United States has taken a 
lead role in modernizing our tools for dealing with crises. At 
President Clinton's initiative, the United States will be 
convening a meeting later this spring with finance ministers 
and central bank Governors from 22 countries to continue these 
efforts and start developing a consensus on policies to deal 
with new challenges facing the international financial system.
    Just last weekend, the G-7 finance ministers discussed this 
subject of modernizing financial architecture at their meeting 
in London. The issues for discussion included: how to promote 
more efficient global markets; steps to increase disclosure and 
transparency; measures to strengthen financial systems, both 
globally and in individual countries; national policy 
management to prevent and manage crises; the international 
community's role in times of crisis; and appropriate 
burdensharing by the private sector to treat the so-called 
moral hazard problem.
    These issues are as complex as they are important. Some 
will take time to work through and then to reach consensus with 
others in the international community. Given the high stakes 
involved, we cannot risk pushing through major reforms before 
the consequences can be thoroughly examined, nor can we afford 
to leave the IMF ill prepared to respond until these issues are 
resolved.
    Mr. Chairman, the globalization of financial markets has 
been a breathtaking development. Huge amounts of capital flow 
quickly among closely integrated financial systems. 
Technological change has made possible flows of information and 
finance on a vast scale. Globalization has thrust the private 
sector into a predominant role in finance and development 
around the world. Private capital has financed great advances 
in productivity and has raised living standards, and in doing 
so, created new markets for U.S. goods. Globalization has 
created great new opportunities for Americans. At the same 
time, globalization brings new risk.
    The Asian crisis will likely be viewed as the first crisis 
of the new global economy. Making the most of our opportunities 
while minimizing the risks will be a central issue for this 
Subcommittee and the nation in the years ahead.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. David A. Lipton, Under Secretary for International 
Affairs, U.S. Department of Treasury

    Mr Chairman, I am pleased to have this opportunity to 
discuss recent developments in Asian financial markets and the 
effects on our economy.
    Today I would like to focus my testimony on the 
Administration's strategy for restoring stability in Asia. I 
would also like to speak about the critical need to support the 
IMF so we can maintain our capacity to respond to financial 
crises around the world.

             I. The Risks Posed by the Instability in Asia

    As the President said in his State of the Union Address, 
the Asian economies are our customers, our competitors and our 
allies. The financial turmoil in the region is affecting growth 
in our economy, and thus is affecting the well-being of 
American workers, businesses and farmers. Our aim is to restore 
stability for these key markets as soon as possible.
    Nearly one third of our exports go to Asia--more than we 
sell to Europe. Already many small businesses and some major 
Fortune 500 companies are seeing reduced export demand in the 
wake of the instability in Asia. Reduced demand translates into 
fewer new jobs for American workers.
    Our economy is in strong shape today, so we can expect to 
withstand likely short-term effects of the crisis as it has 
unfolded thus far. But the costs could be much larger if Asian 
economies prove unable to restore stability and if the crisis 
were to spread to emerging markets in other regions. Prolonged 
instability in Asian and other markets could:
     lead to a cycle of competitive depreciation and 
trade barriers;
     threaten American exports and the jobs that depend 
on them;
     affect our own financial markets, imperiling those 
who rely on them for investment finance, personal incomes and 
mortgages for new homes; and
     raise national security concerns, if the financial 
crisis were to lead to broader conflicts. Under Secretary 
Eizenstat addresses this risk in some detail in his testimony 
for today's hearing.
    In short, the risk of failing to respond to this crisis--
the risk for our economy, the stability of our financial 
markets and our broader national security--far exceeds the risk 
of action. We can, and we must, work with the international 
community to help restore confidence and growth as soon as 
possible--so that these nations can continue to be strong 
markets and stable allies for the United States.

                    II. The United States' Approach

    As Ambassador Barshefsky mentioned earlier, the U.S. 
economy is strong and our ability to weather the Asian crisis 
is better at this time than virtually any other time. However, 
we are highly integrated into the global economy and rely upon 
these markets for a significant share of our exports. 
Therefore, it is in our interest to strengthen the markets in 
Asia. Our approach rests on four principles:
     first, the major responsibility for overcoming 
crisis rests with the countries themselves and the actions they 
are prepared to take;
     second, the international community should be 
prepared to provide temporary, conditioned financial support 
for countries to provide breathing space for carrying out 
reforms;
     third, the major industrialized nations, 
particularly Japan, must promote balanced growth in their own 
economies to support the return of market confidence and to 
help accommodate transitional trade imbalances in crisis-
affected countries; and
     fourth, the architecture of the international 
financial system must be modernized to make us better able to 
prevent and manage crises.
    Let me give you a more detailed explanation of these 
principles, focussing on the first two, which involve the IMF.
    A strong domestic response in the countries facing crisis 
is the absolute prerequisite for restoring stability. The 
reform programs we have supported in Thailand, Indonesia and 
Korea commit these countries to concrete actions to restore 
stability and lay a surer foundation for long-term growth.
    While each program is tailored to address the specific 
causes of that country's crisis, the focus throughout has been 
on making economies more market-oriented and better able to 
allocate capital and to allow market forces to operate. 
Important, long overdue changes need to be made in the 
structure of these economies--changes which have been welcomed, 
in many cases, by officials in the countries themselves. The 
major reform areas include:
     restoration of appropriate monetary and fiscal 
policies, and agreement on stable and transparent rules for 
policy makers for the longer term.
     measures to strengthen the domestic financial 
system, (through financial sector restructuring, improved 
transparency, and supervision), elimination of inter-
relationships between government and business that lead to 
inefficiencies and corruption, and opening of domestic capital 
markets.
     structural reforms to break up commodity 
monopolies and open protected sectors to foreign competition.
    Bearing in mind the strong interest of this committee in 
the trade aspects of these programs, let me say a little more 
on that subject.
    Indonesia's stabilization package commits the government to 
eliminating a range of officially-sanctioned import and export 
monopolies, removing export taxes on resource products, 
reforming the government procurement process, and accelerating 
the pace of privatization. Tariffs on food imports have been 
cut to a maximum of 5 percent, effective immediately.
    Similarly, the Thai program includes a greater emphasis on 
privatization, measures to reduce subsidies to state 
enterprises, and loosening of the limitations on foreign 
ownership and exchange controls.
    As part of its IMF program, the Korean government has 
pledged, among other things, to eliminate subsidies to Korean 
exporters, ease up on import licensing and cumbersome customs 
procedures, end government-directed non-economic lending and 
substantially ease restrictions on foreign ownership of Korean 
companies.
    Mr Chairman, it is worth taking a step back to consider 
what these changes represent. The close relationship between 
the government, the banks and the chaebol conglomerates has 
been one of the salient characteristics of the Korean economy 
for years. That relationship has been at the root of our 
persistent trade problems with the country, because it resulted 
in poor market access, uneconomic investment, excessive 
concentration, and excess capacity in key industries. Tackling 
these practices has been very difficult using traditional trade 
policy tools. That is because these practices could not be 
changed without altering fundamentally the relationship between 
the government and business. Now, President-elect Kim Dae Jung 
has embraced to an IMF program that aims not only to overcome 
Korea's financial crisis, but to break up this preferential 
relationship once and for all.
    More broadly, the design of reform programs and the 
provision of assistance is centered around the IMF. That is why 
we ask you to support two critical requests: an increase in our 
IMF quota subscription, and U.S. participation in an augmented 
back-up facility, the New Arrangements to Borrow, to supplement 
the IMF's resources. These additional resources need to be put 
in place as quickly as possible to enable the international 
community to be in a position to respond to any worsening of 
this crisis, or to deal with any future crisis that might 
arise. The likelihood of such developments may be small, but 
the consequences for America would be large. We cannot afford 
that risk. Moreover, failure to provide these resources could 
shake confidence in American leadership in the global economy 
just at a time when confidence and American leadership are so 
important in re-establishing stability in Asia.
    The IMF has been and must continue to be the institution we 
rely upon to support countries with severe balance of payments 
problems. Its conditional finance, bolstered by additional 
support from the World Bank and the regional development banks, 
is key to our approach to crisis management. Moreover, our 
reliance on the IMF and other international financial 
institutions has ensured international burden-sharing. In 
contrast to the Mexican support program three years ago where 
the United States took the lead, the international financial 
institutions have been responsible for the bulk of the 
financing provided.
    The industrialized nations are also directly responding to 
the crisis by helping to support trade flows in the region. At 
present domestic recession in the affected Asian economies is 
being exacerbated by a shortage of short-term trade finance. 
Weighed down by debt, some financial systems virtually ceased 
to function--making it all but impossible for businesses to 
obtain credit to import vital goods and materials.
    Our own Export-Import Bank is leading a global effort to 
provide needed trade finance. Providing this support is truly a 
win-win proposition for the United States: it gives immediate 
protection to American exports and jobs, while at the same time 
speeding the long-term recovery of these important markets. Ex-
Im has offered enhanced short-term export insurance in Korea 
and recently announced $3 billion in additional loans and loan 
guarantees for sale of American products to Korea, Thailand and 
Indonesia. Other export credit agencies have also joined in the 
multilateral initiative to support the region's import 
financing needs.

                         III. Long-Term Agenda

    Mr. Chairman, recent events in Asia leave in their wake an 
important long-term agenda for the international community. We 
need to work to reduce the risk of financial crisis and learn 
to manage them more effectively when they do occur. We need, in 
Secretary Rubin's words, an international financial 
architecture as ``modern as the markets it serves.''
    President Clinton began this effort four years ago at the 
G-7 Summit in Naples. The next year in Halifax, we launched a 
broad international effort to strengthen safeguards in the 
global financial system. Two important parts of this initiative 
were an international program to strengthen disclosure and the 
development of core principles for supervision of emerging 
market financial systems.
    The United States continues to take a lead role in 
modernizing our tools for dealing with the crisis. One 
outgrowth of the Halifax process, the Emergency Financing 
Mechanism of the IMF, has enabled the institution to respond 
quickly to problems in a number of Asian countries. More 
recently, the IMF membership agreed to establish a new set of 
financing parameters, through the Supplemental Reserve 
Facility, which provide for shorter maturities and premium 
interest rates on exceptional programs--this facility is being 
utilized for much of the program for Korea.
    At President Clinton's initiative, the United States will 
convene a meeting later this spring of Finance Ministers and 
Central Bank Governors from 22 countries to continue these 
efforts and start developing a consensus on policies to deal 
with new challenges to the international financial system. A 
week ago, Deputy Secretary Summers held a productive, 
preparatory meeting with his counterparts from these countries. 
And just last weekend, the G-7 Finance Ministers discussed the 
subject of modernizing financial architecture in their meeting 
in London.
    In shaping that agenda, we aim:
     to promote measures to make global markets 
function more efficient, for example through enhanced 
surveillance and enhanced national supervision and regulation;
     to increase transparency and disclosure, including 
for a broader range of central bank and commercial bank data;
     to strengthen financial systems in emerging 
markets and globally, for example, through strengthened banking 
supervision and wider adoption of Basle Core Principles;
     to improve domestic policy management in emerging 
market countries;
     to strengthen the role of the international 
financial institutions in preventing and responding to 
financial crises; and
     to ensure that the private sector plays an 
essential role in the resolution of crises.
    These issues are as complex as they are important. Some 
will take time to work through and then to reach consensus with 
others in the international community. Given the high stakes 
involved, we cannot risk pushing through major reforms before 
the consequences have been thoroughly examined. Nor can we 
afford to leave the IMF ill-prepared to respond until these 
issues are resolved.
    We are already making progress--even in the midst of 
crisis--on some items in this agenda:
     to strengthen crisis prevention in the future, we 
have reached agreement with Asian governments on the 
development of a regional surveillance mechanism to promote 
Asian financial stability and increase financial market 
transparency.
     to promote transparency, as a condition for 
disbursements of financial support in Thailand, Indonesia and 
Korea, we strongly, and successfully, urged that governments 
publish their ``Letter of Intent'' outlining the reform 
measures agreed with the IMF.
     to reduce moral hazard, we created a new IMF 
lending facility (mentioned earlier) under which much of the 
IMF financing is provided at shorter maturities and a premium 
interest, increasing the incentive for borrowing countries to 
restore their creditworthiness quickly and regain access to 
private capital markets.
     to enlist the private sector to play a greater 
role in crisis resolution, we catalyzed a major private sector 
effort to extend credit maturities for Korean commercial banks.
    To repeat, Mr Chairman, these and other steps must be seen 
as part of a rolling but accelerated reform agenda to which we 
are fully committed as an urgent priority.

                          IV. Support for IMF

    Mr. Chairman as I stated earlier, we need to ensure 
adequate funding for the IMF at this critical time. The 
President asked, as a supplementary request, for Congress to 
support the IMF in two important ways: first, through an 
increase in our quota subscription, and second, by contributing 
to an augmented emergency facility, the New Arrangements to 
Borrow.
    Mr. Chairman, we have responded to these crises because 
they raise important risks for our core economic and national 
security interests, risks that will increase the longer the 
instability continues--and the further it spreads. We must 
support the IMF as we work through this crisis, and ensure it 
is ready to respond to any future crises, because it is, quite 
simply, the cheapest, most effective way for us to promote 
those core American interests.
    Without the IMF, at times of crisis, there would be greater 
pressure on the United States to act unilaterally with taxpayer 
resources to protect our interests without the global leverage 
the IMF provides.
    Today, as much as when it was established with U.S. 
leadership more than 50 years ago, the IMF acts to promote out 
economic values and interests. The IMF helped Poland recover 
from the collapse of communism and become one of the fastest 
growing economies of Europe and brought Russia back from the 
brink if hyperinflation. In Argentina, the IMF supported 
Argentina's economic transformation from a country 
characterized by anemic growth and hyperinflation to one that 
enjoys strong growth (8% in 1997), near zero inflation, 
declining fiscal deficits, and a more private-sector oriented 
economy. And in Uganda, it has helped promote ten years of 
successful economic reforms which have generated average annual 
growth rates, in real terms, of over six percent a year.
    By imposing conditions, the IMF supports the right 
policies. By injecting short-term finance it prevents further 
currency depreciation--and supports the return of long-term 
growth. It promotes changes that are in our long-term interest: 
such as making these economies more open to foreign trade and 
reducing domestic subsidies. And it provides us maximum 
leverage: each dollar we contribute levers four to five from 
the rest of the world. Even with these new funds, the IMF's 
resources would still represent well under half a percent of 
global output, less than half of what they were 15 years ago 
(1983). In relation to private capital flows going to 
developing countries they are one-twentieth as large as they 
were 15 years ago.
    I thought that it may be helpful for me to say a few words 
about the financing structure of the IMF. In some ways, the IMF 
operates like a credit union. We extend a credit line--for most 
of our quota subscription and for our proposed NAB commitment--
which the IMF can draw on. Any drawing by the IMF gives us a 
claim--not unlike a deposit--in the IMF, which is of equal 
value, pays interest, is supported by over $30 billion in gold, 
and which we can withdraw essentially on demand if necessary. 
For these reasons, U.S. participation in the IMF is treated as 
an exchange of financial assets. U.S. transfers to the IMF are 
not scored as budget outlays, and do not come at the expense of 
domestic programs.
    A number of concerns have been raised about our continued 
support of the IMF. Let me take a little time to address two of 
these.
    Some have expressed the concern that IMF stabilization 
programs in Asia have been excessively contractionary and 
focused too little on the need to restore growth and provide 
for rising individual incomes and opportunities in these 
countries.
    The hardships that have come with the ``slowdown'' in 
growth in Asia stem mainly from domestic policy mismanagement 
and the ensuing loss of market confidence, not from the 
involvement of the IMF. The IMF has offered finance and, in 
Korea, Thailand and the Philippines, has triggered a 
restoration of confidence that is already lessening the burden 
of adjustment. The primary focus of these programs is 
structural--on the promotion of policies that will promote 
growth by allowing markets to operate and market forces to 
operate.
    Macroeconomic programs must always weigh what is needed to 
stop a free-falling currency, and what can be done to maintain 
production. As we go forward the United States will watching 
closely to ensure the right balance is being struck as 
conditions change and confidence is improved. But be clear: 
these programs are designed with the objective of quickly 
restoring stability, which is the surest route to a restoration 
of growth.
    Another concern is that the international financial 
institutions work to ensure that the impact of adjustment on 
the poor is cushioned. This is being addresses in several 
respects:
     in the Indonesian and Thai programs, spending on 
health, education and social programs have been expressly 
protected from any fiscal consolidation, and where possible, 
efforts to target spending on the poorest segments of society 
have been intensified.
     In Korea, the program commits the government to 
strengthening the labor insurance system, and the promotion of 
active labor market policies to lessen the shock to employment 
due to the crisis;
     in designing programs to supplement the IMF 
program, both the World Bank and the Asian Development Bank 
have been acutely aware of the need to focus on the impact of 
policy on the most vulnerable, both in the new lending provided 
to these countries and through the restructuring of existing 
lending programs to promote urban and rural employment and 
basic health services. New World Bank lending to Thailand and 
Indonesia, for example, foresees upwards of $600 million in new 
loans for improving the social safety net in each of these 
countries.

                         IV. Concluding Remarks

    Mr. Chairman, the globalization of financial markets has 
been a breathtaking development. Huge amounts of capital flow 
quickly among closely integrated financial systems. 
Technological change has made possible flows of information and 
finance on a vast scale. Globalization has thrust the private 
sector into a predominant role in financing development around 
the world. Private capital has financed great advances in 
productivity and has raised living standards, and created new 
markets for U.S. goods. Globalization has created great new 
opportunities for America.
    At the same time, globalization brings new risks. The Asian 
crisis will likely be viewed as the first crisis of the new 
global economy. To date, the impact of the crisis on our 
country is moderate, and manageable. We are in a strong 
position to withstand the effects of this crisis: our economic 
performance is the best in a generation and unrivaled among the 
major industrialized economies. But, if instability were to 
spread or intensify, the potential risks to American jobs, 
American financial markets and our national security could be 
much greater. Given the risks involved, we have a 
responsibility to protect America's core economic and security 
interests, by working to restore stability with the most 
effective mechanisms available to us.
    To fail to fund the IMF adequately and promptly would risk 
our not being able to respond with adequate financial support 
in the event that this crisis were to spread. And it could risk 
a further shock to the confidence of international investors at 
a time of considerable market fragility. These are not risks we 
should take.
    Mr. Chairman global markets of the twenty first century 
present both opportunities and risks for the American people. 
Making the most of those opportunities, while minimizing the 
risks, will be a central issue for this Committee, and the 
nation, in the years ahead. U.S. leadership in these matters 
will be indispensable for fostering growth and stability around 
the world--and protecting and promoting the interests of the 
American people. Thank you very much.
      

                                


    Chairman Crane. Thank you, Mr. Lipton. I know that a lot of 
these Asian countries that are affected by this financial 
crisis are encouraging exports to build up their current 
accounts and, in fact, I read a report that Korea is using IMF 
funds for export loans. Is this correct, and, if so, how do you 
intend to treat the issue?
    Mr. Lipton. I don't know of any explicit loan programs that 
support exports. In fact, in the IMF Program, Korea has pledged 
not to engage in directed lending where the government tries to 
channel funds to particular companies or particular banks.
    I think it is natural that there will be an expansion of 
the current account balance in Korea and other countries both 
because of the significant contraction in domestic incomes and 
because of the depreciation that has taken the won to a very 
low level and from which it really has not yet fully 
stabilized.
    I think that we have in the IMF Program the monitoring 
capability to make sure that there aren't subsidies or directed 
loans that distort trade in the direction of exports in a way 
that would be a violation of the program and undesirable for 
them and for America.
    Mr. Eizenstat. If I may just add one point on that, Mr. 
Chairman, and that is that in South Korea, the change in their 
current account deficit has occurred almost entirely on the 
import side. They had about a 40-percent drop in the amount 
they can import because their economy has deteriorated. Their 
exports have gone up about 2 percent.
    Chairman Crane. But you can't categorically say that Korea 
isn't using IMF funds for that purpose?
    Mr. Lipton. Well, I can say it is not to our knowledge. It 
would be a violation of the IMF Program. I'm happy to check 
with the IMF to see if they have any knowledge of violations, 
but I don't believe that there are any.
    Chairman Crane. All right. Mr. Eizenstat, you've suggested 
that the markets are looking for both economic adjustments and 
the political will to implement reform. Do you believe the lack 
of fast track compromises our ability to press others to 
implement economic and political reforms?
    Mr. Eizenstat. I do believe the absence of fast track 
authority makes it more difficult not only in Asia, but in 
Latin America and other developing markets to press for reform, 
Mr. Chairman. It is ironic that at the very time the developing 
world has bought the bipartisan religion--if I can put it that 
way--that we have lived by for 50 years, namely the 
liberalization, opening markets, privatization, that we appear 
by not moving on fast track to be retreating from that which we 
have been so successful in selling.
    Chairman Crane. And what specific actions will the United 
States take to monitor the Asian crisis and compliance with the 
IMF proposals?
    Mr. Lipton. We will rely, in the first instance, on the IMF 
which now has had missions present in Asia since the beginning 
of the crisis and will continue to for some time. We also have 
a very extensive set of visits to Asia by Treasury Department 
staff and officials. I've been to Korea twice, myself, and 
we've had staff in Thailand and Indonesia in the past week. I 
believe that we are establishing information flows and 
interactions with these governments that will give us a very 
good sense of whether or not they're implementing their 
commitments.
    Chairman Crane. Thank you, Mr. Matsui.
    Mr. Matsui. Thank you, Chairman. Mr. Neal was not able to 
be here today and he's asked me to submit for the record three 
questions to be directed at Secretary Eizenstat, so I'll put 
these in the record and get these copied to you and perhaps you 
can answer them.
    Mr. Eizenstat. Thank you.
    [The following questions submitted by Congressman Neal and 
Mr. Eizenstat's responses follow:]

    Question. 1. It is important to make progress in improving 
our exports to China in order to reduce our trade deficit, but 
would you agree that such progress can be undone if we impose 
unilateral controls on U.S. exports to China? In Massachusetts, 
a number of companies have complained that they cannot sell 
machine tools to China that they know are freely being sold by 
the European competitors. Would it be better to have a position 
on machine tool sales to China that is endorsed and, indeed, 
followed by our allies and trade competitors?
    Answer. We share your commitment to fostering U.S. exports 
to China. That said, the goal of U.S. export control policy is 
to support an overall strategy of engagement with China and to 
promote creation of high-paying, export-based jobs in the U.S., 
while denying licenses for exports that could contribute to 
activities of potential national security concern to the United 
States.
    Evidence is mixed as to whether export controls and the 
denial of export licenses have a substantial effect on the size 
of the U.S. trade deficit with China. China has benefited more 
than most other countries from the Administration's 
liberalization of licensing requirements in 1994, which 
eliminated export controls on an estimated $2 billion annually 
in trade with China. In 1997, U.S. exports to China totaled 
$12.8 billion and the U.S. approved $1.1 billion in export 
licenses. Only $38 million in licenses were denied. However, 
difficulties in obtaining export licenses were one factor in 
decisions to award some very large projects to non-U.S. 
suppliers.
    Obviously we prefer to coordinate to the extent possible 
with our allies on export control policies and our 
participation in multilateral control regimes such as the 
Wassenaar Arrangement is designed to do that. However, whether 
to impose requirements for individual licenses for controlled 
items, whether to grant licenses for those items, and whether 
to unilaterally control items beyond those on the Wassenaar 
Arrangement lists are national decisions and, in the U.S., 
remain subject to normal interagency deliberations.
    Question. 2. It is my understanding that the U.S. position 
on machine tool export controls to China is not shared by our 
allies and this results in U.S. manufacturers losing hundreds 
of millions of dollars worth of exports every year. Do you have 
a comment on this?
    Answer. We share your interest in expanding our exports to 
China when that is compatible with our other policy interests. 
Exports to China have been increasing. For the most part, we 
share a common position with our allies on export control 
policies. However, the U.S. makes decisions on export licenses 
for sophisticated machine tools very carefully, reviewing both 
the end user and whether that end user could use the item for 
other than civilian end uses. Some of our allies have more 
liberal licensing policies.
    Despite the low market share for U.S. tool manufacturers in 
China, it is significant that U.S. manufacturers actually have 
a higher share in China than in some countries to which U.S. 
machine tools exports are not restricted, such as South Korea, 
and that other nations that have a smaller world market share 
have a higher share of the Chinese market than the U.S. The 
reasons may have as much to do with regional trading patterns 
and foreign direct investment as export controls.
    Question. 3. The multilateral machine tool control list 
that was agreed upon in 1996 is scheduled to expire in November 
of this year. It seems that the U.S. government and U.S. 
machine exporters will be even worse off than they are today, 
with no officially recognized export control list to guide our 
allies. What is our government planning to do to address this 
situation?
    Answer. We share your interest in not unduly disadvantaging 
U.S. exporters by our export control policies. As you are 
aware, Wassenaar Arrangement members will be considering this 
year whether to revise the current controls on sophisticated 
machine tools. Discussions on this subject began March 2 in 
Vienna and indications are that we will reach some agreement to 
preserve machine tool controls.
    The U.S. is developing its position on machine tools for 
the Wassenaar Arrangement discussions and will seek generally 
to maintain current control levels. We are seeking to build a 
consensus for this position among our regime partners. However, 
we expect other countries will have alternate proposals and 
there will be a broad debate on the issue in the coming months.
      

                                


    Mr. Matsui. I'm going to be very brief. I just want to ask 
both of you, and I think most of us favor at least the $3\1/2\ 
billion funding for the IMF, and some of us favor the entire 
$18 billion. I certainly favor the entire $18 billion. On the 
other hand, I think all of us agree and I know that the 
administration feels very strongly about this, that reforms 
must occur to make this ultimately work. And I'm wondering if 
there'll be a point when we say this is not in our interest.
    The Japanese, and I mentioned this today when Ambassador 
Barshefsky testified, have really not fulfilled their 
obligations, at least as the other industrialized countries 
have suggested, in the three areas that I think both of you 
mentioned, or at least one of you mentioned: the fiscal 
stimulus; the tax bill, it's not permanent or multiyear, it's 
just a 1-year tax cut; the whole issue of market opening and 
obviously the issue of strengthening their financial 
institutions and putting reforms into their financial 
institutions. And obviously, with the exception of the United 
States, the Japanese is the other engine to make this thing 
work.
    The Indonesians are a basket case; they're not doing 
anything now. In fact, we're having significant problems there. 
The Koreans are doing a great job. Their new leader is 
obviously trying to work through this in a very constructive 
fashion.
    But, generally speaking, the two large countries, one 
economically and the other by population, have not been 
forthcoming. And I understand that no matter what happens, 
there is going to be, obviously, suffering. I mean, their 
public will suffer, the country will suffer, the countries 
involved will suffer, but is that enough?
    I don't agree with the gentleman from the Heritage 
Foundation at all. I think there is a point where some of us 
who are very strong free traders and support the 
administration's position are concerned that we might set a 
precedent that we may, 10 years or 5 years from now live to--
not regret, but at least be concerned about it. Perhaps both of 
you can, or one of you can respond.
    Mr. Lipton. We are doing all we can to encourage Japan to 
fulfill its responsibilities. There have been high-level 
contacts including most recently at the G-7 meeting where, I 
believe, the Japanese heard a united view of the other 6 
members of the G-7 and have seen that the IMF itself has stated 
that Japan should--that the best thing for Japan and for the 
region would be for it to--engage in a fiscal stimulus program 
to restore domestic demand. They were also pressed very hard on 
the issue of resolving problems in their financial system and 
opening up the rest of their economy with deregulation. We 
don't believe that Japan should continue on the path that it's 
on, that it's a very contractionary path that leaves Japan weak 
and that its weakness is bad for Asia. This is a subject we 
will continue to press and press firmly until they adopt a more 
responsible course of action.
    In the case of Indonesia, the problems are a combination of 
political and economic problems with perhaps greater difficulty 
in the political area right now. All I can say about that is 
that the IMF will insist that Indonesia fulfill the spirit and 
letter of the agreements if they wish to continue to get 
financial support from the IMF. In a sense, Indonesia will have 
to make choices about the direction of its policy that will 
determine whether it gets continuing support from the 
international financial community. I think the best thing we 
can do in the case of Indonesia is to try to describe, as 
clearly as we can, a course of action that will help restore 
confidence in that country and permit a restoration of economic 
activity. To that end, the President, I understand, has now 
asked former Vice President Mondale to travel to Indonesia to 
try to convey a message.
    Mr. Eizenstat. I would just add a couple of points to those 
with which I firmly agree with Under Secretary Lipton. Japan 
has participated as perhaps the largest contributor to the 
standby programs----
    Mr. Matsui. Right.
    Mr. Eizenstat. And they recently agreed in London to 
participate with our Ex-Im Bank in what, I think, can be the 
most important at this point, Congressman Matsui and Mr. 
Chairman, for these countries and that is to help them with 
short-term credit needs. They can't activate letters of credit 
to import anything--food stuffs, inputs for eventual exports, 
and the like. But, with respect to their overall contribution, 
much more needs to be done in the areas of deregulation and the 
areas of stimulating domestic demand by deregulation and by tax 
reductions, and, as Mr. Lipton said, also in the financial 
stability area. They have a $100 billion current account 
surplus with the world, and as Asia's largest economy, they 
have a responsibility to bear their share of the burden of 
absorbing these Asian exports.
    With respect to Indonesia, it clearly is a mixed political 
and economic situation, and that is one of the reasons that 
Ambassador Mondale is going. At the same time, Indonesia has 
complied with many of its program obligations, although many 
initiatives still require more aggressive implementation. Their 
financial sector restructuring plan looks solid but still 
requires implementation guidelines. They've begun some 
corporate debt restructuring plans. They've cut import tariffs 
on 650 food and agricultural items and other key products 
including textiles, chemicals, garments, and equipment. Their 
interest rates have risen somewhat compared with recent levels, 
their fiscal compliance has been reasonably strong, and they've 
issued structural reform decrees, including ending the monopoly 
power for BULOG and other such groups. And the compliance with 
the letter of the agreement in this respect is fairly strong, 
so it is a mixed picture. More needs to be done and Mr. Lipton 
is certainly correct that it needs to be not only on the 
economic side, but it needs to be demonstrated by the markets 
that there is an experienced economic team that will have the 
desire to implement this and the political backing in the 
country to do so.
    Mr. Matsui. I'd like to thank both of you for your 
testimony. I appreciate it very much.
    Chairman Crane. I, too, want to express appreciation to 
both of you for your testimony, and also appreciation for 
adjusting your schedules. And I think you're out of here 1 
minute before our planned schedule, so you should make your 
next appointment right on time. [Laughter.]
    And with that, I look forward to a continuing working 
relationship with you both.
    Mr. Eizenstat. Thank you, Mr. Chairman.
    Mr. Lipton. Thank you very much.
    Chairman Crane. And our final panel includes Hon. Henson 
Moore, former colleague and president and chief executive 
officer of the American Forest and Paper Association; William 
Hudson, president and chief executive officer of AMP, Inc., on 
behalf of the American Electronics Association, the National 
Association of Manufacturers, the U.S. Pacific Basin Economic 
Council; Frederick Webber, president and chief executive 
officer of the Chemical Manufacturers Association; David Waide, 
the president of the Mississippi Farm Bureau Association on 
behalf of the American Farm Bureau Association; and, Mary 
Sophos, senior vice president of government affairs for the 
Grocery Manufacturers of America. And, after you people take 
your seats there, we will start with our distinguished former 
colleague, Henson Moore, and proceed in the order that I 
presented you before the Subcommittee.

    STATEMENT OF HON. W. HENSON MOORE, PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, AMERICAN FOREST AND PAPER ASSOCIATION; AND 
                   FORMER MEMBER OF CONGRESS

    Mr. Moore. Thank you, Mr. Chairman. Mr. Chairman, I am the 
president of the American Forest and Paper Association which is 
the national trade association representing the nation's forest 
products industry, both lumber and paper.
    I'd like to point out to the Subcommittee that we are the 
largest industry of our kind in the world. We outproduce the 
next three countries combined. We employ about 1.6 million 
Americans and rank as one of the top 10 manufacturers in 46 
States in the Union.
    Asia is a very important market to us. Forty percent of our 
worldwide exports go to Asia, but Asian countries are also 
producers that rank among our most formidable worldwide 
competitors, and they're adding capacity at a very vigorous 
rate. Historically, our companies have faced a very formidable 
array of trade barriers including tariffs, nontariff barriers, 
and discriminatory standards, in these very markets.
    Recently, the APEC tariff initiative that was endorsed in 
Vancouver in the summit last November offers a very unique 
opportunity to begin to bring some measure of free trade for 
our industry to that part of the world. We think this is a very 
remarkable event for which we are very complimentary of 
Ambassador Charlene Barshefsky, the U.S. Trade Representative, 
and also Under Secretary Stuart Eizenstat and the State 
Department, for the work that they've been doing in this area. 
We very much appreciate their efforts.
    We note, however, that while a number of countries are 
moving toward endorsement of the APEC initiative, there are two 
countries that so far have not; two real leaders in that part 
of the world, Japan and Korea. Thus far, we fail to see either 
one of those countries exercising the leadership which the 
times and their position in that region of the world require. 
Winning their early and firm commitment to the APEC sectorial 
initiatives must be a major objective of U.S. trade, financial 
and security policy in dealing with this crisis.
    The crisis may be used, we fear, by protectionists in those 
countries in order to be able to stall trade liberalization of 
the region. The U.S. forest products industry urges this 
Subcommittee to ensure that the United States policy response 
to the current financial difficulties in Asia goes beyond the 
immediate need to restore financial stability and focuses on 
the more fundamental requirement for genuine market-based 
reform. Monetary and trade policy interests must be coordinated 
and integrated. Asian countries must be pressed hard to open 
their economies, not only to banking and investment, but to 
competition and goods. Protective tariffs, nontariff barriers, 
collusive business practices, cronyism, state trading, are all 
part of the problem which has caused the current crisis in 
Asia. You couldn't find a better time to bring down these trade 
barriers in terms of tariffs. The sharp devaluation of their 
currencies in that part of the world has made producers in 
those countries hypercompetitive. There could really be no 
better time to eliminate tariff barriers than now.
    I also want to point out that most economists generally 
agree that substantially increased exports from these Asian 
countries to the United States will soon occur. The United 
States really can't afford to stand alone as the market of 
first and last resort for the Asian export machine.
    We believe that open markets must be the hallmark of the 
Asian recovery. We urge this Subcommittee to ensure that the 
United States and the multilateral institutions which we 
support place greater emphasis on the market-opening measures, 
and the APEC sectoral initiatives in particular, as critical 
elements in achieving long-term, stable growth in this 
important region of the world.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. W. Henson Moore, President & CEO, American Forest & 
Paper Association; and Former Member of Congress

    My name is Henson Moore. I am President and CEO of the 
American Forest & Paper Association (AF&PA). AF&PA, the 
national trade association of the forest, pulp, paper, 
paperboard, and wood products industry, represents more than 
100 companies. The vital national industry which AF&PA 
represents accounts for 8% of total U.S. manufacturing output. 
The industry employs approximately 1.6 million people and ranks 
among the top 10 manufacturing employers in 46 states. Its 
annual payroll is about $50 billion, and sales of forest and 
paper products top $200 billion annually in the U.S. and 
abroad. We are the largest producer of forest products in the 
world.
    It is a privilege for me to testify today on a matter of 
urgent concern to our member companies.
    The U.S. forest products industry has an important stake in 
Asia. Asia currently accounts for 40% of our worldwide export 
sales. Asian producers rank among our most formidable worldwide 
competitors, and are adding additional capacity at a vigorous 
rate.
    Historically, our companies have faced a formidable array 
of trade barriers--including tariffs, non-tariff barriers, and 
discriminatory standards--in these markets.
    A prime example is the 20% tariff on kraft linerboard (used 
in the manufacture of corrugated shipping containers) imposed 
by Malaysia in 1994, expressly designed to preclude foreign 
competition with a local production facility. For wood 
products, the issue of tariff escalation--the application of 
zero tariffs on raw materials and higher tariffs at progressive 
stages of processing--has meant that market access for our 
higher value-added products has been restricted.
    These tariffs are particularly unfair in view of the fact 
that U.S. tariffs on paper products are at or near zero, and 
are very low for wood products. Moreover, a substantial number 
of these countries benefit from duty free access to the U.S. 
market under the U.S. Generalized System of Preferences (GSP).
    Over the past year, our industry has worked closely with 
the Office of the U.S. Trade Representative (USTR) and our 
industry counterparts in Canada, New Zealand and Indonesia to 
craft a comprehensive program which would eliminate tariff and 
non-tariff barriers, as well as discriminatory standards 
throughout the Asian region. The Asia Pacific Economic 
Cooperation forum (APEC) Forest Products Initiative--which was 
endorsed at the Vancouver Summit in November of last year--
offers the potential to establish a truly barrier free market 
for our products in the APEC region by 2004. By opening 
participation to other trading partners under WTO auspices, it 
could create a global free market in this industry.
    We view this as a remarkable achievement--a testament to 
both the extraordinary negotiating skill of USTR Barshefsky and 
the growing economic sophistication of the APEC member 
economies. It must be emphasized that the APEC leaders took 
this decision, in full light of the unfolding financial crisis, 
precisely and explicitly because they understood that market 
liberalization is sound economics and that a commitment to 
achieve completely free trade in the region's most important 
sectors would send a strong, confidence-boosting signal to 
world financial markets.
    We are further encouraged by the results of recent APEC 
meetings in Penang, where Senior officials reaffirmed their 
commitment to achieve the goals set in Vancouver. At the same 
time, however, we note that some of the developed countries in 
the region--especially Japan and Korea--have so far failed to 
exercise the leadership which the times and their position in 
the region require. Winning their early and firm commitment to 
the APEC sectoral initiative must be a major objective of U.S. 
trade, financial and security policy in dealing with this 
crisis.
    We remain concerned that the crisis may be used by 
protectionists as an excuse to stall trade liberalization in 
the region. The U.S. forest products industry urges this 
Committee to ensure that the U.S. policy response to the 
current financial difficulties in Asia goes beyond the 
immediate need to restore financial stability and focuses on 
the more fundamental requirement for genuine market-based 
reform.
    Monetary and trade policy interests must be coordinated and 
integrated. Asian countries must be pressed hard to open their 
economies, not only to banking and investment, but to 
competition in goods. The U.S. must use its leverage, including 
its position in multilateral institutions, to this end.
    It must be remembered that protective tariffs, non-tariff 
barriers, collusive business practices and state trading are 
all part of the problem which led to the current crisis. There 
can be no meaningful, sustainable recovery in the region unless 
and until these are rooted out.
    Where they exist, anticompetitive practices (such as the 
keiretsu system in Japan; the chaebol in Korea; and the plywood 
cartel in Indonesia) subsidies or other non-market based 
financial incentives for capital investment which have thwarted 
market function, and contributed to the current problems, must 
not be allowed to continue. Making such policies transparent is 
not the answer; they must be eliminated, and markets opened to 
foreign trade and investment on equal terms. The U.S. and 
multilateral lending agencies must ensure that needed 
adjustments are made on the basis of fully open, contestable 
markets.
    The discipline of open markets, which the APEC Forest 
Products Initiative will provide, must be combined with closer 
scrutiny of lending policies by U.S. Government and 
multilateral donor agencies to ensure sustainability in this 
sector. Investment and production decisions must be subject to 
market--not political--forces.
    The recent IMF agreement for Indonesia is a step in the 
right direction, but needs continuing surveillance. By calling 
for the dismantling of the plywood cartel (APKINDO) and the 
elimination of export taxes, it opens the way for enhanced 
competition in panel products' markets around the world. But, 
for Indonesia and for other countries in crisis, the IMF must 
go further. It must press for the elimination of tariff and non 
tariff barriers, before it can be satisfied that the underlying 
causes of the current difficulties are being effectively--and 
permanently--addressed.
    The benefits for the regional economies are clear: The 
elimination of tariff and non-tariff barriers, and the 
rationalization of building standards, would mean lower input 
costs for export oriented industries; reduced prices to 
consumers on products ranging from housing and furniture to 
printed materials; improved efficiency in the utilization of 
precious forest resources; more realistic selection of 
investment projects and improved returns on capital invested; 
and wider markets for value added wood and paper products.
    These outcomes would appear to be necessary ingredients in 
any recovery program and are especially important in view of 
the significance of the forest products industry in some of the 
hardest hit countries of the region such as Indonesia, 
Malaysia, and the Philippines.
    In fact, the opportunity side of this particular crisis may 
be that it diminishes the perceived economic risk for these 
countries in eliminating tariff and other trade barriers. The 
sharp devaluation of their currencies has made producers in 
these countries hyper competitive. There may be no better time 
to eliminate tariff barriers than the present.
    Indeed, the U.S. can ill afford any delay in opening these 
markets. Economists are agreed in their predictions of 
substantially increased exports from Asian countries to the 
U.S. But the U.S. cannot afford to stand alone as the market of 
first and last resort for the Asian export machine. Particular 
pressure must be put on Japan, as the premier developed country 
in the region, to open its markets to regional suppliers. 
Domestic demand stimulation will not suffice absent a strong 
market-growing component, Japanese stimulative measures have 
historically led to increased output by Japanese industry--and 
even greater pressure on U.S. domestic markets. Korea, Taiwan 
and even China have a role to play as well.
    The U.S. forest products industry has consistently 
supported U.S. policies designed to open world markets. During 
the 1980's, we initiated the zero-for-zero concept, offering to 
completely eliminate U.S. tariffs on our products. This past 
year, we worked closely with the Congress to obtain fast track 
authority which would have made new trade initiatives possible.
    We believe that open markets must be the hallmark of Asian 
recovery. We urge this Committee to ensure that the U.S., and 
the multilateral institutions which we support, place greater 
emphasis on market opening measures, and the APEC sectoral 
initiatives in particular, as critical elements in achieving 
long term stable growth in this important region.
      

                                


    Chairman Crane. Thank you.
    Next in line was Mr. Hudson.

 STATEMENT OF WILLIAM J. HUDSON, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, AMP, INC., HARRISBURG, PENNSYLVANIA; ON BEHALF OF 
   AMERICAN ELECTRONICS ASSOCIATION, NATIONAL ASSOCIATION OF 
     MANUFACTURERS, AND U.S. PACIFIC BASIN ECONOMIC COUNCIL

    Mr. Hudson. Thank you, Mr. Chairman. I appreciate this 
opportunity to testify, and thank you for convening this very 
timely hearing on the crisis in Asia. I appear before you as a 
member of the American Electronics Association, as the vice 
chairman of the National Association of Manufacturers, as the 
chairman of the U.S. Member Committee of the Pacific Basin 
Economic Council, and of course, as president and chief 
executive officer of AMP, Inc.
    Our company, AMP, one of AEA's more than 3,000 U.S. 
members, is the world leader in the production of electrical 
and electronic connectors and interconnection systems. Today we 
are a $5.75 billion company with offices in 50 countries and 
sales in over 100. I would mention that I lived in Japan for 
7\1/2\ years, and that during that time I set up eight new 
greenfield operations in the region, and maintained AMP's top 
market-share position in Japan and in Asia.
    On Sunday I returned from a week in Thailand, where I 
received briefings from AMP leaders throughout the Asian-
Pacific region. Before I left, I stated publicly my belief that 
Congress should quickly provide the IMF funding requested by 
the administration. Today, I am even more convinced of the 
importance of following through on that policy.
    The American electronics industry is a phenomenal success 
story. U.S. employment in our industry has grown by 7 percent 
in the last 6 years, creating 290,000 new jobs. To a large 
extent, this has resulted from demand abroad. Many high-tech 
companies--indeed, many Fortune 500 companies--generate high 
percentages of their revenues from overseas sales.
    At AMP, 55 percent of our sales are outside the United 
States. The same is true at Digital. At Motorola that number is 
higher, around 60 percent. This same phenomena can be seen in 
many small companies and in some startups.
    Barringer Technologies, for example, is a maker of advanced 
trace detection technology for security and law enforcement 
applications. It attributes 45 percent of its $25 million in 
sales to non-U.S. orders. Endgate Technology is a California-
based startup manufacturer of wireless telecommunications 
equipment. Eighty percent of their sales are to customers 
abroad.
    While the larger portion of our sales are outside the 
United States, the majority of our work force is here. That is 
true for AMP, and it is true for the U.S. electronics industry 
generally. This industry is the largest U.S. manufacturing 
employer--with 1.9 million U.S. workers. Those numbers swell to 
4.2 million when we include high-tech services employment.
    In 1996 approximately 40 percent of the U.S. high-tech 
industry's exports went to Asia--far more than to any other 
region. Asia is important to the growth of this industry and to 
its tremendous success in creating jobs and generating revenue.
    As noted earlier, the Asian-Pacific region's economic well-
being is important to the continued success and growth of 
America's high-tech industries. A financial meltdown and 
recession in Asia could affect United States competitiveness, 
exports, and jobs. It could also affect pension plans here 
which are tied to the performance of U.S. companies.
    Our task should be to try to avoid any further spread of 
the currency devaluations of Asia and to enact policies that 
will build confidence in the region. The troubled economies of 
the Western Pacific are like patients in an emergency room, and 
the first job of the doctors should be to stabilize the 
patients, not to argue about the hospital admission process.
    The immediate challenge is to strengthen the currencies in 
the affected countries as quickly as possible. Without this 
kind of fundamental improvement, China and Hong Kong may not be 
able to retain the exchange rate relationships of the dollar to 
which they both are now committed. If they devalue, exports 
from the region will accelerate, creating new pressures on the 
United States economy and on the economies of Europe. These 
pressures will have deleterious effects on the quality of life, 
the character of policy, and the levels of international 
cooperation throughout the world. We also need to support the 
IMF in its demand that the countries getting IMF assistance 
agree to and adhere to certain conditions.
    At this point let me summarize the main concerns of the 
American Electronics Association and the other organizations 
for which I am appearing. AEA, NAM, and PBEC support funding 
the total request of $18 billion for IMF. They believe it would 
be counterproductive for the United States to put new, 
unilateral conditions on its contribution to the IMF. They also 
believe, though, that the IMF conditions do advance important 
U.S. interests. They further believe that the IMF conditions 
must be closely monitored, not only by the IMF, but by U.S. 
agencies as well.
    Finally, these groups are concerned, as I am, by the fact 
that the countries in the region, including Japan, continue to 
rely too heavily on export-led growth. While America's 
interests are clearly an issue, other countries must 
demonstrate leadership as well. Japan needs to stimulate its 
economy and further open its markets. China must continue to 
play a responsible role. The recent assurances by Chinese 
officials confirming their commitment to exchange rate 
stability have been both significant and welcome. Europe, too, 
has been affected by the Asian crisis and must do its part to 
counteract it.
    In conclusion, Mr. Chairman, let me return to the key point 
of these remarks. The action you take now will be critical to 
America's future. By nature, business leaders are optimists; 
investors have to be. They see opportunities and potential. The 
opportunities for all parties in the Pacific partnership that 
links America to the Western Pacific are enormous. As a 
country, though, we run the risk of squandering those 
opportunities if we pull back from our long-term commitment to 
the region and to the IMF. I urge you not to do that, but to 
approve the President's request.
    Thank you.
    [The prepared statement follows:]

Statement of William J. Hudson, President and Chief Executive Officer, 
AMP, Inc.; Harrisburg, Pennsylvania; on Behalf of American Electronics 
Association, National Association of Manufacturers, and U.S. Pacific 
Basin Economic Council

                        Opening and Introduction

    Thank you, Mr. Chairman. I am pleased to be here on behalf 
of the American Electronics Association to discuss the vital 
issues of Asia, its currency situation and the progress of Asia 
Pacific Economic Council (APEC). This committee is critically 
important in guiding U.S. policy throughout the world. Today I 
would like to thank you, Mr. Chairman, and the Members of the 
Subcommittee for convening this very timely hearing on the 
crisis in Asia. I appear before you today not only as a member 
of the American Electronics Association, but also as the Vice 
Chairman of the National Association of Manufacturers (NAM) and 
as the Chairman of the U.S. Member Committee of the Pacific 
Basin Economic Council (PBEC). The views expressed here are 
shared by each of these groups.
    The American Electronics Association represents more than 
3,000 member companies across the spectrum of electronics and 
information technology companies--from semiconductors and 
software to computers and telecommunication systems. As the 
largest high-tech trade association in the United States, AEA 
represents American high-tech companies nationally through 17 
council offices and globally through our offices in Tokyo, 
Brussels and Beijing.
    Let me also take the opportunity to tell you about AMP, 
Incorporated. AMP is a global enterprise and world leader in 
the production of electrical and electronic connectors and 
interconnections systems. When I started with AMP in 1961, we 
were primarily a Pennsylvania company with a few foreign 
operations, mainly in France and Japan. Today, we are a $5.75 
billion company, with offices in 50 countries and sales in over 
100. AMP has grown at 13.7 percent compound annual growth for 
the last 40 years. That is, of course, better than the recent 
growth rates of the U.S. economy and even better than the rapid 
annual growth we have seen in many of the Asian economies over 
the past decade.
    You should also know that I lived in Japan for seven and 
half years. During that time I set up eight new greenfield 
operations in the region and maintained AMP's top market share 
position in Japan and Asia.
    Mr. Chairman, the work of the Trade Subcommittee is vitally 
important to the competitiveness of the United States. The 
issues facing this subcommittee and Congress are more 
challenging and complex as a result of the globalization of the 
economy and the increasing interdependence of global markets--
which the Asia crisis vividly demonstrates. There is a 
temptation to view each issue--whether it is the role of the 
International Monetary Fund (IMF) in Asia, fast track, Most 
Favored Nation (MFN) status for China, Africa, or the 
Generalized System of Preferences (GSP)--as independent, 
isolated measures or worse, as tradeoffs. In fact, they are 
interrelated policies that work together to create the level 
playing field and open markets which are critical to the 
continued success and competitiveness of U.S. companies and of 
the United States.

           The U.S. High-Tech Industry in the Global Economy

    The interdependence and complexity of the global economy is 
evident when we look at the high-tech industry and its role in 
U.S. and global economy. The U.S. high-tech industry is the 
single largest manufacturing industry in the United States, 
with 1.9 million manufacturing jobs. When computer and 
communications services are included, the combined employment 
swells to 4.2 million workers. These are high-skill, high-wage 
jobs. The average wage of these jobs is almost $50,000 
($49,586), which is 73% higher than the average private sector 
wage of about $29,000 ($28,582). This industry represents 6.2 
percent of the U.S. GDP, with total annual sales of $866 
billion in 1996. Finally, with $150 billion in exports, the 
American high-tech industry is the single largest merchandise 
export industry in the United States.
    This industry's U.S. success story is largely a story of 
international sales. U.S. employment in our industry has grown 
by 7 percent in the last six years, creating 290,000 new jobs. 
This has been largely a result of demand abroad for U.S. 
products and services. Many high-tech companies--indeed many 
Fortune 500 companies generally--generate a high percentage of 
their revenue from overseas sales. For AMP, 55 percent of our 
sales are outside the U.S. For Digital, non-US revenue accounts 
for 55% of the total and for Motorola, that number is even 
higher at 60%. While it may not be surprising that some of the 
large corporations generate a significant portion of their 
business overseas, small companies like Barringer Technologies, 
makers of advanced trace detection technology for security and 
law enforcement applications, with $25 million in sales 
attributes 45 percent to non-U.S. sales. Even start-ups depend 
on global sales. Endgate Technology, a California-based 
manufacturer of wireless local loop telecommunications 
equipment, attributes 80 percent of their sales to customers 
outside the U.S. I would emphasize that while a large portion 
of our sales are outside the U.S., the majority of our 
workforce is based here in the United States. That is true for 
AMP, and it is true for the U.S. electronics industry as a 
whole as mentioned above.
    I would add that the value of AMP exports from the United 
States is over five times the value of AMP imports and that 
over 40 percent of those exports go to buyers in the Asia 
Pacific region. As you know, U.S. exports of goods and services 
support over 12 million U.S. jobs. A certain number of those 
are jobs at AMP, in the companies that supply us and in the 
communities that are home to AMP employees.
    In 1996, the U.S. high technology industry exported more to 
Asia-Pacific (excluding China and Japan) region than we did to 
our traditional largest trading partner, the European Union--
$40 billion compared to $36 billion. The total exports to Asia, 
including China and Japan, are approximately $60 billion or 
forty percent of the industry's $150 billion in exports. 
Clearly, Asia is important to the growth of this industry and 
to its tremendous success in job creation and revenue 
generation.

               Asian Pacific Economic Cooperation (APEC)

    Given the importance of Asia not only to the high-tech 
industry but to the entire U.S. economy, it is understandable 
that AEA, NAM and PBEC have all been attentive to the APEC 
process and the progress of the negotiations.
    The events of the last six months have been a lesson in the 
concept of global interdependence.
    It is clear, for example, that the economic events in South 
Korea have affected both companies and markets in the United 
States. In the past few decades, the Pacific region has seen 
astounding growth. As the region has grown, it has become more 
interdependent. Growth has also led the economies to recognize 
that continued improvement in their standards of living is best 
pursued by effective trade and investment liberalization. APEC 
continues to be the forum for achieving trade and investment 
liberalization. Indeed, APEC was instrumental in securing the 
Information Technology Agreement (ITA) and continues to be a 
pivotal player in the implementation and expansion of the ITA 
and ITA-2. As you know, the ITA is intended to be a living 
instrument to accommodate new IT products.
    On the subject of investment, I would like to express my 
sincere disappointment over the fact that we have not seen more 
progress on the Multilateral Agreement on Investment (MAI). To 
my knowledge this is not an urgent, bottom-line issue for any 
American company. It is, however, the best opportunity that the 
world has to establish solid rules for the treatment of 
international investment. If the hands off, open principles of 
the MAI had been in place for the last several years in Asia, 
some of today's problems might well have been averted. At the 
very least, the United States would not have to contend with 
some of the beggar-thy-neighbor investment policies that are, 
regrettably, still widespread in the world. I am thinking here, 
for example, of the demands that various countries have imposed 
on investors for technology transfers, product exports, and the 
use of local suppliers.
    On the other hand, the Clinton Administration's 
reinvigoration of APEC, beginning with the Seattle meeting of 
1993, has proven to be of great benefit to the entire region. 
With the current decline in the value of Asian currencies, 
there has been an urgent need to continue the process of 
regional economic liberalization. APEC has provided the forum 
for doing this and for sending the world the all important 
message that it is being done. The APEC process and APEC 
leadership remain essential to the growth of the region's 
economies and to the global economy.

              Asia Currency Crisis and the Role of the IMF

    As noted earlier, the Asia-Pacific region's economic well-
being is important to the continued success and economic growth 
of the U.S. high-tech industry. A financial meltdown and 
recession in Asia has a direct effect on U.S. competitiveness, 
exports and jobs, not to mention our pension plans, which are 
heavily dependent on the U.S. and global stock market 
performance. We must avoid further spread of the currency 
devaluation and enact policies that will build confidence in 
the region. I liken the Asian situation to a patient in the 
emergency room. As doctors, the first measure is to stabilize 
the patient, it is not to argue about the hospital admission 
process.
    Consequently, the U.S. must demonstrate its leadership in 
stabilizing the patient. We can do this by supporting the 
reforms necessary to strengthen these economies and by 
increasing IMF funding so that we are prepared in the event 
that further destabilization occurs. U.S. funding for the IMF 
is critical to the success of the entire stabilization effort. 
It is essential to both America's interests and America's 
leadership in the region. The IMF has been able to persuade 
countries to address issues and to accept reforms that the 
United States has not been able to secure in bilateral 
negotiations with these same countries. As the largest 
contributor in the IMF, the U.S. can have significant influence 
on the conditions to ensure that they are appropriate and 
significant.
    Important as these new liberalization measures may be, the 
immediate and frankly more important challenge is to strengthen 
the currencies in the affected countries as quickly as 
possible. Without this kind of fundamental improvement, it may 
be impossible for China and Hong Kong to retain the exchange 
rate relationships to the U.S. dollar to which they are both 
currently committed. If China and Hong Kong devalue, exports 
from the region will accelerate, creating new pressures on the 
U.S. economy and on the economies of Europe. These pressures 
will have deleterious effects on the quality of life, the 
character of policy, and the levels of international 
cooperation throughout the world.
    In this context, it is sobering to note that the extremely 
large--almost $200 billion--U.S. trade deficit of 1997 does not 
reflect the adverse consequences of falling Asian currencies. 
The way these things work, the first effect from such 
devaluations is a lowering of the import bill for the country 
with the stronger currency.
    In these circumstances, AEA supports funding the total 
request of $18 billion for the IMF--the $3.5 billion New 
Arrangements to Borrow, and the $14.5 billion which is a quota 
increase. The U.S. contribution will result in a pro rata 
contribution will leverage others--fostering a six-fold 
contribution from other countries that will create the critical 
mass needed to guarantee the long-term viability of the IMF.
    AEA does not believe it is appropriate to pre-condition the 
IMF funding on specific reforms in countries receiving IMF 
assistance or on changes in how the IMF operates. Further, the 
imposition of unrelated policy objectives, however meritorious, 
undermines the broader objectives of effectiveness and 
timeliness. As exporters and investors, AEA members have a 
strong interest in seeing that the IMF continues to require 
borrowing countries to adopt substantial structural reforms. 
This focus, however, must not be allowed to obscure the even 
higher priority of stabilization. And there is some danger of 
it doing so. There is a danger that we will become more 
concerned with the ``hospital admission procedures'' than with 
the action necessary to save the patient and restore 
confidence.
    AEA members do believe that the IMF conditions advance 
important U.S. market access interests. Specifically, they can 
help countries avoid future unwise economic behavior, breaking-
up monopolies and ending preferential treatment. Market access 
is a fundamental aspect of the financial and commercial reforms 
demanded by the IMF as conditions for restabilizing the 
financial systems of affected countries.
    In the final analysis, it is the IMF itself that must 
monitor and enforce adherence to the conditions it negotiated 
with various countries. In addition, however, AEA expects 
Treasury, the United States Trade Representative (USTR) and the 
Department of Commerce to closely monitor the progress of 
reforms and to report to Congress routinely on the 
effectiveness of reforms. To date, the USTR has been a vigorous 
advocate for market access, and we would expect them continue 
to play a significant role in this area. We believe focus on 
the fundamental reforms is crucial. We are concerned by the 
fact that the countries in the region, including Japan, 
continue to rely too heavily on export-led growth. Uncorrected, 
this is a harbinger of long-term economic disaster.
    Even though the high-tech industry tends to be particularly 
focused on the economic effects of Asia situation, American 
leadership is necessary not only to ensure our commercial 
interests but vital to our national security interests as well. 
We are talking here about an array of solid relationships with 
important countries such as South Korea, Thailand, Indonesia, 
and Malaysia. In diplomatic terms, our inaction would be seen 
throughout the region as a failure in U.S. leadership at a time 
of extreme need--thereby undermining support for continued U.S. 
political military and commercial engagements. In human terms, 
America would be seen as the erstwhile partner who had turned 
his back on friends in need.

                      The Role of Other Countries

    While America's interests are clearly at issue, other 
countries must demonstrate leadership as well.
    Japan needs to demonstrate its ability to exercise its 
leadership and stimulate its own economy and open up its 
market. As the second largest economy in the world, Japan must 
take the necessary steps to deal with its financial systems, to 
generate solid growth in domestic demand and further open its 
markets. It is in Japan's interest, Asia interests and the 
global economic interests for Japan to take strong action.
    China also plays a crucial role in Asia's economic 
stability and, in fact, the global economy. I have already 
referred to the recent assurances by Chinese officials 
confirming their commitment to exchange rate stability. These 
have been both significant and welcome. Additionally, it is 
important that this major economic and trading partner be 
brought into the global trading system, by acceding to the 
World Trade Organization (WTO) on commercially viable terms. 
AEA, as it stated before this subcommittee last November, wants 
to work closely with the Administration and Congress to ensure 
that we have, as soon as possible, a successful conclusion to 
these negotiations, assuming a strong protocol that adequately 
addresses our commercial concerns.
    Europe, also affected by the Asian crisis, is seeing 
economic growth and must continue to take necessary steps 
toward structural reform that will strengthen its recovery. As 
Europe strengthens its economy, it too can become an engine of 
global growth.

                               Conclusion

    We are faced with a serious challenge in Asia. The actions 
we take now are critical to our economic and national security. 
Big U.S. interests are at stake leadership is required. AEA, 
the NAM and the U.S. Member Comcil are ready to work with 
Congress and the Administration to ensure an effective response 
to this crisis and to prevent further destabilization in the 
region and elsewhere around the world. Thank you, Mr. Chairman.
      

                                


    Chairman Crane. Thank you.
    Mr. Webber.

STATEMENT OF FREDERICK L. WEBBER, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, CHEMICAL MANUFACTURERS ASSOCIATION

    Mr. Webber. Thank you, Mr. Chairman, and good afternoon. My 
name is Fred Webber. I'm president and chief executive officer 
of the Chemical Manufacturers Association.
    In this age of the global economy, the importance of Asian 
markets for United States industry in general, and the chemical 
industry in particular, cannot be overemphasized. The U.S. 
chemical industry is our Nation's largest exporting industry--
exporting more each year than either America's farms or 
America's aerospace firms. Chemical exports account for more 
than $1 of every $10 of U.S. exports, and we as an industry 
have a trade surplus in each of the last 75 years. What's more, 
the jobs of about 182,000 of our industry's total work force of 
1 million is supported by exports.
    Asian markets are critical to our industry's continued 
strength and its future growth. Chemical exports to APEC 
markets in 1996 were more than $36 billion, or more than one-
half of the industry's total 1996 exports of nearly $62 
billion. Our industry's 1997 exports totaled $69.5 billion. We 
expect similar results in 1997 for exports to APEC nations.
    The current Asian financial crisis will have an effect on 
our industry. What isn't so clear, at least not yet, is how the 
crisis will affect our industry and the approximately 1 million 
men and women who are employed by the chemical industry in 
high-wage jobs in the United States. These are high stakes for 
the U.S. chemical industry. Our growth markets, indeed, are in 
Asia and Latin America. That's why we urge congressional 
support for a United States-led initiative underway within the 
Asia-Pacific Economic Cooperation Forum, which, once 
implemented, will dramatically improve the United States access 
to key chemical export markets in the Asia-Pacific region. The 
agreement has the potential to eliminate tariff and nontariff 
trade barriers.
    APEC has recently decided to include chemicals among the 
list of nine sectors slated for accelerated tariff reductions 
under its early voluntary sector liberalization, or EVSL. By 
expanding coverage through the Pacific rim countries of the 
existing chemical tariff harmonization agreement, we will 
significantly lower chemical tariffs throughout APEC, and 
hopefully, reduce many of the nontariff barriers as well. The 
EVSL package includes a proposal to align regulations covering 
chemical safety and testing standards as a first effort to 
ensure better consistency and safety.
    Mr. Chairman, your inclusion of chemical tariff 
harmonization in the Uruguay round Agreements Act resulted in 
CMA working with the Office of the U.S. Trade Representative to 
begin discussions in 1996 within APEC, seeking to generate 
support for existing CTHA to cover all APEC members.
    Last week in Malaysia, CMA convened the third Asian-Pacific 
industrywide conference. We were encouraged to see a high level 
of industry participation, even from countries experiencing 
severe economic problems. Expanding trade and lowering chemical 
tariffs will not only benefit the United States, but will also 
provide substantial benefits for these Asian nations.
    We view the early voluntary sector liberalization as a win/
win situation for United States exporters and our Asian-Pacific 
trading partners alike. We hope that Congress will support the 
administration's effort to ensure this process moves forward 
successfully.
    Finally, no discussion of the global economy and world 
trade would be complete without mentioning fast track. The 
chemical industry believes that the United States should seek 
out, and take advantage of, trade liberalization whenever 
possible. Without renewal of fast track, the United States will 
watch from the sidelines as lucrative trade deals are 
negotiated by our trading partners.
    Even with EVSL, liberalization of key sectors may not take 
place or take into account the interests of U.S. producers. 
This denies our member companies an equal opportunity to 
compete in today's emerging markets. That's why we're 
disappointed by reports that the administration has all but 
abandoned congressional approval of a fast track renewal bill 
prior to the Summit of Americas in April. It is also 
disheartening that so many Members of Congress still oppose 
fast track, which will greatly benefit the entire U.S. economy. 
With your leadership, Mr. Chairman, and with the leadership of 
Members of this Subcommittee, I sincerely hope that we will get 
the fast track debate back on track and win the day for U.S. 
exporters and U.S. workers who make these exports.
    Thank you for allowing me to appear before you today. I 
would welcome any questions you have about my testimony.
    [The prepared statement follows:]`

Frederick L. Webber, President and Chief Executive Officer, Chemical 
Manufacturers Association

    Mr. Chairman, Members of the Committee, my name is 
Frederick L. Webber. I am President and Chief Executive Officer 
of the Chemical Manufacturers Association (CMA), whose more 
than 190 members account for 90 percent of the industrial 
chemicals produced in the United States.
    The chemical industry has for some years been the largest 
U.S. export sector--yes, even larger than agriculture, even 
larger than aerospace--supplying over one out of every ten 
dollars of U.S. goods exports and achieving substantial annual 
trade surpluses for the past 75 years. Given the central role 
that exports play in our commercial operations overall, U.S. 
chemical companies and CMA have long been proponents of greater 
liberalized trade. I want to thank you Mr. Chairman for 
convening this important hearing to discuss the current trade 
and economic situation in Asia.
    As part of my testimony today, I want to highlight the 
importance of the Asian market to U.S. chemical producers. In 
addition, I would like to discuss and urge Congressional 
support for a U.S.-led initiative currently underway within the 
Asia-Pacific Economic Cooperation (APEC) forum which, once 
implemented, will dramatically improve U.S. access to the key 
chemical export markets in the Asia-Pacific.
    These markets are critical to U.S. chemical producers' 
future growth. Unlike Europe, which is already a relatively 
mature market, Asian countries are just beginning to expand 
their consumption of U.S. chemicals. Consequently, we expect 
the growth trend in the Asia region to continue, and even 
accelerate, through the turn of the century.
    To give you a sense of how important Asia is for our 
industry, I would note that U.S. chemical exports to the other 
17 APEC partners exceeded $36 billion in 1996. This figure 
represents over half of the $61.8 billion in total U.S. 
chemical exports world-wide for the same period. Equally 
important, these markets offer tremendous future potential for 
our exporters.
    In this regard, it is instructive to look at the potential 
for growth in China alone. In China, a country of over 1.2 
billion people, per capita sales of chemicals and related 
products stand at about $70, compared with U.S. per capita 
chemical consumption of $1,340 annually. Likewise, consumption 
of plastics is about 5 kilograms per capita in China, compared 
with 120 kilograms in the United States.
    As these statistics illustrate, China's chemical market is 
virtually in its infancy, and we see a similar situation in 
other developing countries in the region including Indonesia, 
Malaysia, Thailand and the Philippines, just to name a few. 
Given this vast untapped potential, U.S. chemical producers 
have a clear interest in ensuring that these and other Asian 
nations prosper so that their economies can continue to grow, 
thereby providing the increased demand for the products 
exported by the CMA members I represent today.
    With that in mind, I would like to take a moment to discuss 
the current financial crisis in Asia and its possible 
ramifications for our industry. Given that the crisis is only 
just beginning to affect trade flows in the region, we are 
still assessing the extent to which the crisis will reduce U.S. 
chemical exports. However, as I am sure you have all seen, 
financial turmoil has already prompted many countries such as 
Indonesia and Malaysia to suspend large-scale industrial 
development projects and to take other measures to curb 
spending. Likewise, private sector entities, which include many 
of our customers, have been forced to delay their expansion 
plans. As a result, we expect our exports to Asia to suffer, at 
least to some degree, until the financial crisis begins to 
subside.
    Given the high stakes involved, we at CMA are considering 
whether to take a public position in support of the various IMF 
assistance programs designed to help our Asian trading partners 
back to fiscal health. We are also considering whether to 
support continued U.S. participation in the IMF and believe 
that the Administration's recent request for $18 billion in 
additional U.S. funding for IMF replenishment is warranted as 
an insurance policy to ensure that the financial crisis does 
not deepen or spread to other emerging markets in Latin America 
and beyond.
    That said, we also see a need for major structural reforms 
in many of the affected Asian nations. Many still need to make 
progress in eliminating tariff and non-tariff barriers to trade 
and to take additional steps to open their economies to U.S. 
chemical exports. We believe that the U.S. should aggressively 
pursue such discussions with the key economies now, while they 
are still recovering from the financial turmoil.
    This brings me to the second topic I would like to discuss 
today--APEC's decision to include chemicals among a list of 
nine sectors slated for accelerated tariff reductions under 
APEC's Early Voluntary Sectoral Liberalization (EVSL) 
initiatives. In short, by expanding the country coverage around 
the Pacific Rim of the existing Chemical Tariff Harmonization 
Agreement (CTHA), we will significantly lower chemical tariffs 
throughout APEC. Our initiative also aims to reduce many of the 
onerous non-tariff barriers currently impeding trade within the 
region.
    By way of brief background, the United States, EU, Japan 
and some two dozen other countries representing 70 percent of 
world chemical trade negotiated the CTHA as one element of the 
Uruguay Round. CMA was a driving force behind the negotiation 
of the CTHA, which requires signatories to reduce their tariffs 
on virtually all chemicals to levels of between 5.5 and 6.5 
percent by 2004. Given that many of the tariffs in place at 
that time were well over 10 percent, the agreement as it 
currently stands has the potential to generate significant cost 
savings for U.S. producers.
    However, many of our important trading partners in Asia did 
not join the CTHA during the Uruguay Round. Mr. Chairman, you 
recognized the importance of incorporating fast-growing and 
emerging economies in this initiative, and included chemical 
tariff harmonization in the Uruguay Round Agreements Act. As a 
result, CMA, working with officials at the Office of the U.S. 
Trade Representative (USTR) began discussions within APEC in 
1996 seeking to generate support within the chemical industries 
of APEC member countries for extending the CTHA to cover all 
APEC members. APEC leaders approved this objective last 
November, and we are now working on the detailed tariff 
packages for each APEC economy. The APEC agreement is slated to 
enter into force in 1999, when APEC members will agree to bring 
their chemical tariffs into conformity with the rates 
established in the CTHA in two stages.
    When our industry developed the CTHA during the Uruguay 
Round negotiations, we proposed that economies would have five 
years to phase down tariffs currently under 10 percent to 
levels between 5.5 and 6.5 percent. As for applied tariff rates 
between 10 and 25 percent, we foresaw that reductions to these 
same levels could occur over as many as 10 years--with up to 15 
years allowed for tariffs currently in excess of 25 percent. We 
are willing to apply similar flexibility now, to permit the 
APEC economies to reach the harmonized rates over a longer 
period of time, if doing so will make it possible to reach a 
``critical mass'' of participation in the CTHA initiative. 
After we have succeeded in reducing the bulk of the world's 
chemical tariffs to levels at or below the 5.5 percent -6.5 
percent called for under the CTHA, we also hope that additional 
tariff reductions would be negotiated in the sector, leading 
ideally to the eventual elimination of chemical tariffs world-
wide. In addition, APEC leaders have agreed to initiate a work 
program to explore ways to reduce non-tariff barriers to trade 
in the chemical sector, with a particular emphasis on 
initiatives aimed at harmonizing chemical safety and testing 
standards as a first effort.
    Given the tremendous cost savings this initiative offers 
U.S. chemical producers and its potential importance to our 
industry, CMA recently sent a delegation to Malaysia to assist 
U.S. officials during the meeting of the APEC chemicals working 
group which met in Penang last week. CMA also convened an Asia-
Pacific industry-wide conference in Kuala Lumpur which brought 
together numerous delegations representing the regional 
chemical industry. I am pleased to report that we were 
encouraged to see a high level of industry participation in 
these events, even from countries that currently are 
experiencing severe economic downturns.
    The strong interest in the EVSL from the Asian region's 
chemical producers bodes well for its final success. As tariff 
and non-tariff barriers begin to come down in the Asia-Pacific 
area, we expect U.S. chemical exports to the region to take off 
accordingly. While expanding trade opportunities certainly will 
benefit U.S. producers, we also firmly believe that lowering 
chemical tariffs provides substantial benefits for Asian 
nations themselves.
    Chemicals are upstream components in the production of a 
wide range of products manufactured in Asia and the rest of the 
world. Currently, many Asian nations experiencing major 
devaluations in their currencies are having difficulty securing 
the funds or credit necessary to purchase key raw materials 
including chemicals. Lowering tariffs on chemical products 
reduces the cost of imports and mitigates inflationary 
pressures. Tariff liberalization will help to create more 
efficient and competitive production in the region as well.
    The increased competition resulting from the reduction of 
trade barriers in the chemical sector will apply additional 
market pressure on Asian economies to streamline their own 
chemical industries, which currently are relatively inefficient 
and operating at over capacity. Consequently, we view the EVSL 
as a ``win-win'' situation for U.S. exporters and for our Asia-
Pacific trading partners alike. We hope that Congress will 
support the Administration's efforts to ensure that this 
process moves forward successfully.
    This brings me to my final point. Negotiations to 
liberalize trade such as the APEC initiative I have been 
discussing, are critical to the long-term health of the U.S. 
chemical industry. We as an industry believe the United States 
should seek out and take advantage of these trade liberalizing 
opportunities whenever possible. Fortunately, the APEC 
chemicals EVSL can move forward without reauthorization of 
fast-track negotiating authority. But, as we know, all sectors 
are not covered. Without a renewal of fast-track, the United 
States will be forced increasingly to watch from the sidelines 
while our trading partners move forward with their own trade 
deals. Because chemicals are used so widely, liberalization of 
key sectors may not take place, and certainly would not proceed 
in ways that take into account the interests of U.S. producers. 
This will deny the companies I represent today an equal 
opportunity to compete in the emerging markets so critical to 
our industry's future.
    For this reason, I certainly was disappointed to read 
reports in the press suggesting that the Administration has 
given up hope for securing Congressional approval of a fast 
track renewal bill prior to the Summit of Americas in April. I 
also am disheartened to see that so many Members of Congress 
still oppose fast track, which is simply a procedural tool 
necessary to allow the United States to continue to play the 
leadership role in trade liberalizing efforts. Strong U.S. 
engagement in the free trade process has proven in the past to 
be highly beneficial to U.S. chemical producers and the U.S. 
economy as a whole. With your leadership Mr. Chairman and the 
leadership of others on this Subcommittee, I hope that we will 
be able to get the fast track debate back on track and 
eventually win the day for U.S. exporters, and for U.S. workers 
making those exports.
    In the meantime, I would like to thank you again for 
allowing me the opportunity to appear before this Subcommittee 
today. I would welcome any questions you may have regarding my 
testimony.
      

                                


    Chairman Crane. Thank you very much, Mr. Webber, and we'll 
get to you momentarily.
    Mr. Waide.

 STATEMENT OF DAVID WAIDE, PRESIDENT, MISSISSIPPI FARM BUREAU 
   FEDERATION; ON BEHALF OF AMERICAN FARM BUREAU ASSOCIATION

    Mr. Waide. Thank you, Mr. Chairman, for the opportunity to 
be here. As you know, I represent the Mississippi Farm Bureau 
Federation and serve on the American Farm Bureau Federation 
board, and I'm here today speaking as a witness on their 
behalf.
    In addition to that, I'm a farmer in north Mississippi, and 
I produce most of the row crops grown in our region--cotton, 
corn, soybeans, wheat, oats, and also cattle. And the area that 
we're dealing with today is absolutely essential if agriculture 
is to continue the growth that it has enjoyed in the past. It's 
essential if we're going to be able to have the export market 
that we've been promised.
    I know in a previous administration we had the promise of 
being able to produce fence row to fence row, and we were going 
to be able to sell those commodities that we produced. 
Unfortunately, that changed, and food was used as a weapon, and 
we lost a much-needed market in part of those countries that we 
had come to depend on.
    I know that this area, the Asian-Pacific region, is 
becoming our most important growth market, as well as one of 
the major economic regions of the world. It's been the fastest 
growing economic region of the world over the past several 
years, and the thing, I think, that's most important to 
agriculture is that it has the greatest numbers of consumers.
    The Asia-Pacific Economic Cooperation, APEC, the forum has 
the potential to create greater market access for United States 
exports and must play a stabilizing role in the current 
economic crisis in this region. APEC members must not be 
allowed to back away from the commitments to expand and 
liberalize trade.
    American farmers and ranchers depend on international 
markets for over 30 percent of their income. The Asian market 
accounts for over 40 percent of our agricultural exports 
worldwide. This totaled over $23 billion in export sales in 
1997.
    Three-fifths of the world's population growth and one-half 
its income growth through 2010 are projected to occur in East 
and Southeast Asia. This is America's fastest growing 
agricultural market and should continue to be for some time, if 
we can resolve this crisis.
    The events in Asia are already affecting sales of 
agricultural goods in 10 Asian markets that have seen their 
currencies devalued over the past 6 months. Devalued currencies 
result in increased consumer prices which directly translate 
into less market demand. The Asian consumer's purchasing power 
has been greatly reduced. Lost sales mean lower income for our 
producers and economic pressures on rural economies.
    Each country's situation is unique, and each has different 
needs and prospects for recovery. The arsenal of tools needed 
to help our trading partners in Asia resolve their crisis must 
be fully utilized. These tools include developing and putting 
into place sound monetary practices, which, when coupled with 
credit guarantees in programs like the USDA export credit 
guarantee programs, as well as the IMF assistance plans without 
further devaluations, should stabilize these economies.
    The IMF Programs can be successful. They're not charitable 
bailouts. These are loans, repayable with interest, with 
requirements for internal structural change. I believe that for 
IMF Programs to be successful they must be adequately funded 
and focused on requiring the recipient countries to make the 
long-term internal adjustments that will lead to sound domestic 
economic systems, which include stable currencies, stable 
taxes, and private property rights upheld.
    Inaction in this matter is not acceptable. IMF-led 
assistance programs are critical to the overall recovery in the 
region, and fast track is critical to picking up lost market 
share and expanding access to worldwide markets. Ours now is 
truly a global economy. U.S. agriculture's ability to gain and 
maintain market share is based on many factors, including good 
trade agreements, the administration's ability to negotiate 
freer and fair market access with fast track authority, sound 
monetary policies, and the ability to utilize market-
stabilizing tools, such as a properly functioning IMF.
    I urge you to provide the funding necessary for the IMF to 
address the needs of our trading partners in Asia, and later 
this spring to grant the administration fast track authority to 
continue to open markets for all sectors.
    Thank you, Mr. Chairman.
    [The prepared statement and attachment follow:]

Statement of David Waide, President, Mississippi Farm Bureau 
Federation; on Behalf of American Farm Bureau Federation

    Mr. Chairman, I am David Waide, president of the 
Mississippi Farm Bureau Federation. I am here today on behalf 
of the American Farm Bureau Federation. The American Farm 
Bureau is the nation's largest general farm organization with 
member state Farm Bureaus in 50 states and Puerto Rico, 
representing 4.7 million member families.
    Farm Bureau farmers and ranchers produce virtually every 
agricultural commodity produced commercially in the United 
States. Among other purposes, AFBF was organized to assist Farm 
Bureau members in attaining economic opportunities through 
domestic and international markets.
    I want to thank you for holding this hearing and providing 
the opportunity to discuss the importance of the Asian market 
to American agriculture and the critical need to resolve the 
Asian fiscal crisis as quickly as possible.
    The Asia Pacific region is becoming our most important 
growth market as well as one of the major economic regions of 
the world. It has been the fastest growing economic region of 
the world over the past several years, as well as having the 
greatest number of consumers. In 1996, total U.S. trade across 
the Pacific was estimated to be more than 75 percent greater 
than that across the Atlantic.
    The Asia-Pacific Economic Cooperative (APEC) forum has the 
potential to create greater market access for U.S. exports and 
must play a stabilizing role in the current economic crisis in 
this region. APEC members must not be allowed to back away from 
commitments to expand and liberalize trade. We are optimistic 
about the potential for APEC to provide increased market 
opportunities only if agriculture remains on the full agenda.
    Your role in helping to shape the direction of trade 
agendas of APEC and programs such as the International Monetary 
Fund (IMF) will have a major impact on the economic stability 
of American agriculture in the Asian marketplace.
    The financial crisis in Asia is of paramount concern to 
Farm Bureau members. America's farmers and ranchers depend on 
international markets for over 30 percent of their income. The 
Asian market accounts for over 40 percent of our agricultural 
exports worldwide. This totaled over $23 billion in export 
sales in 1997.
    Eastern and Southeast Asia is a region with a ratio of 
people to land six times higher than North America. Current 
financial turmoil and harmful currency devaluations must not be 
allowed to obscure the economic and demographic focus at work 
in this region. Three-fifths of the world's likely population 
growth and half of its income growth through 2010 are projected 
to occur in East and Southeast Asia. Aggregate food demand is 
projected to grow 100-150 percent in this region over the next 
25 years. This is America's fastest growing agriculture market 
and should continue to be for some time--if the fiscal crisis 
can quickly be reversed.
    Asia has been a growth market for traditional bulk 
commodities such as soybeans, corn, rice and wheat. But, in 
1997, the fastest growing U.S. agricultural exports were in 
what we call value-added products. These include meat, 
horticultural, fruits and vegetables and processed foods. 
Value-added products account for millions of U.S. jobs in 
processing, packaging, advertising, and shipping. These are 
off-farm jobs that support rural communities and a broad scope 
of interrelated industries.
    The events in Asia are already affecting sales of 
agricultural goods in the 10 Asian markets that have seen their 
currencies devalued over the past six months. Devalued 
currencies result in increased consumer prices which directly 
translates into less market demand. The Asian consumer's 
purchasing power has been greatly reduced. Lost sales mean 
lower incomes for our producers and economic pressures on rural 
economies.
    Current USDA estimates show a reduction of $500 million in 
sales to Asia so far this year. The total impact may exceed 
$1.5 to $2 billion before the crisis is over.
    Let's look at some specifics of what is taking place in 
some of the Asian markets.
    According to experts in the Asian offices of the U.S. Meat 
Export Federation (USMEF), the financial crisis has induced a 
frugality campaign in South Korea. This includes calls for 
consumers to buy domestic instead of imported products. This 
has resulted in many Koreans avoiding fast-food franchises 
which are major users of U.S. value-added products. As an 
effort to attract customers, a French discount store is running 
ad campaigns stating that 95 percent of goods sold are 
domestic.
    Imported beef prices to Korea have risen as much as 20-30 
percent higher than in December. Restaurants serving U.S. or 
Australian beef do not want to pass on the increased prices for 
fear of driving away customers. Imported beef prices are 
expected to climb even higher next month.
    The Indonesian rupiah's drop against the U.S. dollar 
currently means as much as 30-35 percent reduction in consumer 
purchasing power and higher interest rates and inflation. 
USMEF's Asian manager reports that sales of U.S. beef in 
Indonesia's five-star hotels have dropped about 10 to 15 
percent. He estimates that Indonesia will suffer the crisis for 
two or three years. The hotel food and beverage businesses have 
also slowed. Major U.S. chains have reported a 10-15 percent 
decrease while the lesser-known establishments are seeing as 
much as a 39 percent drop in business. Importers are stocking 
less as they are experiencing credit problems. Banks are 
reluctant, or are unable, to issue letters of credit for 
imported goods.
    Each country's situation is unique and each has different 
needs and prospects for recovery, but stable currency is needed 
for viable long-term markets. The arsenal of tools needed to 
help our trading partners in Asia resolve their crises must be 
fully utilized. These tools include developing and putting into 
place sound monetary practices which, when coupled with credit 
guarantees and programs like the USDA export credit guarantee 
programs as well as the IMF assistance plans without further 
devaluations, should stabilize these economies.
    IMF programs can be successful. These are not charitable 
bail-out programs. These are loans, repayable with interest and 
with requirements for internal structural changes. I believe 
that for IMF programs to be successful, they must be adequately 
funded and focused on requiring the recipient countries to make 
the long-term internal adjustments that will lead to sound 
domestic economic systems which include stable currencies, 
stable taxes, and private property rights upheld.
    I want to call your attention to a Senate letter to 
Secretary of the Treasury Rubin which is attached to your copy 
of my testimony. I support these senators in their request for 
greater access for foreign agriculture products as part of 
these countries' reform packages. This has not only been our 
fastest growing market, but also one of the most difficult 
markets in which to attain market access.
    IMF loans are not an expense to the taxpayer, but an 
investment. According to USDA, agriculture will lose at the 
very least three to six percent of our hard-earned market share 
in Asia--even with IMF programs in place. The market may also 
take several years to recover. These loan programs are an 
investment in our future as well as that of our trading 
partners.
    Where do we go with our products from lost market share and 
normal production growth in the meantime? As these programs 
take shape we must also look to expanding existing market 
access and opening new markets. Our negotiators must have fast 
track negotiating authority to do this.
    Inaction in this matter is not acceptable. Tremendous 
resources and efforts have been expended to create these 
markets for U.S. agricultural products whose sales support 
millions of U.S. workers. A loss of 30 to 40 percent of our 
agriculture export market would destabilize our industry. IMF-
led assistance programs are critical to the overall recovery in 
the region and fast track is critical to picking up lost market 
share and expanding access to worldwide markets.
    Ours is truly a global economy. When our strongest 
customers face grave fiscal and financial crisis, as those now 
occurring in Asia, agriculture is the first to feel the effect 
as our customers lose purchasing power. Although America's 
farmers and ranchers are the most efficient and productive in 
the world, they are not positioned to make production decisions 
to protect themselves from drastic currency fluctuations in 
major markets.
    U.S. agriculture's ability to gain and maintain market 
share is based on many factors, including good trade 
agreements, the administration's ability to negotiate freer and 
fairer market access with fast track authority, sound monetary 
policies and the ability to utilize market stabilizing tools 
such as a properly functioning IMF.
    I firmly believe an IMF that lives up to its original 
charter and fast track negotiating authority are critical tools 
that the administration must have to protect and keep the U.S. 
economy stable. These are even more important while our trading 
partners struggle to restructure their economies. It is 
extremely important to U.S. agriculture and the nation's 
economic strength that you do the right thing and pass both of 
these trade measures early in this session of Congress.
    I urge you to provide the funding necessary for the IMF to 
address the needs of our trading partners in Asia and later 
this spring to grant the administration fast track authority to 
continue to open markets for all sectors.
    Thank you.
      

                                

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    Chairman Crane. Thank you, Mr. Waide.
    And now for Hon. Mary Sophos.

   STATEMENT OF HON. MARY C. SOPHOS, SENIOR VICE PRESIDENT, 
   GOVERNMENT AFFAIRS, GROCERY MANUFACTURERS OF AMERICA; AND 
   FORMER ASSISTANT SECRETARY FOR LEGISLATIVE AFFAIRS, U.S. 
                     DEPARTMENT OF TREASURY

    Ms. Sophos. Good afternoon, and thank you for the 
opportunity to testify on the importance of the APEC sectoral 
liberalization process to the food industry and to the 
stability of the Asian economies. I'm Mary Sophos, senior vice 
president, government affairs, of the Grocery Manufacturers of 
America. GMA represents companies that make and market the 
world's best-known brands in food and beverages. Our member 
companies have sales of $400 billion, representing 90 percent 
of all food and consumer package goods sold in the United 
States.
    GMA has strongly supported trade liberalization in food 
products at the multilateral level, and we hope that Congress 
will pass both renewal of the fast track negotiating authority 
and replenishment of the International Monetary Fund, to ensure 
that we can continue to expand markets outside the United 
States.
    The Uruguay round and NAFTA made substantial progress in 
liberalizing world food trade, a $526 billion global market, 
but foreign food and agriculture remains heavily protected and 
subsidized. Fast track puts the United States in a position to 
make liberalization of trade and food a key element of the 
upcoming review of the WTO agricultural agreement. A strong IMF 
will help ensure healthy markets for U.S. exports.
    While broad-based, multilateral liberalization offers the 
greatest long-term opportunities and benefits for U.S. food 
producers, efforts to liberalize at the regional level are also 
important. Efforts such as the APEC process not only offer the 
opportunity for immediate progress on key goals, but also 
provide momentum for complementary efforts at the multilateral 
level.
    Real benefits will result from liberalization of food 
sector trade. In 1996 agricultural exports generated $60 
billion and the largest positive trade balance of any trade 
sector, $27 billion. USDA estimates that these exports 
generated an additional $79.5 billion in U.S. economic 
activity, including $6.7 billion in the food processing sector.
    Only 5 percent of the world's consumers live in the United 
States. If GMA member companies are to continue to grow, they 
must have access to the exploding food markets of the world. In 
1996, $10.7 billion of food and kindred products were exported 
to East Asia, and this can only increase. Aggregate food demand 
is projected to grow 100 to 150 percent in East and Southeast 
Asia over the next 25 years.
    In Asia consumers can spend 25 to 50 percent of their 
disposable income on food. By comparison, U.S. citizens spend 
less than 10 percent of their disposable income on food. 
Opening markets will enable these consumers to get more for 
their money, more value-added food products with greater 
nutritional value, while spending less of their disposable 
income on food, allowing more to be spent for nonfood purchases 
and creating additional U.S. export opportunities.
    Trade in processed food products is becoming increasingly 
important. In 1985 trade in processed food accounted for 50 
percent of global agricultural trade. In the year 2000, that 
percentage is expected to increase to 75 percent.
    GMA endorses APEC's sectoral liberalization as an important 
additional way to stay the trade and investment climate in Asia 
and strongly supports the administration's efforts in this 
regard. We welcome the decision taken by the trade ministers at 
the November 1997 ministerial to identify 15 sectors, including 
the food products sector, for accelerated market-opening 
initiatives. We were, however, disappointed that the food 
products sector was not among the nine sectors for which final 
liberalization plans are to be concluded in 1998. Australia has 
been a leader on the food sector liberalization efforts, and 
interregional food trade is significant. Australia's proposal 
values it at approximately $100 billion.
    The food sector proposal which Australia sponsors would 
affect specifically agreed upon subsectors. GMA endorses this 
approach, which also has attracted support from seven other 
APEC members, including the United States. GMA urges the United 
States to exercise its strong leadership to ensure that at the 
APEC leaders' meeting in November of this year the food sector 
is included among APEC liberalization priorities for 1999.
    Our members would greatly benefit from tariff reductions in 
the processed food sector in APEC countries. Three areas, in 
particular, show bright promise--soups, processed vegetables, 
and pet food. Without a considered effort at liberalization of 
tariff and nontariff barriers, our members will continue to 
face substantial impediments to trade in Asia.
    In the tariff area, the tariff rates on processed food 
products range from 40 to 60 percent, as compared with an 
average U.S. import tariff of 6.3 percent for a wide range of 
both processed foods and commodities. There are extensive 
regulatory and technical impediments to food sector trade, 
including product health, quarantine, labeling standards, and 
inspection requirements.
    In conclusion, promoting APEC liberalization in the food 
sector significantly advances several key U.S. goals. It's 
fully consistent with, and supportive of, larger trade 
liberalization objectives, such as the upcoming WTO 
negotiations in agriculture. It reinforces related efforts to 
stabilize Asian economies, and it promotes United States trade 
in one of the most important sectors of our economy. Continued 
active engagement will ensure that this important sector can 
realize its true potential in the near term.
    Thank you very much.
    [The prepared statement follows:]

Statement of Hon. Mary C. Sophos, Senior Vice President, Government 
Affairs, Grocery Manufacturers of America; and Former Assistant 
Secretary for Legislative Affairs, U.S. Department of Treasury

    Good morning, and thank you for the opportunity to testify 
on the importance of the APEC Sectoral Liberalization process 
to the food industry and to the stability of the Asian 
economies. I am Mary Sophos, Senior Vice President, Government 
Affairs, of the Grocery Manufacturers of America. GMA 
represents companies that make and market the world's best-
known brands of food and beverages. GMA member companies have 
sales of $400 billion, representing 90% of all food and 
consumer packaged goods sold in the U.S.
    GMA is proud of its solid record of support for trade 
liberalization in food products at the multilateral level. 
Consistent with this history, GMA fully endorses renewal of 
fast track negotiating authority and replenishment of the 
International Monetary Fund. We hope that Congress will pass 
these important measures, to ensure the U.S. can continue to 
expand markets outside the U.S. The Uruguay Round and NAFTA 
made substantial progress in liberalizing world food trade. But 
foreign food and agriculture remains heavily protected and 
subsidized. This is a $526 billion global market. Fast track 
puts the U.S. in a position to make liberalization of trade in 
food a key element of the upcoming review of the WTO 
Agricultural Agreement. A strong IMF will help ensure healthy 
markets for U.S. exports.
    While broad-based multilateral liberalization offers the 
greatest, long-term opportunities and benefits for U.S. food 
producers, efforts to liberalize at the regional level are also 
important. Efforts such as the APEC process not only offer the 
opportunity for immediate progress on key goals, but also 
provide momentum for complementary efforts at the multilateral 
level.

                    Importance of Food Trade in Asia

    The U.S. economy will greatly benefit from liberalization 
of food sector trade. In 1996, agricultural exports generated 
$60 billion and the largest positive trade balance of any 
sector--$27 billion. USDA estimates that these exports 
generated an additional $79.5 billion in U.S. economic activity 
and generated 859,000 jobs here in the U.S. Said another way, 
each dollar received from agricultural exports in 1996 
stimulated another $1.32 in supporting activities. In 1996, 
that included $6.7 billion in the food-processing sector, $15.5 
billion in other manufacturing sectors, and $9.7 billion in the 
trade and transportation sector.
    Only five percent of the world's consumers live in the U.S. 
If GMA member companies are to continue to grow, they must have 
access to the exploding food markets of the world. Asia is one 
of the regions with the most significant potential for our 
members. According to Department of Treasury statistics for 
1996, $10.7 billion of food and kindred products was exported 
to East Asia and this can only increase. Three-fifths of the 
world's likely population growth and half its income growth 
through 2010 are projected to occur in East and Southeast Asia. 
Aggregate food demand is projected to grow 100 to 150% in this 
region over the next 25 years. Asia is the fastest growing 
market for U.S. food products. According to the WTO, in 1996, 
Asia accounted for 23% of world food imports and 18% of world 
food exports, placing it second only to Western Europe.
    Market access barriers limit overall exports and stifle 
market development that enhances consumer choice. Reducing or 
eliminating market barriers for our members' products will 
lower costs to consumers and increase the variety of products 
offered. In Asia, consumers can spend from 25% to 50% of their 
disposable income on food. For example, in the Philippines, 47% 
of total private consumption is spent on food; in Thailand, 
29.1%; and in South Korea, 26.9%. By comparison, U.S. citizens 
spend less than 10% of their disposable income on food, 
according to 1997 World Bank statistics. Opening markets will 
enable these consumers to get more for their money--more value-
added food products with greater nutritional value--while 
spending less of their disposable income on food. That frees up 
some of their disposable income for nonfood purchases. Thus, 
improving the efficiency of the food sector will have a 
beneficial, ripple effect on all other sectors, creating 
additional U.S. export opportunities.
    The Asian financial crisis illustrates how closely our 
economies are interrelated and how financial stability is 
inextricably intertwined with trade and open markets. Southeast 
Asia and Korea account for 12% of total U.S. agricultural 
exports; without a financially stable environment, commercial 
trade would be severely disrupted. Fortunately, IMF-led 
assistance programs are helping to stabilize the financial 
environment and at the same time ensure that austerity does not 
lead to closed markets. IMF programs are enabling importers to 
utilize USDA export credit guarantees; IMF-led trade 
liberalization measures and structural reforms are helping to 
ensure U.S. products will continue to enjoy access to these 
markets. GMA fully supports these IMF loans as an investment in 
our future and supports legislation to increase U.S. funding to 
the IMF. For the same reasons, GMA endorses APEC sectoral 
liberalization as an important additional way to steady the 
trade and investment climate in Asia.

                    Expedited Liberalization in APEC

    GMA strongly supports the Administration's efforts to 
promote APEC sectoral trade liberalization. We welcome the 
decision taken by the Trade Ministers at the November 1997 
Ministerial to identify 15 sectors, including the food products 
sector, for accelerated market opening initiatives. We were, 
however, disappointed that the food products sector was not 
among the nine sectors for which final liberalization plans are 
to be concluded in 1998.
    GMA salutes Australia for its leadership on food sector 
liberalization within APEC. Australia's proposal includes 
liberalization of both tariff and nontariff measures. The 
liberalization would affect specifically agreed upon 
subsectors. GMA endorses this approach. Intra-regional food 
trade is significant--Australia's proposal values it at 
approximately $100 billion. Liberalization of trade in food 
would increase sectoral trade and investment, decrease prices 
in food-importing countries, and increase the availability, 
variety and quality of food products.
    The food sector proposal, which Australia sponsored, has 
attracted support from seven members, including the U.S., New 
Zealand, Hong Kong, Singapore, Thailand, New Guinea, and 
Brunei. GMA urges the U.S. to exercise its strong leadership to 
ensure that at the APEC leaders' meeting in November of this 
year, the food sector is included among APEC liberalization 
priorities for 1999.
    Our members would greatly benefit from tariff reductions in 
the processed food subsector in APEC countries. Three areas 
show bright promise--soups, processed vegetables, and pet 
foods. APEC countries are a major potential market for soups 
and broths. In China and Taiwan, high duties are a major 
barrier to trade. This sector has great promise if 
liberalized--soup consumption is high and consumers are 
beginning to demand convenience foods as their standard of 
living improves. Certain processed vegetables are also of 
interest. For example, frozen french fried potatoes are the 
leading processed potato export from the U.S. Tariff 
liberalization would provide the U.S. processed potato industry 
and U.S. potato growers new opportunities for growth. Finally, 
pet food is an area of great interest to our members. U.S. pet 
food exports to APEC countries represent two thirds of total 
U.S. exports. U.S. exports grew nearly 80% in the last four 
years. Commercially prepared pet food is a high value, value-
added agricultural product, and our members are the most 
competitive in the pet food industry.
    Without a concerted effort at liberalization of tariff and 
nontariff barriers, our members will continue to face 
substantial impediments to trade in Asia.

Tariff Barriers

    In the tariff area, the tariff rates on processed food 
products range from 40% to 60%, as compared with an average 
trade weighted tariff of 3.5% for industrial products. Many 
sensitive items have high tariffs, such as basic and processed 
dairy products. Thailand's tariffs on high-value fresh and 
processed food products will remain high (in the 30% to 40% 
range) even after reductions of between 33% and 50% from 
current rates under the WTO rules. Taiwan maintains tariffs 
high enough to be a significant export barrier, such as 40-42% 
on fresh fruit, 35-40% on processed vegetables, including 
juice, and 21-24% on sunflower seeds and oil. Malaysia 
regulates chicken imports with a tariff rate quota that ranges 
from 50% to 70%. In comparison, according to a report prepared 
by USDA's Economic Research Service entitled: APEC Situation 
and Outlook, the average U.S. import tariff for a wide range of 
both processed foods and commodities is 6.3%.

Non-tariff Barriers

    There are extensive regulatory and technical impediments to 
food sector trade. These include product, health, quarantine 
and labeling standards, and inspection requirements. Among 
barriers to food and agriculture trade in Asia identified in 
the most recent USTR National Trade Estimates report are the 
following:
     Taiwan restricts importation of agricultural 
items; Taiwan requires special prior approval, amounting to a 
de facto ban. Taiwan also maintains unreasonable quarantine 
restrictions on fresh and frozen chicken, certain cuts of pork, 
peanuts, live dairy cattle vaccinated against brucellosis, and 
adzuki beans.
     China's sanitary and phytosanitary (SPS) measures 
prohibit imports of U.S. citrus, plums, grapes and Pacific 
Northwest wheat. China's restrictions on imports of citrus and 
pacific Northwest wheat are not based on sound science, and 
USTR has been actively pursuing these issues.
    As an aside, on the issue of SPS measures, we applaud the 
results of the Uruguay Round--in particular the requirement to 
base such measures on scientific evidence and urge the U.S. 
government in the upcoming review of this agreement to ensure 
and maintain the strength of this requirement.
     Japan continues to restrict entry of numerous U.S. 
fresh fruits and vegetables, for phytosanitary reasons. 
Tomatoes, potatoes and plums are banned outright.
     Korea maintains quotas and tariff rate quotas with 
prohibitively high rates for agricultural and fishery products. 
Also, contrary to international practice, Korea approves food 
additives on a case-by-case basis, rather than allowing 
additives that are ``generally recognized as safe'' to be used 
in all food products. In particular, the Food Additives Code 
will often allow a food additive in a traditional Korean food 
product and not allow it in an imported product.
     In Malaysia, the sole authorized importer of 
agriculture and food products is a government corporation. The 
corporation is responsible for ensuring purchases of domestic 
products and therefore has broad powers to limit imports.
    Trade in processed food products is becoming increasingly 
important. In 1985 trade in processed food accounted for 50% of 
global agricultural trade. In the year 2000, that percentage is 
expected to increase to 75%. Lack of market access is a major 
constraint to increased trade. Removing tariff peaks and 
confronting nontariff barriers would help ensure the healthy 
growth of the high value-added processed food sector.

                               Conclusion

    GMA applauds the efforts of USTR to date to promote 
expanded global trade in food. Promoting APEC liberalization in 
the food sector significantly advances several key U.S. goals: 
it is fully consistent with and supportive of larger trade 
liberalization objectives--such as the upcoming WTO 
negotiations in agriculture; it reinforces related efforts to 
stabilize Asian economies so critical to our exporters; it 
promotes increased U.S. trade in one of the most important 
sectors of our economy; and it has a beneficial ripple effect 
on other sectors by opening overseas markets to competitively 
priced food products and thereby freeing up consumer disposable 
income for purchases in other sectors. Continued, active 
engagement will ensure that this important sector can realize 
its true potential in the near term. The APEC liberalization 
process can serve as a catalyst for promoting global 
cooperation in reducing barriers to trade and investment. This 
will reinforce the multilateral trading system and the WTO. It 
will also help to ensure that the upcoming WTO Agricultural 
Round is well positioned to tackle these issues effectively.
      

                                


    Chairman Crane. Thank you, Mary.
    Mr. Webber, you mentioned approximately 185,000 jobs in the 
chemical industry that are immediately and directly related to 
trade, to exports?
    Mr. Webber. Exactly. Yes, sir.
    Chairman Crane. I would like to raise the question with all 
of you, because I don't know what the numbers are, nor the 
percentages of members of the work force in the various 
industries you represent: Do those 185,000 know that their jobs 
are directly related to exports?
    Mr. Webber. I hope so. We make----
    Chairman Crane. Well, now, wait 1 second. You hope so?
    Mr. Webber. We make every effort with our 200 member 
companies to make sure they get the word out in terms of where 
their sales go. It's hard for me to imagine that the folks in a 
typical chemical company don't understand that sales make up--
--
    Chairman Crane. Well, to be sure, but then that reminds me 
of the AFL-CIO members that worked for Boeing that were out 
protesting against fast track renewal, when Boeing is totally 
dependent upon exports to guarantee both its survival and the 
employment of the guys that were out protesting. This is one of 
the frustrations I think all of us that went through that fast 
track battle last November experienced. And that is the 
monumental ignorance in this country on the importance of our 
exports.
    A big part of that--and I've got the same problem back 
home. I've got the corporate headquarters of Ameritech, Sears, 
Motorola. We've got giants like that, but they're not the ones 
that are the major source of our exports out of my home State 
of Illinois. We're the fifth largest export State in the Union, 
and yet over 90 percent of our exporters are companies 
employing 500 or less.
    You bring up an issue like trade at a town meeting and 
people start snoring in the audience, because of a lack of 
understanding of the importance of exports. That is why I've 
been trying to urge chief executive officer's and people in the 
business community to get that information transmitted on how 
vital it is to the business involved, how vital it is to the 
jobs that are affected. I think, frankly, we have not succeeded 
nearly as well as the demagogs on the opposite side of that 
debate that try and scare the socks off of everybody about 
letting any foreign goods cross our borders.
    Let me throw a couple of generic questions out to all of 
you, and one has to do with bribery and corruption, because 
we've heard of a lot of that as a basis for some of the Asian 
economic instability. To what extent can, in your estimation, 
that crisis in Asian countries be directly linked to bribery 
and corruption? Have you any input on that? Any of you?
    Mr. Moore. Mr. Chairman, I can't speak to that, but we can 
speak to our competition in certain countries, where maybe it's 
not bribery and corruption, but it's the cronyism.
    Chairman Crane. Good old boy networks?
    Mr. Moore. Yes, exactly. We have competitors in certain 
countries that got into business and have protective trade 
barriers that are supported by the governments of those 
countries. So that may be close to what you're talking about, 
but that does affect us in a number of countries in the Asian 
region, in particular.
    Chairman Crane. Yes. Have all the rest of you had similar 
experiences like that butting up against good old boy networks?
    Mr. Hudson. I think it's more cronyism than bribery and 
corruption in the high-tech area that tends to affect things. 
We certainly, in Japan, for example, in the communications 
industry saw a great protection when NTT pretty much had 
control of the market. Even though they privatized, there's 
still these very cronyistic tendencies to continue to use their 
same sources of Japanese supply, rather than United States 
suppliers. We're wearing away at it, but it's still there. I 
don't think corruption, however, played a big role in that.
    Chairman Crane. Anybody else got a point to add?
    Mr. Webber. Well, I would identify with this gentleman's 
comments. Cronyism is a problem, and it's always there; it may 
always be there, for all we know. It's something, I suspect, in 
the final analysis we're going to have to confront.
    In terms of bribery and corruption, we have no direct 
reports that we've run into that problem in our trade efforts 
overseas.
    Chairman Crane. OK. To what extent do you think Japan will 
be able to absorb exports from some of these devastated Asian 
countries? I mean with their devastated economies. To what 
extent do you think Japan can absorb some of their exports 
rather than all of them coming here?
    Mr. Hudson. Sir, without stimulus, I don't think there's 
much capacity to do that. I think the Japanese public is very 
demoralized and quite concerned about their financial 
stability. And until they see some fresh signs of a reviving 
economy and some direction of continual growth, I don't think 
they can absorb a great deal.
    Chairman Crane. Anyone else have any comment on that?
    Mr. Moore. Well, Mr. Chairman, I mentioned in my testimony, 
I think that China and Korea and Japan have got to step up to 
the bat. They've got to open up their markets more to absorb 
some of what we see as the threat of increased exports from 
Asia. We can't be the recipient of everything that comes out of 
Asia. That just can't be the case. Those economies have had 
their strong days, and they need to step up and do their part. 
We don't see the regional leadership right now going on that 
one would expect.
    Chairman Crane. Well, do you think that Japan's trade 
policy historically had anything to do with helping to 
contribute to the current crisis?
    Mr. Moore. Surely. Surely, it does. I'd agree with that, 
Mr. Chairman.
    Mr. Webber. In terms of chemicals, Mr. Chairman, it's hard 
to imagine Japan being able to absorb chemicals. Their chemical 
production is quite significant. Their export efforts, of 
course, are well known. So it's hard for me to imagine there'd 
be any absorption, at least from the chemical industry, in that 
part of the world.
    Mr. Hudson. In terms of Japan's being a very large investor 
in other parts of Asia, to a large degree, there was too much 
capital flowing into those economies, and when you have too 
much capital flowing into economies, you don't necessarily get 
the best investment environment. So in that sense, maybe they 
were part of it, but they certainly had a lot of help from, I 
think, some European investors and perhaps even some American 
investors in that regard.
    Chairman Crane. Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman.
    I would just like to follow up on Mr. Crane's observation 
or question, and your response to it. The scenario that I fear 
is that we'll have minimal success in getting the Asian 
countries to agree to conditions, or perhaps they'll say 
they'll do these things and end up perhaps not implementing 
them. And we give the $3.5 billion, and then maybe later this 
year, or perhaps next year, we give the balance of $14.5 
billion. So it's $18 billion. The trade deficit in this country 
explodes because the reforms don't occur. The Japanese don't 
stimulate their economy. They keep it closed, and the Chinese 
economy slows down, and so the hit is on Western Europe and the 
United States.
    Then what happens is that the protection sentiment, which 
is not good here anyway, will explode, and that will be a real 
problem for all of us. I only mention this because I would just 
like to reiterate, I think, what the Chairman has said, and I 
think what all of you know--so I'm really preaching to the 
choir--that the private sector will have to do a better job in 
terms of informing its membership--that is, the employee base 
of all the companies that we're talking about here; we've got 
literally the whole U.S. industrial base here--in informing 
their membership of the value of trade. One-third of the growth 
in the United States in the last 5 years has been based upon 
export opportunities, and people just don't know that. As 
Chairman Crane has said, they either fall asleep or they're 
screaming at you for losing U.S. jobs by supporting fast track 
or free trade initiatives.
    And I might also, Mr. Webber, clarify--well, at least from 
my perspective--clarify an observation you made. The President 
and the administration is not abandoning fast track. What it is 
is that, since November 14, when we left the Congress in 
recess, I know for a fact that Mr. Bowles, the Chief of Staff, 
Ms. Barshefsky, and others in the administration have been 
trying to find some way to add 1 or 2 or 15 votes to the number 
we had when we were not able to bring it forth and have not 
been successful.
    I think we've hit a wall. I don't think fast track is going 
to happen this year. I think it may not happen next year. I 
think Bill Archer has said before that it may not happen until 
after 2000, 2001, since we didn't get it last year.
    I think rather than lament, we should really use this as an 
opportunity to start the educational process. I've come to the 
conclusion that every generation we have to redebate the whole 
issue of the value of trade and internationalism in this 
country, and we are probably at that point again.
    I'd like to say to the American Farm Bureau--and I said 
this, I think, 2 or 3 weeks ago, when we had an agriculture 
hearing in this Subcommittee--that the agriculture industry was 
very late, and as a result of that, Members who should have 
supported us from the agriculture-producing regions of the 
United States were not there. And the reason for it--and I 
don't blame you; you were just a participant in your overall 
association. I blame the California Farm Bureau. I blame all 
the Farm Bureaus. What they did was they held out. They wanted 
to get every ounce of lemon out of that lemonade. They squeezed 
it dry. Then they came onboard, but by that time, the horses 
had left the barn.
    I think we have to just put fast track a little higher in 
our priorities. We can't say that it's important, but we want 
something else. Because, frankly, the whole concept of APEC, 
the Summit of the Americas--all of these initiatives that we 
saw 3 or 4 years ago will be meaningless unless we give the 
President negotiating authority. It just seems incomprehensible 
that we can't communicate that, but that's the reality of the 
situation.
    And I don't know if anyone wants to comment, but I'd be 
happy to take an observation or two.
    Ms. Sophos. Well, I just wanted to say, I think it is our 
responsibility to do a better job of communicating with 
employees in our industries. I think some of our member 
companies have been better at it than others, but I think it 
could be improved. There also should be commitment on the part 
of the Congress to address it in a time to be able, 
realistically, to let us mobilize support.
    I also think you're absolutely right; if there's no fast 
track negotiating authority, it's very unlikely that we'll see 
any productive agriculture round in 1999.
    Mr. Matsui. Right. Right. Absolutely.
    And I might just say, the real problem we face on the lack 
of fast track is that there's no big bang. It's not going to 
create an economic catastrophe. It's not going to have any 
appreciable impact on growth. It's just that 3 years from now 
we'll all say, Geez, what happened? The Japanese or the 
Europeans have captured the Latin American market. The Asian 
market is slowly going someplace else. And then I'll feel, all 
of a sudden, we're finding that our research, development, and 
our basic research will start to diminish because we're not 
doing the whole cyclical aspect of basic research to 
manufacturing, to marketing, to sales. We'll begin to lose 
those opportunities.
    I know, Mr. Webber, you want to respond.
    Mr. Webber. Well, first of all, I find your comments 
reassuring when they come to fast track, although even 2001, 
2002, a lot could happen between now and then, as we sit on the 
sidelines.
    Mr. Matsui. All we need is about 50 more votes.
    Mr. Webber. But we're going to continue to work at it. The 
Chairman was probably not impressed with my comment when I said 
I hope our employees are aware of the fact that their jobs are 
tied to exports. Mickey Kantor, last November, addressed our 
major November conference in Houston and said that the chief 
executive officer's ought to write on every paycheck the 
percentage of the employee's pay that is related to exports. 
That's probably not a bad idea.
    The only other thing I would add is, during the NAFTA 
debate, we flew planeloads of blue collar employees into this 
town to walk the corridors and meet with our Members of 
Congress. The shining example was NALCO, from your home State 
of Illinois, talking to Members of Congress about the 
importance of NAFTA and the importance of exports. So most of 
us have got the message, but I agree, we can do a better job, 
and we'll continue to try.
    Mr. Matsui. If I can just say this, we're not throwing--
neither of us, and I don't think anybody is trying to blame the 
private sector for the loss of fact track. That is not at all 
what I hope you gather from this discussion, because, as I 
said, I just don't think that all of us, including myself and I 
think Members of Congress who support free and open trade, do 
not realize the depth of the lack of knowledge throughout the 
United States on this issue.
    I participated--I know Phil did as well--at a recent 
conference of the Institute of International Economics. We 
started from the basics again. How do we communicate the values 
of this? Someone suggested Oprah; I don't know if that's a good 
idea after Ohio. [Laughter.]
    That might be counterproductive. But at least we need to 
get back to the basics. We can't rely upon foreign policy 
experts like the Council of Foreign Relations up in New York 
any longer to sell this whole concept of internationalism. I 
think that day is long gone. It's all kind of Main Street USA 
now. How we get to them, I don't know. I wouldn't want anyone 
to think, leaving this hearing today, that there's any blame 
being thrown. I fully take responsibility for our loss, and I 
think all of us just have to find a way to turn it around.
    Mr. Hudson. I really would like to add some comments to it 
and give you some assurances. I think, in a way, success with 
NAFTA and the involvement of our employees in that, we kind of 
let go a little bit and assumed that that message was still in 
place----
    Mr. Matsui. Right. That's a good point.
    Mr. Hudson [continuing]. And that when it came to fast 
track, it would smoothly go in there, and we didn't anticipate 
the very strong effort by the AFL-CIO to try to counter that.
    In the case of the employees in my company, they not only 
know the material goes overseas, but they are talking to their 
counterparts by telephone overseas on quality issues and 
delivery issues. During the fast track debate, our employees 
wrote, telephoned, wired. I will tell you, I was very 
disappointed with some of the responses that they got back from 
Congressmen who were claiming certain things were in fast track 
that weren't there, and we're going to follow up with those 
Congressmen, I assure you, and get that straightened out.
    But trade in our company has been a very high-growth sector 
in our United States operation, and our people are very 
sensitive to that because one of our largest trading partners 
is our Japanese company who has a very, very high requirement 
on zero-defect product and ontime delivery. So there's a 
constant dialog going back and forth in that area.
    The trade associations that I represent also have an 
education program because we're trying to convey the whole 
trade message in an orderly fashion, to not only our direct 
employees, but also to the numerous small business suppliers 
that support our businesses, because I don't think some of them 
realize that if they're making a mold for one of my molding 
plants, that that molded part is actually going over to Asia, 
and the fact they've got that mold to produce is very much tied 
into trade and that issue, because I don't think that message 
got out as well as it should.
    So we all certainly got a lesson on this problem back in 
November, and I think a lot of us have awakened to the fact 
we've just got to keep at it.
    Chairman Crane. Well, and I think something else to keep in 
mind and get the message out is that trade constitutes one-
third of our total national economy. It's been the fastest 
growing component of our national economy----
    Mr. Hudson. Right.
    Chairman Crane [continuing]. And with this fast track 
setback, God forbid, if we're not negotiating any extended 
trade agreements until the next millennium, who knows what kind 
of an economic hit we could take.
    And the other thing, I think, to stress--and I mentioned 
this before--if you look at the history of our parties, 
Matsui's party were the free traders and Republicans were the 
total protectionists until after World War II, and now the 
union influence really----
    Mr. Matsui. Don't point to me.
    Chairman Crane. Well, no, you had the guts to stand up and 
be counted. I'm proud of you, Bob, and you're not alone there.
    But, on the other hand, that has had a diminishing impact 
on the Democrats' commitment, and the Republicans still have 
our Smoots and Hawleys. I won't identify them specifically here 
in public hearing, but we still have Smoots and Hawleys on our 
side. Getting a better understanding out there, and to get the 
American people to focus on the realization. This is not a 
party issue; it has nothing to do with Democrats versus 
Republicans. It's what's in the best interest of our National 
economy. It requires a big educational effort, and we 
appreciate all that you folks have contributed thus far, and 
look forward to working with you in the future.
    And with that, I will thank you all for your testimony, and 
that concludes our hearing for today. And the record will be 
open until March 10, and thank you all for your involvement. We 
appreciate it.
    [Whereupon, at 2:32 p.m., the hearing was adjourned, 
subject to the call of the Chair.]
    [Submissions for the record follow:]

Statement of Phil M. Condit, Chairman and Chief Executive Officer, 
Boeing Co., Arlington, Virginia

    Mr. Chairman, Members of the Subcommittee. Thank you for 
providing me with the opportunity to share The Boeing Company 
perspective on the critical issue of trade with Asia. This is 
an issue that has taken on heightened importance to our country 
and our company with the recent economic turmoil in Asia. I 
applaud you for scheduling this important hearing.
    I would like to place my remarks about trade with Asia 
within my company's frame of reference. The new Boeing is the 
world's largest aerospace company. While Boeing is widely 
recognized as a world leader in the production of some of the 
world's finest commercial airplanes, our recent mergers with 
McDonnell Douglas and Rockwell North America dramatically 
expanded our expertise in the areas of military aircraft, 
missiles, information systems and space systems. My comments on 
trade policy are principally oriented toward our commercial 
aircraft business. But, there is little doubt that our defense 
and space sales are also affected by U.S. trade policies toward 
the region.
    The Boeing Company's most important international challenge 
today is to maintain access to the global market. Exporting is 
not a luxury for Boeing. It is our lifeblood. Without success 
overseas, we cannot remain the world's premier aerospace 
company. Nor can we continue to support the hundreds of 
thousands of high quality jobs we do across our nation.
    Today, the Boeing Company is one of America's largest 
exporters. Historically our export share has been about 65 
percent of our business. In the next twenty years, nearly 
three-quarters--or 75 percent--of future business will be 
outside North America. While we sell the majority of our 
commercial aircraft overseas, approximately 85 percent of the 
value of our airplanes is U.S. made, provided by thousands of 
U.S. suppliers located in every state of the union.
    Mr. Chairman and Members of the Committee, if there is a 
single message I could leave with you today it is this--the 
United States must continue to play a leadership role in 
liberalizing trade worldwide and we must lead by example. 
Without continued strong leadership by the United States, the 
enormous progress we have made to date to advance open trade 
will begin to slip backwards. And such a development would 
significantly hurt the economy of the world's largest exporting 
and trading nation--the United States--to say nothing of what 
it would do to the economies of all the other countries in the 
world.
    Having just returned from Asia, where I met directly with 
our customers and government officials, I cannot stress enough 
the importance of continued open trade to Asia's economic 
recovery, and in turn to our own continued success in that 
important market.
    In the months ahead, currency devaluations in Asia are 
likely to lead to ballooning trade deficits with several Asian 
nations. And those deficits, in turn, are likely to create 
enormous pressures on the United States to limit the access 
that Asian businesses have to the U.S. market. You must resist 
those pressures. Not only will they severely damage Asia's 
ability to recover from its current economic troubles, but 
ultimately they will hurt the U.S. economy, U.S. exporters and 
U.S. consumers as well. Protectionist economic policies 
embraced earlier in this century proved disastrous. We do not 
want to repeat past mistakes. Apart from supplemental IMF 
funding which the Boeing Company strongly supports, the single 
most important step the United States can do to help Asia 
recover from the current economic turmoil is to keep its market 
open to Asian goods and services. And stabilizing Asia is 
essential to keeping the global economy--our own economy 
included--growing and prospering.
    Some may criticize such a policy as one that gives Asia a 
blank check to export its way out of its economic troubles. You 
no doubt will hear calls in the months ahead for a trade policy 
that is ``fair'' as well as ``free.'' Well, the Boeing Company 
is as interested as anyone in policies that ensure a level 
playing field. Frankly, we see in Asia's current economic 
crisis an opportunity to advance our fair trade goals. Asia 
needs to pursue policies that stem the outflow of foreign 
investment capital. It needs to restore investor confidence in 
the region and strengthen Asian currencies. And economic reform 
is key to achieving those goals. There's no getting around this 
fact. So, in our view, there is a silver lining to this dark 
cloud. We can and must act to both stabilize Asia and advance 
the economic reforms that, in the long run, will make the Asian 
economies more like our own--market-driven, decentralized and 
open.
    Mr. Chairman, we cannot turn our backs on those Asian 
economies that are actively executing painful prescriptions for 
economic recovery--a recovery that will involve some degree of 
export growth. To do so would hurt them and damage our own 
economic interests.
    I now would like to give you a sense of the importance of 
Asia to The Boeing Company and then outline some of the trade 
policy measures that we believe will be critical to restoring 
confidence in Asia and, in turn, ensure that Asia remains a 
vibrant market for The Boeing Company and the hundreds of 
thousands of workers we employ directly and indirectly.
    Mr. Chairman, no one region is more important to Boeing's 
fortunes than the Asia Pacific region. Over the next twenty 
years, the Asia Pacific market will represent 35 percent of the 
world's market for commercial aircraft--making this region the 
largest in the world and moving the historic leaders, North 
America and Europe to second and third positions. Through the 
year 2016, Asian carriers are expected to purchase $390 billion 
or 4733 commercial aircraft--over one third of the $1.1 
trillion retail value of the world's requirement for aircraft.
    The Asian market is also important for our Information, 
Space and Defense Systems group, which is focused on 
maintaining and expanding its involvement in several key areas 
including space launch services and communications 
infrastructure--primarily space based. These technologies and 
the markets they create are destined to become as important as 
the commercial aviation industry is to our domestic economy. 
These markets have high entry barriers and once missed, 
opportunities to effectively compete will be gone forever. 
Policies that preclude U.S. contractors, and in particular 
Boeing, from competing fairly with international competitors 
will have a long-term adverse impact on the United States. The 
Boeing Company has important customers in virtually every Asian 
country, and our ability to sell our products internationally 
means more competitive prices for our U.S. Government customer 
as well as strengthened U.S. political and military ties with 
our allies.
    While the magnitude of the numbers is impressive, they do 
not tell the full story about the importance of the Asian 
market for our business. For our commercial airplane business, 
five out of the top ten international commercial jet markets 
are in Asia including China, Japan, Korea, Singapore and 
Australia. China is projected to be our largest international 
market with $124 billion worth of projected sales over the next 
20 years. Last year alone, we sold close to $5 billion in 
planes to China. Japan has historically been our largest non-
U.S. market and will continue to be a critical market for 
commercial airplanes with market projections exceeding $85 
billion.
    We have numerous airline customers in this region and are 
currently planning for more than 300 deliveries to airlines in 
Asia for 1998, 1999, and 2000. This represents approximately 
one-fifth of our total production over the same period.
    Our Asian customers are among the most customer-focused and 
profitable airlines in the world, including such premier 
carriers as Japan Airlines, All Nippon Airways, Japan Air 
Systems, Korean Airlines, Asiana, Thai Airways International, 
Malaysia Airlines, Garuda Indonesia, Philippine Airlines, 
Singapore Airlines, EVA Airways, China Airlines, Cathay Pacific 
Airways, Qantas and Air New Zealand, and 34 jet-operating 
airlines in China.
    These airlines comprise the world's largest operators and 
customers of Boeing widebody aircraft including 747s, 777s and 
767s. China will be our largest non-U.S. country market 
potentially for single-aisle 737s and 757s.
    In addition to the Asia Pacific region being the key market 
for 777s, this year the 777-300 will be introduced to a number 
of Asian carriers. The 777 remains remarkably healthy even with 
the present situation in Asia.
    With the Asia/Pacific region having the world's highest 
traffic growth and densest routes, Asian airline customers are 
highly competitive and focused on quality, reliability, 
excellent airplane economics, customer service and passenger 
comfort. When we successfully meet the high demands of our 
discriminating Asian customers, we increase our sales prospects 
elsewhere.
    Mr. Chairman, there is little doubt that our continued 
access to this critical market is being affected by the 
economic turmoil in Asia. The Boeing Company has forecast both 
the near and longer-term effects on our commercial airplane 
business of the Asian economic problems.
    Our most recent analysis shows that over the next three 
years we expect 60 fewer commercial aircraft deliveries to 
Asia. For the most part, Asian airlines are indicating that 
they will take their 1998 deliveries. This implies that most of 
the vulnerability to our production planning resides in the 
1999 and 2000 time frame, or beyond, and is limited primarily 
to the 747 and 777 lines. The demand for those aircraft in 
other parts of the world is robust and we have confidence that 
we will be at the levels of production in that time frame that 
we enjoy today. Additionally, those deliveries are far enough 
into the future that we can proactively manage our production. 
We do not envision a significant reduction in near-term sales 
for our defense and space business although some future orders 
may be delayed.
    However, while the near-term economic effects on The Boeing 
Company and its workforce of the Asian financial crisis may be 
manageable, I cannot overstate the key role of the U.S. 
Government in developing constructive solutions to the problems 
facing this region. If the Asian economies fail to recover or 
the situation in Asia worsens or spreads, Boeing will have to 
revise our analysis.
    Mr. Chairman, there has been considerable attention focused 
on the critical importance of restoring near-term market 
confidence and the role of supplemental IMF funding to ensuring 
global financial stability. The Administration has done an 
outstanding job in moving quickly to lay the groundwork for 
containing the turmoil in Asia. There is little doubt that 
there would be damaging financial and export market effects if 
the United States failed to provide the financial support for 
the IMF. It is in the interests of all Americans to ensure such 
funding is provided.
    But as I noted earlier, IMF funding is not the sole answer 
to the problems facing Asia. We need to work with the countries 
in the region to rebuild their economies in a manner that 
strengthens our ties with this important region. And a key 
element of that prescription is U.S. trade policy.
    At the beginning of my remarks, I underscored that open 
trade is Boeing's lifeblood. Our ability to sell aircraft to 
countries in Asia depends very much on a country's overall 
economic growth rates, which are directly affected by their 
ability to export. This is particularly important now given 
currency devaluations that have made U.S. products to Asia, 
including airplanes, more expensive. While it may be simplistic 
for this knowlegeable Committee, open trade means our customers 
can sell us their products and, in turn, buy our airplanes, and 
numerous other U.S. products and services--like computers, 
medical equipment, insurance and agricultural goods.
    I spoke earlier about the need for the United States to 
maintain its commitment to open trade. I want to acknowledge 
the Herculean efforts of Ambassador Barshefsky and specifically 
highlight her efforts to conclude the World Trade Organization 
(WTO) Financial Services Agreement and to secure additional 
trade liberalization initiatives at the most recent Asia 
Pacific Economic Cooperation (APEC) meeting in Vancouver. These 
agreements are a clear endorsement of the desire of most 
countries to move toward greater trade liberalization and 
market opening--especially under difficult economic 
circumstances.
    We cannot allow this trend to be reversed or even slowed. 
To the contrary, we should press the case for free trade. As I 
mentioned at the outset, Asia's current economic troubles 
provide an opening for the United States to aggressively pursue 
a number of trade initiatives that will help increase U.S. 
firms' access to the Asian market to make sure that trade flows 
in both directions.
    One of the most imminent and important trade 
liberalization/market access initiatives before the United 
States today is the negotiation on China's accession to the 
World Trade Organization. After years of arduous negotiations, 
it now appears that there is movement on both sides to work 
toward a commercially-acceptable protocol that would enable 
China to become a full member of the international trading 
system. Recent Chinese offers in the areas of financial 
services and distribution, coupled with their agreement to take 
on the obligations of the Information Technology Agreement, are 
welcome signs of China's commitment to open its market to 
foreign goods and services.
    China's accession to the WTO--which will include a 
commitment to fundamental GATT/WTO principles; a good market 
access package that will better ensure that U.S. businesses and 
agricultural interests can sell and distribute in China; and 
effective safeguards--will be a key event in ongoing efforts to 
further liberalize trade in Asia and to ensure that U.S. firms 
fully benefit from this agreement, we will also need to extend 
MFN unconditionally to China. Without it, U.S. firms and 
workers will not be able to take full advantage of improved 
market access or the multilateral dispute settlement procedures 
that will be key to safeguarding access to this market.
    The time is also ripe to normalize commercial relations 
with Vietnam. The President should issue and the Congress 
support a Jackson-Vanik waiver for Vietnam along with the 
appropriate waivers to open the Export-Import Bank and the 
Overseas Private Investment Corporation. Without access to 
Eximbank, U.S. firms and workers will be at a serious 
competitive disadvantage in this growing market as compared to 
their European and Japanese competitors.
    I would like to spend a moment on U.S.-Japan trade 
relations, given the heightened attention that we anticipate as 
Japan's exports to the United States continue to climb. We 
believe it is important that Japan clearly understand the 
gravity that the world attaches to its playing its role as the 
engine of growth in the Asian arena. The Administration's 
stance toward Japan has been firm in demanding the opening of 
its markets and deregulation as part of a broader program to 
stimulate economic growth. The style in which we convey the 
necessity for harsh reforms in Japan should be accompanied by 
public words of praise on the amount of contributions the 
Japanese government and people have pledged to help Asian 
economies stabilize and recover. We remain convinced that it 
would send the wrong signal for the United States to take 
action to limit Japan's access to our market. Other measures 
for addressing Japan's unwillingness to implement constructive 
economic policies must be found.
    Mr. Chairman, with respect to other Asian countries, I 
would note that recent IMF agreements work to liberalize trade 
and open markets in Asia. During the upcoming months, it will 
be difficult for Asian leaders to take these appropriate, but 
sometimes difficult, measures to open trade. It will be 
politically impossible for them to pursue these initiatives if 
the United States takes action that could be interpreted as 
moving away from open trade.
    In conclusion, I want to reiterate the important role that 
trade must play in restoring economic vitality to the Asian 
region. The United States must show vision in developing and 
implementing trade policies that will advance the interests of 
the U.S. economy into the next century. Now is not the time to 
retreat from our historical commitment to open trade and the 
benefits that have accrued to the U.S. economy, U.S. industry 
and U.S. workers.
    Thank you.
      

                                


Statement of Joseph D. Russo, President, IPSCO Steel Inc., Muscatine, 
Iowa

     Chairman Crane and Members of the Trade Subcommittee, this 
testimony is submitted to the Committee on behalf of IPSCO 
Steel Inc. As President of IPSCO Steel Inc. I am pleased to 
express our views about the Asian financial crisis and its 
potential impact on the steel industry.
    IPSCO operates a new 1.2 million ton per year steel mini-
mill in Montpelier, Iowa that produces flat plate and hot-
rolled steel coils. The company has invested $450 million in 
land, buildings, equipment and working capital for this 
greenfield facility. Its sister company, IPSCO Tubulars Inc., 
operates a pipe facility in Camanche, Iowa and a pipe mill in 
Geneva, Nebraska whose combined production capacity is 345,000 
tons per year. IPSCO is also in the process of constructing a 
facility with an annual capacity of 300,000 tons per year in 
Blytheville, Arkansas. In addition, another sister company 
PaperCal Steel Co. operates a 200,000 ton per year coil 
processing facility in St. Paul, Minnesota. We directly employ 
between 800 and 1000 employees in these operations and create 
thousands of additional jobs through the construction, supply 
of materials, services, and transportation of products to and 
from our mills.
    We are a member of the Committee on Pipe and Tube Imports 
(``CPTI''), a twenty nine member organization of U.S. steel 
pipe and tube producers that represents about 80% of pipe and 
tube production.
    Mr. Chairman and members of the Committee, we are confident 
and so are steel analysts that our Iowa plant is one of the 
lowest cost producers of flat plate and hot-rolled coils in the 
world. Therefore, we fear no fair competition, domestic or 
foreign. IPSCO would like to express its concerns about unfair 
foreign competition and government-distorted trade policies 
that have and can severely impact our return on investment and 
our ability to expand low cost capacity to serve the U.S. and 
world markets. The success of the IMF package for Korea and 
other Asian countries in a way that not only alleviates the 
near-term liquidity crisis but also eradicates government 
directed lending practices that target favored industries is 
critical to the future success of our company, our workers, and 
the entire U.S. steel industry.
    According to the International Iron and Steel Institute 
(``IISI'') statistics, in 1997, South Korea, a country with 46 
million people was the sixth leading steel producer in the 
world at 42.2 million metric tons, behind only China, Japan, 
the U.S., Russia and Germany. Korean steel production per 
capita is 2.5 times greater than the U.S. In addition, Pohang 
Iron and Steel Company (POSCO), founded by the Korean 
government in just 1967, is forecast to be the largest single 
steel producer in the world in 1998 with estimated production 
of over 28 million tons.
    The Korean government still owns 36% of POSCO, which gives 
it a controlling interest in the company and the ability to 
direct the company. The Korean government has clearly strongly 
supported and targeted a build up of its steel industry, but 
never more so than the case of Hanbo Steel, Korea's second 
largest steel company. Hanbo is certainly the poster child for 
the entire Asian economic crisis. Between 1992 and 1996, Korean 
banks, led by the government-owned Korean Development Bank, 
loaned almost 5.8 billion dollars to Hanbo to build a 
greenfield 9 million ton steel complex on Asan Bay in Tangjin, 
Korea.
    At the start of this period, Hanbo's debt-equity ratio was 
already 5 to 1. By the time the company declared bankruptcy in 
January 1997, the debt-equity ratio had ballooned to over 22 to 
1. Hanbo, a clearly uncreditworthy company, obtained these 
loans because of government directed lending practices and the 
Korean government policy to expand the steel industry. There 
can be no doubt that these loans were government directed. The 
largest creditor was a government owned bank and a number of 
Hanbo executives, government officials and bankers have been 
sentenced to jail in Korea for bribery. You simply don't bribe 
government officials to get you bank loans unless government 
officials can get you bank loans. Even after the company filed 
for bankruptcy, the government continued with subsidies. As 
Trade Minister Han Seung Soon stated on February 4, 1997 ``The 
priority is to finish the construction of Hanbo's steel mill by 
the end of this year through additional financing and 
commissioned management by Pohang Iron and Steel.'' Another 
Finance Ministry official, Yoon Tue Yong, said that, ``for the 
benefit of the national economy, we must keep the plant 
operating.''
    On February 18, 1997, the Committee on Pipe and Tube 
Imports and three U.S. flat rolled steel producers filed a 
request with USTR and the Department of Commerce to pursue a 
dispute settlement case at the WTO for Korean government 
Subsidies Code violations with regard to Hanbo subsidies. The 
administration has not taken any action yet and to the best of 
our knowledge this is largely because, once again, foreign 
policy and national security concerns within the administration 
have been able to outweigh our trade policy interests.
    The Korean government has admitted that it has paid off 
small and medium sized trade creditors of Hanbo so that they 
would not also go into bankruptcy. While the goal may be 
laudable, the direct payment by a government of the company's 
debts represents a direct subsidy to Hanbo steel. For the past 
year, Hanbo has not, to our knowledge, published any financial 
statements so we have no idea how much the company conovernment 
controlled POSCO and Dongbu Steel had jointly bid 1.8 billion 
dollars for the assets of Hanbo. However, amidst suspicions 
that the government was forcing POSCO to make the bid and after 
extremely adverse world market reactions to the bid, the sale 
never materialized. At this point, it is clear that Hanbo can 
never reorganize itself and go back into business. What is 
unclear is whether the bankruptcy trustees in Korea are free 
enough from government control to fairly represent the 
creditors interests and sell Hanbo's assets to the highest 
bidders regardless of whether they intend to operate the 
equipment in Korea or move the equipment to another country.
    Various committees in Congress have already heard enough 
testimony as to why the financial crisis occurred and how the 
IMF and Treasury Department plan on solving it. However, since 
the inception of the discussions with the IMF, our trade 
counsel and our associations have pressed the Treasury 
Department to make sure that U.S. taxpayer dollars would not be 
used to subsidize our competitors in Korea. Initially, we were 
very pleased with the conditions announced by the Korean 
government and the IMF. These included:
     ``The commercial orientation of bank lending will 
be fully respected, and the government will not intervene in 
bank management and lending decisions. Remaining directed 
lending will be eliminated immediately.
     No government subsidized support or tax privileges 
will be provided to bail out individual corporations.''
    If the Korean government lived up to these commitments it 
would radically transform the manner in which business is 
conducted in Korea and return competition between U.S. and 
Korean companies to a level playing field. Although we are 
encouraged that the Administration is committed to enforcing 
the IMF conditions, our greatest concern is that neither the 
IMF nor the Treasury Department have the resouces to monitor 
the trade aspects of the agreement. We are also concerned that 
the administration and the IMF may not have the fortitude to 
enforce the agreement or pull additional funding when 
violations of the agreement occur. It appears our concerns are 
well founded. In a January 15, 1998 Wall Street Journal 
article, IMF president Michel Camdessus said the IMF ``wouldn't 
object to special loans to the export sector ....'' Obviously, 
IMF president Camdessus is unaware that Article 3.1 of the 
Subsidies Code specifically prohibits export subsidies.
    In early February we shared these same views with members 
of the House Banking and Financial Services Committee. It is 
extremely important to our company and ot others in the U.S. 
Steel industry that the conditions of the IMF agreement be 
enforce. Therefore, we recommend the following:
    In summary, we would ask the Committee and the Congress to 
do the following:
    Make sure there is strict wnforcement of the IMF conditions 
and require quarterly reports from the Treasury Department and 
Department of Commerce that verify that no U.S. or IMF funds 
are being used to subsidize Korean industry.
    If the IMG allows the Korean government to use IMF funds 
for export subsidies in direct violations of the Subsidies 
Code, the U.S. Congress should refuse to appropriate more funds 
to the IMF.
    Congress should urge the administration to pursue WTO 
dispute settlement over past Subsidies Code violations 
concerning Hanbo Steel and to aggressively police and prosecute 
all Subsidies Code violations by our trading partners.
    Mr. Chairman, IPSCO, is proud to have invested almost half 
a billion dollars in Iowa and has plans for additional 
investments expanding our steel capacity in the U.S. We did 
this based on a belief that the U.S. government is committed to 
fair trade so that low cost and high quality, nor government 
subsidies determine who gets the sale.
      

                                


Statement of National Cattlemen's Beef Association

    NCBA commends Chairman Crane and the Subcommittee for 
holding hearings to address the status of beef trade and 
projections for trade in light of the recent financial crisis 
in Asia, and for your continuing efforts to improve the export 
outlook for U.S. agricultural products. Expanded access to 
international markets is critical to the economic growth of 
U.S. agriculture. During 1996, beef exports accounted for 
approximately 8 percent of total U.S. production and more than 
12 percent of beef's wholesale value.
    Only 4 percent of the world's population lives within U.S. 
borders. Population demographics suggest that the U.S. 
generally, and agriculture specifically, need to aggressively 
prepare to seize opportunities to market products in countries 
with younger, fast-growing populations with increasingly 
disposable incomes. In spite of the current crisis, expansion 
of marketing opportunities continue to exist in many Asian 
countries. During 1996, beef and beef variety meat exports 
totaled $3.05 billion and generated a trade surplus of $1.27 
billion. When cattle and by-product values are included--tallow 
and untanned hides (not leather and manufactured goods)--the 
value of beef-related exports totaled $4.8 billion during 1996 
with a trade surplus of more than $1.8 billion.
    Asian Crisis: During 1996, approximately 76 percent of all 
U.S. beef exports were sold into the Asian markets that are now 
in various stages of currency devaluation, economic reforms and 
recession. The price of U.S. beef has more than doubled to many 
Asian consumers due to currency devaluation. The Asian crisis 
will likely impact the already struggling economy in Japan. In 
the absence of expanded economic reforms and tax cuts, the 
continued strength of the U.S. dollar versus the yen and 
increasing unemployment increase the likelihood of recession in 
Japan. As the Asian economies slow and the devaluation of Asian 
currencies reduces the purchasing power of consumers in those 
countries, demand for U.S. agricultural products will falter. 
In the case of beef, this reduced demand will be further 
compounded by the fact that the Australian dollar and the 
Canadian dollar have also devaluated relative to the U.S. 
dollar, adding to the price advantage for beef from U.S. 
competitors.
    The value of beef by-products (approximately $100/head of 
cattle) will also be affected by currency devaluation. During 
1996, the total value of U.S. cattle hide exports totaled more 
than $1.125 billion. Korea purchased 40.2 percent of all 1996 
U.S. cattle hide exports. Japan, Taiwan, China/Hong Kong, and 
Thailand combined to purchase another 39 percent. The cost of 
hides to processors throughout Asia has approximately doubled 
due to the devaluation of various currencies. In recent weeks, 
the decreased demand for hides and variety meats has 
contributed to a $30/head decline in value.
    European Access: The World Trade Organization appellate 
panel on January 15, 1998 released a final ruling that the 
European Union (EU) ban on beef produced with growth promotants 
is a nontariff trade barrier that does not comply with WTO 
guidelines. The appeal was filed during September 1997 
subsequent to a May 1997 WTO ruling that the EU ban was not 
based on sound science. Under WTO rules, the EU now must modify 
its regulations to comply with the ruling or the United States 
can retaliate. The EU has until mid-March 1998 to state whether 
or not it intends to comply with the ruling.
    The EU has banned beef produced with growth promotants 
since 1989. When the ban was initiated, U.S. beef producers 
lost $100 million in beef trade to the EU annually. The value 
of that trade is now expected to be hundreds of millions of 
dollars. During the past decade, the EU has not been able to 
cite scientifically valid reasons for the ban. Scientific 
evidence clearly shows growth promotants used by the U.S. beef 
industry are safe. The U.S. filed its formal complaint with the 
WTO in January 1996, claiming the beef ban was a nontariff 
trade barrier. Argentina, Australia, and New Zealand joined the 
United States in the action by signing the complaint. Canada 
filed a separate case, and the final report addressed issues 
raised in both (U.S. and Canadian) cases.
    The ruling is a milestone for U.S. beef producers, but 
additional work must be completed before access to the EU 
market becomes a reality. NCBA requests continued support from 
Congress to urge the U.S. Department of Agriculture and the 
Office of the U.S. Trade Representative to pre-empt European 
strategies and to bring this issue to closure.
    In a separate, but closely related issue, on April 30, 1997 
the United States and the EU agreed, in principal, on red meat 
inspection standards for trade, resolving some EU nontariff 
trade restrictions under its Third Country Directive. The U.S. 
negotiated with the EU for more than three years to establish 
an inspection equivalence agreement for a number of 
agricultural sectors including meat, poultry, dairy, and pet 
food. The EU had maintained that, in a number of key areas, 
U.S. safety and inspection procedures were not equivalent to EU 
procedures. This position was not based on sound science but on 
political science, and therefore functioned as a nontariff 
trade barrier depriving the U.S. access to a large export 
market.
    The veterinary equivalency agreement creates a framework to 
resolve other trade problems, and helped establish science-
based inspection standards as the basis for trade agreements. 
The agreement was originally scheduled to be implemented during 
October 1997, but the EU did not meet the deadline. USDA 
Secretary Dan Glickman met with EU Agricultural Commissioner 
Franz Fischler during January 1998 to urge implementation of 
the agreement. Fischler has since said that he expects the 
agreement to be addressed during the February meeting of EU 
farm ministers. When the agreement is implemented, U.S. 
processors will be qualified to export to the EU based upon 
USDA's inspection and approval rather than subjected to 
arbitrary EU plant inspections.
    NCBA urges that full access to the EU beef market be 
facilitated as soon as possible. The USTR must continue to 
devote adequate resources to assure resolutions to these issues 
that are favorable to the U.S. beef industry. Access to the 
European beef market is the ultimate objective and compensation 
is not an acceptable alternative. NCBA urges continued, 
coordinated pressure by Congress and the Administration to 
assure that the EU lives up to its responsibilities, as a full-
fledged member of the WTO and the world trading community.
    Requested Action: In addition to continued efforts to 
resolve access issues to existing markets the following action 
is needed:
    Increase GSM Funding: Before the main impact of the Asian 
financial crisis became evident, Korea was the fourth largest 
export market for beef and beef variety meats. Through November 
1997, exports of these products to Korea totaled nearly $287 
million, an increase of more than 23.5 percent compared to the 
same time in 1996. NCBA is confident that Korea remains a long-
term growth market for beef that is being disrupted by short-
term currency fluctuations and financial circumstances.
    Swift, decisive and bi-partisan action will be required to 
minimize effects of the Asian financial crisis on the U.S. beef 
industry and the broader U.S. agricultural economy. NCBA and 
other meat industry representatives met with USDA officials 
early in the crisis to request that GSM funds be made available 
for credit guarantees to Asian customers. The industry's 
original request was for $500 million in credit for exports of 
beef and pork to Korea. USDA subsequently allocated $100 
million to beef, pork, poultry and horticultural products out 
of a total $1 billion GSM funding for Korea. Another $1 billion 
of GSM funding was made available to other Asian countries.
    Nearly all of the $50 million GSM credit guarantees made 
available a few weeks ago for meat and certain horticultural 
products was immediately exhausted. It is NCBA's understanding 
that the Korean government requested most of that allocation 
for beef and other value-added meat products. NCBA urged USDA 
to make the additional $50 million of the original GSM 
allocation for meat and horticultural products immediately 
available for Korean customers and those funds were designated 
within one hour. NCBA urges USDA to immediately allocate an 
additional $400 million for GSM credit guarantee resources 
targeted for export of beef and other value-added meat 
products. Australia recently announced a credit guarantee 
program for Korea, and other competitors are sure to follow. 
Increasing the allocation for GSM credit guarantees now will 
build additional loyalty among Korean customers and increase 
future U.S. market share.
    Approve IMF Funding Package: IMF-led financial assistance 
plans in Thailand, Indonesia and Korea are critical to the 
success of GSM credit guarantee packages. The impact of the 
Asian financial crisis on U.S. agricultural exports will depend 
on the success of IMF efforts to stabilize the Asian economies 
and bring about structural reforms and trade liberalization as 
called for by the IMF and World Bank reform packages. In the 
short term, the IMF-mandated trade and investment reforms will 
help stabilize the Asian banking system and help ensure the 
financial stability. In the long term, IMF-mandated structural 
reforms will help ensure economic growth and greater access to 
those markets through liberalized trade measures and policies.
    The IMF plans to improve financial stability should help 
make it possible for importers from Asian countries to utilize 
the GSM export guarantee program. The IMF plan, combined with 
the GSM export credit guarantees, will enable the U.S. to keep 
servicing those markets thereby ensuring that the U.S. is seen 
as a reliable supplier of agricultural products, including 
beef. Without the IMF package, the GSM credit program would be 
of little use in helping resolve the Asian economic crisis.
    NCBA urges the Administration to continue pressuring the 
Asian countries to improve access for U.S. products into 
markets in countries receiving IMF and GSM assistance. We have 
provided a list of access issues and tariff rates in each of 
the affected countries to USDA and Treasury officials and to 
Congressional agricultural committee staff. Some will likely 
question and criticize U.S. assistance to Asian businesses. It 
is important that Congressional leaders and U.S. business 
interests work to educate the public that this assistance--
i.e., these long-term loans--is designed to alleviate short-
term credit shortages. Experience suggests these type of loans 
have an excellent record of being repaid with interest. It is 
also important for the public to understand that, by including 
in these plans efforts to eliminate restrictive trade barriers 
for U.S. agricultural products, we not only increase demand for 
our goods, but we also can benefit consumers in the affected 
countries by providing a greater supply of food at a lower 
price.
    Reinstate Fast Track Negotiation Authority: IMF 
stabilization packages and GSM credit guarantees will help 
reduce the impacts from the Asian financial crisis on U.S. 
agriculture. But even with these measures fully funded and in 
place, it is likely that U.S. agricultural exports to the Asian 
region during the next several years will decline. USDA is now 
projecting a 5 percent decrease in the value of total U.S. beef 
exports during 1998. Declines of 10 percent and 25 percent are 
projected for Japan and Korea, respectively. USDA now projects 
1998 fed-cattle prices to increase only 3 percent above the 
1997 average of $66.10/cwt.--down from earlier projections of a 
10 percent price increase.
    Realistically, it will take two to five years for the Asian 
economies to recover. In the case of Mexico, U.S. beef exports 
declined by approximately 60 percent during 1995, the first 
year after devaluation of the peso (approximately 50 percent 
decline in purchasing power). Beef exports to Mexico recovered 
part of that loss during 1996 and, during 1997, U.S. beef 
exports to Mexico were on target to reach record levels. 
Recovery in Asia will depend on the willingness and political 
ability of the various governments to implement economic 
reforms--closely associated with the willingness of 
international lenders to extend credit--and the extent to which 
competitive devaluation of international currencies continues.
    An additional key to sustaining export market growth is 
gaining and maintaining access to emerging international 
markets in Europe and Latin America. Access to these markets 
will be increasingly critical to help off-set expected declines 
in historically important Asian export markets. The U.S. must 
continue to be aggressive in gaining access to new markets 
around the world. Fast Track authority is a critical element of 
that strategy.
    The U.S. must also hold its trading partners to commitments 
agreed to in previous trade agreements. NCBA appreciates the 
initiatives that have been undertaken to gain access to 
international markets and to resolve lingering issues that 
restrict the ability of the U.S. beef industry to offer its 
products to international consumers. Without fast track 
authority, the U.S. will lose the initiative in gaining access 
to emerging markets and enforcing existing trade agreements.
    The National Cattlemen's Beef Association is prepared to 
participate in the process of evaluating critical trade issues 
within the beef industry. NCBA looks forward to providing 
additional input as the U.S. addresses other trade issues, 
including accession of China to the WTO, resolving a host of 
access issues with the European Union and passing ``Fast 
Track'' legislation to provide authority to negotiate 
additional trade agreements. Thank you for the opportunity to 
present this information.
      

                                


Shannon S.S. Herzfeld, Senior Vice President, International Affairs, 
Pharmaceutical Research and Manufacturers of America

    On behalf of the Pharmaceutical Research and Manufacturers 
of America (PhRMA), I am submitting this written statement of 
our industry's position on the recent developments in trade 
with Asia, as requested by the subcommittee on Trade of the 
House Committee on Ways and Means.
    PhRMA represents the country's major research-based 
pharmaceutical and biotechnology companies, which are leading 
the way in the search for new cures and treatments that will 
enable patients to lead longer, healthier, and more productive 
lives. PhRMA companies invest over $20 billion a year in the 
discovery and development of new medicines, and are the source 
of more than nine out of 10 prescription drugs used in the 
United States, as well as a great many of those used outside 
the U.S. The success of our companies in the $US 84 billion 
pharmaceutical market in the Asia-Pacific region is crucial to 
the industry's ability to invest in R&D now and in the future.
    Pharmaceutical R&D is costly, lengthy, and risky. On 
average it takes more than $US 500 million and 12 to 15 years 
to discover, develop, and obtain approval of a new medicine. 
Moreover, only one in 5,000 compounds ever makes it to market. 
Because of these risks and considerable costs, it is very 
important for our industry, in the Asia-Pacific region, as in 
the rest of the world, to be able to rely on a foundation with 
three solid sides:
    1. Strong intellectual property protection and enforcement;
    2. Appropriate rewards for innovation and cost containment 
systems that recognize the value of patented medicines in 
health care.
    3. Regulatory systems that offer rapid and reliable 
approvals.
    In terms of our industry's interests in the Asia Pacific 
region, we believe improvement in all these areas is necessary 
to ensuring the continued success of the research-based 
pharmaceutical industry there. The problems we have encountered 
may be described as follows:
     First, strong intellectual property protection and 
enforcement of such protection. In many countries in which our 
companies operate, especially in the Asia-Pacific region, there 
have been notable improvements in the legal framework providing 
for adequate and effective intellectual property rights (IPR) 
protection, both for patented products and for trademarks. Yet, 
our industry often finds that, after the legal framework has 
been established, host governments often do not enforce the 
laws which are ``on the books, or try to weaken the laws 
through other means. The issue of enforcement is terribly 
important for our industry, and we are very appreciative of the 
efforts made by the USTR, as well as other agencies of the U.S. 
Government, with the support of the U.S. Congress, to assist 
our industry in improving enforcement mechanisms both inside 
and outside of the Asia-Pacific region. Moreover, in many 
countries, there is no or little protection of proprietary data 
that are part of the product registration package usually filed 
with national regulatory authorities. In many countries in the 
region, the deficiencies in IPR appear in the provisions 
governing the use of compulsory licenses and the non-allowance 
of importation to satisfy the definition of the ``working 
requirements for a patent. For our industry, the countries in 
the Asia-Pacific region in which little or no protection of 
product patent rights exist may be found in India, Pakistan and 
Sri Lanka. The countries in which we believe greater 
enforcement of IPR is needed include: China and Thailand. Data 
protection continues to be sorely lacking in Japan, Australia 
and most of the countries of Southeast Asia.
     Second, appropriate rewards for innovation and 
cost-containment systems that recognize the value of patented 
medicines in health care. This means that,, while our industry 
recognizes the need of governments throughout the Asia-Pacific 
region and the rest of the world to contain costs, we also 
believe that the products which we bring to health care systems 
can actually lower such costs and achieve significant 
improvements in both health outcomes and quality of life. We 
believe that, in certain countries in the Asia-Pacific region, 
policies now in place, or those that are planned for 
implementation in the near future, do not do enough to 
recognize the value of innovation and the contribution that our 
industry makes to finding cost-effective solutions to health 
care problems. These countries include: Japan, Taiwan, 
Australia, China and New Zealand.
     Lastly, regulatory systems that offer rapid and 
reliable approvals for medicines that are safe, efficacious and 
of high quality. In the Asia-Pacific region, as in other parts 
of the world, we are concerned about the often lengthy and 
unnecessary regulatory delays faced by our member companies, 
which serve to de-value the intellectual property protection 
that our industry has worked long and hard to achieve. This is 
especially true in Japan, where all our companies have 
experienced a significant ``drug lag'' in product approvals. In 
Japan today, a drug can take longer than 40 months to get 
through the regulatory process, compared with the U.S., where 
the Food and Drug Administration (FDA) has worked very hard to 
bring this average number down to 15.5. In many countries in 
the Asia-Pacific region, we also are seeing efforts by national 
governments to expedite the approval of generics. Our industry 
fully recognizes a role for generic products, as originators' 
products reach the end of their full and effective 20-year 
patent term. However, we are concerned that, in many countries, 
the standards for bioequivalency and bioavailability testing 
are inadequate to ensuring good quality generic products, even 
after the expiry of the originator's patent rights. Our 
industry views the regulatory process to be particularly 
troublesome in countries such as China, Japan, Korea and 
Thailand.
    I have mentioned here that several countries have used 
``other means'' to de-value the protection that are inherent in 
national patent laws, and that appear in the form of non-tariff 
trade barriers. I would like to draw attention in this regard 
to Korea as a particular example of this problem. Korea's drug 
reimbursement policies within that country's health care system 
generally does not permit imported drugs to be listed on the 
Korean Medical Reimbursement Schedule.
    If imported pharmaceuticals do make it on to this Schedule, 
doctors and hospitals are not permitted to earn any profit 
margin for those medicines. Moreover, hospitals, clinics and 
pharmacies which dispense imported drugs must comply with 
additional administrative procedures to receive reimbursement. 
These additional procedures discourage the use of imported 
drugs and limit the choices available to Koreans.
    PhRMA is working very hard with U.S. Government officials 
in several agencies to try to change these and other 
discriminatory rules maintained by the Korea Government in 
relation to non-Korean medicines. If these shortcomings are not 
repaired by the end of the summer, our industry will have to 
consider more forceful action against the Korean Government.
    Despite these impediments, PhRMA companies continue to lead 
the world in pharmaceutical innovation. This year, PhRMA 
companies are investing a record $20 billion in research and 
development--nearly 20 percent of sales. But to maximize 
benefits of biomedical innovation, our industry believes that 
the U.S. Government should pursue a trade strategy that builds 
on our national and industrial strengths, especially in the 
area of intellectual property.
    The success that we enjoy now may not be the same in future 
years unless we are able to ensure that the IPR, in which our 
industry has invested nearly $100 billion in the past six 
years, are fully protected and enforced; that our industry's 
patented medicines are appropriately rewarded and that our 
industry's products are approved by regulatory authorities in 
unencumbered regulatory systems.
    We understand that the Subcommittee on Trade of the House 
Ways and Means Committee has expressed an interest in two 
particular areas: (1) our industry's involvement in the Asia-
Pacific Economic Cooperation forum, and APEC's potential role 
in improving the environment in the Asia-Pacific region for our 
industry and (2) the effect of the Asia financial crisis on our 
industry in that part of the world. I would like to address 
these two issues below.

          APEC and the Research-Based Pharmaceutical Industry

    PhRMA strongly supports the 18-member APEC forum and the 
principles of free trade on which it was founded. Specifically, 
we support APEC's efforts to develop more transparent trade and 
investment systems, streamline approval and registration 
processes, and eliminate tariffs. APEC also reinforces WTO 
commitments to ensuring the development of free and fair 
international trade practices.
    At the 1997 November APEC Ministerial in Vancouver, the 
APEC leaders decided to initiate a program of early voluntary 
liberalization for 15 selected sectors of significant 
importance to the 18 member countries of APEC as well as to the 
region as a whole. The pharmaceutical industry, under the 
chemicals sector, was chosen as one of the areas for ``sector 
liberalization.'' The inclusion of our industry in this 
initiative is a clear indication of the importance that APEC 
governments are attaching to the health care sector, as they 
consider future options for trade liberalization in the region.
    For the pharmaceutical sector, the estimated market size of 
the APEC region in 1997 was $US 178.4 billion, including the 
United States, Chile and Mexico. Our industry's active 
participation in, and support for the APEC forum and the APEC 
Early Voluntary Liberalization Program will foster goodwill and 
strategic conditions in the region as well as have a 
significant positive effect upon the growth and efficiency of 
modern health care infrastructures in the Asia Pacific region.
    It is well-known that doing business in the Asia Pacific 
region is fraught with difficulty and ambiguity, especially for 
the research-based pharmaceutical industry which is heavily 
regulated and dependent on high standards of intellectual 
property protection. It can be difficult to determine what 
tariffs and commercial regulations apply to particular 
transactions or what government agency is responsible for 
granting licenses. The result is costly legal entanglements, 
time wasted, and bad business decisions.
    APEC seeks to ameliorate some of these problems through 
efforts to harmonize members regulatory and approval processes 
across a wide range of industry sectors. This will facilitate 
business transactions and reduce the time and money spent on 
launching a new product in the region. Utilizing the APEC 
forum, and particularly the Early Voluntary Liberalization 
Program, to generate greater market access and harmonization 
will also enhance regional economic recovery from the Asian 
financial crisis by providing opportunities for investment as 
well as trade. More specifically, liberalization initiative for 
the pharmaceutical sector supports:
    1. A competition-based, market driven environment by 
promoting the free flow of goods across borders.
    2. New economic growth opportunities by bringing increased 
investment to the region as well as higher standards of living 
and the development of more efficient health care 
infrastructures.
    3. The creation of new jobs throughout the industry and an 
increased the demand for technical skills and training 
opportunities.
    4. Strengthened intra-regional cooperation through greater 
private sector participation resulting in deregulation of 
market forces.
    In addition to the Early Liberalization Initiative, PhRMA 
supports the APEC Business Advisory Committee's establishment 
of a Financial Subcommittee devoted to developing policy 
guidelines and assistance programs for those APEC members 
experiencing economic difficulties. Along with the advisory 
mechanisms of the APEC Finance Ministers, the Finance 
Subcommittee can guide APEC's developing countries as their 
economies expand to prevent a crisis situation from developing 
in the future.

       Impact of the Asia Financial Crisis on the Research-Based 
                        Pharmaceutical Industry

    PhRMA believes that, as countries in the region struggle to manage 
fiscal expenditures and regain some of the economic instability lost--
and being lost--in the 1997-1998 Asian financial crisis, it is 
important for those countries' leaders to understand the importance in 
continuing to provide access for their citizens to quality health care 
and quality medicines. The effects of the Asian financial crisis on our 
industry, however, seem to indicate that some of the region's 
government bureaucrats see the crisis as an opportunity to protect and 
favor their own national industries at the expense of the international 
pharmaceutical sector, and, more importantly, at the expenses of 
citizens in their own countries.
    Although the Asia financial crisis has adversely affected all 
sectors, the pharmaceutical sector has particular concerns. Currency 
devaluations in Korea,
    Thailand and Indonesia are severely affecting the ability of U.S. 
companies to purchase their raw materials which must be paid in U.S. 
dollars.
    Unlike most other industries, pharmaceutical companies are less 
able to compensate for the devaluations by adjusting prices since the 
industry is heavily regulated in the prices which they can ask for 
their medicines. This especially is true in cases where medicines are 
reimbursed by national health authorities, as in the case of Korea, but 
also is true in Thailand and Indonesia, where companies must seek 
carefully guarded permission to adjust prices.
    Our industry's situation in the Korean pharmaceutical sector 
provides an unusually poignant example of this problem. During the past 
six months, the Korean Won has devalued by 40 per cent. However, the 
pharmaceutical industry has been able to achieve only a 10 per cent 
price increase, while other industry sectors have been able to achieve 
increases of up to 60 per cent to compensate for the severe 
devaluation. Moreover, the industry has been battling severe market 
access barriers as well as discrimination in pharmaceutical trade 
throughout the region.
    As a condition to receiving lines of credit from the International 
Monetary Fund (IMF), the Governments of Korea, Thailand and Indonesia 
agreed to implement fiscal austerity measures to reduce fiscal 
expenditures as well as streamline and deregulate the financial sector, 
and increase the openness of the domestic market to imports. 
Unfortunately, as the Finance Ministries in Korea, Thailand and 
Indonesia are agreeing to these conditions and accepting lines of 
credit, the government regulatory agencies are implementing ``Buy 
National'' policies to cut social welfare expenditures and protect 
domestic industries, especially in the health care sector.
    Government sponsored ``Buy National'' policies in Korea and 
Thailand target not only imported products, but foreign manufactured 
products produced from operations in country. The basis of the policies 
is to substitute brand-name imported pharmaceuticals with cheaper 
domestic generics and to delist foreign medicines from the 
reimbursement schedule.
    In Korea, this development signifies a definite move to 
discriminate even further against imported products and therefore poses 
a problem in terms of the Korean Government obligations to equal 
treatment rules of the WTO. The delisting of foreign medicines from the 
reimbursement schedule is an indisputable market access barrier to 
trade. Furthermore, the ``Buy National'' activities are is direct 
contravention to the Korean Government's commitments toward market 
opening, trade liberalization and deregulation as agreed to in the 
conditionality arrangement with the IMF. The severity of this problem 
is intensified for our industry in Korea, as it appears with the 
existing barriers to entry that our industry faces, and which I 
discussed earlier in this statement.
    The Royal Thai Government also recently invoked similar ``Buy 
Thai'' regulations which have had a very serious and detrimental impact 
on our industry in Thailand. Although Thailand is not a signatory to 
the WTO Government Procurement Code, the ``Buy Thai'' policies clearly 
violate WTO Article III (i.e., National Treatment) provisions and 
undermine the principles on which the GATT and WTO were founded.
    While the U.S. pharmaceutical industry supports U.S. Government 
participation in the IMF recovery programs for Asia economies, it is 
imperative that the appropriate trade liberalization measures be 
enforced to guarantee market access and, more simply, national 
treatment for the U.S. research-based pharmaceutical industry in Asia. 
The IMF economic recovery programs traditionally have included a 
vigorous combination of macroeconomic policies, financial sector 
restructuring, corporate sector reforms, capitol account 
liberalization, labor market reform, trade liberalization and 
information provision measures.
    Unfortunately, IMF-imposed trade liberalization measures have 
targeted only trade-related subsidies and import certification 
procedures for Korea, and were never even a consideration for Thailand. 
As a result, it appears that those U.S. industries which face onerous 
non-tariff barriers to market access in these countries will not 
receive any real or meaningful progress in terms of opening markets to 
foreign competition in these countries.
    The resistance of some Asian countries to open their economies is 
inherent in their traditional business practices The U.S. research-
based pharmaceutical industry has experienced the effects of this 
resistance to reform first hand since the financial crisis hit Korea in 
1997. We believe that the success of the IMF reform programs will 
depend not so much on the extent of full financial support of the 
international community, but on the determination and commitment of the 
Asian nations to restructuring and opening their economies, and on the 
level of ``peer pressure'' that the international economy can generate 
for their compliance.
    We have asked that the U.S. Treasury Department be vigilant in its 
pursuit of market opening measures in Korea, Thailand and Indonesia; 
and seek to eliminate any special provisions which protect 
``essential'' industries at home (i.e., health care, etc.) from the 
conditionality arrangements. Moreover, we believe that the IMF and the 
international community should demand that all ``Buy National'' 
policies be rescinded immediately, and that the appropriate market 
opening measures to enhance competition and efficiency are implemented 
within a specific time-frame.

                               Conclusion

    I appreciate this opportunity to provide PhRMA's views and 
objectives on U.S. trade policy for the Asia Pacific region, 
which we hope to achieve by working with the members of the 
Subcommittee on Trade of the House Ways and Means Committee, as 
well as other agencies of the U.S. Government and officials in 
the Administration. PhRMA believes that the U.S. Government's 
participation in and support of the IMF and Asia Pacific 
regional trading arrangements, such as APEC, will be crucial to 
the success of the U.S. research-based pharmaceutical industry 
in the region. Whatever support is afforded to the IMF or for 
APEC, we hope that your Committee will support our industry's 
efforts to ensure that existing barriers to trade in innovative 
medicines are removed before such support is finalized, and 
that measures are put in place to ensure that no new barriers 
to trade are erected.
      

                                


Statement of Semiconductor Equipment and Materials International

    Semiconductor Equipment and Materials International (SEMI) 
represents over 2100 companies specializing in the manufacture 
of capital equipment and materials for the production of 
semiconductors. Our members include approximately 1263 U.S. 
companies located in 41 states, contributing over 70,000 jobs 
to the American economy. We appreciate the opportunity to 
provide comments to the Committee on the current financial 
crisis in Asia, and the impact of continuing instability in 
that region on our industry.
    In the United States, our industry is composed mainly of 
small, privately held firms which are technology intensive, 
specializing in the production of a particular tool or material 
used in the semiconductor manufacturing process. Over 80 
percent of our members are companies with annual sales of less 
than $50 million. Although small, these firms develop the 
enabling technology for the nation's semiconductor sector, 
providing the equipment and materials necessary to perform the 
complex fabrication steps that turn raw silicon into an 
integrated circuit.
    As the powerful technology of semiconductors become more 
pervasive in consumer electronics, semiconductor device makers 
are relentlessly pressing for more powerful chips. The 
semiconductor equipment and materials industry is a strategic 
partner in achieving that goal. Once an industry that simply 
created tools according to specifications from our customers, 
today our companies' research and development generates many of 
the strategic process advances which increase chip information 
density, reliability and yields.
    During the 1980s the U.S. semiconductor equipment and 
materials industry (SEM) faced tremendous pressure from abroad, 
and we responded to that pressure by expanding the global reach 
of our industry and by focusing our companies on developing 
highly competitive tools and materials. That strategy 
succeeded--today, SEM companies in the U.S. account for 55 
percent of the world's sales of semiconductor equipment and 
export on average 40 percent of their sales annually, much of 
which flows into the dynamic Asia Pacific region. Asia 
(excluding Japan) currently accounts for nearly 30 percent of 
semiconductor equipment consumption. (See attached charts.)
    The recovery of U.S. competitiveness, however, would not 
have been possible without access to sales in the important 
export markets of the Asia Pacific. Without sales to worldwide 
markets, our industry would have been unable to support the 
high R&D costs that are the crucial investment in keeping pace 
with rapid technology development. That paradigm continues to 
govern the current market environment. No leading semiconductor 
equipment or materials company can survive on the U.S. market 
alone.
    SEMI firmly believes that the U.S. commitment to free trade 
and open markets has played a large role in helping our 
industry thrive in new markets such as those emerging in the 
Asia Pacific region. We have strongly supported the 
government's insistence on market oriented reforms in emerging 
economies as a part of global trade negotiations, and the drive 
to reduce tariff and non-tariff barriers to trade.
    Now, with financial instability threatening many of the 
Asian economies, we believe that the U.S. government, along 
with our allies in Europe and Japan, should work with the 
International Monetary Fund to quickly stabilize and revitalize 
the Asian economies. To allow the crisis to linger, and perhaps 
spread as we fear it will without strong American leadership, 
is to risk not only the inroads we have made into those 
markets, but the American jobs that depend on continued exports 
to the Asia Pacific region.
    To that end, we urge Congress to approve both the $3.5 
billion contribution to the New Arrangements to Borrow and the 
$14.5 billion quota increase. Doing so ensures that funding 
will be available to respond if the crisis does spread. It also 
provides breathing room for the governments of nations like 
Korea to begin to implement the market oriented reforms called 
for under the IMF loan arrangements that are crucial to 
preventing future crises.

                 Asian Markets Crucial to Our Industry:

    The markets of the Asia Pacific region, particularly Korea, 
Taiwan and China, are just beginning to become significant 
forces within the semiconductor device making community. 
Despite the current turmoil, we expect the region to be a 
dynamic source of growth for our industry for many years. 
However, with approximately 30 percent of our worldwide sales 
dependent on Asia, and particularly Korea, any slowdown in 
those economies can not help but reverberate here. Already U.S. 
SEM companies are experiencing downturns in orders from many of 
our Asian customers, which, if continued, could affect our 
ability to continue to be growth drivers for the U.S. economy 
as a whole.
    To remain competitive in the semiconductor equipment and 
materials industry--indeed to survive in the environment of 
ever changing technology--our companies must invest heavily in 
research and development for the next generation of tools. To 
do so requires revenues raised from world wide semiconductor 
equipment markets. Similarly, our customers in the device 
industry must be able to invest in the advanced capital 
equipment necessary to produce the next generation of chips. 
Failure to do so on their part could also engender a 
significant loss in competitiveness
    As many of the Asian nations were seeking to enter the 
semiconductor market, capital investment decisions were not 
always made on the basis of market forces, leading to 
overcapacity in certain industry sectors such as the DRAM 
market. Clearly, the overcapacity problem must be addressed in 
order to stabilize semiconductor markets. However, in order to 
stay abreast of technology, chipmakers in Asia must invest in 
the next generation of equipment, regardless of continued 
overcapacity. In turn, their investment is vital to our 
industry's long-term health and stability.
    SEMI believes that the IMF programs will not only address 
the structural problems facing the Asian economies--
particularly government directed investment decisions unrelated 
to market forces--but also will do so in a manner that will 
allow critical capital investment and will further global 
competition over the long-term.
    We are pleased that China has to date avoided financial 
crisis, and is taking steps to address structural weaknesses in 
its banking system. We believe that rapid stabilization of the 
other economies in the area will lessen the likelihood that the 
growing China market will also descend into turmoil.
    Key facts on the importance of the Asia Pacific economies 
to our industry include:

Korea:

     Korea captured nearly $10 billion in DRAM sales in 
1996 (30% of the world total), and has become a leader in 
state-of-the art 64 Mbit DRAMs.
     Korea's market for semiconductor equipment has 
grown from $1.3 billion (US Dollars) in 1993 to $3.5 billion in 
1997. (source: Korean Semiconductor Industry Association, KSIA)
     Korea's market for semiconductor materials has 
more than doubled in the same time period, moving from $1 
billion in 1993 to $2.8 billion in 1997 (KSIA data).
     According to KSIA, semiconductor equipment 
purchases for 1997 were down 13%. Because of the financial 
crisis, and continued overcapacity in the DRAM market, SEMI is 
predicting that 1998 will see similar, if not greater, 
decreases.

Japan:

     The U.S. has captured approximately 17% of the 
equipment market; nearly 33% if joint ventures are included.
     Japan produces about 35% of worldwide 
semiconductor equipment.
     Japan in 1997 consumed nearly 25% of the $27.6 
billion semiconductor equipment market.
     With a stagnating economy and weak banking system, 
continued instability in other Asia nations could spread to 
Japan, which would in turn severely impact U.S. equipment and 
materials companies.

China:

     While China is still in the early stages of 
building a domestic microelectronics industry, recent 
statistics show that China's electronics output is soaring, and 
in combination with Hong Kong, it is predicted to rank as the 
third largest electronic producer in the world by 2005, after 
the U.S. and Japan.
     Currently China produces only about 20 percent of 
the semiconductors it consumes, but SEMI estimates that by the 
year 2000, China's IC demand will total 4 billion units, with 
approximately one half of these units produced domestically.
     Dataquest has estimated that the Chinese market 
for semiconductors was $7 billion in 1996 and will increase to 
$8.3 billion in 1997 and $17 billion by the year 2000.
     The demand for semiconductor equipment generated 
by China's microelectronics industry is estimated by SEMI to be 
$700 million in 1997 and over $2 billion in the year 2000.

Taiwan:

     Of the total $27.6 billion in semiconductor 
equipment sales in 1997, $3.7 billion went to the Taiwanese 
market, which positions Taiwan at approximately 13.4% of the 
total worldwide equipment market.
     Taiwan accounts for only about 5% of the $21 
billion in estimated materials sales, but because of aggressive 
investment that figure is expected to increase as semiconductor 
production increases.
     Taiwan's integrated circuit manufacturers have 
announced plans for $40 billion in investment between 1997 and 
2007 for future facilities.
     Because of long-standing relationships between 
U.S. and Taiwanese firms, U.S. equipment suppliers should win a 
substantial amount of the business for supplying the tool sets 
for those new facilities.

               Next Steps: Fulfilling our IMF Obligations

    SEMI believes that the Asian markets are an integral part 
of the global economy, and that, if open markets are to be 
achieved, it is appropriate for the IMF, the U.S. Government, 
and other world economic leaders to help stabilize the overall 
economic health of the region. In today's global economy, we 
cannot fail to do so if our trade with those nations is to 
continue to be a positive force for growth here at home.
    In moving forward, it is important to recognize that the 
IMF funding request is not a ``bailout'' for Asia. The 
assistance package is in the form of loans that must be repaid 
and which require structural changes in each nation's financial 
system that will help prevent the current economic turmoil from 
recurring. Loans through the IMF are not an expense to the U.S. 
taxpayer, but an investment in global economic security that 
has a payoff in American economic stability, and in stability 
for our export markets. The IMF has played a key role for the 
past 50 years in maintaining global financial stability, 
preventing such practices as competitive currency devaluations. 
Fulfilling our obligations to the IMF will allow continued U.S. 
leadership in shaping the role of that institution for the next 
50 years.
    Our customers, and in some cases our competitors, reside in 
the Asian nations now in crisis. But we believe that such 
competition makes U.S. industry stronger, and that programs 
designed to set these economies on a more stable, market-
oriented course for growth will, in the long run, provide 
continued trade opportunities for U.S. semiconductor equipment 
and materials companies.
    IMF funding provides breathing room for the difficult 
transitions that lie ahead for the recipient economies. Equally 
valuable, U.S. commitment to new and continued funding provides 
a signal that our government is fully committed to playing a 
leadership role in international economic affairs.
    SEMI would like to thank the Committee for the opportunity 
to provide written testimony on this topic. We would be please 
to answer any questions that arise from our statement, and to 
provide any additional information necessary.
      

                                

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Statement of George Scalise, President, Semiconductor Industry 
Association

    I appreciate the opportunity to appear before the 
Subcommittee on Trade of the Committee on Ways and Means to 
present the views of the Semiconductor Industry Association 
(SIA) on issues affecting U.S.-Asia trade. A primary interest 
of the SIA is China's accession to the WTO, on which I 
testified before this Subcommittee last year. But I understand 
that the subcommittee's chief interest today is the Asian 
financial crisis and its effects on the American economy--so I 
will focus my remarks today on this topic.

                    The U.S. Semiconductor Industry

    Semiconductors are an increasingly pervasive aspect of 
everyday life, enabling the creation of the information 
superhighway and the functioning of everything from automobiles 
to modern defense systems.
    U.S. semiconductor makers employ about 260,000 people 
nationwide, and the presence of the industry is widespread--35 
states have direct semiconductor industry employment. 
Semiconductor products are the enabling technology behind the 
U.S. electronics industry, which provides employment for 4.2 
million Americans, in all 50 states.
    U.S. semiconductor producers are highly committed to 
maintaining their lead in both semiconductor manufacturing and 
technology. The U.S. semiconductor industry devotes on average 
20 percent of its revenues to capital spending and another 11 
percent to research and development--among the highest of any 
U.S. industry.
    While investing heavily in the industry's future 
competitiveness and technological capabilities, SIA members 
also have actively sought open markets around the world. 
Because the semiconductor industry is so global in nature--
roughly half of the U.S. industry's revenues are derived from 
overseas sales--the SIA has been dedicated since its inception 
to promoting free trade and opening world markets. Since the 
early 1980s, SIA has worked for a global tariff-free 
environment. The U.S.-Japan semiconductor negotiations in 
Vancouver in 1996 led directly to the conclusion of the 
Information Technology Agreement last year.
    Historically, Japan has been the most important export 
market for the U.S. semiconductor industry. But the rest of 
Asia is becoming increasingly vital to the health of U.S. 
semiconductor producers. The Asia-Pacific region is home to 
some of the most rapidly growing markets for semiconductors. 
The continued growth--and openness--of these key markets is 
important to the future success of the U.S. semiconductor 
industry.

                   IMF Financial Assistance Packages

    The growth of the world economy and economic stability must 
be the number one economic priority for both the U.S. 
government and American business. SIA therefore supports the 
IMF-led financial assistance programs announced in the last 
several months for a number of troubled Asian economies. Stable 
financial markets promote world economic growth. IMF financial 
assistance can play an essential role in reestablishing 
stability in financial markets. In the long term however, this 
assistance can only succeed if tied to serious commitments to 
market-oriented reforms in the recipient countries. Therefore 
certain conditions must be placed on any such financial 
assistance.
    This crisis is most often addressed in terms of 
macroeconomic factors, but there are distinct microeconomic 
causes and microeconomic effects as well. To be specific, while 
this had been a decade of explosive growth for Asia, at the 
core of this dramatic growth were deep-seated problems: 
inadequate governmental supervision of Asia's financial 
institutions; unsound loans; speculative real estate and equity 
booms; and most importantly, close links between governments, 
banks and corporations, and manipulation of credit markets to 
benefit favored industries. Indeed, as many have observed, the 
government practices underlying the Asian financial crisis are 
in some circumstances the very same practices that have given 
rise to distorted patterns of investment, production and trade 
in Asia.
    South Korea's current economic crisis, for example, stems 
in part from the Korean government's practice of directing 
lending on non-commercial terms to promote the rapid expansion 
of favored export-oriented sectors.\1\ When world markets could 
not absorb the resulting excess production capacity, the prices 
for Korea's major export products declined sharply, thereby 
threatening Korea's ability to repay foreign currency loans 
used to underwrite the aggressive capacity expansion.
---------------------------------------------------------------------------
    \1\ For much of the information on the Korean economy and the 
Korean semiconductor industry, SIA has relied extensively on the 
research provided by Micron Technology, Incorporated, a member of SIA.
---------------------------------------------------------------------------
    Backed by government-directed borrowing, and targeting 90 
percent of its production for the export market, the Korean 
semiconductor industry rose in a few years from an 
insignificant producer to one of the world's largest, capturing 
nearly 40 percent of the worldwide market for memory chips. The 
three Korean semiconductor producers achieved this by 
aggressive, highly-leveraged investment in new production 
capacity at a rate far exceeding that of any other country, and 
at a rate that is economically questionable. Alan Greenspan, 
Chairman of the Federal Reserve, recognized the role played by 
the Korean semiconductor industry in precipitating this crisis 
in his testimony before the Joint Economic Committee on October 
29, 1997, noting that ``the glut of semiconductors in 1996 
suppressed export growth, exerting further pressure on highly 
leveraged business.''
    Whatever the specific role of individual industries, 
perhaps the most positive development coming out of the current 
Asian financial crisis is that an opportunity has been created 
for systemic reform. But the major effort will be long-term. To 
be effective in re-establishing the confidence of world 
markets, basic market-oriented reforms--some of which are 
contained in the agreement between the IMF and the Government 
of Korea--must be fully implemented, monitored and enforced.

 The Goal of the IMF Support Packages Must be to Allow Markets to Work

    The goal of the IMF reforms--of letting market forces 
operate freely-- must be realized in order to deal effectively 
with the Asian crisis.

    Investment, production and exports must take place on the 
basis of market forces--not as a result of subsidies or other 
commercially unjustified support. If companies in troubled 
Asian markets cannot sustain themselves based on market 
principles, they should, for example, be allowed to fail or be 
sold to other firms--just as would happen in the United States 
or any other open-market economy. This must be a fundamental 
principle underlying any long-term solution.
    This principle mandates that any new financing for 
industries in these troubled economies be commercially 
justifiable and not government-directed. Any new loans must: 
(1) be fully market-based; (2) not fall below a commercially-
justifiable benchmark rate based on the credit-worthiness of 
each borrower; and (3) not be government directed, government 
supported or government guaranteed. In particular, none of the 
funds should result in commercially unjustifiable support of 
the Korean semiconductor industry in any form.
    In their current financial condition, many Asian 
manufacturers may not be credit-worthy. For example, the debt-
to-equity ratio of the Korean semiconductor industry reportedly 
averages over 350 percent, nearly ten times the average ratio 
for U.S. semiconductor producers. This debt financed a huge 
capital expansion--in 1996 alone, Korean firms invested $7.3 
billion in new plants and equipment, an amount which was almost 
60 percent of their $12.4 billion in sales.
    It is no longer fashionable--and it has never been 
accurate--to look upon Asian industry as entirely free to 
operate on a different economic model than their market-driven 
competitors. Ultimately, absent government intervention, market 
disciplines apply equally to producers regardless of 
nationality.
    Without an end to government-directed lending, the current 
debt problems facing these countries will not be solved. 
Instead, market forces must be permitted to determine financial 
transactions. Government-directed lending to entities that 
could not receive commercial financing must not be allowed. 
Allocation of credit to favored export industries can only 
result in investment and additional capacity totally 
unjustified by domestic or international market conditions, 
which can lead to dumping and other injurious trade effects.
    Allowing IMF and other assistance funds to subsidize debt-
ridden Asian manufacturers would not only perpetuate the 
underlying economic problems, but would do so at the direct 
expense of U.S. companies. These Asian countries must commit to 
end the use of subsidized support or tax privileges to bail out 
individual corporations.
    It is important to note here that the IMF assistance 
package for Korea does include several conditions to address 
this problem. For example, the package includes commitments by 
the Korean government that the commercial orientation of bank 
lending will be fully respected, and the government will not 
intervene in bank management and lending decisions. 
Importantly, this package also states that remaining ``directed 
lending'' will be eliminated immediately, and that no 
government subsidized support or tax privileges will be 
provided to bail out individual corporations.
    One of the essential elements of what is needed now is 
adequate attention and sufficient resources directed to 
enforcing these IMF-mandated conditions. Enforcement, in turn, 
requires effective and vigorous monitoring. This requires 
increased transparency in the Korean financial system, as well 
as careful oversight by both IMF and U.S. government officials.

      Economic Recovery in Asia Cannot Come Through Exports Alone

    The troubled Asian economies should not seek economic 
recovery solely through increased exports. Subsidization of 
exports or government-directed export targets will only further 
distort Asian economies, harm market-based competitors--and 
will not result in an effective and long-term solution. 
Government-directed lending to selected firms has already 
produced excess capacity in the affected sectors, and continued 
lending can only exacerbate this oversupply. This, in turn 
could lead to depressed world prices and operating losses for 
producers both in and out of Asia. The semiconductor industry 
has been and clearly remains a prime candidate for lending that 
is not commercially justified.
    Unfortunately, there are some indications that many of 
these countries continue to look to export-led growth to solve 
their current economic problems. In Korea, for example--despite 
operating losses and massive debt--Korean semiconductor 
producers have announced plans to significantly increase export 
levels in 1998. The Government of Korea has in fact explicitly 
encouraged export plans. The director of the export division of 
the Korean Ministry of Trade, Industry and Energy recently 
suggested: ``to overcome this crisis, export promotion is the 
most important policy of the country.''
    In addition, the Wall Street Journal reported on February 
17, 1998, that the IMF may permit South Korean banks to use IMF 
loans to back South Korean exports. This must not be allowed to 
happen. Korean exporters already benefit from a decline of 
nearly 50 percent in the value of their currency, which makes 
their exports that much cheaper in dollar terms. They should 
not be permitted to use IMF funds to further expand exports, 
particularly when this gives them an unfair competitive 
advantage over competitors in other countries. The WTO 
Subsidies Agreement, in fact, explicitly prohibits export 
subsidies, and the IMF should ensure that Korea lives up to its 
WTO commitments.
    The U.S. Government and the IMF must take steps to 
discourage such plans, and to promote domestic growth in these 
countries. There is a limit to how much in the way of increased 
exports other markets can absorb. Increasing below-cost exports 
from Asian companies will only worsen the crisis. Asian 
countries that are already suffering losses will see further 
distortion of their economies, while market-based competitors 
will face a flood of underpriced goods.

                International Participation is Essential

    An effective and long-term solution requires international 
participation. The IMF-led bailout efforts will succeed only if 
other countries join the United States in contributing to the 
solution--both through provision of funds and by accepting a 
share of the increased level of exports from the troubled Asian 
economies. The United States cannot--and must not--undertake 
this role alone. Other major industrial countries must take 
steps to promote growth in their domestic economies--which can 
in turn be catalysts for global growth. In particular, within 
Asia, the Administration should continue to encourage Japan and 
China to make the structural reforms necessary to strengthen 
this recovery.
    The participation of Japan--with the largest economy in 
Asia and the second largest in the world--is essential. Japan 
has far more at risk in the current crisis than the United 
States, and has the most to gain from an Asian recovery. A 
strong Japanese economy and open Japanese markets are critical 
to regional recovery.
    The U.S. Government should insist that Japan open its 
market to exports from these Asian countries generally, as well 
as from the United States--both to share more equitably the 
burden of responding to the Asian financial crisis and to 
reduce trade distortions that damage the U.S. and other 
economies. In this respect--to give credit where credit is 
due--very substantial progress has been made under the U.S.-
Japan Semiconductor Agreements to open the Japanese market to 
foreign semiconductors.
    Emerging markets also have a role to play. Short-term 
stabilization of the current crisis requires that the United 
States stop the so-called ``contagion effect''--a spreading of 
this crisis from one region to another. China has played a 
constructive role in this regard by committing to avoid 
devaluation of its currency. The Administration should continue 
to work closely with these and other governments to promote 
structural, financial, and macroeconomic policies that are 
vital to stability and world economic growth.

        Increased Transparency is Critical to Successful Reform

    As part of overall reform efforts, beneficiary countries 
must promptly improve the transparency and accuracy of 
corporate balance sheets, including profit and loss accounts--
by the adoption and implementation of internationally-
recognized accounting standards. This is a condition which is 
in the IMF agreement with Korea. However, Korea reportedly 
adopted in 1996 an accounting standard that permitted companies 
to hide foreign exchange losses by taking them off their income 
statements, thus distorting the firms' true financial 
positions. More recently, it has been reported that Korea 
adopted a standard that permits foreign exchange losses to be 
spread over some future period, creating further distortions. 
These accounting standards should be modified to comply with 
internationally-recognized standards to permit markets to 
monitor effectively the financial health of these firms.
    More generally, such internationally-recognized accounting 
standards must be adopted and implemented immediately in all 
respects by the Korean government. Quarterly financial result 
reports should be required, beginning with the first quarter of 
1998, and continuing forward, and such reports must be 
monitored by the U.S. Government and international financial 
officials.

                               Conclusion

    The Asian financial crisis confers on the international 
community awesome responsibilities. As a global industry 
dependent on exports, the U.S. semiconductor industry fully 
supports measures to end the financial crisis in Asia, assuming 
reasonable conditions are imposed. International rescue plans, 
however, must seek effective and long-term solutions. There 
must be market-oriented reforms, and there must be monitoring 
and enforcement mechanisms to ensure these reforms are carried 
out. U.S. and international assistance cannot permit the 
unsound practices that have harmed both Asian countries and 
U.S. industries to be perpetuated.
    For the Congress, this raises a number of questions which I 
urge you to consider:
     Does the IMF have an effective plan to monitor 
developments in the affected Asian countries so as to ensure 
commitments made to the IMF are being carried out?
     Does the U.S. Government have in place effective 
mechanisms to itself monitor the IMF reform programs and 
condition its own assistance on effective implementation of 
these reforms?
     Are all key agencies, including trade agencies--
USTR and the Department of Commerce--engaged in the oversight 
of the IMF reform programs? Is a special interagency 
enforcement effort needed?
     Have adequate resources been provided in the 
Executive Branch to accomplish the necessary monitoring and 
enforcement to make the IMF reform program a success?
    The answers to these questions will determine whether U.S. 
industry--including the U.S. semiconductor industry--is in the 
long run harmed or permitted to compete on a level playing 
field as a result of the IMF bailouts. I urge you to give these 
questions your serious consideration as you consider 
legislation related to this important issue.
    Thank you for this opportunity to testify.

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