[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE U.S. TRADE DEFICIT: ARE WE TRADING AWAY OUR FUTURE?
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HEARING
BEFORE THE
SUBCOMMITTEE ON
INTERNATIONAL ECONOMIC POLICY AND TRADE
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
THURSDAY, July 22, 1999
__________
Serial No. 106-109
__________
Printed for the use of the Committee on International Relations
Available via the World Wide Web: http://www.house.gov/international
relations
U.S. GOVERNMENT PRINTING OFFICE
64-701 cc WASHINGTON : 2000
______
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa TOM LANTOS, California
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey ENI F.H. FALEOMAVAEGA, American
DAN BURTON, Indiana Samoa
ELTON GALLEGLY, California MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California ALCEE L. HASTINGS, Florida
PETER T. KING, New York PAT DANNER, Missouri
STEVEN J. CHABOT, Ohio EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South BRAD SHERMAN, California
Carolina ROBERT WEXLER, Florida
MATT SALMON, Arizona STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York JIM DAVIS, Florida
TOM CAMPBELL, California EARL POMEROY, North Dakota
JOHN M. McHUGH, New York WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina BARBARA LEE, California
PAUL E. GILLMOR, Ohio JOSEPH CROWLEY, New York
GEORGE RADAVANOVICH, Califorina JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
Richard J. Garon, Chief of Staff
Michael H. Van Dusen, Democratic Chief of Staff
John P. Mackey, Republican Investigative Counsel
Parker Brent, Staff Associate
------
Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairman
DONALD A. MANZULLO, Illinois ROBERT MENENDEZ, New Jersey
STEVEN J. CHABOT, Ohio PAT DANNER, Missouri
KEVIN BRADY, Texas EARL F. HILLIARD, Alabama
GEORGE RADANOVICH, California BRAD SHERMAN, California
JOHN COOKSEY, Louisiana STEVEN R. ROTHMAN, New Jersey
DOUG BEREUTER, Nebraska WILLIAM D. DELAHUNT, Massachusetts
DANA ROHRABACHER, California JOSEPH CROWLEY, New York
TOM CAMPBELL, California JOSEPH M. HOEFFEL, Pennsylvania
RICHARD BURR, North Carolina
Mauricio Tamargo, Subcommittee Staff Director
Jodi Christiansen, Democratic Professional Staff Member
Yleem Poblete, Professional Staff Member
Victor Maldonado, Staff Associate
C O N T E N T S
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WITNESSES
Page
Pat Mulloy, Assistant Secretary for Market Access and Compliance,
U.S. Department of Commerce.................................... 5
Robert E. Scott, Economist, Economic Policy Institute............ 17
Robert A. Blecker, Professor of Economy, American University..... 19
Simon Evenett, Associate Professor, Rutgers University........... 22
APPENDIX
Prepared statements:
Pat Mulloy....................................................... 34
Robert E. Scott.................................................. 64
Robert A. Blecker................................................ 84
Simon Evenett.................................................... 124
Chairwoman Ros-Lehtinen.......................................... 32
THE U.S. TRADE DEFICIT: ARE WE TRADING AWAY OUR FUTURE?
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Thursday, July 22, 1999
House of Representatives,
Subcommittee on International Economic
Policy and Trade,
Committee on International Relations,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 2:55 p.m., in
room 2200 Rayburn House Office Building, Hon. Ileana Ros-
Lehtinen [chairwoman of the Subcommittee] Presiding.
Ms. Ros-Lehtinen. Thank you. The Subcommittee will come to
order. Thank you so much for being here this afternoon.
The U.S. trade deficit has been the object of considerable
concern and controversy among experts, both advocates of free
trade as well as so-called protectionists.
Some contend that the trade deficit is, as one headline
read, ``bleeding the U.S. economy,'' draining our domestic
markets of potential profits and American workers of jobs. Yet
others claim that the growing deficit is a sign of a robust
economy, that it indicates the strong role being played by
America in providing markets for other countries struggling to
recuperate from economic crisis.
Trade has always played a critical role in the development
of America's economy. It has helped to enrich our country's
market size, productivity and competitiveness, while providing
a vehicle for American ingenuity. However, with the economic
prosperity which trade can bring comes the challenge of
striking the delicate balance between trade that is free, yet
fair.
According to experts, America runs trade deficits because
for almost 2 decades, foreign investment in the United States
has exceeded American investment abroad. The deficit is made up
of the difference between domestic savings and investment and
because America invests more than it saves, it is forced to
increase borrowing to pay for the rising tide of foreign goods
and services.
The trade deficit is also tied to the economic success or
failure of our global trading partners, and can be tremendously
influenced by economic crisis abroad, as recently illustrated
by the Asian financial crisis.
Should the growing deficit be a cause for alarm for us in
America? The trade deficit, which according to a recently
released government report hit an all time high in the first 3
months of this year, reaching over $68 billion, has driven even
those who most support trade liberalization to question how
much longer the U.S. economy can continue to sustain such
losses.
Former Treasury officials have said that the ballooning
trade deficit is the single biggest threat to our economy, that
it could lead to a plunge in the dollar's value and to a
tremendous sell off in stocks and bonds, spurring the U.S. into
a recession.
Some experts will point to the increasing trade deficit as
a sign of America's purchasing power and of international
confidence in the U.S. economy. They maintain that when trade
deficits rise, unemployment drops, industrial production
surges, and American corporations sell more goods and services
than any other country in the world.
By contrast, others argue that trade deficits, meaning
declining real wages, increased American job insecurity, and
constitute an erosion of America's industrial base, citing
recent statistics from the U.S. Department of Labor that over
200,000 workers have lost their jobs because of either shifts
in production to Mexico or Canada or because of increased
imports from those countries.
Some claim that trade deficits have no relationship with
the level of employment in manufacturing and, in fact, claim
that cheap imports have helped keep inflation low in the United
States during a period of unusually high employment and heavy
American spending.
Those who argue that trade deficits do not have a
detrimental effect state that years in which the U.S. has run
trade deficits have also been years of increasing income for
the average American.
Yet, in either case, there exists concern across the board
that America is becoming a market of last resort for our
foreign trading partners and that the increasing excess with
which we import over what we export is putting over $20 billion
more into foreign hands each month. Regardless of what we
individually believe to be the causes of our increasing trade
deficit, our challenge in Congress will be to develop policies
which will create balanced trade relationships with our global
partners and which seek to restore the balance of trade.
I look forward to the testimony of today's witnesses and to
their recommendation as to how we can manage the trade deficit
while maintaining freer and more open trade markets. I would
like to recognize our Ranking Member, Congressman Bob Menendez
of New Jersey.
[The prepared statement of Ms. Ros-Lehtinen appears in the
appendix.]
Mr. Menendez. Thank you. Let me give thanks to our
witnesses. I just ask unanimous consent to have my full
statement entered into the record and paraphrase it.
Ms. Ros-Lehtinen. Without objection.
Mr. Menendez. I appreciate all of them coming here today. I
specifically appreciate Dr. Simon Evenett, an associate
professor at Rutgers University, the State University of New
Jersey, coming at our invitation. We have all seen the latest
headlines this week highlights a new trade deficit record of
$21.3 billion. Certainly it is a timely indicator for its need
for the Congress to look at some of the causes of the trade
deficit and what we can do to boost U.S. exports abroad.
There is a concern that I have, it is in part the statement
that Alan Greenspan made as the Chairman of the Federal Reserve
Board at the 35th Conference on Bank Structure and Competition
when he said, ``There is a limit to how long and how far
deficits can be sustained, since the current account deficits
add to the net foreign claims on the United States.'' .
In essence, I guess what he was saying is the current
account deficit puts the economic fortunes of the United States
in the hands of foreign investors.
I know that some of these issues are very difficult and
there are no single solutions, but think the one thing we can
definitely do that we began to do through the Committee is a
question of seeking to open markets and to further promote the
opportunities for American businesses and manufacturers and the
providers of services to seek those markets abroad and to
promote, and that is why I am such a strong supporter of the
Export Enhancement Act, which finds ways to increase American
exports and gain market access for American companies and
products.
It certainly is a good start, but it is minor when you
think about our competitors like the European Union. We just
had some of the new members of the European Union's leadership
here in a meeting with its full committee the other day. Of all
of the things that they could talk about, the one thing they
clearly focused on was the trade issues, for which they have a
surplus with us, a growing surplus, and they have made export
promotion, contract securement and market access priority
issues at the highest levels of their governments. We need, I
believe, to be doing the same.
With that, Madam Chairlady, I look forward to the witnesses
and what their testimony can do to enlighten us on some of
these issues.
Ms. Ros-Lehtinen. Thank you so much, Mr. Menendez. I am
pleased to recognize Mr. Sherman of California.
Mr. Sherman. Thank you. We all know how important this
trade deficit is. I would like to respond to the frequent
statements of those who are apologists for the present do-
nothing policy.
First, we are told that this trade deficit is the sign of a
robust economy. That is like an obese person saying it is a
sign of health that they are getting enough food. But also keep
in mind, 5 years ago, 10 years ago, when our economy was in
giant trouble and the Japanese economy was doing very well, we
had a trade deficit, and we were told at that time we dare not
do anything about it because we need their help, because they
are so robust in helping our economy, which at the time was in
dire straits.
So when the Japanese economy does well and the American
economy does poorly, we are told do nothing, allow lopsided
trade. Now when the situation is reversed, we are told for the
same reason, to allow the same imbalance.
We used to be told that it was our fault, because it was
the Federal budget deficit that caused the trade imbalance. I
know some of the real young people here will not remember that.
But for how many years were we told it isn't the protectionism
of the trading partners, it is the moral fault of a Congress
that keeps spending more than it takes in? Now the United
States has a surplus and all these other countries have
deficits, and for some reason, all the do-nothing supporters of
one-way free trade have forgotten how to pronounce the
arguments that they made 10 years ago, those arguments that
said that a country that runs a budget deficit will inevitably
run a trade deficit.
It only works as an apology for a do-nothing policy for the
United States.
We are told that there is nothing we can do, which really
means there is nothing we can do without upsetting some foreign
governments and upsetting some powerful interests in the United
States.
We are told that those of us who want, if necessary, to
threaten a reduced access to the U.S. market are
protectionists, even if our purpose is to simply use that as a
threat in order to break down the walls that other countries
have put around themselves to prevent American exports.
We are told somehow that it is a free trading system, we
are just losing. But I come from a tourist city, Los Angeles. I
don't know if you see the same thing in southern Florida. But
people come to the United States, and they don't want to see
Olvera Street, they are not so sure they want to see
Disneyland, they want to go to the discount stores and buy
goods produced all over the world, because they are sold more
cheaply in the United States, at retail, than you can get them
wholesale back in their own countries. But this is a trading
system and we are just losing.
Finally, I would point out as to China, which is the most
lopsided, not the largest trade deficit, but the most lopsided
trading relationship in the history of millennium life, we keep
pretending that society lives by the rule of law, so if we can
just get them to change their laws, we accomplished something.
But what happens? We change our laws and we tend to, every
economic enterprise in the United States, say they have MFN,
you can bring in their goods and make a big profit, and don't
you want to do that? Of course, business people do. But if you
are a business person in China, I don't care whether the tariff
is 20 percent--I do care--whether it is 20 percent or 0
percent. But even if the tariff were 0, you can get a call from
a party cadre, saying do you really want to buy $1 million or
$100 million worth of United States goods or a telephone system
or whatever? Because if you do, well, the party might frown on
that. You might need to be sent out for reeducation if you do
that. It doesn't take very much to get a careful or smart
Chinese businessman to say no to American goods. It only takes
a phone call, and you can't take a phone call to WTO court.
I thank you for the time.
Ms. Ros-Lehtinen. Thank you.
[The information referred to appears in the appendix.]
Mr. Menendez. If I just may, I just want to tell my dear
colleague, who I always find incredibly interesting in terms of
the way he presents his view, and often on point, that there
are some of us that are robust and feel robust in the process.
Mr. Sherman. Robust and----
Mr. Menendez. You are saying something about overweight.
Ms. Ros-Lehtinen. That is the old Mr. Menendez.
Thank you so much for those enlightening comments. I
thought only ladies talked about weight.
I am pleased to introduce our first panelist, Mr. Patrick
Mulloy, Assistant Secretary of Commerce for Market Access and
Compliance, the U.S. Department of Commerce's international
trade administration. In this capacity, Mr. Mulloy directs an
extensive staff of international trade specialists to improve
market access for U.S. companies to international markets by
removing foreign barriers to U.S. exports, and ensuring the
compliance of foreign countries to trade agreements with the
United States. Prior to his position at the Department of
Commerce, Secretary Mulloy served in various senior positions
with the staff of the U.S. Senate Banking Committee, where he
helped formulate such important international trade and finance
legislation as the Export Enhancement Act of 1992 and the
Omnibus Trade and Competitive Act of 1988.
We welcome Secretary Mulloy with us this afternoon. Your
statement will be entered in full in the record, and feel free
to summarize your statement.
STATEMENT OF PAT MULLOY, ASSISTANT SECRETARY FOR MARKET ACCESS
AND COMPLIANCE, U.S. DEPARTMENT OF COMMERCE
Mr. Mulloy. Thank you, Madam Chairperson.
As you mentioned, as someone who worked for 15 years on the
staff of the Senate Banking Committee, it gives me great
pleasure to appear before this Subcommittee to talk about the
large and growing U.S. trade deficit.
As you noted, I have a prepared statement which I will have
for the record and I will just make some remarks here to try to
give you an outline of what I think is happening.
Let me begin, Madam Chairman, by saluting you and this
Subcommittee's efforts to draw attention to this important
matter. You had a similar hearing last July; and last October
the Congress, recognizing the key importance of this issue,
established the Trade Deficit Review Commission, where you had
12 people, 3 appointed by Mr. Hastert, 3 appointed by Mr.
Gephardt, 3 appointed by Senator Lott, and 3 appointed by
Senator Daschle, and they are getting down to work now. In
fact, they are going to begin their first public work on August
19th.
This week, my Department released data showing that for the
first 5 months of this year, the deficit in goods and services
is running at an annual rate of $225 billion, up 50 percent
over the first 5 months of last year. The merchandise deficit
so far this year is at an annual rate of $307 billion.
In understanding these huge figures, the most important
point to keep in mind is that the recent growth in the deficit
stems in part from the fact that the U.S. economy is growing
rapidly and others aren't.
The second important point to note is that the recent
deficit increase stems principally from the export side.
Overall imports so far this year are only up 6 percent, a very
modest rate. However, import penetration, imports as a
percentage of our total GDP, have not increased since 1997.
This is not to say there have not been significant
increases in individual sectors, such as steel, where the
administration has acted to halt the flood of imports but,
overall, imports have not risen that rapidly.
The real difficulty is in our exports. Typically our
exports have been growing about 7 percent a year, but they fell
1 percent last year and so far this year have fallen another
2.4 percent. This decline is serious. It is affecting jobs in
America's farms and factories.
The export decline does not reflect a drop in U.S.
competitiveness. In fact, the U.S. share of exports to foreign
markets last year was 15.2 percent, up significantly from the
14 percent average in recent years.
What it reflects is how slow foreign markets are growing,
not just in Asia, but in Europe. Domestic growth is sluggish in
these countries, and demand for imports, including from the
United States, is stagnating.
The most dramatic drop in exports took place in Asia, where
in 1998 exports fell by 15 percent and so far in 1999 they have
fallen a further 2 percent.
On a bilateral basis, our largest deficit is with Japan,
where over the last 12 months it has reached $66 billion.
Our second largest bilateral deficit, $57 billion last
year, is with China. We import 5 times from China what we
export to China, meaning that just to keep the deficit from
growing any more, our export growth rate has to be 5 times as
large as our import growth rate with that country. In the last
3 years, however, the import growth rate has been about 16
percent a year, while our export growth rate has been about 7
percent, and so far this year our exports to China are actually
down 5 percent.
As I noted, China runs a $57 billion trade surplus with the
United States but, overall, China only has a global trade
surplus of $44 billion, so their trade with us is where they
are accruing their foreign exchange earnings.
With the focus on Asia, it is frequently not realized how
much our trade position has deteriorated with Europe. In 1991,
the United States had a surplus of $19 billion with Europe; in
1998, our deficit had reached $32 billion, a negative swing of
$51 billion with Europe in 7 years.
With respect to our NAFTA partners, the story of strong
U.S. domestic growth pulling in imports also applies. So far in
1999, the trade deficit with Mexico is $24 billion at an annual
rate, compared with $14 billion last year, and the deficit with
Canada is going to be running at a $27 billion annual rate
compared with $13 billion last year. The decline of the
Canadian dollar and Mexican peso against the U.S. dollar over
the last 3 years also plays a role in creating these deficits
with our NAFTA partners.
Overall, there is nothing on the immediate horizon to
suggest changes in our recent trade trends. U.S. economic
growth, even though expected to slow in 1999 from 1998, should
still be relatively strong compared to most of our major
trading partners. In Europe and Japan, expectations are for
slow growth to continue.
We cannot, however, blame all of our deficit on the Asian
financial crisis and on the recent difference between U.S. and
foreign economic growth. Longer-term forces are also at work,
including the continued existence of trade barriers that have
held back U.S. export opportunities. Amazing though it may now
seem, from 1894 to 1970, the United States during that 76-year
period had an unbroken string of trade surpluses. But since
1970, we have had virtually an unbroken string of merchandise
trade deficits that have accumulated to over $2 trillion.
Most of our deficit occurred in the last 15 years. Nearly
80 percent of the deficit is with Asia and fully 40 percent of
the total was with one country, Japan.
The recent rise in the trade deficit reflects, in part, the
health of the U.S. economy. Our unemployment rate is extremely
low by historic standards. Inflation is low, economic growth
continues above its long-term trend, and real incomes are
rising. In addition, the rise in the stock market has
encouraged consumer spending. The biggest negative probably is
our personal savings rate, which is close to zero.
While current economic conditions, at least for the United
States, are excellent, we can't help but be concerned with
running extremely high current account deficits long into the
future. To finance these deficits, we must borrow from abroad.
Thus, we become ever more dependent upon receiving and
retaining foreign capital. The net debtor position of the
United States, in fact, stood at $1.2 trillion in 1998. You
have to remember just maybe 10 years ago, we were the largest
creditor Nation in the world. We are the largest debtor Nation
in the world, and that is increasing rapidly.
If current trends continue, our total foreign debt will be
close to $1.5 trillion at the end of 1999.
Another factor that must be considered is the impact of
trade deficits on the composition of our employment. The drop
in our exports has had a serious effect on manufacturing
employment in the United States. While overall employment in
our country is at record levels and, in fact, has grown by 2
million jobs in the last year, there are 422,000 fewer
manufacturing jobs than a year ago. Many of these losses are
directly attributable to the decline in U.S. exports globally,
especially to Asia.
Few actions we can take domestically would have as great an
impact on our trade deficit position as restoration of growth
in our major export markets. The key here is in economic
policies in Europe and Japan that would promote domestic-led
growth rather than export-led growth in those countries.
Former Secretary Rubin, when he was still Secretary of the
Treasury on June 10, said this: ``It is critically important
that Europe and Japan do their part, because the international
system cannot sustain indefinitely the large imbalances created
by the disparities in growth and openness between the U.S. and
its major trading partners.''.
On July 13, Secretary of the Treasury Summers said: ``We
continue to watch the Japanese economy carefully and to believe
that what is most important for Japan is the restoration of
domestic demand-led growth.'' .
The need for these other countries to grow is clear as our
current account deficit position is unsustainable in the long
run. Chairman of the Federal Reserve Board Alan Greenspan, in
something that Mr. Menendez referred to earlier, said on May
6th, ``There is a limit to how long and how far deficits can be
sustained, since current account deficits add to net foreign
claims on the United States. Unless reversed, our growing
international imbalances are apt to create significant problems
for our economy.'' .
In his testimony today before the House Banking Committee,
which I was able to get ahold of, Mr. Greenspan said this: ``As
our international indebtedness mounts, however, and foreign
economies revive, capital inflows from abroad that enable
domestic investment to exceed domestic saving may be difficult
to sustain. Any resulting decline in demand for dollar assets
could well be associated with higher market interest rates,
unless domestic savings rebounds.'' .
Chairman Greenspan went on today to reinforce what
Secretary Rubin said about the need for Japan and Europe to
grow faster. He said, ``Working to offset somewhat this
anticipated slowing of the growth of domestic demand, our
export markets can be expected to be more buoyant because of
the revival in growth in many of our important trading
partners.'' .
Now, that depends on whether they actually get going on
whether they are going to be able to turn around this
situation.
We need to be working to bring the deficit down over the
long-term. We must continue to urge our partners to initiate
domestic growth strategies and we must also foster conditions
for a restoration of our trade position when foreign markets
recover, by assuring that foreign markets remain open by
enforcing our trade laws and promoting exports.
While I do not believe that noncompliance by our trading
partners with trade agreements is the major factor in the
growth of our trade deficit, we must be sure that countries are
keeping markets open and complying with the trade agreements
they sign with us. We need to assure Americans that the
agreements we negotiate are honored and that American firms and
workers obtain the benefits and opportunities we have bargained
for.
The Commerce Department, as never before, is increasing its
monitoring of our trade agreements. When we find indications of
violations, we are being very aggressive in taking up these
matters bilaterally or working with USTR to have them referred
to the appropriate dispute settlement forum, whether in the
WTO, NAFTA or elsewhere.
The Commerce Department is also committed to swift
enforcement of the fair trade laws. These are the ones we put
up to stop surges of foreign imports like we have had in steel
over the last year. During this first 6 months of this year
alone, we have either completed or are in the process of
conducting more than 65 antidumping or countervailing duty
investigations.
But beyond compliance and enforcement, we must be prepared
to take advantage of export opportunities as foreign growth
returns. U.S. firms need to take more advantage of overseas
markets.
Therefore, we are working with the Interagency Trade
Coordinating Committee set up by the Congress and chaired by
the Commerce Department, and we continue to develop new
strategies and approaches to assisting U.S. firms and workers
with trade promotion. ITA's units, including the Foreign
Commercial Service, the Trade Development unit, and my own
market access and compliance unit, are working together to help
small and medium-size firms take advantage of export
opportunities.
Before closing, I want to thank you, Madam Chairman, and
the other Members of the Subcommittee, for your assistance
during the International Relations Committee's reauthorization
of our budget. I particularly want to thank you for drawing
attention to the critical work done by the Market Access and
Compliance Unit which I head.
I am pleased that you and your colleagues appreciate our
efforts to access foreign markets for American firms and
workers and to get our trading partners to comply with our
trade agreements. If we can obtain the funding requested in the
President's 2000 budget, we will be able to reach out and help
small firms, particularly the small- and medium-size firms that
are the engines of growth in our economy.
As I noted to you during my last appearance here, the
number of people that we have to maintain and enforce trade
agreements has actually been in decline over the last several
years because we have not been funded at the levels requested
by the President. I will give you an example. We used to have
10 people working on China. We now have 4 or 5. That is just an
intolerable situation.
Finally, I want to thank you, Madam Chairman, again, and
your Subcommittee, for the work on the trade deficit issue. You
have kept after this issue. It is a very important one. You
might want to have your staff pass on the records of your
hearings to the congressionally created Trade Deficit Review
Commission that I mentioned earlier in my testimony. I think
that commission would find the work you have done very
beneficial.
I thank you again. I will be pleased to try to answer any
of your questions.
[The prepared statement of Mr. Mulloy appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you so much, Secretary Mulloy. The
U.S., as you pointed out, has one of the strongest and most
vibrant economies in the world, while at the same time
maintaining its highest trade deficit in history. Japan, on the
other hand, in spite of the financial difficulties, is still
running a surplus. Could you please elaborate on these two
seemingly incongruous outcomes? What are the variables that
play in these two situations and what lessons can be learned
for improving our trade balance?
Mr. Mulloy. It is true, as Congressman Sherman referred to
before, even when Japan was growing more rapidly, we had trade
deficits with Japan. They did begin to come down from the 1987
period down to about the 1993-1994 period. Then when they went
into this economic recession because they weren't growing and
couldn't take--are not taking American imports, our exports
declined and the trade deficit began to increase with Japan
again.
That is why the administration is leaning so hard on Japan
to go to export--not export-led growth. In other words, what
they tend to do when they get into a recession, instead of
trying to increase domestic-led growth, they rely on export-led
growth to get themselves out of their recession, meaning they
want to increase their trade surplus with the world. They are
running a worldwide surplus of well over $100 billion.
Second, Japan, every country in the world, is frustrated by
the fact that they do run a pretty closed market over there. It
is very difficult, even if it is not the government itself, you
have the companies acting in collusion to restrict access to
that market. We go into it time after time. My Under Secretary
is going over there to take up the construction issue next
week. We have 0.02 percent of their construction market. If we
could just get 1 percent of that market, instead of selling $50
million, we would have $2.5 billion of construction to that
market. So that is a tremendous problem, and it is industry
after industry that you find this problem with the Japanese.
Ms. Ros-Lehtinen. Another question, Secretary Mulloy. What
is your view on the proposal espoused by many, including one of
the panelists coming up after you, that the U.S. should
gradually devalue the dollar as a way of improving the trade
balance? What short-term and long-term effects do you think
this would have on American competitiveness or on the global
market?
Mr. Mulloy. Madam Chairman, as you know, even the President
doesn't talk about the value of the dollar. They pretty much
restrict the Treasury Department to talking about the value of
the dollar. But if you look at--I was reading an article in the
Wall Street Journal the other day about the growing deficits
with Canada and Mexico, and the Wall Street Journal article
referred to the fact that the dollar has increased in value
dramatically versus the peso and the Canadian dollar, and that
does contribute to the trade deficit.
The problem is when we need to attract foreign capital, if
the dollar declines in value it makes it harder to attract the
foreign capital you need to finance your borrowing, plus you
are borrowing to finance your trade deficits. If your currency
is decreasing in value, in order to get those borrowings, you
have to raise your interest rates. So it is kind of a difficult
situation. But I am not going to comment on the value.
Ms. Ros-Lehtinen. OK. One last question from you. You
contend the best solution to alleviate the trade deficit is the
economic recovery of our trading partners. We understand,
obviously if their relative economic position were to improve,
the belief is they would be more readily able to purchase U.S.
goods and services. What policy recommendations would you make
to assist in the economic recovery of those countries if that
were to be the one thing that would help us?
Mr. Mulloy. I think there was a big debate in the Congress
last year about the whole IMF Program and the Congress decided
that it was in our national interest to provide that money to
the IMF to help restart the economic growth in these Asian
economies which fell off so dramatically over the last 2 years.
So I think that will be of assistance to us.
The other thing is, as Secretary Summers and others have
talked about, Europe. They have not been growing like people
had hoped they would be growing. The other thing about Europe
is, when they moved to the Euro, people thought it would
actually strengthen in value against the dollar, but in fact it
has declined by about--I guess it was 14 percent. I think there
has been some recent strengthening of the Euro. Both of those
result in our trade deficit problem with Europe becoming worse.
So we have really got to get Europe to strengthen domestic
demand, have Japan strengthen domestic demand. If that happens,
many of the smaller economies that count on those markets to
grow will also grow, which should help us then begin to change
some of these trends that we are on in terms of being what many
people think we are, the consumer of last resort in the world
market.
Ms. Ros-Lehtinen. Thank you, Mr. Secretary. Mr. Sherman.
Mr. Sherman. Thank you, Madam Chairman. Just a brief
factual question, I don't know if you or your staff have the
answer. What were our exports to China last year?
Mr. Mulloy. Do we have that? Let me just--our total deficit
was about $57 billion. We exported about $14 billion to China
last year.
Mr. Sherman. That is goods and services?
Mr. Mulloy. Yes, that is correct.
Mr. Sherman. There is an advertisement in a leading
publication that claims that we exported $18 billion of goods
and services to China last year.
Mr. Mulloy. Congressman, let me have that figure checked.
I remember I used to say that last year--that in 1997 our
exports to Europe grew in 1 year by more than our total of our
exports to China that same year. That year I think we were
using about a $13 billion figure. It might have gone up.
Mr. Sherman. If you can get back to me, hopefully even
today just on what that number is, perhaps we can find out what
the Business Coalition for U.S.-China Trade is doing with the
$18 billion figure.
Mr. Sherman. It has been said that we need to maintain a
high dollar, which then leads to trade deficits, in order to
attract foreign capital. I would simply comment that if the
rest of the world would buy our goods, that would bring
billions of dollars into the United States, which we could then
invest. Likewise, if we were to be able to reduce imports, that
leaves us with billions of dollars more available for us to
invest.
So I don't think that you need a trade deficit in order to
provide adequate funds for the United States. In fact, a trade
deficit is the export of money and the importation of goods. So
I was surprised that on several occasions, Japan, which is
already running this unbalanced trade relationship with us for
decades, was able to go into the currency markets and
deliberately manipulate a lower yen and a higher dollar without
any protest from the United States.
I would just like to know whether we think it is just fine
for countries that are already having unbalanced malignant
trade relations with us, to manipulate the currencies so as to
increase their trade surpluses with us.
Mr. Mulloy. Congressman, I should note that when I was on
the staff of the Senate Banking Committee, Members were very
concerned about this type of thing where countries manipulate
their currencies to gain a competitive trade advantage. In
fact, they put a provision in the 1988 trade bill that the
Treasury has to do a report once a year and update it annually,
identifying countries that are manipulating their currencies to
gain trade advantage. In the early years, they did identify
Korea and Taiwan.
Now, coming back to Japan, I did note that there was an
article in the Washington Post a little while ago that when the
Japanese did that, Secretary Summers did complain publicly that
that was inappropriate, and then they quoted Fred----
Mr. Sherman. Mr. Secretary, with all due respect of
statements of inappropriateness, the correct response is to
enter the markets immediately on the other side at double the
level and to force the yen much higher than it would have been
if Japan--the idea, somebody shoots at you, and the response is
to send their mother a note. No wonder we are losing.
I might add, our whole approach, say, on construction in
Japan is to use regular mechanisms to try to go from .2 percent
of the market to .3 percent of the market, and then come back
and say the regular mechanisms are working.
Again, one of the defenses of our present approach is that
occasionally we do get a crumb, but as I understand it, it is
our policy never to do anything more than send a note when
other countries enter currency markets and that we have never
entered currency markets for the purpose of increasing our
trade position. When I say never, I mean never in recent
history. Is that correct, or perhaps you don't know?
Mr. Mulloy. I honestly don't know. The intervention in the
markets dealing--they use what they call the Exchange
Stabilization Fund over at the Treasury Department, which was
set up by Congress, I think in 1935. But that is all a Treasury
function. It is not an interagency decision, so I can't really
comment when they are doing it.
Mr. Sherman. Finally, in your comment you talked about the
low U.S. savings rate. I would like to point out that I think
we may have a very high savings rate, disguised by our
accounting system. An economist would tell you that income is
not only realized income, but unrealized income. So let me give
you a typical circumstance.
A family might make $5,000 in a month, net, take home, and
at the same time, they look at their Dreyfus statement and the
value of their assets, money available in their hands right
now, has also gone up $5,000. A true economic view of that
family is that they are now $10,000 richer before they sit down
to pay their bills.
So they sit down and pay their bills, they spend $5,000.
Our accounting system, then, because it ignores unrealized
income, says, your net wages were $5,000, you spent $5,000,
your savings was zero. But really looking at the entire
situation, no, they made $5,000 by working, they made $5,000
profit by having their money in the stock market. The family
made $10,000, they spent $5,000 on expenses, and they let the
other $5,000 remain in the market, just as if they had
liquidated Dreyfus and put all the money in T. Rowe Price, they
now have, whether you churn the money or leave it in--leaving
your profits on the table is investing those profits.
So I don't know whether it is your Department that
calculates the savings rate, but do you know of any analysis of
the U.S. savings rates that takes into account the huge leave-
it-in-the-market savings? I think that American families have
reaped hundreds of billions of dollars. ``Reaped'' may be the
wrong word-have accrued, have obtained, have available to them-
hundreds of billions of dollars of profits in the stock market,
and they have in effect reinvested those by keeping that money
in the market. I think if we look at it that way, we may have a
very high savings rate. But that won't keep those who want to
apologize for our present do-nothing trade system from saying
oh, no, it is not the other countries' fault, it is the low
savings rate in the United States. That is why we have a trade
deficit.
Now, to give you a moment to comment.
Mr. Mulloy. Congressman, let me come back to you now. This
only covers goods? I am sorry, what I have got now from the
Department, U.S. exports to China in 1998, but it is only
goods. It is $14.3 billion. I will try and find out what the
services portion is, and I will get back to you, Congressman.
Mr. Sherman. Although if anything, you tend to support this
add that I questioned. If it is $14.3 in goods, I am sure it is
probably another 3.5 or 3.7 in services. Thank you.
Mr. Mulloy. We will check that and get back to you.
Congressman, on the other, I am not an expert in terms of
the savings rate. I have read the articles in the press that
make the argument that you have put forth here. I just am not
an expert in how savings rates are calculated. The Treasury
Department, again, is the place that both on exchange rate
policy and on the savings rate, you would probably want to hear
from them.
Mr. Sherman. I hate to think that only your Department
would be allowed to have this much fun. I am sure that at some
future time we will spread it around the administration.
Mr. Mulloy. But I think that report I referred to, where
they give it to the Congress once a year and then update it
every 6 months, is very important. That looks at the
international economic position of the United States and looks
at these kinds of issues that you are very interested in, the
currency manipulation and that sort of thing.
I know the last time I testified before the Senate Banking
Committee, Mr. Guitner from the Treasury was with me and the
Committee Members asked him to make sure that that report was
submitted on a timely fashion because they are very interested
in it over there.
Ms. Ros-Lehtinen. Thank you. Mr. Delahunt.
Mr. Delahunt. Yes. I really want to applaud the Chair for
calling this. I think this is really a very important
opportunity for Members to educate themselves. I would
encourage the Chair to on a regular interval have these kind of
hearings, because I think this really gets to the crux of what
we are about as a Subcommittee and obviously is a critical
issue given the amounts of these deficits.
Let me just pick up and make some observations upon what
the comments by my scholarly colleague from California were in
terms of these particular issues, because, it is often stated
on the floor of the House by Members from both sides of the
aisle, this grave concern about the personal savings rate of
Americans.
It is used often in our debate and our discourse. We have
got to be really clear about our definitions here. Because it
is an accepted fact that Americans do not save. I was going to
ask the question out of ignorance, but I think I have been
educated by my, like I say, my colleague from California out of
his background and experience. That is why it is so much fun to
serve with Mr. Sherman.
But the reality is, you are here, Mr. Secretary, you make a
statement that you express some concern about our deficit
because of the investment by foreigners in our economy as being
a source of a dynamic influence in terms of our own growth. But
if he is right, and I think he is right, and I think upon--and
I would like to have a followup from members of your staff, and
there were some other folks back there shaking their head in
the affirmative--if he is right, I would like to have it
confirmed; because when we talk about the personal savings of
Americans, most of us are into 401(ks). Does that include that
particular savings rate? The growth of our pension plans that
are invested in equities, in the markets, is this part of that
definition? We have really got to be clear about it. I think it
is important that you, the 435 of us that serve begin to
understand that.
Again, I was unaware and I was going to ask that question,
like I say. But my sense is many foreigners invest in the
United States because of our political stability. That is why
we are the beneficiaries of foreign investment, because if you
are in South America or Asia or in Third World countries, the
lack of political stability is sufficient in and of itself for
foreign capital to come to these shores.
I don't know if that is going to change anytime soon,
because I continue to see political instability all over the
globe. Feel free to interrupt me.
Mr. Mollohan. Mr. Congressman, I agree with you that part
of the ability of the United States to attract these savings is
because we are kind of an isle of tranquility, politically and
other ways, and even economically, particularly with the
collapse of these Asian markets, for capital. But it is
important to realize that in the old days, people used to think
trade flows would determine currency values. What is going on
is that the capital flows have a big impact on the currency
values. So while we are attracting that flow, it does have an
impact on----
Mr. Delahunt. The strength or weakness of the dollar.
Mr. Mulloy. Exactly.
Mr. Delahunt. I will tell you what I have a problem with. I
share Mr. Sherman's frustration in terms of our bilateral
relationships with countries that either through tariffs or
just administrative impediments restrict access to our markets.
We are going to be debating--is it next week--the MFN issue on
China.
I mean, put aside some very valid concerns about human
rights abuses, about an array of other issues, to just simply
restrict it to the trade issues, we have an imbalance of $57
billion. I want to open up trade. I am a fair-trader. But I
don't see--all I keep hearing from New England corporations
that do business in China is, we want you to support MFN
because the potential is there. We have had potential there for
a long time. I am getting very tired of potential. It is like
that minor league ball player that just, he would come and go
back again from the majors, and it would happen. Potential.
Meanwhile, we are running a $57 billion trade deficit.
My proposition in the past to MFN has been predicated on
the fact of, hey, until you open up, until you remove
impediments, whether they are administrative in nature or
delays that occur, this is part of a bilateral negotiation,
including ascension to WTO. Start playing it straight with us.
There is no reason to have this kind of a deficit.
Brad's observation about sending the note home from the
teacher, I would suggest we just have to get a little tougher,
because my understanding is that in terms of their export
market, we are the ultimate, we are the last--what your term
was, the consumer of last resort. We represent 35 percent of
their export market and they are 2 percent of ours?
We have leverage that I suggest that we are not utilizing
now to say, come on, if you want to engage in an honest and
fair, free, bilateral trade relationship, that is fine. But we
are running out of patience.
Mr. Mulloy. Yes, sir.
Mr. Delahunt. If I may indulge the Chair for just another
minute, your argument, which is a good argument in terms of how
we should encourage these nations with whom we have a trade
deficit, encourage them to grow their economies domestically,
gee, that is a hell of a trick. It really isn't easy. I mean,
we don't have a vote, in the Japanese Parliament, and I don't
know of anybody in this Committee that is a member of the
Politburo in China. We might do lots of things, but to
influence their economic policy to focus on their domestic
markets, I mean, I don't know whether that is realistic or not.
Mr. Mulloy. On the point about China, according to if we
believe their figures, it is not the differences in growth
rates that have been the problem in China. They have been
growing actually, if you look at their figures, faster than the
United States. With China it has clearly been that we have many
multi-tiered trade barrier problems in China.
One of the efforts was in these WTO negotiations to get at
those and try and take care of those in this WTO package. The
Congress will be the ultimate decider of whether the package,
if we get it, is good, because you have to change the law to
give China permanent MFN if you want to do the WTO deal. So I
would again urge you, when you get that package, to probably do
some hearings to really get a good evaluation of it, because
that is a very good point that you made, Congressman.
Finally, I want to thank this Committee again. As I pointed
out, we are the one group in the U.S. Government, we are
charged with monitoring and enforcing trade agreements. We have
149 people. We have 28 other people in my unit, paid for by
AID. We have 149 people, and this is global. I mean, we
honestly can't do the job with those kinds of resources.
Mr. Delahunt. If I could interrupt for one moment, I agree
with you there. I think with this Committee and the leadership
of the Chair and the Ranking Member and the entire
International Relations Committee, they have been extremely
supportive of supporting the exportation of American goods and
services and opening up other markets. I agree, I think that
you are underfunded. I don't think you have the resources that
are necessary to really address the issue, and I would hope at
some point in time that we could advocate on behalf of those
agencies that do, in terms of securing appropriate funding so
that they can accomplish their mission.
We all--I don't want to export jobs, I want to export
American goods and services. So that is what I really want to
do. That is bipartisan in nature. We can have disagreements as
to NAFTA, but I think you have unanimous support as far as the
ability for us to penetrate markets.
Ms. Ros-Lehtinen. Absolutely. Well said. If you would like
to make some wrap-up statements?
Mr. Mulloy. I want to thank you and this Committee again.
You have been very, very supportive to our unit and ITA in
general. I hope that you will maybe followup with the
appropriate appropriations.
Ms. Ros-Lehtinen. Your chunk of that agency, Market Access
and Compliance, that division is very important in making sure
that our trading partners comply with our laws and making sure
that they come forth with the promises they have made when they
enter into these trade agreements.
Mr. Mulloy. We are only 8 percent of the total ITA budget.
Ms. Ros-Lehtinen. It is the important chunk. Thank you so
much for being here. We look forward to you getting back to
Congressman Sherman and the rest of our Subcommittee Members
about those numbers.
Mr. Mulloy. I will.
Ms. Ros-Lehtinen. I would like to introduce the second set
of panelists. Robert Scott is an international economist with
the Economic Policy Institute here in Washington where he has
studied the effects of trade and protection on the U.S.
textile, apparel, and steel industries. He is the author of
various publications and studies measuring the employment
impacts of trade agreements. Mr. Scott has represented U.S.
industries as an expert witness on the economic effects of
imports in several cases before the U.S. international Trade
Commission concerning unfair trade complaints. Prior to joining
EPI, Dr. Scott was an assistant professor with the College of
Business and Management of the University of Maryland in
College Park, and we welcome Dr. Scott with us this afternoon.
Mr. Robert Blecker is Professor of Economics at American
University and a Visiting Fellow at the Economic Policy
Institute. He is the author of various books covering the
issues of international trade and finance. His academic
articles have been published in a variety of scholarly journals
and edited books. His research focuses on international capital
mobility, U.S.-Latin America economic integration, the U.S.
trade deficit and our U.S. trade policy. Dr. Blecker has served
on the Economic Strategy Institute Advisory Panel on the Future
of U.S. trade Policy and on the Council of Foreign Relations
Working Group on Development, Trade and International Finance,
and we welcome Dr. Blecker here with us today.
He will be followed by Mr. Simon Evenett who is currently
the member of the court team drafting the World Development
Report and the principal author of the chapters concerning the
world trading system and global financial matters. Dr. Evenett
is currently on leave from the Department of Economics at
Rutgers University in New Jersey, after serving in an appointed
position at the World Bank and as a Fellow at the Brookings
Institute. He also serves as a research affiliate of the Center
for Economic Policy Research in London, as a member of the
Trustee 21 Initiative organized by the World Economic Forum.
Previously he has served as a Research Fellow and Visiting
Fellow at Brookings and has taught in a visiting capacity at
the University of Michigan business school. We welcome you as
well, Dr. Evenett.
Ms. Ros-Lehtinen. We will begin with Dr. Scott. Please
feel free to summarize your remarks and your entire statement
will be entered in full in the record.
STATEMENT OF ROBERT E. SCOTT, ECONOMIST, ECONOMIC POLICY
INSTITUTE
Mr. Scott. Thank you, Madam Chairman and Members of the
Committee. Thanks for inviting me to testify here today on the
impact of these large and chronic trade deficits on the
American economy. I will this afternoon discuss these causes
and consequences of the growth in our trade deficit and suggest
policies that could improve the U.S. trade position.
I begin by talking about how trade has affected American
workers. I have a few slides. We begin with the first. These
are just a few of the slides in my testimony. In the 1950's and
1960's, the U.S. was the world's leading export power house.
The Marshall Plan in particular helped provide the capital
needed to rebuild Europe and Japan and fueled a tremendous boom
in U.S. exports. As we see on the red line in this diagram, we
had a large trade surplus in that period. It was about 4
percent of the GDP in the early 1950's.
Since the 1970's, we have moved from a surplus to a deficit
as Europe and Japan began first to compete effectively with the
U.S. in a range of industries. Later, we had a tremendous
growth in imports from developing countries as well, which we
will see in a few moments.
Now, this growth in deficits has had a tremendous negative
effect on U.S. workers in many ways. The trade surplus of the
sixties was transformed in this deficit and this deficit will
grow rapidly in the future as a result of the growing financial
crisis. One impact on workers is that it has destroyed millions
of jobs in the U.S., most of them in high-wage and high-skilled
portions of the manufacturing sector. It has pushed workers
into other sectors where wages are lower, such as restaurants
and health services. When I appeared before this Committee last
spring, I summarized an EPI forecast that the Asia crisis would
eliminate about 1 million jobs in the U.S., with most of those
losses concentrated in manufacturing.
Those losses have begun to materialize, despite the growth
in the rest of the economy. We have lost almost 500,000 jobs
since March 1998, and most of this has been due to the rising
trade deficit.
Based on the recent IMF forecasts that the U.S. current
account deficit could reach nearly $300 billion this year, the
U.S. can expect to lose another 400,000 to 500,000
manufacturing jobs in 1999.
Now, trade deficits also have a direct impact on wages,
especially for noncollege educated workers, those who make up
about three-quarters of the labor force. In figure 1, the wage
line in yellow shows that real wages for U.S. production
workers peaked in 1978 and declined more or less steadily
through 1996. What is responsible for this decline? Trade is
certainly one of the most important causes, because it hurts
workers' wages in several ways. First, it eliminates high-wage
manufacturing jobs, as I already mentioned. Second, it
depresses wages through competition with imports, particularly
from low-wage countries. If the prices of these products fall,
this puts downward pressure on prices that firms receive and
forces them to cut wages or otherwise cut costs.
Third, globalization also depresses wages through foreign
direct investment. When U.S. firms threaten to move a plant to
Mexico, it can force workers in those plants to take wage
concessions rather than lose their jobs. We have seen that
happen increasingly in the 1990's.
Why are these trade deficits growing? There are many
reasons that I go over in the statement. I will summarize a few
key facts from my exhibits that emphasize particularly the
unbalanced trade that exists with a few countries and in a few
industries.
If we move to my figure 2, we see that the U.S. trade
imbalances are concentrated in a few regions of the world. Mr.
Mulloy mentioned Asia, and we have a huge trade deficit with
Asia, we see, that approaches $175 billion in 1998. We also had
a fairly large deficit of about $25 to $30 billion each with
NAFTA and Europe in 1998. We also see that the deficits with
all 3 regions are increasing steadily throughout this period.
Now, the causes of these deficits, particularly with Asia,
are discussed in depth in my statement. There are many
important differences in the economic structure and strategy of
each country in this region. However, each follows a general
pattern established by Japan in the fifties and sixties that is
a pattern which is based on export-led growth. Exports are
increased through state promotion and control of targeted
critical industries and, as we have heard, exchange rates are
systematically undervalued as part of this strategy.
Now, in addition to these countries--I am sorry, the
reasons: There are only a few countries responsible for the
majority of the deficit as we see in my figure 4.
In fact, only 10 countries are responsible for the entire
trade deficit in goods. These 10 are listed in figure 4. As you
see here, the deficit in 1998 in those countries total $229
billion. Japan, China, and Germany alone had a deficit of about
$144 billion in 1998, or about two-thirds of this amount.
Now, as I mentioned, the Japanese deficit does reflect
numerous public and private barriers to imports in this policy
of export-led growth, discussed a moment ago. China, as we have
heard earlier, also has a heavy government role which
dramatically restricts imports into that economy, and, as
mentioned earlier, we have a very unbalanced trading
relationship with China, the most unbalanced in the world.
If we turn to the table next, table 1 from the figure, we
see that the trade deficit is growing rapidly this year. These
are the trade deficits, by country, through May of this year.
These are data released on Tuesday. If we look at the trade
deficits, the first column is year-to-date through May 9;
second, year-to-date through May 1998. We see the trade deficit
overall in goods has increased by slightly more than a third,
but the deficit with the NAFTA countries has nearly doubled,
increased by 93.5 percent; and the deficit with western Europe
is up by 75 percent this year.
In addition to the currency factors mentioned earlier, we
also have seen a tremendous surge in foreign direct investment
into Mexico in the last 2 years that stimulated this deficit.
Just quickly, I will mention that in figure 6 we see the
deficit is concentrated in a few key industries. I go into this
in some depth in the testimony, but what is surprising is that
motor vehicles and parts make up such a large part of our
deficit. You would think that most economists would suggest
that we would import lots of low-tech goods, like apparel and
shoes, and we do in fact import those and basic commodities
like petroleum, but we import huge amounts of motor vehicles
and parts. In fact, it makes up half of our deficit with Japan,
two-thirds of our deficit with Canada, and essentially the
entire bilateral trade deficit last year with Mexico.
We also have big deficits in other high-tech products such
as computers, steel, and blast furnace products, TV's, radios;
and in fact only 3 of the top 8 trade deficit products are what
we traditionally think of as low-tech: apparel, leather, and
toys.
Let me summarize, then, my policy recommendations, what I
think we can do about this, in order to save time. I mentioned
four specific points in my testimony that I think are critical
to the development of an environment that is going to generate
what I think is the bottom line, a high and rising standard
level of living for all Americans, and a competitive domestic
manufacturing base is key to achieving this.
First, we should enter into no new trade agreements,
including China's proposed entry into WTO, unless and until
those agreements agree to raise the bar, to include labor and
environmental standards so we don't engage in a raise to the
bottom in those areas.
Second, I think we have to take measures to address these
chronic trade deficits with countries like China and Japan in a
few key industries like motor vehicles and commercial aircraft
as well, where China is exploiting our technology.
Third, I do think we should steadily reduce the value of
the dollar. I am not in the government, so I can say that. I
think we need to do that, and we can talk about that more if
you have time in the Q and A.
Finally, I think we have to develop new incentives to
interest developing countries to change the way in which the
trade negotiating game is played. In the past we have traded
off access to our markets in exchange for protection for our
investors. I think in the future we have to offer them some
kind of new incentives; for example, debt relief and
development aid, in exchange for raising the bar in the way
that I think we need to do it.
I think these goals are achievable. I look forward to our
discussion of these topics.
[The prepared statement of Mr. Scott appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you. Dr. Blecker.
STATEMENT OF ROBERT A. BLECKER, PROFESSOR OF ECONOMY, AMERICAN
UNIVERSITY
Mr. Blecker. Madam Chairman and Members of the
Subcommittee, thank you very much for the opportunity to
testify here today on this important topic. I would like to
begin by directly addressing the question posed in the title of
today's hearing, which I think was an excellent title, and
saying that yes, we are trading away our Nation's economic
future with our massive trade deficits today.
We are trading away our future in two important respects.
First, the damage to our workers and industries, which Dr.
Scott has just discussed; and, second, the damage to our
Nation's financial position, which Mr. Mulloy referred to
earlier and on which I will focus in my remarks.
The trade deficits of the past 15 years, as Mr. Mulloy also
said, have already transformed our country from the world's
largest creditor into the world's largest debtor. Today, as a
result of our record trade deficits, the Nation's net
international debt is rising faster than ever. The Commerce
Department reported last month that the net international debt
had reached $1.2 trillion at the end of 1998, and my
projections, shown in this figure which is also in my written
statement, show that this debt, that is the green line there,
will reach $3.8 trillion by 2005 if present trends continue.
Furthermore, I calculate what I call the net financial
debt, excluding certain assets that are not liquid, and that
red line there, pardon the analogy to the local Metro system,
the red line excludes certain illiquid assets, and that was
already a net debt of $1.6 trillion last year, and I forecast
it to reach $4.1 trillion by 2005, which would then be 35
percent of the gross domestic product.
In the next slide, I also project the net outflow of
interest and dividend payments--this is what we have to pay out
to foreigners for our borrowing from them--will grow from 66
billion, the red line here. There was a $66 billion deficit on
net income and dividend payments last year. I project that will
grow to $166 billion in 2005, which would be equivalent to last
year's trade deficit in goods and services.
Now, as a result of this growing indebtedness and interest
outflow, our Goldilocks economy could come grinding to a halt
sometime in the early 21st Century. This negative financial
position makes us extremely vulnerable to any loss in
confidence in U.S. asset markets, such as the stock market, or
in the U.S. dollar. As figure 6 shows, foreign investors now
hold over $5 trillion of financial assets in the United States.
Most of those assets, as you can see, the vast majority, have
been acquired in just the last 4 or 5 years.
It would not take a very large sell off of these assets to
precipitate a dollar crisis. In fact, if foreigners sold off
only 5.75 percent of that $5.2 trillion that you see on the
right, this would be about $300 billion, or just about the
projected level of the current account deficit for this year.
Such a sell off could cause a collapse of the U.S. dollar
and a hard landing for the American economy unless steps are
taken to put our Nation on a more sustainable growth
trajectory, with smaller trade deficits and less international
borrowing.
In my written statement and also in an attachment I gave
the Committee with a recent report I did for the Economic
Policy Institute on the international debt situation of the
United States, I go into some more detail on these possible
hard-landing scenarios and how we might avoid them or what
could be the triggers for a financial crisis. I would be happy
to discuss that more in response to questions.
But now let me try to move to the policy conclusions. I
think we need to work on two fronts, and that is to reverse
both the short-term and the long-term consequences of our high
trade deficit and our growing international debt.
Now, the two main short-term causes of the high trade
deficit are the rise in the value of the dollar since 1995,
which you can see in figure 1 coming up here, the order of the
figures is different for the presentation than it was in the
paper. The green there is the greenback, the dollar. As you can
see, it started rising in mid-1995. Most of that increase came
with the industrial country major currencies. Then it shot up
even faster in 1997 during the Asian financial crisis. While it
has leveled off, it has stayed at an uncompetitive level ever
since.
Now, no matter how efficient American producers are, no
matter how hard the workers work, no matter how much new
technology they invest in, they cannot compete in global
markets at a dollar that is now 20 percent higher than it was a
few years ago. Therefore, I believe that there cannot be any
solution to the trade deficit problem that does not begin with
and include as an important component a significant effort to
bring down the value of the dollar to a more competitive level.
Now, how we do that will have to vary between the different
kind of trading partners, those that manipulate their
currencies and those with floating rates. We can discuss that
more in the question period.
Second, I do agree with Mr. Mulloy and the administration
statements that he quoted, that we must encourage our trading
partners to stimulate their domestic economies and to open
their markets more to imports of American goods and services. I
think it is time for Europe to abandon some of the self-imposed
restrictions which have already backfired. They were supposed
to make the Euro strong, and instead they made it weak. It is
time for Japan to pull itself out of its slump. Both regions
need a significant fiscal stimulus along with continued
monetary ease, and I think we also need to work on our
administration to pressure the IMF to let up on the crisis
countries. We have imposed on them austerity conditions as part
of IMF causality--I am sorry, IMF conditionality, which have
led directly to this drop-off in our exports to those regions,
to Latin American and Asia, which are such vital export markets
for us, a lot of this is self inflicted damage from our
treasury department telling the IMF to tell those countries
they had to raise their interest rates and slash their budget
deficits and put their economies into depressions. When they go
into depressions, the first thing they do is stop buying
imports from us, not to mention their currencies fell so they
couldn't afford them anyway. We need to start thinking about
the repercussions of some of these things we tell other
countries to do.
Finally, for the longer term, I largely agree with what Dr.
Scott said, but let me put it in my own words. I think we need
to modify the way we approach trade negotiating to better
promote the interests of American-based producers, to look at
things from the perspective of industries and farmers producing
products in the United States, rather than just our companies
selling things abroad.
It is all very well and good to sell bananas in Europe, but
we don't grow bananas here, and we need to think about what we
do produce here. I think we also need to put social concerns
such as human rights, labor standards, and environmental
protection on an equal footing with intellectual property
rights and other types of investor rights in our approach to
trade negotiations. I think this can help to create a more
level playing field with other countries in which a more
balanced trading relationship can emerge.
We also need to remember that competitiveness starts at
home. We should not short-change domestic research and
development, education, public infrastructure, the things that
make our economy productive, because those are the things in
the long term that help our private sector to be more
competitive.
With a more secure economic base at home and more balanced
commercial relations with our trading partners, we should be
able to balance our trade without undue sacrifices of domestic
jobs and living standards in the future.
Thank you.
[The prepared statement of Mr. Blecker appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you so much. Dr. Evenett.
STATEMENT OF SIMON EVENETT, ASSOCIATE PROFESSOR, RUTGERS
UNIVERSITY
Mr. Evenett. Thank you for the invitation to present some
testimony before this Subcommittee, Madam Chairperson. I also
would like to thank Mr. Menendez and his staff for getting in
contact with me with respect to this testimony. I should add
that Rutgers University has always appreciated its close links
with Mr. Menendez.
Ms. Ros-Lehtinen. We will let him know you said so.
Mr. Evenett. Thank you very much. I should add that I am
speaking very much in my capacities as a Rutgers University
professor and a fellow at Brookings, and not in my World Bank
capacity. The articles of the World Bank are extremely clear
about the involvement of World Bank officials in member
countries' politics, so please see me with a Rutgers and a
Brookings hat on. Maybe two hats is too much, but not three.
Thank you.
Let me turn to the substance of my presentation. I have put
together some testimony. I am one of these simple guys who
likes to make three or four points with graphs. I am a
professionally trained economist. I can do it with
mathematically complicated, incomprehensible nonsense.
Mr. Delahunt. We would not understand it.
Mr. Evenett. Most of the time I don't understand it either.
But I leave that for the privacy of my own home. For the rest
of you, I would like to share the following graphs and make
four points. They somewhat go against the grain of what you
have heard up until now, which is first, I don't think the
trade deficits reflect economic malaise.
The second point is that I don't think the U.S. trade
deficit is caused by closed foreign markets.
The third point is in the current U.S. boom, it seems its
trade deficit growth and job creation have gone hand in hand.
There is no big surprise. They are caused by exactly the same
factors. We will talk about that.
Finally, I think the plummeting U.S. savings rate is the
real policy headache, and for more important reasons than its
effect on the trade deficit, as we enter an era where more and
more Americans are approaching their retirement. So let me take
you through those four points.
The first point, and I summarized this, as I said, in four
graphs. The first is that I don't think trade deficits imply
economic malaise. It is actually very interesting that the
United States since 1990 has had the highest growth rate in the
G-7 economies and also had the largest trade deficits all the
way through. In fact, if you were to plot a graph of growth in
the G-7 against their trade deficits, you would find the
countries that have the higher trade deficits were the ones
that were growing.
So I would urge you to ask what you really care about, a
growing economy which, as we will see, produces a lot of jobs,
or are we going to worry about one specific narrow economic
indicator? I think you get more miles or bang for the buck out
of economic growth than you do about worrying about trade
deficits.
The second point I would like to make is I don't think the
U.S. trade deficit is caused by closed foreign markets. In
fact, on my second graph here, it is interesting that if it is
the case that the current U.S. trade deficit was caused by
closed foreign markets, and we have had three rounds of
multilateral trade negotiations, lowering tariffs, lowering
nontariff barriers, then presumably back in the sixties we
would have had even more closed foreign markets, but back then
we had a trade surplus. So something is driving the U.S. trade
deficit, and it is not closed foreign markets, and that is
something I will come to in a minute, and it has to do with
domestic macroeconomic factors.
Really a historical perspective, not history--going back to
1960 is not history for most of us--but going back to 1960, you
can see the U.S. trade deficit has varied for a large number of
reasons, and it doesn't have much to do with closed foreign
markets.
When we looked more recently as to what happened since
1990, we found that employment, nonfarm employment in the
United States, has surged, and so has the current account
deficit. The real explanation there is entirely demand-led,
especially in the last few years.
On my final graph, I think I get to the heart of this, but
looking at what we have had is both an investment boom, a very
healthy investment boom which is bringing new production
techniques, managerial techniques and skills for U.S. workers,
helping to raise their wages and offset some of the growing
inequality we have seen since the seventies.
We have had a healthy investment boom, and we have had a
somewhat more dubious consumption boom. Yes, we have all had a
big party here. One thing is definitely clear: If you don't
like the savings numbers, look at the consumption numbers. The
consumption numbers have absolutely gone through the roof, I
think really for two reasons.
First, as we have said, people are starting to spend down
some of their stock market gains; and, second, people have
refinanced on their houses, too. As interest rates have come
down, they have refinanced at lower interest rates, releasing
some income to be spent on goods and services.
So what that means is when the traditional measure of the
savings rate--which of course is nothing more than the
difference between what America consumes and what it earns--but
that has been shrinking, mainly because consumption has been
surging. Now, that comes out as a plummeting savings gap.
Now, some questions have been raised earlier about how to
measure savings. Some of the more rigorous and sophisticated
ways of trying to measure savings, getting at precisely the
issues raised earlier, still point to a fall in the U.S.
savings rate over the last few years. So this savings rate has
fallen, even when you take account of the factors which were
quite correctly raised earlier.
The second thing is even if you don't think savings have
fallen in the U.S., investments certainly have. All that
matters, all that you need to get a trade deficit is for the
difference between investment and savings to rise. All you are
really saying is the demand in the U.S. economy is rising
faster than its capacity to supply it, so you have to buy goods
from abroad. We have seen a huge surge in investment in the
U.S., primarily in information technology and other areas. But
that is the real reason why we have a trade deficit and a
current account deficit at the minute.
I guess to sum up, I don't want to come off and say--I
don't want to appear to say don't worry about the trade
deficit; because if you think that the savings and investment
imbalance is very precarious, in other words, if you think
people are over consuming, spending far too much money,
spending down stock market gains which could disappear
tomorrow--after all, the Dow fell 200 points very recently,
right?--if you think that is a very precarious way to organize
household consumption decisions, I would agree with you and
turn around and say these numbers could reverse very, very
quickly. That would lead to a quite serious adjustment problem.
What I don't think I agree with is that somehow we have
these foreign markets which are systematically closed to U.S.
goods. I think that where there are problems, countries have
legitimately taken complaints to the WTO, and the U.S. is the
biggest complainant of the WTO, it takes the most cases, and
also answers the most cases, by the way. This country is not
innocent on that score. It has been found guilty in some cases,
too. So the fact is the WTO is the right forum for dealing with
trade complaints.
The second thing is if you think there are existing
barriers that still need to be negotiated down, that is what I
would urge you to do, is endorse a new round of trade
negotiations which could be launched in Seattle and help craft
and shape that agenda. In that agenda I would not put labor and
environmental standards. I can tell you that if those decisions
to negotiate on those issues goes to Seattle, you will get
large numbers of developing countries, countries whose
economies are not growing very fast, potential exports for the
United States, they are not interested and they will walk out.
So my sense is we have to find--we are going to need some
innovative thinking on trade policy that is going to require an
honest discussion about what the remaining trade impediments
are and bringing up labor and environmental standards is merely
going to antagonize our trading partners, who otherwise I think
are quite interested in reducing their trade barriers even
further.
Thank you Madam Chairman.
[The prepared statement of Mr. Evenett appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you so much for your testimony.
I have one question for each of you. I would like for you
to elaborate on the factors that you believe cause the deficits
that we have: the merchandise trade deficit, the manufacturing
trade deficit, the deficit in goods and services. What are the
factors you think contribute to their causes, and the varying
impact that these would have on the U.S. economy? Also related
to that, if you think that the trade deficit in this one sector
is preferable to the deficit in another sector. Dr. Blecker.
Mr. Blecker. That is a big area to talk about, but let me
just say a few points. I think what has happened in the last
few years--and by the way, one area I think I agree with Dr.
Evenett is on the saving rate. I think a major change in recent
years is that what has been happening on the balance of
payments has been driven largely by what is going on in the
capital account rather than the current account. These two
things have to balance each other out, because it is an
accounting statement. But we have seen large inflows of funds.
These in turn pushed up the value of the dollar. They have
financed the shortfall of savings, allowed the consumer boom to
continue, prevented investment from falling, in spite of the
low savings rate.
I disagree somewhat about investment being high. That
depends on how you measure it--in constant dollars or current
dollars--and I prefer a current dollar measure.
But this in turn has basically forced us, then, to run a
current account deficit which is the other side of the coin of
the capital account surplus. That, then, reverberates on to all
of the other balances that are subcomponents of the current
account. Especially it reverberates on to goods and merchandise
because the high dollar and then boom in our economy compared
to sluggish conditions abroad, where I also agree--which is in
fact in my testimony as well--that forces a merchandise deficit
which is very large, but which then has the consequences that
Dr. Scott was discussing.
Even services--we have seen a lot of arguments in recent
years, don't worry about the merchandise deficit, because we
have a services surplus. The services surplus has shrunk, too,
and it is not growing as was expected, because when the rest of
the world is depressed and the dollar is too high, it is not
surprising they don't want to buy so many of our services.
Then there a new part of the overall current account
deficit that is getting worse, which I flagged in my figure, I
think number 2, in my written statement, and that is the
deficit on investment income.
In the past when we were the world's largest creditor, we
had a large net inflow of investment income, mostly from our
multinational corporations abroad. But that is now being
overwhelmed by the net outflow of interest payments and
dividend payments on our financial obligations, and it is a
long story why it has taken a while to turn negative; but it
has now, and if present trends continue, it will become a major
negative factor in the current account and balance of payments
in the next several years. That is going to make it necessary
for us to run even harder just to stay in place as far as
preventing rising current account deficits.
So essentially my causal story would start with the capital
inflows through the dollar and go on through the rest of it.
Ms. Ros-Lehtinen. Thank you. Mr. Scott?
Mr. Scott. Sure. I would say that there are two causes,
generally speaking. They are both short-return financial sector
causes and I think there are long-run structural causes to the
trade deficit.
On the short-run side, as Dr. Blecker describes, I would
like to describe it as a boomerang economy. The rest of the
world collapsed, they sent their capital here, and that
stimulated a boom in the stock market which led to a
consumption boom, and that generated also a short-term increase
in the trade deficit. I think there is no question about that.
On the other hand, as we all know, boomerangs are dangerous
to play with. If that capital decides to depart and it causes a
crash in the stock market, it could certainly destabilize the
economy. So we are playing with a very dangerous situation
here, I think, given the state of the world economy.
So that on the structural side, I very much appreciate Dr.
Evenett's first figure on the structural trade, which to my
view illustrates the pattern of the structural trade deficit.
Obviously I think the data is correct. We all get the data from
the same sources. I think the title is a little bit wrong. It
is very interesting.
He paints this picture of the three long-term rounds of
trade negotiations, the Canada, Tokyo and Uruguay Rounds of
negotiations, and they are clearly linked in some way to an
increase in the U.S. trade deficit. It says on the title of
that, the deficit has grown as foreigners lowered their trade
deficits, not the other way around.
But, in fact, I would argue just the opposite. Our deficit
has grown because we have lowered our trade barriers in total
more than foreigners have. During each round we have reduced
our tariffs to the present day to just about as close to zero
as they can get. Other countries have not reduced their tariffs
as rapidly as we have, first.
Second, more importantly, they have maintained and enhanced
a set of nontariff barriers to trade that both promoted their
exports to the U.S. and acted in new and in creative ways to
restrict U.S. exports to their markets. I think that is the
long-term nature of our trade problem. That is why this trade
deficit goes up as it follows a steady increasing trend, as you
see. That a not a macro short-term problem, that is a long-term
problem and dates from the 1950's and 1960's, I would argue.
Ms. Ros-Lehtinen. Thank you. Dr. Evenett?
Mr. Evenett. Up until the last minute, I was about to say
you were going to witness something rare, which is three
economists agreeing on something. But let me say on the short-
term questions, I think we are all quite agreed. We have had
this surge of investment in the U.S. which has needed to be
funded somehow. The U.S. consumers are not providing it, nor is
the corporate sector, so the money has come from abroad. That
is fine. Everybody understands that, and I think we understand.
Let's talk about the stuff I am less sure I agree with my
colleagues on.
Thinking in terms of breaking it out between manufacturing
and services, I would argue that the downturn--the slowing
growth in service exports is primarily due to these lower
incomes and recessions abroad. In fact, I would point to the
recent forecasts of Professor Alan Dierdorf at the University
of Michigan, one of our most respected trade economists in the
services area and on trade in general, and he has been
examining how the U.S. trade patterns in services will vary
over the next 2 or 3 years. As east Asia and Latin America
bounce back--we are already seeing evidence of that--then
service exports to those areas, an area where is U.S. has
strong comparative advantage, are expected to bounce back. I
think that will provide some good news in terms of the trade
deficit and the current account.
The second thing in terms of the interpretation of this
trade liberalization over the last 30 years, I would argue that
in fact certainly in the Uruguay Round, the U.S. made out like
bandits, quite frankly. You got reduced in your tariffs, but
not by that much. A lot of developing countries for the first
time came onboard and seriously negotiated substantial
reductions in their trade barriers, and not just in the areas
where the U.S. cares about--manufacturing, some in services and
a fair amount in agriculture--although there is a lot more work
that needs to be done in agriculture.
So I would argue that the U.S. did very well out of the
Uruguay Round, and I think the numbers on the gains to the U.S.
which have come out of the economic studies bear that out.
The second thing is in terms of an enhanced nontariff
barrier. For the U.S. ever to lecture the rest of the world on
this is the pot calling the kettle black. The spread of
antidumping laws which was founded on K Street and spread
around with the help of others, has now reached the point that
29 countries are using these laws. Guess who is the No. 1
target? This country. It is this country's exports. So we are
seeing the spread of--if there is a spread of nontariff
barriers, we started it in large part. That is one of the
things, I think antidumping should be on the Seattle
negotiating list. You can bet your life that USTR will want it
to be there, and I can tell you people on K Street don't want
it to be there, but it will be raised by Australia, the
European Union and many other countries, and I do think we need
to nip these nontariff barriers in the bud, and let's start
with antidumping.
Ms. Ros-Lehtinen. Thank you. Mr. Delahunt.
Mr. Delahunt. So you think it is time to get out of the
stock market?
Mr. Blecker. We don't give advice on that.
Mr. Delahunt. That is the measurement we will measure you
by.
A little bit of a primer here, if you will. You all
referred to the $1.2 trillion debt. Please explain that. Is
that debt held by individual Americans, by mutual funds, by
government agencies? Please, just a real kind of concise, very
simple explanation. Anybody.
Mr. Blecker. I will tackle that, since I just wrote a
report on that and just read the latest Commerce Department
release. Basically, this is debt held by foreigners that is
their ownership of American assets in excess of what we own
abroad. So essentially we are saying the foreigners own more
bonds, stocks, Treasury securities, et cetera, et cetera, in
the United States, compared with what we own abroad.
Mr. Delahunt. It is a mix, in other words. It can be
equities, U.S. obligations, it can be private corporate
instruments.
Mr. Blecker. Right. But what has changed most dramatically
in the last 10 or more years that has caused the big swing are
the more liquid financial assets, especially Treasury
securities. We now have, I think, about $1.3 trillion worth of
U.S. treasury securities owned abroad. About half of that is
owned by foreign central banks and the other half is owned by
private investors. That is somewhere around 35 percent or maybe
almost 40 percent, somewhere in that range, of all outstanding
Treasury securities.
Mr. Delahunt. We have been debating the last several days
regarding reducing American debt.
Mr. Blecker. The government debt. You all have been
talking about government debt.
Mr. Delahunt. I understand that. My point is that is a
component of the debt we are talking about.
Mr. Blecker. Right.
Mr. Delahunt. What are the consequences? Clearly it is my
sense, no matter whether what occurs, that there will be debt
reduction, which I presume would mean there would be a demand,
because it is such an attractive, secure investment in an
unstable world. What are the consequences for action that the
United States is now taking in terms of reducing public debt
held by foreigners?
Mr. Evenett. I think the first consequence is that
obviously the return, the interest the U.S. has to pay on
existing long-term debt, that rate of interest will start
falling. The liquidity or the ability to sell those debt
instruments very easily will begin to be reduced because there
won't be such a huge market for it.
I think what will happen, what this will do is, I mean, as
these long-term Treasury instruments get scarcer and scarcer,
then you will find that again the U.S. taxpayer will win out
and that hopefully they will have to pay less and less interest
on the remaining Treasury bills which get issued.
Mr. Delahunt. I understand that. But my point is, what does
it do in terms of multilateral commercial relations, if
anything?
Mr. Evenett. I am not sure--the second point I was going to
make is that I remember 10 years ago a certain British Prime
Minister announcing that the U.S.--the U.K. public debt was
going to be paid down in 15 years because of a huge budget
surplus which emerged at the end of the eighties. Within 3
years----
Mr. Delahunt. Who is that.
Mr. Evenett. Within 3 years, Britain had, I think, a 5
percent budget deficit, the currency had gone through the
floor, and that Prime Minister was out tending roses in her
garden and no longer----
Mr. Delahunt. ``her'' garden?
Mr. Evenett. Her garden, yes. So my sense is that come the
next recession, this budget surplus will evaporate and we have
a short-term gain here. The issue is short-term windfall; the
issue is what to do with it.
Mr. Delahunt. Let me just followup in a question, because I
think you both, Dr. Blecker and Dr. Scott, talked about the
devaluation, if you will, of the American dollar. I hear what
you are saying, but I will tell you what causes me concern, and
I don't know if I have any basis to be concerned. But if we do
devalue, and I don't know how you go about doing that--you were
talking about bilateral devaluation, and, again, I am not
conversant certainly with the world money markets--but if that
were done in any abrupt fashion, I mean, the impact in terms of
the world financial markets, including our own stock market and
bond markets. One thing I continue to hear is that the
financial markets do not like uncertainty and instability. It
would cause me some concern.
Dr. Scott?
Mr. Scott. Yes----
Mr. Delahunt. I understand how it would create more
fairness. But, hell, I mean, we could end up shooting ourselves
while we are trying to solve a problem.
Mr. Scott. I think we don't have to look very far back into
our own history, and remember back to the mid-1980's, the last
time we had a trade deficit that reached 3 percent of GDP. At
that point the dollar was about 50 percent higher than it is
today, perhaps, maybe 40 or 50 percent higher, and we had an
agreement that was reached in the Plaza as I recall, although I
am not a finance person, the Plaza in New York, as I recall, in
roughly 1985, and it was amongst the finance secretaries of the
G-7 countries, and they agreed to gradually reduce the value of
the dollar.
So in my testimony I called for a gradual reduction of the
dollar. We have done it before, we can do it again. Though
financial markets don't like uncertainty, they like even less
to lose. If they have to bet against all of the major central
banks of the G-7 countries, they are going to lose. So if the
finance ministers announce they are going to reduce the value
of the dollar, I think they can successfully do that, as they
did in 1985 through 1987, when they reduced the dollar by about
50 percent.
Mr. Delahunt. Do you agree with that, Dr. Blecker?
Mr. Blecker. Let me amend that very slightly. Actually the
dollar fell quite precipitously between 1985 and 1987. It fell
more rapidly in those years than it rose between 1980 and 1985.
But it did not cause a financial catastrophe, and I think the
reason is what Dr. Scott put his finger on, that this was seen
as an agreed-upon managed depreciation that the major countries
were prepared to stand behind. There were tacit target zones.
That wasn't quite announced, but it was understood the dollar
would stay within certain limits.
I think if we take that approach, again, because I agree
absolutely with the concern you raised, and that is my whole
concern, if we let the debt get out of hand, we will see that
true hard landing for the dollar in the economy further down
the road. The way to get there is not by letting the dollar
stay too low, but by easing it down gradually. This is going to
require cooperation with the other countries.
Mr. Delahunt. Would that be the invisible hand of the
marketplace? It will require active----
Mr. Blecker. Active intervention and cooperation with our
trading partners. What is it our trading partners want out of
all of these negotiations? Access to our markets. We need to
insist on reasonable equilibrium exchange rates as one of the
things that we look for in a normal trading relationship,
whether it be with China, Japan, Europe or anybody else.
Mr. Evenett. I must say the postscript of this story is
they had to get together in 1988 and decide the dollar had
fallen off too much.
Mr. Delahunt. This is all above my pay grade.
Mr. Evenett. So the fact is, the end of this story is it
wasn't quite the smooth managed transition that perhaps has
been suggested. I think you are absolutely right, sir, to
suggest that this is a very dangerous game to go down. To get
people--trying to devalue the U.S. dollar means in effect
scaring foreign investors. That is what you have to do.
Mr. Delahunt. That creates that flight from our capital
markets which creates an impact which would slow down our
economy, which returns us to the issues that we talked about
before in terms of that surplus that I have very little
confidence in, by the way.
I happened to vote not only against the Republican plan,
but the Democratic plan, because when I arrived here 2 years
ago we had a deficit. These estimates, these CBO estimates,
they were telling me we were going to have a $200 billion
deficit; 2 months later, 170; 2 months later, 120; 4 months
later, it broke 100; 3 months later, hell, we can't forecast 2
months ahead, let alone a decade ahead. That is what really
makes me nervous.
Mr. Scott. You notice none of us want to tell you what to
do with your investment funds.
Ms. Ros-Lehtinen. Thank you so much, Mr. Delahunt. I want
to thank the witnesses for your excellent testimony. As you
know, on a bipartisan level, this trade deficit growing out of
control is of increasing concern to us, even if we disagree on
how best to handle it. We look forward to continuing our
conversations with you. Thank you so much.
The Subcommittee is now adjourned.
[Whereupon, at 4:45 p.m., the Subcommittee was adjourned.]
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A P P E N D I X
July 22, 1999
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