[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
UNITED STATES - JAPAN TRADE RELATIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TRADE
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
__________
JULY 15, 1998
__________
Serial No. 105-105
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
63-468 WASHINGTON : 2000
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
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Page
Advisories announcing the hearing................................ 2
WITNESSES
American Council of Life Insurance, Brad Smith................... 84
Asia Pacific Policy Center, Douglas H. Paal...................... 41
Bereuter, Hon. Doug, a Representative in Congress from the State
of Nebraska.................................................... 13
Economic Strategy Institute, Clyde V. Prestowitz, Jr............. 49
Goldman Sachs International, Robert D. Hormats................... 28
Graham, Hon. Lindsey, a Representative in Congress from the State
of South Carolina.............................................. 18
Levin, Hon. Sander M., a Representative in Congress from the
State of Michigan.............................................. 7
Lindsey, Brink, Cato Institute................................... 56
National Bureau of Asian Research, Kenneth B. Pyle............... 62
Pharmaceutical Research and Manufacturers of America, Shannon
S.S. Herzfeld.................................................. 94
Westvaco Corporation, Wendell L. Wilkie II....................... 105
Submissions for the Record
Office of the U.S. Trade Representative, Hon. Richard Fisher,
Ambassador, statement.......................................... 114
______
American Chamber of Commerce in Japan, statement................. 124
American Electronics Association, statement...................... 127
Guardian Industries Corp., Auburn Hills, MI, Peter S. Walters,
statement...................................................... 131
UNITED STATES-JAPAN TRADE RELATIONS
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WEDNESDAY, JULY 15, 1998
House of Representatives,
Committee on Ways and Means,
Subcommittee on Trade,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:30 p.m., in
room 1100, Longworth House Office Building, Hon. Philip M.
Crane (Chairman of the Subcommittee) presiding.
[The advisories announcing the hearing follow:]
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Chairman Crane. Please take seats. We're running just a
little bit late, and we're going to be interrupted by votes
over the course of the afternoon. And so, I would like to
welcome you all to our hearing of the Ways and Means Trade
Subcommittee to consider the U.S. trade agenda with Japan in
the context of the broad range of measures that Japan must take
to address the difficult and painful economic situation it
faces.
Sunday's stunning defeat of the ruling LDP Party, resulting
in the resignation of Prime Minister Hashimoto, and the
cancellation of next week's state visit has thrust Japan into a
period of political transition. Japan must now focus on
identifying new leadership capable of navigating a more
credible record to economic recovery.
Because Japan is our largest trading partner, and perhaps
most important ally in Asia, accounting for over two-thirds of
the region's GDP, the stakes are high not only for the Japanese
people, but also for the United States and the rest of the
world. At this time of uncertainty, it is critically important
that the USTR's trade agenda with Japan, including broad
structural reforms such as deregulation of its economy,
fundamental reform of the banking system, improved
transparency, and the opening of its distribution system to
eliminate exclusionary business practices remain steady and
undeterred.
I firmly believe that successful implementation of these
same measures will contribute substantially to moving Japan in
the direction of economic health and long-term growth. The
danger of inaction in terms of Japan's participation in multi-
lateral organizations such as the WTO and APEC and in Japan's
implementation of existing trade agreements remains a real
threat to the welfare of the Japanese people and to U.S.
economic and security interests in the region.
I want to warmly welcome our colleagues, Sandy Levin and
Doug Bereuter, both long-time observers of Japan. Their
comments should help us put the recent history of Japan's
economic ups and downs, ranging from the booming 1980's to the
stagnant recessionary lost decade of the 1990's into better
perspective. And I also want to recognize, too, the testimony
we will receive in this first panel from our distinguished
colleague, Lindsey Graham, from South Carolina.
I might mention that Members will want to turn their
attention to Doug's resolution H. Res. 392, which has been
sequentially referred to the Ways and Means Committee until
July 17. Sandy and Amo also have a bill, I know, they will want
to discuss. We will then hear from a strong panel of academics
that will discuss the economy and bilateral relationship more
generally and a panel of witnesses from the private sector.
Earlier this afternoon, the subcommittee held an executive
session with Deputy USTR, Richard Fisher, and we had a good
discussion about the U.S. trade agenda with Japan.
I now would like to yield to our distinguished ranking
Minority Member, Mr. Matsui.
Mr. Matsui. Thank you very much, Mr. Chairman. I'm going to
submit my statement for the record. I appreciate your holding
this hearing today.
Thank you.
[The opening statement was not available at the time of
printing.]
Chairman Crane. Thank you.
And now if our witnesses will please sit down at the dais
there. I think it's Sandy in the first one. Right. Okay, we've
got Doug in his seat. And, Lindsey, you're at the far end here.
And we'll proceed in order with--oh, wait. No, no. You guys
got turned around. No, that's okay. He can change. I mean, we
want to make sure everyone addresses you properly. Because the
people here on the panel may not recognize you offhand.
All kidding aside, let's get on to serious business, and
we'll proceed first with Sandy Levin. And, guys, as I've
mentioned before try and keep your oral testimony to 5 minutes
or less. All written submissions will be made a part of the
permanent record.
Sandy.
STATEMENT OF HON. SANDER M. LEVIN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MICHIGAN
Mr. Levin. Thank you, Mr. Chairman.
As you mentioned in your opening statement that I think
very well describes the issue, much has changed since you
originally scheduled this hearing. As you mentioned, Doug
Bereuter and Mr. Houghton and I have presented resolutions that
were an effort to keep the spotlight on the problem areas
within trade matters with Japan. The election has occurred.
Japan is in transition, and, as a result, I think, we need to
be careful and perhaps brief about what we say.
Let me just say a few words. At some point, it was clear, I
think, that the Japanese policy seemed more than not a win-lose
proposition--a win proposition for the Japanese, and a lose
proposition for those who were excluded from their market. But
in recent years, I think it's been increasingly clear that more
than not their policies have been a lose-lose proposition,
losing for them and losing for everybody else.
Until now--and this subcommittee has been so much a part of
this--there have been so many efforts by the United States to
try to pry open the Japanese market to help them deregulate.
And we've tried virtually everything: 301--changing it. Super
301. All kinds of agreements.
Now, with the election, the Japanese appear to be at
another crossroads. And I just want to say, I think we should
do everything that we can, though we have to realize the
limitations to try to help Japan decide on its own the correct
options. There was an article today in the Washington Post
which talked about the presently prevailing parties split on
whether they should fix their economy or ensure their
reelection. I think it's important for the world that they fix
their economy. And there are several legs to that: bank
restructuring, the whole issue of the weakness of their
currency, and trade deregulation. And we're here today, and our
resolutions addressed it, to express the strong belief that
trade deregulation has to be part of the reform of the Japanese
economy. The argument may be that they're in a weakened
position, but actually with the weakness of the yen, this is a
more opportune time for the Japanese to deregulate over a
reasonable time on a broad basis.
Enough said. I'm not going to go, Mr. Chairman, members,
into specific areas like automotive or flat glass or whatever
it is. You have, as mentioned, two resolutions before you. I
don't think it's clear when would be an opportune time to bring
these up on the floor--whether they should be combined. There's
no pride of authorship here. But I do think at an opportune and
appropriate moment the Congress, the House should once again
consider this whole issue of trade policy with Japan--the
essential need for them to deregulate, to open up their
markets, to terminate their exclusionary policies. It will be
much better for the Japanese consumer, who can then participate
in the renovation or the rejuvenation of the Japanese economy.
And it will surely be better for the business people and the
workers, as well as, in the end, the consumers of America.
Thank you very much.
[The prepared statement follows:]
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Chairman Crane. Thank you, Sandy.
Our next witness will be our colleague, Doug Bereuter.
STATEMENT OF HON. DOUG BEREUTER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEBRASKA
Mr. Bereuter. Thank you, Mr. Chairman, Mr. Matsui, members
of the subcommittee, and Mr. Rangel. Thank you for permitting
me to be here for the testimony today. I want to commend you
for holding this timely hearing after the shocking elections in
Japan, and Prime Minister Hashimoto's recent resignation.
I've got a couple of paragraphs you can read for yourself
about what a recent top political pundit in Japan, Mr. Neufer,
had to say about the implications of that.
Mr. Chairman, I think it's important to note that the
people of Japan have spoken to their government officials about
the need for economic reform. It's now more important than ever
that the United States send a clear and unequivocal message,
seconding that call for reform.
As the chairman of the Asia Pacific Subcommittee, I've been
concerned about the impact of the Asian financial crisis on the
United States for some time. Approximately a year ago,
Thailand's financial crisis was described by the President of
the United States and many other experts as a ``small glitch in
the road.'' Now, one year later, Japan and Hong Kong are in
recession. Indonesia's 32-year ruler, Suharto, is gone. Russia
stands in desperate need of moreinternational assistance. And
the world is pleading with China not to devalue its currency. Despite
Chairman Greenspan's intentional--I think intentional--downplaying of
the crisis so as not to disrupt the markets, the Asia financial crisis
threat is real, significant, and unfortunately not a short-term
problem. Mr. Chairman, I felt compelled to testify before you today,
not to extol, however, the dangers of the Asia financial crisis to the
United States. Most members do have some appreciation for this problem.
Instead, I'm here to discuss the important role that Japan
can play in alleviating the effects of that crisis. They should
be second engine of growth in the region. And they're not.
They're a drag on the economy. They're cutting back on their
imports dramatically from east and southeast Asian countries.
They're headed for a negative GNP next year, according to all
predictions. Only the Japanese have the resources to help
themselves. And they do not have a record of having the
necessary resolve to make those changes.
Though the financial crisis presents a serious threat to
our national interest, it also provides an opportunity for the
U.S. Government to pursue a more consistent and balanced trade
and foreign policy agenda with Japan. Even more important, the
crisis provides an opportunity for Japan to act responsibly and
bolster the perception within the American public that it's a
partner as well as an economic competitor.
Now, first, we do need to acknowledge that Japan has
responded to the crisis by acting to protect its self-interests
in the region in several meaningful ways. And I list those
there. I'm not going to go over them because of time. But they
are significant.
But there's another troubling side to all Japan's effort
and its traditional response to the crisis. The reality is that
neither Japan nor any other country has actually dispersed
second-line credits.
Moreover, all of Japan's financial assistance--commitments,
structural adjustment loans, and export-import credits--even
taken altogether are still an inadequate alternative to a
strong Japanese economy. Therefore, the primary question
remains is the Japanese government prepared to make the
fundamental economic, structural, and regulatory changes
necessary to strengthen its economy.
Now the resolution that I've offered, to which referred to
International Relations Committee, a subsequent referral to
Banking and to this committee, is broad as reflecting those
jurisdictions. It is not strictly trade. It goes to a number of
important issues.
U.S. officials representing both Republic and Democratic
administrations have long called for Japan, for example, to
deregulate its economy and remove informal barriers to trade.
More recently, U.S. Treasury and Federal Reserve officials have
called upon Japan to take the tough steps necessary to reform
the financial sectors of their economy. Those officials calls
for deregulation are being belatedly and grudgingly heated.
Under Prime Minister Hashimoto's leadership, the seemingly all-
powerful Minister of Finance bureaucrats finally proposed an
ambitious but problematic financial sector big-bang and a
bridge loan--a bridge bank to close bankrupt financial
institutions. While these moves are in the right directions,
knowledgeable observers have frankly been underwhelmed by the
scale and scope of these and other proposed reforms. To
paraphrase Secretary Rubin, ``it's time for Japan to move
beyond virtual reforms to real reforms.'' And that certainly
does involve a permanent tax cut for individual Japanese
because they're not--they're not confident in their economy,
and they're not investing. And they're not saving in financial
institutions at least. Reportedly the biggest single consumer
item in Japan is home safes. I invite your attention to the
last section in my remarks related to House Resolution 392. I
think it's the appropriate advice for the House to give to the
Japanese, not to pile on, but to let them know how very
important we think their partnership in dealing with the Asian
financial crisis really is--for their sake, for east and
southeast Asia, and also because of its implications on us. And
the details are forthwritten in that section.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Chairman Crane. Thank you, Doug.
And our final witness: our distinguished colleague from
South Carolina, Lindsey Graham.
STATEMENT OF HON. LINDSEY GRAHAM, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF SOUTH CAROLINA
Mr. Graham. Thank you, Mr. Chairman.
I come to the committee today with a little different
approach to the problem. And I know the problem is real and I
want to be part of the solution to maintain a good, strong
relationship with Japan. And I hope Japan can make the
corrections they need, with our assistance, to get economy in
that part of the world going.
But when you talk about U.S.-Japanese trade relations,
people in the third congressional district of South Carolina
take notice for a variety of reasons. But one of the dominant
reasons is that in my district we employ 1,200 folks with Fuji
Photofilm U.S.A., making a variety of products, including
photographic film, paper, quicksnap cameras, and
videocassettes.
Fuji Film U.S.A., Mr. Chairman, has invested over a $1
billion in my district. About every other week, we expand, and
it has brought a quality of life and good paying jobs to my
district that would be very hard to duplicate. And we're very
much appreciative of what Fuji Film has done in South Carolina.
Fuji Film and Kodak were in a dispute, I think some of our
friends from New York will recall, about the idea of whether or
not the film market was open and available in afair manner to
Kodak film. Kodak and Fuji share about the same market share in each
other's country--9 or 10 percent Fuji market share in the United
States; about the same for Kodak in Japan. The dispute was brought to
the attention of the U.S. Trade Representative, and the U.S. Trade
Representative, at Fuji's request, picked an impartial arbitrator. And
the U.S. Trade Representative chose to take the dispute between Kodak
and Fuji and send it to the WTO. And, as you know, Mr. Chairman, the
WTO ruled not very long ago that basically the concerns of Kodak were
not founded in law or fact. And I've been to Japan myself to look at
the availability of Kodak film. What I want this committee to
understand is that what problems we have with Japan, they are real. But
let's focus on the real problems. And one of those problems is not film
access. The WTO has ruled. Let's take the film case and put it on the
shelf, roll up our sleeves, and go to work on the real problems facing
both countries. And I would just like to submit my comments for the
record.
And I appreciate you very much listening to how U.S.-
Japanese trade relations affect a small town in South Carolina.
Thank you very much.
[The prepared statement follows:]
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Chairman Crane. Thank you, Lindsey. And I thank all of you.
Are there any questions? Mr. Matsui.
Mr. Matsui. Well, no, I would just like to thank all three
of the witnesses. I might just point out that I'm on Mr.
Bereuter's bill and the Houghton-Levin legislation as well.
I've looked at the bills, as one might expect, and I don't see
anything particularly inflammatory in them. They're very
thoughtful resolutions, and they really deal with existing
problems. And so, certainly it's something that we need to look
at; that obviously the timing issue is one that is somewhat
unfortunate. But this is something that I think we need to make
some statement on.
Thank you.
Mr. Levin. Thank you. I think, Mr. Matsui, they're probably
more salient today than they were when they were introduced.
The timing we need to be sensitive to.
Chairman Crane. I think Mr. Houghton wanted to make a
statement.
Mr. Houghton. Thank you very much, Mr. Chairman.
Just a couple of comments.
First of all, thanks very much for holding this hearing.
Thank you, gentlemen, for being here.
It's really a sad day because Japan is such a good friend
of ours, and they're going through very difficult times. And we
don't want to do anything to kick them when they're down. But
at the same time, there are some things which we feel very
deeply about; that mention was made of the WTO case as far as
the film industry is concerned. However, in the resolution of
that case, Japan claimed that the distribution system was open
and that they encouraged imports and didn't tolerate restraints
on competition, which certainly is not right.
The bill, H. Con. Res. 233, which Mr. Levin and I have put
in, really goes to film, but that spreads out to a more generic
basis. I mean, I think that, you can't get away from the facts;
that you can have an impression and philosophy and different
changing policies, and listening to the words. But in the case
of Kodak, you know, wherever they've gone in the world, they
have either 40 or 70 percent or 80 percent of any market. And
Japan, despite the protestations of the Japanese government,
they've got about 10 percent and cannot move off the dime--
absolutely cannot do this. And Fuji is able to bring business
and money into this country. They can buy up accounts, and they
can do everything they want. But we can't do it there. So,
clearly, there's an imbalance. I don't know how it's resolved.
And whether we go ahead on these two bills individually, Mr.
Chairman, or whether we combine the two, I don't know. But I
think we're going after the same issue, and I think that as
responsible citizens, the Japanese really ought to know how we
feel, not just say, I know you're having a difficult time. We
want to be your friend, which, of course, we do. But they ought
to know what's happening here. And it just isn't right. And so,
I think these bills put a sharp lens on that. And I think
they're great. And I applaud Mr. Bereuter and Mr. Levin for
their work.
Thank you.
Chairman Crane. Thank you.
Mr. Camp.
Mr. Camp. Thank you, Mr. Chairman. I would just ask
unanimous consent to enter into the record an op-ed piece from
the Asian Wallstreet Journal, and would like to call the
members' attention to the testimony of Peter Walters, of
Guardian Industries, whose testimony has been submitted for the
record. And I think he very succinctly explains the problems
that the U.S. glass manufacturers face with Japanese trade
barriers, and it explains the failings of the 1995 U.S.-Japan
flat glass agreement. I hope that we can continue to work
constructively with the U.S. Trade Representative to ensure
that the terms of this agreement are abided by all parties.
Thank you, Mr. Chairman.
[The information follows:]
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Mr. Levin. Mr. Camp. Mr. Camp.
Mr. Camp. Yes?
Mr. Levin. I'll take 30 seconds. I think it's so, if I
might say, appropriate that you raised it. Anybody who has any
question about the comparable openness of the U.S. and Japanese
distribution and regulatory systems needs only to look at flat
glass, among many other examples, including photography. Our
flat glass companies have been trying to get into the Japanese
market with as good a product if not better and a lower price
for years. And you--and the article you cite spells that out.
And anybody who wants to deny the difference--look, we've got
to help push Japan to open up, to deregulate. And if they
don't, it's going to harm them and harm the rest of Asia, as
Mr. Bereuter has said, and us eventually. It already has.
Mr. Bereuter. Mr. Chairman, if I could----
Mr. Camp. Well, I appreciate those. Yes, I'd be happy to
yield.
Mr. Bereuter. Mr. Chairman, if I could comment on your
remarks. You brought up a particular industry and a company
within it. And in my own testimony, you may have noticed there
is an illustration. On March 28 of 1996, USTR Deputy Ira
Shapiro came up here and testified that the U.S. flat glass
exports to Japan had increased 93 percent due to USTR's
efforts. What he failed to note is that the U.S. flat glass
sales are in a notoriously closed construction industry. So the
percentage that we have of the market has gone up a whopping
one-half percent. They had one-half percent, but a 96 percent
increase gives them a whole one percent of the Japanese market
today, despite the fact that, as Mr. Levin said, they are
extremely competitive and, in fact, should be a very dominant
player in the field.
Mr. Camp. Well, I----
Mr. Bereuter. So those statistics can really be misleading.
Mr. Camp. Yes, and I appreciate both of your comments on
this area. And it is one that needs more attention, and I thank
the chairman for the time.
Chairman Crane. Ms. Dunn?
Ms. Dunn. Mr. Chairman, I'd just like to ask unanimous
consent to enter my statement into the record.
Chairman Crane. Without exception, so ordered.
[The opening statement of Ms. Dunn follows:]
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And, Richie, do you have any questions of our panelists?
Well, I express appreciation to all of our panelists----
Mr. Graham. Mr. Chairman? Excuse me. Could I make one quick
comment just for the record, and I know you're very busy. The
problems that have been expressed in other areas of the economy
I'm sure are very real, and I'm sure they're problems with the
Japanese market. But I want to leave the committee with this
thought and this fact: in the regards to film, the dispute
between Kodak and Fuji, which resides in my district with a
billion dollar investment, the WTO heard the case. The WTO was
selected as the arbitrator by the USTR. And if it's
appropriate, I would like to have their decision entered into
the record. In the area of film, it's about competition. It's
about investment. It's about who's working the hardest, and
who's putting the most money into the marketplaces. It's not
about these other issues.
Thank you, Mr. Chairman.
[The material is being retained in the committee files.]
Chairman Crane. Does anyone else have questions for this
panel? I yield to Mr. Houghton.
Mr. Houghton. With all due deference to my colleague here,
the World Trade Organization is about words, and the
marketplace is about facts. And the facts are not particularly
very good.
Chairman Crane. Thank you, Mr. Corning. And with that, our
panel will be adjourned. And our next panel consists of Robert
D. Hormats, vice chairman of Goldman Sachs; Douglas Paal,
president and founder, Asia Pacific Policy Center; Clyde
Prestowitz, Jr., president, Economic Strategic Institute; Brink
Lindsey, director, Center for Trade Policy Studies, Cato
Institute; and Kenneth Pyle, professor of history and Asian
studies, University of Washington, and president of the
National Bureau of Asian Research in Seattle.
And, gentlemen, as I indicated to colleagues earlier, if
you could try and confine your oral testimony to roughly 5
minutes. All printed statements will be made a part of the
permanent record. And we'll proceed in the order in which I
introduced you.
Dr. Hormats, you will be first.
STATEMENT OF ROBERT D. HORMATS, VICE CHAIRMAN, GOLDMAN SACHS,
NEW YORK, NEW YORK
Mr. Hormats. Thank you, Mr. Chairman, Mr. Matsui, Mr.
Houghton, and other members. It's good to be back to testify
before this committee.
Let me be brief and make a few key points.
First, in my judgement, the world economy today faces
greater danger than at any time since the oil crisis of the
1970's. There's an enormous threat to the global economy. As I
say, the dangers are greater than at any time since the oil
crisis. Let me identify the three major reasons why.
First, recession, a weak yen, and serious banking problems
in Japan. We'll discuss those in greater detail a little bit
later.
Second, faltering growth, recession, or depression in much
of the rest of Asia. I've been to Asia very recently.
Confidence is collapsing. Currencies are under pressure. A
number of countries, Indonesia being the most difficult
situation, are facing depression. Growth expectations are being
steadily and dramatically downgraded. And for many countries,
unemployment is going to skyrocket over the next several
months.
A third element of the problem is sharply lower energyand
commodity prices. Now those, in a way, are of great tax benefit for the
United States. It's like a big tax cut for Americans. But it also is
very harmful for the countries that export oil and export raw
materials. Many large countries, Russia is a good example, have been
hit badly by the collapse in energy and raw material prices.
So this is a very dangerous period for the world economy.
And one has to feel pessimistic, particularly if you visit
various countries of Asia.
This is also a pivotal period for the world economy. Many
of these crisis countries need to come up with measures to halt
the deterioration. All over Asia, major reforms are being
implemented or planned. The question is: Will they be adequate
and will they be implemented quickly enough? Here's where
Japan's reforms must play a central role. Japan has a short
time, a very short time, in which to decide whether to take the
additional steps needed to boost growth, strengthen its banking
system, and thereby restore confidence in its markets and its
currency and become an important part of the solution to the
Asian problems, or to continue to put off tough decisions and
thereby suffer further erosion of its own economy and pose a
growing threat to the Asian region.
I'd also make the point that the Asian crisis has not
really had much of an effect on the U.S. Some would say it's
beneficial, because it has helped to lower interest rates and
lower prices, and thereby stave off an increase by the Fed. On
the other hand, the crisis has adversely affected a large
number of American companies that sell in Asia. And if the
American economy were to turn down at a point in time when the
Asian economies are still as weak as they currently are, that
would have a devastating effect on the global economy. An
interest rate increase by the Fed would also have a very
adverse global effect.
A few points on the impact of Japan on Asia. First, Asia
and Japan are very closely interrelated. For most countries,
Japan is the biggest market for their exports--for virtually
every other Asian country. They export 20 to 25 percent of
their goods to Japan. But more importantly, the collapse of the
yen makes Japanese goods more competitive vis a vis its
neighbors in bilateral trade. And, it makes Japanese exports
more competitive in third countries like the United States. One
example: Korea. Seventeen percent of Korean trade is directly
with Japan, but about 30 percent of Korea's exports compete
head to head with Japanese exports in third country markets.
China sells Japan 20 percent of its exports directly and
competes with Japanese exports in third markets with about 20
percent of its exports. So, that's why the decline in the value
of the yen has been so harmful in terms of its impact on these
other countries--and why their currencies and their markets go
down when the yen depreciates.
Let me turn to a couple of points about reform. Japan has
opened up in the financial services area to a very significant
degree. The foreign exchange law of April 1 and the Big Bang.
Both are pluses. There are concerns, however, that I do have
about Japan's new securities investor protection fund, which is
meant to help out the securities companies that have gotten
into trouble. I think that puts a disproportionately large
share of the costs on the large international firms that
operate in the Japanese market. There are ways of improving
that, which I can elaborate on.
Two areas of assistance that I'll close on.
One, it seems to me, that it is extremely important today
for the United States to use the expertise it has in dealing
with bank workouts. We developed a lot of expertise during the
savings and loan crisis. There are a lot of experienced
individuals--Bill Seidman is one. There are many others in the
regulatory area and the banking area that have a lot of
experience. The Japanese and, indeed, every economy in Asia
needs to restructure its banking system, restructure its bad
loans; and particularly to get real estate collateral now
frozen off the books of the banks. The U.S. can provide
enormous expertise. And it seems to me that is an extremely
important thing.
The second is provide some general advice on opening up
their markets, and particularly ways of deregulating their
economies so that they become more efficient. We've had a
longstanding engagement on the trade front with the Japanese in
this area. And it seems to me that a more open, efficient
economy of the kind we've been urging them to do still ought to
be very high on our agenda.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Chairman Crane. Thank you, Dr. Hormats.
Dr. Paal.
STATEMENT OF DOUGLAS H. PAAL, PRESIDENT AND FOUNDER, ASIA
PACIFIC POLICY CENTER
Mr. Paal. Thank you, Mr. Chairman. It's a pleasure to be
here.
Having had the case made by previous witnesses that the
situation is quite serious, I'd like to address the question of
what do you do under these circumstances with respect to Japan.
Japan is at an impasse. It's in a period of incomplete
political reform and incomplete economic and financial services
reform. And in this period of imperfection, they've been hit by
a financial crisis for which the economic system and the
political system appear inadequate to deal with the situation.
Under these circumstances, we face a question of what do we do
as a nation. Do we do nothing? After all, it's mostly Japan's
problem to solve. Or do we do something? If we decide as,
typically, Americans do, that we ought to do something, the
question is do we do it in a negative fashion? Do we scold or
levy sanctions to find some way to put pressure on Japan. Do we
combine that with a more positive approach that we adopted--
generally positive approach? I think for the moment a generally
positive approach toward the Japanese is the appropriate one.
The range of required actions to address the crisis inJapan
is broad and primarily requires self-help by the peoples of the
countries concerned in the region. But they are literally finding the
ground washing out from under them as Japan's crisis deepens. First, we
should avoid the temptation to assess blame or take delight in Japan's
problems, coming as they do after a period of 1980's Japanese
triumphalism. An American display of triumphalism now over our own
improved circumstances is equally out of place.
We need publicly to avoid the finger-pointing of recent
months, which has built a negative image in Japan among the
Japanese public about American officials. Rather, we should
treat the Japanese as the friends they truly are. We know our
friends in our times of need, and so will they in their time of
need.
Second, the U.S. administration needs to pull its Japan
policy together in a fashion worthy of the name. Lacking anyone
of personal authority or expertise on Japan in its senior
ranks, the administration's policy now is an adjunct of the
Treasury Department's concerns. Treasury has many fine people
trying to do the right thing, but they need the help of the
rest of governmental establishments. The National Security
Council, for example, lacks a senior director to manage overall
Asian affairs right now. It's essential that whoever is chosen
for this position have the capacity to pull together a coherent
Japan policy as part of overall policy toward an Asia in
crisis.
Third, the President and Congress should work together to
demonstrate to the Japanese people that we are on their side as
they struggle to overcome the situation. I think that by
creating a visible and high-ranking interagency team,
consisting of the appropriate representatives from around the
government, and naming a private bilateral advisory commission,
which takes Bob Hormats' recommendation a slight step farther
by making it more organized and official, and have them go to
the Japan and offer advice and assistance where possible, we
can redress some of the damage done by angry words and verbal
shoving in recent months.
Let me stress again that in the end, this is Japan's
problem to solve. But as many veteran observers of the Japanese
scene have noted, Tokyo is currently beset by a pattern of
exceptionally weak political leadership, disconnected
uncharacteristically from a discredited bureaucratic elite.
It's very hard to see the mechanisms whereby policy will be
formed and executed expeditiously. If our help can accelerate
this political process, we should give it.
Current technical advice to Japan can be supplemented by
systematic visits to a broad range of the leadership. A
bilateral commission, preferably led by former Federal Reserve
and Resolution Trust Company officials, can create
psychological pressure on the Japanese elites as they're
televised going from office to office, offering ways out of
their circumstances.
And what should they tell the Japanese? My fourth
recommendation is to urge that the Bank of Japan be pressed to
increase the money supply. For example, by buying up Japanese
government bonds, they can release yen into the economy,
reversing the deflationary slide that has helped erode consumer
confidence. I might note that just last night the central
bankers meeting in Tokyo agreed on a new yen facility for the
region which would do just that with foreign purchasers of the
Japanese government bonds.
Obviously, accelerated banking reform is necessary. Japan's
proposed ``bridge bank,'' meant to function like our RTC, is a
necessary ingredient and should be enabled to function as soon
as possible. That may be in danger in the current circumstances
in Japanese politics. Bad debts and failed banks need to be
confronted and liquidated. Depositors should be protected with
public funds as necessary.
Taxes need to be reduced. High marginal income taxes should
be reduced to G-7 levels, and capital gains taxes on real
estate transfers lowered to the same sorts of levels.
Financial services need deregulation. And the Japanese
markets need to be open. Japanese past assistance in the post-
war era to its Asian neighbors is being wiped out, and its
effect, as they linger in the patterns of the past, is being
felt at home. It's time for change. But this should be done--
addressed--I think at the moment in a positive sense.
Fifth, more concerted efforts are needed to deal with
specific crises in the region. There is scope, for example, for
a combined humanitarian and political relief initiative for
Indonesia as outlined some weeks ago by former ambassador Paul
Wolfowitz.
Members of the committee, in closing I want to stress that
the collapse of the Japanese economic bubble seems for the
moment to have been more of benefit than harm to short-term
U.S. interests. But we must not overlook the aspects of our own
situation that look more like a bubble everyday. Our own
financial institutions have been made more healthy after the
S&L crisis. American firms are increasingly productive and so
on. But American stock markets are dizzyingly high and real
estate values are rising. In a very real sense, the choice
before us today is to let the air out of our bubble slowly and
relatively harmlessly or wait for a swing in market forces to
scythe through our financial institutions. The sooner we can
help the Japanese stabilize their situation by facing up to the
extremely tough and painful choices they themselves face, the
sooner asset flows will become more stable for ourselves and
the friends in Asia we have worked so hard for generations to
help grow and prosper.
Thank you.
[The prepared statement follows:]
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Chairman Crane. Thank you, Dr. Paal.
Mr. Prestowitz.
STATEMENT OF CLYDE V. PRESTOWITZ, JR., PRESIDENT, ECONOMIC
STRATEGY INSTITUTE
Mr. Prestowitz. Thank you, Mr. Chairman. I'd like to
reiterate the warning issued by some of the early commentators.
At the moment, it seems to me that the situation in Asia is
something that we haven't seen in the world since about 1930.
Hundreds of millions of people are being pushed back into a
poverty they only recently escaped.
The bulk of Asia and perhaps much of the rest of the world
is teetering on the brink of disaster, and the key to how that
turns out--whether, in fact, we do have a disaster or whether
we manage to snatch victory from the jaws of defeat--is Japan.
It is virtually impossible to imagine that Asia can recover
without a revitalization of the Japanese economy. And it may
also be the case that the global trading system cannot stand
the impact of continued contraction and decline of the Japanese
economy.
Over the last 25 or 30 years, the United States has had an
almost unending series of trade frictions with Japan. And the
United States is not alone. The European Union and, indeed, the
countries of the rest of Asia have had similar kinds of
disputes with Japan. And these have often been discussed in
terms of market opening; in terms of possible sanctions or
threats. There have been endless negotiations, and a number of
agreements have been reached. Most of those agreements,
according to a recent survey by the American Chamber of
Commerce in Tokyo, are either not working at all or not working
fully. And we could spend a lot of time talking about each one
of them. Some of them have been raised already in testimony
this afternoon. But I think the fact is that they are all, in
fact, manifestations of a much bigger issue. And the much
bigger issue is now evident from the systemic problems of the
entire Japanese economy. The problem here is not a banking
problem, although there is a financial crisis. It's not just a
lack of stimulating in the Japanese economy, although there is
a lack of stimulation. It's a systemic crisis. And I think that
it has to be addressed in that manner, both by the Japanese and
by those outside of Japan, including the United States, who
care about this issue.
Surely, Japan needs to carry through the banking reforms
that have been described. Surely, Japan could use a tax cut. I
would prefer an abolition of the consumption tax, as opposed to
a cut in income taxes because most Japanese don't pay income
taxes. But you can quibble about that. The point is yes, they
need a tax cut; yes, they need to fix the banks. They need to
take whatever it is, $500 billion, a trillion dollars, and pay
off the bad loans. And yet, all of that will not fix the
problem in Japan.
It's a little bit like giving a blood transfusion to a
patient who needs a heart transplant. He needs the blood
transfusion to stay alive, but he needs the heart transplant to
really get well. And the heart transplant in this case is a
thorough restructuring and deregulation of the Japanese
economy. It's land reform. It's creating a real market for real
estate so that real estate actually trades at market values.
It's getting rid of the main bank system and lifetime
unemployment so that you create a real labor market. It's
decartelizing the structure of much of the distribution system
so that manufacturers cannot tie distributors to them. It's a
whole range of issues, and perhaps most importantly is
establishment of a true rule of law so that bureaucrats do not
have the ability to administer administrative guidance.
These are very far-reaching changes that imply very
substantial social and political adjustments. They will not be
easy. And it seems to me that the best thing the United States
can do is to meet quickly with whoever the new Japanese
leadership is to outline our own thoughts about the direction
Japan might profitably go and perhaps to convene a--several
meetings--an extraordinary meeting of APEC leaders to develop
an Asia recovery plan on which Japan's recovery would be the
central part; a meeting of the World Trade Organization to
address the question of how to insulate the trading system from
the impact of a continuing Japanese decline.
Thank you very much.
[The prepared statement follows:]
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Chairman Crane. Thank you, Mr. Prestowitz.
Mr. Lindsey. Dr. Lindsey, excuse me.
STATEMENT OF BRINK LINDSEY, DIRECTOR, CENTER FOR TRADE POLICY
STUDIES, CATO INSTITUTE
Mr. Lindsey. Mr. Chairman, it's Mr. Lindsey.
Chairman Crane. Oh, it is Mr. Lindsey.
Mr. Lindsey. Mr. Chairman, Members of the Trade
Subcommittee, I appreciate the opportunity to come before you
today and discuss the situation in Japan and what, if anything,
the United States can do about it.
The other witnesses in their written and oral testimony
have sketched a grim portrait of economic conditions in Japan.
I generally concur with that assessment. Today, I'd like to
spend a little bit of time, before talking about the proper
U.S. response, I'd like to spend a little bit of time putting
today's conditions in Japan in context. Because while Japan's
serious problems are certainly cause for concern, they also
ought to be some cause for embarrassment on the part of those
Japan experts who not so long ago thought that the Japanese
economy was a vastly superior economic model to our own.
As we discussed in a paper, to be published shortly by the
Cato Institute, the so-called revisionists, including Clyde
Prestowitz, sitting beside me, believed that they had
discovered in Japan a new and superior form of capitalism.
Well, the revisionists turned out to be wrong. In particular,
they completely misread the significance of Japan's distinctive
system for allocating capital. They thought it was a source of
Japan's strength. But, in fact, it turned out to be an
Achilles' heel.
The Japanese financial system systematically insulated
decisions about allocating capital from market signals. With a
heavy reliance on bank lending, an absence of transparency and
full financial disclosure, and a suppression of equity markets
through stable cross-share holding, the Japanese system
allocated funds according to established relationships and
government targeting of strategic industries rather than in
pursuit of the highest market return. Revisionists praised this
system for its long-term focus. In fact, the absence of market
discipline and feedback produced the wild speculation of the
bubble economy during the 1980's and the resulting bad debt
mess of the 1990's. It has wasted the hard-earned savings of
the Japanese people on a truly mind boggling scale.
To regain economic health, Japan must address the bad debt
crisis. Insolvent institutions must be allowed to fail. Weak
institutions must be merged into stronger ones. Good assets
must be separated from bad. Bad assets must be foreclosed on
and written off. Without resolution of this central problem,
the Japanese financial system will remain paralyzed, and many
other beneficial reforms are, therefore, unlikely to do much
good. After all, it's hard to have capitalism without capital.
Well, is Japan going to do the right thing? On the positive
side, the recently announced total plan does at least create a
structure for dealing with the bad debt crisis that could work.
But implementation is everything, and the political obstacles
that stand in the way of effective follow-through are
formidable. Those political obstacles may have been eased or
may have worsened by the recent election results. It's too
early to know. At this point, a healthy skepticism about
expeditious reforms remains in order.
Whatever happens, though, we must face the fact that the
United States can do very little to affect this situation. This
is not a trade dispute. I disagree with the suggestion that
this matter be referred to the WTO. The WTO has neither the
mandate nor the competence to address domestic economic policy
issues such as those that are currently afflicting Japan. This
is a matter of purely domestic economic policy, albeit with
international ramifications. And it will be handled or not by
the Japanese in accordance with domestic political realities.
It's argued, of course, and truly that Japan's problems do
affect the rest of the world. Japan's economic weakness is
worsening the larger crisis in east Asia. And a full-scale
Japanese meltdown could drag the rest of the world into
recession.
Well, while it's true that we live in an interdependent
world, this is also a world of sovereign nations. As much as it
pains us, we do not control the domestic economic policies of
other countries. Western Europe, for example, has suffered for
years now from chronic double-digit unemployment. This problem
saps the vitality of that continent and may, over the long
term, breed serious social pathologies.
At the root of the problem are bad policies--rigid labor
market regulations and dependency-generating social insurance
programs. Although we as Americans and other people around the
world would surely benefit from a more dynamic Europe, we
realize that we have little standing or leverage to affect
domestic policies there. We need to come to the same kind of
humble realization with respect to Japan.
If Japan does make necessary reforms, the process is going
to be driven not by foreign political pressure, but rather by
economic pressure. Japan announced its ``Big-Bang'' reforms not
because of U.S. haggling, but because of the perception that
Tokyo was becoming a financial backwater by comparison to the
more competitive and dynamic markets of London and Tokyo.
Likewise, the pressure of yen leaving the country in search
of a decent return will do more to promote financial
restructuring than any amount of U.S. table pounding. Over the
long term, the most effective thing that we can do to encourage
market-oriented reforms in Japan is to set a good example. If
the United States keeps its own house in order, our superior
economic performance will act as a spur to the Japanese and
other countries around the world to follow our lead. Apart from
a good example, we can provide expertise and advice, but we
ought to have appropriately humble expectations regarding what
they can accomplish. Because, in the end, we cannot force the
Japanese to do what's good for them.
Thank you very much for inviting me here today.
[The prepared statement follows:]
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Chairman Crane. Thank you, Mr. Lindsey.
Dr. Pyle.
STATEMENT OF KENNETH B. PYLE, PROFESSOR, HISTORY AND ASIAN
STUDIES, UNIVERSITY OF WASHINGTON, AND PRESIDENT, NATIONAL
BUREAU OF ASIAN RESEARCH, SEATTLE, WASHINGTON
Mr. Pyle. Thank you, Mr. Chairman. As I understand, my
assignment in this hearing it is to discuss the political
background of our relations with Japan at this time. I will not
attempt to discuss specific trade issues per se but rather the
broader context of Japan-U.S. relations within our present--
within which our present trade negotiations are set. As a
result of Sunday's election, the resignation of the Prime
Minister, present gaping vacuum of political leadership have
further exacerbated what I believe had already become the
greatest political economic crisis Japan has faced since World
War II.
It is a systemic crisis. The problem is not only the
prolonged economic slump, the unresolved banking crisis, and
the uncertain progress of deregulation, but rather in a long
succession of crises in this decade, since the end of the Cold
War, Japan has shown a bewildering lack of purpose and
direction, a pattern of paralysis and immobilism in its policy
making, and a dismaying lack of leadership.
In addition to the failures, to deal with the economic and
financial crisis, there are many other examples of immobilism.
At the beginning of the decade in the Gulf War, there was the
utter failure of Japan to muster coherent support for the
international coalition. And then, during our standoff with
North Korea over its nuclear program in 1994, Japan was unable
to decide whether it could provide backup assistance for U.S.
forces should there be a conflict right next door on the
peninsula.
Japan has reluctantly agreed to our insistence on a
revision of the Defense Cooperation Guidelines, but there is a
mountain of legislation that will be required to make these
guidelines operational. And the whole issue of whether Japan is
willing to engage in collective self-defense remains
unresolved.
In the Kobe earthquake and the nerve gas attack in the
Tokyo subways in 1995, and then in the 1996 Peruvian hostage
crisis at the Japan ambassador's residence, Japan demonstrated
an appalling lack of effective crisis management. Japanese
leadership has also failed to reach consensus about
responsibility for its militarist past, at great cost to
Japan's international standing.
In short, there is a broad pattern of systemic stalemate, a
paralysis of institutions and policymaking that cast doubt on
the likelihood of Japan's ability to contribute to solution of
the Asian financial crisis, or to achieve any time soon the
long promised opening of Japanese markets to trade and
investment.
The Japanese system, which worked so well during the high-
growth period and during the unique circumstances of the Cold
War, and which only a decade ago was widely expected to offer
world leadership, is floundering. The Japanese ship of state
today is adrift, and there's presently no one at the helm.
Five years ago, when the LDP was overthrown after 38 years
of one-party rule, many observers in Japan and abroad thought
the upheaval would lead to sweeping reforms and bring to power
new faces, reformers with new ideas of openness and change and
a new sense of national purpose.
Since then, however, politics have been in a rudderless
state. Parties have experienced a dizzying display of
realignments. In less than five years, we've had four changes
of government, six prime ministers, and the sharing of power by
11 political parties. The opposition parties proved even less
able than the LDP to provide decisive leadership.
Today, the LDP again has a majority in the lower house, but
has just lost its hope of controlling the upper house. The
opposition parties are fragmented, the reformers in disarray,
and the electorate so alienated that fully half of the voters
support no party. Moreover, the LDP itself is internally
divided over fundamental issues of reform and economic policy.
The bureaucracy, which gave Japan strong purposeful
leadership through the post-war decades, is today demoralized
and disoriented by scandals, turf struggles, and a lack of
clear direction. At the same time, it is holding fast to its
power and influence.
How are we to account for the paralysis of Japan's
political leadership since the end of the Cold War? There are,
of course, immediate causes, such as fundamental disagreement
over whether tax cuts and stimulative spending would worsen
already substantial government deficits and undermine the
fiscal discipline required to deal with Japan's rapidly aging
population. But if we look for deeper causes of this
immobilism, they are to be found in the legacy of the policies
and institutions that remain from the catch up period and the
unique role that Japan played in the international system
during the Cold War period. The century-long campaign to catch
up with western industrial economies left many deeply
entrenched interests and institutions, especially the iron
triangles among bureaucracy, industry, and ruling party, which
are resistant to reforms.
Moreover, the post war exclusive concentration on economic
growth left many political strategic institutions undeveloped,
including the weak prime ministership.
Another fundamental reason is the consensual decision
making process of Japan. It is ponderous in times of
uncertainty. And in Japan's post Cold War external environment,
there are huge uncertainties, including the globalization of
capital markets, the rise of China, the prospect of Korean
unification, and so on.
Historically, in such times of uncertainty in its external
environment, Japan has typically held back, watched and waited
for trends to clarify. Japan is not disposed to international
leadership. It is typically adaptive to its environment,
opportunistic and pragmatic, moved by national self interests.
It has a powerful conservative tradition in its society and
politics. Most Japanese policy makers are deeply resistant to
American-style, market-led reforms, which they are believe are
too unpredictable in their social consequences. Many policy
makers, such as Mr. Sakakibara, the key MOF official in
international trade matters, still have faith in a Japanese-
style capitalism.
What all this adds up to in my judgement is a continuing
and prolonged period of drift and instability in Japanese
politics, making Japan a difficult and uncertain partner for
the U.S. in world political economic affairs. Despite the fact
that many of its fundamentals are good, there is little
prospect that Japan will muster the leadership to quickly
stimulate its economy, boldly reform its financial
institutions, and thereby strengthening the yen and help lead
Asia out of regional contagion.
On the contrary, Japan appears to be cutting back in
critical ways. Accordingly, this systemic fatigue and gridlock
in the politics of our principal ally in the region enhances
the imperative for American leadership. We will have no choice
but to continue prodding and pressuring Japan, both bilaterally
and, when possible, multilaterally to take steps its system is
resisting. There is very deep resentment of American hectoring,
and we need to be wise in how we do it.
Fortunately, as a result of America's restored economic and
political influence, Japan has a renewed appreciation of the
indispensability of its alliance with us. And we possess very
considerable leverage.
Thank you.
[The prepared statement follows:]
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Chairman Crane. Thank you, Dr. Pyle.
Dr. Hormats, the resignation of Prime Minister Hashimoto
has created uncertainty about the future direction of economic
policy in Japan, and it's clearly too soon to tell what will
happen yet. But do you have any sense of the prospects for
continuing reform and deregulation?
Mr. Hormats. I think, Mr. Chairman, that we know a few
things. I'm always hesitant to make judgements about other
countries' politics. But there are a couple things we knew.
One is that a large--far larger number of people voted in
this election that had been anticipated. The general view was
that maybe 35 percent or 40 percent of the electorate would
vote. Fifty-nine percent actually voted.
Chairman Crane. Ten percent more than we.
Mr. Hormats. That's right.
And in the urban areas, the LDP won virtually no seats--
none, if I'm correct. Or a very small number. So there was
clearly two things happening: one, a lot of people went out of
their way to express frustration and disappointment and
annoyance with the LDP. And second, in the urban areas, as
opposed to the rural areas, where there is strong LDP
constituencies in the urban areas, the LDP was a disaster. So
this must convey some signal to the LDP aboutfrustration.
What it portends about future reforms is harder to
determine, however. As the testimony that we've heard today, I
think, would indicate one should not make the judgment that the
frustration with the LDP means that the electorate supports the
kind of bold reforms that most here would advocate, which is to
say particularly a very dramatic adjustment--reform of the
banking and the real estate sectors--or these systemic kinds of
reforms that have been discussed here. On the contrary, there
are probably a lot of Japanese who regard those as so wrenching
and so disruptive of labor markets that they would not support
them. So I don't think we can necessarily make the judgment
that this election result means that they're going to proceed
quickly down the road toward bold stimulus, reform of the
banking system, or reform of the property markets. The stock
market, I think, began to believe that the day afterwards--
certainly, the Japanese stock market did. Ours did as well. But
I'm a lot more cautious and circumspect than that.
Chairman Crane. Mr. Prestowitz, in your book, Trading
Places, you advanced some arguments about the Japanese economic
success in the 1980's that I didn't agree with you on, but I
wonder if you still hold the same view that you expressed in
Trading Places.
Mr. Prestowitz. Thank you.
Yes, basically, I do. And I think that--let me pose a
question back to you. Mr. Lindsey here made the comment that I,
as a revisionist, was wrong about Japan. And both he and you
have proceeded on the assumption that I was praising the
Japanese system as a superior system. I'm kind of baffled by
this because I've been attacked in the press. I've been
attacked by Mr. Lindsey's institute as a Japan basher. I mean,
I'm one of the well-known Japan bashers. I can't figure out how
I can be a Japan basher on the one hand, and an advocate of the
Japanese system on the other hand. It's not logical.
Chairman Crane. Oh, I didn't accuse you of it.
Mr. Prestowitz. So let me try to explain this. I lived in
Japan in the 1950's and the 1970's and worked in the government
and negotiated with Japan in the 1980's. In those years, the
Japanese system was doing very well and was displacing U.S.
industry in a number of areas. And I described how the Japanese
system worked and how it was doing that. Now, a very
interesting point is that I said at that time that Japan's was
a mercantilistic, crony capitalist system. And when I said
that, I was attacked by Mr. Niskanen, who's the head of Mr.
Lindsey's institute, and by other leading economists who said,
``no, Japan is just like us.'' It's a good neoclassical
economy. Well, now it turns out that, in fact, it was a
mercantilistic, crony capitalist system, and we're now seeing
that not only did it imply some damage to the U.S. in the
1980's, but it now, the system now threatens not only the U.S.
but itself and the rest of Asia.
Chairman Crane. Are you arguing that nothing that you said
in Trading Places was a recommendation that we might emulate
Japan in some areas?
Mr. Prestowitz. No, of course, not. I mean, look. I wasn't
100 percent right. Even I make mistakes. And, you know, there
were some things in Trading Places, if I had to write it over
again, I'd write it differently. By the same token, the fact
that Japan now has problems doesn't mean there's nothing we can
learn from Japan. Japan's not all wrong. It has just got some
significant structural issues.
Chairman Crane. Okay, we've got to give Mr. Lindsey equal
time.
Mr. Lindsey. Well, it's good to see that Mr. Prestowitz
remains a revisionist. Now he's revising what he used to say.
The debate back in the 1980's was in the context of
Japanese economic success, and the question was what's causing
that success. The revisionists thought it was due to the hand
in glove relationship between industry and government,
occasional targeting of specific industries for support, and
for the closed financial system that allocated capital on what
was thought to be a patient and long-term view.
Those of us on the other side, who were then called naive,
free-market ideologues, said, ``no, Japan's economic success is
due primarily to market factors''--to low taxes and low
spending for many decades after the war--low government
spending and also to the entrepreneurial ingenuity of Japanese
corporations which devised new and superior manufacturing
techniques, which did, indeed, in specific industries, though
not across the board, knock American companies back on their
heels for a number of years, until, American companies learned
to mimic and adopt those practices on their own.
So the issue was what caused Japan's success. The free
market folks never denied that Japan had interventionist
elements. We simply said that Japan was succeeding in spite of
those elements and now it is sadly apparent that those
interventionist aspects of the Japanese system, which won high
praise from the revisionists, have now been Japan's undoing.
Chairman Crane. Thank you.
And Dr. Paal, you mentioned that the replacement of
Hashimoto is not necessarily bad. How long do you think it will
be before the newly chosen leaders can take serious steps to
correct the problems in the Japanese economy and banking
sector?
Mr. Paal. Well, as I discussed earlier, Mr. Chairman,
there's a difference between theory and reality here. In
theory, they could begin very soon. They have a due date of
getting a new cabinet together by the 26th of July and getting
the bridge bank legislation through in a very hurried-up
session at that time, and then addressing tax reductions later
in the year.
I think the chances of those things happening in lock step
are rather small. As an observer of the Japanese scene for
quite a long time, I think that the array of Japanese leaders
ready to take the bit in the teeth and go with it is so narrow
and waiting so long to be senior enough to take the top
leadership posts that I would think we'd have to keep our
expectations low. It's for that reason that I recommend we
adopt as a nation a more activist policy.
Japan has in its history had four occasions when its
economy has gotten into real trouble and it has needed help.
The first was the 1880's, and they had an internal strong man
who led the charge to fix it, Count Matsugata. It happened
again in the 1930's, and the Japanese turned their policy over
to the military. The military marched on until they lost the
war. It happened again in the 1940's when Horace Dodge from the
United States was brought in to straighten out Japanese
economics. And today, we're witnessing the fourth time.
Given the peculiar circumstances of this versus the
previous occasions, I think this is a time when we ought to
take a proactive, constructive, all-embracing approach. It may
fail. But the alternative of doing nothing is likely to lead to
nothing.
Chairman Crane. And one question that I'd like to put out
to all of you folks, and it's a--from a written statement that
we received from Richard Fisher, who's Deputy USTR. And it was
at the recent APEC ministerial meeting in Malaysia. He stated
that Japan, this is a quote, ``Japan pursued a course of action
that could undermine the entire APEC initiative and cast doubt
not only on Asia's recovery, but also on APEC's
effectiveness.''
And I'd like to throw that out to all of you. Do you
basically agree with that assessment? I mean, is that your
reading?
Fire when ready, Gridley.
Mr. Prestowitz. I'm not sure we understand. Would you
repeat that?
Chairman Crane. Yes, at the APEC ministerial meeting in
Malaysia, he said, ``Japan pursued a course of action that
could undermine the entire APEC initiative and cast doubt not
only on Asia's recovery, but also on APEC's effectiveness.''
Mr. Paal. Mr. Chairman, I know something about what I think
is being referred to by Mr. Fisher's statement, and that is
that at the APEC ministerial, the Japanese raised reservations
about the voluntary sectoral trade liberalization measures that
had been promised by the APEC leaders at their previous
meeting. Japan, at the previous meeting, had introduced
reservations in the areas of agriculture and fisheries, because
that's always been a difficult and sensitive area in their
ministry. And they raised them again this time in a context
when other countries were coming forward with liberalizations
that they had promised in the November meeting last year.
In some ways, it should not have been a surprise to the
international community that they did this, because it's always
been a sensitive issue. It was the wrong note to sound at the
wrong time, in an era when everyone is being stricken by
closing markets and other kinds of economic difficulties. And
that I think goes back to the point many of us were making
earlier, which is that Japan today is not in a--its leadership
appears not to be a position to be able to override this narrow
sectoral interest, such as agriculture and fisheries posed
inside Japan.
Chairman Crane. Anyone else have a comment on that?
Mr. Lindsey. Just assuming that that was, indeed, what was
at issue, and I wasn't able to pick that up from that one
comment--however unconstructive Japan has been with respect to
voluntary sectoral liberalization within the APEC process, I
think those kinds of sectoral issues must be put in context,
and they pale in importance next to the huge central issues
that face Asia today: Japan dealing with its bad debt crisis;
and the rest of Asia dealing with their broken and
dysfunctional financial systems. So I think putting too much
emphasis and too much heat on Japan with respect to narrow
sectoral issues is simply bad prioritization. We ought to keep
our eyes on the ball, and the ball is getting the financial
system back into operation.
Chairman Crane. All right. Dr. Pyle, why does Japan
continue to play such a reticent stand-on-the-sidelines role in
the WTO and in APEC?
Mr. Pyle. Well, Japan, as I said, is not disposed by its
nature to be an international leader. Some people, for example,
have said that Japan is leading from behind in organizations
like APEC. Doug Paal is absolutely right in what he described
here as Japan's failure to play a leadership role on this very
important issue. It's still really governed by narrow private
interests, and those private interests too often collide with
the kind of free-trade leadership that is required in WTO and
other such international efforts.
Chairman Crane. Thank you. Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman.
Clyde, I might just add with respect to your book and some
of the writings I read over the 1980's, I don't--I frankly
think you were right. I think what's happening in Japan right
now bears out some of the things you were saying about the
Japanese economy. You were mainly talking about how to open up
the Japanese market because there was a certain amount of
controls through the regulatory process and obviously the
banking system. And I think, you know, from what happened
recently, over the last few years, it bears out your concept of
what the Japanese economy was actually like.
I might just want to pose maybe to all of you, particularly
Mr. Hormats, each one of you said something that was very
important and very interesting. So I'm going to take parts of
it. Dr. Pyle talked about the fact that the Japanese government
drives the system as the bureaucracy and obviously it requires
a consensus. And it's a very slow process. At the same time, I
believe the other four of you, talked about the fact that the
Japanese need to do something on both the financial
institutions, which are in deep trouble at this time. And the
fix that they made a few months ago is not sufficient. They
need to stimulate its economy. And until there's a permanent
tax cut or some direction, probably nothing substantive will,
in fact, happen. And obviously, the whole issue of
deregulation.
And then, there's also an attitudinal problem in terms of
permanent employment and things of that nature. The problem I
see is that each one of these three or four requires
dislocation and a great deal of turmoil in the Japanese
economy, which they're really unwilling to face up to. And
that's why, perhaps, the Prime Minister had to resign, and
that's why there's some uncertainty and instability going on
now--both the political system and in the economy.
Given those elements and given the fact that you're not
going to see them solved probably anytime soon, and then you
all talked about, and I think it was almost unanimous, that
we're seeing something that we hadn't seen since perhaps the
1930's, at least prior to World War II, prior to the war, and
during the time of the Depression. What are the prospects? I
mean, what can we do? Amo, I wish Amo Houghton was here because
when he spoke with Mr. Fisher, he suggested that we need to
talk about macroeconomic policy and members of Congress will
have to show a little discipline and not speak so much about
our specific commodities and specific issues, which I'm sure
the next panel is going to do, just as we would probably expect
them to do. That's not what we really need to do right now.
But that being the case, what should the United States do,
given the limited amount of control? We can hector, as I
believe Mr. Rubin is trying to do in a way that is very
moderate and at the same time a lot of stability in our market.
What can we do? What are the steps that we cantake? Obviously,
we have to do something with the IMF--probably fully fund that. But
beyond that, what can the U.S., in fact, do? Mr. Hormats, and then
maybe each of you.
Mr. Hormats. Okay, let me just try a couple of thoughts.
One, I think funding IMF. I very much agree. I think the
numbers are getting dangerously low. The Fund has to put money
into Russia, and who knows what's coming down the road. And
this is a something that really needs to be done, at least to
help bolster confidence--not that the Fund is perfect, but that
we don't have any substitute for it at this point.
Second, I would make a point about the World Trade
Organization. One of the very positive elements in this
otherwise terrible carnage in east Asia today is that the
countries have avoided wholesale retreat to protectionism, this
is something that might not have been possible perhaps 10, 15
years ago. Then you might have had a lot of countries reverting
toward protectionist measures. The fact that there are World
Trade Organization rules and penalties toward protectionism
have helped to provide a counterweight to those in these
countries who might have advocated that course. Also the IMF
and the Treasury and the USTR have moved in that direction as
well. So, keeping the World Trading Organization rules before
these countries and avoiding protectionism abroad is important.
The same is true here: avoiding a lot of restrictions against
these countries. We're going to have a big trade imbalance with
the rest of Asia for quite some time to come. And if we succumb
to measures to protect our economy, as strong as it is, then
these weaker economies are going to use that as a pretext. So
that's a second thing.
Third, the point I made in my written testimony, when I
mentioned earlier--I think it's very critical now that we--urge
Japan to move at a rapid rate to deregulate the real estate
sector and improve the banks. I think they've got to determine
how to do that, given their own political circumstances. I
think they should do it more rapidly, but we don't know how
quickly they feel they can tolerate it in terms of their own
domestic politics.
I think we can provide a lot of expertise to the Japanese
regulators, to the Japanese banking system, to the people who
are in charge of these bridge loans. There are a whole new
series of institutions that have been set up or are going to be
set up to address the bad bank problem, the bad loan problem,
and the frozen real estate collateral problem. We have a great
many people here--former RTC people, bank people, Fed people,
regulatory experts--who can help them do that. That can
expedite the process. It's not only true in Japan. It's true
all over Asia. And it's not money. Japan doesn't need our
money--but our expertise, our experience in this area, I think,
could be of vital significance. And that's one of the things I
would very much recommend.
Mr. Matsui. Thanks very much.
Dr. Paal?
Mr. Paal. Mr. Matsui, the drift in Japan, the lack of focus
is just hard to believe for someone who's a frequent visitor
there. And that drift has become more conspicuous in recent
months. In many ways, Japan is where Great Britain was at the
turn of the 20th century. They have a choice. They can have
their tea ceremonies and funny hats and live off their savings
for the next 80 years, and hope to make it as a nation. Or they
can really undertake reforms. I think the best thing we can do
as an ally, friend, and sharing the economic universe with them
is to let them make that as informed a choice as possible. We
need to have this kind of conversation in Japan, where it's not
frequently held as a conversation. And I think the teams of
experts--and just getting in their face with this issue is the
responsible thing to do at this time.
Mr. Matsui. Thank you.
Mr. Prestowitz. Could I just add two things? I second what
Bob Hormats proposed, and I also agree with Doug Paal that one
of the striking aspects of this is that in Japan the sense of
urgency about this problem is much less than it is outside of
Japan. I, therefore, think it's very important for the
administration to convey in every way possible, and I think
this means the President ought to go as soon as the new prime
minister is named, go meet him. And say, ``hey, you know,
things are really getting out of hand here.'' I also think the
U.S. can orchestrate APEC and the G-7 and the WTO and the
OECD--all of the international organizations--all to convey a
sense of urgency to Japan so that in a way, you kind of push
the Japanese leadership to rise to the occasion.
The second thing I think is that I don't really think the
Japanese know what to do. And here Bob's idea of sending
experts is good. And I would just extend that and say I think
it's important for the U.S., in conjunction with the Europeans
and the other international organizations, to put together a
pretty explicit road map. We gave a road map to the Chinese
telling them what they had to do to get into the WTO. You know,
a road map here that everybody, not just us, but everybody
gives to the Japanese and says, ``Hey, you know, guys, this is
how to do it.'' I think would be very useful.
Mr. Lindsey. I think that technical advice could be useful,
and we certainly have expertise in some of the areas that are
of greatest challenge to Japan right now. But I think really
the most important thing that the United States can do over the
coming months and years is to avoid taking actions that will
make matters worse. In particular, we need to avoid bilateral
confrontations and showdowns, which could end up actually being
very perversely self-defeating, triggering a market panic that
ends up sending Japan over the edge. So we definitely want to
stay away from that.
Furthermore, though, on the more positive kind of
engagement, I think there is a chance that that also can end up
being self-defeating. I don't see any way that Japan is going
to change until it absolutely has to. And when market forces
give them no alternatives, governments make sweeping reforms
that upset vested interests and important constituencies when
there's no choice at all. And these days very surly and
impatient markets are starting to box in Japanese policymakers.
If we go in and launch some kind of bilateral initiative to
sort out Japan and give it a road map for the future, it's
going to be terribly tempting to declare success, even if the
result is really just temporizing and papering over problems,
which could end up delaying ultimate accountability of Japanese
policymakers for the problems in that country. We need to avoid
taking steps that take market pressure off the Japanese policy
makers--in particular the reforms this April that all but
eliminate foreign exchange restrictions and allow Japanese to
move their money overseas or to move it into foreign-
managedhands. I think will be a marvelously positive lever of pressure
because as that money starts escaping from the country, it's going to
put downward pressure on the yen and put political pressure on the
Japanese government to do something to make Japan be an attractive
place to invest money.
Mr. Matsui. Dr. Pyle, would you.
Mr. Pyle. Congressman, I've just come back from Japan. I've
been going there regularly for 35 or more years. I came back
with several impressions. One was Japan today is feeling very
isolated and self-absorbed, resentful of foreign hectoring, not
really feeling deeply a sense of crisis yet. The kind of sense
we have. At the same time, there's also something that struck
me really strongly on this visit is a renewed respect for the
United States and for the value of the alliance, which in the
1980's was diminished and even in the early 1990's there was a
lot of brave talk about Japan joining with Asia. That's pretty
much gone now. Japan really has a great deal of renewed respect
for this country's leadership. And I think, therefore, that we
have considerable leverage. And that we should use it in the
way that the other panelists have suggested.
I was there when President Clinton was in China, and there
was a great deal of sensitivity in Japan to the kind of things
that the President and Jiang Zemin were saying and intimating
about China's great stature in resisting devaluation. And the
implication was that Japan was not showing this kind of
stature. So I would agree with Clyde that we have an obligation
to the leadership, and we can orchestrate through multilateral
channels considerable pressure on Japan to face up to the
responsibilities that it has.
Mr. Matsui. I'd like to thank all five of you. I appreciate
it. Thank you.
Mr. Herger [presiding]. Anyone else wish to inquire?
Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman.
I was interested in Mr. Lindsey's comments, having been on
the Banking Committee here ten years ago in the middle of the
S&L crisis. I'm struck by the unreason that often prevails in
this institution. When we spoke to the issue at that time of
the S&L crisis, the S&L bailout was much larger than it turned
out to be with a $500 billion price tag. There are even some
bestsellers that were written about the banking situation that
was going to occur after the presidential election. I think the
suggestion was that all the big banks were going to go belly-up
shortly after the election. Recall how popular that notion was?
What was equally popular at the time was the time was the
prevailing suggestion that if we could just restructure our
economy along the lines of what the Japanese had done so
skillfully. In fact, they lectured us a number of times, if you
recall, about the things that we could do. They lectured us
hard about the size of the Federal deficit, and I'd be
interested if you would like to go on a bit more with your
comments. I thought they were right on target.
Mr. Lindsey. Sure, first on the S&L crisis in the United
States. There are many parallels between that situation in the
United States and the situation that currently afflicts Japan,
although the Japanese problems do seem to be both substantially
larger in magnitude and in national scope than those of the S&L
crisis. But nonetheless, at the time, there was a lot of talk
about not just the S&L crisis, but a general crisis in the
banking industry and that we could face a kind of systemic
financial meltdown. That makes me somewhat hopeful that some of
the more apocalyptic talk that we're back at the verge of the
1930's that we're hearing today with respect to the east Asian
crisis may be similarly overdrawn; that it may be that some
particular prudent reforms in the financial sector may be
enough to stave off what could be a real catastrophe.
As to the talk back in the late 1980's and early 1990's
that our financial system ought to mimic the Japanese, there
was very widespread--I don't mean to just single out Clyde
Prestowitz--there was very widespread feeling at the time that
the United States' main problem, its main competitiveness
problem was a short-term focus; that we had impatient equity
markets and we had to report to stockholders every quarter; and
that, boy, wouldn't things be better if we had a system like
the Japanese where all the money goes through banks and
everybody knows everybody, and no one is pressing anyone to
make short-term returns, and therefore, everyone can
concentrate on strategic objectives and building market share
and making investments in new technology and so forth.
Well, as it turned out, our short-termism really now looks
like accountability. And the long-term focus that we were
praising or that some were praising in the Japanese system
turned out to be a lack of accountability; that saying you have
a long-term strategic vision is very convenient when you're not
earning return. You can say, ``Well, just wait until the long-
term. Everything is going to work out okay.'' Well, the long-
term has arrived now in Japan, and it's very ugly.
So, I think there's a lesson for many people that the
market-oriented system of the United States in which banks are
not the central intermediary for allocating capital, but rather
we rely much more heavily on arms-length equity markets, I
think that model--the western model--is going to be ultimately
adopted by east Asia rather than the reverse which was
predicted five, ten years ago.
Mr. Neal. Anybody else wish to comment?
Mr. Hormats. Let me just add one point because I think that
point about equity is an interesting issue. One of the real
problems all over Asia, except for one economy which I'll
mention at the end it's gotten itself into trouble by relying
too little on equity and too much on debt. Japan that's
certainly true. It's really not an equity culture. It's not a
risk-taking culture. The average Japanese puts a huge amount of
their savings into super-secure assets like bank deposits,
which are still secure, and short-term money market funds, but
not equities. Now the opening of opportunities to invest
through mutual funds and foreign companies is making them a
little bit more equity-oriented. But all over Asia, enormous
amount of leveraging took place--huge amounts of debts and
that's why this problem is so difficult. It's true in Japan.
It's true in Korea. It's true in most parts of Asia.
It's very interesting to contrast Taiwan with Korea in the
sense that Taiwan and Korea have the same kinds of industries
generally. But Taiwan's industries were financed largely
through equity--much less debt, much more equity than most
other parts of that region. And I think that to the extent you
can improve the efficiency of equity markets in the area, you
can help to avoid these big buildups of debt, which were big
problems. And equity, when you make an equityinvestment, as
long as it's based on the kind of rules we understand, there's a lot of
accountability based on it. You have to do quarterly reports and things
like that. So, management is much more accountable in that kind of
environment. So it brings with it not only less leverage, but also more
accountability.
Mr. Herger. Thanks. Would anyone else? Yes, Mr. Jefferson.
Mr. Jefferson. I'm afraid there have been so many responses
I can't recall who said what with respect to my question, but
I'll ask it anyhow and maybe you can remember.
I think two panelists said that we should avoid making
matters worse. I know Mr. Lindsey said it over here on this
side. And someone said that we should avoid making decisions
that would limit access to our market for Japanese products and
so on. Is that a recipe for our responding to the Japanese with
regard to their importing to us as usual? Won't this result in
higher deficits? And, if it does, when do you say that's a
problem? How high is--I mean, how high should they go? Do we
talk about deficits any more? Is it too ruinous?
I know these are separate questions, but how we handle the
trade issues and how we handle the issue of soundness of the
Japanese economy, but they are, in the one sense, separate,
another sense, when you get back to your issue of making
matters worse, they're connected. So if you don't want to make
matters worse, what do we do about the deficit issue? Do we
talk about it? How do we handle that?
Mr. Lindsey. Well, I'll take the first crack at this. You
raise a number of different questions. First on the trade
deficit, I don't think bilateral trade deficits are
economically meaningful. The global trade deficit that we run
with the rest of the world is also not a function of trade
policy differences around the world, but rather a function of
macroeconomics, the difference between domestic savings and
domestic investment. My colleague Dan Grizwald wrote a very
good paper recently on the trade deficit and going through
those kinds of issues. I might recommend that.
Right now, the combination of our strong economic
performance and the weak economic performance in Japan is
widening our trade deficit with Japan. That's reflected mostly
by a decrease in Japanese imports from the U.S. rather than an
increase in Japanese exports to the United States. The Japanese
economy is stagnant, therefore imports are going down.
I don't think that fact, in and of itself, should be a bone
of contention. It simply reflects the fact that the Japanese
economy is weak. Everyone recognizes that and we've been
talking about the kinds of things Japan ought to do to fix that
situation.
As far as trade disputes are concerned, certainly Japan and
other countries and the United States have policies that
discriminate against goods and services of foreign origin. With
respect to the Japanese policies that do so, I think we have
the option of taking those kinds of disputes to the World Trade
Organization. We did that, for example, with respect to a
discriminatory tax system Japan had on spirits, alcoholic
spirits. We took it to the WTO; we won. So if we have discrete
commercial disputes regarding Japanese policies that
discriminate against foreign goods and services, I think we
have recourse and we have options. But in general, the trade
deficit, I don't think, should be the focus of our concern.
Mr. Jefferson. What do you mean when you say, And don't
make matters worse by taking actions against the Japanese
economic system?
Mr. Lindsey. Well, if, for example, we said, Japan, you
must reform your economy by date X or we're going to slap 100
percent duties on products X, Y, and Z, first, that could very
well precipitate a financial panic that would be the exact
catalyst to push Japan over the cliff. That is a possible
outcome and, therefore, it's playing with fire to engage in
that kind of confrontation.
At the very least, all it accomplishes is harming American
businesses and consumers that use and benefit from Japanese
products and harming the Japanese companies that earn revenues
from selling abroad. So it doesn't do anything to make the
situation better.
Mr. Jefferson. Let me ask you one other thing, if I might.
There's been some discussion about what the Japanese electorate
doesn't support. Does anybody have a feel for what it does
support with respect to reforming the system or changing the
way the Japanese economy's performing? What does the electorate
support? Does anyone know? The Japanese electorate, not ours.
Mr. Pyle. Well, I think the Japanese electorate is desirous
of changes in many aspects of its political economic system.
The problem has been to find political leadership that will be
responsive to this kind of generalized sentiment that the
Japanese have, which is a recognition that they do have to make
fundamental changes, that they do have to do more to respond to
needs for international leadership.
But the Japanese electorate--for example, there are now
four or five major candidates to take Hashimoto's place. It's
going to be decided in the back room. It's going to be decided
in jockeying among factional leaders and there will be a new
face there in a couple of weeks. But the likelihood that this
will be a leader who has a reform agenda is very, very slim in
my judgment. So the political system is not really responsive
to a kind of generalized recognition on the part of the
electorate that change and reform is necessary.
Mr. Paal. Mr. Jefferson, I think it's fair to say too that,
while the Japanese electorate has signaled a desire for change,
they've repeatedly also signaled a desire to avoid pain and
there's no change without pain in the current circumstances.
And so politicians there are in a situation in which some of
you in this Congress may recognize, which the voters want
something at the lowest possible cost. When it comes to
bankruptcies, for example, you have to declare winners and
losers. If you call in bad loans and you put people out of
business, you put people out of work and that's very hard to do
in a Japanese context. That reinforces, I think, the view of
most of the panelists here, if not all of them, that it's going
to be very, very hard to get the Japanese to bring about this
kind of change on their own; about the situation getting much
worse.
Mr. Lindsey. Let me just add that certainly that voter
turnout and the results indicate a high degree of voter
frustration with the ruling Liberal Democratic Party. But we
don't know whether people are frustrated because the LDP has
done too little or whether they're frustrated because they've
done too much. Or whether they're simply frustrated because the
LDP has been vacillating and inconsistent. I'm sure different
parts of the electorate had different motivations. So, while I
would like to be optimistic and read theseelection results as a
mandate for change, and perhaps it is possible that they will used as
such, it's not necessarily so.
Also, even if frustration with one party is incoherent, in
other systems it nonetheless does have clear policy
ramifications because there's an opposition party that takes
advantage. In the Japanese system, unfortunately, there isn't a
strong, cohesive opposition party that will be able to take
advantage of these particular election results.
Mr. Herger. I thank you, Mr. Jefferson. I thank our
panelists. We do have about three minutes left for this vote.
Thank you very much for appearing and your very good and
helpful testimony.
We will recess now, subject to the call of the Chair. And
when we return, we'll conclude with our third panel. Again,
thank you very much.
[Recess.]
Mr. Herger. We will now reconvene the Ways and Means
Subcommittee on Trade.
And if we could have our last panel--it looks like it's
gathering. Mr. Brad Smith, director of international relations,
American Council of Life Insurance; Shannon S. Herzfeld, senior
vice president, international affairs, Pharmaceutical Research
and Manufacturers of America; and Mr. Wendell Willkie II,
senior vice president, general counsel, of Westvaco
Corporation, New York, New York.
Mr. Smith.
STATEMENT OF BRAD SMITH, DIRECTOR, INTERNATIONAL RELATIONS,
AMERICAN COUNCIL OF LIFE INSURANCE
Mr. Smith. Thank you. Mr. Chairman and members of the
subcommittee, we'd like to thank you on behalf of our 532
member companies for the opportunity to raise this important
issue. In addition to my written comments, with your
permission, I'd also like to submit for the record a further
explanation of the violations that we believe are currently
underway with the 1994 and 1996 U.S.-Japan Bilateral Insurance
Agreements, along with a concurrent document produced by our
sister association, the American Chamber of Commerce in Japan
Insurance Committee.
Mr. Herger. Without objection.
Mr. Smith. Thank you.
At the beginning of 1998, our international committee
authorized the creation of a new task force to review current
and future insurance trade agreements with regard to compliance
and implementation. Its first project was to answer a request
from the United States Trade Representatives' office for
industry input on the Japanese government's implementation of
the 1994 and 1996 U.S.-Japan Insurance Agreements.
The U.S. ensures the Japanese insurance market remains
highly restrictive and extremely difficult to penetrate. At
$407 billion a year in annual premium volume, it is the largest
life insurance market in the world, yet the foreign share of
Japan's market is a mere 3.9 percent. By contrast, the foreign
market share of every other G-7 country is at least 10 percent
and, in some cases, it exceeds 30 percent.
In 1994 and 1996, our respective governments undertook two
agreements designed to promote transparency and deregulation of
the Japanese insurance market and to open it to meaningful
foreign participation. However, the overall goals of these
agreements are far from being achieved until such time as Japan
fully implements the commitments it has made to substantially
deregulate the primary sector areas of its insurance market in
a transparent manner. It is obliged to maintain existing
protections for foreign firms that have created significant
market niches within the so-called third sector, which I'll
explain in a moment.
In terms of liberalizing the primary insurance sector,
which represents 95 percent of the Japanese market, I have
listed the many specific items of non-compliance in my written
testimony, although I'll be pleased to answer any questions you
might have. In sum, this not only means that the Japanese
insurance market remains effectively closed to U.S. insurers,
but that Japanese consumers continue to be denied the benefits
of a competitive marketplace.
Similarly, we are extremely concerned with the diminution
of the third-sector safeguards caused by increased activity of
Japanese insurance firms and subsidiaries in this segment of
the market. The desire of Japanese business to participate here
provides our negotiators with significant leverage to encourage
liberalization of the first sector, which is life, and the
second sector, which is property and casualty.
Until the 1994 agreement, the government of Japan pledged
to continue longstanding limitations on entry by Japanese large
insurance companies into the life portion of the third sector,
as well as specific restrictions on third-sector activities by
Japanese life and non-life subsidiaries. These limitations must
continue until primary sector liberalization has been achieved
and a transition period of two-and-a-half years has expired.
The purpose being to enable foreign firms to establish some
toehold in the primary sectors which, as I said, represents 95
percent of the market, before they are faced with onslaught in
the third sector from large Japanese insurance companies.
Without enforcement of this provision, the foreign market share
in Japan's insurance market may actually fall.
ACLI member companies report that the Ministry of Finance
has failed to live up to this key provision in several critical
ways. First, it has allowed the second-largest Japanese non-
life insurance company, Yasuda, to create, by agreement, a de
facto subsidiary through its partial ownership of INA Himowary,
thus creating radical change in the agreement, which is
specifically prohibited. This circumvention has created
pressure on the Ministry of Finance to also allow other
Japanese companies into third sector, specifically by approving
a cancer insurance rider product for Tokio-Anshin, which is
owned by Japan's largest insurance company, Tokio Fire and
Marine. Even as we speak, companies are reporting potential new
problems in Japan's third sector. The specific concern is that
protected products, like group personal accident and cancer
insurance, are being marketed through new sales channels,
creating radical change in the insurance sector which is a
serious violation of the agreement.
With all this in mind, we firmly agree with USTR's July 1
conclusion that, as things stand today, the two-and-a-half-year
countdown to the opening of the third sector should not begin.
The countdown should not begin until, as the bilateral
agreements require, there is substantial deregulation of the
overall Japanese insurance market. The objective of the
bilateral agreements was to increase American insurance
companies' opportunities in the Japanese market by improving
market access for foreign companies, improving market
competitiveness, and promoting consumer choice. When Japan
lives up to its commitments, the real beneficiaries will be
Japanese consumers who, for the first time, will be able to buy
innovative and competitively priced insurance products.
I'd be pleased to answer any questions you might have.
[The prepared statement and attachments follow. Attachments
are being retained in the committee files.]
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Mr. Herger. Thank you, Mr. Smith.
Ms. Herzfeld.
STATEMENT OF SHANNON S.S. HERZFELD, SENIOR VICE PRESIDENT,
INTERNATIONAL AFFAIRS, PHARMACEUTICAL RESEARCH AND
MANUFACTURERS OF AMERICA
Ms. Herzfeld. Thank you very much, Mr. Chairman. Thank you
for the opportunity to present our industry's views.
As you know, I represent PhRMA, the Pharmaceutical Research
and Manufacturers of America. We are America's leading
research-based pharmaceutical and biotechnology companies. Many
of the members of this committee are quite familiar with
PhRMA's members. Companies like Searle have their headquarters
in Illinois. Pfizer and Bristol-Myers Squibb are headquartered
in New York. Warner Lambert has a state-of-the-art research
facility in Michigan. And, of course, California and
Massachusetts have clusters of high-tech biotech companies such
as Amgen and Genzyme, Genentech, and Biogen.
The lifeblood of our industry is research, taking America's
best ideas and turning them into innovative medicines. PhRMA
companies alone will invest more than $20 billion in research
and development in 1998. That is one-fifth of our total world
sales. This ensures that the American pharmaceutical industry
remains the leader in the development of innovative medicines
and, indeed, half of all new medicines now are discovered here
in the United States.
This not an easy task. On average, it takes 12 to 15 years
and approximately $500 million to go from the discovery of a
new drug to your medicine cabinet. For every 15,000 compounds
that are investigated, only 3 ever make it to your medicine
cabinet and of those 3, only 1 will turn a profit. So that's 1
profitable compound out of every 15,000. This is a risky and
challenging business.
The Japanese market is very, very important to our members.
It is a $64 billion market and Japan is the second-largest
pharmaceutical market in the world. American companies,
however, have managed to capture only 15 percent of this
market. In contrast, for example, we have about twice that
market share in Europe. Since America is undeniably the leader
in innovative medicines, this relatively small market share
percentage is a disappointment.
Professor Lacey Glenn Thomas of the Emory University
Business School recently studied the Japanese pharmaceutical
market. He found that, since 1991, for every 10 new medicines
that were launched in the United States and Europe, only 3 have
become available in Japan. That means that 7 out of 10 new
medicines launched in this decade remain unavailable in Japan.
For example, none of the three leading medicines available
here to treat depression are available in Japan. Nor are major
medicines for epilepsy, migraine headaches, prostate disease,
or leukemia. We in America have begun to expect new medicines
and new therapies to be available to us but, in contrast, the
Japanese patient and their doctors wait as the gap increases
between what is therapeutically possible and what is
administratively available.
Like everything in Japan, the underlying reasons are
complicated, but the entrenched bureaucracy remains at the
core. Foreign clinical data is still not generally accepted by
Japanese regulators. In order to launch your drug in Japan,
Phase III clinical trials--that's when you use thousands of
volunteers--must be repeated on ethnic Japanese persons
residing in Japan. This requirement, which we hope to see
modified in the relatively near future, is time consuming,
costly, and extremely redundant. And there is no analogous
requirement here in the United States. When you finish your
trials, it now takes approximately 40 months from the time you
file your new drug application until its approval. In the
United States, it takes 15 months and that time is dropping.
And, finally, the Japanese bureaucracy sets a reimbursement
price for drugs. Let me state this again: There is no free
market price for our pharmaceuticals in Japan. The Japanese
bureaucracy sets the reimbursement price. And they do so in an
antiquated fashion that ends up propping up older, less-
effective medicines and holding down the priceavailable for new
and innovative medicines. And this robs innovators of their economic
incentive.
Last May, President Clinton and Prime Minister Hashimoto
agreed to deregulate pharmaceuticals within the context of the
Enhanced Initiative on Deregulation and Competition Policy.
This was very important. The Japanese finally recognized that
innovative medicines need to be a part of a modern health care
system and they agreed they needed more transparency in their
health care reform. And, indeed, they agreed to allow the
foreign pharmaceutical companies to finally participate in
their reform discussions. We are optimistic and we realize we
would not have even gotten very far--not this far--without
steadfast support from this committee, from your colleagues in
the Senate, and the Clinton administration, and the U.S.
Embassy in Tokyo.
We are cautiously optimistic, but we know far too well that
agreements that look terrific on paper are sometimes a
disappointment when implemented. Japan continues to experience
difficult economic times and we are quite concerned that the
entrenched bureaucracies will respond by circling the wagons,
holding off reform, and postponing deregulation and this is
precisely why we need your support in order to combat.
We hope that we will continue to have your support in this
endeavor as we look to see last May's agreement turn into a
reality. We will be coming back for your continued support and
I wish to thank you very much, Mr. Chairman, for your kindness
and opportunity to appear today. Thank you.
[The prepared statement follows:]
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Mr. Herger. Thank you. Thank you very much, Ms. Herzfeld.
Ms. Herzfeld. Thank you.
Mr. Herger. Mr. Willkie.
STATEMENT OF WENDELL L. WILLKIE II, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, WESTVACO CORPORATION
Mr. Willkie. Yes, thank you, Mr. Chairman. We appreciate
the opportunity to appear before you today. I appear on behalf
of not only Westvaco corporation, but also the American Forest
and Paper Association.
Westvaco is a major manufacturer of paper packaging and
specialty chemicals. During the last decade, our international
sales have nearly tripled. International business is the
fastest-growing segment of our company and last year our
business outside of the United States accounted for 25 percent
of our total sales.
The American Forest and Paper Association represents an
industry that accounts for 8 percent of U.S. manufacturing
output. The U.S. is the largest producer of paper and wood
products in the world and Japan is the second-largest market
for paper products. Simply put, Mr. Chairman, export sales are
critical to the future growth and well-being of our industry
and access to the Japanese market is an essential part of this
equation.
Unfortunately, however, Japan's continuing refusal to open
its markets adversely affects trade and economic growth in the
Asia Pacific region and now threatens to stall an important
trade liberalization initiative in the APEC forum, as Mr.
Fisher's testimony before the committee earlier today
indicated.
In Vancouver last November, APEC leaders, including
President Clinton and then-Prime Minister Hashimoto, endorsed a
proposal to eliminate tariff and non-tariff barriers in nine
priority sectors, including wood and paper products accounting
for over $1.5 trillion in regional trade. With some of its
members already deeply in crisis, the APEC leaders opted for a
bold trade liberalization plan to stimulate regional trade and
boost the confidence of world financial markets.
The APEC initiative is of vital importance if we are to
open Japan and other Asian markets to U.S. forest products. In
1997, the Far East region attracted 40 percent of U.S. paper
and wood product exports at a dollar value of about $8.5
billion. Statistics from the first quarter of 1998, however, as
compared to the first quarter of 1997, illustrate what our
industry, Mr. Chairman, is now up against. For the first
quarter of 1998, wood product exports are down 44 percent.
Paper and paper board exports are off 77 percent. Newsprint
exports are down 25 percent and printing and writing papers are
down 36 percent. And in the same time frame, wood product
imports have increased 18 percent; paper and paper board by 44
percent; printing and writing imports have increased 138
percent; and newsprint imports are up an alarming 700 percent.
In other words, the Asian economic crisis is having a
significant and very negative impact on the forest products
industry. In this context, trade liberalization through the
APEC initiative is urgently needed if we are to preserve
American jobs in our industry and establish a level playing
field which will enable us to compete in Japan and other Asian
markets over the long term.
Last month, APEC trade ministers met in Kuching, Malaysia.
Country after country agreed that the crisis was not an excuse
to stall further trade liberalization, but on the contrary, a
compelling reason to move forward. These ministers agreed that
eliminating trade barriers must be a part of any long term
solution to the region's economic problems. All countries
agreed, that is, except for Japan. Citing the fact that its
industries cannot stand up to international competition, Japan
is seeking to exclude as many as six of the nine sectors from
its market opening commitment, with forest products topping the
list.
The irony in the Japanese position is striking. By
continuing to protect non-competitive industries, Japan is
refusing prescriptions being taken by weaker economies, smaller
economies in the region. What message is Japan now sending by
its actions to other important APEC countries? The CEOs of our
industry, members of Congress, numerous governors, and the
leaders of our unions have written to the President, urging him
to hold Japan to its APEC commitment.
If the past is any guide, we can expect Japan's leaders to
argue that politicians cannot challenge the powerful economic
interests arguing for continued protection, especially in the
country's current turbulent political climate. But there is no
reason for the United States to concede this and very large
reasons to press even harder for an immediate and firm
commitment by Japan to open its market, including a commitment
to eliminate tariffs and reduce non-tariff barriers in all
sectors being negotiated in APEC. Internal politics
notwithstanding, Japan can no longer duck its obligations to
its partners in the region and to the global trading community.
As with other leaders throughout the region, it is hoped that
Mr. Hashimoto's successor will make market reform the first
order of business.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Mr. Herger. Thank you very much, Mr. Willkie.
Mr. Smith, the administration has emphasized the
implementation of existing trade agreements. In your written
statement, it shows that the 1992-1997 paper agreement--and,
excuse me, I want to address this to Mr. Willkie----
Mr. Willkie. Sure.
Mr. Herger [continuing]. Paper agreement with Japan failed
to increase the market access. Do you feel this was a problem
with implementation?
Mr. Willkie. Well, I think that the last administration's
U.S. Trade Representative Ambassador Hills did a terrific job
in negotiating that agreement. And I think that our industry,
as with others, have also been well-represented. Our interests
have been well-advocated by Ambassador Barshevsky and her
predecessor, Ambassador Kantor.
But the political intransigence and the resistance in Japan
has simply, to date, precluded our making the progress that we
think it's reasonable to anticipate. We have--foreign firms
have a 4 percent market share in forest products in Japan and
the U.S. industry has a 2 percent market share. In every other
market in the world, we have a much more substantial market
share than that. The agreement has not yielded the results we
had anticipated and now we see that Japan is refusing to
participate in this APEC trade liberalization process.
So we think it's important that we keep up the pressure.
This is the right way to go. It's the way the whole rest of the
world is going and, Mr. Chairman, we appreciate the leadership
that you and other members of Congress have taken in
articulating the interests of our industry. We know you've been
a good friend to our industry. And we just think we need to
keep the pressure on.
Mr. Herger. Thank you, Mr. Willkie. Ms. Herzfeld, you
described the U.S.-Japan Enhanced Initiative on Deregulation
and Competition as a constructive step in this area. As we have
learned over the years, agreements are only as good as their
implementation. What steps do you believe will lead to adequate
implementation?
Ms. Herzfeld. Thank you very much, Mr. Chairman. We think
it was a breakthrough agreement in that it got the Japanese to
recognize formally that there is a role for innovative
medicines in health care reform. We, though, are very uneasy
that during this time of economic difficulty, the bureaucracy,
which is really responsible for the slow change in Japan, is
going to entrench; is going to be obstructive.
The bureaucracy needs to be led from the top. We are
looking for continued pressure, like we have received from this
committee, from your colleagues in the Senate, from the
administration, at every step. Japan is going through a major
health care reform, quite independently of their financial
crisis. They have pledged to have a massive new health care
system in place by April, 2000. And that will either be a
health care system which is inward-looking and bureaucracy-
driven or a health care system which is modern.
We will get to a modern health care system if we keep the
pressure on, day-in and day-out, from the Embassy to the
Department of Commerce to the U.S. Trade Representative,
through members such as yourself and your committee and through
the Senate. Without it, the progress will stop in its tracks.
Mr. Herger. Thank you, Ms. Herzfeld. Now, Mr. Smith, does
the extreme weakness of the yen affect your members' ability to
sell insurance in Japan?
Mr. Smith. No, not at all. The U.S. insurance companies,
because of the very competitive nature of the United States
market, have been very successful in markets around the world.
The purpose of these agreements is to create the opportunity
for U.S. companies to be able to compete in Japan on price. The
historical regulation of the Japanese market is everybody has
to sell the same product at exactly the same price. Actually,
in times of economic difficulty, price competition would add to
increased sales by U.S. companies, so this should actually be
an advantage to us, if we're truly allowed to compete in the
market, as the agreements are intended to achieve.
Mr. Herger. Thank you very much. I do thank our panelists
and your participation. These are concerns for not only your
companies, but many other companies that are in our districts
throughout our nation and I agree with you that we have to
continue to keep the pressure on, to continue to work on this
issue together. I believe only by doing so will we see the
progress that we deserve and which has to come about.
I thank you. With that, this Subcommittee will stand
adjourned. Thank you.
[Whereupon, at 5:05 p.m., the hearing was adjourned subject
to the call of the Chair.]
[Submissions for the record follow:]
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