[Congressional Record Volume 140, Number 33 (Tuesday, March 22, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 22, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
          UNITED STATES-JAPAN RELATIONS: A STRATEGIC FRAMEWORK

  Mr. BRADLEY. Mr. President, America's most important relationship 
internationally is with a country that is in the throes of a historic 
transformation. It is a country trying to break free from the 
bureaucratic shackles which have victimized its people and reduced its 
quality of life, shackles which have denied the public a voice in the 
governance of their country and a fair share of if considerable 
prosperity.
  The stakes in the success of this transformation are high. If it 
succeeds, this country will emerge as a primary American partner in 
working for the kind of international environment conducive to a 
stable, peaceful, prosperous, and democratic future. If it fails, the 
world will be more nasty and brutish, and we will have to devote more 
of our scarce resources in support of vital national interests abroad.
  The country in question is not Russia or China, it is Japan. And our 
approach to Japan has broad implications for American interests across 
the board: in bilateral trade, Japan's political reform, and American 
strategic interests.
  The most visible symbol of the United States-Japan relationship is 
our merchandise trade deficit, now over $59 billion. Our current 
account deficit, which takes into account our surplus in service trade, 
is only around $12 billion smaller.
  To understand what can work to reduce the bilateral trade balance, we 
must first understand what will not work. Quantitative measures will 
not eliminate the bilateral trade imbalance. The studies I have seen 
indicate that removing every single Japanese barrier would reduce the 
merchandise trade deficit by less than 20 percent. For example, a 
comprehensive study by the Institute for International Economics 
concludes that Japanese market access barriers are limiting American 
merchandise exports by only about $9 to $18 billion, or less than the 
increase in that deficit since 1990. This is significant, of course, 
and argues for effective policies to open Japanese markets. But it 
pales in comparison with the magnitude of the overall problem.
  The economic fact is that the overall U.S. trade deficit will 
continue as long as the gap remains between American savings and 
investment. As long as we consume more than we save, we will need to 
draw in goods from abroad. The Japanese component of that overall 
deficit will remain too large as long as the macroeconomic mix is 
wrong.
  Japan is currently in recession, the deepest since its recovery from 
World War II. Industrial production is down 3.1 percent from a year 
ago. Unemployment is up and, for the first time in two generations, 
Japanese workers fear for their jobs. As a result, Japanese consumers 
are buying less and importing less. In fact, Japanese households spent 
0.6 percent less in 1993 than in 1992, the first year-on-year drop in 
12 years.
  At the same time, the American economy is enjoying a recovery. This 
recovery, I should point out, owes something to the administration's 
successful effort to cut the budget deficit by almost $500 billion. 
Americans are buying more--industrial production is up 4.8 percent; 
retail sales have increased 5.8 percent. As a result, America is 
sucking in more imports. This combination of Japan in recession and 
America in recovery has led to a worsening of the bilateral trade 
deficit.

  So our first task is to get the macroeconomic fundamentals in synch. 
That means the Japanese must take effective measures to get their 
economy growing again. A growing Japanese economy will do more than 
quantitative targets to bring the deficit down.
  However, a growing economy is not enough. For even in a growing 
Japanese economy that imports more American goods, there will remain 
barriers to American companies in specific markets. Make no mistake 
about that. There are barriers. In pulp and paper, wood products, flat 
glass, auto parts--the list goes on and on--Japanese cartels and other 
market barriers are making it very difficult for United States firms to 
gain market share. These barriers must be removed. The question, then, 
is not whether to try to eliminate the barriers to the penetration of 
American goods into the Japanese market, but how to get those barriers 
removed.
  There are two approaches to opening the Japanese economy to our 
products. One is to set and enforce quantitative sales targets on a 
market-by-market basis. Mr. President, I do not think this is going to 
work.
  The problem with quantitative measures is that, like all measures for 
managing trade, they deny American firms the ability to compete and win 
market share. This is because, while it is always possible for 
bureaucrats to come up with a number--indeed, that is what Soviet 
bureaucrats did for over 60 years--there is no guarantee the number 
chosen will be the right number.
  The Americans inevitably will see this number as a floor. The 
Japanese will see it as a ceiling. So trade will settle at that figure, 
or lower, even though there is no way of knowing whether that figure is 
the right one. If it is too high, trade will not reach it, no matter 
how much pressure is applied. If it is too low, we have missed out on 
sales and jobs.
  However, there is another way. Instead of trying to manage results, 
we can focus our efforts on improving the working of the market. This 
means negotiating rules, then providing for adjudication. Under a 
transparent, open market, with agreed rules, backed by a transparent, 
open dispute resolution mechanism, American companies will have the 
opportunity to increase market share well beyond any number Japanese 
bureaucrats would agree to. When the market, not bureaucrats, decide, 
American companies benefit.
  Take the semiconductor agreement, for example. The target was set at 
20 percent. Foreign market share is hovering around 20 percent and will 
continue to do so. That is what the target was; that is roughly where 
we are. I believe that in an open, transparent market with adequate 
dispute resolution, the American share alone would be far higher than 
20 percent. Or, if the share did not exceed 20 percent, it would be for 
market reasons. Perhaps, for example, the product in question has lost 
its technological edge and American industry was focusing its efforts 
elsewhere. What good is a 20-percent market share in buggy whips? The 
point is, the market would decide, not a Japanese or American 
bureaucrat.
  You do not have to take my word for this. Even the semiconductor 
industry, the beneficiary of the semiconductor agreement, concurs. In a 
March 2 form letter to me, the president of the Semiconductor Industry 
Association admits,

       There is no doubt that the United States share alone of the 
     Japanese semiconductor market would be far higher than 20 
     percent if the market was open to free and fair competition.

  In other words, with no quantitative target but an open market we 
would be doing a lot better.
  I agree with those who assert that previous rules-based negotiations, 
such as the MOSS and SII talks, have been largely ineffective. But I 
believe they were ineffective not because of their focus on rules, but 
because of the lack of an ajudication process to hold the sides to 
their agreements. What we need to do is keep the focus on the process, 
while adding effective enforcement.
  The focus on quantitative indicators also undercuts our interest in a 
successful Japanese political transformation. Prime Minister Hosokawa, 
the first post-war prime minister who is not from the Liberal 
Democratic Party, came to power on a wave of reform promises and has 
already taken courageous steps to update Japan's political economy. He 
has cracked open Japan's rice market, to the eventual benefit of 
Japan's consumers. He has also established single-member electoral 
districts which will give urban consumers a greater voice in the 
political process and has removed some of the money corruption that has 
so plagued Japanese politics.
  Hosokawa's ultimate objective is to reduce the power of the 
bureaucracy and the entrenched big business interests, and thereby 
empower the people, the consumers, through their elected 
representatives. When consumers have more power, they will demand--and 
get--cheaper goods, higher quality goods, and a better standard of 
living. Cheaper goods, higher quality goods--that means American goods.
  As I have explained, the Japanese Government must get its economy 
going again. To do that, Hosokawa is going to have to override the 
objections of his bureaucrats. The recent announcement of a $50 billion 
income tax cut shows how far he has come--and how far he still has to 
go.
  The bureaucrats in the Finance Ministry are pushing hard for a 
consumption tax increase to counteract Hosokawa's income tax cut, even 
though that would reduce or even eliminate the stimulus to Japan's 
economy. In other words, the bureaucracy is putting budget stringency 
ahead of the economic welfare of the Japanese people. Hosokawa has 
secured the $50 billion cut for 1 year, but the questions of whether it 
will be permanent and whether it will be paid for by other tax 
increases, have yet to be settled. If Hosokawa is to do the right 
thing, he will need the power to override the bureaucrats.
  But a policy focused on quantitative indicators works against 
Hosokawa's efforts by strengthening the bureaucrats and the cartels, 
and cutting the consumer out of the process. Quantitative targets need 
someone to do the quantifying and someone to monitor results against 
the targets. Politicians will not do this. Voters will not do this. 
Bureaucrats will. And who will they work with? The cartels, of course. 
Quantitative targets, then, strengthen the bureaucracy and the cartels 
at the expense of the consumer, at the expense of political reform, and 
at the expense of American exports.

  There is a better way. A rules-based approach with an effective 
dispute settlement mechanism would, by opening up the process, educate 
Japanese consumers to the market impediments which are reducing their 
quality of life. Once an American company demonstrates, through a 
transparent dispute-settlement process, how it could deliver a better 
product at a lower price, Japanese consumers will be empowered to 
demand the product and demand the elimination of the market impediment. 
The argument will shift from, ``Why are the Americans managing trade?'' 
to ``Why does our Japanese system work against our interests as 
Japanese people?''
  Finally, a trade policy focusing on quantitative measures would be 
devastating to America's strategic interests.
  I realize that there is a constituency here in the United States that 
favors standing up to Japan. I know that failure of the framework talks 
was politically safer than agreement.
  But I also know that leadership means identifying and pursuing 
American interests, even at short-term political cost. And, in this 
case, our interests are clear--you do not pick needless fights with 
your closest allies.
  Every President intones that ``the most important bilateral 
relationship we have is with Japan.'' It has become a mantra, not a 
policy. Yet we see at the same time a policy that I would call trust 
but quantify. What does that sound like? Trust, but verify, the 
Reaganera cold war refrain. What does that tell you? That we do not 
trust our most important global strategic partner any more than we 
trusted our most dangerous strategic rival. That signals an ominous 
mindset that could hinder the achievement of our worldwide strategic 
objectives.
  Look at our most important foreign policy challenges in this time of 
transformations following the end of the cold war, such as 
strengthening the global economy; containing nuclear proliferation in 
North Korea; supporting reform in Russia and the rest of the former 
Soviet Union; encouraging the development of a globally responsible 
China; reforming the international financial institutions. The list 
goes on, but all the items have one thing in common. Without United 
States-Japan cooperation, we will not be successful.
  However, no cooperative relationship can succeed without trust, the 
trust underpinning tough decisions and sacrifices. Trust but quantify, 
by undermining United States-Japanese trust, undermines our ability to 
manage these issues.
  In addition, it puts the United States at a disadvantage vis-a-vis 
Japan in our legitimate economic competition. Take, for example, our 
economic relations with the Southeast Asian ``Tigers.'' These countries 
are all going to the Japanese saying, ``Don't give in. Don't 
accept managed trade.'' All of these countries see free and open trade 
as vital to their economic development and prosperity, so they support 
Japan, which in this case ironically has the opportunity to portray 
itself as a free-trader standing firm against American efforts at 
managed trade.

  As a result, a policy based on quantitative indicators undercuts the 
United States position as the balance to Japan in these countries, 
thereby reducing American influence and market share. It clears the way 
for the Japanese to become the champions of free trade and to portray 
us as the country pushing policies that are contrary to southeast Asian 
interests.
  And it is not only the ASEAN's who are concerned. The Europeans are 
not only critical of a quantity-based approach, they are trying to take 
advantage by cozying up to the Japanese as one free trader to another.
  So where do we go from here? I would recommend a two-part strategy: 
launch a new round of negotiations to agree on trading rules backed by 
dispute-settlement procedures, and identify areas for strategic 
cooperation.
  First, we start a new round of talks. The goal of these negotiations 
would be to identify market impediments in specific sectors, negotiate 
rules to remove those barriers, and agree on an effective dispute 
settlement mechanism to ensure that both sides stick to their 
agreements.
  What kind of dispute mechanism would provide United States companies 
adequate relief when Japanese markets don't function properly? I would 
recommend a three-part structure consisting of GATT/WTO procedures, 
United States-Japan binational panels, and a subcabinet early warning 
committee.


                         1. gatt/wto procedures

  The Uruguay round provides negotiated rules and an agreed panel 
structure for those areas covered by the agreement. Panels are made up 
of three experts chosen from a permanent roster. Decisions can be 
appealed, but cannot be blocked by the losing party. The winner can use 
cross retaliation against a recalcitrant loser. The problem here, of 
course, is that Japan largely conforms to GATT rules. The problems are 
in areas, such as competition policy, which are not covered under GATT.


                          2. binational panels

  For those issues that fall outside of GATT, such as competition 
policy, financial services, specific sector agreements, asset prices, 
et cetera, the United States and Japan would negotiate bilateral rules 
backed by a binational dispute panel mechanism. The United States-
Israel FTA panel structure is a good model, with its three-member 
panels. Each side chooses one member and jointly chooses the president.
  Panel procedures would be open and transparent, with ample scope for 
nonofficial input and maximum publicity. After all, the whole point is 
for consumers to know what is going on. There would be strict time 
limits on the process to prevent stalling.
  Like the United States-Canada chapter 18 panels, United States-Japan 
panels would hold hearings and issue reports. Reports would be 
politically binding and form the basis for a resolution. Whenever 
possible, the result would be nonimplementation or removal of the 
offending measure. If that didn't happen, the Government of the winning 
party would be free to take sanctions. These sanctions would not, as 
now, appear as the result of Government fiat, but be seen by consumer 
as the result of an open, logical process.


                      3. subcabinet early warning

  Prevention is the best policy. To nip budding disputes, where 
possible, the United States and Japan should establish an informal 
group at subcabinet level. The group would be composed, perhaps, of a 
deputy USTR, Under Secretaries of State and Commerce, and an NEC 
deputy, with Japanese counterparts. The idea would be to develop an 
informal forum for straight talk that would eliminate misunderstandings 
that lead to disputes. This would not be adding a layer of bureaucracy 
to manage trade, but simply an informal discussion group to keep lines 
of communication open.
  As the final piece of the trade puzzle, the two governments could set 
up a deregulation working group. Deregulation is essential to opening 
Japan's market, but it also constitutes the greatest threat to Japan's 
bureaucracy, since it would weaken the bureaucracy's power over its 
domestic constituencies. The fate of the Hiraiwa Commission report 
demonstrates the size of the obstacle.
  What we must find is a way to empower Hosokawa to deregulate by 
giving him two arguments: The Americans want it, and it is good for 
Japan. We could do this by setting up a deregulation working group made 
up of executive, legislative, business, labor, and academic 
representatives. This satisfies the the Americans want it criterion. 
The group could build on the Hiraiwa Commission, and be charged to 
study regulation in both countries and come up with ideas that would 
benefit Japan. This satisfies the it's good for Japan criterion.
  There would be no formal mechanism for implementing the Commission's 
recommendations. If these were binding, I doubt either bureaucracy, 
United States or Japanese, would agree to participate. However, 
assuming Hosokawa really is committed to deregulation, the Commission 
could give him a leg up on the bureaucrats.
  Second, beyond trade, we need to look for high profile cooperative 
efforts in areas of strategic importance to us and the Japanese. The 
areas specified in the Framework Agreement--environment, technology, 
development of human resources, population, and AIDS--are a start but, 
frankly, do not go far enough. We must work together on such topics as 
human rights in China, North Korea proliferation, Russian reform, 
Middle East oil, and reform of the international economic system. In 
this way, we can build momentum in our relationship and establish the 
trust so vital to our strategic interests.
  The United States has a major stake in the historic transformation 
underway in Japan. For half a century, the United States has borne the 
responsibility for making the international system work, for creating a 
benign international environment in which America and Americans can 
prosper. We should not shoulder that responsibility alone, but neither 
can we cast it off.
  That responsibility now requires intelligent support for Japan's 
transformation. Trade policy must be at the center of our efforts, but 
a trade policy that works in synch with the ongoing transformation of 
Japan's economy and politics to achieve results that conform to both 
our interests.
  Mr. HATCH addressed the Chair.
  The ACTING PRESIDENT pro tempore. The Senator from Utah is 
recognized.
  Under the previous order, morning business closes at 10 o'clock. If 
the Senator wishes the full 15 minutes, he would have to ask unanimous 
consent.
  Mr. HATCH. Mr. President, I ask unanimous consent that I be afforded 
the full 15 minutes and that the time not be counted against the budget 
resolution.
  The PRESIDING OFFICER (Mr. Mathews). Without objection, it is so 
ordered.

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