U.S. GOVERNMENT PRINTING OFFICE

64–701 CC WASHINGTON : 2000

THE U.S. TRADE DEFICIT: ARE WE TRADING

AWAY OUR FUTURE?

HEARING

BEFORE THE

SUBCOMMITTEE ON

INTERNATIONAL ECONOMIC POLICY AND TRADE

OF THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

THURSDAY, July 22, 1999

Serial No. 106–109

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international relations

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVEN J. CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. McHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE RADAVANOVICH, Califorina

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

MICHAEL H. VAN DUSEN, Democratic Chief of Staff

JOHN P. MACKEY, Republican Investigative Counsel

PARKER BRENT, Staff Associate

SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE

ILEANA ROS-LEHTINEN, Florida, Chairman

DONALD A. MANZULLO, Illinois

STEVEN J. CHABOT, Ohio

KEVIN BRADY, Texas

GEORGE RADANOVICH, California

JOHN COOKSEY, Louisiana

DOUG BEREUTER, Nebraska

DANA ROHRABACHER, California

TOM CAMPBELL, California

RICHARD BURR, North Carolina

ROBERT MENENDEZ, New Jersey

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

STEVEN R. ROTHMAN, New Jersey

WILLIAM D. DELAHUNT, Massachusetts

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

MAURICIO TAMARGO, Subcommittee Staff Director

JODI CHRISTIANSEN, Democratic Professional Staff Member

YLEEM POBLETE, Professional Staff Member

VICTOR MALDONADO, Staff Associate

(III)

C O N T E N T S

WITNESSES

Page

Pat Mulloy, Assistant Secretary for Market Access and Compliance, U.S.

Department of Commerce .................................................................................... 5

Robert E. Scott, Economist, Economic Policy Institute ........................................ 17

Robert A. Blecker, Professor of Economy, American University ......................... 19

Simon Evenett, Associate Professor, Rutgers University ..................................... 22

APPENDIX

Prepared statements:

Pat Mulloy ................................................................................................................ 34

Robert E. Scott ......................................................................................................... 64

Robert A. Blecker ..................................................................................................... 84

Simon Evenett .......................................................................................................... 124

Chairwoman Ros-Lehtinen ..................................................................................... 32

(1)

THE U.S. TRADE DEFICIT: ARE WE TRADING

AWAY OUR FUTURE?

Thursday, July 22, 1999

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON INTERNATIONAL ECONOMIC

POLICY AND TRADE, Committee on International Relations,

WASHINGTON, D.C.

The Subcommittee met, pursuant to notice, at 2:55 p.m., in room

2200 Rayburn House Office Building, Hon. Ileana Ros-Lehtinen

[chairwoman of the Subcommittee] Presiding.

Ms. ROS-LEHTINEN. Thank you. The Subcommittee will come to

order. Thank you so much for being here this afternoon.

The U.S. trade deficit has been the object of considerable concern

and controversy among experts, both advocates of free trade as well

as so-called protectionists.

Some contend that the trade deficit is, as one headline read,

‘‘bleeding the U.S. economy,’’ draining our domestic markets of potential profits and American workers of jobs. Yet others claim that

the growing deficit is a sign of a robust economy, that it indicates

the strong role being played by America in providing markets for

other countries struggling to recuperate from economic crisis.

Trade has always played a critical role in the development of

America’s economy. It has helped to enrich our country’s market

size, productivity and competitiveness, while providing a vehicle for

American ingenuity. However, with the economic prosperity which

trade can bring comes the challenge of striking the delicate balance

between trade that is free, yet fair.

According to experts, America runs trade deficits because for almost 2 decades, foreign investment in the United States has exceeded American investment abroad. The deficit is made up of the

difference between domestic savings and investment and because

America invests more than it saves, it is forced to increase borrowing to pay for the rising tide of foreign goods and services.

The trade deficit is also tied to the economic success or failure

of our global trading partners, and can be tremendously influenced

by economic crisis abroad, as recently illustrated by the Asian financial crisis.

Should the growing deficit be a cause for alarm for us in America? The trade deficit, which according to a recently released government report hit an all time high in the first 3 months of this

year, reaching over $68 billion, has driven even those who most

support trade liberalization to question how much longer the U.S.

economy can continue to sustain such losses.

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Former Treasury officials have said that the ballooning trade deficit is the single biggest threat to our economy, that it could lead

to a plunge in the dollar’s value and to a tremendous sell off in

stocks and bonds, spurring the U.S. into a recession.

Some experts will point to the increasing trade deficit as a sign

of America’s purchasing power and of international confidence in

the U.S. economy. They maintain that when trade deficits rise, unemployment drops, industrial production surges, and American corporations sell more goods and services than any other country in

the world.

By contrast, others argue that trade deficits, meaning declining

real wages, increased American job insecurity, and constitute an

erosion of America’s industrial base, citing recent statistics from

the U.S. Department of Labor that over 200,000 workers have lost

their jobs because of either shifts in production to Mexico or Canada or because of increased imports from those countries.

Some claim that trade deficits have no relationship with the level

of employment in manufacturing and, in fact, claim that cheap imports have helped keep inflation low in the United States during

a period of unusually high employment and heavy American spending.

Those who argue that trade deficits do not have a detrimental effect state that years in which the U.S. has run trade deficits have

also been years of increasing income for the average American.

Yet, in either case, there exists concern across the board that

America is becoming a market of last resort for our foreign trading

partners and that the increasing excess with which we import over

what we export is putting over $20 billion more into foreign hands

each month. Regardless of what we individually believe to be the

causes of our increasing trade deficit, our challenge in Congress

will be to develop policies which will create balanced trade relationships with our global partners and which seek to restore the balance of trade.

I look forward to the testimony of today’s witnesses and to their

recommendation as to how we can manage the trade deficit while

maintaining freer and more open trade markets. I would like to

recognize our Ranking Member, Congressman Bob Menendez of

New Jersey.

[The prepared statement of Ms. Ros-Lehtinen appears in the appendix.]

Mr. MENENDEZ. Thank you. Let me give thanks to our witnesses.

I just ask unanimous consent to have my full statement entered

into the record and paraphrase it.

Ms. ROS-LEHTINEN. Without objection.

Mr. MENENDEZ. I appreciate all of them coming here today. I specifically appreciate Dr. Simon Evenett, an associate professor at

Rutgers University, the State University of New Jersey, coming at

our invitation. We have all seen the latest headlines this week

highlights a new trade deficit record of $21.3 billion. Certainly it

is a timely indicator for its need for the Congress to look at some

of the causes of the trade deficit and what we can do to boost U.S.

exports abroad.

There is a concern that I have, it is in part the statement that

Alan Greenspan made as the Chairman of the Federal Reserve

3

Board at the 35th Conference on Bank Structure and Competition

when he said, ‘‘There is a limit to how long and how far deficits

can be sustained, since the current account deficits add to the net

foreign claims on the United States.’’ .

In essence, I guess what he was saying is the current account

deficit puts the economic fortunes of the United States in the hands

of foreign investors.

I know that some of these issues are very difficult and there are

no single solutions, but think the one thing we can definitely do

that we began to do through the Committee is a question of seeking to open markets and to further promote the opportunities for

American businesses and manufacturers and the providers of services to seek those markets abroad and to promote, and that is why

I am such a strong supporter of the Export Enhancement Act,

which finds ways to increase American exports and gain market access for American companies and products.

It certainly is a good start, but it is minor when you think about

our competitors like the European Union. We just had some of the

new members of the European Union’s leadership here in a meeting with its full committee the other day. Of all of the things that

they could talk about, the one thing they clearly focused on was the

trade issues, for which they have a surplus with us, a growing surplus, and they have made export promotion, contract securement

and market access priority issues at the highest levels of their governments. We need, I believe, to be doing the same.

With that, Madam Chairlady, I look forward to the witnesses and

what their testimony can do to enlighten us on some of these

issues.

Ms. ROS-LEHTINEN. Thank you so much, Mr. Menendez. I am

pleased to recognize Mr. Sherman of California.

Mr. SHERMAN. Thank you. We all know how important this trade

deficit is. I would like to respond to the frequent statements of

those who are apologists for the present do-nothing policy.

First, we are told that this trade deficit is the sign of a robust

economy. That is like an obese person saying it is a sign of health

that they are getting enough food. But also keep in mind, 5 years

ago, 10 years ago, when our economy was in giant trouble and the

Japanese economy was doing very well, we had a trade deficit, and

we were told at that time we dare not do anything about it because

we need their help, because they are so robust in helping our economy, which at the time was in dire straits.

So when the Japanese economy does well and the American economy does poorly, we are told do nothing, allow lopsided trade. Now

when the situation is reversed, we are told for the same reason, to

allow the same imbalance.

We used to be told that it was our fault, because it was the Federal budget deficit that caused the trade imbalance. I know some

of the real young people here will not remember that. But for how

many years were we told it isn’t the protectionism of the trading

partners, it is the moral fault of a Congress that keeps spending

more than it takes in? Now the United States has a surplus and

all these other countries have deficits, and for some reason, all the

do-nothing supporters of one-way free trade have forgotten how to

pronounce the arguments that they made 10 years ago, those arguVerDate 11-MAY-2000 12:36 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 64701.TXT HINTREL1 PsN: HINTREL1
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ments that said that a country that runs a budget deficit will inevitably run a trade deficit.

It only works as an apology for a do-nothing policy for the United

States.

We are told that there is nothing we can do, which really means

there is nothing we can do without upsetting some foreign governments and upsetting some powerful interests in the United States.

We are told that those of us who want, if necessary, to threaten

a reduced access to the U.S. market are protectionists, even if our

purpose is to simply use that as a threat in order to break down

the walls that other countries have put around themselves to prevent American exports.

We are told somehow that it is a free trading system, we are just

losing. But I come from a tourist city, Los Angeles. I don’t know

if you see the same thing in southern Florida. But people come to

the United States, and they don’t want to see Olvera Street, they

are not so sure they want to see Disneyland, they want to go to

the discount stores and buy goods produced all over the world, because they are sold more cheaply in the United States, at retail,

than you can get them wholesale back in their own countries. But

this is a trading system and we are just losing.

Finally, I would point out as to China, which is the most lopsided, not the largest trade deficit, but the most lopsided trading

relationship in the history of millennium life, we keep pretending

that society lives by the rule of law, so if we can just get them to

change their laws, we accomplished something. But what happens?

We change our laws and we tend to, every economic enterprise in

the United States, say they have MFN, you can bring in their

goods and make a big profit, and don’t you want to do that? Of

course, business people do. But if you are a business person in

China, I don’t care whether the tariff is 20 percent—I do care—

whether it is 20 percent or 0 percent. But even if the tariff were

0, you can get a call from a party cadre, saying do you really want

to buy $1 million or $100 million worth of United States goods or

a telephone system or whatever? Because if you do, well, the party

might frown on that. You might need to be sent out for reeducation

if you do that. It doesn’t take very much to get a careful or smart

Chinese businessman to say no to American goods. It only takes a

phone call, and you can’t take a phone call to WTO court.

I thank you for the time.

Ms. ROS-LEHTINEN. Thank you.

[The information referred to appears in the appendix.]

Mr. MENENDEZ. If I just may, I just want to tell my dear colleague, who I always find incredibly interesting in terms of the way

he presents his view, and often on point, that there are some of us

that are robust and feel robust in the process.

Mr. SHERMAN. Robust and——

Mr. MENENDEZ. You are saying something about overweight.

Ms. ROS-LEHTINEN. That is the old Mr. Menendez.

Thank you so much for those enlightening comments. I thought

only ladies talked about weight.

I am pleased to introduce our first panelist, Mr. Patrick Mulloy,

Assistant Secretary of Commerce for Market Access and Compliance, the U.S. Department of Commerce’s international trade adVerDate 11-MAY-2000 12:36 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 64701.TXT HINTREL1 PsN: HINTREL1
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ministration. In this capacity, Mr. Mulloy directs an extensive staff

of international trade specialists to improve market access for U.S.

companies to international markets by removing foreign barriers to

U.S. exports, and ensuring the compliance of foreign countries to

trade agreements with the United States. Prior to his position at

the Department of Commerce, Secretary Mulloy served in various

senior positions with the staff of the U.S. Senate Banking Committee, where he helped formulate such important international

trade and finance legislation as the Export Enhancement Act of

1992 and the Omnibus Trade and Competitive Act of 1988.

We welcome Secretary Mulloy with us this afternoon. Your statement will be entered in full in the record, and feel free to summarize your statement.

STATEMENT OF PAT MULLOY, ASSISTANT SECRETARY FOR

MARKET ACCESS AND COMPLIANCE, U.S. DEPARTMENT OF

COMMERCE

Mr. MULLOY. Thank you, Madam Chairperson.

As you mentioned, as someone who worked for 15 years on the

staff of the Senate Banking Committee, it gives me great pleasure

to appear before this Subcommittee to talk about the large and

growing U.S. trade deficit.

As you noted, I have a prepared statement which I will have for

the record and I will just make some remarks here to try to give

you an outline of what I think is happening.

Let me begin, Madam Chairman, by saluting you and this Subcommittee’s efforts to draw attention to this important matter. You

had a similar hearing last July; and last October the Congress, recognizing the key importance of this issue, established the Trade

Deficit Review Commission, where you had 12 people, 3 appointed

by Mr. Hastert, 3 appointed by Mr. Gephardt, 3 appointed by Senator Lott, and 3 appointed by Senator Daschle, and they are getting down to work now. In fact, they are going to begin their first

public work on August 19th.

This week, my Department released data showing that for the

first 5 months of this year, the deficit in goods and services is running at an annual rate of $225 billion, up 50 percent over the first

5 months of last year. The merchandise deficit so far this year is

at an annual rate of $307 billion.

In understanding these huge figures, the most important point to

keep in mind is that the recent growth in the deficit stems in part

from the fact that the U.S. economy is growing rapidly and others

aren’t.

The second important point to note is that the recent deficit increase stems principally from the export side. Overall imports so

far this year are only up 6 percent, a very modest rate. However,

import penetration, imports as a percentage of our total GDP, have

not increased since 1997.

This is not to say there have not been significant increases in individual sectors, such as steel, where the administration has acted

to halt the flood of imports but, overall, imports have not risen that

rapidly.

The real difficulty is in our exports. Typically our exports have

been growing about 7 percent a year, but they fell 1 percent last

6

year and so far this year have fallen another 2.4 percent. This decline is serious. It is affecting jobs in America’s farms and factories.

The export decline does not reflect a drop in U.S. competitiveness. In fact, the U.S. share of exports to foreign markets last year

was 15.2 percent, up significantly from the 14 percent average in

recent years.

What it reflects is how slow foreign markets are growing, not

just in Asia, but in Europe. Domestic growth is sluggish in these

countries, and demand for imports, including from the United

States, is stagnating.

The most dramatic drop in exports took place in Asia, where in

1998 exports fell by 15 percent and so far in 1999 they have fallen

a further 2 percent.

On a bilateral basis, our largest deficit is with Japan, where over the last 12 months it has reached $66 billion.

Our second largest bilateral deficit, $57 billion last year, is with

China. We import 5 times from China what we export to China,

meaning that just to keep the deficit from growing any more, our

export growth rate has to be 5 times as large as our import growth

rate with that country. In the last 3 years, however, the import

growth rate has been about 16 percent a year, while our export

growth rate has been about 7 percent, and so far this year our exports to China are actually down 5 percent. As I noted, China runs a $57 billion trade surplus with the

United States but, overall, China only has a global trade surplus

of $44 billion, so their trade with us is where they are accruing

their foreign exchange earnings.

With the focus on Asia, it is frequently not realized how much

our trade position has deteriorated with Europe. In 1991, the

United States had a surplus of $19 billion with Europe; in 1998,

our deficit had reached $32 billion, a negative swing of $51 billion

with Europe in 7 years.

With respect to our NAFTA partners, the story of strong U.S. domestic growth pulling in imports also applies. So far in 1999, the

trade deficit with Mexico is $24 billion at an annual rate, compared

with $14 billion last year, and the deficit with Canada is going to

be running at a $27 billion annual rate compared with $13 billion

last year. The decline of the Canadian dollar and Mexican peso

against the U.S. dollar over the last 3 years also plays a role in

creating these deficits with our NAFTA partners.

Overall, there is nothing on the immediate horizon to suggest

changes in our recent trade trends. U.S. economic growth, even

though expected to slow in 1999 from 1998, should still be relatively strong compared to most of our major trading partners. In

Europe and Japan, expectations are for slow growth to continue.

We cannot, however, blame all of our deficit on the Asian financial crisis and on the recent difference between U.S. and foreign

economic growth. Longer-term forces are also at work, including

the continued existence of trade barriers that have held back U.S.

export opportunities. Amazing though it may now seem, from 1894

to 1970, the United States during that 76-year period had an unbroken string of trade surpluses. But since 1970, we have had virtually an unbroken string of merchandise trade deficits that have

accumulated to over $2 trillion.

7

Most of our deficit occurred in the last 15 years. Nearly 80 percent of the deficit is with Asia and fully 40 percent of the total was

with one country, Japan.

The recent rise in the trade deficit reflects, in part, the health

of the U.S. economy. Our unemployment rate is extremely low by

historic standards. Inflation is low, economic growth continues

above its long-term trend, and real incomes are rising. In addition,

the rise in the stock market has encouraged consumer spending.

The biggest negative probably is our personal savings rate, which

is close to zero.

While current economic conditions, at least for the United States,

are excellent, we can’t help but be concerned with running extremely high current account deficits long into the future. To finance these deficits, we must borrow from abroad. Thus, we become ever more dependent upon receiving and retaining foreign

capital. The net debtor position of the United States, in fact, stood

at $1.2 trillion in 1998. You have to remember just maybe 10 years

ago, we were the largest creditor Nation in the world. We are the

largest debtor Nation in the world, and that is increasing rapidly.

If current trends continue, our total foreign debt will be close to $1.5 trillion at the end of 1999.

Another factor that must be considered is the impact of trade

deficits on the composition of our employment. The drop in our exports has had a serious effect on manufacturing employment in the

United States. While overall employment in our country is at

record levels and, in fact, has grown by 2 million jobs in the last

year, there are 422,000 fewer manufacturing jobs than a year ago.

Many of these losses are directly attributable to the decline in U.S.

exports globally, especially to Asia.

Few actions we can take domestically would have as great an impact on our trade deficit position as restoration of growth in our

major export markets. The key here is in economic policies in Europe and Japan that would promote domestic-led growth rather

than export-led growth in those countries.

Former Secretary Rubin, when he was still Secretary of the

Treasury on June 10, said this: ‘‘It is critically important that Europe and Japan do their part, because the international system

cannot sustain indefinitely the large imbalances created by the disparities in growth and openness between the U.S. and its major

trading partners.’’.

On July 13, Secretary of the Treasury Summers said: ‘‘We continue to watch the Japanese economy carefully and to believe that

what is most important for Japan is the restoration of domestic demand-led growth.’’ .

The need for these other countries to grow is clear as our current

account deficit position is unsustainable in the long run. Chairman

of the Federal Reserve Board Alan Greenspan, in something that

Mr. Menendez referred to earlier, said on May 6th, ‘‘There is a

limit to how long and how far deficits can be sustained, since current account deficits add to net foreign claims on the United States.

Unless reversed, our growing international imbalances are apt to

create significant problems for our economy.’’ .

In his testimony today before the House Banking Committee,

which I was able to get ahold of, Mr. Greenspan said this: ‘‘As our

8

international indebtedness mounts, however, and foreign economies

revive, capital inflows from abroad that enable domestic investment to exceed domestic saving may be difficult to sustain. Any resulting decline in demand for dollar assets could well be associated

with higher market interest rates, unless domestic savings rebounds.’’ .

Chairman Greenspan went on today to reinforce what Secretary

Rubin said about the need for Japan and Europe to grow faster. He

said, ‘‘Working to offset somewhat this anticipated slowing of the

growth of domestic demand, our export markets can be expected to

be more buoyant because of the revival in growth in many of our

important trading partners.’’ .

Now, that depends on whether they actually get going on whether they are going to be able to turn around this situation.

We need to be working to bring the deficit down over the longterm. We must continue to urge our partners to initiate domestic

growth strategies and we must also foster conditions for a restoration of our trade position when foreign markets recover, by assuring that foreign markets remain open by enforcing our trade laws

and promoting exports.

While I do not believe that noncompliance by our trading partners with trade agreements is the major factor in the growth of our

trade deficit, we must be sure that countries are keeping markets

open and complying with the trade agreements they sign with us.

We need to assure Americans that the agreements we negotiate are

honored and that American firms and workers obtain the benefits

and opportunities we have bargained for.

The Commerce Department, as never before, is increasing its

monitoring of our trade agreements. When we find indications of

violations, we are being very aggressive in taking up these matters

bilaterally or working with USTR to have them referred to the appropriate dispute settlement forum, whether in the WTO, NAFTA

or elsewhere.

The Commerce Department is also committed to swift enforcement of the fair trade laws. These are the ones we put up to stop

surges of foreign imports like we have had in steel over the last

year. During this first 6 months of this year alone, we have either

completed or are in the process of conducting more than 65 antidumping or countervailing duty investigations.

But beyond compliance and enforcement, we must be prepared to

take advantage of export opportunities as foreign growth returns.

U.S. firms need to take more advantage of overseas markets.

Therefore, we are working with the Interagency Trade Coordinating Committee set up by the Congress and chaired by the Commerce Department, and we continue to develop new strategies and

approaches to assisting U.S. firms and workers with trade promotion. ITA’s units, including the Foreign Commercial Service, the

Trade Development unit, and my own market access and compliance unit, are working together to help small and medium-size

firms take advantage of export opportunities.

Before closing, I want to thank you, Madam Chairman, and the

other Members of the Subcommittee, for your assistance during the

International Relations Committee’s reauthorization of our budget.

I particularly want to thank you for drawing attention to the critVerDate 11-MAY-2000 12:36 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 64701.TXT HINTREL1 PsN: HINTREL1
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ical work done by the Market Access and Compliance Unit which

I head.

I am pleased that you and your colleagues appreciate our efforts

to access foreign markets for American firms and workers and to

get our trading partners to comply with our trade agreements. If

we can obtain the funding requested in the President’s 2000 budget, we will be able to reach out and help small firms, particularly

the small- and medium-size firms that are the engines of growth

in our economy.

As I noted to you during my last appearance here, the number

of people that we have to maintain and enforce trade agreements

has actually been in decline over the last several years because we

have not been funded at the levels requested by the President. I

will give you an example. We used to have 10 people working on

China. We now have 4 or 5. That is just an intolerable situation.

Finally, I want to thank you, Madam Chairman, again, and your

Subcommittee, for the work on the trade deficit issue. You have

kept after this issue. It is a very important one. You might want

to have your staff pass on the records of your hearings to the congressionally created Trade Deficit Review Commission that I mentioned earlier in my testimony. I think that commission would find

the work you have done very beneficial.

I thank you again. I will be pleased to try to answer any of your

questions.

[The prepared statement of Mr. Mulloy appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you so much, Secretary Mulloy. The

U.S., as you pointed out, has one of the strongest and most vibrant

economies in the world, while at the same time maintaining its

highest trade deficit in history. Japan, on the other hand, in spite

of the financial difficulties, is still running a surplus. Could you

please elaborate on these two seemingly incongruous outcomes?

What are the variables that play in these two situations and what

lessons can be learned for improving our trade balance?

Mr. MULLOY. It is true, as Congressman Sherman referred to before, even when Japan was growing more rapidly, we had trade

deficits with Japan. They did begin to come down from the 1987

period down to about the 1993–1994 period. Then when they went

into this economic recession because they weren’t growing and

couldn’t take—are not taking American imports, our exports declined and the trade deficit began to increase with Japan again.

That is why the administration is leaning so hard on Japan to

go to export—not export-led growth. In other words, what they

tend to do when they get into a recession, instead of trying to increase domestic-led growth, they rely on export-led growth to get

themselves out of their recession, meaning they want to increase

their trade surplus with the world. They are running a worldwide

surplus of well over $100 billion.

Second, Japan, every country in the world, is frustrated by the

fact that they do run a pretty closed market over there. It is very

difficult, even if it is not the government itself, you have the companies acting in collusion to restrict access to that market. We go

into it time after time. My Under Secretary is going over there to

take up the construction issue next week. We have 0.02 percent of

their construction market. If we could just get 1 percent of that

10

market, instead of selling $50 million, we would have $2.5 billion

of construction to that market. So that is a tremendous problem,

and it is industry after industry that you find this problem with

the Japanese.

Ms. ROS-LEHTINEN. Another question, Secretary Mulloy. What is

your view on the proposal espoused by many, including one of the

panelists coming up after you, that the U.S. should gradually devalue the dollar as a way of improving the trade balance? What

short-term and long-term effects do you think this would have on

American competitiveness or on the global market?

Mr. MULLOY. Madam Chairman, as you know, even the President

doesn’t talk about the value of the dollar. They pretty much restrict

the Treasury Department to talking about the value of the dollar.

But if you look at—I was reading an article in the Wall Street

Journal the other day about the growing deficits with Canada and

Mexico, and the Wall Street Journal article referred to the fact that

the dollar has increased in value dramatically versus the peso and

the Canadian dollar, and that does contribute to the trade deficit.

The problem is when we need to attract foreign capital, if the

dollar declines in value it makes it harder to attract the foreign

capital you need to finance your borrowing, plus you are borrowing

to finance your trade deficits. If your currency is decreasing in

value, in order to get those borrowings, you have to raise your interest rates. So it is kind of a difficult situation. But I am not going

to comment on the value.

Ms. ROS-LEHTINEN. OK. One last question from you. You contend

the best solution to alleviate the trade deficit is the economic recovery of our trading partners. We understand, obviously if their relative economic position were to improve, the belief is they would

be more readily able to purchase U.S. goods and services. What policy recommendations would you make to assist in the economic recovery of those countries if that were to be the one thing that

would help us?

Mr. MULLOY. I think there was a big debate in the Congress last

year about the whole IMF Program and the Congress decided that

it was in our national interest to provide that money to the IMF

to help restart the economic growth in these Asian economies

which fell off so dramatically over the last 2 years. So I think that

will be of assistance to us.

The other thing is, as Secretary Summers and others have talked

about, Europe. They have not been growing like people had hoped

they would be growing. The other thing about Europe is, when they

moved to the Euro, people thought it would actually strengthen in

value against the dollar, but in fact it has declined by about—I

guess it was 14 percent. I think there has been some recent

strengthening of the Euro. Both of those result in our trade deficit

problem with Europe becoming worse.

So we have really got to get Europe to strengthen domestic demand, have Japan strengthen domestic demand. If that happens,

many of the smaller economies that count on those markets to

grow will also grow, which should help us then begin to change

some of these trends that we are on in terms of being what many

people think we are, the consumer of last resort in the world market.

11

Ms. ROS-LEHTINEN. Thank you, Mr. Secretary. Mr. Sherman.

Mr. SHERMAN. Thank you, Madam Chairman. Just a brief factual

question, I don’t know if you or your staff have the answer. What

were our exports to China last year?

Mr. MULLOY. Do we have that? Let me just—our total deficit was about $57 billion. We exported about $14 billion to China last year.

Mr. SHERMAN. That is goods and services?

Mr. MULLOY. Yes, that is correct.

Mr. SHERMAN. There is an advertisement in a leading publication that claims that we exported $18 billion of goods and services to

China last year.

Mr. MULLOY. Congressman, let me have that figure checked. I remember I used to say that last year—that in 1997 our exports to

Europe grew in 1 year by more than our total of our exports to

China that same year. That year I think we were using about a

$13 billion figure. It might have gone up.

Mr. SHERMAN. If you can get back to me, hopefully even today

just on what that number is, perhaps we can find out what the

Business Coalition for U.S.-China Trade is doing with the $18 billion figure.

Mr. SHERMAN. It has been said that we need to maintain a high

dollar, which then leads to trade deficits, in order to attract foreign

capital. I would simply comment that if the rest of the world would

buy our goods, that would bring billions of dollars into the United

States, which we could then invest. Likewise, if we were to be able

to reduce imports, that leaves us with billions of dollars more available for us to invest.

So I don’t think that you need a trade deficit in order to provide

adequate funds for the United States. In fact, a trade deficit is the

export of money and the importation of goods. So I was surprised

that on several occasions, Japan, which is already running this unbalanced trade relationship with us for decades, was able to go into

the currency markets and deliberately manipulate a lower yen and

a higher dollar without any protest from the United States.

I would just like to know whether we think it is just fine for

countries that are already having unbalanced malignant trade relations with us, to manipulate the currencies so as to increase their

trade surpluses with us.

Mr. MULLOY. Congressman, I should note that when I was on the

staff of the Senate Banking Committee, Members were very concerned about this type of thing where countries manipulate their

currencies to gain a competitive trade advantage. In fact, they put

a provision in the 1988 trade bill that the Treasury has to do a report once a year and update it annually, identifying countries that

are manipulating their currencies to gain trade advantage. In the

early years, they did identify Korea and Taiwan.

Now, coming back to Japan, I did note that there was an article

in the Washington Post a little while ago that when the Japanese

did that, Secretary Summers did complain publicly that that was

inappropriate, and then they quoted Fred——

Mr. SHERMAN. Mr. Secretary, with all due respect of statements

of inappropriateness, the correct response is to enter the markets

immediately on the other side at double the level and to force the

yen much higher than it would have been if Japan—the idea, someVerDate 11-MAY-2000 12:36 Jul 25, 2000 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 64701.TXT HINTREL1 PsN: HINTREL1
12

body shoots at you, and the response is to send their mother a note.

No wonder we are losing.

I might add, our whole approach, say, on construction in Japan

is to use regular mechanisms to try to go from .2 percent of the

market to .3 percent of the market, and then come back and say

the regular mechanisms are working.

Again, one of the defenses of our present approach is that occasionally we do get a crumb, but as I understand it, it is our policy

never to do anything more than send a note when other countries

enter currency markets and that we have never entered currency

markets for the purpose of increasing our trade position. When I

say never, I mean never in recent history. Is that correct, or perhaps you don’t know?

Mr. MULLOY. I honestly don’t know. The intervention in the markets dealing—they use what they call the Exchange Stabilization

Fund over at the Treasury Department, which was set up by Congress, I think in 1935. But that is all a Treasury function. It is not

an interagency decision, so I can’t really comment when they are

doing it.

Mr. SHERMAN. Finally, in your comment you talked about the low

U.S. savings rate. I would like to point out that I think we may

have a very high savings rate, disguised by our accounting system.

An economist would tell you that income is not only realized income, but unrealized income. So let me give you a typical circumstance.

A family might make $5,000 in a month, net, take home, and at

the same time, they look at their Dreyfus statement and the value

of their assets, money available in their hands right now, has also

gone up $5,000. A true economic view of that family is that they

are now $10,000 richer before they sit down to pay their bills. So they sit down and pay their bills, they spend $5,000. Our accounting system, then, because it ignores unrealized income, says,

your net wages were $5,000, you spent $5,000, your savings was

zero. But really looking at the entire situation, no, they made

$5,000 by working, they made $5,000 profit by having their money

in the stock market. The family made $10,000, they spent $5,000

on expenses, and they let the other $5,000 remain in the market,

just as if they had liquidated Dreyfus and put all the money in T.

Rowe Price, they now have, whether you churn the money or leave

it in—leaving your profits on the table is investing those profits.

So I don’t know whether it is your Department that calculates

the savings rate, but do you know of any analysis of the U.S. savings rates that takes into account the huge leave-it-in-the-market

savings? I think that American families have reaped hundreds of

billions of dollars. ‘‘Reaped’’ may be the wrong word-have accrued,

have obtained, have available to them-hundreds of billions of dollars of profits in the stock market, and they have in effect reinvested those by keeping that money in the market. I think if we

look at it that way, we may have a very high savings rate. But that

won’t keep those who want to apologize for our present do-nothing

trade system from saying oh, no, it is not the other countries’ fault,

it is the low savings rate in the United States. That is why we

have a trade deficit.

Now, to give you a moment to comment.

13

Mr. MULLOY. Congressman, let me come back to you now. This

only covers goods? I am sorry, what I have got now from the Department, U.S. exports to China in 1998, but it is only goods. It is

$14.3 billion. I will try and find out what the services portion is,

and I will get back to you, Congressman.

Mr. SHERMAN. Although if anything, you tend to support this add that I questioned. If it is $14.3 in goods, I am sure it is probably

another 3.5 or 3.7 in services. Thank you.

Mr. MULLOY. We will check that and get back to you.

Congressman, on the other, I am not an expert in terms of the

savings rate. I have read the articles in the press that make the

argument that you have put forth here. I just am not an expert in

how savings rates are calculated. The Treasury Department, again,

is the place that both on exchange rate policy and on the savings

rate, you would probably want to hear from them.

Mr. SHERMAN. I hate to think that only your Department would

be allowed to have this much fun. I am sure that at some future

time we will spread it around the administration.

Mr. MULLOY. But I think that report I referred to, where they

give it to the Congress once a year and then update it every 6

months, is very important. That looks at the international economic

position of the United States and looks at these kinds of issues that

you are very interested in, the currency manipulation and that sort

of thing.

I know the last time I testified before the Senate Banking Committee, Mr. Guitner from the Treasury was with me and the Committee Members asked him to make sure that that report was submitted on a timely fashion because they are very interested in it

over there.

Ms. ROS-LEHTINEN. Thank you. Mr. Delahunt.

Mr. DELAHUNT. Yes. I really want to applaud the Chair for calling this. I think this is really a very important opportunity for

Members to educate themselves. I would encourage the Chair to on

a regular interval have these kind of hearings, because I think this

really gets to the crux of what we are about as a Subcommittee and

obviously is a critical issue given the amounts of these deficits.

Let me just pick up and make some observations upon what the

comments by my scholarly colleague from California were in terms

of these particular issues, because, it is often stated on the floor of

the House by Members from both sides of the aisle, this grave concern about the personal savings rate of Americans.

It is used often in our debate and our discourse. We have got to

be really clear about our definitions here. Because it is an accepted

fact that Americans do not save. I was going to ask the question

out of ignorance, but I think I have been educated by my, like I

say, my colleague from California out of his background and experience. That is why it is so much fun to serve with Mr. Sherman.

But the reality is, you are here, Mr. Secretary, you make a statement that you express some concern about our deficit because of

the investment by foreigners in our economy as being a source of

a dynamic influence in terms of our own growth. But if he is right,

and I think he is right, and I think upon—and I would like to have

a followup from members of your staff, and there were some other

folks back there shaking their head in the affirmative—if he is

14

right, I would like to have it confirmed; because when we talk

about the personal savings of Americans, most of us are into

401(ks). Does that include that particular savings rate? The growth

of our pension plans that are invested in equities, in the markets,

is this part of that definition? We have really got to be clear about

it. I think it is important that you, the 435 of us that serve begin

to understand that.

Again, I was unaware and I was going to ask that question, like

I say. But my sense is many foreigners invest in the United States

because of our political stability. That is why we are the beneficiaries of foreign investment, because if you are in South America

or Asia or in Third World countries, the lack of political stability

is sufficient in and of itself for foreign capital to come to these

shores.

I don’t know if that is going to change anytime soon, because I

continue to see political instability all over the globe. Feel free to

interrupt me.

Mr. MOLLOHAN. Mr. Congressman, I agree with you that part of

the ability of the United States to attract these savings is because

we are kind of an isle of tranquility, politically and other ways, and

even economically, particularly with the collapse of these Asian

markets, for capital. But it is important to realize that in the old

days, people used to think trade flows would determine currency

values. What is going on is that the capital flows have a big impact

on the currency values. So while we are attracting that flow, it

does have an impact on——

Mr. DELAHUNT. The strength or weakness of the dollar.

Mr. MULLOY. Exactly.

Mr. DELAHUNT. I will tell you what I have a problem with. I

share Mr. Sherman’s frustration in terms of our bilateral relationships with countries that either through tariffs or just administrative impediments restrict access to our markets. We are going to

be debating—is it next week—the MFN issue on China.

I mean, put aside some very valid concerns about human rights

abuses, about an array of other issues, to just simply restrict it to

the trade issues, we have an imbalance of $57 billion. I want to

open up trade. I am a fair-trader. But I don’t see—all I keep hearing from New England corporations that do business in China is,

we want you to support MFN because the potential is there. We

have had potential there for a long time. I am getting very tired

of potential. It is like that minor league ball player that just, he

would come and go back again from the majors, and it would happen. Potential. Meanwhile, we are running a $57 billion trade deficit.

My proposition in the past to MFN has been predicated on the

fact of, hey, until you open up, until you remove impediments,

whether they are administrative in nature or delays that occur,

this is part of a bilateral negotiation, including ascension to WTO.

Start playing it straight with us. There is no reason to have this

kind of a deficit.

Brad’s observation about sending the note home from the teacher, I would suggest we just have to get a little tougher, because my

understanding is that in terms of their export market, we are the

ultimate, we are the last—what your term was, the consumer of

15

last resort. We represent 35 percent of their export market and

they are 2 percent of ours?

We have leverage that I suggest that we are not utilizing now

to say, come on, if you want to engage in an honest and fair, free,

bilateral trade relationship, that is fine. But we are running out of

patience.

Mr. MULLOY. Yes, sir.

Mr. DELAHUNT. If I may indulge the Chair for just another

minute, your argument, which is a good argument in terms of how

we should encourage these nations with whom we have a trade deficit, encourage them to grow their economies domestically, gee, that

is a hell of a trick. It really isn’t easy. I mean, we don’t have a vote,

in the Japanese Parliament, and I don’t know of anybody in this

Committee that is a member of the Politburo in China. We might

do lots of things, but to influence their economic policy to focus on

their domestic markets, I mean, I don’t know whether that is realistic or not.

Mr. MULLOY. On the point about China, according to if we believe their figures, it is not the differences in growth rates that

have been the problem in China. They have been growing actually,

if you look at their figures, faster than the United States. With

China it has clearly been that we have many multi-tiered trade

barrier problems in China.

One of the efforts was in these WTO negotiations to get at those

and try and take care of those in this WTO package. The Congress

will be the ultimate decider of whether the package, if we get it,

is good, because you have to change the law to give China permanent MFN if you want to do the WTO deal. So I would again urge

you, when you get that package, to probably do some hearings to

really get a good evaluation of it, because that is a very good point

that you made, Congressman.

Finally, I want to thank this Committee again. As I pointed out,

we are the one group in the U.S. Government, we are charged with

monitoring and enforcing trade agreements. We have 149 people.

We have 28 other people in my unit, paid for by AID. We have 149

people, and this is global. I mean, we honestly can’t do the job with

those kinds of resources.

Mr. DELAHUNT. If I could interrupt for one moment, I agree with

you there. I think with this Committee and the leadership of the

Chair and the Ranking Member and the entire International Relations Committee, they have been extremely supportive of supporting the exportation of American goods and services and opening up other markets. I agree, I think that you are underfunded.

I don’t think you have the resources that are necessary to really

address the issue, and I would hope at some point in time that we

could advocate on behalf of those agencies that do, in terms of securing appropriate funding so that they can accomplish their mission.

We all—I don’t want to export jobs, I want to export American

goods and services. So that is what I really want to do. That is bipartisan in nature. We can have disagreements as to NAFTA, but

I think you have unanimous support as far as the ability for us to

penetrate markets.

16

Ms. ROS-LEHTINEN. Absolutely. Well said. If you would like to

make some wrap-up statements?

Mr. MULLOY. I want to thank you and this Committee again. You

have been very, very supportive to our unit and ITA in general. I

hope that you will maybe followup with the appropriate appropriations.

Ms. ROS-LEHTINEN. Your chunk of that agency, Market Access

and Compliance, that division is very important in making sure

that our trading partners comply with our laws and making sure

that they come forth with the promises they have made when they

enter into these trade agreements.

Mr. MULLOY. We are only 8 percent of the total ITA budget.

Ms. ROS-LEHTINEN. It is the important chunk. Thank you so

much for being here. We look forward to you getting back to Congressman Sherman and the rest of our Subcommittee Members

about those numbers.

Mr. MULLOY. I will.

Ms. ROS-LEHTINEN. I would like to introduce the second set of

panelists. Robert Scott is an international economist with the Economic Policy Institute here in Washington where he has studied

the effects of trade and protection on the U.S. textile, apparel, and

steel industries. He is the author of various publications and studies measuring the employment impacts of trade agreements. Mr.

Scott has represented U.S. industries as an expert witness on the

economic effects of imports in several cases before the U.S. international Trade Commission concerning unfair trade complaints.

Prior to joining EPI, Dr. Scott was an assistant professor with the

College of Business and Management of the University of Maryland

in College Park, and we welcome Dr. Scott with us this afternoon.

Mr. Robert Blecker is Professor of Economics at American University and a Visiting Fellow at the Economic Policy Institute. He

is the author of various books covering the issues of international

trade and finance. His academic articles have been published in a

variety of scholarly journals and edited books. His research focuses

on international capital mobility, U.S.-Latin America economic integration, the U.S. trade deficit and our U.S. trade policy. Dr.

Blecker has served on the Economic Strategy Institute Advisory

Panel on the Future of U.S. trade Policy and on the Council of Foreign Relations Working Group on Development, Trade and International Finance, and we welcome Dr. Blecker here with us today.

He will be followed by Mr. Simon Evenett who is currently the

member of the court team drafting the World Development Report

and the principal author of the chapters concerning the world trading system and global financial matters. Dr. Evenett is currently

on leave from the Department of Economics at Rutgers University

in New Jersey, after serving in an appointed position at the World

Bank and as a Fellow at the Brookings Institute. He also serves

as a research affiliate of the Center for Economic Policy Research

in London, as a member of the Trustee 21 Initiative organized by

the World Economic Forum. Previously he has served as a Research Fellow and Visiting Fellow at Brookings and has taught in

a visiting capacity at the University of Michigan business school.

We welcome you as well, Dr. Evenett.

17

Ms. ROS-LEHTINEN. We will begin with Dr. Scott. Please feel free

to summarize your remarks and your entire statement will be entered in full in the record.

STATEMENT OF ROBERT E. SCOTT, ECONOMIST, ECONOMIC

POLICY INSTITUTE

Mr. SCOTT. Thank you, Madam Chairman and Members of the

Committee. Thanks for inviting me to testify here today on the impact of these large and chronic trade deficits on the American economy. I will this afternoon discuss these causes and consequences of

the growth in our trade deficit and suggest policies that could improve the U.S. trade position.

I begin by talking about how trade has affected American workers. I have a few slides. We begin with the first. These are just a

few of the slides in my testimony. In the 1950’s and 1960’s, the

U.S. was the world’s leading export power house. The Marshall

Plan in particular helped provide the capital needed to rebuild Europe and Japan and fueled a tremendous boom in U.S. exports. As

we see on the red line in this diagram, we had a large trade surplus in that period. It was about 4 percent of the GDP in the early

1950’s.

Since the 1970’s, we have moved from a surplus to a deficit as

Europe and Japan began first to compete effectively with the U.S.

in a range of industries. Later, we had a tremendous growth in imports from developing countries as well, which we will see in a few

moments.

Now, this growth in deficits has had a tremendous negative effect on U.S. workers in many ways. The trade surplus of the sixties

was transformed in this deficit and this deficit will grow rapidly in

the future as a result of the growing financial crisis. One impact

on workers is that it has destroyed millions of jobs in the U.S.,

most of them in high-wage and high-skilled portions of the manufacturing sector. It has pushed workers into other sectors where

wages are lower, such as restaurants and health services. When I

appeared before this Committee last spring, I summarized an EPI

forecast that the Asia crisis would eliminate about 1 million jobs

in the U.S., with most of those losses concentrated in manufacturing.

Those losses have begun to materialize, despite the growth in the

rest of the economy. We have lost almost 500,000 jobs since March

1998, and most of this has been due to the rising trade deficit.

Based on the recent IMF forecasts that the U.S. current account

deficit could reach nearly $300 billion this year, the U.S. can expect

to lose another 400,000 to 500,000 manufacturing jobs in 1999.

Now, trade deficits also have a direct impact on wages, especially

for noncollege educated workers, those who make up about threequarters of the labor force. In figure 1, the wage line in yellow

shows that real wages for U.S. production workers peaked in 1978

and declined more or less steadily through 1996. What is responsible for this decline? Trade is certainly one of the most important

causes, because it hurts workers’ wages in several ways. First, it

eliminates high-wage manufacturing jobs, as I already mentioned.

Second, it depresses wages through competition with imports, particularly from low-wage countries. If the prices of these products

18

fall, this puts downward pressure on prices that firms receive and

forces them to cut wages or otherwise cut costs.

Third, globalization also depresses wages through foreign direct

investment. When U.S. firms threaten to move a plant to Mexico,

it can force workers in those plants to take wage concessions rather

than lose their jobs. We have seen that happen increasingly in the

1990’s.

Why are these trade deficits growing? There are many reasons

that I go over in the statement. I will summarize a few key facts

from my exhibits that emphasize particularly the unbalanced trade

that exists with a few countries and in a few industries.

If we move to my figure 2, we see that the U.S. trade imbalances

are concentrated in a few regions of the world. Mr. Mulloy mentioned Asia, and we have a huge trade deficit with Asia, we see,

that approaches $175 billion in 1998. We also had a fairly large

deficit of about $25 to $30 billion each with NAFTA and Europe in

1998. We also see that the deficits with all 3 regions are increasing

steadily throughout this period.

Now, the causes of these deficits, particularly with Asia, are discussed in depth in my statement. There are many important differences in the economic structure and strategy of each country in

this region. However, each follows a general pattern established by

Japan in the fifties and sixties that is a pattern which is based on

export-led growth. Exports are increased through state promotion

and control of targeted critical industries and, as we have heard,

exchange rates are systematically undervalued as part of this strategy.

Now, in addition to these countries—I am sorry, the reasons:

There are only a few countries responsible for the majority of the

deficit as we see in my figure 4.

In fact, only 10 countries are responsible for the entire trade deficit in goods. These 10 are listed in figure 4. As you see here, the

deficit in 1998 in those countries total $229 billion. Japan, China,

and Germany alone had a deficit of about $144 billion in 1998, or

about two-thirds of this amount.

Now, as I mentioned, the Japanese deficit does reflect numerous

public and private barriers to imports in this policy of export-led

growth, discussed a moment ago. China, as we have heard earlier,

also has a heavy government role which dramatically restricts imports into that economy, and, as mentioned earlier, we have a very

unbalanced trading relationship with China, the most unbalanced

in the world.

If we turn to the table next, table 1 from the figure, we see that

the trade deficit is growing rapidly this year. These are the trade

deficits, by country, through May of this year. These are data released on Tuesday. If we look at the trade deficits, the first column

is year-to-date through May 9; second, year-to-date through May

1998. We see the trade deficit overall in goods has increased by

slightly more than a third, but the deficit with the NAFTA countries has nearly doubled, increased by 93.5 percent; and the deficit

with western Europe is up by 75 percent this year.

In addition to the currency factors mentioned earlier, we also

have seen a tremendous surge in foreign direct investment into

Mexico in the last 2 years that stimulated this deficit.

19

Just quickly, I will mention that in figure 6 we see the deficit

is concentrated in a few key industries. I go into this in some depth

in the testimony, but what is surprising is that motor vehicles and

parts make up such a large part of our deficit. You would think

that most economists would suggest that we would import lots of

low-tech goods, like apparel and shoes, and we do in fact import

those and basic commodities like petroleum, but we import huge

amounts of motor vehicles and parts. In fact, it makes up half of

our deficit with Japan, two-thirds of our deficit with Canada, and

essentially the entire bilateral trade deficit last year with Mexico.

We also have big deficits in other high-tech products such as

computers, steel, and blast furnace products, TV’s, radios; and in

fact only 3 of the top 8 trade deficit products are what we traditionally think of as low-tech: apparel, leather, and toys.

Let me summarize, then, my policy recommendations, what I

think we can do about this, in order to save time. I mentioned four

specific points in my testimony that I think are critical to the development of an environment that is going to generate what I think

is the bottom line, a high and rising standard level of living for all

Americans, and a competitive domestic manufacturing base is key

to achieving this.

First, we should enter into no new trade agreements, including

China’s proposed entry into WTO, unless and until those agreements agree to raise the bar, to include labor and environmental

standards so we don’t engage in a raise to the bottom in those

areas.

Second, I think we have to take measures to address these chronic trade deficits with countries like China and Japan in a few key

industries like motor vehicles and commercial aircraft as well,

where China is exploiting our technology.

Third, I do think we should steadily reduce the value of the dollar. I am not in the government, so I can say that. I think we need

to do that, and we can talk about that more if you have time in

the Q and A.

Finally, I think we have to develop new incentives to interest developing countries to change the way in which the trade negotiating game is played. In the past we have traded off access to our

markets in exchange for protection for our investors. I think in the

future we have to offer them some kind of new incentives; for example, debt relief and development aid, in exchange for raising the

bar in the way that I think we need to do it.

I think these goals are achievable. I look forward to our discussion of these topics.

[The prepared statement of Mr. Scott appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you. Dr. Blecker.

STATEMENT OF ROBERT A. BLECKER, PROFESSOR OF

ECONOMY, AMERICAN UNIVERSITY

Mr. BLECKER. Madam Chairman and Members of the Subcommittee, thank you very much for the opportunity to testify here

today on this important topic. I would like to begin by directly addressing the question posed in the title of today’s hearing, which

I think was an excellent title, and saying that yes, we are trading

20

away our Nation’s economic future with our massive trade deficits

today.

We are trading away our future in two important respects. First,

the damage to our workers and industries, which Dr. Scott has just

discussed; and, second, the damage to our Nation’s financial position, which Mr. Mulloy referred to earlier and on which I will focus

in my remarks.

The trade deficits of the past 15 years, as Mr. Mulloy also said,

have already transformed our country from the world’s largest

creditor into the world’s largest debtor. Today, as a result of our

record trade deficits, the Nation’s net international debt is rising

faster than ever. The Commerce Department reported last month

that the net international debt had reached $1.2 trillion at the end

of 1998, and my projections, shown in this figure which is also in

my written statement, show that this debt, that is the green line

there, will reach $3.8 trillion by 2005 if present trends continue.

Furthermore, I calculate what I call the net financial debt, excluding certain assets that are not liquid, and that red line there,

pardon the analogy to the local Metro system, the red line excludes

certain illiquid assets, and that was already a net debt of $1.6 trillion last year, and I forecast it to reach $4.1 trillion by 2005, which

would then be 35 percent of the gross domestic product.

In the next slide, I also project the net outflow of interest and

dividend payments—this is what we have to pay out to foreigners

for our borrowing from them—will grow from 66 billion, the red

line here. There was a $66 billion deficit on net income and dividend payments last year. I project that will grow to $166 billion in

2005, which would be equivalent to last year’s trade deficit in goods

and services.

Now, as a result of this growing indebtedness and interest outflow, our Goldilocks economy could come grinding to a halt sometime in the early 21st Century. This negative financial position

makes us extremely vulnerable to any loss in confidence in U.S.

asset markets, such as the stock market, or in the U.S. dollar. As

figure 6 shows, foreign investors now hold over $5 trillion of financial assets in the United States. Most of those assets, as you can

see, the vast majority, have been acquired in just the last 4 or 5

years.

It would not take a very large sell off of these assets to precipitate a dollar crisis. In fact, if foreigners sold off only 5.75 percent

of that $5.2 trillion that you see on the right, this would be about

$300 billion, or just about the projected level of the current account

deficit for this year.

Such a sell off could cause a collapse of the U.S. dollar and a

hard landing for the American economy unless steps are taken to

put our Nation on a more sustainable growth trajectory, with

smaller trade deficits and less international borrowing.

In my written statement and also in an attachment I gave the

Committee with a recent report I did for the Economic Policy Institute on the international debt situation of the United States, I go

into some more detail on these possible hard-landing scenarios and

how we might avoid them or what could be the triggers for a financial crisis. I would be happy to discuss that more in response to

questions.

21

But now let me try to move to the policy conclusions. I think we

need to work on two fronts, and that is to reverse both the shortterm and the long-term consequences of our high trade deficit and

our growing international debt.

Now, the two main short-term causes of the high trade deficit are

the rise in the value of the dollar since 1995, which you can see

in figure 1 coming up here, the order of the figures is different for

the presentation than it was in the paper. The green there is the

greenback, the dollar. As you can see, it started rising in mid-1995.

Most of that increase came with the industrial country major currencies. Then it shot up even faster in 1997 during the Asian financial crisis. While it has leveled off, it has stayed at an uncompetitive level ever since.

Now, no matter how efficient American producers are, no matter

how hard the workers work, no matter how much new technology

they invest in, they cannot compete in global markets at a dollar

that is now 20 percent higher than it was a few years ago. Therefore, I believe that there cannot be any solution to the trade deficit

problem that does not begin with and include as an important component a significant effort to bring down the value of the dollar to

a more competitive level.

Now, how we do that will have to vary between the different

kind of trading partners, those that manipulate their currencies

and those with floating rates. We can discuss that more in the

question period.

Second, I do agree with Mr. Mulloy and the administration statements that he quoted, that we must encourage our trading partners to stimulate their domestic economies and to open their markets more to imports of American goods and services. I think it is

time for Europe to abandon some of the self-imposed restrictions

which have already backfired. They were supposed to make the

Euro strong, and instead they made it weak. It is time for Japan

to pull itself out of its slump. Both regions need a significant fiscal

stimulus along with continued monetary ease, and I think we also

need to work on our administration to pressure the IMF to let up

on the crisis countries. We have imposed on them austerity conditions as part of IMF causality—I am sorry, IMF conditionality,

which have led directly to this drop-off in our exports to those regions, to Latin American and Asia, which are such vital export

markets for us, a lot of this is self inflicted damage from our treasury department telling the IMF to tell those countries they had to

raise their interest rates and slash their budget deficits and put

their economies into depressions. When they go into depressions,

the first thing they do is stop buying imports from us, not to mention their currencies fell so they couldn’t afford them anyway. We

need to start thinking about the repercussions of some of these

things we tell other countries to do.

Finally, for the longer term, I largely agree with what Dr. Scott

said, but let me put it in my own words. I think we need to modify

the way we approach trade negotiating to better promote the interests of American-based producers, to look at things from the perspective of industries and farmers producing products in the

United States, rather than just our companies selling things

abroad.

22

It is all very well and good to sell bananas in Europe, but we

don’t grow bananas here, and we need to think about what we do

produce here. I think we also need to put social concerns such as

human rights, labor standards, and environmental protection on an

equal footing with intellectual property rights and other types of

investor rights in our approach to trade negotiations. I think this

can help to create a more level playing field with other countries

in which a more balanced trading relationship can emerge.

We also need to remember that competitiveness starts at home.

We should not short-change domestic research and development,

education, public infrastructure, the things that make our economy

productive, because those are the things in the long term that help

our private sector to be more competitive.

With a more secure economic base at home and more balanced

commercial relations with our trading partners, we should be able

to balance our trade without undue sacrifices of domestic jobs and

living standards in the future.

Thank you.

[The prepared statement of Mr. Blecker appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you so much. Dr. Evenett.

STATEMENT OF SIMON EVENETT, ASSOCIATE PROFESSOR,

RUTGERS UNIVERSITY

Mr. EVENETT. Thank you for the invitation to present some testimony before this Subcommittee, Madam Chairperson. I also would

like to thank Mr. Menendez and his staff for getting in contact

with me with respect to this testimony. I should add that Rutgers

University has always appreciated its close links with Mr. Menendez.

Ms. ROS-LEHTINEN. We will let him know you said so.

Mr. EVENETT. Thank you very much. I should add that I am

speaking very much in my capacities as a Rutgers University professor and a fellow at Brookings, and not in my World Bank capacity. The articles of the World Bank are extremely clear about the

involvement of World Bank officials in member countries’ politics,

so please see me with a Rutgers and a Brookings hat on. Maybe

two hats is too much, but not three. Thank you.

Let me turn to the substance of my presentation. I have put together some testimony. I am one of these simple guys who likes to

make three or four points with graphs. I am a professionally

trained economist. I can do it with mathematically complicated, incomprehensible nonsense.

Mr. DELAHUNT. We would not understand it.

Mr. EVENETT. Most of the time I don’t understand it either. But

I leave that for the privacy of my own home. For the rest of you,

I would like to share the following graphs and make four points.

They somewhat go against the grain of what you have heard up

until now, which is first, I don’t think the trade deficits reflect economic malaise.

The second point is that I don’t think the U.S. trade deficit is

caused by closed foreign markets.

The third point is in the current U.S. boom, it seems its trade

deficit growth and job creation have gone hand in hand. There is

23

no big surprise. They are caused by exactly the same factors. We

will talk about that.

Finally, I think the plummeting U.S. savings rate is the real policy headache, and for more important reasons than its effect on the

trade deficit, as we enter an era where more and more Americans

are approaching their retirement. So let me take you through those

four points.

The first point, and I summarized this, as I said, in four graphs.

The first is that I don’t think trade deficits imply economic malaise.

It is actually very interesting that the United States since 1990 has

had the highest growth rate in the G–7 economies and also had the

largest trade deficits all the way through. In fact, if you were to

plot a graph of growth in the G–7 against their trade deficits, you

would find the countries that have the higher trade deficits were

the ones that were growing.

So I would urge you to ask what you really care about, a growing

economy which, as we will see, produces a lot of jobs, or are we

going to worry about one specific narrow economic indicator? I

think you get more miles or bang for the buck out of economic

growth than you do about worrying about trade deficits.

The second point I would like to make is I don’t think the U.S.

trade deficit is caused by closed foreign markets. In fact, on my second graph here, it is interesting that if it is the case that the current U.S. trade deficit was caused by closed foreign markets, and

we have had three rounds of multilateral trade negotiations, lowering tariffs, lowering nontariff barriers, then presumably back in

the sixties we would have had even more closed foreign markets,

but back then we had a trade surplus. So something is driving the

U.S. trade deficit, and it is not closed foreign markets, and that is

something I will come to in a minute, and it has to do with domestic macroeconomic factors.

Really a historical perspective, not history—going back to 1960

is not history for most of us—but going back to 1960, you can see

the U.S. trade deficit has varied for a large number of reasons, and

it doesn’t have much to do with closed foreign markets.

When we looked more recently as to what happened since 1990,

we found that employment, nonfarm employment in the United

States, has surged, and so has the current account deficit. The real

explanation there is entirely demand-led, especially in the last few

years.

On my final graph, I think I get to the heart of this, but looking

at what we have had is both an investment boom, a very healthy

investment boom which is bringing new production techniques,

managerial techniques and skills for U.S. workers, helping to raise

their wages and offset some of the growing inequality we have seen

since the seventies.

We have had a healthy investment boom, and we have had a

somewhat more dubious consumption boom. Yes, we have all had

a big party here. One thing is definitely clear: If you don’t like the

savings numbers, look at the consumption numbers. The consumption numbers have absolutely gone through the roof, I think really

for two reasons.

First, as we have said, people are starting to spend down some

of their stock market gains; and, second, people have refinanced on

24

their houses, too. As interest rates have come down, they have refinanced at lower interest rates, releasing some income to be spent

on goods and services.

So what that means is when the traditional measure of the savings rate—which of course is nothing more than the difference between what America consumes and what it earns—but that has

been shrinking, mainly because consumption has been surging.

Now, that comes out as a plummeting savings gap.

Now, some questions have been raised earlier about how to

measure savings. Some of the more rigorous and sophisticated

ways of trying to measure savings, getting at precisely the issues

raised earlier, still point to a fall in the U.S. savings rate over the

last few years. So this savings rate has fallen, even when you take

account of the factors which were quite correctly raised earlier.

The second thing is even if you don’t think savings have fallen

in the U.S., investments certainly have. All that matters, all that

you need to get a trade deficit is for the difference between investment and savings to rise. All you are really saying is the demand

in the U.S. economy is rising faster than its capacity to supply it,

so you have to buy goods from abroad. We have seen a huge surge

in investment in the U.S., primarily in information technology and

other areas. But that is the real reason why we have a trade deficit

and a current account deficit at the minute.

I guess to sum up, I don’t want to come off and say—I don’t want

to appear to say don’t worry about the trade deficit; because if you

think that the savings and investment imbalance is very precarious, in other words, if you think people are over consuming, spending far too much money, spending down stock market gains which

could disappear tomorrow—after all, the Dow fell 200 points very

recently, right?—if you think that is a very precarious way to organize household consumption decisions, I would agree with you and

turn around and say these numbers could reverse very, very quickly. That would lead to a quite serious adjustment problem.

What I don’t think I agree with is that somehow we have these

foreign markets which are systematically closed to U.S. goods. I

think that where there are problems, countries have legitimately

taken complaints to the WTO, and the U.S. is the biggest complainant of the WTO, it takes the most cases, and also answers the most

cases, by the way. This country is not innocent on that score. It has

been found guilty in some cases, too. So the fact is the WTO is the

right forum for dealing with trade complaints.

The second thing is if you think there are existing barriers that

still need to be negotiated down, that is what I would urge you to

do, is endorse a new round of trade negotiations which could be

launched in Seattle and help craft and shape that agenda. In that

agenda I would not put labor and environmental standards. I can

tell you that if those decisions to negotiate on those issues goes to

Seattle, you will get large numbers of developing countries, countries whose economies are not growing very fast, potential exports

for the United States, they are not interested and they will walk

out.

So my sense is we have to find—we are going to need some innovative thinking on trade policy that is going to require an honest

discussion about what the remaining trade impediments are and

25

bringing up labor and environmental standards is merely going to

antagonize our trading partners, who otherwise I think are quite

interested in reducing their trade barriers even further.

Thank you Madam Chairman.

[The prepared statement of Mr. Evenett appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you so much for your testimony.

I have one question for each of you. I would like for you to elaborate on the factors that you believe cause the deficits that we have:

the merchandise trade deficit, the manufacturing trade deficit, the

deficit in goods and services. What are the factors you think contribute to their causes, and the varying impact that these would

have on the U.S. economy? Also related to that, if you think that

the trade deficit in this one sector is preferable to the deficit in another sector. Dr. Blecker.

Mr. BLECKER. That is a big area to talk about, but let me just

say a few points. I think what has happened in the last few years—

and by the way, one area I think I agree with Dr. Evenett is on

the saving rate. I think a major change in recent years is that what

has been happening on the balance of payments has been driven

largely by what is going on in the capital account rather than the

current account. These two things have to balance each other out,

because it is an accounting statement. But we have seen large

inflows of funds. These in turn pushed up the value of the dollar.

They have financed the shortfall of savings, allowed the consumer

boom to continue, prevented investment from falling, in spite of the

low savings rate.

I disagree somewhat about investment being high. That depends

on how you measure it—in constant dollars or current dollars—and

I prefer a current dollar measure.

But this in turn has basically forced us, then, to run a current

account deficit which is the other side of the coin of the capital account surplus. That, then, reverberates on to all of the other balances that are subcomponents of the current account. Especially it

reverberates on to goods and merchandise because the high dollar

and then boom in our economy compared to sluggish conditions

abroad, where I also agree—which is in fact in my testimony as

well—that forces a merchandise deficit which is very large, but

which then has the consequences that Dr. Scott was discussing.

Even services—we have seen a lot of arguments in recent years,

don’t worry about the merchandise deficit, because we have a services surplus. The services surplus has shrunk, too, and it is not

growing as was expected, because when the rest of the world is depressed and the dollar is too high, it is not surprising they don’t

want to buy so many of our services.

Then there a new part of the overall current account deficit that

is getting worse, which I flagged in my figure, I think number 2,

in my written statement, and that is the deficit on investment income.

In the past when we were the world’s largest creditor, we had

a large net inflow of investment income, mostly from our multinational corporations abroad. But that is now being overwhelmed

by the net outflow of interest payments and dividend payments on

our financial obligations, and it is a long story why it has taken

26

a while to turn negative; but it has now, and if present trends continue, it will become a major negative factor in the current account

and balance of payments in the next several years. That is going

to make it necessary for us to run even harder just to stay in place

as far as preventing rising current account deficits.

So essentially my causal story would start with the capital

inflows through the dollar and go on through the rest of it.

Ms. ROS-LEHTINEN. Thank you. Mr. Scott?

Mr. SCOTT. Sure. I would say that there are two causes, generally speaking. They are both short-return financial sector causes

and I think there are long-run structural causes to the trade deficit.

On the short-run side, as Dr. Blecker describes, I would like to

describe it as a boomerang economy. The rest of the world collapsed, they sent their capital here, and that stimulated a boom in

the stock market which led to a consumption boom, and that generated also a short-term increase in the trade deficit. I think there

is no question about that.

On the other hand, as we all know, boomerangs are dangerous

to play with. If that capital decides to depart and it causes a crash

in the stock market, it could certainly destabilize the economy. So

we are playing with a very dangerous situation here, I think, given

the state of the world economy.

So that on the structural side, I very much appreciate Dr.

Evenett’s first figure on the structural trade, which to my view illustrates the pattern of the structural trade deficit. Obviously I

think the data is correct. We all get the data from the same

sources. I think the title is a little bit wrong. It is very interesting.

He paints this picture of the three long-term rounds of trade negotiations, the Canada, Tokyo and Uruguay Rounds of negotiations,

and they are clearly linked in some way to an increase in the U.S.

trade deficit. It says on the title of that, the deficit has grown as

foreigners lowered their trade deficits, not the other way around.

But, in fact, I would argue just the opposite. Our deficit has

grown because we have lowered our trade barriers in total more

than foreigners have. During each round we have reduced our tariffs to the present day to just about as close to zero as they can

get. Other countries have not reduced their tariffs as rapidly as we

have, first.

Second, more importantly, they have maintained and enhanced

a set of nontariff barriers to trade that both promoted their exports

to the U.S. and acted in new and in creative ways to restrict U.S.

exports to their markets. I think that is the long-term nature of our

trade problem. That is why this trade deficit goes up as it follows

a steady increasing trend, as you see. That a not a macro shortterm problem, that is a long-term problem and dates from the

1950’s and 1960’s, I would argue.

Ms. ROS-LEHTINEN. Thank you. Dr. Evenett?

Mr. EVENETT. Up until the last minute, I was about to say you

were going to witness something rare, which is three economists

agreeing on something. But let me say on the short-term questions,

I think we are all quite agreed. We have had this surge of investment in the U.S. which has needed to be funded somehow. The

U.S. consumers are not providing it, nor is the corporate sector, so

27

the money has come from abroad. That is fine. Everybody understands that, and I think we understand. Let’s talk about the stuff

I am less sure I agree with my colleagues on.

Thinking in terms of breaking it out between manufacturing and

services, I would argue that the downturn—the slowing growth in

service exports is primarily due to these lower incomes and recessions abroad. In fact, I would point to the recent forecasts of Professor Alan Dierdorf at the University of Michigan, one of our most

respected trade economists in the services area and on trade in

general, and he has been examining how the U.S. trade patterns

in services will vary over the next 2 or 3 years. As east Asia and

Latin America bounce back—we are already seeing evidence of

that—then service exports to those areas, an area where is U.S.

has strong comparative advantage, are expected to bounce back. I

think that will provide some good news in terms of the trade deficit

and the current account.

The second thing in terms of the interpretation of this trade liberalization over the last 30 years, I would argue that in fact certainly in the Uruguay Round, the U.S. made out like bandits, quite

frankly. You got reduced in your tariffs, but not by that much. A

lot of developing countries for the first time came onboard and seriously negotiated substantial reductions in their trade barriers, and

not just in the areas where the U.S. cares about—manufacturing,

some in services and a fair amount in agriculture—although there

is a lot more work that needs to be done in agriculture.

So I would argue that the U.S. did very well out of the Uruguay

Round, and I think the numbers on the gains to the U.S. which

have come out of the economic studies bear that out.

The second thing is in terms of an enhanced nontariff barrier.

For the U.S. ever to lecture the rest of the world on this is the pot

calling the kettle black. The spread of antidumping laws which was

founded on K Street and spread around with the help of others, has

now reached the point that 29 countries are using these laws.

Guess who is the No. 1 target? This country. It is this country’s exports. So we are seeing the spread of—if there is a spread of nontariff barriers, we started it in large part. That is one of the things,

I think antidumping should be on the Seattle negotiating list. You

can bet your life that USTR will want it to be there, and I can tell

you people on K Street don’t want it to be there, but it will be

raised by Australia, the European Union and many other countries,

and I do think we need to nip these nontariff barriers in the bud,

and let’s start with antidumping.

Ms. ROS-LEHTINEN. Thank you. Mr. Delahunt.

Mr. DELAHUNT. So you think it is time to get out of the stock

market?

Mr. BLECKER. We don’t give advice on that.

Mr. DELAHUNT. That is the measurement we will measure you

by.

A little bit of a primer here, if you will. You all referred to the

$1.2 trillion debt. Please explain that. Is that debt held by individual Americans, by mutual funds, by government agencies?

Please, just a real kind of concise, very simple explanation. Anybody.

28

Mr. BLECKER. I will tackle that, since I just wrote a report on

that and just read the latest Commerce Department release. Basically, this is debt held by foreigners that is their ownership of

American assets in excess of what we own abroad. So essentially

we are saying the foreigners own more bonds, stocks, Treasury securities, et cetera, et cetera, in the United States, compared with

what we own abroad.

Mr. DELAHUNT. It is a mix, in other words. It can be equities,

U.S. obligations, it can be private corporate instruments.

Mr. BLECKER. Right. But what has changed most dramatically in

the last 10 or more years that has caused the big swing are the

more liquid financial assets, especially Treasury securities. We now

have, I think, about $1.3 trillion worth of U.S. treasury securities

owned abroad. About half of that is owned by foreign central banks

and the other half is owned by private investors. That is somewhere around 35 percent or maybe almost 40 percent, somewhere

in that range, of all outstanding Treasury securities.

Mr. DELAHUNT. We have been debating the last several days regarding reducing American debt.

Mr. BLECKER. The government debt. You all have been talking

about government debt.

Mr. DELAHUNT. I understand that. My point is that is a component of the debt we are talking about.

Mr. BLECKER. Right.

Mr. DELAHUNT. What are the consequences? Clearly it is my

sense, no matter whether what occurs, that there will be debt reduction, which I presume would mean there would be a demand,

because it is such an attractive, secure investment in an unstable

world. What are the consequences for action that the United States

is now taking in terms of reducing public debt held by foreigners?

Mr. EVENETT. I think the first consequence is that obviously the

return, the interest the U.S. has to pay on existing long-term debt,

that rate of interest will start falling. The liquidity or the ability

to sell those debt instruments very easily will begin to be reduced

because there won’t be such a huge market for it.

I think what will happen, what this will do is, I mean, as these

long-term Treasury instruments get scarcer and scarcer, then you

will find that again the U.S. taxpayer will win out and that hopefully they will have to pay less and less interest on the remaining

Treasury bills which get issued.

Mr. DELAHUNT. I understand that. But my point is, what does it

do in terms of multilateral commercial relations, if anything?

Mr. EVENETT. I am not sure—the second point I was going to

make is that I remember 10 years ago a certain British Prime Minister announcing that the U.S.—the U.K. public debt was going to

be paid down in 15 years because of a huge budget surplus which

emerged at the end of the eighties. Within 3 years——

Mr. DELAHUNT. Who is that.

Mr. EVENETT. Within 3 years, Britain had, I think, a 5 percent

budget deficit, the currency had gone through the floor, and that

Prime Minister was out tending roses in her garden and no

longer——

Mr. DELAHUNT. ‘‘her’’ garden?

29

Mr. EVENETT. Her garden, yes. So my sense is that come the

next recession, this budget surplus will evaporate and we have a

short-term gain here. The issue is short-term windfall; the issue is

what to do with it.

Mr. DELAHUNT. Let me just followup in a question, because I

think you both, Dr. Blecker and Dr. Scott, talked about the devaluation, if you will, of the American dollar. I hear what you are saying, but I will tell you what causes me concern, and I don’t know

if I have any basis to be concerned. But if we do devalue, and I

don’t know how you go about doing that—you were talking about

bilateral devaluation, and, again, I am not conversant certainly

with the world money markets—but if that were done in any abrupt fashion, I mean, the impact in terms of the world financial

markets, including our own stock market and bond markets. One

thing I continue to hear is that the financial markets do not like

uncertainty and instability. It would cause me some concern.

Dr. Scott?

Mr. SCOTT. Yes——

Mr. DELAHUNT. I understand how it would create more fairness.

But, hell, I mean, we could end up shooting ourselves while we are

trying to solve a problem.

Mr. SCOTT. I think we don’t have to look very far back into our

own history, and remember back to the mid-1980’s, the last time

we had a trade deficit that reached 3 percent of GDP. At that point

the dollar was about 50 percent higher than it is today, perhaps,

maybe 40 or 50 percent higher, and we had an agreement that was

reached in the Plaza as I recall, although I am not a finance person, the Plaza in New York, as I recall, in roughly 1985, and it was

amongst the finance secretaries of the G–7 countries, and they

agreed to gradually reduce the value of the dollar.

So in my testimony I called for a gradual reduction of the dollar.

We have done it before, we can do it again. Though financial markets don’t like uncertainty, they like even less to lose. If they have

to bet against all of the major central banks of the G–7 countries,

they are going to lose. So if the finance ministers announce they

are going to reduce the value of the dollar, I think they can successfully do that, as they did in 1985 through 1987, when they reduced the dollar by about 50 percent.

Mr. DELAHUNT. Do you agree with that, Dr. Blecker?

Mr. BLECKER. Let me amend that very slightly. Actually the dollar fell quite precipitously between 1985 and 1987. It fell more rapidly in those years than it rose between 1980 and 1985. But it did

not cause a financial catastrophe, and I think the reason is what

Dr. Scott put his finger on, that this was seen as an agreed-upon

managed depreciation that the major countries were prepared to

stand behind. There were tacit target zones. That wasn’t quite announced, but it was understood the dollar would stay within certain limits.

I think if we take that approach, again, because I agree absolutely with the concern you raised, and that is my whole concern,

if we let the debt get out of hand, we will see that true hard landing for the dollar in the economy further down the road. The way

to get there is not by letting the dollar stay too low, but by easing

30

it down gradually. This is going to require cooperation with the

other countries.

Mr. DELAHUNT. Would that be the invisible hand of the marketplace? It will require active——

Mr. BLECKER. Active intervention and cooperation with our trading partners. What is it our trading partners want out of all of

these negotiations? Access to our markets. We need to insist on

reasonable equilibrium exchange rates as one of the things that we

look for in a normal trading relationship, whether it be with China,

Japan, Europe or anybody else.

Mr. EVENETT. I must say the postscript of this story is they had

to get together in 1988 and decide the dollar had fallen off too

much.

Mr. DELAHUNT. This is all above my pay grade.

Mr. EVENETT. So the fact is, the end of this story is it wasn’t

quite the smooth managed transition that perhaps has been suggested. I think you are absolutely right, sir, to suggest that this is

a very dangerous game to go down. To get people—trying to devalue the U.S. dollar means in effect scaring foreign investors. That

is what you have to do.

Mr. DELAHUNT. That creates that flight from our capital markets

which creates an impact which would slow down our economy,

which returns us to the issues that we talked about before in terms

of that surplus that I have very little confidence in, by the way.

I happened to vote not only against the Republican plan, but the

Democratic plan, because when I arrived here 2 years ago we had

a deficit. These estimates, these CBO estimates, they were telling

me we were going to have a $200 billion deficit; 2 months later,

170; 2 months later, 120; 4 months later, it broke 100; 3 months

later, hell, we can’t forecast 2 months ahead, let alone a decade

ahead. That is what really makes me nervous.

Mr. SCOTT. You notice none of us want to tell you what to do

with your investment funds.

Ms. ROS-LEHTINEN. Thank you so much, Mr. Delahunt. I want to

thank the witnesses for your excellent testimony. As you know, on

a bipartisan level, this trade deficit growing out of control is of increasing concern to us, even if we disagree on how best to handle

it. We look forward to continuing our conversations with you.

Thank you so much.

The Subcommittee is now adjourned.

[Whereupon, at 4:45 p.m., the Subcommittee was adjourned.]

(31)

A P P E N D I X

JULY 22, 1999

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