[Congressional Record Volume 140, Number 87 (Friday, July 1, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: July 1, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                        TRADE DEFICIT WITH JAPAN

                                 ______


                             HON. TOM DeLAY

                                of texas

                    in the house of representatives

                        Thursday, June 30, 1994

  Mr. DeLAY. Mr. Speaker, as you know, this week the U.S. dollar 
reached a record post-World War II low relative to the Japanese yen. 
For every percentage depreciation of the value of the dollar, Japanese 
manufacturers pay that much less for raw materials priced in dollars in 
the world market, resulting in an increase in the U.S. trade deficit 
with Japan. Over a decade our trade deficit with Japan has continued to 
climb. The Federal Government has used trade restrictions and 
manipulated exchange rates to try to balance trade with Japan for 
years. However, the deficit has doubled since 1985 alone. Obviously, 
our current trade policies are not the answer to the problem.
  I would like to bring to the table another point of view by 
submitting for the Congressional Record this monograph entitled ``The 
United States Trade Deficit With Japan: Made in America'' by Dr. 
Lawrence M. Parks. Dr. Parks recognizes that trade negotiators have 
overlooked the concept of the quality of money. Monetary policy 
influences, if not determines, capital investment and international 
trade. He states that the debasement of the dollar has an adverse 
affect on long-term nominal interest rates that becomes even greater 
when applied to long-term investments, thus increasing the trade 
deficit. By strengthening the value of the dollar, U.S. capital 
investments are more likely to increase, improving the quality of goods 
for foreign trade and therefore our competitiveness.
  In order to address the trade deficit, I agree with Dr. Parks that it 
is imperative to develop a sound economy and currency. By doing so, we 
will focus on a solution that has long been overdue. Dr. Parks offers 
an informative and rational proposal to settle the trade deficit debate 
and restore America's competitiveness. I encourage my colleagues to 
read and consider his piece.

      The United States Trade Deficit With Japan: Made in America

                          (By Lawrence Parks)

       Summary: The United States trade deficit with Japan is 
     primarily driven by the higher rate, actual and expected, at 
     which the Dollar is being debased relative to the Yen. It is 
     not due to any industrial policy of the Japanese Government. 
     The debasement difference may appear small, but, because of 
     the effect it has on long-term nominal interest rates, and as 
     a result of interest rate compounding, the effect of 
     debasement becomes large when applied to long-time-horizon 
     investments. The advantage that Japan has had in long-time-
     horizon investments has given rise to the trade deficit.
       As a matter of principle, the stronger a nation's currency, 
     that is, the less susceptible it is to debasement, the 
     greater the trade advantage that country has over those with 
     weaker currencies. This is totally contrary to the untrue and 
     widely accepted notion that countries that weaken their 
     currencies enjoy a sustainable trade advantage because their 
     exports become cheaper. Also, while Japan has not been 
     completely open to foreign goods and services, competitive 
     advantage is never sustained by tariffs and other trade 
     barriers. Consider:
       First, there is no historical precedent where fiat 
     currencies did not become severely debased. All over the 
     planet, fiat currencies are being debased, as evidenced by 
     inflation everywhere. The market translates varying currency 
     debasement rates--which are the essence of currency risks--
     into long-term nominal interest rate differentials. The 
     higher the actual or anticipated currency debasement, the 
     higher the relative long-term nominal interest rates in the 
     affected country. Figure 1 [all illustrations referred to 
     have been omitted] shows the long-term nominal interest rate 
     differentials between the United States and Japan (1977-
     1992).
       Second, increasing long-term nominal interest rates cause 
     long-term investment activity to decrease because it is 
     highly sensitive to slight changes in interest rates when 
     such changes are compounded over many years. Over time, as 
     long-term nominal interest rates increase, decreasing present 
     values cause a dynamic reallocation of capital from 
     investments in long-term economic activities to investments 
     in short-term economic activities.
       Table 1 depicts the present value of $1 for varying 
     interest rates and time periods. As can be seen, for 
     investments with expected lives of 15 to 20 years, a nominal 
     interest rate differential of 5 percent results in present 
     value changes of more than 2:1. Thus, a 5 percent lower long-
     term nominal interest rate (and a differential that is the 
     consequence of a stronger currency), results in an 
     overpowering competitive investment advantage of more than 
     100 percent over a country with the higher long-term nominal 
     interest rate (which is a consequence of an actual and 
     expected higher debasement rate).
       For the years 1977-92, Figure 2 shows the relative present 
     value investment advantage of Japan over the United States 
     for investments with expected lives of 20 years or more due 
     to Japan's lower currency debasement rate. The average 84 
     percent present value advantage is so great that entire 
     industries, especially those that are capital intensive or 
     require long investment horizons, have migrated from the 
     United States to foreign shores.
       Thus, the United States' emphasis upon the short-term as 
     compared to the Japanese long-term perspective is not due to 
     some American cultural deficiency. It is a rational market 
     response to relatively higher actual and expected currency 
     debasement (as reflected in measured inflation) and 
     concomitant higher long-term nominal interest rates.
       This result is confirmed by historical experience. The 
     inherent constraints of the Gold Standard reduced the risk of 
     currency debasement so that long-term nominal interest rates 
     were substantially lower, and the investment horizon was much 
     longer. In 1882, for example, a railroad company sold 1,000 
     year bonds, and earlier in this century there are many 
     examples of 100 year bonds. For the same reason, the savings 
     rate in the United States was much higher. A shorter 
     investment horizon and a lower savings rate are a logical 
     identity. Actual and expected currency debasement is the 
     cause of both.
       Third, as long-term nominal interest rates increase, there 
     is not only a dynamic reallocation of financial capital, 
     there is also a dynamic reallocation of intellectual capital 
     from the long term to the short term. That is part of the 
     reason why in America there has been a 25 percent dropoff in 
     engineering and science education--which skills are mostly 
     used in long-term economic activities--from 8 percent of the 
     student body in the 1970's to about 6 percent today. Not 
     surprisingly, there has been a corresponding increase in 
     skill sets that are focused more on short-term economic 
     activities, such as lawyering or other services.
       As a result of a lower currency debasement rate--as 
     manifested by lower nominal inflation and lower long-term 
     nominal interest rates--Japan's present value of long-term 
     investments is higher. Consequently, more long-term economic 
     activities, such as research and development, are undertaken. 
     In a similar way, because manufacturing is more capital 
     intensive than services, in the United States there has been 
     a reallocation from a manufacturing economy, which generally 
     requires a longer planning and investment horizon, to a 
     service economy, which generally requires a shorter planning 
     and investment horizon.
       The resulting greater allocation of capital to research and 
     development and to other capital intensive economic 
     activities during the past fifteen-years has given Japan a 
     definitive competitive advantage in product development and 
     innovation. At the same time, a lower cost of capital has 
     enabled Japan to offer customer financing of its goods and 
     services at better rates. Thus, Japan has been able to 
     produce better products at a lower cost than the United 
     States for almost fifteen years. This is the root cause of 
     the trade imbalance.
       Over time, currency debasement rates may vary, and relative 
     competitive advantage may shift from one country to another. 
     However, without exception, there is less accumulation of 
     capital (both material and intellectual), shorter investment 
     horizons, less savings, less long-term investment and fewer 
     well-paying jobs than there would otherwise be if there were 
     sound currencies.
       In many countries, and especially in the United States, 
     long-term nominal interest rates, together with taxes and 
     regulatory burdens, are so high that there has been a 
     continuing contraction in the productive asset base, 
     especially intellectual capital. As currency debasement 
     persists, the continuing reallocation of capital causes a 
     corresponding decrease in high-value-added employment and 
     production, higher unemployment, and a decrease in the 
     standard of living.
       The speed at which various currencies are debased is 
     determined by fiscal and monetary policies of the various 
     countries. Because Japan has more conservative fiscal and 
     monetary policies, there is less current and anticipated 
     debasement of the Yen relative to the Dollar. Thus, Japan 
     continues to enjoy a competitive advantage over the United 
     States and the trade imbalances persist. A return to sound 
     money is a precondition for restoring America's economic and 
     industrial competitiveness that once was, and could be again.

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