[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                          UNITED STATES -JAPAN
                      ECONOMIC AND TRADE RELATIONS

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 28, 2005

                               __________

                           Serial No. 109-35

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 20, 2005 announcing the hearing............     2

                               WITNESSES

Moran, Hon. Jerry, a Representative in Congress from the State of 
  Kansas.........................................................    10

                                 ______

Office of the U.S. Trade Representative, Wendy Cutler, Assistant 
  U.S. Trade Representative for Japan, Korea and Asia-Pacific 
  Economic Cooperation Affairs...................................    16
U.S. Department of the Treasury, David Loevinger, Deputy 
  Assistant Secretary for Africa, Middle East, and Asia..........    22
U.S. Department of Agriculture, Foreign Agricultural Service, A. 
  Ellen Terpstra, Administrator..................................    26
California Department of Food and Agriculture, A.G. Kawamura, 
  Secretary of Agriculture.......................................    31

                                 ______

American Council of Life Insurers, Hon. Frank Keating............    46
Advanced Medical Technology Association, Edwards Lifesciences 
  Corporation, Michael A. Mussallem..............................    51
National Cattleman's Beef Association, Jim McAdams...............    57
General Motors, Mustafa Mohatarem................................    63
American Chamber of Commerce, Japan Market Resource Network, 
  Deborah Howard.................................................    68

                       SUBMISSIONS FOR THE RECORD

American Farm Bureau Federation, Washington, DC, statement.......    82
Automotive Trade Policy Council, Inc., Washington, DC, statement.    82
Damond, Joseph, PhRMA, Washington, DC, statement.................    88
Gillenwater, Todd, California Healthcare Institute, La Jolla, CA, 
  statement......................................................    90
International Roundtable for Trade and Competition Policy, Inc., 
  Miami, FL, statement...........................................    92
MacCarthy, Timothy, Association of International Automobile 
  Manufacturers, Arlington, VA, statement........................    97


                          UNITED STATES-JAPAN
                      ECONOMIC AND TRADE RELATIONS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 28, 2005

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:06 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
September 20, 2005
No. FC-13

  Thomas Announces Hearing on United States-Japan Economic and Trade 
                               Relations

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
economic and trade issues with Japan. The hearing will take place on 
Wednesday, September 28, 2005, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 1:00 p.m.
      
    Oral testimony at this hearing will be from both invited and public 
witnesses. Invited witnesses will include Wendy Cutler, Assistant U.S. 
Trade Representative (USTR) for Japan, Korea and Asia-Pacific Economic 
Cooperation Affairs; A. Ellen Terpstra, Administrator, Foreign 
Agricultural Service; and David Loevinger, Deputy Assistant Secretary 
of the Treasury for Africa, Middle East and South Asia. Any individual 
or organization not scheduled for an oral appearance may submit a 
written statement for consideration by the Committee and for inclusion 
in the printed record of the hearing.
      

BACKGROUND:

      
    The World Bank lists Japan as the second-largest economy in the 
world after the United States, and the U.S. Department of Commerce 
lists Japan as the fourth-largest trading partner with the United 
States after Canada, China and Mexico. The United States is Japan's 
largest export market. In 2004, imports from Japan to the United States 
totaled $129 billion. United States exports to Japan were $54 billion, 
resulting in a deficit of $75 billion. Major U.S. imports from Japan 
are passenger cars and parts, computers and components, office 
machinery parts and electrical machinery. Major U.S. exports to Japan 
include computers, computer components, gas turbines, office machinery, 
electrical machinery, optical and medical equipment, and agricultural 
products.
      
    Japan has maintained a significant trade surplus with the United 
States for many years. The surplus was generally increasing during the 
1990s, however it dropped abruptly from $81 billion in 2000 to $69 
billion in 2001 and 2002. During the same period, Chinese exports to 
the United States began significantly increasing. The sectors in which 
the United States runs the largest trade deficits with Japan are 
automobiles and automobile parts.
      
    Japan presents many areas of concern. Japan's persistent trade 
surplus with the United States, coupled with its staunchly 
protectionist attitudes reflected in high tariffs, non-tariff barriers, 
and discriminatory government action toward foreign products, has led 
to frequent tension in the trade relationship. For example, Japan only 
recently announced it would eliminate discriminatory sanitary and 
phytosanitary standards against U.S. apples after a protracted World 
Trade Organization (WTO) dispute. Japan has not reopened its market for 
U.S. beef (nor announced a definite time for doing so) despite 
extensive testing and safety protections in the United States to 
prevent bovine spongiform encephalopathy in cattle. Many other similar 
barriers remain, however, but do not receive the same degree of 
attention.
      
    Japan's economy went into recession in 1990, averaging only 1.2 
percent growth between 1993 and 2003. Growth picked up in 2004 to 2.7 
percent. However in July 2005, various economic data suggested that the 
recovery, despite improvement, has not yet become firm--household 
spending dropped 3.7 percent from 2004, unemployment surged to 4.4 
percent, and prices continued to deflate by 0.6 percent from 2004 
levels. In an effort to improve the business climate in Japan, USTR and 
Japanese officials continue to participate in the U.S.-Japan Regulatory 
Reform and Competition Policy Initiative launched in 2001. USTR's 
recommendations cover key areas such as information technologies, 
telecommunications, medical devices and pharmaceuticals, energy, and 
competition policy. USTR also recommended privatization of the $3 
trillion Kampo, a government agency performing various functions of a 
postal service, national insurance agency, and retirement savings bank 
among others. Indeed, the recent election in Japan that returned the 
ruling Liberal Democrat Party (led by Prime Minister Junichiro Koizumi) 
to a strengthened position of power was brought about in part because 
of controversial legislative proposals to privatize and reform Kampo. 
The heavy government involvement in these areas has led to objections 
from the U.S. couriers, insurance, and financial services industries, 
which seek to compete in Japan.
      
    The goal of this hearing is to discuss Japan's continuing 
importance as an economic partner to the United States and the issues 
surrounding the U.S.-Japan economic and trade relationship.
      
    In announcing the hearing, Chairman Thomas stated, ``Japan remains 
one of our most important trading partners, and recent political and 
economic reform movements in Japan raise our hopes that our trade 
relationship will greatly improve. Yet after all these years, U.S. 
firms do not have full access to Japanese markets. For example, the 
U.S. agriculture, automobile, insurance, healthcare, and express 
delivery industries are only a few of the competitive industries that 
have long sought fair access to the Japanese market. If Japan becomes a 
`normal' country, as its leaders are now emphasizing as their goal, we 
anticipate trade improvements that will benefit both U.S. firms and 
Japanese consumers.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on U.S.-Japan economic and trade relations 
and Japan's role in the world economy, with a narrower focus on the 
following: (1) Japan's economic problems, their causes, and the impact 
on the United States and the world economy; (2) Japan's barriers to 
trade including sanitary and phytosanitary barriers to agriculture 
imports such as the ban on U.S. beef, discriminatory government actions 
against U.S. products, and general non-tariff barriers; (3) Japan's 
role in the current WTO negotiations; and (4) the recent economic and 
regulatory reforms attempts in Japan, including the proposed 
legislation to privatize major components of Kampo.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Requests to be heard at the hearing must be made by telephone to 
Michael Morrow or Kevin Herms at (202) 225-1721 no later than the close 
of business Thursday, September 22, 2005. The telephone request should 
be followed by a formal written request faxed to Allison Giles, Chief 
of Staff, Committee on Ways and Means, U.S. House of Representatives, 
1102 Longworth House Office Building, Washington, D.C. 20515, at (202) 
225-2610. The staff of the Committee will notify by telephone those 
scheduled to appear as soon as possible after the filing deadline. Any 
questions concerning a scheduled appearance should be directed to the 
Committee staff at (202) 225-1721.
    In view of the limited time available to hear witnesses, the 
Committee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing in lieu of a personal appearance. All persons requesting to be 
heard, whether they are scheduled for oral testimony or not, will be 
notified as soon as possible after the filing deadline.
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Committee are required to submit 300 copies, along with an 
IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, of 
their prepared statement for review by Members prior to the hearing. 
Testimony should arrive at the full Committee office, 1102 Longworth 
House Office Building, no later than close of business on Monday, 
September 26, 2005. The 300 copies can be delivered to the Committee 
staff in one of two ways: (1) Government agency employees can deliver 
their copies to 1102 Longworth House Office Building in an open and 
searchable box, but must carry with them their respective government 
issued identification to show the U.S. Capitol Police, or (2) for non-
government officials, the copies must be sent to the new Congressional 
Courier Acceptance Site at the location of 2nd and D Streets, N.E., at 
least 48 hours prior to the hearing date. Please ensure that you have 
the address of the Committee, 1102 Longworth House Office Building, on 
your package, and contact the staff of the Committee at (202) 225-1721 
of its impending arrival. Due to new House mailing procedures, please 
avoid using mail couriers such as the U.S. Postal Service, UPS, and 
FedEx. When a couriered item arrives at this facility, it will be 
opened, screened, and then delivered to the Committee office, within 
one of the following two time frames: (1) expected or confirmed 
deliveries will be delivered in approximately 2 to 3 hours, and (2) 
unexpected items, or items not approved by the Committee office, will 
be delivered the morning of the next business day. The U.S. Capitol 
Police will refuse all non-governmental courier deliveries to all House 
Office Buildings.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing 
for which you would like to submit, and click on the link entitled, 
``Click here to provide a submission for the record.'' Once you have 
followed the online instructions, completing all informational forms 
and clicking ``submit'' on the final page, an email will be sent to the 
address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Wednesday, 
February 23, 2005. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman THOMAS. Good afternoon. Today the Committee is 
examining the United States' trade relationship with Japan 
because it is so important to U.S. producers, workers, 
consumers, farmers, and ranchers, particularly at a time when 
self-protectionism and isolationism threaten the current World 
Trade Organization negotiations and possibly poison the 
atmosphere for free trade. This Committee last held a hearing 
on Japan in July 1998. I think it is more than appropriate to 
look at the relationship again to measure the degree of change, 
if measurable, between 1998 and today, and also to look at the 
recent elections in Japan and other developments.
    China attracts a great deal of media and congressional 
attention, but China is right now only a developing market. The 
World Bank lists Japan as the second largest economy in the 
world. And then when we look at our trading partners, other 
than those in which we have a common border--Canada and 
Mexico--China and Japan are next in order. The United States is 
Japan's largest export market, and Japan's large, thrifty, 
modern, and wealthy population should be a major buyer of 
American goods today, but it is not, in large part because the 
Japanese have built a wall of complex protectionist practices 
and regulatory systems.
    Today we will hear from witnesses from various U.S. 
industries and a Member of Congress to discuss the difficulties 
they have in selling to the Japanese market, including beef, 
medical devices, and insurance, to name only a few.
    Much has been written and much speculation has been 
presented about the results of the recent Japanese election, 
and especially the change in the membership of the Diet. Once 
again that is about the possibility for ``tomorrow.'' In the 
Chair's opinion, too much of our relationship with Japan has 
been waiting for ``tomorrow.'' Pick your cliche: ``Tomorrow is 
forever,'' or ``Tomorrow never comes.'' Either one pretty well 
represents the relationship that we have had with Japan.
    All of us are in hopes that the election indicates that 
there will truly be a new ``tomorrow.'' The purpose of this 
hearing, primarily, is not to speculate about ``tomorrow,'' but 
to determine what ``today'' looks like, and especially in 
comparison with what ``today'' looks like and what 
``yesterday'' looked like--from 1998 until today. Just what 
movement has been evident in the Japanese willingness to open 
up their markets, notwithstanding all the promises of a bright 
tomorrow?
    And with that, I will yield to the Chairman of the Trade 
Subcommittee, the gentleman from Florida, Mr. Shaw.
    Mr. SHAW. Thank you, Mr. Chairman.
    This afternoon we once again gather in a bipartisan manner 
to help comprehend the practices and policies of a vital 
trading partner. In recent months, this Committee has been 
proactive in providing members the opportunity to hear from 
Government, business, and industry leaders on trade relations 
with specific foreign governments. Today we turn our attention 
and focus on United States trade relations with Japan. It is 
time for Japan to know that the United States is serious about 
a free, fair, and transparent trading relationship.
    According to the World Bank, Japan is the world's second 
largest economy. The Department of Commerce lists Japan as the 
United States' fourth largest export market behind Canada, 
China, and Mexico. In addition, Japan is a key partner in our 
efforts to expand American products into the Pacific Rim. 
However, it is most unfortunate that the protectionist views in 
Tokyo have placed American business and industry at a severe 
disadvantage.
    I have heard directly from a number of industries, 
including the automobile industry, the medical device industry, 
and the insurance industry, to name only three. I have 
discussed with them the issues surrounding trade with Japan. 
Overwhelmingly, the serious concern that I share with these 
industry leaders is the numerous and unfair tariff and 
nontariff barriers which exist today.
    The Office of the U.S. Trade Representative produced a book 
entitled ``Barriers to Trade.'' This document provides detailed 
country-by-country barriers on a host of products. The United 
States Trade Representative, USTR, section on Japan, which I 
have here, is an astounding 30-page document. Protectionist 
measures currently in place include high tariffs, support 
programs, quotas, and discriminatory standards. Japan's average 
bound tariff rate on agricultural goods stands at 51 percent 
compared to 12 percent for the United States. The average 
applied tariff rate for agricultural products in Japan is 29.4 
percent compared to 2.4 percent for the United States.
    The United States has always been and will always be a 
leader within the World Trade Organization in seeking the 
removal of trade barriers, including those unfair barriers in 
Japan. We must pressure our Japanese friends to negotiate in 
good faith toward moving its market to one that is fair, 
transparent, and less regulated.
    On September 11th, the Prime Minister was re-elected with 
tremendous support. An issue that he based his re-election on 
was the privatization of Japan's post-insurance arm, the Kampo. 
I understand legislation will move toward the Diet to reform 
Kampo by offering a competitive environment for the United 
States insurance industry. United States life insurers make up 
an estimated $38 billion in annual policy premiums in Japan. As 
Tokyo moves forward in privatizing Kampo, a transition period 
will take place. Regardless of the amount of time the Japanese 
deem necessary to transition into a competitive market, I urge 
the Japanese to conduct the Kampo reform in an open and 
transparent process which will eliminate any hint of unfair 
practices. A transparent process is tremendously important.
    I am also concerned about regulations imposed on the 
medical device industry. The decision to establish 
reimbursement rates based on foreign pricing is perplexing. I 
look forward to hearing from our witnesses addressing this area 
as well.
    Finally, during our focus on China and its currency peg, I 
have heard a number of times that we should not overlook the 
Japanese yen. Over a 3-year period, 2000 to 2003, the Japanese 
Government took steps that thwarted the yen from appreciating 
significantly against the dollar, making U.S. exports to Japan 
more expensive and Japan imports to the United States less 
expensive. While the yen has raised almost 15 percent against 
the dollar in the last 2 years, many economists feel that it is 
still undervalued. I look forward to hearing from our witnesses 
regarding the Japanese yen.
    Mr. Chairman, I appreciate today's witnesses and their 
willingness to educate us on this bilateral relationship. I 
hope to hear their views about whether the recent election will 
usher in reforms. I look forward to working with my friend, Ben 
Cardin, in addressing these concerns and others raised this 
afternoon. And I yield back.
    Chairman THOMAS. The Chair now recognizes the gentleman 
from Maryland, the Ranking Member on the Trade Subcommittee, 
Mr. Cardin.
    Mr. CARDIN. Thank you very much, Mr. Chairman, and let me 
thank you for holding this hearing and say that I am in total 
agreement with the statements that have been made by our 
Chairman and the Chairman of the Trade Subcommittee.
    My concern has been that with all the attention on China, 
we may have lost focus on Japan and making sure that we have 
enforcement of our trade rules with Japan and opening up more 
markets. So, this hearing, I think, is an important step in 
establishing the record as to the current relationship between 
our two countries as it relates to commerce.
    It has already been pointed out that Japan is our next 
largest trading partner outside of North America behind China. 
We had a $75 billion trade imbalance in 2004. I think all of us 
are very concerned about that. Japanese investors are the 
leading foreign holders of U.S. Treasury securities. At the end 
of 2003, they held 15 percent of all privately held Federal 
securities.
    As Mr. Shaw pointed out, there is serious concern as to the 
intervention of Japan into the currency market that is used in 
a way to manipulate the currency in order to give Japanese 
imports into our market an unfair advantage. We need to take a 
look at that and see, in fact, what is being done here and look 
at the impact it has not only on the market today but on the 
future vulnerability of our Nation.
    Mr. Chairman, I appreciate the witnesses that you have, 
particularly on the private sector panel, because I think they 
represent the challenges that we have in our relationship with 
Japan in trading. We have representatives from the auto and 
auto parts industry, and we know that nontariff barriers in 
Japan have worked to the detriment of the auto and auto parts 
industry here in the United States. We have representatives 
from the agriculture/beef industry. We know about the high 
tariffs in Japan on agricultural products and the use of 
sanitary requirements, the standards that go well beyond the 
protection of the health of the people of Japan. We need to 
look at that and see how these distortions are affecting the 
market here and in Japan.
    Representatives from the life sciences are here to talk 
about the medical equipment issue that has been mentioned by 
both the Chairman and the Ranking Member. And representatives 
from the life insurance or service industries are here. Mr. 
Shaw mentioned the privatization of Kampo. It has been delayed 
for a long time. We would like to know the reasons why. And as 
the Chairman said, we are losing patience in promises that have 
been made and not kept. And the issue goes well beyond just 
Kampo. It has to do also with opening up opportunities in other 
service areas.
    Mr. Chairman, these issues are very important. I have, 
along with many of my colleagues on the Democratic side of the 
aisle, been urging the Administration to be more aggressive in 
enforcing our trade rules. In March of this year, I joined 
Ranking Member Rangel and other Members of the Democratic House 
leadership in urging the administration to take action in the 
WTO and under section 301 of the U.S. trade laws to address 
some of our trade issues with Japan, particularly in the area 
of nontariff barriers.
    Mr. Chairman, I can assure you and I can assure our 
witnesses today that we are united to work with all the Members 
of this Committee to make sure that we pay strict attention to 
our relationship with Japan, with the goal of removing 
distorting practices that are now being imposed in Japan, that 
affects access of U.S. companies to the markets in Japan. We 
want to see action, and we look forward to the testimony of the 
witnesses today.
    Chairman THOMAS. I thank the gentleman.
    Before we hear from those panels that the gentleman from 
Maryland described, it is our pleasure to hear from a senior 
Member of the Agriculture Committee, our friend and colleague 
Jerry Moran, from the State of Kansas, for, as far as the Chair 
is concerned, two principal reasons: one, being a Member who is 
not on this Committee, the depth and breadth of the rank-and-
file's attitude about this issue; and, two, because he does 
come from the heartland. The question of agriculture is 
probably as egregious as any in the United States-Japan 
relationship.
    I would tell the gentleman from Kansas any written 
statement he may have will be made a part of the record, 
without objection, and he can address the Committee in any way 
he sees fit.

  STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF KANSAS

    Mr. MORAN. Mr. Chairman, thank you so very much for those 
remarks and for allowing me the opportunity to join you and the 
other distinguished Members of the House Committee on Ways and 
Means and for this opportunity to testify. While I know this 
hearing will cover a number of Japanese trade concerns, I want 
to focus my comments and remarks on the economic harm that U.S. 
farmers, ranchers, processors, and retailers have experienced 
because of a Japanese embargo on American beef.
    Japan has prohibited the import of beef from the United 
States since December of 2003, when a single case of BSE was 
found in a Canadian-born animal. Since that time, we have had 
only two cases of BSE in our country, yet the market remains 
closed.
    Since 2003, the United States has undertaken rigorous and 
thorough surveillance programs for BSE testing and has 
implemented safeguards to protect human and animal health. That 
list is lengthy. We have removed SRMs from the food supply. 
From June 1st of 2004 to August of 2005, we have tested more 
than 450,000 animals. They have tested negative for BSE. We 
have placed a ban on imports of live cattle and most ruminant 
products from high-risk countries; FDA's 1997 prohibition on 
the use of most mammalian protein in cattle feed; an aggressive 
surveillance program has been in place for more than a decade; 
the banning of non-ambulatory cattle from the human food chain; 
requirements for establishing the use of advanced meat recovery 
systems; prohibition against air injection stunning of cattle; 
and if an animal is presented for slaughter and is sampled for 
BSE, they hold the carcass until the test results have been 
confirmed negative.
    These safeguards have exceeded internationally recognized 
standards promoted by the World Organization on Animal Health, 
of which Japan is a Member. And while the Sanitary and 
Phytosanitary Agreement provides members of WTO the right to 
take measures to protect human, animal, and plant health under 
the principles of sound science, the SPS Agreement does not 
provide WTO members the right to discriminate and restrict 
trade arbitrarily.
    So, despite the discovery of only two animals, despite all 
these steps taken, Japan continues to refuse to purchase meat 
products from the United States.
    The Department of State, the Office of the USTR, and the 
U.S. Department of Agriculture have worked tirelessly to open 
this export market, and I commend them for their efforts. And 
on October 23, 2004, almost a year ago, the United States and 
Japan concluded an understanding that established a process to 
lead to the resumption of beef imports from the United States. 
Despite these efforts, the Government of Japan continues to 
delay imports of beef from the United States on the basis of 
factors not grounded in science or consumer safety.
    We are losing $1.7 billion of export market to Japan. It is 
the largest export market for the livestock industry. The 2-
year delay has now totaled more than $3.4 billion in losses. 
And whether you are a farmer or a rancher or a retailer or 
processor, the loss of those markets have a detrimental effect 
upon many communities and the agriculture economy. We are 
losing $100 million each month Japan remains closed to the 
United States, and we have lost an estimated 10,000 jobs.
    Mr. Chairman, this issue is very important in Kansas. I 
know we are thought of as a wheat State, but my district 
produces approximately 5 billion pounds of beef a year, making 
it the largest beef-producing congressional district in the 
Nation.
    It is estimated by my cattlemen that we are losing $6 to $8 
a hundredweight as a result of the Japanese ban. There is no 
more important trade issue in Kansas than resumption of beef 
sales, livestock sales to Japan.
    In March, Mr. Chairman, as you know, I introduced House 
Resolution 137 which has approximately 80 cosponsors of our 
colleagues. That resolution is a sense of the House of 
Representatives that if Japan fails to meet its obligations 
under that agreement reached nearly a year ago, USTR should 
immediately impose retaliatory economic measures against Japan. 
While I do not wish for the U.S. and Japan to enter into a 
drawn-out trade dispute, the reality is that Japan must be 
encouraged, must uphold its trade agreements. I urge this 
Committee to bring this resolution to the floor and show Japan 
the serious nature of this trade issue.
    Congress works to promote trade agreements. Mr. Chairman, 
as you indicated, I am a Member of the House Agriculture 
Committee. We are often asked to support trade agreements, 
CAFTA being the most recent example. And among my colleagues 
and among my constituents, I don't see any problem in reducing 
tariffs, but they wonder what happens after we enter into that 
trade agreement. Why doesn't it result in additional sales? So, 
reducing that tariff, leveling the playingfield in that regard 
is important, but our failure to make certain that the markets 
are open once the agreement is entered into creates a real 
interest on the part of Members of Congress and my constituents 
as to whether trade agreements--what the value of a trade 
agreement is.
    Mr. Chairman, in my opinion, Japan cannot have it both 
ways. They benefit from exports to the U.S. while denying 
imports, such as beef, with no scientific evidence to support 
their actions. In 2004, as Mr. Cardin indicated, our trade 
deficit with Japan was in excess of $75 billion. I urge support 
of House Resolution 137 and ask that this Committee bring that 
resolution to the House floor for a vote.
    I again thank the Chairman for the opportunity to be here 
on behalf of the Agriculture Committee and on behalf of Kansans 
back home.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Moran follows:]

 Statement of The Honorable Jerry Moran, a Representative in Congress 
                        from the State of Kansas

    Good Morning and thank you Chairman Thomas, Ranking Member Rangel, 
and distinguished members of this Committee for the opportunity to 
testify today. While this hearing will cover a number of Japanese trade 
concerns, I will focus just on the economic harm that U.S. farmers, 
ranchers, processors, and retailers have experienced because of the 
Japanese embargo of American beef.
    Japan has prohibited imports of beef from the United States since 
December 2003, when a single case of Bovine Spongiform Encephalopathy 
(BSE) was found in a Canadian-born animal. Since that time, there have 
only been two cases of BSE in this country compared to 20 BSE cases in 
Japan. With a herd size of only 1.5 million beef and dairy cattle in 
Japan, this same ratio would translate to over 560 cases of BSE in a 
U.S. herd size of over 42 million.
    Since 2003, the United States has undertaken a rigorous and 
thorough surveillance program for BSE testing and has implemented 
safeguards to protect human and animal health. These safeguards have 
exceeded internationally recognized standards promoted by the World 
Organization for Animal Health (OIE), for which Japan is a member.
    While the Sanitary and Phytosanitary (SPS) Agreement provides 
members of the WTO the right to take measures to protect human, animal, 
and plant health under the principles of sound science, the SPS 
Agreement does not provide WTO members the right to discriminate and 
restrict trade arbitrarily.
    The U.S. State Department, the Office of the United States Trade 
Representative and the U.S. Department of Agriculture have worked 
tirelessly to reopen this export market for U.S. beef, and they should 
be commended for their efforts. On October 23, 2004, the United States 
and Japan concluded an understanding that established a process to lead 
to the resumption of beef imports from the United States. Despite these 
efforts, the Government of Japan continues to delay imports of beef 
from the U.S. on the basis of factors not grounded in science or 
consumer safety.
    Losing our annual 1.7 billion dollar export market to Japan is 
having a large and negative impact on our entire beef industry and it 
also puts at risk our well-established bilateral trade relationship. 
This two year delay has now totaled almost $3.4 billion in losses. 
Whether you are a farmer or rancher, a beef processor or retailer, the 
loss of these markets is having a detrimental effect on our rural 
communities and our agriculture economy. The U.S. cattle and beef 
industries are losing $100 million each month Japan remains closed to 
U.S. beef. Since December, 2003 the U.S. meat industry has lost 10,000 
jobs, mostly attributed to lost export markets.
    Mr. Chairman, this issue is very important to my constituents of 
the First Congressional District in Kansas. When you think of Kansas 
you probably think of mostly wheat growing on the plains. However, my 
district produces approximately 5 billion pounds of beef a year, making 
it the largest beef producing congressional district in the nation.
    In March of this year I introduced House Resolution 137 which 
currently has 80 cosponsors. This Resolution is a sense of the House of 
Representatives that if the Government of Japan continues to delay in 
meeting its obligations under the understanding reached with the U.S. 
on October 23, 2004, the U.S. Trade Representative should immediately 
impose retaliatory economic measures on Japan. While I do not wish for 
the U.S. and Japan to enter a drawn out trade dispute, the reality is 
Japan must be encouraged to uphold its trade agreements. I urge the 
committee to help bring this resolution to the floor and show Japan the 
serious nature of this trade issue.
    Before the August recess, I also had the opportunity to discuss 
this issue with President Bush and Ambassador Portman. As Congress 
works to promote free trade agreements throughout the world, it is 
important for our trading partners to honor current agreements and 
international standards. Without these assurances, support for future 
free trade agreements will erode.
    Just this week, I was also joined by over 100 members of Congress 
in sending a letter to President Bush asking that he make restoring 
market access for U.S. beef to Japan his highest economic priority. I 
support our government's efforts to reopen our beef exports to Japan 
but the Japanese continue to unjustifiably delay the process.
    The Senate has voiced similar concerns with letters to the 
President, Senator Thune's companion resolution, and amendments in the 
agriculture appropriations process.
    Mr. Chairman, Japan cannot have it both ways. They cannot benefit 
from exports to the U.S. while denying our imports, such as beef, with 
no scientific evidence to support their actions. Congressional patience 
has been exhausted. I urge you to support House Resolution 137 and help 
bring this resolution to the House floor for a vote.
    Thank you Mr. Chairman again for the opportunity to come before you 
today to discuss an issue of great importance to the state of Kansas 
and of the nation.

                                 

    Chairman THOMAS. Thank you very much, and as a Member from 
California, I think that beef on the plate would go well with a 
starch and quality vegetable or fruit, with a glass of wine, so 
that the Japanese consumer can appreciate the full agricultural 
blessings of this country.
    Any Member wish to inquire of the gentleman from Kansas? 
The gentleman from Pennsylvania.
    Mr. ENGLISH. I want to thank the gentleman for his 
testimony, and I wonder for context, because you have obviously 
been a leader in this effort, have you experienced any other 
markets that have been as protectionist as Japan with regard to 
our agricultural products?
    Mr. MORAN. Well, I am not sure how to compare the two, but 
certainly the European Community has created a significant 
number of trade barriers for agricultural products being sold 
into the European Community. But at the moment--and that is a 
longstanding dispute. At the moment, clearly the issue in 
agriculture today is the failure of Japan. And I cannot see how 
they can stand on any ground for their position, no basis, no 
scientific basis, no consumer safety, no food safety issue. We 
exceed the standards by the agreement which they have entered 
into. And so, clearly, Japan is at the top of the list in my 
mind.
    Mr. ENGLISH. I want to thank the gentleman for his advocacy 
and the fine work he has done with this resolution, and I yield 
back the balance of my time.
    Mr. MORAN. Thank you, Mr. English.
    Chairman THOMAS. Any additional--the gentleman from North 
Dakota.
    Mr. POMEROY. Mr. Chairman, I want to commend my colleague, 
Jerry Moran. It is my privilege to serve on the Subcommittee he 
leads in the House Agriculture Committee. I strongly agree with 
his testimony this morning--this afternoon, I should say.
    One question is this business of the U.S. Department of 
Agriculture seeming to open the door to Japanese beef imports 
to us. It seems to me most curious that that would move forward 
while they are holding our product out. That was a measure--
they announced the proposal in August of 2005. The Senate voted 
as part of the 2006 agriculture appropriations bill to prohibit 
implementing this proposal. Do you have a thought specifically 
on that action by the U.S. Department of Agriculture?
    Mr. MORAN. Mr. Pomeroy, clearly a question that should be 
asked of USDA as to their thinking. My guess, as I explain it 
to my constituents, is that USDA wants to have the United 
States' trade regimen operate based upon sound science, abide 
by the rules so that we have no--so that Japan has no 
opportunity to claim that we are not doing something we should 
be doing. I have explained this at home that my guess is USDA 
was trying to provide a carrot to Japan, but what I would 
suggest that we need is a stick, not a carrot. This is stick 
time, not carrot time.
    Mr. POMEROY. I have explained it slightly differently. I 
have said it is totally crazy for the United States to bring in 
Japanese beef when we cannot get our beef out, and perhaps it 
is part of the explanation as to how we have dug ourselves into 
this current account deficit in trade. We have to simply be 
much more aggressive, I believe, in demanding fair treatment. I 
very much appreciate the gentleman's leadership on this issue. 
You are terrific on these matters.
    Mr. MORAN. Mr. Pomeroy, I have not been in Congress quite 
as long as you, but I have been here nearly 10 years, and every 
one of these instances, the conversation I have with colleagues 
but, more importantly, with people at USTR, at USDA, is we 
cannot rock the boat. And I think we simply have heard this 
expression, we have this attitude it has gone on far too long. 
We have to rock the boat or we remain with the status quo. And 
in my opinion, it is time to rock the boat.
    Mr. POMEROY. I agree with you completely. I think that 
those watching this exchange should note bipartisan Members of 
Congress have had their belly full and we intend to rock the 
boat, as you say.
    I yield back, Mr. Chairman.
    Mr. MORAN. Mr. Chairman, Mr. Pomeroy is one of my most 
difficult Subcommittee members, and I am glad we are in 
agreement today.
    [Laughter.]
    Chairman THOMAS. Well, the Chair only wants to indicate 
that if anybody wants any carrots, we have quality carrots in 
the old-fashioned version.
    [Laughter.]
    Chairman THOMAS. Or the ever more popular small carrots in 
bags available, even in Japan, if we could get them in.
    Does the gentleman from Missouri wish to be recognized?
    Mr. HULSHOF. I do, Mr. Chairman. Thank you, and I, too, 
wish to associate myself with my friend from Kansas' remarks, 
just as I am on his resolution and just as I was proud to be a 
signatory of the letter that you sent to the President of the 
United States, and to echo what my friend from North Dakota has 
said.
    You know, at the time when there was a bit of controversy 
here in our country about reopening the border, beef coming 
across the Canadian border, and there was a lot of angst about 
this, and probably in the gentleman from North Dakota's home 
State, I know that there was a lot of concern among cattle 
producers in my home State of Missouri about this. And my 
response to constituents was, the science is there. We cannot 
have a different set of standards dealing with our partners to 
the North if, in fact, we are wanting to push the Japanese 
market on beef. And so at least that was the story that I had 
as far as why the USDA was pushing so hard to have Canadian 
beef flow back South into our country.
    So, again, not to belabor the point, but I would say to my 
friend from North Dakota, just as we had a meeting--what was 
it, Mr. Chairman?--10 days ago with the European Union Ag 
Commissioner, and the gentleman from Kansas is absolutely 
correct as far as protectionist measures with the European 
Community. You know, we are the most open country on the face 
of the Earth as far as having access to our markets. And when 
you see other nations that have thrown up protection barriers 
simply to keep our products out of their markets, it is time 
that I think the administration--and we have shared this not 
only with the EU Ag Commissioner but with our own former 
colleague of this Committee, the U.S. Trade Representative, 
that it is time for us to be much more aggressive, and that is 
why I commend the gentleman again for the resolution, for the 
letter, for all of your efforts, because I think the science is 
on our side, and this is an issue that we must be aggressive.
    And I appreciate the Chairman yielding me time.
    Mr. BEAUPREZ. Mr. Chairman?
    Chairman THOMAS. The gentleman from Colorado, would you 
yield briefly?
    Mr. BEAUPREZ. I would, Mr. Chairman.
    Chairman THOMAS. I have heard it told that the Japanese 
actually do rely on science in terms of allowing products in. 
The trouble is it was weather science. And whenever there was 
bad weather in short supply in Japan, somehow the market was 
open; when the weather is good, the market is not open. So, 
they may be relying on science, but it is weather science 
rather than the science we usually refer to in terms of quality 
and protection under sanitary and phytosanitary reasons.
    The gentleman from Colorado, thank you.
    Mr. BEAUPREZ. I thank the Chairman. I thank my colleague 
from Kansas, Mr. Moran, as well for his outspokenness and 
leadership on this issue and for the resolution you have 
introduced as well.
    Being a neighbor from Colorado and having an economy that 
is very, very similar, we finish a little beef in Colorado, 
too, as the gentleman knows. And I don't think that there is a 
more raw nor sensitive subject right now among Colorado 
ranchers and farmers and beef growers than the one that you 
raise today.
    Unfortunately, it is too symptomatic of other trade 
barriers, trade problems we have, and probably the reason why 
we are having this hearing today, with our friends in Japan. I 
have some personal familiarity with the issue that you raise, 
Jerry. Back through the eighties, we were in the dairy cattle 
business, pure-bred dairy cattle, and we exported cattle all 
over the world. The Japanese market was much coveted because if 
you could manage to get it over there, they always wanted the 
best, and they were willing to pay for it.
    Unfortunately, they had a barrier--not just a tariff 
barrier, which we are all familiar with, but we called it a 
functional barrier with unbelievably restrictive health 
requirements. I am going to guess that my colleague from Kansas 
would agree with me that the American farmer--and I think 
rightfully--always prided themselves in producing the best and 
the finest and the safest food in the world, and in abundance, 
I might add. And it absolutely confounded me that these 
artificial barriers were put up against U.S. ag products then 
and, unfortunately, they still exist today.
    So, again, I applaud you. I associate myself with your 
comments and your fine leadership on this, and I hope that 
maybe today's hearing brings some light to a subject that is 
causing otherwise very good friends and allies to have a 
considerable point of disagreement right now, and that is this 
issue of truly fair and free trade.
    Mr. MORAN. I thank the gentleman from Colorado for 
associating himself with my remarks, as well as the gentleman 
from Missouri. And, Mr. Chairman, I failed to mention that even 
as late as this week, the Japanese Commission chief that is 
reviewing the science on this issue has announced that there is 
no hurry to make a decision. There is no need to give into the 
pressure to a rush. Again, I think the message ought to be that 
there is a reason and that people simply cannot continue to 
ignore agreements that have been entered into with impunity.
    Chairman THOMAS. The Chair recognizes the gentleman from 
Iowa, Mr. Nussle.
    Mr. NUSSLE. Thank you, Mr. Chairman.
    My question is--maybe it underscores something that you 
said already. I would ask my friend from Kansas, we are coming 
up on the 1-year anniversary of the agreement that was made to 
resume these commitments, and I guess my first question to the 
gentleman is--and I am a cosponsor of your resolution. Are you 
aware whether or not the United States has--my understanding is 
we have fulfilled our part of the bargain here, that we have 
fulfilled our part of the commitment when it comes to this 
agreement that was made in October of 2004. Is that your 
understanding?
    Mr. MORAN. It is my understanding.
    Mr. NUSSLE. And if it is true that, in fact, the 
Commissioner in Japan has indicated that there is no rush and a 
year is not long enough for Japan to fulfill its part of the 
bargain when, in fact, I believe 70 other markets have now been 
reopened to American beef--and I am asking this from a 
strategic standpoint, recognizing that the Senate last week, as 
part of their appropriations process, if I am not mistaken, 
adopted a resolution that is very similar to the one that you 
wrote here in the House. What should our strategy be from a 
congressional standpoint? Obviously, we are going to have 
administration witnesses before us today, but what is your 
suggestion or your proposal of how the House could or should 
proceed as we not only try and deal with this but also put 
pressure on Japan short of locking down markets and initiating 
what would be tantamount to a trade war?
    Mr. MORAN. I thank the gentleman from Iowa. I don't think 
the Senate has yet passed this resolution. It has been 
introduced. The Senator from South Dakota, Mr. Thune, has 
introduced a companion resolution. The Senate this week did 
take steps in the appropriations process, in the agriculture 
appropriations bill, to deal with this issue. Mostly I think 
their effort was to prohibit the importation of Kobe Japanese 
beef into the United States until the reverse market is open 
for us.
    So, the Senate is taking steps in regard to their 
displeasure with our trading relationship with Japan, 
particularly as it relates to beef.
    I do think that this is--a year is a long time. In fact, 
Mr. Nussle, I got most interested in this topic when I was 
reading that the Food Safety Commission was meeting once every 
4 weeks. This is back in February of this year. The Committee 
that was designed to determine how to implement the October of 
2004 agreement was only meeting once every month. It seemed to 
me that the expediency demanded of this process should be 
greater than that. And so this resolution was introduced last 
March.
    I think it is time for the House of Representatives to pass 
this resolution or a similar resolution, appropriately worded, 
determined by the Ways and Means Committee, and that 
particularly in light of a potential visit by the Prime 
Minister of Japan to the United States in the near future, an 
awfully good time for the House of Representatives to express 
it opinion in this regard.
    We often talk in Congress about, delivering a message, and 
I am happy to deliver the message. The last thing I would want 
is a trade war, an unnecessary trade war, difficult trading 
relations with the Japanese. But, again, I go back to what I 
indicated to Mr. Pomeroy, that we cannot always take the 
position that rocking the boat, creating dissension, creating 
difficulties--we have to go through that process to have a 
desirable outcome, and the status quo, again, remains 
unsatisfactory.
    So, I think the timing for action by this Committee and by 
the House of Representatives is here. My own constituents, your 
constituents, Mr. Nussle, would say it is past time, that this 
has gone on too long.
    Mr. NUSSLE. And I would say to my friend from North Dakota, 
I am not sure we are rocking the boat. The boat is rocking. It 
is a matter of trying to prevent it from tipping over 
completely, because that is where we are at at this point in 
time. And my judgment is that we are--the boat is--we are in a 
storm right now, and we have got to figure out how to get out 
of this storm, and it is about time that that occur. Otherwise, 
this, in fact, may capsize and we may get into a situation that 
neither country, particularly countries that are friends and 
that have had a longstanding relationship, a good relationship 
in certainly the last number of decades--we need to prevent 
that from happening. But it appears that most of that onus is, 
unfortunately, outside of our control other than to express our 
displeasure and put whatever pressure we can. And I think we 
should--I think that process should continue, and I appreciate 
your leadership in giving us advice on how we could continue 
that pressure.
    Thank you.
    Mr. MORAN. I thank the gentleman, and I appreciate his 
analogy.
    Chairman THOMAS. I thank the gentleman.
    The Chair thanks the gentleman from Kansas and appreciates 
his focusing on one particular aspect of an ongoing festering--
--
    Mr. MORAN. Mr. Chairman, thank you, and I would be 
politically inept and remiss if I did not mention that 
California is the largest agriculture-producing State in the 
Nation, although Kansas is thought to be an agriculture State. 
We are that, but California is much more, and between you and 
Mr. Herger and Mr. Nunes, I recognize that these issues have 
huge consequences to your economy.
    Chairman THOMAS. Quality beef and quality wheat is always 
appreciated to augment the broad and vast agricultural wealth 
found in California.
    I thank the gentleman very much.
    Chairman THOMAS. The Chair would ask the first panel to 
come forward: Wendy Cutler, who is the Assistant U.S. Trade 
Representative for Japan, Korea, and Asia-Pacific Economic 
Cooperation Affairs, Office of the U.S. Trade Representative; 
David Loevinger, who is the Deputy Assistant Secretary for 
Africa, the Middle East, and Asia, United States Department of 
Treasury; A. Ellen Terpstra, who is the Administrator, Foreign 
Agricultural Service, U.S. Department of Agriculture; and Mr. 
A.G. Kawamura, who is the Secretary of Agriculture in the 
California Department of Food and Agriculture.
    The Chair would indicate that any written statement that 
the panel has will be made a part of the record. You can 
address the Committee in any way you see fit. The microphones 
are in front of you. They may need to be turned on 
individually. And beginning, with Ms. Cutler, we move then 
across the panel.

      STATEMENT OF WENDY S. CUTLER, ASSISTANT U.S. TRADE 
  REPRESENTATIVE FOR JAPAN, KOREA, AND ASIA-PACIFIC ECONOMIC 
  COOPERATION AFFAIRS, OFFICE OF THE U.S. TRADE REPRESENTATIVE

    Ms. CUTLER. Thank you, Mr. Chairman. On behalf of the 
Office of the U.S. Trade Representative, I would like to thank 
you, the Ranking Member, and other members of the Committee for 
convening today's hearing. I am Wendy Cutler, Assistant USTR 
for Japan, Korea, and APEC Affairs, and I very much welcome the 
opportunity to provide testimony today.
    Japan is currently our fourth largest trading partner with 
$180 billion in total two-way goods trade, our third largest 
export market, and our third largest market for U.S. 
agricultural exports.
    Over the years, the bilateral trade relationship has grown 
from one dominated by acrimony to one where we are increasingly 
seeking ways to work together to find win-win solutions. That 
said, old ways die hard in Japan. While we continue to make 
progress, we still run into heavy resistance to change. So, let 
me start with some good news.
    Since your last hearing in 1998, Japan has become one of 
the most competitive broadband markets in the world, which has 
really been a boon to U.S. suppliers. Japan has dramatically 
reduced customs processing fees at its ports. It has 
significantly strengthened its IPR regime. It has liberalized 
its energy sector. And it has fostered the independence and 
staffing of the Japan Fair Trade Commission.
    More recent reforms will be detailed in our next soon-to-
be-completed annual Report to the Leaders under our Regulatory 
Reform Initiative. Mr. Chairman, you will find in this year's 
Report to the Leaders a new section on agriculture, where we 
are addressing specific ongoing concerns with Japan's 
phytosanitary regime, and we attained encouraging progress. 
Japan, for example, has removed three citrus pests from its 
fumigation list, eliminating over $1 million in annual costs on 
imports of U.S. citrus. And I should add that Japan last month 
eliminated its unjustified fire blight measures on imports of 
U.S. apples, following a resounding U.S. victory for the United 
States in the WTO.
    There are, nevertheless, formidable problems in our 
bilateral trade relationship with Japan. Foremost among them is 
Japan's continued ban on U.S. beef imports. The administration 
shares your frustration over Japan's glacial speed at reopening 
its market. We have repeatedly and consistently engaged Japan 
at all levels on this issue. Ambassador Portman has devoted 
considerable time to this problem. He raised this issue just 
yesterday with Ambassador Kato after reading press reports 
coming out of the Food Safety Commission's deliberations on 
Monday.
    The Food Safety Commission appears to be in the final 
stages of its deliberations. Unfortunately, it is not there 
yet, and this is very disappointing. By any reasonable measure, 
Japan has had ample time to reach a conclusion on this issue 
and reopen its market. We will continue to press hard on Japan.
    Another priority issue for the administration is Japan Post 
privatization. We are urging Japan to take three steps to 
ensure fair competition for its market participants in the 
banking, insurance, and express delivery sectors. We want Japan 
to completely eliminate the tax, regulatory, and other 
advantages that Japan Post continues to enjoy over its 
competitors. We want Japan to ensure that Japan Post is not 
allowed to make new product offerings in these markets until a 
fully level playingfield is achieved. And we want to ensure 
full transparency throughout the process.
    We are also devoting much attention to Japan's health care 
reform efforts and specifically what they mean for the U.S. 
medical device and pharmaceutical industries. Our focus right 
now is on the biennial review of the reimbursement prices Japan 
assigns to devices and drugs, a process that in the past has 
presented many problems and one that should be done in a fair 
and transparent manner and in a manner which rewards 
innovation.
    Working with industry and in close cooperation with the 
Department of Commerce, we will continue to press Japan to find 
solutions to the pricing and product approvals issues in these 
sectors.
    Before closing, allow me to turn to the Doha Development 
Agenda. Ambassador Portman has been urging Japan to play a more 
forward-learning role. To be sure, Japan has been doing some 
good work, particularly with respect to the industrial tariff 
or NAMA negotiations. But with respect to agriculture, the 
Japanese regrettably have allowed their protectionist domestic 
agriculture interests to prevail, and this is disappointing. As 
a result, they have bee incapable of finding a solution at home 
that would permit them to take a constructive position on the 
market access piece of agriculture. If the DDA is to succeed, 
Japan will have to substantially reduce its tariffs on 
agricultural products and ensure meaningful improvements in 
market access.
    Mr. Chairman, we have come a long way with Japan over the 
years and have found ways of doing business on the trade front 
that are increasingly yielding positive results. This has been 
an incremental process in sector after sector, and while we 
welcome the progress we have made, we cannot and will not 
become complacent. We have some very real trade problems with 
Japan today that are subject to this hearing, and they require 
our focus and constant attention and engagement with Japan at 
all levels. I can tell you that USTR will do everything in its 
power to ensure these problems are resolved in a timely and 
fair manner.
    Thank you.
    [The prepared statement of Ms. Cutler follows:]

  Statement of Wendy Cutler, Assistant U.S. Trade Representative for 
 Japan, Korea and Asia-Pacific Economic Cooperation Affairs, Office of 
                     the U.S. Trade Representative

    On behalf of the U.S. Trade Representative, I would like to thank 
the Chairman, Ranking Member, and the other members of this Committee 
for convening this hearing today. I am Wendy Cutler, Assistant USTR for 
Japan, Korea and APEC Affairs and I very much welcome this opportunity 
to provide testimony on the state of our economic and trade 
relationship with Japan.
    As you point out in your announcement for this hearing, Japan is 
currently our fourth largest goods trading partner with $180 billion in 
total two-way goods trade during 2004. It is a huge magnet for the 
things we produce and grow. Overall, Japan is our third largest export 
market. It is also our third largest market for U.S. agricultural 
exports.
    Not only is our trade relationship enormous in volume, it is also 
rich in complexity and it has significant ramifications for the Asian 
region and the world. Over the years, that relationship has grown from 
one dominated by acrimony to one where we are increasingly working 
together to find win-win solutions where possible. There is much that 
underlies this shift, including our changed world in the post-9/11 era 
and the spectacular economic dynamism of the Asian region. There is 
also the close friendship President Bush shares with Prime Minister 
Koizumi, which has helped create an environment conducive to good 
cooperation between our two Governments. And I should add that the 
Prime Minister, who just won re-election by an historic landslide, has 
done his part to accelerate economic reform in Japan, which in turn 
makes our job a little easier.
    That said, old ways die hard in Japan. While we continue to make 
good progress up and down the trade front, we still run into heavily 
reinforced bulwarks against change.
    Today, I would like to sketch out some of the progress we have made 
in recent years with Japan as well as underscore that there remains 
substantial inertia at work in the enormous and critically important 
Japanese market--inertia that continues to frustrate our efforts to do 
business there. Japan's inability to move expeditiously to reopen its 
beef market is an example of this.
Achieving Progress
    So let's start with the good news. In recent years, Japan has 
significantly lowered retail rates for calling mobile networks, and by 
reducing monopoly control over networks and equipment, Japan has 
created conditions for one of the most competitive broadband markets in 
the world. It has dramatically reduced certain customs processing fees 
at its ports,thereby lowering the cost of doing business for U.S. 
exporters and express carriers. Japan has undertaken significant 
liberalization of both its electricity and gas sectors. It has 
significantly strengthened its intellectual property rights regime by, 
for example, extending the term of copyright protection for 
cinematographic works from 50 to 70 years. And it has bolstered the 
independence and staffing of its antitrust watchdog, the Japan Fair 
Trade Commission or JFTC, so that it can better promote a competitive 
environment in the Japanese market for domestic and foreign companies 
alike.
    More recent progress will be detailed in our next annual Report to 
the Leaders under the Regulatory Reform and Competition Policy 
Initiative, which was established by President Bush and Prime Minister 
Koizumi in 2001. That Initiative is the chief mechanism we use to 
manage our trade and economic relationship with Japan. The Leaders 
Report, which should be finished shortly, will include a myriad of 
regulatory reform steps Japan has, or will be taking, in the key 
sectors.
    In the telecommunications sector, Japan is poised to make 
substantial blocks of spectrum available primarily for new wireless 
entrants, helping break a longstanding oligopoly and thereby creating 
opportunities not only for U.S. telecommunications companies wanting to 
expand into the wireless business in Japan, but also equipment 
suppliers to those companies.
    Japan is also removing numerous regulatory impediments to e-
commerce, further strengthening copyright protection, cooperating 
closely with the private sector to combat spam, improving government 
network security, ensuring effective and transparent implementation of 
its new Privacy Law, and improving foreign firms' access to bidding on 
government IT systems.
    Though not going far enough, the Japanese have finally made the 
decision to reduce landing fees at Narita International Airport, a step 
that will lower costs in Japan for U.S. airlines and express delivery 
companies.
    Mr. Chairman, you will also find in this year's Report to the 
Leaders a new section on agriculture where we are addressing specific, 
ongoing concerns with Japan's phytosanitary regime--and we have 
obtained very encouraging progress. As you know, for years we have had 
problems with Japan's requirements to fumigate fruits and vegetables 
upon import for pests that that are also reportedly present in Japan. 
That fumigation has either adversely affected the quality of the 
product (particularly for lettuce) or added unnecessary costs (for 
example on citrus) or both.
    In response to U.S. concerns, we have recently obtained Japan's 
commitment to take steps to bring its phytosanitary measures in line 
with international standards. Japan has committed to conduct import 
risk assessments for quarantine pests in accordance with the relevant 
International Plant Protection Convention standard to use science to 
determine if these pests should be subject to quarantine measures. In 
concrete terms, Japan has removed three citrus pests from its 
fumigation target list, thereby eliminating over $1 million in annual 
fumigation costs on imports of U.S. citrus. In another step in the 
right direction, Japan also has agreed to assess certain pests of 
lettuce to determine if fumigation requirements for them are really 
necessary. All told, we believe this effort under the Regulatory Reform 
Initiative is a positive and constructive path to addressing systemic 
phytosanitary regulatory impediments in Japan.
    While I am on the issue of agriculture, I might add that we finally 
reached resolution with Japan on a long-standing WTO dispute over 
apples. (You may recall that we won a related case against Japan on 
testing of varietal fruits in the late 1990's.) Last month, Japan 
eliminated its unjustified fire blight measures on imports of U.S. 
apples, following a resounding victory for the United States in the 
WTO. As a result, we expect U.S. apples will be shipped to Japan later 
this year.
    Turning to some more comprehensive cross-cutting areas, this year's 
Report to the Leaders specifies that Japan has taken further steps to 
strengthen the JFTC's enforcement capabilities through recent 
amendments to the Antimonopoly Act that will increase penalties on 
companies participating in price-fixing and introduce a leniency 
program to combat cartels effective January 2006.
    In addition, Japan passed legislation just last June to strengthen 
its Public Comment Procedures. That legislation was not as robust as we 
would have liked, but it should help increase transparency in the 
development and implementation of regulations in a system that has been 
notorious in the past for its opaqueness.
    In another step forward, the Japanese Corporate Code has been 
amended in ways that will ultimately permit U.S. and other foreign 
firms to use modern merger techniques (such as triangular mergers) when 
making acquisitions in Japan.
    Achieving progress in these cross-cutting areas is crucial for our 
companies as these are the areas where some deeply ingrained 
impediments to trade and investment remain. The automotive industry, 
for example, continues to face systemic issues such as regulatory 
transparency and competition policy concerns that can make Japan a 
difficult place to do business. That is why the cross-cutting issues 
are such a priority for us.
    In sum, we have and will continue to make good progress in our 
efforts to further open markets in Japan in key sectors such as 
telecommunications, information technologies, medical devices and 
pharmaceuticals, energy, and agriculture. And we will continue to go 
after the hard-to-get-to impediments to trade in cross-sectoral areas 
such as competition policy and transparency.
    That said, there are some formidable problem areas in our bilateral 
trade relations.
Fighting Inertia
    Foremost among these is Japan's continued ban on beef imports from 
the United States. I know my USDA colleague Ellen Terpstra will have 
much to say about this, but allow me to offer a few words here as 
Ambassador Portman has devoted significant time to this problem and 
raised it on every possible occasion with his Japanese counterparts. In 
fact, he just delivered a strong message on the beef ban to Japan's 
Trade Minister, who was here in Washington earlier this month. This 
issue also remains a top priority for President Bush, who has raised it 
directly with Prime Minister Koizumi on several occasions.
    We share your frustration over the glacial speed with which Japan 
has been moving to reopen its market to U.S. beef. We have repeatedly 
and consistently engaged Japan at all levels on this issue. This 
Administration has transmitted a huge amount of scientific information 
to the Japanese Government on the safety of U.S. beef.
    The Food Safety Commission (FSC), charged with conducting the risk 
assessment of the safety of U.S. beef, appears to be in the final 
stages of its deliberations. But unfortunately, it is not there yet and 
this is very disappointing. Once the FSC completes its work, we 
understand that will initiate a 30-day public comment period, followed 
by a reopening of the market shortly thereafter.
    By any reasonable measure, Japan has had ample time to reach a 
conclusion to this issue. We will continue to press hard on Japan at 
all levels until it does the right thing in line with science and fully 
reopens its market to U.S. beef.
    Another item high on our bilateral agenda is the privatization of 
Japan Post. Whether or not privatization should be enacted is of course 
Japan's choice. Certainly Prime Minister Koizumi has pursued this major 
reform with great determination, and he has been most articulate about 
the broad domestic objectives that underpin his commitment to seeing 
his initiative achieved.
    The ripple effects of these reforms are substantial, however, and 
the Administration is focused on the impact they will have on 
competition in Japan's banking, insurance, and express delivery markets 
where Japan Post is such a major player. Unequal conditions of 
competition in these markets between Japan Post and U.S. and other 
private companies have long been high on our list of concerns. The 
Administration is urging Japan to take this opportunity to make the 
policy choices that are necessary to finally achieve a level playing 
field.
    In order for Japan to achieve fair play for all participants in 
these key markets, we are urging Japan to take three steps. First, we 
are calling on Japan to fully eliminate the web of legal, tax, and 
regulatory advantages that have allowed Japan Post to grow its 
businesses while putting U.S. and other companies at a substantial 
competitive disadvantage. Second, it is important that Japan Post not 
be permitted to expand its product offerings in those businesses where 
it competes with the private sector until a level playing field has 
been established. Third, it is imperative that Japan undertake the 
privatization process in manner that is fully transparent to all 
parties.
    The Administration has been responding with a concerted interagency 
effort, using every opportunity at all levels of government, to urge 
Japan to embrace the three basic elements I have just described to you. 
Importantly, our views are also echoed by others, including key 
Japanese insurance companies, as well as Japanese, European, and 
Canadian business associations. We will remain vigilant as the process 
unfolds and urge Japan to do the same in its efforts to ensure that 
fair competition is actually achieved.
    We are also devoting much attention to issues related to health 
care reform in Japan, particularly how these reform policies impact 
U.S. medical devices and pharmaceuticals industries. Over the years, we 
have worked very closely with these industries to ensure they get a 
fair shake in Japan. And we have seen some success as Japan has taken 
steps to expedite regulatory approvals and make its reimbursement 
pricing process more transparent than in the past.
    Japan is currently cycling into yet another biennial review of the 
reimbursement prices it assigns to medical devices and pharmaceuticals, 
a process that has presented many problems in the past. Our chief 
concern is that the process is done in a transparent and fair manner. 
While we fully understand the need for Japan to reduce rising costs 
related its national healthcare system, we also strongly believe 
innovation should be rewarded for these products. Indeed, by rewarding 
innovation, Japan ensures that Japanese patients can obtain the best 
drugs and devices, which in turn shortens the time they stay in 
hospitals, improves their lives, makes them more productive to society, 
and contributes to economic growth.
    Even so, it is crucial these devices and drugs get to Japanese 
patients in a timely fashion. As I believe you will hear later today 
from industry, Japan's recent efforts to speed regulatory approvals 
through a merger of administrative agencies have, to our dismay, 
yielded poor results. Approvals, in fact, are slower now than before--
thus undermining some past achievements.
    Many important decisions on these pricing and approvals issues will 
be made in the coming months in Japan. Working closely with industry 
and in close cooperation with the Department of Commerce, we will 
continue to press Japan to find solutions in these problem areas that 
are both fair and equitable.
    Before closing, I would like to highlight two other, broader 
aspects of our economic relationship with Japan.
Doha Development Agenda
    First, as you know, Ambassador Portman is working hard in the run-
up to the Hong Kong Ministerial meeting in December to set the stage to 
complete the Doha Development Agenda, or DDA, by the end of 2006. He 
spent most of last week in Paris conducting intensive discussions with 
the European Union and other WTO Members on this.
    With the two largest economies in the world, the United States and 
Japan share a special responsibility to work together to use the power 
of open markets to pull people up and expand political as well as 
economic freedom. And there may be no other single action we could take 
to deliver the broad and long-term economic benefits of trade than 
successfully concluding the current round of global trade talks.
    To this end, Ambassador Portman has been urging Japan to be more 
constructive and play a more forward-leaning role in the DDA. The good 
news is that we have begun seeing some positive efforts by Japan in 
recent months. Japan has, for example, stepped forward by focusing the 
attention of other Asian capitals on the non-agricultural market access 
(NAMA) issues to help set the stage for more progress this fall and has 
been an important leader in sponsoring and helping to push our agenda 
on sectoral initiatives. Japan will also be showing some leadership by 
hosting a Senior Officials Meeting in Geneva later this week to discuss 
the DDA. In addition, Japan, like us, has been utilizing the APEC 
process to help build momentum for Doha.
    These steps are welcome, but as Ambassador Portman has been 
reminding Japan and others, all countries must pitch in to make 
substantial progress in the three agriculture pillars of export 
subsidies, market access, and domestic support. Frankly, the Japanese 
have allowed their protectionist domestic agriculture interests to 
prevail, and this has been disappointing. As a result, they have been 
incapable of finding a solution at home that would permit them to take 
a forward-leaning position on the market access piece of agriculture, 
which is the key concern of the U.S. agricultural community when it 
comes to Japan. If the DDA is to succeed, Japan will have to 
substantially reduce its tariffs on agricultural products and ensure 
meaningful improvements in market access. It's now up to Japan to 
decide whether or not it wants to get on the train as it leaves the 
station.
U.S.-Japan Cooperation in Asia
    The other broader aspect of our economic relationship I would like 
to comment on is the importance of U.S.-Japan cooperation vis-`-vis 
Asia.
    With its vibrant economies, able work forces, and enormous consumer 
markets, Asia has assumed greater economic, strategic and political 
relevance to the United States and Japan than ever before. For a whole 
host of reasons, it is very important that our two countries promote 
more growth and development in the region. And it is important that we 
set a good example in the way we conduct our trade relations, opening 
our markets to goods and services from around the region, and above 
all, ensuring fair play in the marketplace.
    In particular, the United States and Japan are working together to 
help ensure China's integration into the global economy is a smooth 
one. One of the ways we have been doing this is by working closely 
together to strengthen intellectual property rights protection and 
enforcement in China and around the region. Over the past year, 
officials from the U.S. and Japanese Governments have met on numerous 
occasions to discuss this topic. Those discussions have led to Japan's 
endorsement of an important new IPR initiative we have been promoting 
in APEC.
    My central point here is that while we do have several difficult 
bilateral trade issues with Japan, we are still friends and allies with 
a great deal to gain from close cooperation on matters of global 
concern, such as advancing DDA, as well as matters of regional concern, 
such as strengthening intellectual property rights protection and 
enforcement.
Continued Vigilance Necessary
    We have come a long way with Japan over the years and have found 
ways of doing business on the trade front that are generally yielding 
good results. This has been an incremental process occurring in sector 
after sector. The Japanese market is more open than it used to be. 
Japan's ministries are coming to grips with the importance of 
transparency in policy-making and are taking steps to improve this. And 
its IPR regime has seen vast improvements over the years. While we very 
much welcome all this progress, we should not be complacent. We have 
some very real trade problems with Japan today that require our focused 
and constant attention and engagement at all levels. I can tell you 
that USTR will do everything in its power to ensure these problems are 
resolved in a timely and fair manner. Thank you.

                                 

    Chairman THOMAS. Thank you. Mr. Loevinger?

 STATEMENT OF DAVID LOEVINGER, DEPUTY ASSISTANT SECRETARY FOR 
 AFRICA, MIDDLE EAST, AND ASIA, U.S. DEPARTMENT OF THE TREASURY

    Mr. LOEVINGER. Thank you, Mr. Chairman, other Committee 
members, for this opportunity to talk about the 
administration's engagement with Japan. Mr. Chairman, as you 
mentioned, this hearing is timely, as it is taking place at a 
time both of growing optimism about the possibility of 
sustained domestic demand-led growth in the Japanese economy 
and about the prospects for more rapid economic reforms 
following this month's elections.
    My colleagues have testified and will testify today on a 
number of sectoral trade issues. The Treasury Department works 
closely with USTR, Commerce, and other agencies on these 
issues. Treasury has focused particularly on access to the 
Japanese market for U.S. financial services providers.
    In addition to these sectoral issues, Treasury pays very 
close attention to the overall growth of the Japanese economy. 
Strong, sustained, and domestic demand-led growth in Japan--and 
as many of you have mentioned today, which is the second-
largest economy in the world and one of our largest trading 
partners--would boos growth in U.S. exports and jobs and 
contribute to more balanced global growth.
    Japan has struggled for the past decade and a half to 
overcome the effects of the collapse in the late eighties of 
the asset price bubble. The Government responded to the 
economic downturn with a series of fiscal stimulus packages, 
mostly public works spending that yielded low results. 
Regulatory forbearance allowed banks to remain technically 
solvent without dealing with their growing bad loans. This led 
to the eventual failure of many banks.
    Japan's slowness in dealing with failing banks and 
delinquent corporate debtors kept it, until now, from achieving 
sustained domestic demand-led growth. Evergreening loans to 
what we call zombie borrowers locked resources up in non-
productive activities, and heavy debt burdens limited new 
investment in new activities. Short-lived economic rebounds in 
1993, 1995-96, and 1999-2000 faded quickly back into recession 
once the initial fiscal or export stimulus faded. The 
protracted economic slowdown led to persistent deflation.
    Japan's struggle to emerge from deflation, sluggish growth, 
and banking sector problems may be finally coming to an end. 
The Koizumi Administration made clear that restoring growth 
would require structural reforms and Japan could no longer rely 
on fiscal stimulus. The Koizumi government also brought tougher 
banking regulation, which forced banks to raise capital and 
deal with their problem borrowers.
    There are growing signs that the labor market is finally 
strengthening. While exports, especially to China, helped fuel 
the early stages of Japan's current recovery, household 
consumption and investment have been key engines of growth in 
recent quarters. So, Mr. Chairman, at least for the Japanese 
economy, after several false dawns, a new day may finally have 
arrived.
    But the Japanese economy still faces numerous headwinds. 
Deflation still persists. Many small banks are still weak. And 
after years of failed fiscal stimulus, Japan now has the 
largest fiscal deficit and government debt, relatively to its 
economy, of any G7 economy. Moreover, a rapidly aging 
population will necessitate increased public spending on health 
care and pensions, while a shrinking work force will limit the 
growth of income and payroll tax receipts.
    Japan's long-term growth potential is estimated to be only 
about 1.5 percent a year compared to over 3 percent for the 
U.S. Given these headwinds, far-reaching structural reforms are 
needed to boost growth so Japan can make a larger contribution 
to global growth.
    On financial sector issues, there have been regular 
discussions between Treasury, Japan's Ministry of Finance, and 
Japan's financial services agencies. These have continued to 
expand opportunities for U.S. firms.
    Ten years ago, foreign participation in Japan's domestic 
financial market was almost unthinkable. Now U.S. investors own 
several Japanese banks, and market share of U.S. and other 
foreign securities firms is growing. U.S. direct investment in 
Japan in the financial services sector has grown from about $6 
billion 10 years ago to over $38 billion last year.
    On exchange rate policy, an issue which you, Mr. Chairman, 
and many other members have raised, we are aware that Japan has 
intervened in the foreign exchange market in the past, 
sometimes in large amounts. We have discussed foreign exchange 
market issues with Japanese officials, and they are fully aware 
of our views that the world economy works best with free trade, 
free flow of capital, and flexible exchange rates in large 
economies. The Japanese authorities have not intervened in the 
foreign exchange market since March 2004. Japan has also 
supported the U.S. in the G7 on exchange rates, and this has 
been expressed in a series of G7 communiques calling for 
greater exchange rate flexibility. Japan is also working with 
us to bring about greater exchange rate flexibility in China 
and in other large economies in East Asia. We will continue to 
express our view that major economies should have flexible 
exchange rates, with market intervention kept to a minimum.
    Thank you.
    [The prepared statement of Mr. Loevinger follows:]

 Statement of David Loevinger, Deputy Assistant Secretary for Africa, 
         Middle East, and Asia, U.S. Department of the Treasury

    Chairman Thomas, Ranking Member Rangel, and other Committee 
members, thank you for this opportunity to talk about developments in 
the Japanese economy and the Administration's engagement with Japan on 
macroeconomic and financial issues. This hearing is timely, as it is 
taking place at a time of growing optimism both about the possibility 
of sustained domestic demand-led growth in Japan and more rapid 
economic reforms following this month's elections.
    My colleagues have testified on a number of sectoral trade issues. 
The Treasury Department works closely with USTR, Commerce, and other 
agencies on these issues through the Trade Policy Review Group. 
Moreover, Treasury has focused particular attention on access to the 
Japanese market by U.S. financial services providers.
    In addition to these sectoral issues, Treasury pays close attention 
to the overall growth of the Japanese economy. Strong, sustained, and 
domestic demand-led growth in Japan--the world's second largest 
economy--would boost U.S. exports and jobs and would also contribute to 
more balanced global growth. For the last decade Treasury has consulted 
closely with Japanese authorities on ways to achieve this.
    Japan has struggled for the past decade and a half to overcome the 
effects of the collapse of the late-1980s asset price ``bubble.'' 
Falling property prices--with commercial land prices down more than 80% 
in Japan's major metropolitan areas between 1991 and 2004--hit 
corporate and household balance sheets. Banks were hit by the financial 
stress of their customers and by falling collateral values when they 
tried to foreclose.
    Firms that had built up capacity and staffing during the latc-1980s 
boom reduced their investment spending. They also held down hiring, cut 
back on overtime and bonuses, and replaced permanent employees with 
part-time workers. The resulting drop in wages slowed household 
consumption.
    The government responded to the economic downturn with a series of 
fiscal stimulus packages, mostly public works spending yielding low 
returns. Regulatory forbearance allowed banks to remain technically 
solvent without dealing with their growing bad loans. This led to the 
eventual failure of many banks, including some systemically large 
institutions, and large infusions of public funds since the late 1990s.
    Japan's slowness in dealing with failing banks and delinquent 
corporate debtors kept it, until now, from achieving sustained domestic 
demand-led growth. Evergreening loans to zombie borrowers locked 
resources up in non-productive activities, and heavy debt burdens 
limited investment in new activities. Short-lived economic rebounds in 
1993, 1995-96, and 1999-2000 faded quickly back into recession once the 
initial fiscal or export stimulus faded. The protracted economic 
slowdown led to persistent deflation.
    Over the past decade U.S. engagement with Japan focused on 
resolving banking sector problems; overcoming deflation, and restoring 
sustained, domestic demand-led growth. At times this discussion was 
acrimonious. The Bush Administration established a quieter, more 
cooperative dialogue with Japan, focused on creating the fundamentals 
for sustained growth rather than encouraging fiscal stimulus to pump up 
growth over the next few quarters.
    Japan's struggle to emerge from the deflation, sluggish growth, and 
banking sector problems may finally be coming to an end. The Koizumi 
Administration made clear that restoring growth would require 
structural reforms such as increasing competition in domestic markets 
and improving the efficiency of financial intermediation, and could no 
longer rely on fiscal stimulus. The Koizumi government also brought 
tougher banking regulation, which forced the banks to raise capital and 
deal with their problem borrowers. Corporate restructuring has 
strengthened firms' finances and reduced excess debt and capacity.
    There are also growing signs that the labor market is finally 
strengthening: the number of full-time employees rose recently for the 
first time in seven years, and the number of part-time workers fell for 
the first time in a decade. While exports, especially to China, helped 
fuel the early stages of Japan's current recovery, household 
consumption and investment have been the key growth engines in recent 
quarters. So, at least for the Japanese economy, after several false 
dawns, a new day may have finally arrived.
    But the Japanese economy still faces numerous headwinds. Deflation, 
though diminished, still persists. Many small banks and small firms 
still remain weak. After years of stimuli, Japan now has the largest 
fiscal deficit and government debt, relative to GDP, of any G7 country. 
A large fiscal retrenchment is inevitable. Moreover, a rapidly aging 
population will necessitate increased limit the growth of income and 
payroll tax receipts, making the fiscal retrenchment more difficult. By 
2025, public spending on health care and pensions, while a shrinking 
workforce will . . .
    Japan is projected to have more than half as many elderly as 
working-age people, up from less than one-third today. In the United 
States, in contrast, that ratio is projected to rise from about one-in-
five today to about one-in-three by 2025.
    Japan's long-term potential growth rate is estimated to be only 
about 1Yz percent per year, vs. 3Yi-4 percent in the United States. We 
share Prime Minister Koizumi's view that, given these headwinds, far-
reaching structural reforms are needed to boost productivity so that 
the Japanese economy can navigate the challenges of the 21st century 
and make a larger contribution to global growth.
Financial Sector Issues
    The length of the post-bubble economic troubles and the high costs 
of cleaning up the banking sector owe much to the financial system that 
Japan maintained after the Second World War. Bank-dominated, heavily 
segmented and regulated, and closed to outsiders, the Japanese 
financial system failed to innovate and develop the credit analysis and 
risk assessment tools that financial institutions in the United States 
introduced.
    For the past two decades, starting with the Yen-Dollar talks in the 
1980's, the Treasury has pressed Japanese financial regulators to 
reform and modernize Japan's financial system and open the sector up to 
foreign investment. The U.S.-Japan Financial Services Agreement, 
negotiated in 1995, opened up a number of sectors for U.S. financial 
services firms, including the management of public pension funds. The 
``Big Bang'' financial liberalization decontrolled prices and fees, 
opened up financial markets to new entry and new products, and shifted 
regulation and supervision to a modern market--and risk-based system. 
Regular discussions between Treasury, Japan's Ministry of Finance and 
Japan's Financial Services Agency have continued to expand 
opportunities for U.S. firms--in managing the assets of Postal Savings 
system and offering 401K pension products, structured asset products, 
investment advisory and custodial services, and many others.
    Ten years ago, foreign participation in Japan's domestic financial 
market was almost unthinkable. Today, market access and national-
treatment are no longer prominent issues in our financial sector 
dialogue. U.S. investors own two large Japanese banks and several small 
ones. And the market share of U.S. and other foreign securities firms 
is growing, as it is for foreign pension and mutual fund managers. 
Those developments are reflected in the rapid growth of U.S. direct 
financial services investment in Japan, which has grown from $6Yi 
billion in 1994 to more than $38 billion last year on a historical cost 
basis. Income from those investments has grown even more rapidly, from 
around $400 million in 1994 to nearly $5 billion last year.
    We still have a very active engagement with Japan on financial 
sector issues, but the issues have shifted from market access to market 
development. These have included restrictions on short sale 
transactions, the ability to conduct global risk management across 
financial entities, participation of global custodians in government 
bond settlement, and taxation of mutual funds.
    One recent example illustrates the importance of this engagement. A 
revision of section 821 of Japan's proposed Corporation Law, submitted 
to the Diet this year, could have required many foreign financial and 
non-financial firms to reincorporate as Japanese subsidiaries, in many 
cases with substantial tax liability on realized capital gains. Our 
Financial Attache in Tokyo worked closely with U.S. firms and the 
Japanese Diet to craft a legislative history exempting foreign firms. 
We continue to monitor this issue to determine if this will suffice or 
if corrective legislation is necessary.
    The most important financial sector issue now is the privatization 
of Japan's Postal financial institutions--Postal Savings and Postal 
Life. These are huge institutions, by far the world's largest savings 
bank and life insurer, accounting for a third of Japan's deposits and 
40% of its life insurance policies. We believe Prime Minister Koizumi's 
postal privatization bills can help increase the efficiency of 
financial intermediation, and potentially reduce the need for such high 
precautionary savings, boosting growth and imports. One key to success, 
as Secretary Snow and other Treasury officials have stressed to our 
Japanese counterparts, will be ensuring a level playing field so that 
the competitive advantages enjoyed by the privatized postal savings and 
postal life insurance firms are eliminated. Another key will be strict 
regulation, especially to limit risk transfers or cross-subsidization 
among the privatized financial and non-financial corporations.
    But postal privatization will not be enough, as Prime Minister 
Koizumi recognized when he called for sweeping reforms including labor 
and product market deregulation and fundamental reforms of government 
lending institutions. Japan also needs continued progress in capital 
market and corporate governance reforms to ensure that corporate 
managers are focused on shareholder value. Our own experience shows 
that allowing the full range of foreign and domestic M&A activity helps 
develop the market for corporate control, which can contribute to 
better resource allocation, higher returns on investment, and faster 
growth and impoi1s.
Exchange Rate Policy
    Japan has intervened in the foreign exchange market in the past, 
sometimes in large amounts. We have discussed foreign exchange market 
issues with Japanese officials, and they are fully aware of our views 
that the world economy works best with free trade, free flow of 
capital, and flexible exchange rates for large economies. Japanese 
authorities have not intervened in the foreign exchange market since 
March 2004. Japan has also supported the G7 position on exchange rates, 
expressed in a series of G7 Communiques, calling for greater exchange 
rate flexibility. And Japan has worked with us to bring about greater 
exchange rate flexibility in China and in other large economies in East 
Asia. We will continue to strongly express our views that major 
economies should have flexible exchange rates, determined in the market 
with intervention kept to a minimum.
    Thank you again for this opportunity to testify before you. 
Ensuring vigorous, domestic demand-led growth, increased financial 
sector dynamism and opportunities for U.S. firms, and flexible, market-
determined exchange rates in Japan and other large economies will 
continue to be priorities for the Treasury and the Administration.

                                 

    Chairman THOMAS. Ms. Terpstra?

    STATEMENT OF A. ELLEN TERPSTRA, ADMINISTRATOR, FOREIGN 
      AGRICULTURAL SERVICE, U.S. DEPARTMENT OF AGRICULTURE

    Ms. TERPSTRA. Thank you, Mr. Chairman. Members of the 
Committee, I am pleased to be here with my colleagues today to 
discuss trade with Japan.
    For the past 45 years, United States agriculture has posted 
a positive trade balance. In 2004, exports reached a record 
$62.4 billion, and this year we expect strong sales of $62 
billion. For 2006, we are forecasting yet another historical 
record--$63.5 billion. And this is while major markets, 
including most notably Japan, remain unjustifiably closed to 
the United States products.
    While we highly value Japan as an important market, we have 
had major difficulties in maintaining that market. The source 
of many difficulties is protectionism reflected through 
unjustified use of sanitary and phytosanitary regulations. The 
inconsistent use of a scientific underpinning for an SPS 
regulatory structure has resulted in many disputes, some very 
protracted.
    None of the disputes has been of the same magnitude as the 
closure of Japan's market to our beef and beef products. Until 
recently, Japan was the leading market for U.S. beef, buying 
$1.4 billion worth in 2003. This issue has received the highest 
level of attention in our Government, involving the President, 
Secretary Johanns, Ambassador Portman, and many other high-
level officials. Many Members of Congress, including some on 
this Committee, have been very actively involved in this issue 
as well.
    We have worked hard to restore the market. We have 
responded to requests for information, hosted technical teams, 
and traveled to Japan for countless meetings. We have stressed 
the use of international standards and the propriety of 
science-based decisions. We have urged Japan to promptly 
complete review of its import rules and to reopen the market to 
our beef.
    The Japanese assure us that they are working through the 
process, but as time quickly passes, those assurances ring 
hollow. The time to resume trade has long passed.
    Let me address another priority issue: Japan's official 
control policy. This policy calls for fumigating for pests that 
are present in Japan but are neither being eradicated nor 
contained as required by international standards. This 
longstanding issue particularly affects fresh fruits and 
vegetables, such as citrus and lettuce.
    This year we have made some progress toward changing the 
quarantine status of these pests, a critical first step toward 
eliminating unnecessary fumigations. For example, in April, 
Japan removed fumigation requirements for certain citrus pests, 
a priority issue for our citrus industry. Also in April, 
Japan's official control policy was raised at the Regulatory 
Reform Dialog, an initiative launched by President Bush and 
Prime Minister Koizumi. These talks resulted in Japan agreeing 
to bring its official control policy into compliance with 
international standards.
    Japan has also agreed to assess certain pests of lettuce 
with the aim of removing fumigation requirements for them. We 
continue to press for improved market access to U.S. lettuce 
into the Japanese market.
    I would also like to talk about the WTO negotiations and 
Japan's role in those talks. Throughout the summer, despite the 
best efforts by many, little progress was made on key issues in 
the negotiations. It is my perception that Japan has taken a 
protectionist approach, especially on market access, and it 
has, thus, been of little help. We have significant differences 
in the approach to tariff reductions. The United States is 
seeking substantial reductions in tariffs. Our tariffs average 
12 percent on agricultural products, in comparison to Japan's 
average of 51 percent. Japan strongly opposes progressive 
tariff cutting and any tariff cap. We advocate for an 
aggressive formula that cuts the highest tariffs the most, and 
we insist on a cap on tariffs that are unreasonably high.
    As in the past, Japan appears primarily interested in 
protecting its agricultural industries from import competition. 
It has lobbied for continued use of safeguards and to expand 
product eligibility for the safeguard currently available. In 
contrast, the United States and other ambitious countries would 
like to eliminate developed countries' use of such safeguards. 
We also differ on sensitive products. We want to limit the 
number of products a country may identify as sensitive, while 
Japan wants to maximize the use of such products.
    We have made very clear what we are seeking in these talks. 
Our goal is to level the playingfield for our farmers and 
ranchers. Our markets are relatively open. Our domestic 
supports are relatively low. We insist upon substantial 
progress in all three pillars in the agriculture negotiations. 
We are encouraging Japan to constructively engage in these 
negotiations, to work with us to obtain a Doha outcome that 
will underpin our continuing, mutually advantageous trading 
relationship.
    Mr. Chairman, Japan is an important market for U.S. farmers 
and ranchers, our number three market in calendar year 2004. We 
highly value that commercial relationship, and we want it to 
contribute to a further strengthening of our overall bilateral 
relationship.
    That concludes my statement. I would be pleased to answer 
questions. Thank you.
    [The prepared statement of Ms. Terpstra follows:]

  Statement of A. Ellen Terpstra, Administrator, Foreign Agricultural 
                Service, U.S. Department of Agriculture

    Mr. Chairman, members of the Committee, I am pleased to come before 
you today with my colleagues from the Department of Treasury and the 
Office of the U.S. Trade Representative to discuss trade with Japan.
Importance of Exports to U.S. Agriculture 
    My focus today is the agriculture and food sector of our economy. I 
will discuss the importance of agricultural exports to our economy, 
trade issues with Japan, and Japan's role in the agriculture 
negotiations in the World Trade Organization's (WTO) Doha Development 
Agenda.
    Agriculture long has been a true bright spot in our nation's trade 
balance. For the past 45 years, agriculture has posted a positive trade 
balance. U.S. sales abroad have grown from $4.5 billion in 1960 to a 
record $62.4 billion in 2004. This year, we foresee still strong sales 
of $62 billion, just shy of the record. We now are forecasting yet 
another record--$63.5 billion--for 2006. And, I should add that these 
estimates reflect the fact that several major markets--including most 
notably Japan--with additional sales of some $3 billion remain 
unjustifiably closed to the United States.
    The benefits of agricultural exports extend far beyond the 
farmgate. Last year's sales of $62.4 billion generated $158 billion in 
overall economic activity. These sales support additional services to 
harvest, process, package, store, transport, and market the products. 
High-value fresh and processed foods and beverages--which have become a 
bigger share of our overseas sales--now represent more than 40 percent 
of total export value, and they generate more additional economic 
activity than bulk commodities.
    Agricultural exports also mean jobs. Our research indicates that 
every billion dollars in agricultural exports supports 15,300 jobs--in 
trade, transportation, services, food processing, and other 
manufacturing sectors. That means our total exports support nearly one 
million jobs. These are good jobs--with one third in rural areas and 
two thirds in metro areas. In our rural communities, agricultural 
exports generate more employment benefits than any other export 
industry.
    I cannot emphasize enough that the future financial health of 
American agriculture depends on its success in the international 
marketplace. Historically, we have been the world's largest 
agricultural exporter. U.S. farmers last year earned 27 percent of 
their total cash receipts from foreign customers. For many products, 
the dependence is far greater--up to 70 percent for some items. And, 
increasingly, we are exporting more livestock and horticultural 
products, high-value products that further stimulate our economy.
Trade with Japan
    Now, let me turn to Japan which long has played an important role 
in American agriculture's success story. In the early post-war years, 
Japan was a U.S. food aid recipient, but soon grew to be the top export 
market for our farmers and ranchers. It remained there for over 20 
years, but recently has been replaced by Canada and Mexico, our two 
partners in the North American Free Trade Agreement. In fiscal year 
2004, Japan purchased $8.5 billion worth of U.S. food and agricultural 
products. This year, sales to Japan are forecast at only $7.7 billion, 
reflecting in part lower prices for corn and soybeans.
    While we highly value Japan as an important market, we have had 
major difficulties in maintaining the market and mixed success in 
trying to enable it to reach its full potential. The source of many 
difficulties is the arbitrary use of sanitary and phytosanitary (SPS) 
regulations. This has resulted in many disputes, some very protracted, 
over the years.
Reopening the Japanese Market to U.S. Beef 
     None of the disputes has been of the magnitude nor of the 
intensity as one still pending before us. That, as everyone here today 
well knows, is the closure of Japan's market to our beef and beef 
products owing to the discovery of BSE in the United States in 2003. 
Japan was the leading market for U.S. beef, buying some $1.4 billion 
worth in 2003.
    This issue has received the highest attention in our government, 
involving the President on several occasions--and has commanded the 
full attention of Secretary Johanns and his predecessor Secretary 
Veneman, Vice President Cheney, Secretary of State Rice and her 
predecessor Secretary Powell, U.S. Trade Representative Portman and his 
predecessor Ambassador Zoellick, and many other high-level officials. 
Many Members of Congress, including some on this committee, have been 
very actively involved in the issue, as well.
    We have worked diligently from the outset to restore this market. 
We have responded to numerous requests for information, hosted several 
technical teams, and traveled extensively to Japan for countless 
meetings. We have emphasized the role and guidelines of the 
international standard-setting body, the World Animal Health 
Organization (OIE) and the need for science-based decision-making. We 
have urged the Japanese Food Safety Commission to complete its review 
of import rules expeditiously and the Government of Japan to take 
prompt action to reopen the market to our beef.
    We have repeatedly told the Japanese government that it is 
critically important to resolve this issue so that we can eliminate 
this source of friction between our countries and instead focus on 
broadening and deepening our overall trade and economic relationship. 
The Japanese assure us they are working through the process to reopen 
their market to safe U.S. beef. As time quickly passes, those 
assurances ring hollow--the time to act is now.
Official Control
    Beyond beef, let me address another trade priority, and that is 
Japan's official control policy that frustrates our ability to ship a 
variety of fruits and vegetables. This policy, which calls for 
fumigating pests that are not being eradicated or contained in Japan as 
required by international standards, has been an issue of longstanding 
concern. This particularly affects fresh fruits and vegetables such as 
citrus and lettuce.
    In December 2004, Japan's official control policy was raised at the 
Regulatory Reform Dialogue, an economic reform initiative launched by 
President Bush and Prime Minister Koizumi. These talks resulted in 
Japan agreeing to bring its official control policy into compliance 
with international standards.
    As a result of raising this matter through the Regulatory Reform 
Initiative, this year we have seen some progress toward changing the 
quarantine status of these pests, a critical first step toward 
eliminating unnecessary fumigations. In April, Japan removed fumigation 
requirements for certain citrus pests, a priority issue for our citrus 
industry. This action significantly reduced fumigation costs for citrus 
traders and will enhance product quality, greatly improving consumer 
acceptance in the local market.
    Japan also has agreed to assess certain pests associated with 
lettuce production, with the aim of minimizing the need for fumigation. 
Japan confirmed earlier this year that it is conducting a pest risk 
assessment for several different pests, including Western Flower 
Thrips, one of the most frequently intercepted pests on lettuce. We 
will continue to press for improved market access for U.S. lettuce into 
the Japanese market.
    USDA also remains active in addressing market issues for many other 
products. For example, we work closely with our rice industry to ensure 
that Japan meets its WTO commitments for market access. To date, they 
have purchased the required amounts. However, we are seeking to secure 
improved access, particularly to reach Japanese consumers more 
directly.
Fire Blight
    I can report one success among our many, long-standing efforts to 
open Japan's market. As you know, we were successful in our WTO 
challenge of Japan's fire blight restrictions against our apples to 
bring its restrictions into conformity with the WTO SPS agreement.
    On August 25, Japan published the detailed rules for U.S. apple 
imports, which comply with the WTO fire blight ruling. We have reviewed 
the work plan described in the rules and can confirm that the work plan 
will be in operation for the upcoming season.
    Japan's compliance with the WTO decision is a clear victory for the 
United States, for our apple industry, and most importantly for the 
credibility of the international trading rules. As a result, the 
Japanese market now is open to our apples under reasonable and science-
based terms. This outcome also signifies the importance of WTO SPS 
obligations and the need for commitment from WTO members to adhere to 
science-based, risk-based import and export standards and to apply them 
equitably without discrimination.
Doha Negotiations
     Before concluding, I want to mention the WTO negotiations and 
Japan's role in the talks. Throughout the summer, despite the best 
efforts by many, little progress was made on key issues in the 
negotiations. It is my perception that Japan has taken a protectionist 
approach, especially on market access, and thus has not helped move the 
process forward.
    As in past negotiations, Japan appears primarily interested in 
protecting its agricultural industries from import competition. It has 
actively lobbied for continued use of safeguards and to expand product 
eligibility for the safeguards currently available to members. In 
contrast, the United States and other countries with high ambition 
would like to eliminate developed countries' use of such safeguards.
    We also differ on use of ``sensitive products''. We want to limit 
the number of products a country may identify as sensitive, while Japan 
wants to maximize the use of such products.
    We also have significant differences in the approach to tariff 
reduction. Our agricultural tariffs only average 12 percent in contrast 
to Japan's average of 51 percent. Japan strongly opposes use of any 
type of progressive tariff-cutting formula and any tariff cap. It still 
prefers the old fashioned, go-slow approach of the Uruguay Round. In 
sharp contract, we advocate an aggressive formula that cuts the highest 
tariffs the most, and we insist upon a cap on tariffs that are 
unreasonably high.
    We have made very clear what we are seeking. We simply want to 
level the playing field for our farmers and ranchers. Our markets are 
relatively open, and yet, we have stepped forward and put our domestic 
supports on the table. We insist upon substantial progress in all three 
pillars of the negotiations: market access; trade-distorting domestic 
support; and export competition. We are encouraging Japan to 
constructively engage in the negotiations, to work with us in obtaining 
a Doha outcome that will underpin our continuing, mutually advantageous 
trading relationship.
Conclusion
     Mr. Chairman, Japan is an important market for U.S. farmers and 
ranchers--our number three market in calendar year 2004. We highly 
value that commercial relationship--and we want it to contribute to a 
further strengthening of our overall bilateral relationship.
     To accomplish this, for our mutual benefit, we want to find ways 
to expand our cooperation with Japan--to focus on our bilateral 
relationship and also to find ways to cooperate more effectively in the 
international arenas. As we move forward in the Doha talks, we intend 
to aggressively seek additional market access gains, including 
important markets like Japan.
     Mr. Chairman, that concludes my statement. I would be pleased to 
answer any questions.

                                 

    Chairman THOMAS. Mr. Kawamura?

     STATEMENT OF A.G. KAWAMURA, SECRETARY OF AGRICULTURE, 
  CALIFORNIA DEPARTMENT OF FOOD AND AGRICULTURE, SACRAMENTO, 
                           CALIFORNIA

    Mr. KAWAMURA. Thank you, Chairman Thomas, Ranking Member 
Shaw, and members of the Committee, for calling this hearing to 
discuss the importance of our trading relationship with Japan. 
I am A.G. Kawamura, Secretary of the Department of Agriculture, 
and I am here today as Governor Schwarzenegger's 
representative. In California, we are working very hard to 
share our understanding that access--and it is an important 
word, ``access``--to nutritious California-grown foods or U.S. 
foods is an essential component of a healthy lifestyle and is a 
key part of our State and national economy.
    As you know, California's agricultural production--$31.8 
billion in 2004 in farm-gate value--if ranked separately would 
rank economically as the fifth largest agricultural region in 
the world.
    California is the number one dairy State in the Nation, 
accounting for more than 20 percent of this Nation's milk 
supply. And California is also the number two producer of 
cheese, rice, poultry, and cotton for the Nation. We are the 
sole producer of 12 commodities and the national leader in 81 
other commodities. And in terms of global markets, the 
important part for this discussion, California is the national 
leader accounting for 10 percent of U.S. agricultural exports. 
All of this leads to an economic impact in the State--and, of 
course, for the Nation--of more than $130 billion, if the 
multiplier could be used conservatively. Clearly, given these 
important facts, any opportunities to expand California 
agriculture's success in access to foreign markets, including 
Japan, would benefit our entire Nation.
    The critical importance of Japan as an economic partner to 
the United States, especially to our State of California, is 
clear when you look at the numbers. Japan consistently ranks as 
the number two or three market for California's agricultural 
exports. In 2003, this totaled $913 million. Our top five 
commodities for that year were rice, almonds, beef, hay, and 
wine. Additionally, in 2003, as was mentioned throughout, 
California's share of that beef production number was $86 
million in beef and beef products exported to Japan, more than 
half of the 2003 number. This figure comprises 40 percent of 
all California beef exports for that year, and as Congressman 
Moran mentioned, that is a $1.5 billion loss for the 2004-05 
for zero shipments during the ban.
    This continuing ban on U.S. beef, despite our rigorous 
surveillance and testing protocols, is of great concern to all 
of us who believe in the validity of science-based measures to 
ensure food safety.
    In fact, the harmonization of sanitary and phytosanitary 
standards and other trade barriers between the U.S. and Japan 
can greatly enhance the potential for export of many crops. For 
example, as was mentioned, California's stone fruits, lettuce, 
and rice face restrictive policies that significantly limit 
shipments of those commodities into Japan. In California, we 
understand the need for phytosanitary caution. Our Department 
of Agriculture expends approximately $197 million per year to 
protect our agricultural commodities and ensure that only 
quality food products reach the consumer. All agricultural 
trade then can suffer from foodborne disease and pest 
outbreaks. And for this reason, all nations have a stake in 
being alert to the enormous challenges caused by introduction 
of unwanted species of pests and diseases. However, with 
California's stringent environmental and conservation practices 
and with strict Federal guidelines that ensure food safety and 
quality, our farmers and ranchers produce a finished product 
that meets or exceeds the highest standards in the world. These 
exacting standards are just what the Japanese consumer demands.
    As the WTO process works to promote market access, we would 
clearly expect the agricultural trading relationship between 
Japan and the United States to continue to expand. Working 
together, I am confident that the issues that we face today 
with Japan can be resolved to our mutual benefit.
    In fact, we look forward to building upon the relationship 
between our Governor and Prime Minister Koizumi and his new 
government.
    Over the last 2 years, Japan has been in the process of 
transitioning maximum residue limited from a negative list 
system to that of a positive. This will result in determination 
of allowable chemical residues for a wide variety of 
agricultural products, especially those from the specialty crop 
arena and value-added foods. We have faith that this new 
process will be a facilitation of our ability to send products 
to Japan and not restrict the access to these high-quality, 
safe, and nutritious U.S. products.
    The clear benefits of trade are often more than just 
impressive numbers, though. We live in a time where 
California's farmers and ranchers comprise one of the largest 
delivery systems of food and fiber in the world. And it is this 
extraordinary and dependable supply of farm products that 
provides all consumers with food security and stability. It is 
this food security and stability that Japanese consumers 
demand. The existence of trade barriers limits our ability to 
enjoy full access to the market. The goal of every Nationshould 
be to provide a wide array of safe and nutritious farm products 
throughout the year to its citizens. So, choice, affordability, 
and availability help to create and maintain a nation's health, 
not just our Nation's health but Japan's as well.
    California, again, is committed to ensuring the economic 
security and competitiveness for our growers while providing a 
safe and secure food supply. We are all witness to the amazing 
globalization of this very small planet of ours. Globalization 
is not a threat but an opportunity. Human progress then will be 
measured by every nation's ability to deliver an abundance of 
affordable goods, including those products that are essential 
to health and well-being. We believe that the Japanese consumer 
deserves access to high-quality foods that this Nation so 
expertly produces. Trade policies that limit the availability 
of these goods should be revisited and revised.
    The 21st century will bring many challenges but none 
greater than achieving a renewed commitment to agriculture and 
its fundamental role in all societies. We are all stakeholders 
in this future, and I thank you for this testimony opportunity 
today.
    [The prepared statement of Mr. Kawamura follows:]

   Statement of A.G. Kawamura, Secretary of Agriculture, California 
           Department of Food and Agriculture, Sacramento, CA

Introduction
    Thank you Chairman Thomas, members of the committee, for calling 
this hearing to discuss the importance of our trading relationship with 
Japan. I am A.G. Kawamura, Secretary of the California Department of 
Food and Agriculture. I'm here today as Governor Schwarzenegger's 
representative. In California, we are working hard to share our 
understanding that access to nutritious California grown foods is an 
essential component of a healthy lifestyle and is a key part of our 
state and national economy.
California feeds the world
    As you know, California's agricultural production--$31.8 billion 
dollars in farm-gate value--if ranked separately would make it 
economically the fifth largest agricultural region in the world.
    California is the No. 1 dairy state in the nation, accounting for 
more than 20 percent of the milk consumed by Americans. California is 
also the No. 2 cheese, rice, poultry and cotton state in the nation. We 
are the sole producer of 12 commodities and the national leader in 81 
other commodities. In terms of global markets, California is the 
national leader accounting for 10 percent of U.S. agricultural exports. 
All of this leads to an economic impact in the state of more than $130 
billion dollars. Clearly, given these important facts, any 
opportunities to expand California agriculture's access to foreign 
markets, including Japan, would benefit our entire nation.
U.S-Japan trade relations are of vital importance
    The critical importance of Japan as an economic partner to the 
U.S., especially to the state of California, is clear when you look at 
the numbers. Japan consistently ranks as the No. 2 or No. 3 market for 
California's agricultural exports. In 2003, this totaled $913 million 
dollars. Our top five commodities for that year were rice, almonds, 
beef, hay and wine. Additionally, in 2003 California beef producers 
shipped $86 million in beef and beef products to Japan. This figure 
comprised 40 percent of all California beef exports that year.
    The continuing ban on U.S. beef, despite our rigorous surveillance 
and testing protocols, is of great concern to all of us who believe in 
the validity of science-based measures to ensure food safety.
Harmonization of staandards
    In fact, the harmonization of sanitary and phytosanitary standards 
and other trade barriers between the U.S. and Japan can greatly enhance 
the potential for export of many crops. For example, California's stone 
fruits, lettuce and rice face restrictive policies that significantly 
limit shipments of those commodities into Japan. In California, we 
understand the need for phytosanitary caution. The California 
Department of Food and Agriculture expends approximately $197 million 
per year to protect our agricultural commodities and ensure that only 
quality food products reach the consumer. All agricultural trade can 
suffer from food borne disease and pest outbreaks. For this reason, all 
nations have a stake in being alert to the enormous challenges caused 
by introduction of unwanted species of pests and diseases. However, 
with California's stringent environmental and conservation practices, 
and with strict federal guidelines that ensure food safety and quality, 
our farmers and ranchers produce a finished product that meets or 
exceeds the highest standards in the world. These exacting standards 
are just what the Japanese consumer demands.
    As the WTO process works to promote market access, we would clearly 
expect the agricultural trading relationship between Japan and the U.S. 
to continue to expand. Working together, I'm confident that the issues 
that we face today with Japan can be resolved to our mutual benefit.
    Over the last two years, Japan has been in the process of 
transitioning maximum residue limits from a negative list system to 
that of a positive. This will result in determination of allowable 
chemical residues for a wide variety of agricultural products, 
including specialty crops and value-added foods. With full faith in 
scientific standards, recognizing food safety and security, California 
stresses that these standards must reflect production needs and 
establish criteria for new compound evaluations that facilitate, not 
restrict, the access to high quality, safe and nutritious U.S. 
agricultural products.
    Increased consumption of nutritious foods
    The clear benefits of trade are often more than just impressive 
numbers. We live in a time where California's farmers and ranchers 
comprise one of the largest delivery systems of food and fiber in the 
world. It is this extraordinary and dependable supply of farm products 
that provides all consumers with food security and stability. It is 
this food security and stability that Japanese consumers demand. 
However, the existence of trade barriers limits our ability to enjoy 
full access to the market. The goal of every nation should be to 
provide a wide array of safe and nutritious farm products throughout 
the year to its citizens. Choice, affordability and availability help 
to create and maintain a nation's health--whether it is here in the 
U.S. or in Japan.
Conclusion
    California is a major gateway in providing both domestic and 
imported agricultural goods to the nation. Governor Schwarzenegger is 
committed to ensuring economic security and competitiveness for our 
growers, while providing a safe and secure food supply. We are all 
witness to the amazing globalization of this very small planet of ours. 
Globalization is not a threat but an opportunity. Human progress will 
be measured by every nation's ability to deliver an abundance of 
affordable goods, including those products that are essential to health 
and well-being. We believe that the Japanese consumer deserves access 
to high-quality foods that this nation so expertly produces. Trade 
policies that limit the availability of these goods should be revisited 
and revised.
    California agriculture is leading the world in achieving a safe and 
reliable supply of farm products produced through responsible 
stewardship of our resources under the watchful eye of caring farm 
families. The 21st century will bring many challenges, but none greater 
than achieving a renewed commitment to agriculture and its fundamental 
role in all societies. We are all stakeholders in this future. Thank 
you for taking testimony today and for your support.

                                 

    Chairman THOMAS. Thank you very much.
    Let me say initially, in terms of the Administration 
testimony, I just flat out couldn't be more disappointed. I 
said at the beginning of this hearing that we didn't want to 
talk about tomorrow, I didn't want to hear a lot of verbiage in 
terms of positive spin.
    Let me give you a feeling of what I heard from your 
testimony in terms of the high points. Ms. Cutler, ``removal of 
unjustified ban.'' Wow. I call that progress. ``Appears to be 
in the final stages of deliberations.'' Aggressive.
    Mr. Loevinger, optimism. ``Prospects for the future based 
upon recent elections.'' That is tomorrow. You brag about the 
fact that in March of 2004 they finally quit spending hundreds 
of billions of yen trying to artificially shore up their 
currency. You talked about zombie loans. I guess you meant it 
may be morning in the night of the living dead. ``May finally 
be coming to an end.'' ``A new day may have finally arrived.''
    Now, in the second largest economy in the world, you held 
up, I assume admirably, a five-fold growth in a decade from $6 
billion to $35 billion, at a time when the world in terms of 
truly open trading partners had multiplied far beyond that 
shabby number.
    Ms. Terpstra, they ``remain unjustifiably closed.'' Well, 
the question is: If they remain unjustifiably closed, how long 
are you going to let them remain unjustifiably closed? And when 
are you going to do something about the fact that they are 
unjustifiably closed? ``This year we made some progress . . .'' 
``With the aim of . . . we have been very clear on what we are 
seeking.'' ``Seeking.''
    Seeking, seeking, seeking. When are you going to find it? I 
am a little disappointed in you folks coming here and being 
apologists for whatever Japanese regime happens to be in.
    Now, if you are not result-oriented, I want to assure you 
that this Congress in a bipartisan way is going to be. The 
world has changed, and the world is changing. The Government of 
Korea is interested in a free trade agreement, and I am 
interested in working a free trade agreement with the country 
of Korea.
    China--we are going to examine China. In the short time 
that they have been in, they have made more promises and 
actually honored more commitments than Japan has in the decades 
in which Japan has promised a better tomorrow.
    And for you to come here and to talk about tomorrow and 
seeking and possibly hoping that things will be better, in 
other areas of interpersonal human behavior, that is called 
``enablers.'' And we expect something different. And if we 
don't get something different, you will get clear, 
understanding, behavioral measures from this Congress.
    And this is coming from someone who is more than willing to 
let people try, but that is all we have ever done, and that is 
all we have ever gotten, and that is ``try,'' ``tomorrow.'' I 
said at the beginning of this hearing I am not interested in 
tomorrow. Changes have to be made. Yes, there has just been an 
election, but I think at some point you draw the line.
    This hearing today, at least under whatever power I have, 
is drawing the line. There are no more tomorrows.
    The gentleman from Florida?
    Mr. SHAW. Thank you, Mr. Chairman.
    I am somewhat confused as to the motivation of the Japanese 
in some areas. We have heard from several witnesses now the ban 
on American beef coming into Japan, and we know that there are 
no logical sanitary barriers that could be put up, and that we 
have a better situation than they have certainly in that 
regard. Also, I have been told and I understand that we are not 
really competing with their markets.
    So, would one of you like to tell me what is their 
motivation in blocking American beef coming into Japan? Who 
wants to take that? Ms. Terpstra, you testified in that area.
    Ms. TERPSTRA. Thank you. I will try to answer that 
question. You are very right, I think, in the history of our 
working to export U.S. beef to Japan. Early on, it used to be 
to protect their domestic producers. Today it seems to be, I 
think, symptomatic of a larger problem, and that is their lack 
of an effective regulatory system that generates confidence in 
it by their consumers. They seem to be, I would say, somewhat 
adrift in terms of how to deal with SPS measures.
    Some of their actions I think are continuing to try to 
protect, perhaps more in the fruit and vegetable area, their 
own producers. But with regard to beef, you have made the point 
that we are not competing with their producers. Their consumers 
enjoy our products. There seems to be no good economic reason 
for keeping out our product. I think Japan is truly struggling 
with how to deal with consumer concerns over the food safety 
system.
    Chairman THOMAS. Would the gentleman yield?
    Mr. SHAW. Yes, I will yield.
    Chairman THOMAS. Have you ever heard of stonewalling?
    Ms. TERPSTRA. Yes.
    Chairman THOMAS. Wouldn't it be very difficult for Japan if 
they had scientific tests and allowed beef, in which there is 
no true competitor, and wouldn't they, therefore, have to 
respond in a number of others areas with scientific tests to 
open up the market and that once they start, there is no 
stopping it? And that rather than some confusion or inability 
to understand what is going on, it is an absolute stonewall in 
which if they show any movement whatsoever, they have to show 
movement across the board. That is not hard to understand, and 
it is not confusion. It is stonewalling.
    I thank the gentleman.
    Mr. SHAW. You hit right on the point. In fact, many years 
ago when I was a Mayor, I was trying to--we were looking to 
have an experimental rail system put in by the Japanese, and I 
was told at that time--given sort of instructions on how to 
negotiate with the Japanese. And I was told that it was like 
there is a curtain and you throw an idea over and just wait for 
something else to be thrown back, and you never knew how long 
it was going to take for it to come back.
    Our way of negotiation in the West is more or less we want 
to sit down and make a deal. We want to discuss it and work it 
out and make a deal.
    I think our difference in our negotiation tactics has 
probably worked very much to our disadvantage. And this brings 
up the stonewalling because that is exactly what is involved. 
While we are waiting for them to come back and them saying that 
they are in no hurry to respond to us, I think we need to put 
in place some penalties for stonewalling so that we will be 
believed as doing something. When we make an agreement, we 
stick with it, and we should expect and require other countries 
to do that.
    Where are they getting most of their beef, by the way? Does 
anybody know that?
    Ms. TERPSTRA. In the interim, without U.S. product, I would 
say from Australia.
    Mr. SHAW. One last question. If all of these tariffs and 
barriers were to come down and they were to mirror our 
structure here in the United States, what effect would that 
have on our balance of trade? Does anybody care to----
    Mr. KAWAMURA. Those of us in California believe there would 
be tremendous results in terms of the value-added products that 
we can send over there, everything from salad in a bag to the 
fresh fruits and stone fruits that we have, including rice 
would be an immediate winner in that arena. Of course, you know 
that beef would be a large part of that product line that we 
can send there. We would be very happy--including the different 
nut products we have. We would be very excited. It is a 
wonderful, developed, as a previous speaker mentioned, mature 
economy that can afford to buy so many of our products, and 
much of their economy can afford to buy even our more 
affordable products as well. And so these trade barriers limit 
that potentiality tremendously.
    Mr. SHAW. Mr. Chairman, just to sum up, I think that it is 
very apparent from what you are hearing from the dais up here, 
from both sides of the aisle, is that we are out of patience, 
and it is time to move.
    Thank you.
    Mr. LEVIN. Thank you very much.
    In my opening statement, I mentioned a series of concerns, 
three of them--the appeal issue, the beneficiary rights issues, 
and also the evidentiary record issue. Let me start with one of 
them, and I am going to stick within 5 minutes. I think the 
Chairman might insist on that anyway. Then others can pick up 
these other concerns.
    Let's take the evidentiary issue, the appeal process. The 
proposed limitation would apply to what would be, what, the 
third step of the process?
    Ms. BARNHART. It would be the third step of the process, 
the DDS, the reviewing official, and then the administrative 
law judge, yes.
    Mr. LEVIN. Now, what percentage of the cases more or less 
goes to the ALJ?
    Ms. BARNHART. If I could describe it a little differently 
than that, I have some numbers I think may make it clear. If 
you look at initial claims and you take a hundred cases, Mr. 
Levin, the number that go to the second level, which is 
reconsideration, is 22. So, 22 out of the 63 that are denied at 
the first level move on to the DDS level. Of those 22, 19 move 
on to the ALJ level of appeal.
    Mr. LEVIN. So, of the hundred cases----
    Ms. BARNHART. Sixty-three are denied at the first step by 
the DDS, 37 allowed. Of those 63, 22 of those appeal for 
reconsideration. Of those 22, 3 are allowed, 19 are denied. 
Nineteen appeal--virtually all appeal to the next stage.
    Mr. LEVIN. Now, in what percentage more or less of these 
cases is there an attorney, do you know?
    Ms. BARNHART. In terms of representation?
    Mr. LEVIN. It doesn't have to be an attorney.
    Ms. BARNHART. Representation in general for--I can give it 
to you by Title 2 as well as SSI. In Title 2 it is 74 percent 
are represented. The vast majority of those are attorneys, I 
would point out. I don't have that breakout for you, but I can 
get that for the record. And for SSI, 47 percent are 
represented.
    Mr. LEVIN. Now, is there any evidence now of a problem of 
submittal of evidence? You are changing the rule. You are 
proposing to change the rule, and what evidence is there that 
it is now a problem?
    Ms. BARNHART. Well, it is not a matter of what--I cannot 
categorize the evidence for you, Mr. Levin, but I do know that 
based on the number of postponements and rescheduling of 
hearings that are requested, a number of them the request is 
made because of things other than a no-show, for example, by 
the claimant.
    Chairman THOMAS. Thank the gentleman. If you want an 
absolute number, in visiting with a sake maker outside Tokyo, 
he indicated that if he could import cow rose rice from 
California versus the price he is forced to buy domestic 
Japanese rice for, he could cut the price of his sake by 50 
percent and not diminish quality whatsoever.
    Gentleman from Michigan.
    Mr. LEVIN. Thank you, Mr. Chairman. It was good that you 
called this hearing. You mentioned that you thought in many 
sectors the Japanese have been stonewalling the U.S., and I 
must say, listening to your testimony, I think you are 
stonewalling us and the American people, because maybe it is 
because they are the largest holder, the Japanese, of U.S. 
Treasury Securities, that you come here and you are afraid to 
kind of tell it like it is. I don't think you have done that.
    Ms. Cutler, you say we have come a long way, I quote, with 
Japan over the years. A long ways. I don't know, in view of the 
facts, how you can say that. I was just looking at the trade 
figures, the merchandise trade figures, and in dollar terms 
they are worse than they were 7, 8 years ago. You know this. 
The surest figures, if you look at those--and you kind of 
lauded it--the change in the trade balance has been so small. 
The '97 figures merchandise trade, the trade balance was 56.1 
billion. Now it is 75.2 billion. I looked at the auto figures. 
You know, we have been working on this for 15 years. The total 
passenger exports in 1990 were 2.2. Then they went down to 1.2 
billion. Now they are up to 1.7 billion from Japan to here. Our 
trade deficit has gone from 30 billion in the auto sector to 
$43 billion. That has come a long ways.
    And then, Mr. Loevinger, you talk about the currency 
manipulation. I forget the billions that they spent in '04, the 
billions. The reports of Treasury always hesitated to say that 
Japan was manipulating. Tell me in a word why? I don't 
understand that. I think Treasury was stonewalling the American 
people. When they spent all of those billions and billions, you 
say that--they were manipulating their currency, weren't they? 
Yes or no?
    Mr. LOEVINGER. Thank you, Congressman.
    Mr. LEVIN. Maybe you don't want to thank me.
    [Laughter.]
    Mr. LOEVINGER. No, no, no. Also I want to say to you and 
other members of the Committee that we hear the message.
    Mr. LEVIN. Tell me, were they manipulating the currency in 
'03-'04?
    Mr. LOEVINGER. As you know, Mr. Congressman, the Treasury 
reports for those periods concluded that no country met the 
technical requirements of the 1988 Trade Act, but as I said, we 
were very aware of the intervention going on. We had very clear 
and tough discussions with them. We made our views known, and 
in March of 2004 they stopped and they have not intervened 
since then.
    Mr. LEVIN. We will get into that first. I have not met a 
Member of Congress who buys the Treasury Department explanation 
about technical compliance. So, in my last 30 seconds, Ms. 
Terpstra, in terms of beef, do you think Japan has been 
violating its WTO obligations?
    Ms. TERPSTRA. I think that their policies are not 
consistent with the international obligations under the SBS 
agreement, and----
    Mr. LEVIN. So, the answer is?
    Ms. TERPSTRA. Yes.
    Mr. LEVIN. Why did we not file action with the WTO? Why are 
we here so much longer? Just tell our constituents. We worked 
on the WTO. We worked to change the dispute settlement system. 
We worked to give it finality. A lot of us here worked hard to 
bring that about. Why did we not use it?
    Ms. TERPSTRA. Because the first stage in the WTO is having 
bilateral consultations. last October we felt that we had a way 
forward for both of our countries to move toward resuming trade 
in a manner that was consistent with our obligations.
    Mr. LEVIN. That was a year ago.
    Ms. TERPSTRA. Yes. And we share the frustration. Secretary 
Johanns has also said enough is enough. That process has run 
its course.
    Mr. LEVIN. American will believe enough is enough only when 
there is action, not rhetoric. I for the life of me don't 
understand the hesitation to use our WTO rights.
    Thank you, Mr. Chairman.
    Mr. SHAW. [Presiding.] The time of the gentleman has 
expired.
    Mrs. Johnson?
    Mrs. JOHNSON OF CONNECTICUT. Thank you very much, Mr. 
Chairman.
    Ms. Cutler, in your testimony you make the statement on 
page 4 that in sum, we have and will continue to make good 
progress in our efforts to further open markets in Japan and 
key sectors such as telecommunications, information technology, 
medical devices and pharmaceuticals, energy and agriculture.
    Just in medical devices Japan has the slowest and most 
costly system of approving new medical technologies of any 
developed country, and on top of that, they have just added a 
new very burdensome regulatory regime that will require our 
companies to expend $1.5 billion just to comply with yet 
additional regulatory requirements by 2010.
    In addition, the Japanese Government has made significant 
reductions. In fact, in some cases deep cuts in the price they 
will pay for medical technology, signifying that they have 
absolutely no intention of providing research and development 
resources that medical technology depends on to make life-
saving changes in how we are able to help people who need 
medical devices for survival and for a functional life.
    Now, what makes you think we are making progress? How can 
you even include medical devices in the list of things in which 
we are making good progress, because it looks to me like we are 
going backward.
    I would say the same about life insurance. You know, Kampo 
is not supposed to put in any new products, they put out new 
products, which they are still paying no taxes and while the 
Government still takes responsibility for backing risk.
    So, it is not just that they are continuing to do the kinds 
of things that they have done that represent non-tariff 
barriers. It is no wonder we have a trade deficit; it is a 
wonder it isn't deeper. But there are many areas in which we 
currently trade, where we could be trading in a fair regimen 
and not have a trade deficit. So, I see them as going backward.
    Furthermore, I see their actions as duplicitous. To say 
that we are going to have Kampo privatized and compete, and 
before they do that, give it a new advantage in new products. I 
don't know how you can be as optimistic as you have been in 
your presentations. I can see that maybe the relationship isn't 
as hostile as it has been before that. Maybe now you get a 
response in weeks rather than years. But where do yo see the 
opportunity for progress on now the many pressing fronts on 
which their behavior is grossly, totally unacceptable as part 
of the world trading community?
    I am directing this to Ms. Cutler first, but if any of you 
want to comment afterward, I would be happy to hear your 
comments.
    Ms. CUTLER. I have been at USTR working on Japan trade 
issues since 1991, and perhaps--it has been quite a long time, 
and I think in a lot of these sectors maybe I have a good 
recollection of the starting point and how bad things, really 
bad things used to be. So, for example, in the medical device 
industry we made enormous breakthroughs in terms of achieving 
transparency improvements for industry so they could provide 
input into the pricing deliberations, to they could have a seat 
at the table when other decisions were being taken that would 
affect their industry.
    That said, I totally understand that we have a lot of work 
ahead of us. In the past we have worked closely with industry, 
and a number of cycles of these biennial pricing reviews to 
head off some of the worst price cuts that were under 
consideration. We are determined to work with industry and to 
work with Congress again in this cycle to head off price cuts 
that are discriminatory, unfair, and that disproportionately 
ask our companies to take on the burden of Japan's desire to 
reduce its health care cost.
    I have work for many years on the Japan insurance issue, 
including on the negotiation of the '94 and '96 bilateral 
insurance agreements. I don't have statistics from back then, 
but in 1998 U.S. market share in the life insurance market in 
Japan, the private sector market, was 4.6 percent. In 2004 it 
was 18.8 percent. That is progress, and perhaps in my view that 
is good progress, but maybe I have been working with Japan for 
too long if I think that is good progress.
    That said, the challenges presented by postal privatization 
and the implications it might have for our industry is a 
priority issue on our agenda. We are working very closely with 
industry.
    Mrs. JOHNSON OF CONNECTICUT. Let me, because my time is 
about to expire and I know you can't go through the whole list 
of things you would like to go through.
    Let me just say that a group of us backed Secretary 
Baldridge when he was negotiating with the Japanese on machine 
tool issues and later on auto issues. We saw what it was like 
then. It has changed a little, but not enough for the modern 
world, and Japan is a major economy of the modern world. They 
have simply got to change their ways at a speed that has not 
been traditional in their society because if they don't we will 
have to use the tools at our disposal to override the 
negotiating process. That would not be good for us or for them, 
but it will be necessary if we can't change the style and the 
process and the speed at which problems between us are 
resolved.
    Thank you.
    Mr. SHAW. Mr. Cardin?
    Mr. CARDIN. Thank you very much, Mr. Chairman.
    It is a pleasure to have you before us. I think the 
frustration is--and you saw the passion of our Chairman, and I 
must tell you, those on my side of the aisle don't always agree 
with our Chairman, but we always admire his passion on issues. 
We would like to see some of that from the Executive 
Department, particularly as it relates to trade issues.
    I think we would feel more comfortable if we felt that 
there was outrage as to the delaying tactics being used by 
Japan and other trading partners to resolve issues. We don't 
see that. We don't see that in your testimony. We don't see 
that in your action.
    On Treasury, on currency manipulation and China's 
intervention into the currency market if I am correct, I think 
since 2000 the intervened somewhere around 150 times, and, yes, 
now you have gotten some action on their part, we believe, 
after a lot of damage has been done. It took 150 interventions 
before we could get any action done? And we never filed claims. 
I think we are concerned as to whose side are you on. I say 
that with a great deal of respect for the public service of the 
people who serve in your agencies. We have been waiting a long 
time on beef, waiting too long.
    And on Kampo, you mentioned that we have greater 
penetration in the insurance market, but how would you like to 
be a company in the United States competing against a company 
in Japan that has the relationship with its government so it 
doesn't have to pay taxes, it doesn't have to do anything else 
and you have to compete with them. That is wrong. You know it 
is wrong, we know it is wrong. And they are delaying dealing 
with it and we don't do anything about it. Japan files claims 
against us, Byrd amendment. WTO claims filed. They are taking 
retaliatory action. They don't have the niceties of saying, 
well, gee, we will wait and talk and talk.
    You talk about consultation before you file a WTO case. Let 
me just ask you, Ms. Cutler, are we in consultation before 
filing a WTO? Have we put them on notice that we are going to 
be filing a WTO claim?
    Ms. CUTLER. With respect to insurance?
    Mr. CARDIN. Beef, insurance, you pick the ones. Where are 
we in the queue to file WTO claims actions against Japan? Have 
we told them we are in our consultation period before filing 
claims? Are we prepared to claim or are we going to continue to 
wait?
    Ms. CUTLER. With respect to insurance, we are working with 
our industry, exchanging information in terms of the strength 
of the case we might have in the WTO, but I think--and Governor 
Keating will testify later--I think we are in agreement that 
the best strategy now is to try and work with the Japanese 
Government to head off the harmful implications of postal 
privatization that would impact our companies and make them 
compete, as you said, on an unfair basis with a huge entity 
that gets special advantages.
    Mr. CARDIN. So, we are not in the process of seriously 
preparing for a WTO challenge?
    Ms. CUTLER. We are keeping that option open, and our 
lawyers are working with our insurance industry lawyers, 
looking at a case, but once again, we look at the most 
appropriate avenue for trying to solve the issue and gain 
access and forestall barriers put up against our companies so 
they can compete in the market.
    Mr. CARDIN. Japan as a developed Nationhas historically 
supported the U.S. position on rules, countervailing duties and 
antidumping duties. Many of us think that because of these 
barriers that they have, and protectionist policies, that they 
can get the benefit of profits by protecting their market so 
that they can join the developing countries in trying to weaken 
the anti-dumping rules. What action have you taken wilp in the 
Doha Development Agenda on the rules agenda, the rules issues?
    Ms. CUTLER. You are correct. In the rules area Japan is 
working with a number of other countries to try and weaken our 
dumping and countervailing----
    Mr. CARDIN. Doesn't that get you? Aren't you outraged by 
that?
    Ms. CUTLER. We are----
    Mr. CARDIN. It is counter-intuitive that they are doing 
this. There is something wrong.
    Ms. CUTLER. We are working in the rules group to forestall 
this and to make sure that we can continue using these rules in 
accordance with the WTO rules.
    Mr. CARDIN. I can tell you, you are going to have a lot of 
problems with Democrats who have supported trade legislation 
historically if we find that you are making compromises on 
rules because you have a tough going because you don't have the 
allies that you need because you haven't done the necessary 
preparation with our allies on this issue. It seems to me if we 
were tougher on the trade distortions with Japan, we wouldn't 
have the same problem we are having now in the Doha Development 
Agenda. I think it is going to have serious ramifications if we 
don't take a tougher position with our traditional friends.
    Thank you, Mr. Chairman.
    Mr. SHAW. Mr. Herger?
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. Kawamura, it is good to have you from California. Thank 
you for the great job you are doing representing us in 
agriculture. All of this panel, I am sure sense the frustration 
that we have in the Ways and Means Committee, which is 
responsible for trade.
    And I represent one of the most productive, fertile 
agricultural districts in the world in Northern California, and 
certainly I am hearing not only from my agriculture, but as you 
know, Mrs. Cutler and others, that California has a number of 
companies that would like to be doing business on a more fair 
basis with our friends in Japan, which aren't able to. I have 
heard concern from some of the groups that Mrs. Johnson 
mentioned, the medical device industry, which leads the world 
in life science research and is encountering regulatory 
obstacles in Japan now. I have heard from the life insurance 
industry, which has a very large interest in the direction of 
deregulation of Japan post, and I have heard from some of my 
dairy people in my district and livestock industry.
    But what I would like to focus on, my question to you, Ms. 
Cutler, is the many rice growing constituents in my Northern 
California district, which is the second largest rice growing 
area in the Nation, it is my understanding that the Japanese 
Government recently announced a new discriminatory policy that 
will provide selected end users in Japan with access to 
imported rice stocks held by the Japanese Government, and that 
these rice stocks are mostly of U.S. origin. I understand that 
Japan's Food Department will make imported rice available to 
industrial users in Japan if these users agree to reduce 
imports of a product called rice cake.
    I have two concerns with this proposed policy. First, Japan 
appears to be in possible violation of its WTO obligations by 
treating imported rice differently than domestic rice; and 
second, Japan is apparently pursuing an import substitution 
policy by targeting approximately 20 million in the trade of 
rice cake mixes. Japan will reportedly make this new policy 
operational in late October or November.
    Ms. Cutler, I would like to find out from you how the USTR 
and the Administration plan to move forward in addressing this 
discriminatory policy?
    Ms. TERPSTRA. Congressman, if I could first attempt to 
answer that.
    Mr. HERGER. Please.
    Ms. TERPSTRA. I think you very well described the new 
proposal from the Japanese Government that would seem to be 
undermining the access we have for our rice and rice products 
into Japan. This is something we just recently learned about. 
We will be working with the rice industry. We have raised it 
through our embassy in Tokyo, but we will go and fully explore 
what the WTO issues are here and pursue it. We don't want to 
see our access undermined any further than it already is.
    Mr. HERGER. I would like to continue our discussion, and I 
am very interested in what the results are. Again, this is one 
more example of something--not only are we not making progress, 
but we are actually digressing in this areas, so I would like 
to have you report back to me as soon as you can on what you 
find out.
    Thank you.
    Mr. SHAW. Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman.
    Ms. Cutler, let me congratulate you. The panel today, as 
assembled and the answers you have given, this is the only time 
in 10 years we have all agreed on something. I think it speaks 
to the seriousness of the matter that is before us.
    A simple question to begin with. What can Congress be doing 
to speak to some of these issues? Then I will address a couple 
of specific questions to you on the life insurance and medical 
devices fields.
    Ms. CUTLER. I think the letters we receive and the letters 
that are sent directly to Japanese Ministers and the Japanese 
Ambassadors really help underscore that it is Congress and the 
Administration that are concerned in a wide range of areas. I 
also believe a hearing like the one you are holding today is 
very useful in underscoring to our Japanese colleagues the 
seriousness that Congress attaches to all of these issues. 
Frankly, I think sometimes they think that Congress is not 
paying attention to them, and so hearings like this and the 
letters help us do our job.
    Mr. NEAL. Specifically in the insurance industry, as Kampo 
moves down the road, to what some of us believe will be 
privatization, what assurance can you give the life insurance 
industry here in America, that as they proceed to 
privatization, that we are not going to be in an unfair 
position, given opportunities for growth here in America?
    Ms. CUTLER. The assurance we can give them is that we will 
work hand in glove with them at senior levels of this 
Administration to make sure that the inroads that we have made 
into this market over the years are sustained, and that our 
presence in Japan in the life and non-life market will continue 
to grow. This is an issue of high priority for the 
Administration. It is not just USTR that is attaching the 
highest concern to this issue. I am working closely with my 
colleagues in the White House, at the Treasury Department, at 
the State Department. Our embassy is holding weekly meetings 
with key players who work on this subject in Japan.
    So, we are attaching top priority and doing everything we 
can, and working with the insurance industry. And also, this 
time around in the insurance area we have allies within Japan, 
and we are working with them, so we have domestic support for 
our position as well in Japan, and that is very helpful.
    Mr. NEAL. Are you prepared to name any of those allies that 
we have?
    Ms. CUTLER. They are business groups in Japan. They are the 
Japanese life insurance companies that are supporting our 
position. Our industry is working--and I am sure Governor 
Keating will talk about this later--closely with the European 
and Canadian insurance providers who also share our position, 
and there are many, frankly, in the Japanese Government that 
are very sympathetic to our position.
    Mr. NEAL. Part of what you are hearing today is the tension 
that exists between the Legislative Branch of Government and 
the Executive Branch, and as you know, the Framers intended 
that we would respond more quickly than the executive branch to 
concerns that we hear, but the frequency with which we receive 
these complaints is very important. I think that as we pass 
them on to you, it was pretty clear today that we would like 
some action. And as the next panel arrives we are going to have 
a chance to talk to them about medical devices as well.
    But where I live, Ms. Cutler, these are substantial issues. 
The whole question, as Mr. Cardin, I think, accurately depicted 
of the notion of free trade, where we are constantly on our 
side asked to take that leap of faith--and most of us 
frequently do, incidentally--oftentimes the reward for it is to 
run up against these sort of obstacles which make it in the end 
much more difficult for us to convince our own constituents of 
the merits and worthiness of free trade.
    Thank you, Mr. Chairman.
    Mr. SHAW. Mr. Camp?
    Mr. CAMP. Thank you, Mr. Chairman.
    I guess I will address my remarks to the entire panel, but 
as I listen to this testimony, I agree with all that I have 
heard my colleagues say. I don't think the lack of progress 
have been for lack of trying, and it doesn't seem as though we 
have a Government that is responsive to the numerous 
negotiations that we have put forward. I look at my State of 
Michigan and I look at autos and auto parts, and it seems as if 
we have gone backward. The bilateral agreement expired in 2000, 
where the Japanese had agreed to change the regulations that 
discourage the import of U.S. made cars and parts, and that 
agreement expired. There has been no renegotiation of that. 
They have overly restrictive regulations. They lack 
transparency. They have a unique and complex set of rules for 
certifying foreign automobiles in that country, which just 
doesn't stand public scrutiny.
    I look to the areas of beef, which we have heard discussed. 
There is a lot of beef in Michigan, and apples particularly, 
where I don't know that they are allowing imports yet, even 
though the WTO has ruled decisively in our favor. Before the 
WTO ruling, the Japanese failed to even meet with or respond to 
us for 3 years.
    It seems to me as though they are using rules, regulations 
and sanitary and phytosanitary standards as trade barriers and 
restrictive trade practices, and I for one would like to hear 
your comments on the general merits of these agricultural 
standards in Japan, and any comments you might have on how we 
can make improvement, because we have not seemed to move 
forward in the channels that you have all been working on for 
so many years. Those have not been successful.
    While incremental progress is being made, we are in an era 
where that just isn't good enough. I think to compare back to 
15 years ago, the world has changed in 15 years, and we really 
need to see quicker progress, more substantial progress in all 
of these areas, whether it be auto, auto parts, beef, apples, 
agricultural products, insurance products. This is significant. 
We would hope to have a productive trading relationship with 
the Japanese, but I wonder if that is really being called into 
question, and it might even be in something that we should 
seriously act.
    So, I would be interested in any one who would care to 
comment. Yes?
    Mr. KAWAMURA. Congressman Camp and Committee members, I 
think it would be fair to mention that in the course of 10, 15 
years a lot has changed in the way the world operates, and in 
the area of agriculture certainly we have seen world class 
competitors come out of countries that we never thought 15 
years ago would be competing in our arenas of agricultural 
products. In the arena of beef, we certainly are alarmed and 
concerned at the lack of progress in that arena, but at the 
same time the fact that there is another country that has an 
adequate supply of beef that can quickly be a replaceable 
supplier of our U.S. product line makes us all take pause as 
how we look at the future of U.S. agriculture.
    And as I look at these members here in this Committee and 
all the different Committees within Congress, about our future 
in agriculture, one of the things that I would encourage all of 
us to think long and hard about is, is that future--are we just 
replaceable suppliers in this Nation, or are we part of the 
resource base, if you will, are we part of the environment?
    So, with that, I think where we need to help--two things--
understand in this difficult trade arena, in this international 
globalization of how things move around the world, we recognize 
that there are winners and losers, sometimes for no reason of 
our own.
    Mr. CAMP. I am about ready to lose my time. I appreciate 
your comment.
    Mr. KAWAMURA. Sorry about that.
    Mr. CAMP. I don't think we are afraid of competition, but 
we are afraid of competition from people who don't follow the 
rules, who create false sanitary and phytosanitary standards, 
and are even reluctant to explain the rationale for these rules 
and standards.
    So, I guess my message is, I don't think we have done 
enough, whether it be in the Trade Office or Agriculture or 
Treasury, or the State Department. We need to do more. And I 
think we need to hammer hard and not just sit back and say, 
well, let us have another meeting. We haven't made enough 
progress in any of the areas I mentioned, and I would like to 
see all of you go back--I don't necessarily fault all of you. 
Clearly, we are not negotiating with somebody who is coming to 
the table in good faith. So, I think we need to change tactics 
and do everything we can to move forward.
    Thank you, Mr. Chairman.
    Chairman THOMAS. [Presiding.] Thank the gentleman.
    The Chair will announce that--with apologies to the other 
members--that the Chair will dismiss this panel. Thank you very 
much.
    Any Member may submit questions in written form to expect a 
response in written form. And the Chair will indicate to those 
individuals who are to comprise the second panel, that the 
Committee will recess to the call of the Chair, and the Chair 
anticipates, if at all possible, that the Committee will 
reconvene within the hour.
    The Committee stands in recess.
    [Whereupon, at 2:55 p.m., the Committee recessed, to 
reconvene at the call of the Chair.]
    Mr. SHAW. [Presiding.] If the guests would take their 
seats. To the second panel, my apologies, but there has been a 
lot of things going on outside of this room that have required 
our presence.
    The second panel right now is the Honorable Governor Frank 
Keating, who is President of the American Council of Life 
Insurers; Michael A. Mussallem, Chief Executive Officer, 
Edwards Lifesciences Corporation; Jim McAdams, President of the 
National Cattlemen's Beef Association. You are going to have to 
help me. I was introduced to you earlier, but I am having 
problems.
    Mr. MOHATAREM. Mustafa Mohatarem.
    Mr. SHAW. Yes. He is Chief Economist for General Motors in 
Detroit; and Deborah Howard, who is President of Japan Market 
Resource Network, Tokyo, Japan, and she is here on behalf of 
the American Chamber of Commerce in Japan.
    Welcome, all of you. As is our custom, your entire 
statement is made a part of the record, and you may proceed as 
you see fit. Governor?

STATEMENT OF HON. FRANK KEATING, PRESIDENT, AMERICAN COUNCIL OF 
                         LIFE INSURERS

    Mr. KEATING. Chairman Shaw and Congressman Levin, thank you 
for the opportunity for us to be able to appear before you. I 
have two studies that are referenced in my formal testimony 
that has been made a part of the record. I would appreciate it 
if those two studies could be made a part of the record as 
well.
    I represent the American Council of Life Insurers, as you 
have noted, Mr. Shaw, which represents some 400 life insurance 
companies in the United States. A number of our companies do 
business in Japan. Those businesses are significant to the 
companies involved. As has been referenced, some $38 billion in 
premium income has been provided to those companies as a result 
of product sales in Japan.
    We have been successful in moving our market share from 
some 3, 4 percent of the market to over 15 percent of the 
market. We think a competitive opportunity for us good for the 
people of Japan, it is good for the consumers and policy 
holders of Japan, because it gives them more product at less 
cost.
    I was there in late January and early February and spoke to 
a number of members of the Diet as well as ministerial 
officials about the postal privatization initiative of Prime 
Minister Koizumi. We did not take a position for or against 
privatization. That is a decision of the Japanese people. But 
it is very important, consistent with GATS. The market does 
require, the statute does require that national treatment be 
afforded our companies as well as the Japanese companies that 
are doing business in that country.
    We are very concerned because the conduct that we have 
observed has been violative of GATS. It is the position of our 
British friends, it is the position of our Canadian friends, it 
is certainly the position of the life insurance companies that 
I represent that the conduct of the Japanese Government with 
respect to Kampo's size and weight and breadth and bulk and 
conduct is violative of their GATS agreements.
    Why is that? Well, because, as has been noted, they don't 
pay taxes. They are not under FSA regulation as we are. They 
enjoy the full faith and credit of the Japanese Government, 
something obviously we do not do. And they don't have to pay 
into a policy holder protection fund in the event of insolvency 
or some other risk event. That gives them an enormous 
advantage. They are some 40 percent of the Japanese market.
    Now, during the course of the privatization, we are 
concerned about two things:
    First, that there will be partial privatization, and that 
is not good. We think consistent with the law, which is being 
drafted, that there should be full privatization and during 
that privatization period that there be no new or modified 
products introduced to the Japanese public to put us at a 
further competitive disadvantage and further violate the GATS 
agreement.
    Second, we are very concerned about transparency, that the 
structure that will be constructed around this privatization 
model will not be such that we cannot and other competitors 
cannot see what is going on so that there cannot be the 
opportunity of sending money from one ailing part of the ship 
to another.
    So, we have worked very closely with the USTR. I want to 
say that the Trade Rep has been very good, Wendy and her staff, 
as well as the senior officials, Mr. Portman, and before him 
Mr. Zoellick. They have been very helpful. The same thing with 
the Department of Commerce, the same thing with the Department 
of State. They have been our advocates and friends. But this is 
a devil-in-the-details moment.
    So, we would hope that the Committee--the comments made 
from both the minority and the majority we embrace. We think 
that this is a very concerning time during the transition 
process. We want to see a successful and a competitive 
marketplace, which means no new or modified products introduced 
to the Japanese market until such time as privatization is 
complete.
    As has been noted, in 2004, there was a product introduced, 
in spite of our objections, in spite of the objections of our 
Government, and that product now is 10 percent of Kampo's 
sales. So, we are very concerned about that, and we 
congratulate the Committee on its vigilance, and we hope that 
our Government will continue to be vigilant during the course 
of this process.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Keating follows:]

 Statement of The Honorable Frank Keating, President, American Council 
                            of Life Insurers

               Reform of Japan Post's Insurance Business

    Mr. Chairman, Members of the Committee, Ladies and Gentlemen:
    My name is Frank Keating, President and Chief Executive Officer of 
the American Council of Life Insurers (ACLI). I speak today on behalf 
of many of our members who have operations in Japan's vibrant life 
insurance marketplace. We welcome this opportunity to briefly discuss 
with you our observations and concerns with regard to implementation of 
the privatization of Japan Post, and in particular, its life insurance 
arm, Kampo, which is the largest life insurer in the world.
    Mr. Chairman, it might be useful for the Committee to focus briefly 
on the importance of the U.S. presence in Japan's life insurance 
marketplace. That presence has grown over more than three decades from 
a very small toehold in an otherwise closed market to 15% of what is 
now a far more open market. To put it into perspective, U.S. 
pharmaceuticals account for sales in Japan of slightly over $14 billion 
annually. The U.S. medical devices export market to Japan is just over 
$3 billion annually. Beef exports to Japan from the United States are 
approximately $1.5 billion annually. By contrast, U.S. life insurers 
account for $38 billion annually in policy premiums in Japan. This is 
truly an American success story.
    This success has not come easily. There is a long history of trade 
friction and negotiations with Japan regarding the conditions of 
competition in its life insurance marketplace. Year after year, through 
successive U.S. administrations, USTR has urged Japan to ``level the 
playing field'' so as to counteract Kampo's looming presence. Kampo was 
originally established in 1916 to provide life insurance to consumers 
who could not acquire insurance from private suppliers. The private 
sector can now fully meet all consumers' insurance needs and the 
original reason for Kampo's existence is long gone. However, despite 
regulatory constraints competition from this government insurance 
entity has weakened and impeded the development of Japan's private 
insurance industry.
    In the 1990's, there were two bilateral agreements that were in 
part designed to set forth the limits of Kampo's ability to market 
commercially competitive products given its special government-provided 
advantages. There were later discussions concerning the pace and 
conditions of opening up all sectors of the market pursuant to those 
agreements. The U.S. expressed a high level of concern in late 2003 
about a product Kampo planned to market which appeared to require Diet 
approval under the bilateral agreements. Before discussions could be 
completed Japan Post went ahead and issued a new product in direct 
competition with private insurers. Also during this period, U.S. 
companies were faced with extremely high contribution requirements to 
the Life Insurance Policyholder Protection Fund (LIPPC) caused by the 
failures of several domestic Japanese insurers. Kampo is not required 
to make such payments, and questions persist about the level of 
exposure it may impose on current private sector contributors should it 
be made subject to the LIPPC. Despite these hurdles, some of which 
continue as problems, U.S. companies have introduced innovative 
products in Japan, and Japanese consumers have responded with 
extraordinary enthusiasm. We have made significant gains in market 
share. U.S. insurance suppliers are also admired in Japan for their 
stability and soundness.
    In March of 2004, ACLI issued a comprehensive study of Japan's 
Expanding Postal Life Insurance Business, which outlined in detail 
Kampo's inconsistencies with the GATS and its impact on the goals of 
Japanese economic reform. The study pointed out several policy concerns 
regarding the continuation of Kampo's preferred position:

      It undermines economic reform efforts.
      It is inconsistent with longstanding bilateral 
understandings.
      It is inconsistent with Japan's commitment to Article 
XVII of the GATS, providing that ``each Member shall accord to services 
and service suppliers of any other Member, in respect of all measures 
affecting the supply of services, treatment no less favorable than it 
accords to its own like services suppliers.''

    Despite having some restrictions on what products it can offer, 
Kampo, the insurance arm of Japan Post, has captured 40% of the 
marketplace. It pays no taxes, contributes nothing to policyholder 
protection funds, enjoys separate and more lenient regulation and 
oversight, and receives full, unique government guarantees for all of 
its products. These many government-provided benefits have greatly 
contributed to the growth of Kampo, and its unprecedented size is 
itself an advantage. The continuation of these advantages over the 
years, in the face of repeated U.S. and other nations' entreaties to 
remedy the situation, calls into question Japan's commitment to the 
GATS.
    ACLI's study addressed Japan's assertion that it could offer Kampo 
preferential treatment ``in the exercise of governmental authority'' 
(using the GATS definition to show that the term does not apply to 
Kampo's operations); rebutted the notion that because other Japanese 
suppliers were equally disadvantaged ``national treatment'' does not 
apply (under GATS only one preferred domestic supplier [Kampo] is 
necessary to trigger a violation); rebutted the alleged need to 
demonstrate ``adverse effects'' in order to establish a national 
treatment violation; successfully rejected the notion that Japan's 
``intention to discriminate'' was relevant; and characterized Kampo's 
special privileges, which led to the erosion of the private insurance 
sector, as ``anti-prudential.'' ACLI is submitting the study to this 
Committee with a request that it be made part of the record of this 
proceeding. The prospect of postal privatization, which requires 
revision of existing legislation with respect to Japan Post, offers an 
opportunity for Japan to bring itself into conformity with its national 
treatment commitments under GATS.
    As you know, the matter of privatization of Japan Post was the 
central reason for the recent elections in Japan. Those elections 
resulted in a resounding mandate to Prime Minister Koizumi to follow 
through on his privatization initiative. Key for U.S. companies in 
Japan is the fact that privatization legislation will at some point 
clear the way for Japan Post to sell products it is now not permitted 
to market. Now that it is clear that postal privatization will go 
forward, it is vital that U.S. market participants be reassured that 
Japan will comply with its international trade obligations before new 
or modified postal insurance products are introduced. It is also 
required by the General Agreement on Trade in Services (the ``GATS'').
    Prime Minister Koizumi should be complimented on attempting reforms 
of Japan Post--an entity that clearly impacts the whole of Japan's 
economy. ACLI recognizes the enormous challenge that the Prime Minister 
and his government have accepted in tackling postal reform, and view 
the reform process as a vehicle for Japan to ``level the playing 
field'', and thereby bring itself into compliance with its national 
treatment commitments.
However, a partial or incomplete ``reform'' of Kampo should not be 
        allowed to deprive U.S. and other foreign market participants 
        of the market presence they have worked so hard to develop in 
        Japan.
    How could that happen? Japan Post employs 280,000 people and has 
thousands of post office outlets for the exclusive sales of its 
products throughout Japan. In terms of its distribution capacity, it 
dwarfs Japan's next largest life insurers, as well as the several 
American companies operating in this market. Our fundamental concern is 
the prospect of an ``incomplete privatization'' under which the postal 
insurance corporation would retain some of its special privileges 
(including the benefits of its unprecedented size) but at the same time 
would enjoy greatly enhanced freedom to compete (offer new products) 
with the private sector. Unleashing Kampo's enormous size and any 
retained government privileges would jeopardize the market developed by 
sustained innovative effort by U.S. companies.
It is the very real prospect of sanctioned, unbalanced, competition 
        that makes Japan Post privatization the number one trade issue 
        for our association.
    In the wake of its recent election Japan is about to pass postal 
privatization legislation which may require Kampo to pay taxes, operate 
under the same regulations and regulators as its competitors, make 
contributions to a policyholder protection fund, and drop its 
government guarantees from products to be issued in the future. While 
this sounds positive, the problem is that it could take up to 10 years 
under the legislation to achieve those objectives, if in fact they are 
achieved. At present, it is not clear under the legislation whether 
during this potentially long interval Kampo's successor will be 
permitted to sell products that compete with U.S. and other companies' 
offerings before a level playing field is achieved. If it is 
prematurely granted that ability (referred to often as ``management 
freedom''), while still enjoying some form of advantages, the result 
could be serious damage to the $38 billion level of premiums generated 
annually by U.S. life insurers in Japan.
    An excellent monograph on this subject was prepared by the 
Privatization Task Force of the American Chamber of Commerce in Japan 
(ACCJ) in August of 2004. Applying Privatization Global Best Practices 
to Japan Post looks comprehensively at establishing an effective 
regulatory framework, providing transparency, and appropriate 
government oversight and concludes that it is within Japan's power to 
successfully employ the best experiences of other countries that have 
made similar efforts to privatize. Again, we are submitting this White 
Paper to the Committee with a request that it be made part of the 
record.
    The U.S. government agencies involved in this matter have been 
persistent in their efforts to persuade Japan's government to ``do the 
right thing'' with respect to GATS. ``Doing the right thing'', which 
means achieving a market regime consistent with GATS requirements, 
would also better ensure the soundness of Japan's insurance market and 
financial system. We are grateful for the efforts of the Office of the 
United States Trade Representative, which has been untiring in its 
efforts, the Departments of State, Treasury and Commerce, the U.S. 
Embassy in Tokyo, and others in the federal government--including 
numerous members of this Committee--for the continuing concern you have 
shown our industry regarding this issue.
    This is not a partisan issue, or even a U.S.-national issue. It is 
a fundamental trade policy issue. At its core it asks the question 
whether one of the United States' best trading partners will live up to 
its international trade commitments. This is an issue that the whole 
world is watching given the high profile privatization in Japan has 
achieved. Several of its major trading partners have asked Japan to 
comply with its GATS obligations. The industry association of the 
European Union, Canada and others have taken positions similar to ours, 
as has the Life Insurance Association of Japan (LIAJ). Other countries, 
going through or considering similar privatization initiatives, are 
carefully watching what Japan will do and what the trade community will 
accept. We believe we all have a stake in the outcome.
    We believe it is key that Japan make a commitment on this. 
Representatives of USTR have been negotiating on the issues in the 
context of the language of the annual Report to Leaders. The Report 
provides Japan with the opportunity to achieve a mutual understanding--
the ball is certainly in their court to demonstrate their intentions.
    We view the timing of the introduction of any further new or 
modified postal products and the requirement of an open, transparent 
process to evaluate the activities of the new Japan Post as fundamental 
issues. The timing of new products must be appropriate to avoid 
unfairness. Transparency in financial reporting and public disclosure 
by all of the postal businesses must also occur, since without a clear 
picture of the industry giant and its internal operations our industry, 
and our government will be greatly limited in efforts to articulate 
what is happening in the marketplace.
    Perhaps U.S. insurers would be less concerned had Japan not 
introduced a new postal life insurance product in 2004 over the strong 
objections of the U.S. government and in violation of existing 
bilateral commitments to the United States. That product competes 
directly with U.S. companies' products and has secured unusually 
impressive sales since its introduction.
    We feel a sense of urgency in this regard since executives of Japan 
Post have recently stated that it must, in order to survive, soon begin 
selling the kinds of products our companies have developed. Indeed, 
there are very recent press reports that top Japanese government 
officials may have already made commitments on early ``management 
freedom'' to the leadership of Japan Post.
    Mr. Chairman, we welcome competition, but it must be fairly 
premised.
    Our request to you Mr. Chairman, and to the rest of the Committee 
on Ways & Means, is to assist us and the rest of our government in 
making sure that Japan does not, by accident or by design, seriously 
harm what has become a real ``American Success Story'', and that it 
abide by its international trade commitments. We pledge to keep you 
informed to the best of our ability.
    Mr. Chairman, let me again thank you and those members of the 
Committee on Ways & Means who have assisted us thus far in this very 
important effort. We look forward to your continued interest and 
involvement, and we thank you for permitting us to testify today.

                                 

STATEMENT OF MICHAEL A. MUSSALLEM, CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, EDWARDS LIFESCIENCES CORPORATION, IRVINE, CALIFORNIA, 
  AND CHAIRMAN OF THE INTERNATIONAL BOARD COMMITTEE, ADVANCED 
                 MEDICAL TECHNOLOGY ASSOCIATION

    Mr. MUSSALLEM. Hello, I am Mike Mussallem. I am the 
Chairman and CEO of Edwards Lifesciences, and today I am here 
as the Chairman of the International Committee of AdvaMed, our 
trade association.
    By way of background, AdvaMed represents over 1,300 medical 
technology companies that manufacture medical devices, 
diagnostic products, and medical information systems. And our 
products save and improve lives and enhance economic 
productivity by allowing workers to recover from illnesses 
faster, remain longer in the work force, and live without 
costly long-term care. A recent study indicated that for every 
dollar that America invests in medical technology, the returns 
are between $2 and $3 in real health gains.
    Now, to deliver these high-quality and innovative products, 
we invest heavily in R&D. As a matter of fact, we invest 11 
percent of our sales in R&D, which is about 3 times the U.S. 
industry average. And within AdvaMed, our members manufacture 
nearly 90 percent of the $90 billion of U.S. health care 
technology and about half of the $220 million global market. In 
2004, U.S. exports in medical devices and diagnostics totaled 
over $24 billion. In terms of work force, the medical 
technology industry employs nearly 350,000 workers across the 
United States.
    Now, regarding today's hearing, AdvaMed and its members 
would like to thank the Committee for drawing attention to the 
U.S.-Japan trade relations. Japan is our industry's largest 
overseas market, and the obstacles that we face there are 
coming more onerous every year. And let me provide you a little 
background on that.
    Japan's system for approving the use of new medical 
technologies is the slowest and the costliest in the world. As 
a result, the medical technologies that Japanese patients 
receive are several generations behind those available in the 
U.S. and Europe, and even developing countries like China and 
India and Thailand and Mexico.
    Japan is compounding the problem with even more burdensome 
and costlier regulations. In addition to the customary 
regulatory expenses, Japan recently enacted new regulations 
that will cost our industry about $1.5 billion over the next 
few years. And at the same time that it raises our regulatory 
costs, Japan is cutting reimbursement for medical technologies. 
Between April of 2002 and May of 2006, total revenues lost from 
recently enacted reimbursement cuts will be about $3 billion.
    In terms of how these payment reductions are made, Japan 
issues price cuts every 2 years, actually in two different 
ways: One is it surveys its hospitals and reduces reimbursement 
to reflect the pricing hospitals are paying for all medical 
technologies. At least this approach is based on conditions in 
Japan. Second, since 2002, Japan has also begun using a foreign 
average price, or FAP process, to cut prices for selected 
devices. Now, FAP aims to base reimbursements on average prices 
paid for medical technologies in the U.S., France, Germany, and 
the U.K. And under this model, they base technology prices not 
on the expensive Japanese market but on the unrelated 
conditions in foreign markets. And we have a very strong 
objection to FAP. Japan's market is vastly different and it is 
much more expensive than the other four countries that they use 
to compute the FAP, and the products that we sell there are not 
the same products that we see in the U.S. and Europe, and the 
terms and conditions are different.
    In addition, the three European countries impose relatively 
low price ceilings or price controls on the medical 
technologies, which further distorts the prices. So, from our 
perspective, Japan appears to be seeking ever lower prices for 
American medical technologies, in part to avoid correcting the 
massive inefficiencies in the health care system, such as long 
hospital stays. As you may know, Japanese patients stay in 
hospitals 5 times longer than other developed countries, which 
really drives up costs.
    And while changes in other areas might have real impact on 
Japanese health care spending, the threatened cuts in our 
industry actually would have no perceptible effect of really 
impacting total health expenditures. Our medical devices 
account for only 8 percent of their total health spending, and 
the targeted products actually account for less than 1 percent.
    And while we believe that payment reductions for our 
technologies will not help solve the underlying problem, it 
also seems inappropriate that virtually all of the technologies 
targeted for cuts are produced by non-Japanese companies. In 
general, we believe payment reductions to medical technology 
are counterproductive to Japan's goals, as studies show that 
investing in health care reduces long-term health care costs. 
And our products will actually become part of the solution as 
their population gets older.
    We have recommendations to help address these issues. With 
respect to the regulatory environment, we ask the Japanese 
Government to simplify and speed the approval processes while 
they continue to ensure that products are safe and effective. 
And regarding reimbursement, we seek a fair, transparent, and 
predictable system based on operating conditions and the costs 
of doing business in Japan.
    As an industry, we seek to work with the Japanese 
Government on a system that would limit the size of the price 
reductions in any given year and allow us to build such cuts 
into our long-term planning.
    Thank you again for inviting us to raise these issues. We 
hope that you will continue to recognize the important role 
that our industry plays in improving and extending patients' 
lives, and we hope you will work with us to ensure the 
continued access to foreign markets. As you may know, the 
engagement of the Congress and the Administration is critical 
to maintaining our exports into this important market. So, 
thank you again.
    [The prepared statement of Mr. Mussallem follows:]

  Statement of Michael A. Mussallem, Chief Executive Officer, Edwards 
Lifesciences Corporation, Irvine, CA, and Chairman of the International 
        Board Committee, Advanced Medical Technology Association

    AdvaMed and its member companies would like to thank the Chairman, 
Ranking Member, and Members of the Committee for holding this timely 
and important hearing today. Japan is our industry's largest overseas 
market, second only to the United States. We applaud the Committee for 
recognizing Japan's continued importance in the global economy, world 
trade, and U.S. foreign trade. We also greatly appreciate the work 
Executive Branch agencies have done on our industry's behalf.
The Medical Technology Industry
     AdvaMed represents over 1300 of the world's leading medical 
technology innovators and manufacturers of medical devices, diagnostic 
products and medical information systems. AdvaMed is proud to represent 
an industry that brings new hope to patients around the world, and U.S. 
companies are still benchmark manufacturing leaders in terms of total 
production, innovation and highest quality products. Our member 
companies manufacture nearly 90% of the $94 billion U.S. health care 
technology market, and nearly 50% of the $220 billion of medical 
technology products that are purchased globally each year. In 2004, 
U.S. exports in medical devices and diagnostics totaled over $24 
billion. The medical technology industry directly employs about 350,000 
workers in the U.S.
    Our industry is fueled by intensive competition and the innovative 
energy, driving very rapid innovation cycles that in many cases can 
lead to new product iterations every 18 months. About 70% of AdvaMed's 
membership is comprised of small and medium sized enterprises. 
Accordingly, our industry is most successful in fair, transparent, 
global markets where products can be adopted in a timely fashion and on 
their merits.
    Innovative medical technology saves and enhances peoples' lives. 
Our products enrich patients' productivity and quality of life, thereby 
improving living standards and benefiting society overall.
    Medical technology also contributes substantially to economic 
growth. Our products increase productivity by allowing workers to 
recover from illness faster, remain longer in the workforce, and thrive 
without expensive long-term care. Studies show that funds invested in 
health care yield far greater benefits than costs to a nation's economy 
over the long term.
    The use of medical technology will become even more important as a 
nation's population ages. According to the 2002 Commission on Global 
Aging, medical advances will bring ``longer, healthier, more productive 
lives with declining rates of disability for the elderly.'' Innovative 
medical technologies offer an important solution for nations that face 
the challenges of balancing serious budget constraints and the demands 
of serving aging populations.
    To deliver this value to patients, our industry invests heavily in 
research and development (R&D). Today, our industry leads global 
medical technology R&D, both in terms of innovation as well as 
investment. The level of R&D spending in the medical devices and 
diagnostic industry, as a percent of sales, more than doubled during 
the 1990s--increasing from 5.4% in 1990 to 8.4% in 1995 and over 11% 
last year. In absolute terms, R&D spending has increased 20% on a 
cumulative annual basis since 1990. Our industry's level of spending on 
R&D is more than three times the overall U.S. average.
Global Challenges
    Despite the great advances the medical technology industry has made 
in improving patient quality of life and delivering considerable value 
for its innovations, patient access to critical medical technology 
advances can be hindered by onerous government policies. Patients and 
health care systems experience much less benefit from our industry's 
R&D investment when regulatory procedures are complex, non-transparent, 
or overly burdensome--all of which can significantly delay patient 
access and drive up costs. In the future, patients will be further 
disadvantaged if reimbursement systems fail to provide appropriate 
payments for innovative products--which will subsequently affect the 
availability of R&D funds and the stream of new technologies.
    The medical technology industry is facing these challenges around 
the world as governments enact more regulations. While we support those 
regulations that ensure product safety and efficacy, many others are 
being imposed without scientific justification, and in non-transparent 
processes, which only adds to costs and delays without improving 
patient outcomes.
    As governments prioritize difficult budget decisions, they 
sometimes look to short-term decreases in health care expenditures 
without accurately assessing the long-term implications. In most cases, 
governments do not effectively measure the contributions medical 
technology makes in enhancing patient outcomes and productivity as well 
as expanding economic growth, which would more than offset the costs of 
providing these products. Instead, governments often inappropriately 
include reduced reimbursement rates as part of overall budget cuts.
The Challenge in Japan
    This is the situation we are facing in Japan, and it is getting 
more difficult every year. Japan's system for approving use of new 
medical technologies is the slowest and most costly in the developed 
world. Although Japan is one of the wealthiest countries in the world--
the second largest economy in the world--its spending on health care is 
among the lowest of major developed countries. On a per capita basis, 
Japan's spending of 7.8% of GDP is lower than 17 other Organization of 
Economic Cooperation and Development (OECD) member countries.
    Japan is compounding the problem by imposing more burdensome and 
costlier regulations, thereby penalizing the U.S. medical technology 
industry. Japan's latest regulations are expected to cost our industry 
over $1.5 billion just to achieve compliance to 2010. \1\
---------------------------------------------------------------------------
    \1\ Treasury's methodology was confirmed by the GAO in an April 
2005 Report (GAO-05-351). The GAO concluded in the Highlights section 
of the report that ``Treasury has generally complied with the reporting 
requirements for its exchange rate reports--'' On page 13 of the 
report, GAO stated ``Treasury did not find that Japan was manipulating 
its currency in 2003 and 2004. Treasury officials told us that they 
viewed Japan's interventions as a part of macroeconomic policy aimed at 
combating deflation in Japan and they expressed skepticism about the 
efficacy of intervention to affect the yen's value.''
---------------------------------------------------------------------------
    At the same time, Japan has made significant reimbursement 
reductions for medical technologies that impact the medical device 
industry in many ways, including limiting the availability of funds 
that could be devoted to R&D of new and innovative products. Inventing 
products that save and enhance lives requires large investments. Deep 
cuts for medical technologies in Japan have put downward pressure on 
companies' ability to invest in R&D. For the period April 2002 to March 
2006, the total revenue loss from these reimbursement reductions is 
expected to be about $3 billion--a significant share of which would 
have gone toward R&D. \2\
---------------------------------------------------------------------------
    \2\ An Assessment of the Impact of Japanese Foreign Exchange 
Intervention: 1991-2004, by Alain P. Chaboud and Owen F. Humpage, Board 
of Governors of the Federal Reserve System, International Finance 
Discussion Papers, Number 824, January 2005.
---------------------------------------------------------------------------
    Japan appears to be making these changes, in part, as a way to 
avoid correcting the existing inefficiencies in its health care 
delivery system. Yet, because of its country's practices, Japanese 
patients often must wait two, three, or even five years longer for 
access to technologies that are already available in most other 
countries. Japanese patients are being denied access to our most 
advanced medical technologies.
An Inefficent Health Care System in Japan
    Japan's hospitalization practices are the major contributor to high 
healthcare expenditures in Japan, with patients staying five to six 
times longer in hospitals than in other developed countries. For 
example, the average hospital length of stay in the U.S. is 6 days 
compared to 37 days in Japan, and these additional days clearly 
escalate the cost of care without significantly contributing to the 
quality of patient care. Japanese doctors own the hospitals in Japan, 
so there appears to be little incentive to diminish costs by better 
managing hospital stays.
    The monetary cost of the inefficiencies of this system is huge. 
Japan's MHLW has estimated that excessively long hospital stays alone 
inflate annual costs by at least $20 billion. This figure was found by 
comparing the average length of stay for Japan in total to a ``best 
practice'' length of stay in its most efficient district--leading to a 
reduction of stay length to 28 days. Using this same methodology, we 
estimate that Japan could save over $68 billion by bringing its 
hospitalization lengths of stay down to the average in other developed 
countries (7.3 days) and $71 billion if Japan reduced its 
hospitalization durations to the U.S. average of 6 days.
    In addition, Japan has the highest ratio of beds to population of 
any of the 30 OECD nations and four times the number of hospital beds 
per person than in the U.S., which increases costs and reduces 
efficiency in several ways. First, Japan maintains many hospitals that 
would otherwise be closed. While we are sensitive to cultural 
differences between Japan and the U.S. or Europe, even the country's 
own Ministry of Health, Labor and Welfare (MHLW) has recognized that 
the current number of beds is excessive.
    Second, Japan's diffuse hospital settings prevent the cost savings 
offered by specialized centers. A source of savings in specialize 
centers is the enhanced expertise doctors achieve when performing 
specific operations many times. The Japanese system limits the 
opportunities for Japan's health care professionals to develop optimal 
skills for performing complex medical procedures. Doctors who implant 
only a few devices each year would not receive as much training to 
perfect their skills as doctors practicing in specialized surgical 
hospitals, where a doctor might perform several implants (such as 
pacemakers) on a daily basis.
    Unquestionably, this system substantially drives up costs for our 
industry. Since clinicians in Japan are often less familiar with the 
technical specifications and use of our products, service costs--
including physician training and assistance during procedures--are much 
higher for industry. Medical technology products are often handled by 
two or more layers of distributors in Japan, each adding their own 
mark-up or margin. In comparison, the vast majority of medical 
technologies in the U.S. are sold directly without distributors.
A Slow Regulatory Process for Medical Devices in Japan
    In addition to the overall inefficiencies of its health care 
system, Japan's new technology approval process remains the slowest and 
most costly in the developed world. Even after creating a new agency 
last year to process applications for medical technology products, 
Japan had a backlog in February of over 491 applications filed before 
April 2004. When new applications are included, the backlog is 
reportedly much longer. A problem for this new agency is the number of 
staff reviewing applications for approval of medical technology 
products--about 40 officials, compared to over 700 in the U.S. Due to 
the long approval process, the medical technologies patients receive in 
Japan are often several generations behind the products in the U.S., 
Europe, and even developing countries like China, India and Thailand. 
Lengthy approvals also translate to higher costs for the U.S. medical 
technology industry, which must maintain out-of-date product lines just 
for Japan.
    Japan should be examining ways to streamline its regulatory system, 
achieving greater efficiencies and facilitating patient access to the 
most advanced technologies available. We have made such suggestions to 
the Regulatory Reform Council, established by Prime Minister Koizumi, 
on some changes. We also have been working with MHLW officials and are 
willing to continue doing so.
    So far, however, instead of facilitating patient access to medical 
technology, Japan has been compounding the problem by imposing more 
burdensome and costlier regulations that discourage innovation. Its 
revised Pharmaceuticals Affair Law (PAL), which covers medical 
technology products, went into effect on April 1, 2005. Even our 
largest companies are experiencing difficulties meeting PAL's 
complicated provisions. Some of our smaller companies have indicated 
they may have to exit the Japanese market because of PAL requirements. 
The initial and on-going costs of $1.5 billion through 2010 are monies 
that otherwise could have been invested in furthering innovation for 
patients who need it most.
Continued Reduction in Reimbusrements for Medical Devices in Japan
    At the same time our industry is facing these onerous and costly 
regulations, MHLW is threatening severe reimbursement rate cuts. In 
Japan, the government sets the maximum reimbursement rates, which 
usually act as ceiling prices for all medical technology products. 
These prices are reviewed and usually reduced every two years.
    Before 2002, Japan adjusted prices according to a process it called 
``reasonable-zone'' or ``R-zone.'' In brief, MHLW surveys its hospitals 
for prices paid to distributors, and allows for a reasonable margin (or 
``zone'') for discounts off of the government's reimbursement rate. 
While there are some difficulties with this system--as identified in 
bilateral Market-Oriented, Sector Specific (MOSS) negotiations between 
the U.S. and Japanese governments--our industry recognizes that it is 
at least based on factors in the Japanese market.
    In 2002, however, Japan also adopted a system called Foreign 
Average Pricing (FAP). This system calls for the establishment and 
revision of reimbursement rates on the basis of prices paid for medical 
technology products in the U.S., France, Germany, and the United 
Kingdom (U.K). The prices of medical technology products in Japan are 
designed to be based not on that market's requirements, but on 
completely unrelated conditions in foreign markets.
    The U.S. medical technology industry has several strong objections 
to this method of calculating reimbursement rates.

      As a methodology for setting reimbursement rates, it is 
not economically sound to compare prices in foreign markets that 
operate under vastly different conditions. Japan's regulatory system is 
far costlier to comply with than European or U.S. regulations. In 
addition, the overall cost of doing business in Japan is far higher 
than in the U.S. or Europe. Just in terms of basic cost of living, 
Tokyo is ranked the most expensive city in the world, with Osaka number 
2. Tokyo is about twice as costly in general as New York City and about 
2.5 times as expensive as a mid-western city, like Minneapolis. No U.S. 
city is in the top 20 cities on this list. \3\
---------------------------------------------------------------------------
    \3\ The yen behavior in 2003 and 2004 is especially interesting 
because the Japanese Ministry of Finance reports that interventions by 
the Bank of Japan in 2000 amounted to 1,528.9 billion yen; 3,210.7 
billion in 2001; 4,016.2 billion in 2002; 20,425 billion in 2003; and 
the final intervention was 14,831.4 billion in the first quarter of 
2004. Thus, despite the largest intervention over this period, the yen 
went strongly in the opposite direction.
---------------------------------------------------------------------------
      Operating in Japan compounds costs by our industry 
compared to selling in other countries. For example, the added 
expenditures for product redesign, development, distribution, research 
and marketing all increase the cost of supplying Japanese patients by 
hundreds of millions of dollars each year.
      Conditions in the three European countries included in 
the FAP analysis are different from both the U.S. and Japan. The 
European Union member states use a product approval system that, in 
many cases, is more streamlined than the U.S. process. However, France, 
Germany and the U.K. also maintain pricing interventions that place a 
ceiling on medical technology pricing.
      Comparing prices even within markets--let alone across 
national boundaries--is difficult. Our member companies sell products 
under a variety of terms and conditions. In the U.S., our companies can 
often offer lower prices to buyers willing to commit to much larger 
volumes for longer periods of time, but Japan does not have such buyers 
and offers minimal channels for efficient selling and distribution of 
medical technologies. Additionally, Japan's FAP system is an attempt to 
compare prices for products that are not the same in Japan as they are 
in other countries. Due to Japan's regulatory delays, U.S. 
manufacturers must incur the cost of maintaining older or outmoded 
production lines for sale in Japan.
      Japan established its FAP system and continues its plans 
to cut reimbursement rates because of the ``perception'' that prices 
for certain medical technology products are much higher in Japan than 
in other countries. As previously noted, there are many reasons prices 
are higher in Japan than in other countries. In addition, Japanese 
doctors and others in Japan, often obtain this perception by comparing 
U.S. hospital purchase prices to the official Japanese reimbursement 
rates, which are usually higher that the prices medical technology 
products are sold in Japan.
      As previously mentioned, the net effect of Japan's 
reimbursement rate cuts could have a detrimental effect on the funds 
available for research and development (R&D) of innovative products 
that are intended to lessen the time, pain and expense of treatments 
for a wide range of illnesses.

    Ironically, Japan's planned reimbursement decreases are likely to 
have no perceptible effect on moderating Japan's health care budgetary 
expenditures. While some of the other practices mentioned in this 
testimony are very inefficient and obvious drivers of inflation of 
Japan's health care costs, medical technology products account for only 
about 8% of Japan's total health care spending, and products targeted 
for price cuts represent less than 0.7% of all health care expenses. 
Virtually all technologies targeted for these cuts are made by non-
Japanese companies.
    Instead of trying to balance its budget on the backs of the medical 
technology industry, Japan should look to major reforms of its 
inefficient hospital system. Such reforms would provide huge savings 
and would be good for Japanese patients and for Japan's economy.
U.S. Government Support
    The U.S. Government has provided our industry with tremendous 
support in trying to convey this message to the Japanese government. We 
have enjoyed bipartisan Congressional support, with these hearings 
serving as just the most recent manifestation of that support.
    Our industry has also benefited from continuous support from the 
Executive Branch. We want to thank the Departments of Commerce, State 
and Treasury, the Office of the U.S. Trade Representative (USTR), and 
the U.S. Embassy in Tokyo for their hard work on our behalf. Since the 
mid-1980s, Executive Branch agencies have included regulatory and 
reimbursement issues in the MOSS negotiations. More recently, these 
issues have also been a topic for high-level USTR-Commerce negotiations 
with Japan under the Regulatory Reform Initiative.
    We believe that U.S. government support has been a major reason 
that total U.S. medical technology exports have flourished world-wide 
for many years, exceeding imports. In fact, this past year was the 
first time that total U.S. imports of $25.2 billion ever exceeded 
exports in the medical technology sector.
    While U.S. exports of medical technology have enjoyed a surplus 
with Japan, we see disturbing signs that this too could change. During 
the 1980s and 1990s, our industry's exports rose steadily. Since Japan 
introduced its FAP system in 2002, U.S. exports have basically 
stagnated at essentially the same level of exports in 2004 as in 2001. 
At the same time, Japan's exports of medical technology products in 
2004 rose by 10%, contributing modestly to Japan's burgeoning total 
trade surplus with the U.S. of $75 billion--an increase of 14% last 
year. With added regulatory hurdles and reimbursement reductions, U.S. 
exports to Japan could deteriorate further.
    The World Trade Organization (WTO) recognizes that standards and 
regulations can be non-tariff barriers (NTBs). While we are not 
alleging a WTO violation, we do believe that Japanese policies are 
essentially creating new NTBs for our industry to try to overcome.
Recommendations
    We have several recommendations to help ameliorate the situation in 
Japan and, at the same time, facilitate patient access to advanced 
medical technology products. AdvaMed members want to cooperate with the 
Government of Japan to find solutions that are mutually beneficial to 
patients, Japan, and our industry. We have met frequently with 
officials from MHLW and other government agencies, including at senior 
levels, to seek such solutions. We respectfully request that such 
solutions be based on actual operating conditions in Japan and not on 
circumstances in other countries.
    In terms of the regulatory environment, AdvaMed members will 
continue our efforts to understand and comply with existing 
regulations. At the same time, we ask that MHLW seriously examine our 
suggestions to facilitate patient access to advanced technologies.

      Regulatory Improvements. Japan should urgently address 
the growing backlog of product applications and to reduce the review 
times of new product applications--particularly in light of Japan's 
User Fee system and its commitment to meet performance measures. One 
concrete step would be to quickly expand the number of experts employed 
in Japan to review product approval applications for product safety and 
efficacy, which would help reduce the considerable backlog. As part of 
this effort, the expertise and training of reviewers could be broadened 
to include necessary skill sets, such as a background in engineering 
and biostatistics. Another step would be for Japan to accept results of 
scientific studies conducted in the U.S. We have made recommendations 
of this nature to the Government of Japan, and we would hope they 
receive serious consideration.
      Reimbursement Improvements. We seek a fair, transparent 
and predictable system based on actual operating conditions in Japan. 
We believe such a system should reward innovation by providing higher 
payments for truly innovative products. If there is a clear 
demonstrable reason to reduce some product prices, we would welcome the 
opportunity to work with MHLW on a transparent system that would limit 
the size of reductions in any given year and would allow us to build 
such cuts into our long-term planning, instead of being unpredictable 
and dictated every two years.
Conclusion
    Thank you, Mr. Chairman, and the other members of this Committee 
for providing us the opportunity to submit the views of our industry in 
the context of a hearing on overall U.S.-Japan trade relations. We hope 
you and other members of Congress will continue to recognize the 
importance of the medical device industry, as well as access to foreign 
markets for the sustained growth of our industry and U.S. jobs. In our 
relationship with Japan, Congressional and Administration involvement 
is critical to maintaining our exports to this important market.

                                 

    Mr. SHAW. Thank you. Mr. McAdams?

STATEMENT OF JIM McADAMS, PRESIDENT, NATIONAL CATTLEMEN'S BEEF 
                          ASSOCIATION

    Mr. MCADAMS. Thank you, Mr. Chairman. I am Jim McAdams. I 
am a cattle producer from Adkins, Texas, and I am President of 
the National Cattlemen's Beef Association. We represent our 
25,000 members, and through our affiliates we represent over 
230,000 cattle and beef producers in the United States. We 
appreciate the Committee allowing us the opportunity to share 
our thoughts regarding beef trade with Japan.
    Prior to the identification of a case of BSE in the United 
States, international trade had been a great benefit to U.S. 
beef producers. We were enjoying on average every year over a 
$1 billion trade surplus. Japan was our largest export market. 
In 2003, we sold them $1.7 billion worth of beef and beef 
products.
    But after December 23, 2003, when the case of BSE was 
identified, we lost 90 percent of those export markets. It has 
been nearly 2 years now since we lost those markets, and with a 
lot of hard work, we have only been able to open up about one-
third of them. Japan still is not open. They were our primary 
market, and the Administration developed a strategy to get that 
market open. We supported that strategy, and we feel like the 
Administration has done everything they could to make that 
strategy work.
    But next month, it will be a year ago since Japan and the 
United States announced that we had a framework for agreement 
allowing the resumption of beef trade. And in the over 11 
months since that agreement was announced, we haven't shipped 
the first pound of beef to Japan. We were asked at that time to 
be patient and to allow Japan the time to work through their 
domestic process.
    We have been patient, but the time for patience is gone. 
There is no more need for any words. We need to act. For us, 
this is a bigger issue than just opening the Japanese border 
for our beef. American agriculture has been the foundation of 
this country when we were founded and we needed to be able to 
sell our agricultural products, and that has not changed. 
Agriculture is more than a part of our heritage. It is a vital 
component of our future.
    We in agriculture and in the beef industry realize that we 
have to be part of this international market if we are going to 
be able to grow our industry and have a prosperous industry. 
But when we see the chaos that has been created by the 
disruptions in trade, we are wondering should we even support 
additional trade agreements.
    We are entering a critical timeline in the WTO 
negotiations, and the agriculture component has been an 
impediment to progress. We realize that. We see this Japanese 
beef issue as a litmus test as to if we can't resolve this 
Japanese issue, how can we have confidence in our ability to 
negotiate and enforce trade issues in the future?
    So, where we are today is this: We either solve this 
problem quickly and correctly, or it just does not make sense 
for U.S. cattle and beef producers to be supporting any future 
trade negotiations. The producers of our industry have been 
patient, but while we have been patient, we have absorbed 
billions of dollars in losses. And we can no longer wait for a 
process that seems bent on delay.
    We are anxious to work together to achieve our end goal, 
and that is reopening these markets, because we realize that 
the alternative is protectionist policies, it is trade wars, 
and it is chaos in commerce. But we cannot be satisfied with 
the status quo. We feel the United States has played by the 
rules. We have negotiated fairly. We have based our policies on 
sound science, and it is time for the Japanese to reciprocate. 
The Japanese Food Safety Commission has not worked to expedite 
this process. Instead, we feel they have delayed it. They have 
even stated, ``What is the rush?`` Instead of working with us 
to solve this, they have denigrated the safety of our product 
and the effectiveness of our firewalls.
    We believe strongly that the time for the Japanese to open 
their markets to our beef is now. It is time for them to start 
working with us and not against us. And it is time for our 
Government, all segments of our Government, to assure that this 
happens. We are asking this Committee to work with us to take 
whatever steps are necessary to get this market open.
    We appreciate once again the time that you have given us, 
and I will be glad to answer your questions at the appropriate 
time.
    [The prepared statement of Mr. McAdams follows:]

    Statement of Jim McAdams, President, National Cattleman's Beef 
                              Association 

    Chairman Thomas, Ranking Member Rangel, and members of the 
Committee: On behalf of cattle producers nationwide, the National 
Cattlemen's Beef Association (NCBA) appreciates the opportunity to 
present our views on U.S. and Japan Economic and Trade relations. I am 
Jim McAdams, a cattle producer from Adkins, Texas. I am privileged to 
serve as President, representing more than 25,000 beef producers and 
more than 230,000 members through our state and breed affiliates. Today 
I would like to focus on Japan's sanitary and phytosanitary barriers to 
trade for agricultural imports, specifically the ban on U.S. beef and 
beef products.
    Access to the Japanese market for U.S. beef and beef products has 
been restricted for nearly 21 months despite many proactive measures 
taken by the U.S. government and beef industry to demonstrate the 
safety of U.S. produced beef.
    Beginning in 1989, the United States was the first country without 
Bovine Spongiform Encephalopathy (BSE) within its borders to begin a 
series of interlocking safeguards to prevent this disease from ever 
taking hold in the United States. The U.S. was also the first country 
without BSE to test cattle for the disease. Eight years ago in 1997, 
the U.S. instituted a ruminant-to-ruminant feed ban when it was 
determined that this was the vector that allowed for the spread of this 
disease between cattle. After the December 23, 2003 discovery of BSE in 
Washington state, the U.S. began an aggressive policy of specified risk 
material (SRM) removal to ensure additional levels of safety. Removal 
of SRMs combined with an effective feed ban, are the principal 
components to our system of interlocking firewalls.
    The Japanese did not put comparable measures into place until they 
had identified their first case in 2001; to date, they have identified 
20 positive cases of BSE in a cow herd that is only 3.6 percent the 
size of the UnitedStates cattle population.
    Since June 2004, the U.S. Department of Agriculture's (USDA's) 
Enhanced BSE Surveillance Program has tested more than 471,691 cattle 
in highest risk category for BSE and has found only one confirmed case, 
evidence that U.S. firewalls are working and the prevalence of this 
disease in the U.S. is extremely low. Testing 268,500 animals can 
detect BSE at a rate of 1 in 10 million adult cattle at a 99 percent 
confidence level.
    Nearly one year ago, October 23, 2004, the U.S. government and the 
government of Japan issued a joint press statement outlining the 
conditions and modalities by which the two countries would begin 
resuming two-way trade in beef and beef products,. This agreement was 
subject to their respective regulatory approval processes and based on 
science.
    We saw the implementation of this agreement as an interim step in 
resumption of trade with Japan and believed it would lead to science-
based trade consistent with the World Animal Health Organization's 
(OIE) guidelines in an expeditious manner.
    Yet, today, 11 months after this framework agreement was announced 
by the two governments, the ban on U.S. beef and beef products remains 
in place, and U.S. cattle producers' patience with Japan's Food Safety 
Commission (FSC) has been exhausted.
    Cattle producers consider October 2005 a significant milestone in 
the push for resumption of U.S. beef exports to Japan. The 
Administration has fully responded to all of the government of Japan's 
requests for information in a science-based manner. The United States 
has been extremely patient with Japan, giving them a generous amount of 
time to work through internal processes, but we have yet to see a 
timeline regarding re-opening of Japan's borders to U.S. beef. Quite 
simply, Japan has not followed through on what it committed to in 
October 2004.
    A continued ban on U.S. beef is not based on science. In recent 
weeks, Japan's FSC has made erroneous claims regarding the safety of 
U.S. beef. These continued delay tactics represent nothing more than a 
trade barrier and these statements must be rebuked. We are extremely 
proud of all that has been done in the United States to keep beef safe 
from BSE. Extensive U.S. leadership regarding this disease is now 
leading toward the eventual eradication of BSE. We cannot accept the 
safety of U.S. beef to be questioned in such a way.
    The National Cattlemen's Beef Association, on behalf of cattlemen 
nationwide, supports the recent measures taken by members in the U.S. 
House of Representatives and U.S. Senate to ensure fair treatment for 
our product in this trade agreement. And with no end in sight, we 
encourage our lawmakers to evaluate every measure possible to regain 
access to Japan for U.S. beef and beef products.
Trade Benefits Beef Producers
    International trade is a key to economic growth and creates 
opportunities to help U.S. cattle producers grow demand for our product 
and enhance our profitability. With the vast majority of the world's 
population living outside our borders, we must look abroad to generate 
new markets and expand existing ones. Prior to the discovery of BSE in 
December 2003 in the United States, and the subsequent closure of over 
two-thirds of our export markets, the United States was the largest 
importer of beef in the world and one of the largest exporters. We 
exported our high value beef and beef products, and imported lower 
value products of which we had a deficit.
    In 2003, the United States imported $2.62 billion of beef and 
variety meats and exported a record $3.86 billion in beef and beef 
variety meats. In that year, the average per pound value of U.S. beef 
exports was $1.66 while the average per pound value of our imports was 
$1.21. Overall, the United States enjoyed a record $2.2 billion beef 
and beef product trade surplus in 2003. Such success in the export 
market is nearly unprecedented in any agriculture commodity when one 
considers that the U.S. beef industry also experienced record domestic 
prices in 2003.
    Following the announcement on December 23, 2003, many countries 
shut their borders to our products, including our largest export 
market: Japan. In 2003, the United States exported $1.4 billion worth 
of beef and beef variety meats to Japan.
    Overall, the cumulative swing in the net balance of beef trade 
since then will result in a more than a $7 billion loss to our industry 
by the end of this year. Japan and South Korea currently account for 
approximately 80 percent of our lost export markets that are worth $175 
per head to U.S. beef cattle producers. That's $60 million per week in 
lost income.
Science-based Protocol for Trade with Countries with BSE Necessary
    Prior to the discovery of BSE in Canada and the United States, 
countries did not want to trade with other countries known to have even 
one case of BSE within their borders. However, this practice did not 
follow OIE guidelines on how to trade products safely under those 
circumstances. In fact, the new BSE health code, published in August 
2005 by the OIE, states that boneless skeletal beef from animals less 
than 30 months of age can be traded regardless of the BSE risk status 
of its country of origin. It is time for a new order in world beef 
trade. One of the lessons the United States learned is that we must 
treat others as we would like to be treated in similar situations. As 
such, NCBA calls for an international commission to establish a 
science-based protocol in which all countries are accountable in 
resuming trade.
    If we would have had such a commission prior to December 23, 2003, 
we might have been able to prevent much of the economic losses that the 
cattle producers of this great nation have experienced since.
    In no way does this proposal intend to suggest errors have been 
made or that these government to government negotiations to reopen our 
exports markets have been mismanaged. We see this as a ``next step'' 
effort to further instill confidence and reliability in scientifically-
sound regulations. In order to prevent any future collapse in the 
confidence and safety of beef, anywhere in the world, because of policy 
decisions based upon political perception rather than sound science.
    On September 10, 2001 when Japan discovered its first case of BSE, 
Japanese consumers didn't stop buying just Japanese beef; the 
undisputable fact is that they significantly curtailed buying all beef, 
regardless of its origin. (U.S. exports to Japan fell by roughly 40 
percent in 2002, which played a part in the dismal U.S. cattle prices 
of that year.)
    Japan's decision to test 100 percent of the cattle slaughtered was 
not based upon science but rather an attempt to begin to reassemble the 
Japanese consumers' shattered confidence in beef. Nearly four years 
later, on August 1, 2005, Japan finally began its return toward a 
science-based path as it repealed its 100 percent testing requirement. 
Japan now requires BSE tests for cattle 21 months of age and older. As 
a result of this change, it also requested as an interim step that U.S. 
beef exports to Japan come from cattle 20 months of age or younger.
    While we realize that this is by no means a science-based criterion 
for beef trade, we also understand the necessity of rebuilding Japanese 
consumers' confidence in beef. We are committed to this effort as long 
as Japan is committed to a path that will lead to trade in beef based 
upon scientifically-sound and internationally accepted regulations and 
protocols. However, the reopening of Japanese market to U.S. beef from 
cattle under 21 months must be a short-term interim step that allows us 
to resume commerce. Trade must then be expanded in an expeditious 
manner following OIE guidelines. 
No Japanese Beef Imports Until U.S. Exports to Japan Resumed
    While we believe any decision to prevent trade should have science-
based reasons, NCBA cannot support the reopening of the U.S. market to 
imports of Japanese beef until Japan reopens its market to U.S. beef. 
In this particular case, it's the principle of the thing. We'll agree 
to take Japan's half a semi-load of beef it ships us each year, at a 
value of $45 per pound, simultaneously and on the same terms as our 
$1.7 billion in exports to Japan, BUT NOT BEFORE. Nowhere in the 
framework agreement does it say we have to go first.
Summary
    Several years ago, Europe decided to shut its doors to U.S. beef by 
manipulating and then flaunting international trade rules. If Japan, 
the world's second largest economy, does the same, how can we view 
international trade positively? Rapid resolution of this Japanese trade 
issue is critical to moving forward in the reality of today's 
international agricultural marketplace. If we don't get positive 
resolution on this issue, the alternative is an ugly drawn out trade 
war that benefits no one and results in protectionist policies and 
chaos in commerce.
    America's cattlemen realize that our future depends upon how 
international trade is conducted, and re-opening this valuable market 
remains our highest trade priority. Given a fair chance, we are willing 
and able to compete with anyone in the world with the highest quality 
and safest beef. All we're asking for is the opportunity to sell the 
same beef we feed our families every day to the world's consumers.
    We understand this is a government-to-government negotiation. All 
we're asking from our government leaders is that they stand committed 
to resolving this issue based upon sound scientific principles. There 
is a difference between deciding to make a decision and actually doing 
something--we simply need to see some action.
    The United States has played by the rules and honored its 
commitments, and now it is time for Japan to do the same and to lift 
its ban on U.S. beef.
Attachment 1:

                       U.S._Japan Progress Report

        Action Taken to Resolve Japanese Import Ban on U.S. Beef

                       NCBA Fact Sheet: Fall 2005


----------------------------------------------------------------------------------------------------------------
 What did the October 2004
 Agreement between U.S. and                     What Has Been Done and Where We are Now . . .
      Japan call for?
----------------------------------------------------------------------------------------------------------------
``Specified risk materials   A Japanese government study-mission visited the U.S. and Canada in May 2005 to
 (SRMs) must be removed       examine BSE preventative measures for Japanese exports. The group consisted of six
 from animals of all ages''   officials from the Ministry of Health, Labor and Welfare, the Ministry of
                              Agriculture, Forestry and Fisheries and the Foreign Ministry. The group found and
                              reported that both Canada and the United States have taken strict steps to remove
                              specified risk materials from cows.


----------------------------------------------------------------------------------------------------------------
``Animals must be verified   As stated in a USDA press release dated October 2004, two methods will be used to
 at 20 months of age or       verify that animals are 20 months or younger.(1) Production records that indicate
 younger''                    birth dates. These include records for individual animals; records from
                              insemination; group age verification plans; and records from already existing USDA-
                              certified special programs. (2) The USDA physiological grading system. A special
                              study is being conducted to examine the correlation between chronological age and
                              physiological characteristics. This information then will be used to define the
                              parameters of the USDA grading criteria that will be used in determining animal
                              eligibility for export.Also, a new BSE health code, published in August 2005 by
                              the OIE, states that boneless skeletal beef from animals less than 30 months of
                              age can be traded regardless of the BSE risk status of its country of origin.
----------------------------------------------------------------------------------------------------------------
``BSE testing requirements   Many believed the United States could speed the process of resuming beef trade with
 finalized'' ``BSE testing    Japan if the USDA would perform 100% testing of cattle for BSE. On the contrary,
 requirements finalized''     this request was never made by the Japanese government, and Japan and the U.S.
 (cont.)                      never agreed to 100% percent testing as terms of agreement.


----------------------------------------------------------------------------------------------------------------
``Japan's domestic approval  In September 2005, Japan's FSC had its sixth meeting since May to discuss
 process to include           resumption of U.S. beef trade with Japan. The FSC was required by the Japanese
 deliberation by the Food     government to speed up its process by increasing the size of the committee and its
 Safety Commission (FSC)''    staff and holding meetings more frequently.


----------------------------------------------------------------------------------------------------------------
``Other international        In May 2005, the World Organization for Animal Health (OIE) changed its
 experts including the        recommendations for standards on trade status in regards to BSE. Risk profiles of
 World Organization for       countries that have experienced BSE in their national herds will now be based on
 Animal Health (OIE) and      what steps the country is taking to manage the disease. They also expanded the
 the World Health             list of tradable, non-risk products to include boneless beef.
 Organization (WHO) invited
 to participate in
 consultations with
 Japanese and U.S.
 government officials''

----------------------------------------------------------------------------------------------------------------
``Both the United States     In June, both Japanese Prime Minister Junichiro Koizumi and Japanese Chief Cabinet
 and Japan to have food       Secretary Hiroyuki Hosoda said the confirmation of a second case of BSE in the
 safety systems in place      United States ``will not directly affect'' deliberations on reopening Japan's
 that are sufficiently        market to U.S. beef. But still, the Food Safety Commission continued to request
 robust such that a few       more information in July 2005 from the USDA regarding the second American case of
 additional BSE cases will    BSE so it can make a risk assessment on U.S. beef.
 not result in market
 closures and disruption of
 beef trade patterns
 without scientific
 foundations''

----------------------------------------------------------------------------------------------------------------


                                 

    Mr. SHAW. Thank you. Mr. Mohatarem?

  STATEMENT OF G. MUSTAFA MOHATAREM, PH.D., CHIEF ECONOMIST, 
               GENERAL MOTORS, DETROIT, MICHIGAN

    Mr. MOHATAREM. Chairman Shaw, Congressman Levin, thank you 
for providing me the opportunity to testify this afternoon.
    2005 is shaping up to be another banner year for auto sales 
in the U.S. Calendar year-to-date sales have been running at a 
pace just over 17 million, a level that was considered 
unattainable a few years ago. But despite these strong sales, 
U.S. auto manufacturers and suppliers are struggling to turn a 
profit. Autoworkers have been laid off, credit ratings for the 
auto companies have been downgraded, and many suppliers are 
facing bankruptcy.
    Now, there are many reasons for our current challenges, but 
the legacy of Japan's mercantilist trade policies and the 
impact of Japan's sustained currency manipulation stand out 
among the primary causes.
    With the progressive lowering of tariffs and other barriers 
to trade, exchange rates have taken on a larger component of 
competitive advantage. Indeed, Japan is demonstrating that 
elimination of tariffs and removal of nontariff barriers are 
meaningless if a country is allowed to offset these actions by 
artificially depreciating its currency.
    No industry better exemplifies the effects of Japan's 
mercantilist post-war trade policy than the U.S. automotive 
industry. Last year, the U.S.-Japan automotive trade deficit 
reached $44 billion, representing over two-thirds of our total 
U.S.-Japan deficit, and this is not a new development. This has 
been going on for almost 25 years.
    In 1995, the U.S. Government negotiated an agreement, a 5-
year agreement with Japan that was designed to address many of 
the barriers we had identified. It was a good agreement, and it 
immediately resulted in an increase in not just our exports, 
but the exports of our suppliers to Japan. But just as we had 
finished making significant investments to take advantage of 
this agreement, the Japanese Government began to intervene in 
currency markets to deliberately weaken the yen. The impact of 
this was to make U.S. exports to Japan prohibitively costly. In 
pursuing this weak yen policy, Japan effectively nullified the 
value and commercial significance of the 1995 U.S.-Japan Auto 
Agreement.
    Now, the IMF clearly states that members should avoid 
manipulating exchange rates in order to gain an unfair 
competitive advantage over other members and defines such 
manipulation as protracted large-scale intervention in one 
direction in exchange markets. Since 2000, Japan has intervened 
over 400 times, spending over $420 billion. As a result, Japan 
has seen a massive increase in its reserves, growing from $345 
billion in July of 2000 to over $840 billion.
    Now, we heard from the earlier panel that Japan has not 
intervened since the first quarter of 2004. That is true. But 
it is important to keep in mind that Japan spent $150 billion 
in that one quarter alone and announced that they had budgeted 
another $1 trillion to intervene in currency markets. With an 
intervention of that magnitude and a commitment to continue 
intervening, is it any surprise they have not needed to 
intervene further?
    Now, this intervention, the cheap currency translates 
directly into competitiveness. We estimate that in the last 
year alone, the cheap yen resulted in a subsidy to Japanese 
manufacturers of approximately $3,000 on a small car going up 
to $12,000 on a large luxury car. For those who question 
whether this matters, all you have to look at is the first-half 
results announced by the Japanese auto companies. Collectively, 
they reported $1 billion in additional earnings as a result of 
the weak yen.
    It is precisely for this reason that the WTO, the IMF, and 
the Omnibus Trade Act address the issue of currency 
manipulation, yet Japan has been able to do that without any 
consequences.
    On behalf of General Motors, I urge the Committee to give 
greater attention to our ongoing trade and currency problems in 
Japan and to see how directly these issues are related to the 
competitive problems American manufacturers face. There are 
responsible actions that Congress and the Administration can 
take. You can insist that these unfair currency practices 
cease, and if Japan or another trading partner continues, they 
must understand there will be consequences. The Congress and 
the Administration should make clear they will make full use of 
U.S. and international trade laws to discipline unfair currency 
manipulation. The bottom line is in a world where we have much 
more open trade, currency valuation makes a tremendous 
difference, and when we allow a country like Japan to 
manipulate its currency to the advantage of their 
manufacturers, it comes as the detriment of our manufacturers, 
us and our employees.
    Thank you again for the opportunity.
    [The prepared statement of Mr. Mohatarem follows:]

Statement of Mustafa Mohatarem, Ph.D., Chief Economist, General Motors, 
Detroit, MI Chairman Thomas, Ranking Member Rangel, Members of the Ways 
and Means Committee: Thank you for providing me with the opportunity to 
provide testimony at the hearing this morning.
    General Motors Corporation, founded in 1908, is the world's largest 
automaker and has been the global industry sales leader since 1931. GM 
has employees in all 50 states for total U.S. employment of 166,000 
people. GM's worldwide employment is approximately 317,000. Last year 
GM spent over $6.5 billion in pension payments to 456,000 retirees and 
surviving spouses, and provided health care benefits of over $5.2 
billion to more than 1.1 million retirees, workers, and their 
families.GM has manufacturing operations in 32 countries and its 
vehicles are sold in virtually every country. In 2004, GM sold nearly 9 
million cars and trucks globally.
    2005 is shaping up to be another banner year for auto sales in the 
United States. Calendar year-to-date sales have been running at a pace 
just over 17 million units. Annual auto sales have hovered at or 
exceeded 17 million units--a level that was considered unattainable as 
recently as the early l990s--for seven straight years.
    Given the strength of auto sales, one would think that U.S. auto 
manufacturers, auto suppliers and their workers would be celebrating. 
But we are not. Despite the strong sales, U.S. auto manufacturers and 
suppliers are struggling to turn a profit, autoworkers have been laid 
off, credit ratings for U.S. auto companies have been downgraded and 
many suppliers are faced with bankruptcy.
    While there are many reasons for the current challenges facing 
American-owned auto manufacturers, the legacy of Japan's unfair and 
mercantilist trade policies and the impact of Japan's sustained 
currency manipulation stand out among the primary causes. With the 
progressive lowering of tariffs and other barriers to trade, exchange 
rates have taken on a larger component of competitive advantage. 
Indeed, Japan has demonstrated that elimination of tariffs and the 
removal of non-tariff barriers are meaningless if a country is allowed 
to offset these actions by artificially depreciating its currency. 
Thus, for example, the artificially weak yen has provided Japanese auto 
companies a cost advantage ranging from $3,000 on a small car to 
$12,000 on a luxury sport utility. This subsidy has both facilitated 
the expansion of Japanese companies in the U.S. and succeeded in 
keeping American-built automobiles out of Japan.
    The world's acceptance of Japan's postwar export-based economic 
growth model has long been debated here in Congress and elsewhere. 
However, it is frustrating, really unbelievable, to many of us in this 
business and the American manufacturing sector that the Japanese 
government's extraordinary $420 billion currency manipulation program 
has gone unquestioned and unchallenged, while China has become the sole 
focus of attention as the threat to American competitiveness.
    Let me assure you--when it comes to working to secure the health 
and viability of American auto jobs and the future well being of this 
industry, there is nothing more important to consider than the U.S.-
Japan relationship.
U.S.-Japan Automotive Trade
    No industry better exemplifies the effects of Japan's imbalanced, 
mercantilist postwar trade policy than the automotive sector. Last 
year, the U.S.-Japan bilateral automotive trade deficit reached $44.2 
billion, making it the largest sectoral trade deficit the United States 
maintains with any country. In 2004, automotive trade represented over 
two-thirds of the total U.S.-Japan deficit. And this is not a new 
development. This has been the case for more than twenty-five years, 
confirming the deep historical and structural nature of the chronic 
trade imbalance between our two countries.
    A quick glance at the trade numbers confirms this pattern. In 2004, 
Japan exported to the United States over 1.7 million passenger vehicles 
and a substantial amount of auto parts worth a total of $46 billion. 
During the same time, Japan imported just 15,000 passenger vehicles and 
auto parts from the United States worth a total of $1.8 billion. The 
market share of Japanese nameplate brands reached over 30% of the total 
U.S. light vehicle market in 2004--including nearly 40% of passenger 
cars. In contrast, sales of U.S. nameplates in Japan reached only 2% of 
the total market.
    It didn't have to be this way. The reality is that Japan built and 
grew its economy based on exports, and has fueled that export machine 
by restricting demand in its domestic market. It is a mercantilist 
model that others have sought to follow, and it has succeeded, in large 
part, at the expense of its trade partners. In an effort to address the 
obvious problems in automotive trade, in 1995, the United States and 
Japan signed a five-year agreement intended to address the huge 
structural imbalance in our automotive trade by improving the access of 
U.S. automakers to the Japan market. It was a good agreement, and 
resulted initially in a modest increase in sales for U.S. auto and auto 
parts companies in Japan.
    It was a good agreement that made a serious effort to address the 
very broad range of non-tariff barriers that had successfully 
maintained Japan as a closed market, even after Japan reduced its 
vehicle tariffs to zero. These non-tariff barriers included the 
interlinking collusive business practices such as the `keiretsu' 
relationships between Japanese auto manufacturers and their family of 
suppliers, and the restricted distribution arrangements between 
Japanese manufacturers and their dealers that prevented Japanese 
dealers from establishing contractual relationships with U.S. and other 
foreign auto companies.
    Additionally, Japan's regulatory system that governs certification 
to safety and emission standards was, by any objective standard, 
clearly designed for the convenience of Japanese automakers and to make 
it expensive, difficult, and very time consuming to sell imported cars 
in Japan.
    In the 1995 Auto Agreement, the United States set out a specific 
course of action that included a detailed set of measures that the 
Japanese government and industry agreed to take to remove the labyrinth 
of non-tariff barriers that had been used to successfully keep the 
market closed. Among the major commitments made by Japan in the 1995 
Agreement were:
1995 U.S.-Japan Auto Agreement
    The Japanese government agreed to:

      ``Demonstrate the commitment of the Japanese vehicle 
manufacturer to support open and competitive distribution systems for 
vehicles in Japan'';
      ``Eliminate concerns that Japanese vehicle dealers may 
have about the consequences associated with carrying competing foreign 
motor vehicles''; and
      Confirmed that the government ``supports open and 
competitive distribution systems for motor vehicles in Japan.''
      ``The Government of Japan will provide guidance to auto 
parts distributors that ``they refrain from any form of discrimination 
when handling foreign made auto parts;
      Deregulation of Disassembling Repair Requirements 
(Critical Parts Requirements);
      Deregulation of Certified and Designated Garages;
      Deregulation of Modification Inspection Requirements;
      Notification of Regulatory Changes; and
      The Government of Japan agreed to 23 specific commitments 
intended to ease the burden, cost and overall disproportionate process 
required of foreign automakers to achieve certification of vehicles for 
sale in Japan.

    Many of these measures and commitments contained in the 1995 U.S.-
Japan Auto Agreement were potentially important positive developments. 
If fully tested and implemented, they could perhaps have made a 
significant difference in improving sales opportunities for U.S. auto 
and auto parts companies in the Japanese market. However, just as the 
U.S. companies began to undertake the extensive capital investments to 
test these commitments, the Japanese government moved in a major new 
policy direction that totally changed the terms of trade.
    In l996, it began to use massive resources to intervene in currency 
markets to deliberately manipulate the value of the yen in order to 
weaken its value to promote exports. The impact of this was to make 
U.S. exports to Japan significantly, and for many, prohibitively 
costly. In pursuing this weak yen policy throughout the late l990s, 
Japan effectively vitiated the value and commercial significance of the 
1995 U.S.-Japan Auto Agreement. As a result, to this day, we have no 
way of knowing whether Japan's commitments made in 1995 to remove its 
web of non-tariff barriers restricting access to its auto and auto 
parts markets were met.
Currency Manipulation
    Japan's weak yen policy has given its exporters a huge subsidy and 
competitive advantage in the U.S. market, causing significant harm to 
U.S. manufacturers. One clear sign that a country is manipulating its 
currency is a substantial increase in its foreign currency reserves, 
which occurs as it buys and holds dollars. Japan has seen a massive 
increase in its foreign currency reserves since 2001, growing from 
$344.8 billion in July 2000 to $840 billion in July 2005.
    In a January 2005 Working Paper, the U.S. Federal Reserve reported 
that ``Since the early 1990s, the monetary authorities of the major 
industrialized countries, with one notable exception, have greatly 
curtailed their foreign-exchange interventions. That exception has been 
Japan, where the Ministry of Finance has continued to intervene 
frequently--and at times massively--in foreign exchange markets.''
    There are several international agreements that preclude or limit 
the use of currency intervention for trade-distorting purposes. These 
agreements seem to put Japan's currency intervention actions on the 
level of a non-tariff barrier. Of particular interest are the rules 
governing the IMF and the original GATT. Section IV of the IMF charter 
states without reservation, that ``members should avoid manipulating 
exchange rates in order to gain an unfair competitive advantage over 
other members'' and defines such manipulation as ``protracted, large-
scale intervention in one direction in exchange market.''
    Perhaps more relevant, GATT Article XV (Exchange Arrangements) 
states that contracting parties shall not, by exchange action, 
frustrate the intent of the Agreement. The intent of the Agreement, as 
stated in the preamble, is the objective of ``entering into reciprocal 
and mutually advantageous arrangements directed to the substantial 
reduction of tariffs and other barriers to trade.'' Japan is clearly 
violating GATT Article XV by manipulating its currency to keep it 
artificially weak. Japan is in effect providing a substantial subsidy 
to its exporting industries. These practices are clearly inconsistent 
with the intent of the IMF and GATT, and likely violate both the IMF 
and the GATT Agreements, causing major distortions to international 
trade.
    As a result of Japan's massive and disruptive currency 
interventions, the value of the yen fell from 101 yen/dollar in January 
2000 to 136 yen/dollar in 2002. Market forces, helped by Bush 
Administration officials' statements, had pushed the yen to slightly 
more reasonable levels of 105 yen/dollar in early 2005. However, due in 
part to ongoing ``jawboning'' and verbal intervention by high-ranking 
Japanese officials, the yen is currently in the 111 yen/dollar range. 
The damage caused to key sectors of the U.S. economy has been deep and 
in many cases permanent.
    Japan's artificially weak currency provides a significant per-
vehicle cost advantage that amounts to an outright annual subsidy of 
between $3,000 for small car to $12,000 for a luxury sedan or SUV for 
every vehicle exported to the United States. Cars produced here by 
Japanese companies also benefit heavily from this subsidy because of 
their high use of imported parts and components. Japanese automakers 
have used this cost advantage to:

      Dramatically increase investment in technology and 
production worldwide;
      Minimize, and in some cases reduce, prices on new models;
      Dramatically increase spending on advertising;Offset 
tariffs, taxes and other fees; Increase incentives to boost market 
share; and
      Enhance spending on research and development.

    For those who may question whether the exchange rate policies of 
our trading partners are important factors affecting U.S. 
competitiveness, half-year earnings statements just released by Japan's 
automakers answer that conclusively. Toyota, Nissan, Honda, Subaru, and 
Japan's other auto companies announced last week that they earned 
nearly $1 billion in unanticipated windfall profits in the first half 
of fiscal year 2005. These were due exclusively to the artificial 
weakness of the yen.
    Most Japanese automakers set a projected exchange rate of 105 yen/
dollar as their benchmark at the beginning of the 2005 fiscal year. 
But, because Japanese government policies resulted in a yen/dollar 
exchange rate much weaker than that, Japanese automakers' total profits 
increased by 112 billion yen--over $1 billion--above what they 
projected. Much of that profit increase came as a result of sales in 
the United States. According to the Nikkei news service, the breakdown 
of these additional weak currency-driven profits include 50 billion 
yen/$452 million for Toyota, 28 billion yen/$253 million for Nissan, 
and 14.2 billion yen/$127 million for Honda.
    With no sign that the Japanese government will change its exchange 
rate policy to allow the yen to rise to its true market level (90 to 
100 yen per dollar is the commonly accepted range), the full-year 
windfall provided by the Japanese government's currency policy could 
likely be a check for $2 billion written to Japan's automakers.
    Is it any surprise then that the relative competitive performance 
of the Japanese and U.S. auto companies is so dramatically different? 
Armed with a significant per-vehicle subsidy, the Japanese companies 
have embarked on a period of rapidly escalating profits, which they 
have directed toward increasing market share in the United States.
    Intervention on the scale that Japan has engaged in is no different 
from other forms of subsidies that governments offer. That is why the 
WTO has explicit provisions against currency manipulation. And that is 
why the Omnibus Trade Act of 1988 required the U.S. Treasury to monitor 
currency manipulation by other countries and to take appropriate 
measures to prevent other countries from manipulating their currencies 
to gain unfair competitive advantage for their products.
Conclusion
    Automotive trade between the United States and Japan has been 
chronically and structurally unbalanced for decades. It has 
consistently made up the vast majority of the United States' total 
deficit with Japan. Contrary to claims that the opening of Japanese 
auto plants in the United States would cause Japanese auto exports to 
decline, Japan's automakers have sharply increased their exports to the 
United States. Even a hard-fought and sound 1995 U.S.-Japan Auto 
Agreement has been rendered useless because of reckless Japanese 
currency policies. Over the last five years, subsidized by an 
artificially weak yen funded by $420 billion in Japanese government 
currency interventions, Japan's automakers have exported an annual 
average of 1.8 million cars and trucks into the United States, 13% 
higher than the average from 1996-2000.
    On behalf of General Motors, I urge the Committee to give greater 
attention to our ongoing trade and currency problems with Japan--and to 
see how directly these issues are related to America's slipping 
industrial competitiveness. There are responsible actions the Congress 
and the Administration can take to respond. You can insist that these 
unfair competitive currency practices cease. And if Japan or another 
trading partner continues, they must understand there will be 
consequences. The Congress and the Administration should make clear it 
will make full use of U.S. and international trade laws to discipline 
unfair currency manipulation. And the United States will refuse to 
consider any further overtures, such as Free Trade Agreements or tariff 
reductions to countries like Japan that are engaged in such practices, 
until such time as those governments commit publicly to cease engaging 
in currency manipulation and intervention in the future.

                                 

    Mr. SHAW. Thank you, sir. Ms. Howard?

 STATEMENT OF DEBORAH HOWARD, PRESIDENT, JAPAN MARKET RESOURCE 
    NETWORK, TOKYO, JAPAN, ON BEHALF OF AMERICAN CHAMBER OF 
                COMMERCE IN JAPAN, TOKYO, JAPAN

    Ms. HOWARD. Mr. Chairman, Congressman Levin, thank you for 
the opportunity to appear before you today on behalf of the 
American Chamber of Commerce in Japan, or ACCJ. My name is 
Debbie Howard, and I am the founder and President of a market 
research firm based in Tokyo that has been in business for 17 
years. I also currently serve as the elected President of the 
ACCJ. I would like to discuss some key structural challenges 
confronting Japan and what we believe must be done to ensure 
Japan's sustained economic growth.
    The first challenge is Japan's rapidly aging population, 
the most extreme of all industrialized nations. Japan's birth 
rate is also flattening, and the downward trend shows no sign 
of stopping. Japan will likely increase consumption taxes in 
2007 and implement other tax reforms to help cover the 
anticipated costs, but these measures are unlikely to be 
adequate.
    The second major challenge confronting Japan is its 
unprecedented fiscal crisis. Japan's public debt exceeds 163 
percent of GDP, over 2 times that of the U.S. Japan has 
basically reached its limit on borrowing and must look to other 
solutions to deal with its aging demographics. Considering 
these challenges, Prime Minister Koizumi has decided to 
introduce private sector-driven reforms that will enhance 
efficiency in the overall economy of Japan.
    The centerpiece of Prime Minister Koizumi's reforms is the 
privatization of Japan Post. This Committee has been involved 
in postal reform from the very beginning and has issued a very 
strong joint letter to Japan calling for equal treatment 
between private companies and the privileged, government-run 
postal companies, as well as for a standstill on new product 
offerings until such equal treatment is achieved. Even after 
the legislation passes in October, though, this Committee's 
continued engagement will be essential to obtain commitments 
from Japan to ensure equivalent conditions of competition and 
transparency of the process by which the postal entities will 
be allowed to expand the range of their businesses. This is 
critical to the future viability of many U.S. financial 
institutions that generate tens of billions of dollars annually 
in Japan. They will also ensure Japan's compliance with its 
national treatment obligations under the GATS.
    Japan has also begun to consider broad reform of its health 
care system. It is important that health care reform 
incorporate market-based measures that make efficient use of 
limited resources and enable innovative companies, including 
U.S. companies, to provide cost-effective solutions that 
improve patient access to the most advanced treatments, as well 
as improve diagnostics and patient quality of life. In addition 
to hastening approval times for pharmaceuticals and medical 
devices, ACCJ members would very much like to see private 
companies permitted to own or manage medical institutions on a 
for-profit basis.
    It is also important for Japan to continue to strengthen 
its corporate governance. Progress has slowed dramatically in 
this area. Rather than protecting the interest of Japanese 
management, the government should be focusing on improving 
corporate governance through active shareholder participation 
and through the introduction of modern merger techniques that 
create a market for corporate control and facilitate corporate 
restructuring and investment.
    The U.S. Government has for many years been encouraging 
Japan to take measures to improve the transparency of its 
policymaking process. Progress has been made with the 
establishment of public comment procedures and no action letter 
systems, as well as improved access to advisory groups. On the 
downside, however, government agencies often provide 
unreasonably short comment periods and ignore comments 
submitted during the public comment process. Most agencies also 
remain reluctant to respond to no action letter requests, and 
the quality of access to advisory groups varies depending on 
the agencies and officials involved.
    In conclusion, Mr. Chairman, U.S. business interests in 
Japan have become much more complicated. In addition to the 
priority areas I have outlined today, the ACCJ is seeking 
policy improvements in areas as wide-reaching as labor 
mobility, personal information protection, taxation, 
competition policy, and even Narita airport management. While 
we have come a long way, there is still much work to be done, 
and it is critical that Japan implement further reforms in a 
manner that creates a level playingfield.
    In terms of trade policy, it is essential that the U.S. 
Government remain engaged multilaterally in the WTO, APEC, and 
other forums, and bilaterally in the Economic Partnership for 
Growth and other processes, to ensure that reform in Japan 
stays on track and that Japan lives up to its trade 
commitments.
    On behalf of the members of the ACCJ, I would like to thank 
you again and the members of your Committee for this 
opportunity to present our views.
    [The prepared statement of Ms. Howard follows:]

Statement of Deborah Howard, President, Japan Market Resource Network, 
Tokyo, Japan on behalf of American Chamber of Commerce in Japan, Tokyo, 
                                 Japan

    Mr. Chairman and members of the Committee, thank you for the 
opportunity to appear before you today on behalf of the American 
Chamber of Commerce in Japan, or ACCJ, at this important hearing on 
U.S.-Japan economic relations. My name is Debbie Howard. I am the 
founder and president of a market research firm based in Tokyo that has 
been in business for 17 years. I also serve as the elected President of 
the ACCJ. The ACCJ's mission is to promote commerce between the United 
States and Japan, promote the interests of U.S. companies and members, 
and improve the international business environment in Japan. 
Established in 1948, the ACCJ has grown into one of the most 
influential business organizations in Japan, with 3,000 individual 
members and 1,400 companies, ranging from Fortune 500s to 
entrepreneurial ventures like mine.
    We are delighted that the Committee is carefully examining the 
U.S.-Japan economic relationship and appreciate the strong leadership 
demonstrated by this Committee on this very important issue. Japan has 
the world's second largest economy--three times larger than that of 
China and larger than those of the U.K., France, and Italy combined. 
Our two economies are inextricably intertwined. As a result, Americans 
have a huge stake in Japan's continued economic growth and in 
strengthened economic ties between the two countries. For example, 
Japan is the largest overseas market for America's farmers, and is the 
United States' largest overseas export market overall, purchasing $54 
billion in American goods in 2004, up from $52 billion the year before. 
Japanese companies also employ approximately one million Americans at 
home. In addition, Japan is by far the largest holder of U.S. Treasury 
securities. Japan is also an important global partner in many other 
ways, for example, by committing funds and troops to Iraq and actively 
contributing to international relief efforts such as tsunami recovery 
and aid to Africa. The United States and Japan also have shared 
interests in strengthening the global trading system and in particular 
in working together to constructively respond to the challenges and 
opportunities presented by China's rapid growth and emergence as a 
major trading nation and in ensuring that China lives up to its 
commitments under the WTO agreements.
    In the next few minutes, I would like to briefly discuss some key 
structural challenges currently confronting Japan and what must be done 
to ensure sustained economic growth in Japan. A robust Japanese 
economic and financial system governed by market-based principles and 
transparent rules is a crucial building block for continued growth and 
prosperity in the United States and must be a key factor when 
considering U.S. trade policy for Asia and indeed the world.
Structural Challenges
    The first challenge is that Japan's population is rapidly aging and 
is in fact shrinking.
    Japan's population will peak in 2006 at 127.7 million and by 2050 
decline to just over 100.6 million. In 2000, the ratio of productive to 
dependent members of society stood at four to one. By 2050, that ratio 
will drop to one to 1.5.
    Japan's birthrate has plummeted from 3.65 children per woman in 
1950 to less than 1.29 today, and the downward trend shows no signs of 
stopping. These demographic trends are straining Japan's social safety 
net systems to the breaking point and the government is scrambling to 
figure out how to respond. In 2004 government expenditures for 
pensions, medical expenses, and nursing care totaled 86 trillion yen or 
$825 billion. By 2025, that total is expected to jump to 152 trillion 
yen or $1.5 trillion. Japan will likely substantially increase 
consumption taxes in 2007 to help cover some of the costs, but measures 
currently being contemplated are unlikely to adequately cover the 
anticipated expenses.
    This brings me to a second major challenge confronting Japan--that 
is, its government's unprecedented fiscal crisis. In the decade 
following the collapse of its asset bubble in the early 1990s, Japan 
attempted to spend its way out of a prolonged economic slump with 
public works spending. The result is a public debt that exceeds 163 
percent of GDP, compared to U.S. public debt of 63.5 percent of GDP. 
The Government of Japan has basically reached its limit on borrowing 
and must look to other solutions to deal with its aging demographics.
    Accordingly, the Government of Japan must take decisive, private-
sector-driven measures to enhance efficiency in its economy overall and 
to create a new social safety net system able to cope with an older 
society. In the recent election, the Prime Minister ran on a platform 
of reform; his basic position was that slimming the bureaucracy and 
bringing vitality to the private sector was the only way to create 
sustainable economic growth and reform of Japan's healthcare, pension, 
and other social safety net systems in the face of Japan's falling 
birthrate and declining population. Indeed, the Japanese public's 
strong support for Prime Minister Koizumi in the election is seen by 
many as a clear signal that the people of Japan understand the need for 
reform and are ready to move forward.
Postal Reform
    The centerpiece of Prime Minister Koizumi's revitalized reform 
platform is the privatization of Japan's postal operation, Japan Post. 
I would like to note that this Committee has been involved in postal 
reform from the beginning and, among other things, has issued a very 
strong joint letter to the Government of Japan calling for equal 
treatment between private companies and the privileged government-run 
postal companies and for a standstill on new product offerings until 
such equal treatment is achieved. We very much appreciate the 
Committee's involvement and credit much of the progress made on this 
issue to your active oversight.
    During the election, the Prime Minister's message was that smaller 
government through postal privatization is the only way to overcome the 
challenges now confronting Japan. He has called Japan Post 
privatization Japan's most important reform since the Meiji Era. It is 
hard to disagree--indeed, Japan Post privatization is the ACCJ's top 
advocacy priority. In addition to delivering the mail, Japan Post 
operates the largest bank and life insurance company in the world. 
Japan Post accounts for approximately 40 percent of Japan's life 
insurance assets and 30 percent of the country's individual savings 
deposits. A quarter of Japanese households' total financial assets are 
held by Japan Post, and a quarter of all Japanese government bonds are 
owned by Japan Post.
    The postal entities compete directly with the private sector, yet 
receive government privileges, including tax exemptions, government 
guarantees of their products, and separate, more lenient regulatory 
supervision, all of which unfairly disadvantages their private 
competitors. More importantly, the exemption of these mammoth 
institutions from the Financial Services Agency's comprehensive, rules-
based system of financial regulation undermines the ability of the 
Government of Japan to provide a sound regulatory environment essential 
to the future growth of Japan's financial sector.
    The Prime Minister has pledged to reform and privatize Japan Post 
by 2007. When his postal privatization legislation was rejected early 
last month, Mr. Koizumi dissolved the Diet, calling a snap election in 
which postal privatization was the key issue--almost the only issue. 
Now armed with a more than two-thirds majority in the lower house, the 
Prime Minister has re-introduced the legislation and hopes to have it 
enacted into law by mid October.
    It has been the longstanding position of the U.S. government, as 
expressed in the National Trade Estimate and other documents, that 
Japan Post should not introduce any new products or services until 
equivalent conditions of competition with private sector competitors 
are established. This is consistent with language in the Japan Post 
legislation, which provides that ``measures shall be implemented to 
ensure equivalent conditions of competition between [the privatized 
postal companies] and other companies engaged in like business 
operations.''
    Despite this language, it is vital that we obtain specific 
commitments from the Government of Japan to faithfully implement this 
language and prohibit product expansion until a level playing field is 
established and to ensure transparency of the process by which the 
postal entities will be allowed to expand the range of their 
businesses. These duel commitments are essential to the future 
viability of many U.S. financial institutions who generate tens of 
billions of dollars annually in Japan, and to the sound regulation of 
the world's second largest financial sector. They will also ensure 
Japan's compliance with its national treatment obligations under the 
GATS. After the legislation passes, this Committee's continued 
engagement will be essential to ensure full implementation of the 
promised measures to ensure equivalent conditions of competition.
Healthcare Reform
    Japan has recently begun to consider broad reform of its healthcare 
system recognizing that the current system is financially unsustainable 
given the rapid aging of Japanese society and low birth rate. 
Consistent with the Prime Minister's theme of ``letting the private 
sector do what it can do,'' it is essential that these reforms 
incorporate market-based measures that make more efficient use of 
limited resources and enable innovative companies--including U.S. 
companies--to provide cost-effective solutions. Under the current 
rules, for example, private companies are not permitted to own or 
manage medical institutions on a for-profit basis. This restriction is 
a substantial trade barrier to U.S. companies and denies Japanese 
consumers of potential efficiency gains that for-profit management 
could bring. It is also essential that healthcare reform include wide-
reaching measures applying market-based pricing premiums for 
pharmaceuticals and medical devices that reward and stimulate advances 
in drug research and medical technology and which accurately reflect 
the value of innovative products. The current system, which is more a 
political negotiation than a market pricing mechanism, stifles 
innovation and denies Japanese consumers access to the most advanced 
treatment.
Corporate Governance
    Continued measures to strengthen sound corporate governance are 
essential to improving corporate performance in Japan. Such measures 
would ensure that management works to maximize shareholder value 
through increased productivity and economically sound business 
decisions. Keys to improving corporate governance include the active 
shareholder participation as well as the introduction of modern merger 
techniques that create a market for corporate control and facilitate 
corporate restructuring and investment.
    Unfortunately, a growing fear of hostile foreign takeovers sparked 
by a recent series of domestic events quite unrelated to foreign 
investors has slowed progress in this area substantially, leading to 
the recent amendment of the Japanese corporate code allowing a range of 
new takeover defenses and to a delay in the adoption of rules allowing 
cross-border triangular mergers that companies overseas could use to 
acquire companies in Japan. Rather than protecting the parochial 
interests of Japanese management, the Government of Japan should be 
focusing on enhancing corporate governance in Japanese companies and 
creating a regulatory framework that emphasizes shareholder value and 
efficient capital markets. Such measures would promote Japanese 
consumer welfare; create a better business environment for all 
companies, domestic and foreign; ensure Japan's continued economic 
growth; and enhance Japan's ability to contribute as a global citizen 
to the international economy.
Transparency
    For many years, the United States Government and the ACCJ have been 
encouraging the Government of Japan to take measures to improve the 
transparency of its policymaking process. Much progress has been made. 
For example, public comment procedures and no action letter systems 
have been established in most areas of government, and our member 
companies have improved access to the advisory council deliberative 
process, which is central to the legislative and regulatory drafting 
process in Japan.
    The fact remains, however, that Government agencies often provide 
unreasonably short comment periods and ignore comments submitted during 
the public comment process, and most agencies remain reluctant to 
respond to no action letter requests. Further, while we are grateful 
for improved access to the advisory council process, the quality of 
that access varies widely depending on the agencies and officials 
involved.
    A case in point is Article 821, a recently enacted amendment to 
Japan's Corporation Law, which may force foreign companies operating 
branches in Japan whose sole business is in Japan to transform their 
branches into Japanese corporations, resulting in millions in 
additional expenses to those companies. Even though the provision was 
aimed at foreign companies, it was drafted without sufficient 
consultation with the foreign business community, and the public 
comment procedure was effectively circumvented, because the version 
adopted was completely different from that submitted for public 
comment. Most firms became aware of the new amended Article 821 only 
after it had passed the Diet's lower house. Unfortunately, we were 
unable to get the Article amended prior to its passage into law and had 
to settle for legislative history aimed at narrowing its application 
and a supplemental resolution promising to consider revising the 
provision as necessary.
    Article 821 casts into doubt the legal and corporate structure by 
which foreign companies have operated as good corporate citizens in 
Japan for more than 50 years, and it must be amended before its 
scheduled implementation date next year. The ACCJ will be working to 
achieve such an amendment during the upcoming legislative session this 
fall.
    Although we applaud the significant progress on transparency to 
date, much work remains to be and we look forward to the Committee's 
continued support on this front.
Conclusion
    Over the past 60 years, the United States and Japan have forged a 
remarkably close bilateral relationship that continues to yield 
tremendous benefits to both sides--economically, politically, and 
culturally. This relationship is not always easy, but it is always 
worth it. Access to Japan's markets for U.S. goods and services has 
improved substantially over time, but there is still work to be done, 
and meaningful progress on the issues I've just outlined will help 
continue moving the ball forward. In terms of trade policy, it is 
essential that the U.S. Government remain engaged multilaterally in the 
WTO, APEC, and other forums and bilaterally in the Economic Partnership 
for Growth, U.S.-Japan Insurance Talks, and other processes to ensure 
that reform in Japan stays on track and Japan lives up to its trade 
commitments. Accordingly, the ACCJ firmly supports the U.S. 
Government's efforts to make meaningful progress under the Doha 
Development Agenda. History shows that government-to-government 
engagement on regulatory issues has had a substantial impact on the 
course of reform in Japan--indeed, this Committee has played a vital 
role. Continued active involvement by the U.S government remains key. 
Also, we believe that careful investment in the U.S.-Japan relationship 
will enhance our ability to leverage our relationship with Japan to 
collaboratively address issues related to China's integration into the 
global economy to the great benefit of both the United States and 
Japan.
    In closing, I would like to point out that the business environment 
in Japan has changed for the better in many important ways over the 
past six to seven years. It is much more open to imports. Foreign 
direct investment has grown substantially, and the Japanese government 
is more open and receptive to ideas from the ACCJ and foreign business 
community. In short, it is easier to do business in Japan now.
    At the same time, U.S. business interests in Japan have become much 
more complicated. In addition to the large priority areas I have 
outlined today, we are seeking policy improvements in areas such as 
labor mobility, personal information protection, taxation, competition 
policy, and even Narita airport management.
    Fortunately, and most important, Prime Minister Koizumi's landslide 
victory indicates that a consensus has emerged among the Japanese 
people and its leaders that even more reform is necessary for Japan to 
meet the challenges of the future. The ACCJ stands ready to engage both 
the U.S. and Japanese governments in finding the right solutions.
    On behalf of the members of the ACCJ, I would like to thank you and 
the members of your committee for this opportunity to present our 
views. We look forward to working with this Committee to improve 
economic relations with Japan.

                                 

    Mr. SHAW. Thank you.
    Mr. Levin?
    Mr. LEVIN. Thank you very much, Mr. Chairman, and thank you 
for your testimony.
    I think a lot of our colleagues are not here--I just was 
shown on the BlackBerry there was another session called. The 
Secretary of Defense is having a briefing right now, as I 
understand it, and so we regret that so many of our colleagues 
went there. They will fill us in on what was said there. It was 
a secret briefing, so they will tell us directly. We will fill 
them in on what you have had to say.
    Let me just ask, in view of your important testimony, 
Governor Keating, you have talked about the challenge of their 
reform and what it could mean for American industry. Mr. 
McAdams, you discussed so thoroughly, as did the Governor, the 
challenge relating to agriculture. You kind of lauded our 
Government or said they were doing--they were working on it. 
But here it is almost a year later, and nothing has happened.
    Dr. Mohatarem, you have spelled out so clearly the problems 
with the currency, and it was not so long ago that they were 
rigging their currency, or whatever word one wants to chooses, 
very harmfully to the U.S.
    So, tell us--now we have votes--what do you want us to do 
that has not been done? Take each of your fields. If postal 
reform, jawboning has not worked very well. I remember the 
Motorola case--and I will be very brief--where the Japanese 
said to Motorola you can sell this in northern Japan, but not 
in Tokyo. And the company was willing to stand up and say, no 
way, we are not going to settle for that, or settle for a lot 
of jawboning.
    So, in a word, tell us what you expect of this Government, 
and what happens if it is not working well? Take each of the 
three cases as examples.
    Mr. KEATING. Mr. Levin, as I mentioned in my formal remarks 
and in my summary remarks, this is a very fragile time because, 
for our industry, this is huge. Japan is the second-largest 
life insurance market in the world. Kampo is the largest life 
insurance company in the world, and for Japan to honor its GATS 
commitment and permit all of this to be on a level playingfield 
and compete is good for Japan, as well as good for the American 
people.
    We have seen our market share advance, unlike some of these 
other representatives at the witness table. We are happy with 
that. We have also seen, as a result of some very good work on 
the part of the Trade Rep, Department of Commerce, Department 
of State, that this legislation--and as I mentioned, I spoke to 
a number of members of the Diet as well as ministerial 
officials--has the elements in it that we want, namely, we 
hope--because it has not been introduced yet--the FSA 
regulation, taxation, no full faith and credit, and product 
holder protection fund. What it does not have is transparency. 
That worries us. And the devil is in the details.
    So, right now we are cautiously optimistic with a small 
``c'' and as this process is completed, hopefully that will be 
a capital ``C.'' But they are in violation of the GATS 
agreement right now, and they did last year introduce a product 
that is a very significant product and a competitive product to 
the United States companies that are there.
    So, we are concerned, we are alarmed, but we have not 
panicked yet. If this hearing were 6 months from now, perhaps 
our reaction would be different.
    Ms. HOWARD. And may I add one point to that? This 
privatization will probably take place over the course of about 
10 years, so if we do not get it right, it is really quite a 
long period of time where our industries are going to be 
suffering. And we are really on the case watching the details. 
I think we are all very concerned about that.
    Mr. LEVIN. Now, Mr. Chairman, if we want to give the others 
a brief--do you want to have time for your questions, too? 
However you want to handle it. Should we just ask each of the 
others to give a very brief answer?
    Mr. SHAW. I think that is good.
    Mr. LEVIN. Take beef and then currency.
    Mr. SHAW. I am going to ask this panel if they would answer 
written questions that we will be submitting to you. And I also 
would like to say that I along with Mr. Cardin and the rest of 
the Trade Subcommittee are looking forward to following up on 
this. We are not going to just drop it. We are going to watch 
it very closely, and some of you may be invited back to 
testify. And I would hope that you would keep us advised, 
Governor Keating, you with what is going on with regard to the 
transparency, and keep this Committee advised as to exactly 
what is happening. Too often we come and we visit a subject, 
and then go on and do something else and don't come back to it. 
And I think that the Japanese really have to know that it is in 
their best interest to move forward and cooperate and allow our 
business to compete just as we allow their businesses to 
compete.
    What was your suggestion?
    Mr. LEVIN. Just quickly if we could have a quick response 
on the beef issue and currency. What next? What do you expect?
    Mr. MCADAMS. Well, from the beef standpoint, there is a 
strong inclination on our part, our hearts are saying, we are 
not being treated fairly and we need to retaliate. But when we 
think with our heads, we look at what has happened with our 
beef trade to Europe. For all practical purposes, we have none. 
They have manipulated and flaunted the international rules to 
the point that we don't have access to that market.
    So, whatever we do, we want to see a positive result 
quickly, and I am going to use a cowboy analogy, because I 
don't know how to give you a straight answer other than this. 
What I do know is when you are training a horse, what you never 
want to do is use one ounce of pressure less than needed. What 
you want to do is just use only one ounce of pressure more than 
is necessary. And so I am dependent on you in Congress, and we 
are willing to work with you to figure out what that is. But 
that is where I see we are right now.
    Mr. SHAW. I think even somebody from Michigan could figure 
that out.
    [Laughter.]
    Mr. LEVIN. Or Florida.
    Mr. MOHATAREM. Congressman, the 1988 Trade Act clearly lays 
out a procedure for the Treasury to identify countries that 
might be manipulating the currency. The IMF has a process and 
the World Bank has a process. But we have to be willing to step 
up and ask that that process be utilized.
    One thing we have to remember is that with Japan, as you 
have dealt with them for a long time, being identified as a 
currency manipulator I frankly believe would be more than 
sufficient to get them to stop because that is the one thing 
they do not want. Yet we have been very reluctant, and as the 
Director of the IMF noted in a Washington Post article today, 
we have been very reluctant to go to the IMF and to make that 
request.
    So, I think that is where it has to start, that we have to 
be willing to say this is inappropriate, this is unacceptable, 
and that we will use our laws and our international agreements.
    Mr. LEVIN. Amen. Thank you.
    Mr. SHAW. Mr. Mussallem, let me ask you one question with 
regard to medical devices and the extensive process that you 
have to go through. Have we had any instances where a device 
has been approved by the FDA that has not met the standards 
required of the Japanese?
    Mr. MUSSALLEM. Thank you for that question, Mr. Chairman. 
This happens routinely. As a matter of fact, I can just speak 
of our own company. We have several heart valves that are 
approved in this country that are not approved yet in Japan, 
and----
    Mr. SHAW. Is that because of red tape or have they been 
turned down?
    Mr. MUSSALLEM. It is generally because of red tape.
    Mr. SHAW. So, there are Japanese people who are dying 
because these life-saving devices are just not approved.
    Mr. MUSSALLEM. That is absolutely true.
    Mr. SHAW. Answer specifically, though, what I asked. Has 
any device been actually turned down by the Japanese after 
going through their extensive process that was approved here 
that you can recall?
    Mr. MUSSALLEM. Well, what happens along the way is they do 
get turned down, and then we resubmit data, and ultimately 
these generally get approved. So, what we find in general is 
that product lines get approved in Japan, but somewhere 3 to 5 
years after they are approved in this country, often. So, we 
are oftentimes even producing products uniquely for Japan 
because they are out of date by the standards that would be 
employed in the rest of the world.
    Mr. SHAW. Somewhere along the line we have got to in our 
country, as well as other countries, countries that have a 
vigorous process, up to the standard of our own, allow 
companies to have an abbreviated process once it has been 
approved and whatever the gold standard is with the other 
country, because it is crazy to make you guys go through it 
all, and it just runs the cost of health care up. We are going 
to have to adjourn this hearing right now because we are out of 
time. There are a number of questions, including a couple that 
I know the Chairman wanted to submit, that we would be 
submitting to you, and we will keep the record open for that 
purpose. Thank you very much.
    [Whereupon, at 5:29 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Thomas and 
Representative Thompson to Ms. Wendy Cutler, Ms. A. Ellen 
Terpstra, and Dr. Mustafa Mohatarem, and their responses 
follow:]

       Question Submitted by Chairman Thomas to Ms. Wendy Cutler

    Question: Thank you for testifying before the Committee on Ways and 
Means during the September 28, 2005, hearing on U.S.-Japan Economic and 
Trade Relations. In addition to your testimony before the Committee, 
please submit written responses to the following questions:
    The United States was ultimately successful in the World Trade 
Organization apples case, but that case does not appear to have broader 
application to sanitary and phytosanitary barriers on other products. 
Is there a potential and appropriate broad-based WTO case that could be 
brought against the Japanese for its sanitary and phytosanitary 
barriers to trade, and what cases would have the broadest results in 
opening the Japanese market for many U.S. goods?
    Answer: WTO dispute settlement cases generally need to address 
specific measures of a WTO member. On an ongoing basis, the United 
States monitors Japan's compliance with WTO obligations and is prepared 
to take WTO dispute cases as appropriate. The United States has taken 
two dispute cases against Japan for its phytosanitary measures and we 
won them both: (1) a dispute on Japan's varietal testing requirements 
for fruit in the late nineties, which opened Japan's market to tomatoes 
and resolved barriers related to fumigation of fruit, and (2) a dispute 
with Japan for its fire blight measures on imported U.S. apples that we 
expect will result in a resumption of apple shipments to the Japanese 
market later this year.
    In response to U.S. concerns, we recently obtained Japan's 
commitment to take the necessary steps to reform its phytosanitary 
measures so that these decisions are science-based and more 
predictable. Under the auspices of the U.S.-Japan Regulatory Reform and 
Competition Policy Initiative, Japan has committed to conduct import 
risk assessments for quarantine pests in accordance with the relevant 
International Plant Protection Convention standard using science to 
determine if these pests should be subject to quarantine measures. In 
concrete terms, Japan has removed three citrus pests from its 
fumigation target list, thereby eliminating over $1 million in annual 
fumigation costs on imports of U.S. citrus. In another step in the 
right direction, Japan also has agreed to assess 11 more pests, 
including pests found in lettuce, to determine if fumigation 
requirements for them are necessary. We believe our work under the 
Regulatory Reform Initiative is a positive and constructive path to 
addressing systemic phytosanitary regulatory impediments in Japan. 
Nevertheless, we will continue to monitor Japan's actions and take 
appropriate and necessary steps to ensure Japan meets its international 
obligations.
    Question: Please provide an update on the status of specific 
agriculture barriers in Japan including whether Japanese government 
officials have provided U.S. officials with adequate scientific 
information and risk assessments to justify the barriers as well as 
whether the laws, regulations, and legal guidance on the standard and 
the appropriate controls, if any, are available. In each instance that 
the information has not been made available by the Japanese government, 
what is the U.S. government's strategy for obtaining the information to 
determine whether the standards and controls are appropriate and WTO 
compatible? Please identify the timeline for actions needed by U.S. and 
Japanese officials in this regard.
    Answer: Clearly the most critical barrier that Japan maintains is 
its import prohibition on U.S. beef. We have repeatedly and 
consistently engaged Japan at all levels on this issue. This 
Administration has transmitted a huge amount of scientific information 
to the Japanese Government on the safety of U.S. beef. By any 
reasonable measure, Japan has had ample time to reach a conclusion to 
this issue. We will continue to press hard on Japan until it does the 
right thing in line with science and fully reopens its market to U.S. 
beef.
    In addition to beef, as noted in the previous question, USTR and 
USDA have been working with the Japanese Government to eliminate 
unjustified phytosanitary restrictions by bringing Japan's 
phytosanitary regime in line with international standards. Further, 
USTR and USDA are working to resolve sanitary and phytosanitary issues 
on U.S. cherries, chipping potatoes, and poultry. If USDA is unable to 
resolve issues at a technical level, USTR can engage the Japanese 
Government bilaterally and through the World Trade Organization, as 
appropriate.
                               __________

     Question Submitted by Chairman Thomas to Ms. A. Ellen Terpstra

    Question: Thank you for testifying before the Committee on Ways and 
Means during the September 28, 2005, hearing on U.S.-Japan Economic and 
Trade Relations. In addition to your testimony before the Committee, 
please submit written responses to the following questions:

    1.  The United States was ultimately successful in the World Trade 
Organization apples case, but that case does not appear to have broader 
application to sanitary and phytosanitary barriers on other products. 
Is there a potential and appropriate broad-based WTO case that could be 
brought against the Japanese for its sanitary and phytosanitary 
barriers to trade, and what cases would have the broadest results in 
opening the Japanese market for many U.S. goods?
    2.  Please provide an update on the status of specific agriculture 
barriers in Japan including whether Japanese government officials have 
provided U.S. officials with adequate scientific information and risk 
assessments to justify the barriers as well as whether the laws, 
regulations, and legal guidance on the standard and the appropriate 
controls, if any, are available. In each instance that the information 
has not been made available by the Japanese government, what is the 
U.S. government's strategy for obtaining the information to determine 
whether the standards and controls are appropriate and WTO compatible? 
Please identify the timeline for actions needed by U.S. and Japanese 
officials in this regard.

    Answer:
    Dear Mr. Chairman:
    Thank you for your letter of October 4, 2005, regarding the 
Committee hearing on U.S.-Japan Economic and Trade Relations of 
September 28, 2005, and requesting additional information in connection 
with my testimony.
    As you know there have been some key developments since the hearing 
was held. Most notable, of course, was the reopening of the Japanese 
market to U.S. beef products on December 11, 2005. Resumption of beef 
trade with Japan is, indeed good news for American producers and 
Japanese consumers, and an important step toward normalized trade, 
based on scientifically sound, internationally recognized standards. 
While we are currently addressing issues of compliance with Japan's 
import requirements, we believe that the measures Secretary Johanns 
recently announced will prove satisfactory to the Japanese officials.
    You asked if there was a broad-based World Trade Organization (WTO) 
case that could be taken against the Japanese on sanitary and 
phytosanitary (SPS) barriers to trade. We have successfully brought two 
SPS cases against Japan in the plant health area. One involved Japan's 
measures concerning codling moth and the other involved a pathogen 
known as fireblight. In each case, the United States successfully 
challenged scientifically unjustifiable measures that improperly 
restricted market access for U.S. apples and certain other fruits. The 
balance of rights and obligations under the SPS agreement is to permit 
WTO members to adopt SPS measures necessary for the protection of 
human, animal and plant life or health without unnecessarily 
restricting trade with other members. Consequently, the SPS agreement 
requires risk assessments associated with particular products coming 
from particular countries and sufficient scientific evidence to support 
the measures applied as a result of such risk assessments. Therefore, 
the SPS agreement contemplates examination of individual measures as 
applied to particular goods from members, among whom different risks to 
the importing country may exist because of differing occurrences of 
diseases, pests, and other health risks. Some of Japan's measures 
applied with respect to U.S. goods or goods from other trading partners 
may be scientifically justifiable. Others may not be. The United States 
has been more aggressive with Japan than with any other country in the 
WTO in terms of bringing two formal WTO disputes to challenge 
scientifically unjustified SPS measures.
    Regarding your request for an update on the status of specific 
agriculture barriers, please see the enclosed list which provides 
information on the status of key trade issues. In addition, we are 
seeing progress in other areas. Japan publishes its quarantine taws, 
maintains a website in English, and provides timely WTQ notifications 
on a number of issues. We fully expect these practices to continue. We 
also have an ongoing dialog with Japan on many levels, including 
through the U.S. Embassy in Tokyo, which has been vital in our 
information sharing and collecting.
    Progress on all of these issues has also been advanced by the 
timely intervention from many Members of Congress, including yourself 
and other members of the Committee on Ways and Means. We must continue 
to work together to resolve issues with Japan since it represents an 
extremely important market for U.S. farmers and ranchers (at $8.14 
billion, our number three market in calendar year 2004). We highly 
value our commercial relationship with Japan and want it to contribute 
to strengthening our overall bilateral relationship.
    Thank you again for the opportunity to testify before the Committee 
and respond to your follow-up questions related to that hearing.

            Sincerely,

                                          A. Ellen Terpstra
                                                      Administrator

    Japan Key Trade Issues January 2006


------------------------------------------------------------------------
             ISSUE                     STATUS             NEXT STEPS
------------------------------------------------------------------------
Aflatoxin                       Currently, all U.S.  USDA continues to
                                 corn bound for       work with Japan's
                                 food processing in   Ministry of
                                 Japan are subject    Health, Labor and
                                 to ``test and        Welfare (MHLW) to
                                 hold'' inspections   alleviate any
                                 at import arrival    delays and
                                 because of a         increased costs
                                 single finding of    due to Japan's
                                 a U.S. corn sample   requirements for
                                 that had an          aflatoxin
                                 aflatoxin level      inspection for
                                 exceeding Japan's    U.S. corn
                                 established          shipments.
                                 maximum level.
                                 Japan is our top
                                 market for corn.
------------------------------------------------------------------------
Bt10                            Syngenta's Bt10      USDA will continue
                                 corn was released    to work with grain
                                 in limited           traders and
                                 quantities and was   Japan's Ministry
                                 not commercially     of Agriculture,
                                 approved at the      Forestry and
                                 time of its          Fisheries (MAFF)
                                 release. However,    to ensure that
                                 in March 2005,       Japan's proposed
                                 U.S. regulatory      guidelines and
                                 agencies             procedures for
                                 determined that      Bt10 testing will
                                 there were no        not cause
                                 food, feed, or       unnecessary and
                                 environmental        costly trade
                                 safety issues        disruptions for
                                 associated with      corn shipments.
                                 Bt10 and that Bt10
                                 is legal to be in
                                 food and feed in
                                 the United States.
                                 Currently, FDA is
                                 responding to
                                 Syngenta's formal
                                 request for a food
                                 safety
                                 consultation of
                                 Bt10.
------------------------------------------------------------------------
Cherries                        USDA is currently    Studies will be
                                 working with Japan   conducted in
                                 to develop a         California
                                 systems approach     orchards in 2006.
                                 alternative to
                                 costly methyl
                                 bromide fumigation
                                 for U.S. cherries.
                                 Japan is reviewing
                                 data collected
                                 from studies on
                                 the presence of
                                 codling moth in
                                 Pacific Northwest
                                 cherry orchards.
------------------------------------------------------------------------
Chipping potatoes               Japan is in the      Japan is expected
                                 final stages of      to open the marker
                                 granting market      for chipping
                                 access for U.S.      potatoes in early
                                 chipping potatoes.   2006, pending
                                 In July 2005,        successful
                                 Japanese officials   revision to their
                                 completed            regulations and
                                 inspections of       visits to
                                 U.S. potato          supplying States
                                 fields. The          in the United
                                 Japanese Ministry    States.
                                 of Agriculture,
                                 Forestry and
                                 Fisheries (MAFF)
                                 is currently
                                 soliciting public
                                 comment on revised
                                 regulations to
                                 allow market
                                 access for U.S.
                                 chipping potatoes.
------------------------------------------------------------------------
New Maximum Residue Levels      Japan is revising    USDA's foreign
 (MRL) system                    its MRL              Agricultural
                                 regulations to       Service is working
                                 improve its system   with the U.S.
                                 to limit the         agricultural
                                 distribution of      industry, the U.S.
                                 foods that contain   Environmental
                                 agricultural         Protection Agency,
                                 chemicals above      and Japan's
                                 established          Ministry of
                                 tolerances. In       Health, Labor and
                                 this action Japan    Welfare (MHLW) to
                                 is proposing to      avoid proposed
                                 adopt numerous new   MRLs which could
                                 MRLs involving       create trade
                                 over 700             disruptions.
                                 pesticides,
                                 veterinary drugs,
                                 and feed additives.
------------------------------------------------------------------------
Heat-treated poultry            Japan conducted      USDA is working
                                 inspections of a     with Japan to
                                 sampling of U.S.     implement
                                 poultry plants in    protocols for heat-
                                 March 2005. Japan    treated poultry
                                 provided an audit    products to avoid
                                 report of these      trade disruptions
                                 inspections, and     caused by
                                 USDA and the U.S.    detections of
                                 poultry industry     avian influenza in
                                 are currently        the United States.
                                 preparing for a      When fully
                                 follow-up audit.     implemented, the
                                 Most recently,       protocols are
                                 USDA and USTR        expected to
                                 officials, during    eliminate avian
                                 trade discussions    influenza related
                                 held in Seattle on   trade disruptions
                                 December 7, 2005,    to U.S. heat-
                                 raised this issue    treated poultry
                                 with senior          product exports.
                                 Japanese
                                 officials, and
                                 pressed for a
                                 timely resolution.
------------------------------------------------------------------------

                               __________

    Question Submitted by Chairman Thomas to Dr. Mustafa Mohatarem:

    Question: Thank you for testifying before the Committee on Ways and 
Means during the September 28, 2005, hearing on U.S.-Japan Economic and 
Trade Relations. In addition to your testimony before the Committee, 
please submit written responses to the following question:
    Please outline in detail any specific legal or regulatory 
requirements placed upon U.S. automobiles when sold in Japan that are 
not in place for autos produced in Japan. Identify any known 
justification by Japanese officials for these requirements and the 
steps taken by U.S. auto firms to contest the requirements. In each 
case explain the rationale as to why the requirement is not WTO 
compatible and the evidence that might be used to support any U.S. 
claim against Japan.
    Answer:
    Dear Chairman Thomas:
    Thank you for giving me the opportunity to testify before the 
Committee on Ways and Means on the challenges American auto 
manufacturers face in competing with Japanese manufacturers-- in the 
United States and around the world.
    In your letter of October 4, 2005, you requested information on any 
specific legal and regulatory requirements that impede the sale of 
U.S.-made vehicles in Japan. As I noted in my testimony, American 
automakers are unable to sell vehicles in substantial volume in the 
Japanese market as a result of the persistent policy of the Japanese 
government to intervene in currency markets to weaken the value of the 
yen relative to the U.S. dollar. As a result, U.S. auto manufacturers 
are relegated to the position of niche, low-volume players in Japan. 
Our low volumes place us at a distinct disadvantage when complying with 
local regulatory requirements as compared to Japanese manufacturers who 
can spread the regulatory costs over a much higher volume.
    The problem is that Japan has promulgated several safety and 
emission regulations that are not harmonized with either the U.S. or 
European regulatory systems. Examples include pedestrian head 
protection, driver visibility requirements, an advanced OBD system, 
enhanced emission standards for NOx and particulate matter, and a new 
fuel economy standard. These and other regulations that are specific to 
Japan are burdensome to importers because the costs that American 
manufacturers incur to make the engineering and design changes 
necessary to comply are prohibitive when sales volume per model are in 
the hundreds of units. Not surprisingly, Japanese manufacturers are 
able to spread these costs over a huge volume base in their home 
market.
    In short, a weak yen that is the direct result of currency 
intervention by the Bank of Japan prevents us from profitably selling 
high volumes of products in Japan. The low volumes, in turn, lead to 
much higher per unit costs of complying with Japan's unique regulatory 
standards. Thus, even though Japanese manufacturers must comply with 
the same requirements, the compliance burden is much greater on 
importers.
    The key to opening the Japanese market for American products thus 
lies in persuading the Japanese government to cease its policy of 
currency manipulation. While elimination of regulatory burdens will 
help, a market determined yen dollar exchange rate is essential to the 
success of American auto manufacturers, in Japan and in the U.S.
            Sincerely,
                                               G. Mustafa Mohatarem
                               __________

   Question Submitted by Representative Thompson to Ms. Wendy Cutler

    Question: Wine
    Japan is the second largest export market for American wine. 
However, it has one of the higher tariffs for wine in Asia, with a 
15.3% tariff rate for bottled wines. This tariff rate exceeds China's 
tariff rate, which is 14%, or Taiwan's rate, which is 10%. How does a 
developed country like Japan justify such a high rate, especially when 
the purchasing power for the average Japanese is approximately 36 times 
greater than that of the average Chinese?
    Answer: Japan's agricultural tariffs generally are significantly 
higher than other countries' tariffs. In fact, Japan's average 
agricultural tariff is 51 percent, compared to the United States' 
average agricultural tariff of 12 percent. During the Uruguay round of 
negotiations, Japan did reduce its bound tariff on wine from 55 percent 
to 15 percent. Significant improvement in market access for U.S. food 
and agricultural exports is a top priority for the agriculture 
negotiations in the WTO. In the Doha Development Agenda, the United 
States is seeking a significant cut in Japan's food and agricultural 
tariffs, including for exports of U.S. wine.
    Question: Timber
    In the 1990 U.S.-Japan Wood Products Agreement, Japan committed to 
take the necessary steps to reduce overall tariff rates on wood 
products. This doesn't appear to be the case, with Japan's tariff rates 
on timber products as high as 10%. By contrast, both China and 
Indonesia charge zero rate of duty on logs and lumber. What steps is 
the USTR taking at the Doha round to get Japan on board in support of 
U.S. trade liberalization objectives?
    Answer: In the industrial goods market access negotiations in the 
Doha round--where forest products are covered--the United States is 
pressing for a robust tariff-cutting formula that reduces tariffs on a 
line-by-line basis with no flexibility from application of this formula 
for developed countries, including Japan.
    Question: Medical Devices
    In 2002, Japan implemented a new ``foreign reference pricing'' 
system for medical devices. The pricing system links prices in Japan to 
those prevailing in the United States, France, Germany and the United 
Kingdom. Is it appropriate for Japan to base prices for medical devices 
on comparisons with overseas markets?
    Answer: We continue to press Japan's Ministry of Health, Labor and 
Welfare to implement reimbursement pricing policies that reward U.S. 
companies for developing innovative, life-enhancing medical technology. 
We will keep urging that Ministry to ensure its policies do not 
unfairly discriminate against American medical devices and that 
reimbursement levels are determined in a way that is transparent, 
predictable, and fair. Over the years, we have had a long and 
cooperative relationship with the U.S. medical device industry on 
reimbursement pricing issues in Japan. We share U.S. industry's 
concerns about the Foreign Average Price rule for medical devices and 
we are prepared to ratchet up our approach to the Japanese Government 
on this matter as necessary.
    Question: Rice
    In June, the Japanese government announced a new policy to sell 
large stockpiles of imported rice at discounted prices for the 
production of rice/flour premixes called ``cake mixes.'' Does this new 
policy violate Japan's WTO obligation not to treat imported rice 
differently than domestic rice? If so, shouldn't Japan offer the same 
discounted price to all other end users, including retailers, 
foodservice and other industrial buyers? What plans, if any, does the 
Administration have for addressing this discriminatory policy and 
preventing it from being implemented?
    Answer: On June 29, 2005, Japan's Ministry of Agriculture, 
Fisheries, and Forestry announced new guidelines for the sale of 
imported rice from government held stocks. While we strongly support 
the release of government held stocks of imported rice into commercial 
markets in Japan, we are very concerned about the restrictions that 
these new guidelines impose on these sales.
    These guidelines establish complex rules that base the volume of 
imported rice cake mix that each company is eligible to purchase on the 
amount of imported rice cake mix it has historically imported. The 
guidelines also create incentives for processors to reduce their 
purchases of imported rice by linking increases in the quantity of 
imported rice that processors are permitted to purchase from government 
stocks to reductions in the quantity of imported rice cake mix. 
Further, the guidelines impose penalties that reduce the amount of 
imported rice stocks a processor may purchase if it fails to reduce its 
imports of imported rice cake mix by the amount claimed.
    USTR and USDA are currently evaluating whether the new guidelines 
raise WTO concerns and are working closely with U.S. industry to 
resolve this issue.
    [Submissions for the record follow:]
            Statement of The American Farm Bureau Federation
    The American Farm Bureau Federation is pleased to submit for the 
record our views on the economic effects of the closure of the Japanese 
market to U.S.-produced beef.
    The discovery of a BSE-infected cow in Washington state in December 
2003 resulted in serious disruptions in beef and cattle trade between 
the U.S. and other beef producing and consuming countries. Following 
the identification of the BSE-infected animal, more than 60 countries 
banned the importation of U.S. beef. Since that time, the U.S. has 
resumed trade at levels that account for roughly one-third of the pre-
BSE volume. However, two of the traditionally largest export markets, 
Japan and South Korea, still remain closed to U.S. beef. Losses to the 
U.S. cattle and beef industry resulting from the discovery of BSE 
conservatively total $4 billion.
    In 2003, the U.S. exported 2.5 billion pounds of beef and beef 
variety meats valued at $3.8 billion. Japan and South Korea alone 
accounted for 1.2 billion pounds of beef and beef variety meats 
totaling $2.2 billion in value. The domestic discovery of a BSE-
infected cow resulted in market closures and a reduction of U.S. beef 
exports in 2004 to less than 500 million pounds. A primary consequence 
of the reduced market access for U.S. beef is that other world beef 
exporters were able to gain global market share that they will not 
easily relinquish once the U.S. regains access to traditional trading 
markets. Although the U.S. is slowly regaining access to previous 
export markets, it will likely be several years before U.S. beef is 
traded at volumes attained prior to the discovery of BSE.
    More specific to the Japanese beef market, the U.S. and Japan 
reached an agreement in October 2004 to facilitate the resumption of 
U.S. beef exports to Japan. Japan's Food Safety Commission (FSC), which 
makes the final determination on resuming imports of U.S. beef, has 
been reviewing the safety of U.S. beef since the agreement was signed. 
Despite aggressive negotiations on the part of the U.S. government and 
extensive scientific information that has been provided by the U.S. 
Department of Agriculture, academia and the beef industry, the time for 
a final report from the FSC is uncertain. Without a decision from the 
FSC, trade remains halted and the financial losses to U.S. beef 
producers continue to mount.
    The U.S. has provided all the data necessary to demonstrate that 
U.S. beef can be safely imported and enjoyed by Japanese consumers. 
Furthermore, we have advanced our part of the October 2004 agreement 
which entailed amending our regulations to permit the limited import of 
certain types of low-risk Japanese beef. Given the overwhelming amount 
of scientific evidence that shows U.S. beef is safe and the efforts 
that have been made to share that information with Japan, the American 
Farm Bureau Federation strongly believes Japan should move as quickly 
as possible to reopen their market to imports of U.S. beef. Thank you.

                                 

            Statement of The Automotive Trade Policy Council
    2005 is shaping up to be another strong year for auto sales in the 
United States. Based on vehicle sales thus far, U.S. car and light 
truck sales should reach just over 17 million units. Annual U.S. auto 
sales have hovered at or exceeded 17 million units--a level that was 
considered unattainable as recently as the l990s--for seven straight 
years.
    Given the strength of auto sales, one would think that U.S. auto 
manufacturers, auto suppliers and their workers would be in a strong 
economic position. However, this is not the case. Despite the strong 
sales, U.S. auto manufacturers and suppliers are struggling to turn a 
profit, autoworkers have been laid off, credit ratings for U.S. auto 
companies have been downgraded and many suppliers are faced with 
bankruptcy--including the largest auto supplier in the world, which 
filed Chapter 11 last week.
    While there are many reasons for the current challenges facing 
American owned auto manufacturers, the long history of Japan's unfair 
and mercantilist trade policies and the most recent impact of Japan's 
currency manipulation stand out as among the primary causes. While the 
world's acceptance of Japanese postwar export-based economic growth 
model has been a long debate here in Congress and elsewhere, it is 
frustrating, if almost unbelievable, to many of us in this business 
that the Japanese government's extraordinary S400 billion currency 
manipulation program has gone unquestioned and unchallenged--by the 
press, academics, and to a large degree Congress and the 
Administration--while China has become the sole focus of the attention 
as the challenge to American competitiveness.
U.S.-Japan Automotive Trade
    No industry exemplifies the imbalanced, mercantilist history of 
Japan's postwar trade policy more than the automotive sector. Last 
year, the U.S.-Japan bilateral automotive trade deficit reached $43.7 
billion, making it the largest trade deficit in any sector the U.S. 
maintains with any country in the world. In 2004, automotive trade 
represented over two-thirds of the total U.S.-Japan deficit. And this 
is not a new development: it has been the case for more than twenty 
years, confirming the deep historical and structural nature of the 
chronic trade imbalance.
    A quick glance at the trade numbers confirms this unbalanced 
pattern: in 2004, Japan exported to the U.S. over 1.7 million passenger 
vehicles, as well as auto parts, worth a total of $46 billion. During 
the same time, Japan imported just 15,000 passenger vehicles as well as 
auto parts from the U.S., worth a total of $1.8 billion.
    The market share of Japanese nameplate brands reached over 30% of 
the total U.S. light vehicle market in 2004--including nearly 40% of 
passenger cars. In contrast, sales of all foreign nameplates 
(worldwide) in Japan reached only 4.5% of the total market or 272, 880 
import sales.
    Japan's motor vehicle manufacturing industry, led by Toyota, Honda 
and Nissan, produced over 10 million vehicles in 2004. In the same 
year, just about 6 million motor vehicles were sold in Japan. Buffeted 
by a persistently stagnant economy, sales of domestically produced 
passenger cars have basically been flat for a decade or more. Domestic 
manufacturers dominate the market with Toyota, Honda, Nissan, 
Mitsubishi, Mazda, Fuji Heavy, Suzuki, Daihatsu, and Isuzu accounting 
for nearly 95% of Japan's market in 2004. U.S. nameplates continue to 
represent less than three percent of Japan's total market.
    The reality is that Japan has built and grown its economy based on 
exports, and has fueled that export machine by restricting and 
controlling its domestic market. It is a mercantilist model that others 
have sought to follow, and it has succeeded in large part, at the 
expense of its trade partners. A major factor in the past years that 
has compounded and sustained this imbalanced trade relationship has 
been the Japanese government's policy of maintaining an artificially 
weak value of the yen against the dollar. This policy has been fueled 
by massive interventions--over $400 billion--by the Japanese government 
in currency markets since 2000 [see attachment 1]. This artificially 
weak yen has provided a subsidy amounting to thousands of dollars per 
vehicle for every car exported to the United States [see attachment 2]. 
It has given a significant competitive cost advantage to Japanese 
vehicle makers, who have used this windfall to increase investments in 
technology and plants worldwide, offer higher sales incentives, broaden 
and deepen advertisement campaigns, and enhance research and 
development.
    In 1995, the U.S. and Japan signed a five-year agreement intended 
to address the huge structural imbalance in our automotive trade by 
improving the access of U.S. automakers to the Japan market. It was a 
good agreement, and resulted in modest positive progress for U.S. 
companies selling into the Japanese market. But in 2000 the Japanese 
government engaged in a renewed policy of major currency manipulation 
that negated or reversed much of those gains. At the same time, pushed 
by a weakened yen which made its exports more cost competitive,
    Japan's automotive imports to the U.S. renewed a substantial upward 
trend, continuing to rise every year, while ATPC member companies' 
combined market share in Japan remains below 3%, unchanged from the 
l995 level.
    Japan's history of discouraging direct foreign investment and the 
close business relationships (keiretsu ties) between Japanese firms 
traditionally made it difficult for outsiders to participate in the 
market. This is now changing. In the last few years, foreign auto 
companies have acquired controlling interest in a number of Japanese 
auto companies. This change, however, is still too recent to determine 
whether it will have a lasting effect on opening access to the Japanese 
auto market.
    Today's auto industry is a global one that is intensely 
competitive. ATPC and its member companies believe that it is 
critically important that the U.S. continue to press countries such as 
Japan to eliminate artificial trade barriers, such as currency 
manipulation, that provide them an unfair competitive advantage.
The Economic Impact of the U.S. Auto Industry
    The U.S. automakers--DaimlerChrysler Corporation, Ford Motor 
Company, and General Motors Corporation--are a critical component of 
the manufacturing and industrial base of the United States. Our 
companies have been instrumental in the growth and prosperity of the 
American economy in the 20th century and continue to serve as an engine 
of economic growth.
    Our companies face unprecedented competitive challenges from auto 
producers around the globe. We are meeting these challenges by 
investing billions of dollars in the United States in new products, 
facilities, advanced technologies, and education and training. The 
following are highlights of the vital role DaimlerChrysler, Ford, and 
General Motors play in our economy, our communities, and the major 
challenges we face.
    The auto industry is essential to the health of the American 
economy, accounting for 4% of U.S. GDP and 11% of manufacturing 
shipments. DaimlerChrysler, Ford, and General Motors comprise the 
majority of that contribution. They:

      Manufacture 74% of all the cars and trucks made in 
America
      Employ nearly 400,000 workers across the United States
      Have 176 major automotive facilities in 34 states
      Purchase 80% of all U.S. auto parts--totaling $155 
billion
      Are among the largest purchasers of U.S. semiconductors 
and electronics, rubber, aluminum, iron, and steel
      Invested over $176 billion in the U.S. auto industry 
since 1980--85% of the total investment made by all automakers
      Spend over $16 billion annually on research and 
development--significantly more than any other industry sector
      Provide health care benefits to over 2 million U.S. 
employees, retirees, and their families at an annual cost of $9.3 
billion (2004)
      Pay over $11 billion in pension payments each year to 
over 800,000 retirees and surviving spouses, providing economic 
stimulus in every state in the United States
Specific Areas of Concern
Traffic: Japan has a 0% tariff rate on motor vehicles. The fact that 
        Japan maintains a 0% motor vehicle tariff, yet is among the 
        most difficult and unwelcoming markets in the industrialized 
        world for imports is the classic example of how powerful non-
        tariff barriers can be in severely limiting trade.

      Financial Services: Credit companies cannot act as 
insurance agents in offering credit products that incorporate insurance 
features. The credit industry continues to be subject to 
``administrative (METI) guidance'' rather than specific, well-
documented and transparent rules and regulations.
      Standards: In the 2003 Annual Trade Report, USTR states 
``Further opening of the Japanese auto and auto parts markets remains 
an important objective of the United States. Access to Japan's 
automotive market continues to be impeded by a variety of overly 
restrictive regulations, a lack of transparency in rule making, and 
lackluster enforcement of antitrust laws. While there has been a trend 
toward closer integration and important technological advancements in 
the global automotive industry over the past several years, the effect 
these changes will have on market access and competition in this sector 
remain unclear.''

    Japan has made attempts to improve the transparency of its 
standards regime over the years, however some serious problems still 
remain. Certification of import autos remains costly & difficult. Two 
systems are allowed, with limited vehicles (PHP type) and expensive and 
extensive testing required (TDS type). In both cases, imports need to 
meet unique standards. This means that imported vehicles must undergo 
expensive modification to meet unique standards; limited imports under 
PHP prevent free importation of vehicles; long delay in approval 
process for TDS type inspections. Also, unique homologation 
requirements are discriminatory to imported vehicles. Currently, for 
example, three areas are of concern in ongoing standards issues 
impacting U.S. imports including: driver visibility, pedestrian 
protection, and VIN stamping.

      Trade-Distorting Taxes: A tax system with a number of 
different automobile-related taxes, including a consumption tax, an 
annual engine-displacement based tax that ranges from 7,200 to 111,000 
yen, and an acquisition tax of 3% to 5% based on vehicle size and use, 
which has the cumulative effect of impacting imported motor vehicles 
more than domestic vehicles, unfairly discriminating in final sale 
prices.
      Structurally Closed Market: The results of this unusually 
imbalanced trade model are seen most clearly in the Japan experience. 
Japan's pursuit of aggressive worldwide market expansion for its auto 
exports from a protected domestic automotive market base has resulted 
in the most vivid example in the WTO history of severe distortion of 
the principles and expectations of the founding Charter of the General 
Agreement on Tariffs and Trade.
Currency Manipulation
    Currency manipulation is a policy used by the governments and 
central banks of some of America's largest trading partners to 
artificially set the value of their currency to gain an unfair 
competitive advantage for their exports. The IMF defines currency 
manipulation as ``protracted large-scale intervention in one direction 
in the exchange market.'' Japan's interventions in currency markets--
over 150 times in five years in the amount of $400 billion--without 
question meets that definition. Countries that manipulate their 
currencies effectively protect jobs in their home country at the 
expense of jobs and economic growth in their trading partners' markets. 
Japan, in particular, has been using currency manipulation to avoid 
making much-needed domestic economic reforms.
    In effect, Japan's weak yen policy has given its exporters a huge 
subsidy and competitive advantage in the U.S. market, causing 
significant harm to U.S. manufacturers. One clear sign that a country 
is manipulating its currency is a substantial increase in its foreign 
currency reserves, which occurs as it buys and holds dollars. Japan has 
seen a massive increase in its foreign currency reserves since 2001--in 
fact, Japan holds more forex reserves than any other nation, including 
China--growing from $344.8 billion in July 2000 to $840 billion in July 
2005 [see attachment 3].
    In a January 2005 Working Paper, the U.S. Federal Reserve reported 
that ``Since the early 1990s, the monetary authorities of the major 
industrialized countries, with one notable exception, have greatly 
curtailed their foreign-exchange interventions. That exception has been 
Japan, where the Ministry of Finance has continued to intervene 
frequently--and at times massively--in foreign exchange markets.''
    There are differences in how countries manipulate their currency to 
gain unfair trade advantages for their export industries. The intent, 
however, is always the same--to artificially weaken their currency to 
provide their industries with a cost advantage. Japan has regularly and 
actively intervened in global exchange markets, purchasing massive 
amounts of dollars in order to ``push down'' the value of their own 
currency to give their exports a price advantage. Japan also 
manipulates its currency by less transparent actions, such as 
encouraging domestic pension funds and large corporations to sell yen 
and buy dollars at strategic times. Since 2000, Japan has intervened 
over 150 times in global currency markets, spending over $400 billion 
in the process. In 2004, Japan spent over $139 billion, all in the 
first quarter.
    As a result of Japan's massive and disruptive currency 
interventions, the value of the yen fell from 101 yen/dollar in January 
2000 to 136 yen/dollar in 2002. Market forces, helped by Bush 
Administration officials' statements, have pushed the yen to slightly 
more reasonable levels of 105 yen/dollar in early 2005 [see attachment 
4]. However, due in part to ongoing ``jawboning'' and verbal 
intervention by high-ranking Japanese officials, the yen is currently 
in the 111 yen/dollar range. The damage caused to key sectors of the 
U.S. economy have been deep and in many cases permanent.
    Japan's artificially weak currency provides a significant per-
vehicle cost advantage that amounts to an outright subsidy of thousands 
of dollars for every car exported to the United States. Cars produced 
here also benefit heavily from this subsidy because of their high use 
of imported parts and components. Japanese automakers have used this 
cost advantage to:

      Minimize price increases on new models and in some cases 
reduce prices on new models;
      Dramatically increase spending on advertising;
      Offset tariffs, taxes and other fees;Increase incentives 
to boost market share; and
      Enhance spending on research and development.

    For those who may question whether exchange rate policies of our 
trading partners are important factors affecting U.S. competitiveness, 
half-year earnings statements just released by Japan's automakers this 
month answer that conclusively. Toyota, Nissan, Honda, Subaru, and 
others announced last week that they earned nearly $1 billion in 
windfall profits in the first half of their fiscal year due to the 
artificial weakness of the yen.
    Most Japanese automakers set a projected exchange rate of 105 yen/
dollar as their benchmark at the beginning of the 2005 fiscal year. 
But, because Japanese government policies resulted in a yen/dollar 
exchange rate much weaker than that, Japanese automakers' total profits 
increased by 112 billion yen--over $1 billion--above what they 
projected. Much of that increase came as a result of sales in the 
United States. According to the Nikkei news service, the breakdown of 
these additional weak currency-driven profits include 50 billion yen/
$452 million for Toyota, 28 billion yen/$253 million for Nissan, and 
14.2 billion yen/$127 million for Honda.
    With no sign that the government will change its exchange rate 
policy to allow the yen to rise to its true market level (90 to 100 yen 
per dollar is the commonly accepted range), the full-year windfall 
could be a check for $2 billion to Japan's automakers.
    There are several international agreements that preclude or limit 
the use of currency intervention for trade-distorted purposes. These 
agreements seem to put Japan's actions on currency intervention on the 
level of a NTB. Of particular interest are the rules governing the IMF 
and the original GATT. Section IV of the IMF charter states without 
reservation, that ``members should avoid manipulating exchange rates in 
order to gain an unfair competitive advantage over other members'' and 
defines such manipulation as ``protracted, large-scale movement in one 
direction in exchange market.''
    Perhaps more relevant, GATT Article XV (Exchange Arrangements) 
states that contracting parties shall not, by exchange action, 
frustrate the intent of the Agreement not by trade action, the intent 
of the provisions of the Articles of Agreement of the IMF. The intent 
of the Agreement, as stated in the preamble, is the objective of 
``entering into reciprocal and mutually advantageous arrangements 
directed to the substantial reduction of tariffs and other barriers to 
trade.''
    Japan is clearly violating GATT Article XV by manipulating its 
currency to keep it artificially weak. Japan is in effect providing a 
substantial subsidy to its exporting. These practices are clearly 
inconsistent, and likely violate both the IMF and the GATT Agreements, 
cause major distortions to international trade and should validly be 
questioned and challenged as part of an Automotive NTB Vertical 
Initiative in the NAMA as the largest single non-tariff barrier that 
Japan maintains with the U.S. in automotive trade. (Also GATT XXVI > 
Nullification and Impairment).
Conclusion
    Automotive trade between the United States and Japan has been 
chronically and structurally unbalanced for decades. Over the past 
twenty years, automotive trade has represented 66% of our total deficit 
with Japan. Contrary to claims that the opening of Japanese auto plants 
in the U.S. would cause Japanese auto exports to decline, Japan's 
automakers have sharply increased their exports to the United States. 
Over the last five years, subsidized by an artificially weak yen funded 
by $450 billion in Japanese government currency interventions, Japan's 
automakers have exported an annual average of 1.8 million cars and 
trucks into the United States, 13% higher than the average from 1996-
2000. Japan's auto trade with the U.S. is a one-way street that, if 
left unchecked, will continue to see our largest single-sector trade 
deficit grow even more imbalanced. Japan's government needs to take the 
steps necessary--steps it pledged originally in the 1995 Auto Agreement 
but which have never been truly tested in a market environment due to 
the widespread use of currency manipulation--to reduce friction in 
automotive trade.
                               __________
    1) Japan's Currency Manipulations Have Been Massive
    [GRAPHIC] [TIFF OMITTED] T6370A.002
    

    Source: Bank of Japan
                               __________
    2) The Weak Yen Provides Japanese Automakers With a Significant 
Cost Advantages in the U.S. Market

[GRAPHIC] [TIFF OMITTED] T6370A.001

    Source: ATPC Member analysis

                                 

                   Statement of Joseph Damond, PhRMA
Recognizing the Value of Pharmaceutical Innovation: Putting Patients 
        First
    Mr. Chairman, Members of the Committee, Ladies and Gentlemen:
    On behalf of PhRMA, I want to express our appreciation for the 
opportunity to present written testimony to the Committee. PhRMA 
represents America's leading life sciences companies. Our business is 
pioneering new ways to save lives, cure disease, and promote a 
healthier aging process. We are businesses, but our broader mission is 
to enable patients around the world to live longer, healthier, and more 
productive lives. In 2005, America's pharmaceutical and biotechnology 
companies will invest over $38.5 billion in advanced scientific 
research to develop new medicines. The fruits of our efforts are new 
and more effective innovative medical treatments for use around the 
world, bringing life, cures, and hope to patients and their families 
where currently there is none.
    Japan is the world's second-largest pharmaceutical market. 
America's pharmaceutical companies have been doing business in Japan 
for decades. On an annual basis, sales of U.S. medicines currently 
total about $14 billion, and represent about 25 % of the Japanese 
market. We are proud of our leadership in supplying Japanese patients 
with breakthrough medicines.
    Japan's health care system has long been admired for its 
achievements in delivering universal access to quality health care 
services at a reasonable cost. However, more than any other 
industrialized nation, Japan now faces a difficult demographic and 
economic challenge as it rapidly transitions to an ``aging'' society. 
Bridging this transition--while continuing to provide Japanese patients 
with quality health care and access to the latest medical discoveries--
will require changes in the way that health care services are financed 
and delivered.
    PhRMA has been pleased to work with the Japanese Government and the 
Ministry of Health Labor and Welfare (MHLW) to explore constructive 
ways to support life sciences discovery and expand access to innovative 
medicines. Our paper--Putting Patients First: A Program for 21st 
Century Health Care Reform in Japan--represented a comprehensive effort 
to show that competition and choice are fully compatible with the NHI 
system's core principles of equity and universality. Working within the 
NHI system, PhRMA sought to show that a virtuous cycle of reform--one 
that links private sector incentives to advance medical progress with 
regulatory efficiencies in the delivery and financing of essential 
health care services--is in the interests of Japan as a nation and 
Japanese patients, who like patients everywhere want access to the 
latest advances in medical science. We welcome many of the MHLW's 
policy proposals in its bold 2002 Vision: ``Towards Reinforcing the 
Global Competitiveness of the Pharmaceutical Industry, Mainstay of the 
`Century of Life.'''
    Over the past four years, PhRMA has been privileged to work with 
the Commerce Department and the Office of the U.S. Trade Representative 
on the Bush Administration's Regulatory Reform and Competition 
Initiative. This initiative, which was launched by President Bush and 
Prime Minister Koizumi in 2001, built on the Clinton Administration's 
Enhanced De-Regulation Initiative and the Reagan Administration's 
Market-Oriented Sector Specific Initiatives. It seeks to promote 
economic growth and open markets to American products by focusing on 
sectoral and cross-sectoral regulatory barriers. Our industry views the 
1998 Birmingham Agreement as a major breakthrough. In the Birmingham 
Agreement, Japan committed to ``recognize the value of innovation of 
pharmaceuticals and medical devices, so as not to impede the 
introduction of innovative products which bring more effective and more 
cost-effective treatments to patients. It committed to ensure 
transparency in the consideration of health care policies'' and to 
allow foreign pharmaceutical manufacturers ``meaningful opportunities 
to state their views in the relevant Councils . . .''
    The Birmingham Agreement has transformed our industry's 
relationship with MHLW. Japan's commitment to improved transparency has 
proven invaluable, as it has allowed PhRMA companies to participate 
directly in MHLW's biennial price revision process and in the 
consideration by the Ministry of potential changes to the NHI drug 
pricing rules. In 1999, the Ministry created a new MHLW Study Group to 
facilitate more effective consultation with PhRMA, the Japanese 
Federation of Pharmaceutical Manufacturers (FPMAJ), and the European 
Federation of Pharmaceutical Industry Associations (EFPIA) prior to 
meetings of the Ministry's chief advisory council--the Chuikyo. Such 
transparency would have been unthinkable a decade ago when we were 
often on the outside looking in, when key rule and policy changes were 
discussed behind closed doors with Japanese stakeholders. We believe 
MHLW has taken its transparency commitments seriously. For its part, 
PhRMA has worked hard to come forward with thoughtful, constructive 
policy proposals, as in ``Putting Patients First.'' We believe the 
Ministry appreciates its dialogue with U.S. industry, and sees us as a 
source of constructive advice on ways to promote life sciences 
innovation and modernize Japan's new drug approval process.
    Japan's commitment in the Birmingham Agreement to recognize the 
value of pharmaceutical innovation has been useful, although so far 
there has been only limited progress on this score. We continue to be 
deeply concerned that the NHI reimbursement system is contributing to a 
downward spiral in Japanese pharmaceutical prices, because the prices 
of new drugs are based on the devalued prices of much older comparator 
products. Japan's low prices have contributed to a steep decline in 
Japanese competitiveness in the life sciences and an increasing drug 
lag. Recent studies confirm that many of the world's leading medicines 
still are not available to Japanese patients. The decline in Japan's 
life sciences sector, moreover, is accelerating. Many of Japan's 
leading pharmaceutical companies are now shifting their most advanced 
biomedical research and development to U.S. laboratories and 
introducing their best and most innovative drug discoveries in the U.S. 
market before bringing them to Japan.
    Above all, I want to express PhRMA's appreciation to our U.S. 
negotiating team --the Department of Commerce, Office of the U.S. Trade 
Representative, State Department, and U.S. Embassy in Tokyo. Our 
negotiators secured the Birmingham commitments for our industry. 
However difficult the situation in Japan, we know it would be a lot 
worse if they had not negotiated forcefully on our behalf and worked 
tirelessly to hold Japan to its commitments on transparency and 
recognition of the value of innovation.
    We are deeply concerned about certain near-term and long-term 
developments in Japan.
Near-Term Developments
    In the near-term, policy proposals from MHLW threaten to roll-back 
some of the gains achieved through the bilateral dialogue. Of 
particular concern in the near-term are: (1) calls to abolish, reduce 
or restrict the application of the Foreign Price Adjustment for 
Pharmaceuticals (FPA-P); (2) suggestions that downward pharmaceutical 
price revisions be conducted annually--a major change from current 
biennial price reviews; and (3) increasing regulatory delays at the 
Pharmaceuticals and Medical Devices Agency (PMDA).Foreign Price 
Adjustment
    The proposed changes to the FPA-P would accelerate the downward 
spiral in Japanese prices for leading innovative medicines. While PhRMA 
does not support foreign reference pricing as a general principle, the 
peculiarities and distortions of Japan's NHI pricing system mean that 
the FPA-P has become an important corrective mechanism for ensuring 
that Japanese prices are at least somewhat aligned with prices in the 
U.S. and Europe. If FPA-P is to be revised, it should only be in the 
context of overall reforms to the NHI system which address other 
underlying distortions, e.g. the practice of basing the prices of 
innovative new drugs on older, and less effective ``comparators'' that 
do not reflect the latest advances in biomedical science.
    The proposed changes to the FPA-P would further erode Japan's 
recognition of the value of life sciences innovation and worsen the 
drug lag. If the rule is altered or eliminated, the Japanese 
pharmaceutical market is likely to become even more isolated and 
anachronistic, as NHI reimbursement prices grow increasingly out of 
line with those in other advanced industrial economies, i.e. the United 
States, Germany, France, and the U.K. Ultimately, the proposed changes 
to the FPA-P would hurt Japanese patients, who would experience even 
longer delays in access to advanced medicines.
Annual Price Revisions
    Currently, NHI price revisions are instituted every two years based 
on a survey of drug prices. We understand that MHLW is considering 
changing from a biennial to an annual process. Again, while there may 
be legitimate reasons for the price revision process, such a change to 
annual revisions should only take place as part of a comprehensive 
reform of the current NHI pricing system, which addresses a host of 
rules and practices, such as the comparator system and various 
repricing rules, e.g. market expansion, that artificially depress the 
prices of breakthrough U.S. medicines. Otherwise, changing to an annual 
price revision process will only accelerate the downward spiral in 
Japanese new drug prices, and worsen the current delays in bringing the 
most innovative global medicines to Japanese patients.
Regulatory--PMDA
    In the Birmingham Agreement, Japan committed to ``[s]horten the 
approval processing period for new drug applications to 12 months by 
April 2000, with steady and continuous improvement between now and 
then, and to further speed the introduction of innovative new 
pharmaceuticals, significantly shorten approval times, particularly for 
priority drugs.'' In addition, Japan committed to ``[e]xpand acceptance 
of foreign clinical test data for pharmaceuticals.'' Since 1998, PhRMA 
has worked closely with MHLW on the establishment of a new and 
independent regulatory agency--the PMDA--modelled on the U.S. Food and 
Drug Agency and the European Medicines Evaluation Agency (EMEA. As part 
of this process, we worked closely with MHLW on a new system of user 
fees and benchmarks for speeding up the traditionally slow and 
cumbersome Japanese new drug evaluation process to the time frames 
achieved by FDA and EMEA.
    While we welcomed the creation of the PMDA, we are deeply concerned 
by the increasing delays in the new drug approval process; and 
increasing indications that the agency is experiencing serious 
difficulties in assembling the trained personnel, expertise, and 
resources to carry out its mission. Such delays carry a serious human 
cost. America's biopharmaceutical companies are leaders in developing 
innovative treatments for crippling and life-threatening diseases. With 
each new breakthrough medicine we produce, we offer new hope to 
countless people. However, such advances cannot help patients if they 
remain tied up in endless and regulatory processes. We are also 
concerned by the increasingly dire shortage of Japanese capacity for 
advanced clinical trials. Absent such capacity, it is vital the MHLW 
further expand the acceptance of foreign clinical data. In short, we 
urge an intensive effort by MHLW and PMDA to address the growing delays 
in the new drug approval process.
Long-term Developments: Comprehensive Health Care Reform
    We understand that the Prime Minister has directed the Council on 
Economic and Fiscal Policy (CEFP) to begin developing proposals to 
reform Japan's social security and health care systems. Mr. Chairman, 
as the Ways and Means Committee knows, it is exceedingly difficult to 
successfully foster far-reaching reform legislation. We applaud the 
Prime Minister Koizumi's bold leadership in seeking to grapple 
decisively with the long-term challenges facing Japanese society. The 
task, though difficult, offers great potential benefits for Japan's 
economy and for U.S. health care companies.
    However, we need your immediate help to ensure that the U.S. 
industry is brought into the CEFP's process of developing health care 
reform proposals in a meaningful and timely way. Specifically, in the 
Birmingham Agreement, Japan committed to provide meaningful 
opportunities for U.S. companies to state their concerns in the 
``relevant Councils'' on an equal basis with Japanese stakeholders. The 
GOJ's broad Birmingham commitment clearly covers the CEFP.
    Accordingly, we seek your support in urging GOJ to bring us into 
the CEFP process, so that we have a meaningful opportunity to share our 
ideas and views, consistent with the Birmingham Agreement. For our 
part, we pledge to approach our dialogue with the CEFP in a 
constructive and positive spirit, and to bring our best ideas, 
information, and experts to the table. We have much to contribute to 
the upcoming dialogue over reforming Japan's health care system, and 
are important stakeholders in the outcome. As always, our objective 
will be to ensure that Japanese patients continue to benefit from 
improved access to the latest advances in medical treatment and to 
life-saving cures for disease and disability.
Conclusion
    Mr. Chairman, we applaud the Committee's leadership in scheduling 
this hearing. U.S.-Japan trade relations have changed dramatically in 
the past decade. Much progress has been achieved. Many challenges 
remain. We look forward to working with the Committee to continue to 
improve recognition of the value of pharmaceutical innovation in Japan; 
to ensure the continued transparency of Japan's pricing and health care 
policy processes; to speed the approval of innovative new medicines; 
and to lock in the benefits of the Birmingham Agreement for Japanese 
patients and global life sciences innovation. Thank you.

                                 

  Statement of Todd Gillenwater, California Healthcare Institute, La 
                           Jolla, California
    The California Healthcare Institute (CHI) appreciates the 
opportunity to present its views for this important hearing.
    CHI represents more than 250 of California's leading biotechnology, 
pharmaceutical, and medical device companies as well as our state's 
premier academic and non-profit research institutions. California 
medical device and diagnostics companies lead the world in life 
sciences R&D, accounting for nearly one-third of all medical technology 
innovators in the United States. Medical device and diagnostics firms 
in the state employ over 75,000 workers, account for over $4.5 billion 
in exports, and, in 2003, received nearly 20 percent of the total life 
sciences venture capital dollars invested in the U.S.
    The research these firms conduct holds tremendous promise for 
patients and their families. Already, advanced technologies such as 
replacement heart valves, implantable defibrillators, and coronary 
stents have helped reduce deaths from heart disease and stroke by more 
than half over the past 30 years. Medical technology products also 
contribute to our nation's economic health, increasing productivity by 
allowing workers to recover from illness faster, remain longer in the 
workforce, and thrive without expensive long-term care.
    Important as these contributions have been, experience elsewhere is 
that patient access to critical medical technology advances can be 
hindered by onerous government policies.
    This is increasingly the situation in Japan.
Experiences and Challenges in Japan
    Japan's system for approving new medical technologies is the 
slowest and most costly in the industrialized world. During the past 
decade, the Japanese regulatory process has grown progressively more 
complicated and burdensome. At the same time, Japan has significantly 
cut payments for medical technologies. The effect of lower margins has 
been to reduce the capital available for research and the development 
of new and innovative products.
    Even after creating a new agency last year to process applications 
for medical technology products, Japan had a backlog in February of 
over 491 applications filed before April 2004. When new applications 
are included, the backlog is reportedly much longer. Due to the long 
approval process, the medical technologies Japanese patients receive 
may be generations behind state-of-the-art products in the U.S., 
Europe, and even in developing countries like China, India and 
Thailand. Prolonged regulatory processes translate to higher costs for 
the U.S. medical technology industry, which must maintain out-of-date 
product lines for Japan.
    Likewise, Japan's revised Pharmaceuticals Affair Law (PAL), which 
covers medical technology products and went into effect on April 1, 
2005, has caused difficulties for medical technology companies. While 
larger firms may be able to absorb higher costs associated with 
compliance, some smaller firms, with limited resources, have indicated 
they may have to exit the Japanese market altogether because of PAL 
requirements.
    At the same time industry is facing these burdensome and costly 
regulations, Japan's Ministry of Health, Labor and Welfare (MHLW) is 
threatening severe reimbursement rate cuts.
    Before 2002, Japan adjusted prices according to a process it called 
``reasonable-zone'' or ``R-zone.'' In brief, MHLW surveys hospitals for 
prices paid to distributors, and allows for a reasonable margin (or 
``zone'') for discounts from the government's reimbursement rate. While 
there are some difficulties with this system--as identified in 
bilateral Market-Oriented, Sector Specific (MOSS) negotiations between 
the U.S. and Japanese governments--industry has recognized that it has 
been based on factors within the Japanese market.
    In 2002, however, Japan adopted a system of Foreign Average Pricing 
(FAP). This system calls for the establishment and revision of 
reimbursement rates on the basis of prices paid for medical technology 
products in the U.S., France, Germany, and the United Kingdom (U.K). 
The result is that prices of medical technology products in Japan are 
designed to be based not on that market's requirements, but on 
completely unrelated conditions in foreign markets.
    As a methodology for setting reimbursement rates, it is 
economically unsound to compare prices in foreign markets that operate 
under vastly different conditions. For instance, Japan's regulatory 
system is far costlier to comply with than European or U.S. 
regulations. In addition, the overall cost of doing business in Japan 
is far higher than in most of the developed world.
    Furthermore, comparing prices within national markets--let alone 
across international boundaries--is difficult. Medical technology 
companies sell products under a variety of terms and conditions. In the 
U.S., firms can often offer lower prices to buyers willing to commit to 
larger volumes for longer periods of time, but Japan does not have such 
buyers and offers minimal channels for efficient selling and 
distribution of medical technologies. Additionally, Japan's FAP system 
is an attempt to compare prices for products that are not the same in 
Japan as they are in other countries. As noted above, due to Japan's 
regulatory delays, U.S. manufacturers must incur the cost of 
maintaining older or outmoded production lines for sale in Japan alone.
Conclusion
    Together, reimbursement reductions and regulatory hurdles in Japan 
have had a damaging effect on the ability of California's medical 
technology industry to expand further in that important market. In 
fact, since Japan introduced its FAP system in 2002, total U.S. medical 
technology exports have stagnated. Meanwhile, Japan's exports of 
medical technology products in 2004 rose by 10 percent, contributing 
modestly to Japan's burgeoning total trade surplus with the U.S. of $75 
billion--an increase of 14 percent last year.
    Congressional and Administration attention and involvement, as 
exemplified by this hearing, is critical to maintaining and expanding 
access for the U.S. medical device and diagnostics industry to the 
Japanese market.
    CHI again appreciates the importance of these proceedings and 
thanks the Chairman and the other members of the Committee for 
providing the opportunity to submit the views of the California medical 
technology industry in the context of a hearing on overall U.S.-Japan 
trade relations.

                                 

Statement of International Roundtable for Trade and Competition Policy, 
                          Inc., Miami, Florida
Developing Competition in the Japanese Postal System
    We are pleased that the House Ways and Means committee is looking 
at the issue of Japan's economy in general, and in particular at the 
issue of postal privatization. The International Roundtable for Trade 
and Competition Policy, Inc a 501(c)(6) organization is a privately 
funded non-government organization (the ``Roundtable'') that looks 
particularly at the link between internal market and regulatory issues 
and their impact on international trade and economic development. The 
Roundtable looks at these issues across all markets, but has a strong 
focus on markets that are in the process of undergoing privatization or 
market liberalization.
    We are firm advocates of pro-competitive privatization and 
liberalization processes. We see great opportunities for the Japanese 
postal privatization in this regard. We believe that if the postal 
liberalization truly unleashes the forces of competition, this could 
lead to greater efficiency in the postal system in Japan, and also more 
opportunities for new entrants in this and related sectors, wherever 
they are from. The results have the promise to be good for Japanese 
consumers as well as competitive companies. However, if the 
liberalization does not succeed in unleashing pro-competitive forces, 
then it poses the danger of merely converting public monopoly with 
regulation to private monopoly without regulation. This would have a 
negative impact on competition, and on consumers. The decision to 
privatize, alone, does not guarantee competitive markets. The end 
result depends on the quality and design of the regulatory framework.
Postal Privatization
    Perhaps the most important argument in favor of postal 
privatization is often lost when the issue is discussed, and critically 
when the regulatory framework is decided upon and implemented. While 
the argument that the postal company will become more efficient, with 
resulting benefits for investors is often raised, the impact on 
consumers of privatization is often ignored. This is a pity as the 
benefits to consumers are the most valuable benefits for society as a 
whole provided that the privatization is accompanied by competition as 
well as liberalization.
    The benefits of privatization are that public sector postal 
monopolies tend not to be as efficient as private entities. It is to be 
hoped that privatization will lead to more efficiencies, because 
managers will be able to keep costs down and quality up. Managers will 
be able to ensure workers maximize output and minimize waste. These are 
things that are not easily done in a public sector context. But these 
greater efficiencies do not just arise because of the fact of 
privatization. They arise because of the restraints that competition 
imposes on managers to discipline and also get the most out of their 
workforce. Postal prices have generally risen in countries where the 
postal service is a government owned monopoly. This is in contrast to 
other sectors where prices in communications and transportation have 
fallen.
Key Areas That Need to be Addressed
    There are a number of key areas that need to be addressed. These 
can be regarded as benchmarks to assess whether the regulatory design 
is indeed pro-competitive or not. We will examine these in turn.
Reserved Sector
    While the postal law covers the fact of privatization, there will 
be implementing regulations under the postal privatization that will 
address more specific aspects of the privatization. A key area here is 
how the reserved sector will be treated. Too large a reservation could 
have a very negative impact on competition in the market. Typically 
postal companies reserve as part of their postal monopoly all goods up 
to a certain weight limit. This weight limit varies considerably around 
the world (among postal agencies). Recent European directives set the 
reservation at 100g, declining to 30g over time. Clearly a reservation 
that is significantly more than this could have adverse competitive 
impacts.
    There is a market impact of such reservations. These reservations 
can lead to the following anti-competitive effects:
    1. Where there is competition between the postal company and other 
providers of non-postal services. The reservation prevents the non-
postal service providers from functioning in the market at all.
    2. The fact that there is a reservation enables the postal company 
to lower its costs in the non-reserved sector. This can distort the 
market for provision of services in the non-reserved sector.
    As a result, we believe that the appropriate weight limit for the 
reserved sector should be a maximum of 100g progressively reduced over 
time.
    It should be the goal of the reservation not to lead to potential 
anti-competitive harms in sectors that can be impacted by the postal 
sector, but are not postal in and of themselves. The larger the 
reservation, the greater the pool funds that could be available to the 
Post Office to anti-competitively cross-subsidize in certain areas 
outside of the postal sector. Given the development of the internet, 
and other methods of information delivery (see post), Post Offices are 
feeling more and more pressure to diversify into other businesses. 
Nothing should prevent them from doing so. However, they should not be 
given governmental aids or benefits to succeed.
Quality and Access Issues
Universal Service Issues
    Japanese Cabinet Decision on Basic Policy on Postal Privatization 
(Sept 10, 2004) (the ``Cabinet Decision'') states that ``Preferential 
measures shall be established if necessary to maintain universal 
service''. While universal service is a laudable goal, this statement 
presents a number of problems as our studies of the universal service 
obligation (``USO'') in a number of different areas demonstrates. These 
studies show that the universal service commitment may actually lead to 
cost advantages for the incumbent that is subject to the USO. This is 
because the universal USO means that the Post Office has a built-in 
infrastructure that can be used to lower costs for the provision of 
certain services outside the reserved sector. For example, the Post 
Office can use its infrastructure to lower the costs associated with 
sending packages through express mail, if it has an express mail arm. 
Instead of having to pay costs of C for utilization of infrastructure 
which the private competitor must build out, the Postal Company must 
pay only C-X (the cost of elements that are needed but have already 
been built out under the USO). This reduction of costs means that the 
Postal Company is at a cost advantage over the private competitor. The 
USO therefore becomes more like a State Aid to use the language of 
European competition law. Applying the concepts that are applicable 
under European State Aid law, the USO becomes a governmental benefit 
that alters the cost base of the postal company.
European State Aids Law and Its Application
    Neither Japan nor the United States has a set of disciplines like 
European state aids law. However, analysis of how these rules are 
applied and the jurisprudence that has developed under them prove 
instructive in understanding how a regulatory system could be crafted 
in Japan to avoid potential anti-competitive harms. We therefore look 
at European rules and their interpretation to assist us in ensuring 
that the laws and regulations are properly crafted to move the Japanese 
postal economy to a more competitive one.
    Under European terms, the aid is an ``economic advantage which it 
would not have obtained under normal market conditions.'' Under 
European law there is an exemption for services of general economic 
interest. However, European courts have interpreted how the state aids 
rules apply in Altmark Trans GmbH and Regierungsprasidium Magdeburg v 
Nahverkehrsgesellschaft Altmark GmbH [2003] ECR I-nyr. In the case, the 
court ruled that in order for a benefit to be classifiable as a state 
aid, it must be capable of being regarded as an ``advantage'' conferred 
on the recipient undertaking which that undertaking would not have 
obtained under normal market conditions. Four conditions (the so-called 
Altmark conditions) would have to apply in order for a state financial 
measure to escape classification as a state aid if it is for services 
to a recipient to discharge public service obligations. First, the 
recipient undertaking must actually have public service obligations to 
discharge and those obligations must be clearly defined. Second, the 
parameters on the basis of which compensation is calculated must be 
established in advance in an objective and transparent manner. Third 
the compensation cannot exceed what is necessary to cover all or part 
of the costs incurred in the discharge of the public service 
obligation, taking into account the relevant receipts and a reasonable 
profit. Fourth, where the undertaking is not chosen in a public 
procurement, the level of compensation must be determined by a 
comparison with an analysis of the costs which a typical transport 
undertaking would incur (taking into account the receipts and a 
reasonable profit from discharging the obligations).
    In other words any USO that exceeds this level would be a state aid 
under the Altmark test. This would mean that any USO Fund which is 
based on a tax that competitors of the postal company would pay would 
almost automatically violate the Altmark principles because a fixed tax 
rate would be contingent on the variable of the revenues of the 
companies from which it is accrued, and that would have nothing to do 
with the actual cost of providing the universal service. We understand 
in Japan the proceeds of privatization will be used to set up a 
Universal Service Fund. While this is a marginally better situation 
than taxing potential competitors, it could still have market 
distorting consequences unless it is carefully and rigidly accounted 
for. The precise amount must also be calibrated to the actual level of 
USO, so that it cannot be used for other purposes.
    The allocation of such funds would, under European law, also 
constitute special and exclusive rights under Article 87 of the Treaty 
on European Union (``TEU''). In ascertaining whether the services are 
in the general economic interest, it is necessary to ask whether the 
service has special characteristics that distinguish it from other 
economic activities, and the transfer of funds must be shown to be 
connected to that specific characteristic. One of the relevant factors 
is a financial advantage beyond the cost of covering the USO being 
given to one of the undertakings. Hence in order for a USO fund not to 
be caught under these provisions, it would need to be clearly defined.
    Even if a political decision is taken to impose a Universal Service 
Obligation and obtain monies for that obligation from other parties, 
this has to be carefully handled in order to make sure that the 
incumbent company does not hide behind the USO as a way to engage in 
more anti-competitive practices. This has been dealt with in numerous 
ways across multiple network industry sectors. In general a number of 
themes emerge:
    1. The USO has certain benefits and certain costs. The costs and 
the benefits must be weighed against each other. The historical USO in 
the case of the Post Office will be an advantage as it has enabled the 
Post Office to build out the necessary infrastructure in rural and 
remote areas in Japan.
    2. The Universal Service Obligation should be supported by those 
who benefit from it. Clearly people in the rural areas themselves 
benefit from the Universal Service Fund. Clearly, people in rural areas 
cannot be expected to support the Universal Service fund entirely on 
their own. The obligation should therefore rest with taxpayers, but 
should be made explicit, so that the people make a decision as to 
whether they are prepared to pay the cost of the universal service 
benefit.
    3. Universal Service Fund obligations should not be imposed 
generally on competitors or potential entrants to market. This is 
because this damages competitive markets. These public sector 
restraints are effectively state aids to the Post Office which may be 
used to help it compete against other new entrants in sectors that are 
broadly competitive.
New Communications Economy
    In order to properly understand postal privatization in the context 
of a modern internet economy, one must fully understand where postal 
fits into the broader area of information delivery. In the past, postal 
delivery was the only means of keeping different communities connected. 
There was a real national security dimension to the work of the postal 
service. It was also the only way of sending documents for business 
purposes, and so there was also an economic security dimension to its 
work also. In the 21st century, the way information is delivered to 
consumers is undergoing a rapid and total change. People are organizing 
themselves around information and content, and less on materials and 
delivery. In this age, downward pressure on delivery costs brought 
about by the costless delivery of information over the internet and e-
mail is very high. This has caused a shift to the actual content--a 
complete reversal from a world where ``medium is the message''. It is 
hard to explain the full impact of this information revolution. Suffice 
it to say that costs reductions brought about by the printing press 
were of the order of 1,000. Costs reductions brought about as a result 
of the invention of the microprocessor has dropped 10 millionfold. The 
printing press led to the industrial revolution as the microprocessor 
has led to the information revolution.
    In many ways, there is a new communications economy which applies 
to the way that all manner of products are transported across borders. 
In this new communications economy, the activities of a 
telecommunications provider, carrying information across the e-mail, or 
a mail carrier carrying the same information in documentary form, or an 
express delivery provider carrying the same document must be weighed. 
Since these different platforms in some senses compete against each 
other, it is important that nothing is done that damages one or the 
other in the government's regulatory supervision of any one of these 
sectors. In order to ensure the most efficient and effective delivery 
channel, it is important that the channels are allowed to be as strong 
competitors as possible. Economists have described the theory that 
underpins such competition the theory of monopolistic competition. 
Under this theory, individual platforms (which may dominate very narrow 
market segments, but are not monopolies in the antitrust or economic 
sense) can compete better against each other and promote overall 
consumer welfare in an economic sense.
    All of this has important consequences for postal companies. In the 
case of Japan Post, it is necessary to ensure that the regulations 
which are under the Postal Law ensure that Japan maximizes this new 
communications economy, so that all the different information delivery 
platforms can function as competitively as possible. Regulations in the 
postal sector could have important impacts in these related sectors.
Public Goods Theory
    The original motivation for a letter mail monopoly was that 
communications were a vital part of ensuring national identity. The 
Postal service satisfied the public goods theory, because consumers 
that benefited from the service did not deprive others of its benefits 
or limit supply. Because the postal service had a role to play beyond 
pure commerce (see above), it was deemed that any possibility of market 
failure should be dealt with by some form of government action. Under 
ordinary public goods theory, there is an incentive for a monopoly to 
be declared because of the market failure brought about as a result of 
the fact that we are dealing with public goods. Market failure occurs 
because the marginal cost curve of these kinds of public goods 
decreases to zero (instead of being a U-shaped curve as is the case 
with other goods). This occurs because they generally have very high 
fixed costs, such as infrastructure and so forth that means that the 
average cost curve declines. This means that as more and more services 
are provided, costs decline to zero as does price. This prevents the 
service provider from functioning and hence explains the request for 
state subvention or in extreme cases, state-mandated monopoly.
    However, with the advent of things like e-mail, the internet and 
telecommunications services, the arguments favoring public goods models 
are less and less persuasive. There is no longer a compelling public 
interest in ensuring that people have access to postal service because 
of the many other ways that information is transmitted. Furthermore, 
even if those arguments held up, there would be no reason not to permit 
competition, rather competition with regulated rates would be the norm 
in cases that are supposedly natural monopolies.
    Conventional public goods analysis is frequently given as the 
reason supporting a natural monopoly. In this world, competition is 
shunned for fear that it will give rise to duplicated networks and less 
rather than more efficiency. In this context, it is important to note 
that legislated monopolies were created before the development of 
public goods theories. In other words, much of the economics to justify 
natural monopoly theory occurred well after the political forces that 
gave rise to natural monopoly did. The reality is that natural monopoly 
theories never did hold much weight. Viewing the competitive process as 
a dynamic one, we can see that few industries could say that the free 
market, applying a natural monopoly would allow consolidation to 
monopoly without the potential for new entrants or future competition 
acting as a restraint. Even if there are still adherents to the concept 
of natural monopoly, the number of industries that do not now have 
substantial infrastructural bypass capabilities is small and declining. 
One can look at the impact of wireless technology on the wired market 
and the arguments for natural monopoly there that were based on the 
high fixed costs of building the network. In the case of postal, this 
is even further removed from the realm of natural monopoly because of 
the ways that competing methods of getting information to people do not 
rely on or in any sense interconnect with the Postal Service's network.
    A major issue is the notion of whether in a dynamic competitive 
environment, there is such a thing as excessive competition. 
``Ruinous'' or ``excessive'' competition frequently harms high cost 
producers and benefits consumers. Consumers are only harmed if the low 
cost producers are actually producing below cost, and hence setting up 
the conditions for monopoly later. The whole concept of public goods 
theory rests on the presumption that in certain cases monopoly is the 
preferred market condition, because competition would invariably be 
excessive and lead to duplication. However, there is no reason in a 
public goods context why free competition as opposed to a legislatively 
granted monopoly might not lead to a large provider, and there is no 
inconsistency with normal competitive conditions that this should 
occur. It certainly does not mean that certain industries are prone to 
natural monopoly, or that the market fails in certain cases.
    Even during the high water mark of public goods theory or public 
utility theory, economists did point out that state privileges granted 
to state monopolies led to corruption and higher prices. In most 
network industries that had previously been thought to be natural 
monopolies, such as the electric utilities industry, competition has 
been an important element in keeping downward pressure on price.
Network Industries and Natural Monopolies
    While the notion of natural monopoly in general has broken down, 
even if one accepts the notion of natural monopoly, postal services are 
the least likely entities to qualify for such treatment. In 
electricity, telecom or gas facilities, one can see the very high fixed 
capital costs of building out complex wire or pipe networks. We do not 
see such high fixed costs for postal services. However, this is not to 
assume that these energy and communications industries are natural 
monopolies. In the case of telecom, as has been noted above the advent 
of wireless telephony has rendered some of the difficulties in building 
infrastructure less critical in this sector. In the case of Postal the 
higher fixed costs are represented by requiring a postal office in 
multiple jurisdictions. However data shows that labor is a substantial 
component of these costs, perhaps as high as 80% in the case of the 
U.S.
    The notion that the Postal service is somehow to be equated with 
very intensive capital cost industries such as electricity, 
telecommunications and gas is therefore misleading. The industry is 
closer to trucking or airlines, where a large percentage of the costs 
is actually labor cost, as well as any legacy labor costs. Neither of 
these industries sink much capital into a network. In the comparable 
industries of airlines and trucking, deregulation has taken place and 
has led to dramatic changes in pricing and cost structures. The Postal 
service does have to contend with inflated labor costs (at least in the 
U.S.) and a large amount of political power derived from the size of 
the labor force.
    Future mail delivery is a platform that admittedly now competes 
with other ways of sending out information, or, for example, paying 
bills. There are advantages to conventional ``snail mail'', above e-
mail such as privacy and identity theft concerns. It is possible that 
in the future that postal bill paying might be competitive with e-bill 
paying. The important thing in terms of delivery of benefits to 
consumers is that these platforms are able to compete well against each 
other, following the theory of monopolistic competition, set out above.
Ensuring Pro-Competitive Market in Postal and Related Areas
    The Japan Postal Privatization bill does contemplate a separation 
between the various lines of business of Japan Post. This is very 
important, and it is good that separation of these revenue streams is 
in the bill. It will be important to ensure no possibility of cross 
subsidization, so in implementing regulations, it would be important to 
see safeguards against this. This includes both De jure and de facto 
separation, including having separate price caps, if price caps are 
contemplated. Rigid accounting separation between these entities would 
also be required. However the separation currently contemplated is what 
one would expect from a Postal company that is also one of the world's 
largest banks and insurance companies. The separation currently 
referred to in the Postal Law is a separation of the postal from the 
financial services and savings branches. While this is good, it does 
not necessarily address the possibility that the postal monopoly can be 
used, especially if accompanied by anti-competitive universal service 
obligations and an overly broad reserved sector, to anti-competitively 
cross-subsidize into related areas, such as new businesses that the 
Postal company is active in.
    The threat of anti-competitive cross-subsidization is a very real 
one, and can only be addressed by:
    1. Developing rigid accounting separation of the different aspects 
of the Postal company's business.
    2. Developing an appropriate cost methodology that builds in 
elements of cost that Japan Post has as a result of its historic 
government ownership and statutorily endowed privileges. This can 
include including an element of costs to account for parking 
privileges, favorable customs treatment, favorable tax treatment and so 
forth. This ensures that when evaluating whether an attempt to enter 
into a new business line is below cost, we are using an appropriate 
measure of cost.
    3. Recognizing the government owned legacy, and result of the 
statutory monopoly. Since governments are not profit maximizers, and 
the statutory monopoly confers quasi-governmental status even after the 
privatization, we must recognize, as European competition law does, 
that there should be no need to recoup lost profit in the future in 
order to make out a below cost pricing case.
Japan Postal Privatization Commission
    The Postal Bill contemplates a Postal Privatization Commission, 
which would be a body that oversees and guides the privatization 
process. This group does not currently have within its number 
representatives of the Competition Agency. This would be very important 
to ensure pro-competitive concerns are addressed in the privatization 
process itself. Too often ``competition'' issues are raised by other 
ministries without paying due regard to what the competitive process 
actually entails. Indeed there is great danger in confusing the terms 
``competition'' with ``competitiveness''. While having a competitive 
market will doubtless, all other things being equal, lead to greater 
economic competitiveness for the country as a whole, adopting a 
regulatory design designed to make specific companies more competitive 
probably will not. Competition agencies are in the best position to 
evaluate and filter what are truly ``competition'' considerations.
    There are also special exemptions that are contemplated in the 
privatization during the preparatory period for Japan Post. These 
include the ability of Japan Post to provide financing for 
international cargo transport. There are provisions that provide that 
this must be approved by the privatization commission, and that this 
activity must not unfairly harm those who provide like activities. This 
is a step in the right direction, but again these issues need to be 
evaluated properly and underlying regulations need to be carefully 
drafted. This applies with equal particularity to the privatization of 
the financial and insurance arms of Japan Post.
Conclusion
Competition Red Flags
    There are certain competition red flags which denote specific areas 
of competition policy where policymakers should be concerned to ensure 
pro-competitive regulatory solutions. The key areas where the 
regulatory design for Japanese postal privatization should be watched 
are as follows:
    1. Use of the USO as a shield for anti-competitive practices. 
Frequently, as noted above, the USO is so used. Particularly attention 
should be paid to ensure that any universal service fund is limited to 
the specific regulatory purpose for which it was intended.
    2. A rigorous accounting separation mechanism among the various 
businesses is required to ensure that any anti-competitive cross-
subsidization is limited. In considering the costs for provision of a 
service, we recommend using a hypothetical private firm, and adding to 
that cost base the benefits accrued from being government owned, 
including all exemptions from taxes, licenses or any other regulatory 
process that private firms would have to engage in. All these costs 
should be added to the hypothetical benchmark. If the postal company is 
charging below these costs in any of the related businesses, then a 
case should be made for anti-competitive cross-subsidization.
    3. Particular attention should be paid to the size of the reserved 
sector.

                                 

Statement of Timothy MacCarthy, Association of International Automobile 
                Manufacturers, Inc., Arlington, Virginia
    This statement for the record with respect to the above-captioned 
hearing is submitted for the Committee's consideration. The Association 
of International Automobile Manufacturers, Inc. (AIAM) is concerned 
that some of the testimony received by the Committee concerning the 
yen/dollar exchange rate relationship misrepresented the situation 
existing today in U.S.-Japan automotive trade. Contrary to some of 
these assertions, the evidence demonstrates that the yen/dollar rate 
has had no short-term impact on U.S.-Japan automotive trade and does 
not constitute a subsidy. The current yen/dollar relationship arises 
from the overall strength of the U.S. economy and the resulting flow of 
investment dollars into the U.S. from foreign countries. Significantly, 
only one witness testifying at the hearing expressed concerns about the 
yen/dollar relationship.
    AIAM is a trade association representing 14 international motor 
vehicle manufacturers who have invested over $27 billion to manufacture 
approximately 30 percent of all passenger cars and light trucks 
produced in the United States. AIAM members directly employ over 93,000 
Americans, and generate an additional 500,000 U.S. jobs in dealerships 
and supplier industries nationwide. AIAM members include Aston Martin, 
Ferrari, Honda, Hyundai, Isuzu, Kia, Maserati, Mitsubishi, Nissan, 
Peugeot, Renault, Subaru, Suzuki and Toyota. AIAM also represents 
original equipment suppliers and other automotive-related trade 
associations.
THE FACTS
U.S. Government Findings
    Two recent U.S. government reports directly contradict the 
assertion that ``Japan's sustained currency manipulation'' and the 
resulting ``artificially weak yen'' provide a subsidy to Japanese 
automobile manufacturers. As noted during the Hearing by Treasury 
Deputy Assistant Secretary for Africa, Middle East and Asia, David 
Loevinger, the Treasury report on International Economic and Exchange 
Rate Policies released in May 2005 stated that Japan was not a currency 
manipulator.[1] Mr. Loevinger further said that in response to a U.S. 
request, Japan had not intervened since March of 2004, and that Japan 
has consistently supported the positions taken by the United States in 
the Group of Seven.
    A second U.S. Government study, a Federal Reserve Staff Study of 
January 2005, concluded that interventions by the Japanese Government 
since 2002 have little or no impact on the yen/dollar rate.[2] Based on 
the findings of these two eminent studies, it seems clear--contrary to 
the claims heard by the Committee--that there has been no subsidy.
    Indeed there is further concrete evidence that such a subsidy does 
not exist. For example, if the Japanese Government were providing a 
subsidy to its auto manufacturers, evidence of such action should 
appear in the annual financial statements of these corporations. 
However, an examination of the statements of Honda, Nissan, and 
Toyota--the three largest Japanese automakers--shows a mixed result. 
During the period since 2000, only Toyota reported that the impact of 
exchange rates on its operations was consistently positive before 
reversing in FY2005 (-140 billion yen). Honda and Nissan reported that 
with the exception of 2002, when the yen was the weakest, and, despite 
consistently increasing annual net profits, they lost money on currency 
each year. This data does not support the assertion that a large 
subsidy has been granted to the Japanese auto companies.
    We also note that the Committee heard testimony suggesting that for 
the first six months of the current fiscal year, Toyota, Honda and 
Nissan earned additional profits in excess of $1 billion due to a 
weaker than anticipated yen value. This assertion is not supported by 
the facts, since none of the Japanese auto makers have issued their 
financial reports for the first six months of their fiscal years. 
Beyond this fact, it is also true that even if these companies have 
earned these additional profits, such profits can be considered as 
evidence of conservative financial practices, rather than a subsidy.
U.S.-Japan Vehicle Trade
    The assertion that the yen has weakened and caused U.S. imports of 
Japanese vehicles to increase and the bilateral motor vehicle trade 
deficit to worsen is not supported by the facts.

                            U.S. Trade Data

----------------------------------------------------------------------------------------------------------------
                            Factor                                2000      2001      2002      2003      2004
----------------------------------------------------------------------------------------------------------------
Y/D Rate                                                          107.8    121.57    125.22    115.94    108.15
----------------------------------------------------------------------------------------------------------------
U.S. Imports of Japanese Vehicles ($s billions)                    32.1      31.1      35.0      32.2      32.2
----------------------------------------------------------------------------------------------------------------
U.S./Japan Motor Vehicle Trade Deficit ($s billions)               31.3      30.5      34.6      31.7      31.7
----------------------------------------------------------------------------------------------------------------
U.S. Imports of Japanese Vehicles (Millions of Units)              1.82      1.79      2.05      1.77      1.72
----------------------------------------------------------------------------------------------------------------
Value per Unit ($s)                                              17,637    17,374    17,073    18,192    18,720
----------------------------------------------------------------------------------------------------------------

    Sources: Trade data from the Office of Automotive and Aerospace 
Industries in the U.S. Department of Commerce. The currency data is 
from the Federal Reserve System. The unit values are calculated.
    This data gives the appearance that exchange rates may have had 
some effect on U.S.-Japan trade flows over this period, but the impact 
has been mixed, not long-lasting and remarkably small. When the yen 
weakened through 2002, U.S. imports of Japanese vehicles increased. 
However, when the yen strengthened strongly in 2003, U.S. imports fell 
and then stabilized in 2004, despite a further strengthening of the 
yen.  The fact that the changes in trade over this period have been so 
small merely demonstrates that consumer demand is the real driver in 
the market. AIAM member companies do not respond to short term 
movements in exchange rates, but do respond to changes in consumer 
demand.
Exchange Rates and the U.S. Light Vehicle Market
    Developments in the U.S. light vehicle market show that the yen/
dollar rate cannot be a subsidy.

              U.S Light Vehicle Sales (millions of units)

----------------------------------------------------------------------------------------------------------------
                             SALES                                2000      2001      2002      2003      2004
----------------------------------------------------------------------------------------------------------------
Total U.S. Market                                                17.332    17.118    16.808    16.622    16.648
----------------------------------------------------------------------------------------------------------------
Big 3                                                            11.341    10.806    10.345     9.999     9.864
----------------------------------------------------------------------------------------------------------------
Total Japanese                                                    4.431     4.577     4.706     4.796     5.154
----------------------------------------------------------------------------------------------------------------
Japanese From NAFTA                                               2.825     2.939     2.953     3.077     3.522
----------------------------------------------------------------------------------------------------------------
Japanese From Imports                                             1.606     1.638     1.753     1.719     1.632
----------------------------------------------------------------------------------------------------------------
1y/d rate                                                         107.8    121.57    125.22    115.94    108.15
----------------------------------------------------------------------------------------------------------------

    Source: Office of Automotive and Aerospace Industries, U.S. 
Department of Commerce
    Over the period 2000-2004, the Detroit Three (DaimlerChrysler 
Corporation, Ford Motor Company and General Motors Corporation) lost 
1.477 million units of sales while Japanese automakers gained only 723 
thousand units, or about half of what the Detroit Three lost (the 
market decline of about 648 thousand units cost them most of the 
remainder). Of this gain by the Japanese automakers, 697 thousand units 
have come from the member countries of the North American Free Trade 
Agreement (NAFTA)--the U.S., Canada and Mexico. Another way to look at 
this is that over 94 percent of the increase in Japanese light vehicle 
sales in the United States has come from plants located in the NAFTA 
countries where the yen/dollar exchange rate has no effect.
Foreign Currency Behavior Against the U.S. Dollar
    Did the yen behave in a different fashion against the U.S. dollar 
than other currencies? Federal Reserve data provides an overall picture 
of what has actually happened between the U.S. dollar and our major 
trading partners.

                       Currencies per U.S. Dollar

----------------------------------------------------------------------------------------------------------------
                                                                                                        %Change
                   Currency                        2000       2001       2002       2003       2004    in $ +or-
----------------------------------------------------------------------------------------------------------------
Australia*                                        0.5815     0.5169     0.5437     0.6524     0.7365     -26.65
----------------------------------------------------------------------------------------------------------------
Canada                                            1.4855     1.5487     1.5704     1.4008     1.3017     -12.37
----------------------------------------------------------------------------------------------------------------
Euro*                                             0.9232     0.8952     0.9454     1.1321     1.2438     -34.72
----------------------------------------------------------------------------------------------------------------
Japan                                              107.8     121.57     125.22     115.94     108.15      +0.32
----------------------------------------------------------------------------------------------------------------
Korea                                            1130.90    1292.01    1250.31    1192.08    1145.24      +1.23
----------------------------------------------------------------------------------------------------------------
All Major Currencies**                             98.34     104.26     105.98      93.04      85.42     -13.14
----------------------------------------------------------------------------------------------------------------

    * U.S.$s per currency unit // ** This is an index where March 1973 
equals 100

    The assertion that interventions by the Japanese government have 
caused aberrant exchange rate behavior and a subsidy to their exporters 
is not supported by the data. During the most recent five year period, 
the U.S. dollar initially strengthened slightly against the yen and the 
won, and fell against the others. Beginning in 2001, the dollar fell 
against all these currencies (it fell 11.04% against the yen). 
Interestingly, the Bank of Japan made its largest interventions during 
this period in 2003 with the intention of maintaining a weak yen. [3] 
The yen, however, continued its steady rise against the dollar. This 
outcome clearly does not support the allegation.
Direct Government Expenditures in Foreign Exchange Markets Do Not Work
    The principal reason governments cannot permanently affect exchange 
rates without altering basic economic fundamentals is that governments 
simply do not have enough currency to significantly move the markets. 
For example, in the 1st quarter of 2004 Japan purchased nearly $140 
billion in an attempt to reduce the value of the yen. However, even 
this action failed to change the yen's value because it was miniscule 
in relation to the size of the yen/dollar market. The Bank of 
International Settlements estimates that every day approximately $230 
billion are exchanged for yen. This translates to a market during the 
quarter of about $22 trillion or $84 trillion for the year. It is clear 
therefore that even $140 billion, while large, has little chance to 
influence such a massive market.
The Impact of ``Verbal Intervention''
    Although Japan's Ministry of Finance (MOF) has not intervened in 
the markets since the 1st quarter of 2004, allegations have been made 
that Japan and Korea are now using ``verbal intervention'' to drive 
down the value of the yen or prevent it from strengthening further. 
However, many governments make comments about the value of their 
currencies in the market, the United States among them. It is a policy 
tool which governments sometimes use. Sometimes it works for a little 
while, more often it does not. In the case of Japan, it seems unlikely 
that, following the failure of monetary intervention, a few well-chosen 
words regarding the need for currency stability and orderly adjustment 
would have anything more than a temporary effect.
    The job of central bankers is to seek stability, not disrupt it. 
There is nothing to suggest that Japanese bankers are doing otherwise 
or acting differently than the many other national economic managers 
and leaders around the world.
CONCLUSIONS
      It is clear from the facts that Japanese governmental 
intervention in exchange rate markets did not have a significant impact 
on exchange rates and did not constitute a subsidy.
      Even if intervention had more than a temporary effect, 
such intervention would make no difference in the competitive 
relationship between automobile companies in a global market. 
Currently, about 70 percent of all cars and light trucks sold by 
Japanese automakers in the United States are built in the NAFTA 
countries. Over 94 percent of the increase in Japanese light vehicle 
sales in the United States since 2000 has come from local manufacturing 
in NAFTA countries. Local content rates for these vehicles average 70 
percent and many exceed 90 percent. The yen/dollar rate has no effect 
on these vehicles.
      Private foreign trade and investment flows have a far 
greater impact on currency values than government intervention. The 
size of the yen/dollar market is simply too large to enable government 
attempts at intervention to have any more than a temporary effect.
      While exchange rates impact trade over the long run and 
are used to make business decisions, they are not the sole basis for 
those decisions, nor are they the most important factor in those 
decisions. Building and offering the right products that fit the needs 
and desires of consumers is the goal of AIAM member companies and is 
the basis on which the business decisions of these companies are made.

                                 
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