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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
        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

                        U.S. GOVERNMENT PRINTING OFFICE
64-701 cc                       WASHINGTON : 2000

                                 ______
                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVEN J. CHABOT, Ohio               EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE RADAVANOVICH, Califorina      JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    Richard J. Garon, Chief of Staff
            Michael H. Van Dusen, Democratic Chief of Staff
            John P. Mackey, Republican Investigative Counsel
                     Parker Brent, Staff Associate
                                 ------                                

        Subcommittee on International Economic Policy and Trade

                 ILEANA ROS-LEHTINEN, Florida, Chairman
DONALD A. MANZULLO, Illinois         ROBERT MENENDEZ, New Jersey
STEVEN J. CHABOT, Ohio               PAT DANNER, Missouri
KEVIN BRADY, Texas                   EARL F. HILLIARD, Alabama
GEORGE RADANOVICH, California        BRAD SHERMAN, California
JOHN COOKSEY, Louisiana              STEVEN R. ROTHMAN, New Jersey
DOUG BEREUTER, Nebraska              WILLIAM D. DELAHUNT, Massachusetts
DANA ROHRABACHER, California         JOSEPH CROWLEY, New York
TOM CAMPBELL, California             JOSEPH M. HOEFFEL, Pennsylvania
RICHARD BURR, North Carolina
             Mauricio Tamargo, Subcommittee Staff Director
        Jodi Christiansen, Democratic Professional Staff Member
                Yleem Poblete, Professional Staff Member
                   Victor Maldonado, Staff Associate
                            C O N T E N T S

                              ----------                              

                               WITNESSES

                                                                   Page

Pat Mulloy, Assistant Secretary for Market Access and Compliance, 
  U.S. Department of Commerce....................................     5
Robert E. Scott, Economist, Economic Policy Institute............    17
Robert A. Blecker, Professor of Economy, American University.....    19
Simon Evenett, Associate Professor, Rutgers University...........    22

                                APPENDIX

Prepared statements:

Pat Mulloy.......................................................    34
Robert E. Scott..................................................    64
Robert A. Blecker................................................    84
Simon Evenett....................................................   124
Chairwoman Ros-Lehtinen..........................................    32

        THE U.S. TRADE DEFICIT: ARE WE TRADING AWAY OUR FUTURE?

                              ----------                              

                        Thursday, July 22, 1999

                  House of Representatives,
             Subcommittee on International Economic
                                          Policy and Trade,
                              Committee on International Relations,
        Washington, D.C.
    The Subcommittee met, pursuant to notice, at 2:55 p.m., in 
room 2200 Rayburn House Office Building, Hon. Ileana Ros-
Lehtinen [chairwoman of the Subcommittee] Presiding.
    Ms. Ros-Lehtinen. Thank you. The Subcommittee will come to 
order. Thank you so much for being here this afternoon.
    The U.S. trade deficit has been the object of considerable 
concern and controversy among experts, both advocates of free 
trade as well as so-called protectionists.
    Some contend that the trade deficit is, as one headline 
read, ``bleeding the U.S. economy,'' draining our domestic 
markets of potential profits and American workers of jobs. Yet 
others claim that the growing deficit is a sign of a robust 
economy, that it indicates the strong role being played by 
America in providing markets for other countries struggling to 
recuperate from economic crisis.
    Trade has always played a critical role in the development 
of America's economy. It has helped to enrich our country's 
market size, productivity and competitiveness, while providing 
a vehicle for American ingenuity. However, with the economic 
prosperity which trade can bring comes the challenge of 
striking the delicate balance between trade that is free, yet 
fair.
    According to experts, America runs trade deficits because 
for almost 2 decades, foreign investment in the United States 
has exceeded American investment abroad. The deficit is made up 
of the difference between domestic savings and investment and 
because America invests more than it saves, it is forced to 
increase borrowing to pay for the rising tide of foreign goods 
and services.
    The trade deficit is also tied to the economic success or 
failure of our global trading partners, and can be tremendously 
influenced by economic crisis abroad, as recently illustrated 
by the Asian financial crisis.
    Should the growing deficit be a cause for alarm for us in 
America? The trade deficit, which according to a recently 
released government report hit an all time high in the first 3 
months of this year, reaching over $68 billion, has driven even 
those who most support trade liberalization to question how 
much longer the U.S. economy can continue to sustain such 
losses.
    Former Treasury officials have said that the ballooning 
trade deficit is the single biggest threat to our economy, that 
it could lead to a plunge in the dollar's value and to a 
tremendous sell off in stocks and bonds, spurring the U.S. into 
a recession.
    Some experts will point to the increasing trade deficit as 
a sign of America's purchasing power and of international 
confidence in the U.S. economy. They maintain that when trade 
deficits rise, unemployment drops, industrial production 
surges, and American corporations sell more goods and services 
than any other country in the world.
    By contrast, others argue that trade deficits, meaning 
declining real wages, increased American job insecurity, and 
constitute an erosion of America's industrial base, citing 
recent statistics from the U.S. Department of Labor that over 
200,000 workers have lost their jobs because of either shifts 
in production to Mexico or Canada or because of increased 
imports from those countries.
    Some claim that trade deficits have no relationship with 
the level of employment in manufacturing and, in fact, claim 
that cheap imports have helped keep inflation low in the United 
States during a period of unusually high employment and heavy 
American spending.
    Those who argue that trade deficits do not have a 
detrimental effect state that years in which the U.S. has run 
trade deficits have also been years of increasing income for 
the average American.
    Yet, in either case, there exists concern across the board 
that America is becoming a market of last resort for our 
foreign trading partners and that the increasing excess with 
which we import over what we export is putting over $20 billion 
more into foreign hands each month. Regardless of what we 
individually believe to be the causes of our increasing trade 
deficit, our challenge in Congress will be to develop policies 
which will create balanced trade relationships with our global 
partners and which seek to restore the balance of trade.
    I look forward to the testimony of today's witnesses and to 
their recommendation as to how we can manage the trade deficit 
while maintaining freer and more open trade markets. I would 
like to recognize our Ranking Member, Congressman Bob Menendez 
of New Jersey.
    [The prepared statement of Ms. Ros-Lehtinen appears in the 
appendix.]
    Mr. Menendez. Thank you. Let me give thanks to our 
witnesses. I just ask unanimous consent to have my full 
statement entered into the record and paraphrase it.
    Ms. Ros-Lehtinen. Without objection.
    Mr. Menendez. I appreciate all of them coming here today. I 
specifically appreciate Dr. Simon Evenett, an associate 
professor at Rutgers University, the State University of New 
Jersey, coming at our invitation. We have all seen the latest 
headlines this week highlights a new trade deficit record of 
$21.3 billion. Certainly it is a timely indicator for its need 
for the Congress to look at some of the causes of the trade 
deficit and what we can do to boost U.S. exports abroad.
    There is a concern that I have, it is in part the statement 
that Alan Greenspan made as the Chairman of the Federal Reserve 
Board at the 35th Conference on Bank Structure and Competition 
when he said, ``There is a limit to how long and how far 
deficits can be sustained, since the current account deficits 
add to the net foreign claims on the United States.'' .
    In essence, I guess what he was saying is the current 
account deficit puts the economic fortunes of the United States 
in the hands of foreign investors.
    I know that some of these issues are very difficult and 
there are no single solutions, but think the one thing we can 
definitely do that we began to do through the Committee is a 
question of seeking to open markets and to further promote the 
opportunities for American businesses and manufacturers and the 
providers of services to seek those markets abroad and to 
promote, and that is why I am such a strong supporter of the 
Export Enhancement Act, which finds ways to increase American 
exports and gain market access for American companies and 
products.
    It certainly is a good start, but it is minor when you 
think about our competitors like the European Union. We just 
had some of the new members of the European Union's leadership 
here in a meeting with its full committee the other day. Of all 
of the things that they could talk about, the one thing they 
clearly focused on was the trade issues, for which they have a 
surplus with us, a growing surplus, and they have made export 
promotion, contract securement and market access priority 
issues at the highest levels of their governments. We need, I 
believe, to be doing the same.
    With that, Madam Chairlady, I look forward to the witnesses 
and what their testimony can do to enlighten us on some of 
these issues.
    Ms. Ros-Lehtinen. Thank you so much, Mr. Menendez. I am 
pleased to recognize Mr. Sherman of California.
    Mr. Sherman. Thank you. We all know how important this 
trade deficit is. I would like to respond to the frequent 
statements of those who are apologists for the present do-
nothing policy.
    First, we are told that this trade deficit is the sign of a 
robust economy. That is like an obese person saying it is a 
sign of health that they are getting enough food. But also keep 
in mind, 5 years ago, 10 years ago, when our economy was in 
giant trouble and the Japanese economy was doing very well, we 
had a trade deficit, and we were told at that time we dare not 
do anything about it because we need their help, because they 
are so robust in helping our economy, which at the time was in 
dire straits.
    So when the Japanese economy does well and the American 
economy does poorly, we are told do nothing, allow lopsided 
trade. Now when the situation is reversed, we are told for the 
same reason, to allow the same imbalance.
    We used to be told that it was our fault, because it was 
the Federal budget deficit that caused the trade imbalance. I 
know some of the real young people here will not remember that. 
But for how many years were we told it isn't the protectionism 
of the trading partners, it is the moral fault of a Congress 
that keeps spending more than it takes in? Now the United 
States has a surplus and all these other countries have 
deficits, and for some reason, all the do-nothing supporters of 
one-way free trade have forgotten how to pronounce the 
arguments that they made 10 years ago, those arguments that 
said that a country that runs a budget deficit will inevitably 
run a trade deficit.
    It only works as an apology for a do-nothing policy for the 
United States.
    We are told that there is nothing we can do, which really 
means there is nothing we can do without upsetting some foreign 
governments and upsetting some powerful interests in the United 
States.
    We are told that those of us who want, if necessary, to 
threaten a reduced access to the U.S. market are 
protectionists, even if our purpose is to simply use that as a 
threat in order to break down the walls that other countries 
have put around themselves to prevent American exports.
    We are told somehow that it is a free trading system, we 
are just losing. But I come from a tourist city, Los Angeles. I 
don't know if you see the same thing in southern Florida. But 
people come to the United States, and they don't want to see 
Olvera Street, they are not so sure they want to see 
Disneyland, they want to go to the discount stores and buy 
goods produced all over the world, because they are sold more 
cheaply in the United States, at retail, than you can get them 
wholesale back in their own countries. But this is a trading 
system and we are just losing.
    Finally, I would point out as to China, which is the most 
lopsided, not the largest trade deficit, but the most lopsided 
trading relationship in the history of millennium life, we keep 
pretending that society lives by the rule of law, so if we can 
just get them to change their laws, we accomplished something. 
But what happens? We change our laws and we tend to, every 
economic enterprise in the United States, say they have MFN, 
you can bring in their goods and make a big profit, and don't 
you want to do that? Of course, business people do. But if you 
are a business person in China, I don't care whether the tariff 
is 20 percent--I do care--whether it is 20 percent or 0 
percent. But even if the tariff were 0, you can get a call from 
a party cadre, saying do you really want to buy $1 million or 
$100 million worth of United States goods or a telephone system 
or whatever? Because if you do, well, the party might frown on 
that. You might need to be sent out for reeducation if you do 
that. It doesn't take very much to get a careful or smart 
Chinese businessman to say no to American goods. It only takes 
a phone call, and you can't take a phone call to WTO court.
    I thank you for the time.
    Ms. Ros-Lehtinen. Thank you.
    [The information referred to appears in the appendix.]
    Mr. Menendez. If I just may, I just want to tell my dear 
colleague, who I always find incredibly interesting in terms of 
the way he presents his view, and often on point, that there 
are some of us that are robust and feel robust in the process.
    Mr. Sherman. Robust and----
    Mr. Menendez. You are saying something about overweight.
    Ms. Ros-Lehtinen. That is the old Mr. Menendez.
    Thank you so much for those enlightening comments. I 
thought only ladies talked about weight.
    I am pleased to introduce our first panelist, Mr. Patrick 
Mulloy, Assistant Secretary of Commerce for Market Access and 
Compliance, the U.S. Department of Commerce's international 
trade administration. In this capacity, Mr. Mulloy directs an 
extensive staff of international trade specialists to improve 
market access for U.S. companies to international markets by 
removing foreign barriers to U.S. exports, and ensuring the 
compliance of foreign countries to trade agreements with the 
United States. Prior to his position at the Department of 
Commerce, Secretary Mulloy served in various senior positions 
with the staff of the U.S. Senate Banking Committee, where he 
helped formulate such important international trade and finance 
legislation as the Export Enhancement Act of 1992 and the 
Omnibus Trade and Competitive Act of 1988.
    We welcome Secretary Mulloy with us this afternoon. Your 
statement will be entered in full in the record, and feel free 
to summarize your statement.

STATEMENT OF PAT MULLOY, ASSISTANT SECRETARY FOR MARKET ACCESS 
          AND COMPLIANCE, U.S. DEPARTMENT OF COMMERCE

    Mr. Mulloy.  Thank you, Madam Chairperson.
    As you mentioned, as someone who worked for 15 years on the 
staff of the Senate Banking Committee, it gives me great 
pleasure to appear before this Subcommittee to talk about the 
large and growing U.S. trade deficit.
    As you noted, I have a prepared statement which I will have 
for the record and I will just make some remarks here to try to 
give you an outline of what I think is happening.
    Let me begin, Madam Chairman, by saluting you and this 
Subcommittee's efforts to draw attention to this important 
matter. You had a similar hearing last July; and last October 
the Congress, recognizing the key importance of this issue, 
established the Trade Deficit Review Commission, where you had 
12 people, 3 appointed by Mr. Hastert, 3 appointed by Mr. 
Gephardt, 3 appointed by Senator Lott, and 3 appointed by 
Senator Daschle, and they are getting down to work now. In 
fact, they are going to begin their first public work on August 
19th.
    This week, my Department released data showing that for the 
first 5 months of this year, the deficit in goods and services 
is running at an annual rate of $225 billion, up 50 percent 
over the first 5 months of last year. The merchandise deficit 
so far this year is at an annual rate of $307 billion.
    In understanding these huge figures, the most important 
point to keep in mind is that the recent growth in the deficit 
stems in part from the fact that the U.S. economy is growing 
rapidly and others aren't.
    The second important point to note is that the recent 
deficit increase stems principally from the export side. 
Overall imports so far this year are only up 6 percent, a very 
modest rate. However, import penetration, imports as a 
percentage of our total GDP, have not increased since 1997.
    This is not to say there have not been significant 
increases in individual sectors, such as steel, where the 
administration has acted to halt the flood of imports but, 
overall, imports have not risen that rapidly.
    The real difficulty is in our exports. Typically our 
exports have been growing about 7 percent a year, but they fell 
1 percent last year and so far this year have fallen another 
2.4 percent. This decline is serious. It is affecting jobs in 
America's farms and factories.
    The export decline does not reflect a drop in U.S. 
competitiveness. In fact, the U.S. share of exports to foreign 
markets last year was 15.2 percent, up significantly from the 
14 percent average in recent years.
    What it reflects is how slow foreign markets are growing, 
not just in Asia, but in Europe. Domestic growth is sluggish in 
these countries, and demand for imports, including from the 
United States, is stagnating.
    The most dramatic drop in exports took place in Asia, where 
in 1998 exports fell by 15 percent and so far in 1999 they have 
fallen a further 2 percent.
    On a bilateral basis, our largest deficit is with Japan, 
where over the last 12 months it has reached $66 billion.
    Our second largest bilateral deficit, $57 billion last 
year, is with China. We import 5 times from China what we 
export to China, meaning that just to keep the deficit from 
growing any more, our export growth rate has to be 5 times as 
large as our import growth rate with that country. In the last 
3 years, however, the import growth rate has been about 16 
percent a year, while our export growth rate has been about 7 
percent, and so far this year our exports to China are actually 
down 5 percent.
    As I noted, China runs a $57 billion trade surplus with the 
United States but, overall, China only has a global trade 
surplus of $44 billion, so their trade with us is where they 
are accruing their foreign exchange earnings.
    With the focus on Asia, it is frequently not realized how 
much our trade position has deteriorated with Europe. In 1991, 
the United States had a surplus of $19 billion with Europe; in 
1998, our deficit had reached $32 billion, a negative swing of 
$51 billion with Europe in 7 years.
    With respect to our NAFTA partners, the story of strong 
U.S. domestic growth pulling in imports also applies. So far in 
1999, the trade deficit with Mexico is $24 billion at an annual 
rate, compared with $14 billion last year, and the deficit with 
Canada is going to be running at a $27 billion annual rate 
compared with $13 billion last year. The decline of the 
Canadian dollar and Mexican peso against the U.S. dollar over 
the last 3 years also plays a role in creating these deficits 
with our NAFTA partners.
    Overall, there is nothing on the immediate horizon to 
suggest changes in our recent trade trends. U.S. economic 
growth, even though expected to slow in 1999 from 1998, should 
still be relatively strong compared to most of our major 
trading partners. In Europe and Japan, expectations are for 
slow growth to continue.
    We cannot, however, blame all of our deficit on the Asian 
financial crisis and on the recent difference between U.S. and 
foreign economic growth. Longer-term forces are also at work, 
including the continued existence of trade barriers that have 
held back U.S. export opportunities. Amazing though it may now 
seem, from 1894 to 1970, the United States during that 76-year 
period had an unbroken string of trade surpluses. But since 
1970, we have had virtually an unbroken string of merchandise 
trade deficits that have accumulated to over $2 trillion.
    Most of our deficit occurred in the last 15 years. Nearly 
80 percent of the deficit is with Asia and fully 40 percent of 
the total was with one country, Japan.
    The recent rise in the trade deficit reflects, in part, the 
health of the U.S. economy. Our unemployment rate is extremely 
low by historic standards. Inflation is low, economic growth 
continues above its long-term trend, and real incomes are 
rising. In addition, the rise in the stock market has 
encouraged consumer spending. The biggest negative probably is 
our personal savings rate, which is close to zero.
    While current economic conditions, at least for the United 
States, are excellent, we can't help but be concerned with 
running extremely high current account deficits long into the 
future. To finance these deficits, we must borrow from abroad. 
Thus, we become ever more dependent upon receiving and 
retaining foreign capital. The net debtor position of the 
United States, in fact, stood at $1.2 trillion in 1998. You 
have to remember just maybe 10 years ago, we were the largest 
creditor Nation in the world. We are the largest debtor Nation 
in the world, and that is increasing rapidly.
    If current trends continue, our total foreign debt will be 
close to $1.5 trillion at the end of 1999.
    Another factor that must be considered is the impact of 
trade deficits on the composition of our employment. The drop 
in our exports has had a serious effect on manufacturing 
employment in the United States. While overall employment in 
our country is at record levels and, in fact, has grown by 2 
million jobs in the last year, there are 422,000 fewer 
manufacturing jobs than a year ago. Many of these losses are 
directly attributable to the decline in U.S. exports globally, 
especially to Asia.
    Few actions we can take domestically would have as great an 
impact on our trade deficit position as restoration of growth 
in our major export markets. The key here is in economic 
policies in Europe and Japan that would promote domestic-led 
growth rather than export-led growth in those countries.
    Former Secretary Rubin, when he was still Secretary of the 
Treasury on June 10, said this: ``It is critically important 
that Europe and Japan do their part, because the international 
system cannot sustain indefinitely the large imbalances created 
by the disparities in growth and openness between the U.S. and 
its major trading partners.''.
    On July 13, Secretary of the Treasury Summers said: ``We 
continue to watch the Japanese economy carefully and to believe 
that what is most important for Japan is the restoration of 
domestic demand-led growth.'' .
    The need for these other countries to grow is clear as our 
current account deficit position is unsustainable in the long 
run. Chairman of the Federal Reserve Board Alan Greenspan, in 
something that Mr. Menendez referred to earlier, said on May 
6th, ``There is a limit to how long and how far deficits can be 
sustained, since current account deficits add to net foreign 
claims on the United States. Unless reversed, our growing 
international imbalances are apt to create significant problems 
for our economy.'' .
    In his testimony today before the House Banking Committee, 
which I was able to get ahold of, Mr. Greenspan said this: ``As 
our international indebtedness mounts, however, and foreign 
economies revive, capital inflows from abroad that enable 
domestic investment to exceed domestic saving may be difficult 
to sustain. Any resulting decline in demand for dollar assets 
could well be associated with higher market interest rates, 
unless domestic savings rebounds.'' .
    Chairman Greenspan went on today to reinforce what 
Secretary Rubin said about the need for Japan and Europe to 
grow faster. He said, ``Working to offset somewhat this 
anticipated slowing of the growth of domestic demand, our 
export markets can be expected to be more buoyant because of 
the revival in growth in many of our important trading 
partners.'' .
    Now, that depends on whether they actually get going on 
whether they are going to be able to turn around this 
situation.
    We need to be working to bring the deficit down over the 
long-term. We must continue to urge our partners to initiate 
domestic growth strategies and we must also foster conditions 
for a restoration of our trade position when foreign markets 
recover, by assuring that foreign markets remain open by 
enforcing our trade laws and promoting exports.
    While I do not believe that noncompliance by our trading 
partners with trade agreements is the major factor in the 
growth of our trade deficit, we must be sure that countries are 
keeping markets open and complying with the trade agreements 
they sign with us. We need to assure Americans that the 
agreements we negotiate are honored and that American firms and 
workers obtain the benefits and opportunities we have bargained 
for.
    The Commerce Department, as never before, is increasing its 
monitoring of our trade agreements. When we find indications of 
violations, we are being very aggressive in taking up these 
matters bilaterally or working with USTR to have them referred 
to the appropriate dispute settlement forum, whether in the 
WTO, NAFTA or elsewhere.
    The Commerce Department is also committed to swift 
enforcement of the fair trade laws. These are the ones we put 
up to stop surges of foreign imports like we have had in steel 
over the last year. During this first 6 months of this year 
alone, we have either completed or are in the process of 
conducting more than 65 antidumping or countervailing duty 
investigations.
    But beyond compliance and enforcement, we must be prepared 
to take advantage of export opportunities as foreign growth 
returns. U.S. firms need to take more advantage of overseas 
markets.
    Therefore, we are working with the Interagency Trade 
Coordinating Committee set up by the Congress and chaired by 
the Commerce Department, and we continue to develop new 
strategies and approaches to assisting U.S. firms and workers 
with trade promotion. ITA's units, including the Foreign 
Commercial Service, the Trade Development unit, and my own 
market access and compliance unit, are working together to help 
small and medium-size firms take advantage of export 
opportunities.
    Before closing, I want to thank you, Madam Chairman, and 
the other Members of the Subcommittee, for your assistance 
during the International Relations Committee's reauthorization 
of our budget. I particularly want to thank you for drawing 
attention to the critical work done by the Market Access and 
Compliance Unit which I head.
    I am pleased that you and your colleagues appreciate our 
efforts to access foreign markets for American firms and 
workers and to get our trading partners to comply with our 
trade agreements. If we can obtain the funding requested in the 
President's 2000 budget, we will be able to reach out and help 
small firms, particularly the small- and medium-size firms that 
are the engines of growth in our economy.
    As I noted to you during my last appearance here, the 
number of people that we have to maintain and enforce trade 
agreements has actually been in decline over the last several 
years because we have not been funded at the levels requested 
by the President. I will give you an example. We used to have 
10 people working on China. We now have 4 or 5. That is just an 
intolerable situation.
    Finally, I want to thank you, Madam Chairman, again, and 
your Subcommittee, for the work on the trade deficit issue. You 
have kept after this issue. It is a very important one. You 
might want to have your staff pass on the records of your 
hearings to the congressionally created Trade Deficit Review 
Commission that I mentioned earlier in my testimony. I think 
that commission would find the work you have done very 
beneficial.
    I thank you again. I will be pleased to try to answer any 
of your questions.
    [The prepared statement of Mr. Mulloy appears in the 
appendix.]
    Ms. Ros-Lehtinen. Thank you so much, Secretary Mulloy. The 
U.S., as you pointed out, has one of the strongest and most 
vibrant economies in the world, while at the same time 
maintaining its highest trade deficit in history. Japan, on the 
other hand, in spite of the financial difficulties, is still 
running a surplus. Could you please elaborate on these two 
seemingly incongruous outcomes? What are the variables that 
play in these two situations and what lessons can be learned 
for improving our trade balance?
    Mr. Mulloy.  It is true, as Congressman Sherman referred to 
before, even when Japan was growing more rapidly, we had trade 
deficits with Japan. They did begin to come down from the 1987 
period down to about the 1993-1994 period. Then when they went 
into this economic recession because they weren't growing and 
couldn't take--are not taking American imports, our exports 
declined and the trade deficit began to increase with Japan 
again.
    That is why the administration is leaning so hard on Japan 
to go to export--not export-led growth. In other words, what 
they tend to do when they get into a recession, instead of 
trying to increase domestic-led growth, they rely on export-led 
growth to get themselves out of their recession, meaning they 
want to increase their trade surplus with the world. They are 
running a worldwide surplus of well over $100 billion.
    Second, Japan, every country in the world, is frustrated by 
the fact that they do run a pretty closed market over there. It 
is very difficult, even if it is not the government itself, you 
have the companies acting in collusion to restrict access to 
that market. We go into it time after time. My Under Secretary 
is going over there to take up the construction issue next 
week. We have 0.02 percent of their construction market. If we 
could just get 1 percent of that market, instead of selling $50 
million, we would have $2.5 billion of construction to that 
market. So that is a tremendous problem, and it is industry 
after industry that you find this problem with the Japanese.
    Ms. Ros-Lehtinen. Another question, Secretary Mulloy. What 
is your view on the proposal espoused by many, including one of 
the panelists coming up after you, that the U.S. should 
gradually devalue the dollar as a way of improving the trade 
balance? What short-term and long-term effects do you think 
this would have on American competitiveness or on the global 
market?
    Mr. Mulloy. Madam Chairman, as you know, even the President 
doesn't talk about the value of the dollar. They pretty much 
restrict the Treasury Department to talking about the value of 
the dollar. But if you look at--I was reading an article in the 
Wall Street Journal the other day about the growing deficits 
with Canada and Mexico, and the Wall Street Journal article 
referred to the fact that the dollar has increased in value 
dramatically versus the peso and the Canadian dollar, and that 
does contribute to the trade deficit.
    The problem is when we need to attract foreign capital, if 
the dollar declines in value it makes it harder to attract the 
foreign capital you need to finance your borrowing, plus you 
are borrowing to finance your trade deficits. If your currency 
is decreasing in value, in order to get those borrowings, you 
have to raise your interest rates. So it is kind of a difficult 
situation. But I am not going to comment on the value.
    Ms. Ros-Lehtinen. OK. One last question from you. You 
contend the best solution to alleviate the trade deficit is the 
economic recovery of our trading partners. We understand, 
obviously if their relative economic position were to improve, 
the belief is they would be more readily able to purchase U.S. 
goods and services. What policy recommendations would you make 
to assist in the economic recovery of those countries if that 
were to be the one thing that would help us?
    Mr. Mulloy.  I think there was a big debate in the Congress 
last year about the whole IMF Program and the Congress decided 
that it was in our national interest to provide that money to 
the IMF to help restart the economic growth in these Asian 
economies which fell off so dramatically over the last 2 years. 
So I think that will be of assistance to us.
    The other thing is, as Secretary Summers and others have 
talked about, Europe. They have not been growing like people 
had hoped they would be growing. The other thing about Europe 
is, when they moved to the Euro, people thought it would 
actually strengthen in value against the dollar, but in fact it 
has declined by about--I guess it was 14 percent. I think there 
has been some recent strengthening of the Euro. Both of those 
result in our trade deficit problem with Europe becoming worse.
    So we have really got to get Europe to strengthen domestic 
demand, have Japan strengthen domestic demand. If that happens, 
many of the smaller economies that count on those markets to 
grow will also grow, which should help us then begin to change 
some of these trends that we are on in terms of being what many 
people think we are, the consumer of last resort in the world 
market.
    Ms. Ros-Lehtinen. Thank you, Mr. Secretary. Mr. Sherman.
    Mr. Sherman. Thank you, Madam Chairman. Just a brief 
factual question, I don't know if you or your staff have the 
answer. What were our exports to China last year?
    Mr. Mulloy. Do we have that? Let me just--our total deficit 
was about $57 billion. We exported about $14 billion to China 
last year.
    Mr. Sherman. That is goods and services?
    Mr. Mulloy. Yes, that is correct.
    Mr. Sherman. There is an advertisement in a leading 
publication that claims that we exported $18 billion of goods 
and services to China last year.
    Mr. Mulloy.  Congressman, let me have that figure checked. 
I remember I used to say that last year--that in 1997 our 
exports to Europe grew in 1 year by more than our total of our 
exports to China that same year. That year I think we were 
using about a $13 billion figure. It might have gone up.
    Mr. Sherman. If you can get back to me, hopefully even 
today just on what that number is, perhaps we can find out what 
the Business Coalition for U.S.-China Trade is doing with the 
$18 billion figure.
    Mr. Sherman. It has been said that we need to maintain a 
high dollar, which then leads to trade deficits, in order to 
attract foreign capital. I would simply comment that if the 
rest of the world would buy our goods, that would bring 
billions of dollars into the United States, which we could then 
invest. Likewise, if we were to be able to reduce imports, that 
leaves us with billions of dollars more available for us to 
invest.
    So I don't think that you need a trade deficit in order to 
provide adequate funds for the United States. In fact, a trade 
deficit is the export of money and the importation of goods. So 
I was surprised that on several occasions, Japan, which is 
already running this unbalanced trade relationship with us for 
decades, was able to go into the currency markets and 
deliberately manipulate a lower yen and a higher dollar without 
any protest from the United States.
    I would just like to know whether we think it is just fine 
for countries that are already having unbalanced malignant 
trade relations with us, to manipulate the currencies so as to 
increase their trade surpluses with us.
    Mr. Mulloy. Congressman, I should note that when I was on 
the staff of the Senate Banking Committee, Members were very 
concerned about this type of thing where countries manipulate 
their currencies to gain a competitive trade advantage. In 
fact, they put a provision in the 1988 trade bill that the 
Treasury has to do a report once a year and update it annually, 
identifying countries that are manipulating their currencies to 
gain trade advantage. In the early years, they did identify 
Korea and Taiwan.
    Now, coming back to Japan, I did note that there was an 
article in the Washington Post a little while ago that when the 
Japanese did that, Secretary Summers did complain publicly that 
that was inappropriate, and then they quoted Fred----
    Mr. Sherman. Mr. Secretary, with all due respect of 
statements of inappropriateness, the correct response is to 
enter the markets immediately on the other side at double the 
level and to force the yen much higher than it would have been 
if Japan--the idea, somebody shoots at you, and the response is 
to send their mother a note. No wonder we are losing.
    I might add, our whole approach, say, on construction in 
Japan is to use regular mechanisms to try to go from .2 percent 
of the market to .3 percent of the market, and then come back 
and say the regular mechanisms are working.
    Again, one of the defenses of our present approach is that 
occasionally we do get a crumb, but as I understand it, it is 
our policy never to do anything more than send a note when 
other countries enter currency markets and that we have never 
entered currency markets for the purpose of increasing our 
trade position. When I say never, I mean never in recent 
history. Is that correct, or perhaps you don't know?
    Mr. Mulloy.  I honestly don't know. The intervention in the 
markets dealing--they use what they call the Exchange 
Stabilization Fund over at the Treasury Department, which was 
set up by Congress, I think in 1935. But that is all a Treasury 
function. It is not an interagency decision, so I can't really 
comment when they are doing it.
    Mr. Sherman. Finally, in your comment you talked about the 
low U.S. savings rate. I would like to point out that I think 
we may have a very high savings rate, disguised by our 
accounting system. An economist would tell you that income is 
not only realized income, but unrealized income. So let me give 
you a typical circumstance.
    A family might make $5,000 in a month, net, take home, and 
at the same time, they look at their Dreyfus statement and the 
value of their assets, money available in their hands right 
now, has also gone up $5,000. A true economic view of that 
family is that they are now $10,000 richer before they sit down 
to pay their bills.
    So they sit down and pay their bills, they spend $5,000. 
Our accounting system, then, because it ignores unrealized 
income, says, your net wages were $5,000, you spent $5,000, 
your savings was zero. But really looking at the entire 
situation, no, they made $5,000 by working, they made $5,000 
profit by having their money in the stock market. The family 
made $10,000, they spent $5,000 on expenses, and they let the 
other $5,000 remain in the market, just as if they had 
liquidated Dreyfus and put all the money in T. Rowe Price, they 
now have, whether you churn the money or leave it in--leaving 
your profits on the table is investing those profits.
    So I don't know whether it is your Department that 
calculates the savings rate, but do you know of any analysis of 
the U.S. savings rates that takes into account the huge leave-
it-in-the-market savings? I think that American families have 
reaped hundreds of billions of dollars. ``Reaped'' may be the 
wrong word-have accrued, have obtained, have available to them-
hundreds of billions of dollars of profits in the stock market, 
and they have in effect reinvested those by keeping that money 
in the market. I think if we look at it that way, we may have a 
very high savings rate. But that won't keep those who want to 
apologize for our present do-nothing trade system from saying 
oh, no, it is not the other countries' fault, it is the low 
savings rate in the United States. That is why we have a trade 
deficit.
    Now, to give you a moment to comment.
    Mr. Mulloy.  Congressman, let me come back to you now. This 
only covers goods? I am sorry, what I have got now from the 
Department, U.S. exports to China in 1998, but it is only 
goods. It is $14.3 billion. I will try and find out what the 
services portion is, and I will get back to you, Congressman.
    Mr. Sherman. Although if anything, you tend to support this 
add that I questioned. If it is $14.3 in goods, I am sure it is 
probably another 3.5 or 3.7 in services. Thank you.
    Mr. Mulloy. We will check that and get back to you.
    Congressman, on the other, I am not an expert in terms of 
the savings rate. I have read the articles in the press that 
make the argument that you have put forth here. I just am not 
an expert in how savings rates are calculated. The Treasury 
Department, again, is the place that both on exchange rate 
policy and on the savings rate, you would probably want to hear 
from them.
    Mr. Sherman. I hate to think that only your Department 
would be allowed to have this much fun. I am sure that at some 
future time we will spread it around the administration.
    Mr. Mulloy.  But I think that report I referred to, where 
they give it to the Congress once a year and then update it 
every 6 months, is very important. That looks at the 
international economic position of the United States and looks 
at these kinds of issues that you are very interested in, the 
currency manipulation and that sort of thing.
    I know the last time I testified before the Senate Banking 
Committee, Mr. Guitner from the Treasury was with me and the 
Committee Members asked him to make sure that that report was 
submitted on a timely fashion because they are very interested 
in it over there.
    Ms. Ros-Lehtinen. Thank you. Mr. Delahunt.
    Mr. Delahunt. Yes. I really want to applaud the Chair for 
calling this. I think this is really a very important 
opportunity for Members to educate themselves. I would 
encourage the Chair to on a regular interval have these kind of 
hearings, because I think this really gets to the crux of what 
we are about as a Subcommittee and obviously is a critical 
issue given the amounts of these deficits.
    Let me just pick up and make some observations upon what 
the comments by my scholarly colleague from California were in 
terms of these particular issues, because, it is often stated 
on the floor of the House by Members from both sides of the 
aisle, this grave concern about the personal savings rate of 
Americans.
    It is used often in our debate and our discourse. We have 
got to be really clear about our definitions here. Because it 
is an accepted fact that Americans do not save. I was going to 
ask the question out of ignorance, but I think I have been 
educated by my, like I say, my colleague from California out of 
his background and experience. That is why it is so much fun to 
serve with Mr. Sherman.
    But the reality is, you are here, Mr. Secretary, you make a 
statement that you express some concern about our deficit 
because of the investment by foreigners in our economy as being 
a source of a dynamic influence in terms of our own growth. But 
if he is right, and I think he is right, and I think upon--and 
I would like to have a followup from members of your staff, and 
there were some other folks back there shaking their head in 
the affirmative--if he is right, I would like to have it 
confirmed; because when we talk about the personal savings of 
Americans, most of us are into 401(ks). Does that include that 
particular savings rate? The growth of our pension plans that 
are invested in equities, in the markets, is this part of that 
definition? We have really got to be clear about it. I think it 
is important that you, the 435 of us that serve begin to 
understand that.
    Again, I was unaware and I was going to ask that question, 
like I say. But my sense is many foreigners invest in the 
United States because of our political stability. That is why 
we are the beneficiaries of foreign investment, because if you 
are in South America or Asia or in Third World countries, the 
lack of political stability is sufficient in and of itself for 
foreign capital to come to these shores.
    I don't know if that is going to change anytime soon, 
because I continue to see political instability all over the 
globe. Feel free to interrupt me.
    Mr. Mollohan. Mr. Congressman, I agree with you that part 
of the ability of the United States to attract these savings is 
because we are kind of an isle of tranquility, politically and 
other ways, and even economically, particularly with the 
collapse of these Asian markets, for capital. But it is 
important to realize that in the old days, people used to think 
trade flows would determine currency values. What is going on 
is that the capital flows have a big impact on the currency 
values. So while we are attracting that flow, it does have an 
impact on----
    Mr. Delahunt. The strength or weakness of the dollar.
    Mr. Mulloy.  Exactly.
    Mr. Delahunt. I will tell you what I have a problem with. I 
share Mr. Sherman's frustration in terms of our bilateral 
relationships with countries that either through tariffs or 
just administrative impediments restrict access to our markets. 
We are going to be debating--is it next week--the MFN issue on 
China.
    I mean, put aside some very valid concerns about human 
rights abuses, about an array of other issues, to just simply 
restrict it to the trade issues, we have an imbalance of $57 
billion. I want to open up trade. I am a fair-trader. But I 
don't see--all I keep hearing from New England corporations 
that do business in China is, we want you to support MFN 
because the potential is there. We have had potential there for 
a long time. I am getting very tired of potential. It is like 
that minor league ball player that just, he would come and go 
back again from the majors, and it would happen. Potential. 
Meanwhile, we are running a $57 billion trade deficit.
    My proposition in the past to MFN has been predicated on 
the fact of, hey, until you open up, until you remove 
impediments, whether they are administrative in nature or 
delays that occur, this is part of a bilateral negotiation, 
including ascension to WTO. Start playing it straight with us. 
There is no reason to have this kind of a deficit.
    Brad's observation about sending the note home from the 
teacher, I would suggest we just have to get a little tougher, 
because my understanding is that in terms of their export 
market, we are the ultimate, we are the last--what your term 
was, the consumer of last resort. We represent 35 percent of 
their export market and they are 2 percent of ours?
    We have leverage that I suggest that we are not utilizing 
now to say, come on, if you want to engage in an honest and 
fair, free, bilateral trade relationship, that is fine. But we 
are running out of patience.
    Mr. Mulloy.  Yes, sir.
    Mr. Delahunt. If I may indulge the Chair for just another 
minute, your argument, which is a good argument in terms of how 
we should encourage these nations with whom we have a trade 
deficit, encourage them to grow their economies domestically, 
gee, that is a hell of a trick. It really isn't easy. I mean, 
we don't have a vote, in the Japanese Parliament, and I don't 
know of anybody in this Committee that is a member of the 
Politburo in China. We might do lots of things, but to 
influence their economic policy to focus on their domestic 
markets, I mean, I don't know whether that is realistic or not.
    Mr. Mulloy.  On the point about China, according to if we 
believe their figures, it is not the differences in growth 
rates that have been the problem in China. They have been 
growing actually, if you look at their figures, faster than the 
United States. With China it has clearly been that we have many 
multi-tiered trade barrier problems in China.
    One of the efforts was in these WTO negotiations to get at 
those and try and take care of those in this WTO package. The 
Congress will be the ultimate decider of whether the package, 
if we get it, is good, because you have to change the law to 
give China permanent MFN if you want to do the WTO deal. So I 
would again urge you, when you get that package, to probably do 
some hearings to really get a good evaluation of it, because 
that is a very good point that you made, Congressman.
    Finally, I want to thank this Committee again. As I pointed 
out, we are the one group in the U.S. Government, we are 
charged with monitoring and enforcing trade agreements. We have 
149 people. We have 28 other people in my unit, paid for by 
AID. We have 149 people, and this is global. I mean, we 
honestly can't do the job with those kinds of resources.
    Mr. Delahunt. If I could interrupt for one moment, I agree 
with you there. I think with this Committee and the leadership 
of the Chair and the Ranking Member and the entire 
International Relations Committee, they have been extremely 
supportive of supporting the exportation of American goods and 
services and opening up other markets. I agree, I think that 
you are underfunded. I don't think you have the resources that 
are necessary to really address the issue, and I would hope at 
some point in time that we could advocate on behalf of those 
agencies that do, in terms of securing appropriate funding so 
that they can accomplish their mission.
    We all--I don't want to export jobs, I want to export 
American goods and services. So that is what I really want to 
do. That is bipartisan in nature. We can have disagreements as 
to NAFTA, but I think you have unanimous support as far as the 
ability for us to penetrate markets.
    Ms. Ros-Lehtinen. Absolutely. Well said. If you would like 
to make some wrap-up statements?
    Mr. Mulloy.  I want to thank you and this Committee again. 
You have been very, very supportive to our unit and ITA in 
general. I hope that you will maybe followup with the 
appropriate appropriations.
    Ms. Ros-Lehtinen. Your chunk of that agency, Market Access 
and Compliance, that division is very important in making sure 
that our trading partners comply with our laws and making sure 
that they come forth with the promises they have made when they 
enter into these trade agreements.
    Mr. Mulloy. We are only 8 percent of the total ITA budget.
    Ms. Ros-Lehtinen. It is the important chunk. Thank you so 
much for being here. We look forward to you getting back to 
Congressman Sherman and the rest of our Subcommittee Members 
about those numbers.
    Mr. Mulloy. I will.
    Ms. Ros-Lehtinen. I would like to introduce the second set 
of panelists. Robert Scott is an international economist with 
the Economic Policy Institute here in Washington where he has 
studied the effects of trade and protection on the U.S. 
textile, apparel, and steel industries. He is the author of 
various publications and studies measuring the employment 
impacts of trade agreements. Mr. Scott has represented U.S. 
industries as an expert witness on the economic effects of 
imports in several cases before the U.S. international Trade 
Commission concerning unfair trade complaints. Prior to joining 
EPI, Dr. Scott was an assistant professor with the College of 
Business and Management of the University of Maryland in 
College Park, and we welcome Dr. Scott with us this afternoon.
    Mr. Robert Blecker is Professor of Economics at American 
University and a Visiting Fellow at the Economic Policy 
Institute. He is the author of various books covering the 
issues of international trade and finance. His academic 
articles have been published in a variety of scholarly journals 
and edited books. His research focuses on international capital 
mobility, U.S.-Latin America economic integration, the U.S. 
trade deficit and our U.S. trade policy. Dr. Blecker has served 
on the Economic Strategy Institute Advisory Panel on the Future 
of U.S. trade Policy and on the Council of Foreign Relations 
Working Group on Development, Trade and International Finance, 
and we welcome Dr. Blecker here with us today.
    He will be followed by Mr. Simon Evenett who is currently 
the member of the court team drafting the World Development 
Report and the principal author of the chapters concerning the 
world trading system and global financial matters. Dr. Evenett 
is currently on leave from the Department of Economics at 
Rutgers University in New Jersey, after serving in an appointed 
position at the World Bank and as a Fellow at the Brookings 
Institute. He also serves as a research affiliate of the Center 
for Economic Policy Research in London, as a member of the 
Trustee 21 Initiative organized by the World Economic Forum. 
Previously he has served as a Research Fellow and Visiting 
Fellow at Brookings and has taught in a visiting capacity at 
the University of Michigan business school. We welcome you as 
well, Dr. Evenett.
    Ms. Ros-Lehtinen.  We will begin with Dr. Scott. Please 
feel free to summarize your remarks and your entire statement 
will be entered in full in the record.

   STATEMENT OF ROBERT E. SCOTT, ECONOMIST, ECONOMIC POLICY 
                           INSTITUTE

    Mr. Scott. Thank you, Madam Chairman and Members of the 
Committee. Thanks for inviting me to testify here today on the 
impact of these large and chronic trade deficits on the 
American economy. I will this afternoon discuss these causes 
and consequences of the growth in our trade deficit and suggest 
policies that could improve the U.S. trade position.
    I begin by talking about how trade has affected American 
workers. I have a few slides. We begin with the first. These 
are just a few of the slides in my testimony. In the 1950's and 
1960's, the U.S. was the world's leading export power house. 
The Marshall Plan in particular helped provide the capital 
needed to rebuild Europe and Japan and fueled a tremendous boom 
in U.S. exports. As we see on the red line in this diagram, we 
had a large trade surplus in that period. It was about 4 
percent of the GDP in the early 1950's.
    Since the 1970's, we have moved from a surplus to a deficit 
as Europe and Japan began first to compete effectively with the 
U.S. in a range of industries. Later, we had a tremendous 
growth in imports from developing countries as well, which we 
will see in a few moments.
    Now, this growth in deficits has had a tremendous negative 
effect on U.S. workers in many ways. The trade surplus of the 
sixties was transformed in this deficit and this deficit will 
grow rapidly in the future as a result of the growing financial 
crisis. One impact on workers is that it has destroyed millions 
of jobs in the U.S., most of them in high-wage and high-skilled 
portions of the manufacturing sector. It has pushed workers 
into other sectors where wages are lower, such as restaurants 
and health services. When I appeared before this Committee last 
spring, I summarized an EPI forecast that the Asia crisis would 
eliminate about 1 million jobs in the U.S., with most of those 
losses concentrated in manufacturing.
    Those losses have begun to materialize, despite the growth 
in the rest of the economy. We have lost almost 500,000 jobs 
since March 1998, and most of this has been due to the rising 
trade deficit.
    Based on the recent IMF forecasts that the U.S. current 
account deficit could reach nearly $300 billion this year, the 
U.S. can expect to lose another 400,000 to 500,000 
manufacturing jobs in 1999.
    Now, trade deficits also have a direct impact on wages, 
especially for noncollege educated workers, those who make up 
about three-quarters of the labor force. In figure 1, the wage 
line in yellow shows that real wages for U.S. production 
workers peaked in 1978 and declined more or less steadily 
through 1996. What is responsible for this decline? Trade is 
certainly one of the most important causes, because it hurts 
workers' wages in several ways. First, it eliminates high-wage 
manufacturing jobs, as I already mentioned. Second, it 
depresses wages through competition with imports, particularly 
from low-wage countries. If the prices of these products fall, 
this puts downward pressure on prices that firms receive and 
forces them to cut wages or otherwise cut costs.
    Third, globalization also depresses wages through foreign 
direct investment. When U.S. firms threaten to move a plant to 
Mexico, it can force workers in those plants to take wage 
concessions rather than lose their jobs. We have seen that 
happen increasingly in the 1990's.
    Why are these trade deficits growing? There are many 
reasons that I go over in the statement. I will summarize a few 
key facts from my exhibits that emphasize particularly the 
unbalanced trade that exists with a few countries and in a few 
industries.
    If we move to my figure 2, we see that the U.S. trade 
imbalances are concentrated in a few regions of the world. Mr. 
Mulloy mentioned Asia, and we have a huge trade deficit with 
Asia, we see, that approaches $175 billion in 1998. We also had 
a fairly large deficit of about $25 to $30 billion each with 
NAFTA and Europe in 1998. We also see that the deficits with 
all 3 regions are increasing steadily throughout this period.
    Now, the causes of these deficits, particularly with Asia, 
are discussed in depth in my statement. There are many 
important differences in the economic structure and strategy of 
each country in this region. However, each follows a general 
pattern established by Japan in the fifties and sixties that is 
a pattern which is based on export-led growth. Exports are 
increased through state promotion and control of targeted 
critical industries and, as we have heard, exchange rates are 
systematically undervalued as part of this strategy.
    Now, in addition to these countries--I am sorry, the 
reasons: There are only a few countries responsible for the 
majority of the deficit as we see in my figure 4.
    In fact, only 10 countries are responsible for the entire 
trade deficit in goods. These 10 are listed in figure 4. As you 
see here, the deficit in 1998 in those countries total $229 
billion. Japan, China, and Germany alone had a deficit of about 
$144 billion in 1998, or about two-thirds of this amount.
    Now, as I mentioned, the Japanese deficit does reflect 
numerous public and private barriers to imports in this policy 
of export-led growth, discussed a moment ago. China, as we have 
heard earlier, also has a heavy government role which 
dramatically restricts imports into that economy, and, as 
mentioned earlier, we have a very unbalanced trading 
relationship with China, the most unbalanced in the world.
    If we turn to the table next, table 1 from the figure, we 
see that the trade deficit is growing rapidly this year. These 
are the trade deficits, by country, through May of this year. 
These are data released on Tuesday. If we look at the trade 
deficits, the first column is year-to-date through May 9; 
second, year-to-date through May 1998. We see the trade deficit 
overall in goods has increased by slightly more than a third, 
but the deficit with the NAFTA countries has nearly doubled, 
increased by 93.5 percent; and the deficit with western Europe 
is up by 75 percent this year.
    In addition to the currency factors mentioned earlier, we 
also have seen a tremendous surge in foreign direct investment 
into Mexico in the last 2 years that stimulated this deficit.
    Just quickly, I will mention that in figure 6 we see the 
deficit is concentrated in a few key industries. I go into this 
in some depth in the testimony, but what is surprising is that 
motor vehicles and parts make up such a large part of our 
deficit. You would think that most economists would suggest 
that we would import lots of low-tech goods, like apparel and 
shoes, and we do in fact import those and basic commodities 
like petroleum, but we import huge amounts of motor vehicles 
and parts. In fact, it makes up half of our deficit with Japan, 
two-thirds of our deficit with Canada, and essentially the 
entire bilateral trade deficit last year with Mexico.
    We also have big deficits in other high-tech products such 
as computers, steel, and blast furnace products, TV's, radios; 
and in fact only 3 of the top 8 trade deficit products are what 
we traditionally think of as low-tech: apparel, leather, and 
toys.
    Let me summarize, then, my policy recommendations, what I 
think we can do about this, in order to save time. I mentioned 
four specific points in my testimony that I think are critical 
to the development of an environment that is going to generate 
what I think is the bottom line, a high and rising standard 
level of living for all Americans, and a competitive domestic 
manufacturing base is key to achieving this.
    First, we should enter into no new trade agreements, 
including China's proposed entry into WTO, unless and until 
those agreements agree to raise the bar, to include labor and 
environmental standards so we don't engage in a raise to the 
bottom in those areas.
    Second, I think we have to take measures to address these 
chronic trade deficits with countries like China and Japan in a 
few key industries like motor vehicles and commercial aircraft 
as well, where China is exploiting our technology.
    Third, I do think we should steadily reduce the value of 
the dollar. I am not in the government, so I can say that. I 
think we need to do that, and we can talk about that more if 
you have time in the Q and A.
    Finally, I think we have to develop new incentives to 
interest developing countries to change the way in which the 
trade negotiating game is played. In the past we have traded 
off access to our markets in exchange for protection for our 
investors. I think in the future we have to offer them some 
kind of new incentives; for example, debt relief and 
development aid, in exchange for raising the bar in the way 
that I think we need to do it.
    I think these goals are achievable. I look forward to our 
discussion of these topics.
    [The prepared statement of Mr. Scott appears in the 
appendix.]
    Ms. Ros-Lehtinen. Thank you. Dr. Blecker.

STATEMENT OF ROBERT A. BLECKER, PROFESSOR OF ECONOMY, AMERICAN 
                           UNIVERSITY

    Mr. Blecker.  Madam Chairman and Members of the 
Subcommittee, thank you very much for the opportunity to 
testify here today on this important topic. I would like to 
begin by directly addressing the question posed in the title of 
today's hearing, which I think was an excellent title, and 
saying that yes, we are trading away our Nation's economic 
future with our massive trade deficits today.
    We are trading away our future in two important respects. 
First, the damage to our workers and industries, which Dr. 
Scott has just discussed; and, second, the damage to our 
Nation's financial position, which Mr. Mulloy referred to 
earlier and on which I will focus in my remarks.
    The trade deficits of the past 15 years, as Mr. Mulloy also 
said, have already transformed our country from the world's 
largest creditor into the world's largest debtor. Today, as a 
result of our record trade deficits, the Nation's net 
international debt is rising faster than ever. The Commerce 
Department reported last month that the net international debt 
had reached $1.2 trillion at the end of 1998, and my 
projections, shown in this figure which is also in my written 
statement, show that this debt, that is the green line there, 
will reach $3.8 trillion by 2005 if present trends continue.
    Furthermore, I calculate what I call the net financial 
debt, excluding certain assets that are not liquid, and that 
red line there, pardon the analogy to the local Metro system, 
the red line excludes certain illiquid assets, and that was 
already a net debt of $1.6 trillion last year, and I forecast 
it to reach $4.1 trillion by 2005, which would then be 35 
percent of the gross domestic product.
    In the next slide, I also project the net outflow of 
interest and dividend payments--this is what we have to pay out 
to foreigners for our borrowing from them--will grow from 66 
billion, the red line here. There was a $66 billion deficit on 
net income and dividend payments last year. I project that will 
grow to $166 billion in 2005, which would be equivalent to last 
year's trade deficit in goods and services.
    Now, as a result of this growing indebtedness and interest 
outflow, our Goldilocks economy could come grinding to a halt 
sometime in the early 21st Century. This negative financial 
position makes us extremely vulnerable to any loss in 
confidence in U.S. asset markets, such as the stock market, or 
in the U.S. dollar. As figure 6 shows, foreign investors now 
hold over $5 trillion of financial assets in the United States. 
Most of those assets, as you can see, the vast majority, have 
been acquired in just the last 4 or 5 years.
    It would not take a very large sell off of these assets to 
precipitate a dollar crisis. In fact, if foreigners sold off 
only 5.75 percent of that $5.2 trillion that you see on the 
right, this would be about $300 billion, or just about the 
projected level of the current account deficit for this year.
    Such a sell off could cause a collapse of the U.S. dollar 
and a hard landing for the American economy unless steps are 
taken to put our Nation on a more sustainable growth 
trajectory, with smaller trade deficits and less international 
borrowing.
     In my written statement and also in an attachment I gave 
the Committee with a recent report I did for the Economic 
Policy Institute on the international debt situation of the 
United States, I go into some more detail on these possible 
hard-landing scenarios and how we might avoid them or what 
could be the triggers for a financial crisis. I would be happy 
to discuss that more in response to questions.
    But now let me try to move to the policy conclusions. I 
think we need to work on two fronts, and that is to reverse 
both the short-term and the long-term consequences of our high 
trade deficit and our growing international debt.
    Now, the two main short-term causes of the high trade 
deficit are the rise in the value of the dollar since 1995, 
which you can see in figure 1 coming up here, the order of the 
figures is different for the presentation than it was in the 
paper. The green there is the greenback, the dollar. As you can 
see, it started rising in mid-1995. Most of that increase came 
with the industrial country major currencies. Then it shot up 
even faster in 1997 during the Asian financial crisis. While it 
has leveled off, it has stayed at an uncompetitive level ever 
since.
    Now, no matter how efficient American producers are, no 
matter how hard the workers work, no matter how much new 
technology they invest in, they cannot compete in global 
markets at a dollar that is now 20 percent higher than it was a 
few years ago. Therefore, I believe that there cannot be any 
solution to the trade deficit problem that does not begin with 
and include as an important component a significant effort to 
bring down the value of the dollar to a more competitive level.
    Now, how we do that will have to vary between the different 
kind of trading partners, those that manipulate their 
currencies and those with floating rates. We can discuss that 
more in the question period.
    Second, I do agree with Mr. Mulloy and the administration 
statements that he quoted, that we must encourage our trading 
partners to stimulate their domestic economies and to open 
their markets more to imports of American goods and services. I 
think it is time for Europe to abandon some of the self-imposed 
restrictions which have already backfired. They were supposed 
to make the Euro strong, and instead they made it weak. It is 
time for Japan to pull itself out of its slump. Both regions 
need a significant fiscal stimulus along with continued 
monetary ease, and I think we also need to work on our 
administration to pressure the IMF to let up on the crisis 
countries. We have imposed on them austerity conditions as part 
of IMF causality--I am sorry, IMF conditionality, which have 
led directly to this drop-off in our exports to those regions, 
to Latin American and Asia, which are such vital export markets 
for us, a lot of this is self inflicted damage from our 
treasury department telling the IMF to tell those countries 
they had to raise their interest rates and slash their budget 
deficits and put their economies into depressions. When they go 
into depressions, the first thing they do is stop buying 
imports from us, not to mention their currencies fell so they 
couldn't afford them anyway. We need to start thinking about 
the repercussions of some of these things we tell other 
countries to do.
    Finally, for the longer term, I largely agree with what Dr. 
Scott said, but let me put it in my own words. I think we need 
to modify the way we approach trade negotiating to better 
promote the interests of American-based producers, to look at 
things from the perspective of industries and farmers producing 
products in the United States, rather than just our companies 
selling things abroad.
    It is all very well and good to sell bananas in Europe, but 
we don't grow bananas here, and we need to think about what we 
do produce here. I think we also need to put social concerns 
such as human rights, labor standards, and environmental 
protection on an equal footing with intellectual property 
rights and other types of investor rights in our approach to 
trade negotiations. I think this can help to create a more 
level playing field with other countries in which a more 
balanced trading relationship can emerge.
    We also need to remember that competitiveness starts at 
home. We should not short-change domestic research and 
development, education, public infrastructure, the things that 
make our economy productive, because those are the things in 
the long term that help our private sector to be more 
competitive.
    With a more secure economic base at home and more balanced 
commercial relations with our trading partners, we should be 
able to balance our trade without undue sacrifices of domestic 
jobs and living standards in the future.
    Thank you.
    [The prepared statement of Mr. Blecker appears in the 
appendix.]
    Ms. Ros-Lehtinen. Thank you so much. Dr. Evenett.

   STATEMENT OF SIMON EVENETT, ASSOCIATE PROFESSOR, RUTGERS 
                           UNIVERSITY

    Mr. Evenett. Thank you for the invitation to present some 
testimony before this Subcommittee, Madam Chairperson. I also 
would like to thank Mr. Menendez and his staff for getting in 
contact with me with respect to this testimony. I should add 
that Rutgers University has always appreciated its close links 
with Mr. Menendez.
    Ms. Ros-Lehtinen. We will let him know you said so.
    Mr. Evenett. Thank you very much. I should add that I am 
speaking very much in my capacities as a Rutgers University 
professor and a fellow at Brookings, and not in my World Bank 
capacity. The articles of the World Bank are extremely clear 
about the involvement of World Bank officials in member 
countries' politics, so please see me with a Rutgers and a 
Brookings hat on. Maybe two hats is too much, but not three. 
Thank you.
    Let me turn to the substance of my presentation. I have put 
together some testimony. I am one of these simple guys who 
likes to make three or four points with graphs. I am a 
professionally trained economist. I can do it with 
mathematically complicated, incomprehensible nonsense.
    Mr. Delahunt. We would not understand it.
    Mr. Evenett. Most of the time I don't understand it either. 
But I leave that for the privacy of my own home. For the rest 
of you, I would like to share the following graphs and make 
four points. They somewhat go against the grain of what you 
have heard up until now, which is first, I don't think the 
trade deficits reflect economic malaise.
    The second point is that I don't think the U.S. trade 
deficit is caused by closed foreign markets.
    The third point is in the current U.S. boom, it seems its 
trade deficit growth and job creation have gone hand in hand. 
There is no big surprise. They are caused by exactly the same 
factors. We will talk about that.
    Finally, I think the plummeting U.S. savings rate is the 
real policy headache, and for more important reasons than its 
effect on the trade deficit, as we enter an era where more and 
more Americans are approaching their retirement. So let me take 
you through those four points.
    The first point, and I summarized this, as I said, in four 
graphs. The first is that I don't think trade deficits imply 
economic malaise. It is actually very interesting that the 
United States since 1990 has had the highest growth rate in the 
G-7 economies and also had the largest trade deficits all the 
way through. In fact, if you were to plot a graph of growth in 
the G-7 against their trade deficits, you would find the 
countries that have the higher trade deficits were the ones 
that were growing.
    So I would urge you to ask what you really care about, a 
growing economy which, as we will see, produces a lot of jobs, 
or are we going to worry about one specific narrow economic 
indicator? I think you get more miles or bang for the buck out 
of economic growth than you do about worrying about trade 
deficits.
    The second point I would like to make is I don't think the 
U.S. trade deficit is caused by closed foreign markets. In 
fact, on my second graph here, it is interesting that if it is 
the case that the current U.S. trade deficit was caused by 
closed foreign markets, and we have had three rounds of 
multilateral trade negotiations, lowering tariffs, lowering 
nontariff barriers, then presumably back in the sixties we 
would have had even more closed foreign markets, but back then 
we had a trade surplus. So something is driving the U.S. trade 
deficit, and it is not closed foreign markets, and that is 
something I will come to in a minute, and it has to do with 
domestic macroeconomic factors.
    Really a historical perspective, not history--going back to 
1960 is not history for most of us--but going back to 1960, you 
can see the U.S. trade deficit has varied for a large number of 
reasons, and it doesn't have much to do with closed foreign 
markets.
    When we looked more recently as to what happened since 
1990, we found that employment, nonfarm employment in the 
United States, has surged, and so has the current account 
deficit. The real explanation there is entirely demand-led, 
especially in the last few years.
    On my final graph, I think I get to the heart of this, but 
looking at what we have had is both an investment boom, a very 
healthy investment boom which is bringing new production 
techniques, managerial techniques and skills for U.S. workers, 
helping to raise their wages and offset some of the growing 
inequality we have seen since the seventies.
    We have had a healthy investment boom, and we have had a 
somewhat more dubious consumption boom. Yes, we have all had a 
big party here. One thing is definitely clear: If you don't 
like the savings numbers, look at the consumption numbers. The 
consumption numbers have absolutely gone through the roof, I 
think really for two reasons.
    First, as we have said, people are starting to spend down 
some of their stock market gains; and, second, people have 
refinanced on their houses, too. As interest rates have come 
down, they have refinanced at lower interest rates, releasing 
some income to be spent on goods and services.
    So what that means is when the traditional measure of the 
savings rate--which of course is nothing more than the 
difference between what America consumes and what it earns--but 
that has been shrinking, mainly because consumption has been 
surging. Now, that comes out as a plummeting savings gap.
    Now, some questions have been raised earlier about how to 
measure savings. Some of the more rigorous and sophisticated 
ways of trying to measure savings, getting at precisely the 
issues raised earlier, still point to a fall in the U.S. 
savings rate over the last few years. So this savings rate has 
fallen, even when you take account of the factors which were 
quite correctly raised earlier.
    The second thing is even if you don't think savings have 
fallen in the U.S., investments certainly have. All that 
matters, all that you need to get a trade deficit is for the 
difference between investment and savings to rise. All you are 
really saying is the demand in the U.S. economy is rising 
faster than its capacity to supply it, so you have to buy goods 
from abroad. We have seen a huge surge in investment in the 
U.S., primarily in information technology and other areas. But 
that is the real reason why we have a trade deficit and a 
current account deficit at the minute.
    I guess to sum up, I don't want to come off and say--I 
don't want to appear to say don't worry about the trade 
deficit; because if you think that the savings and investment 
imbalance is very precarious, in other words, if you think 
people are over consuming, spending far too much money, 
spending down stock market gains which could disappear 
tomorrow--after all, the Dow fell 200 points very recently, 
right?--if you think that is a very precarious way to organize 
household consumption decisions, I would agree with you and 
turn around and say these numbers could reverse very, very 
quickly. That would lead to a quite serious adjustment problem.
    What I don't think I agree with is that somehow we have 
these foreign markets which are systematically closed to U.S. 
goods. I think that where there are problems, countries have 
legitimately taken complaints to the WTO, and the U.S. is the 
biggest complainant of the WTO, it takes the most cases, and 
also answers the most cases, by the way. This country is not 
innocent on that score. It has been found guilty in some cases, 
too. So the fact is the WTO is the right forum for dealing with 
trade complaints.
    The second thing is if you think there are existing 
barriers that still need to be negotiated down, that is what I 
would urge you to do, is endorse a new round of trade 
negotiations which could be launched in Seattle and help craft 
and shape that agenda. In that agenda I would not put labor and 
environmental standards. I can tell you that if those decisions 
to negotiate on those issues goes to Seattle, you will get 
large numbers of developing countries, countries whose 
economies are not growing very fast, potential exports for the 
United States, they are not interested and they will walk out.
    So my sense is we have to find--we are going to need some 
innovative thinking on trade policy that is going to require an 
honest discussion about what the remaining trade impediments 
are and bringing up labor and environmental standards is merely 
going to antagonize our trading partners, who otherwise I think 
are quite interested in reducing their trade barriers even 
further.
    Thank you Madam Chairman.
    [The prepared statement of Mr. Evenett appears in the 
appendix.]
    Ms. Ros-Lehtinen. Thank you so much for your testimony.
    I have one question for each of you. I would like for you 
to elaborate on the factors that you believe cause the deficits 
that we have: the merchandise trade deficit, the manufacturing 
trade deficit, the deficit in goods and services. What are the 
factors you think contribute to their causes, and the varying 
impact that these would have on the U.S. economy? Also related 
to that, if you think that the trade deficit in this one sector 
is preferable to the deficit in another sector. Dr. Blecker.
    Mr. Blecker.  That is a big area to talk about, but let me 
just say a few points. I think what has happened in the last 
few years--and by the way, one area I think I agree with Dr. 
Evenett is on the saving rate. I think a major change in recent 
years is that what has been happening on the balance of 
payments has been driven largely by what is going on in the 
capital account rather than the current account. These two 
things have to balance each other out, because it is an 
accounting statement. But we have seen large inflows of funds. 
These in turn pushed up the value of the dollar. They have 
financed the shortfall of savings, allowed the consumer boom to 
continue, prevented investment from falling, in spite of the 
low savings rate.
    I disagree somewhat about investment being high. That 
depends on how you measure it--in constant dollars or current 
dollars--and I prefer a current dollar measure.
    But this in turn has basically forced us, then, to run a 
current account deficit which is the other side of the coin of 
the capital account surplus. That, then, reverberates on to all 
of the other balances that are subcomponents of the current 
account. Especially it reverberates on to goods and merchandise 
because the high dollar and then boom in our economy compared 
to sluggish conditions abroad, where I also agree--which is in 
fact in my testimony as well--that forces a merchandise deficit 
which is very large, but which then has the consequences that 
Dr. Scott was discussing.
    Even services--we have seen a lot of arguments in recent 
years, don't worry about the merchandise deficit, because we 
have a services surplus. The services surplus has shrunk, too, 
and it is not growing as was expected, because when the rest of 
the world is depressed and the dollar is too high, it is not 
surprising they don't want to buy so many of our services.
    Then there a new part of the overall current account 
deficit that is getting worse, which I flagged in my figure, I 
think number 2, in my written statement, and that is the 
deficit on investment income.
    In the past when we were the world's largest creditor, we 
had a large net inflow of investment income, mostly from our 
multinational corporations abroad. But that is now being 
overwhelmed by the net outflow of interest payments and 
dividend payments on our financial obligations, and it is a 
long story why it has taken a while to turn negative; but it 
has now, and if present trends continue, it will become a major 
negative factor in the current account and balance of payments 
in the next several years. That is going to make it necessary 
for us to run even harder just to stay in place as far as 
preventing rising current account deficits.
    So essentially my causal story would start with the capital 
inflows through the dollar and go on through the rest of it.
    Ms. Ros-Lehtinen. Thank you. Mr. Scott?
    Mr. Scott. Sure. I would say that there are two causes, 
generally speaking. They are both short-return financial sector 
causes and I think there are long-run structural causes to the 
trade deficit.
    On the short-run side, as Dr. Blecker describes, I would 
like to describe it as a boomerang economy. The rest of the 
world collapsed, they sent their capital here, and that 
stimulated a boom in the stock market which led to a 
consumption boom, and that generated also a short-term increase 
in the trade deficit. I think there is no question about that.
    On the other hand, as we all know, boomerangs are dangerous 
to play with. If that capital decides to depart and it causes a 
crash in the stock market, it could certainly destabilize the 
economy. So we are playing with a very dangerous situation 
here, I think, given the state of the world economy.
    So that on the structural side, I very much appreciate Dr. 
Evenett's first figure on the structural trade, which to my 
view illustrates the pattern of the structural trade deficit. 
Obviously I think the data is correct. We all get the data from 
the same sources. I think the title is a little bit wrong. It 
is very interesting.
    He paints this picture of the three long-term rounds of 
trade negotiations, the Canada, Tokyo and Uruguay Rounds of 
negotiations, and they are clearly linked in some way to an 
increase in the U.S. trade deficit. It says on the title of 
that, the deficit has grown as foreigners lowered their trade 
deficits, not the other way around.
    But, in fact, I would argue just the opposite. Our deficit 
has grown because we have lowered our trade barriers in total 
more than foreigners have. During each round we have reduced 
our tariffs to the present day to just about as close to zero 
as they can get. Other countries have not reduced their tariffs 
as rapidly as we have, first.
    Second, more importantly, they have maintained and enhanced 
a set of nontariff barriers to trade that both promoted their 
exports to the U.S. and acted in new and in creative ways to 
restrict U.S. exports to their markets. I think that is the 
long-term nature of our trade problem. That is why this trade 
deficit goes up as it follows a steady increasing trend, as you 
see. That a not a macro short-term problem, that is a long-term 
problem and dates from the 1950's and 1960's, I would argue.
    Ms. Ros-Lehtinen. Thank you. Dr. Evenett?
    Mr. Evenett. Up until the last minute, I was about to say 
you were going to witness something rare, which is three 
economists agreeing on something. But let me say on the short-
term questions, I think we are all quite agreed. We have had 
this surge of investment in the U.S. which has needed to be 
funded somehow. The U.S. consumers are not providing it, nor is 
the corporate sector, so the money has come from abroad. That 
is fine. Everybody understands that, and I think we understand. 
Let's talk about the stuff I am less sure I agree with my 
colleagues on.
    Thinking in terms of breaking it out between manufacturing 
and services, I would argue that the downturn--the slowing 
growth in service exports is primarily due to these lower 
incomes and recessions abroad. In fact, I would point to the 
recent forecasts of Professor Alan Dierdorf at the University 
of Michigan, one of our most respected trade economists in the 
services area and on trade in general, and he has been 
examining how the U.S. trade patterns in services will vary 
over the next 2 or 3 years. As east Asia and Latin America 
bounce back--we are already seeing evidence of that--then 
service exports to those areas, an area where is U.S. has 
strong comparative advantage, are expected to bounce back. I 
think that will provide some good news in terms of the trade 
deficit and the current account.
    The second thing in terms of the interpretation of this 
trade liberalization over the last 30 years, I would argue that 
in fact certainly in the Uruguay Round, the U.S. made out like 
bandits, quite frankly. You got reduced in your tariffs, but 
not by that much. A lot of developing countries for the first 
time came onboard and seriously negotiated substantial 
reductions in their trade barriers, and not just in the areas 
where the U.S. cares about--manufacturing, some in services and 
a fair amount in agriculture--although there is a lot more work 
that needs to be done in agriculture.
    So I would argue that the U.S. did very well out of the 
Uruguay Round, and I think the numbers on the gains to the U.S. 
which have come out of the economic studies bear that out.
    The second thing is in terms of an enhanced nontariff 
barrier. For the U.S. ever to lecture the rest of the world on 
this is the pot calling the kettle black. The spread of 
antidumping laws which was founded on K Street and spread 
around with the help of others, has now reached the point that 
29 countries are using these laws. Guess who is the No. 1 
target? This country. It is this country's exports. So we are 
seeing the spread of--if there is a spread of nontariff 
barriers, we started it in large part. That is one of the 
things, I think antidumping should be on the Seattle 
negotiating list. You can bet your life that USTR will want it 
to be there, and I can tell you people on K Street don't want 
it to be there, but it will be raised by Australia, the 
European Union and many other countries, and I do think we need 
to nip these nontariff barriers in the bud, and let's start 
with antidumping.
    Ms. Ros-Lehtinen. Thank you. Mr. Delahunt.
    Mr. Delahunt. So you think it is time to get out of the 
stock market?
    Mr. Blecker.  We don't give advice on that.
    Mr. Delahunt. That is the measurement we will measure you 
by.
    A little bit of a primer here, if you will. You all 
referred to the $1.2 trillion debt. Please explain that. Is 
that debt held by individual Americans, by mutual funds, by 
government agencies? Please, just a real kind of concise, very 
simple explanation. Anybody.
    Mr. Blecker.  I will tackle that, since I just wrote a 
report on that and just read the latest Commerce Department 
release. Basically, this is debt held by foreigners that is 
their ownership of American assets in excess of what we own 
abroad. So essentially we are saying the foreigners own more 
bonds, stocks, Treasury securities, et cetera, et cetera, in 
the United States, compared with what we own abroad.
    Mr. Delahunt. It is a mix, in other words. It can be 
equities, U.S. obligations, it can be private corporate 
instruments.
    Mr. Blecker.  Right. But what has changed most dramatically 
in the last 10 or more years that has caused the big swing are 
the more liquid financial assets, especially Treasury 
securities. We now have, I think, about $1.3 trillion worth of 
U.S. treasury securities owned abroad. About half of that is 
owned by foreign central banks and the other half is owned by 
private investors. That is somewhere around 35 percent or maybe 
almost 40 percent, somewhere in that range, of all outstanding 
Treasury securities.
    Mr. Delahunt. We have been debating the last several days 
regarding reducing American debt.
    Mr. Blecker.  The government debt. You all have been 
talking about government debt.
    Mr. Delahunt. I understand that. My point is that is a 
component of the debt we are talking about.
    Mr. Blecker.  Right.
    Mr. Delahunt. What are the consequences? Clearly it is my 
sense, no matter whether what occurs, that there will be debt 
reduction, which I presume would mean there would be a demand, 
because it is such an attractive, secure investment in an 
unstable world. What are the consequences for action that the 
United States is now taking in terms of reducing public debt 
held by foreigners?
    Mr. Evenett. I think the first consequence is that 
obviously the return, the interest the U.S. has to pay on 
existing long-term debt, that rate of interest will start 
falling. The liquidity or the ability to sell those debt 
instruments very easily will begin to be reduced because there 
won't be such a huge market for it.
    I think what will happen, what this will do is, I mean, as 
these long-term Treasury instruments get scarcer and scarcer, 
then you will find that again the U.S. taxpayer will win out 
and that hopefully they will have to pay less and less interest 
on the remaining Treasury bills which get issued.
    Mr. Delahunt. I understand that. But my point is, what does 
it do in terms of multilateral commercial relations, if 
anything?
    Mr. Evenett. I am not sure--the second point I was going to 
make is that I remember 10 years ago a certain British Prime 
Minister announcing that the U.S.--the U.K. public debt was 
going to be paid down in 15 years because of a huge budget 
surplus which emerged at the end of the eighties. Within 3 
years----
    Mr. Delahunt. Who is that.
    Mr. Evenett. Within 3 years, Britain had, I think, a 5 
percent budget deficit, the currency had gone through the 
floor, and that Prime Minister was out tending roses in her 
garden and no longer----
    Mr. Delahunt. ``her'' garden?
    Mr. Evenett. Her garden, yes. So my sense is that come the 
next recession, this budget surplus will evaporate and we have 
a short-term gain here. The issue is short-term windfall; the 
issue is what to do with it.
    Mr. Delahunt. Let me just followup in a question, because I 
think you both, Dr. Blecker and Dr. Scott, talked about the 
devaluation, if you will, of the American dollar. I hear what 
you are saying, but I will tell you what causes me concern, and 
I don't know if I have any basis to be concerned. But if we do 
devalue, and I don't know how you go about doing that--you were 
talking about bilateral devaluation, and, again, I am not 
conversant certainly with the world money markets--but if that 
were done in any abrupt fashion, I mean, the impact in terms of 
the world financial markets, including our own stock market and 
bond markets. One thing I continue to hear is that the 
financial markets do not like uncertainty and instability. It 
would cause me some concern.
    Dr. Scott?
    Mr. Scott. Yes----
    Mr. Delahunt. I understand how it would create more 
fairness. But, hell, I mean, we could end up shooting ourselves 
while we are trying to solve a problem.
    Mr. Scott. I think we don't have to look very far back into 
our own history, and remember back to the mid-1980's, the last 
time we had a trade deficit that reached 3 percent of GDP. At 
that point the dollar was about 50 percent higher than it is 
today, perhaps, maybe 40 or 50 percent higher, and we had an 
agreement that was reached in the Plaza as I recall, although I 
am not a finance person, the Plaza in New York, as I recall, in 
roughly 1985, and it was amongst the finance secretaries of the 
G-7 countries, and they agreed to gradually reduce the value of 
the dollar.
    So in my testimony I called for a gradual reduction of the 
dollar. We have done it before, we can do it again. Though 
financial markets don't like uncertainty, they like even less 
to lose. If they have to bet against all of the major central 
banks of the G-7 countries, they are going to lose. So if the 
finance ministers announce they are going to reduce the value 
of the dollar, I think they can successfully do that, as they 
did in 1985 through 1987, when they reduced the dollar by about 
50 percent.
    Mr. Delahunt. Do you agree with that, Dr. Blecker?
    Mr. Blecker.  Let me amend that very slightly. Actually the 
dollar fell quite precipitously between 1985 and 1987. It fell 
more rapidly in those years than it rose between 1980 and 1985. 
But it did not cause a financial catastrophe, and I think the 
reason is what Dr. Scott put his finger on, that this was seen 
as an agreed-upon managed depreciation that the major countries 
were prepared to stand behind. There were tacit target zones. 
That wasn't quite announced, but it was understood the dollar 
would stay within certain limits.
    I think if we take that approach, again, because I agree 
absolutely with the concern you raised, and that is my whole 
concern, if we let the debt get out of hand, we will see that 
true hard landing for the dollar in the economy further down 
the road. The way to get there is not by letting the dollar 
stay too low, but by easing it down gradually. This is going to 
require cooperation with the other countries.
    Mr. Delahunt. Would that be the invisible hand of the 
marketplace? It will require active----
    Mr. Blecker. Active intervention and cooperation with our 
trading partners. What is it our trading partners want out of 
all of these negotiations? Access to our markets. We need to 
insist on reasonable equilibrium exchange rates as one of the 
things that we look for in a normal trading relationship, 
whether it be with China, Japan, Europe or anybody else.
    Mr. Evenett. I must say the postscript of this story is 
they had to get together in 1988 and decide the dollar had 
fallen off too much.
    Mr. Delahunt. This is all above my pay grade.
    Mr. Evenett. So the fact is, the end of this story is it 
wasn't quite the smooth managed transition that perhaps has 
been suggested. I think you are absolutely right, sir, to 
suggest that this is a very dangerous game to go down. To get 
people--trying to devalue the U.S. dollar means in effect 
scaring foreign investors. That is what you have to do.
    Mr. Delahunt. That creates that flight from our capital 
markets which creates an impact which would slow down our 
economy, which returns us to the issues that we talked about 
before in terms of that surplus that I have very little 
confidence in, by the way.
    I happened to vote not only against the Republican plan, 
but the Democratic plan, because when I arrived here 2 years 
ago we had a deficit. These estimates, these CBO estimates, 
they were telling me we were going to have a $200 billion 
deficit; 2 months later, 170; 2 months later, 120; 4 months 
later, it broke 100; 3 months later, hell, we can't forecast 2 
months ahead, let alone a decade ahead. That is what really 
makes me nervous.
    Mr. Scott. You notice none of us want to tell you what to 
do with your investment funds.
    Ms. Ros-Lehtinen. Thank you so much, Mr. Delahunt. I want 
to thank the witnesses for your excellent testimony. As you 
know, on a bipartisan level, this trade deficit growing out of 
control is of increasing concern to us, even if we disagree on 
how best to handle it. We look forward to continuing our 
conversations with you. Thank you so much.
    The Subcommittee is now adjourned.
    [Whereupon, at 4:45 p.m., the Subcommittee was adjourned.]
      
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                            A P P E N D I X

                             July 22, 1999

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