U.S. GOVERNMENT PRINTING OFFICE

63–468 WASHINGTON : 2000

UNITED STATES - JAPAN TRADE RELATIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON TRADE

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

JULY 15, 1998

Serial No. 105–105

Printed for the use of the Committee on Ways and Means

(

(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON TRADE

PHILIP M. CRANE, Illinois, Chairman

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

AMO HOUGHTON, New York

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

WALLY HERGER, California

JIM NUSSLE, Iowa

ROBERT T. MATSUI, California

CHARLES B. RANGEL, New York

RICHARD E. NEAL, Massachusetts

JIM MCDERMOTT, Washington

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

(III)

C O N T E N T S

Page

Advisories announcing the hearing ........................................................................ 2

WITNESSES

American Council of Life Insurance, Brad Smith ................................................. 84

Asia Pacific Policy Center, Douglas H. Paal .......................................................... 41

Bereuter, Hon. Doug, a Representative in Congress from the State of Nebraska .................................................................................................................... 13

Economic Strategy Institute, Clyde V. Prestowitz, Jr .......................................... 49

Goldman Sachs International, Robert D. Hormats ............................................... 28

Graham, Hon. Lindsey, a Representative in Congress from the State of South

Carolina ................................................................................................................ 18

Levin, Hon. Sander M., a Representative in Congress from the State of

Michigan ............................................................................................................... 7

Lindsey, Brink, Cato Institute ................................................................................ 56

National Bureau of Asian Research, Kenneth B. Pyle ......................................... 62

Pharmaceutical Research and Manufacturers of America, Shannon S.S.

Herzfeld ................................................................................................................. 94

Westvaco Corporation, Wendell L. Wilkie II ......................................................... 105

SUBMISSIONS FOR THE RECORD

Office of the U.S. Trade Representative, Hon. Richard Fisher, Ambassador,

statement .............................................................................................................. 114

American Chamber of Commerce in Japan, statement ........................................ 124

American Electronics Association, statement ....................................................... 127

Guardian Industries Corp., Auburn Hills, MI, Peter S. Walters, statement ...... 131

(1)

UNITED STATES-JAPAN TRADE RELATIONS

WEDNESDAY, JULY 15, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON TRADE,

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:30 p.m., in room

1100, Longworth House Office Building, Hon. Philip M. Crane

(Chairman of the Subcommittee) presiding.

[The advisories announcing the hearing follow:]

2

3

4

5

6

Chairman CRANE. Please take seats. We’re running just a little

bit late, and we’re going to be interrupted by votes over the course

of the afternoon. And so, I would like to welcome you all to our

hearing of the Ways and Means Trade Subcommittee to consider

the U.S. trade agenda with Japan in the context of the broad range

of measures that Japan must take to address the difficult and painful economic situation it faces.

Sunday’s stunning defeat of the ruling LDP Party, resulting in

the resignation of Prime Minister Hashimoto, and the cancellation

of next week’s state visit has thrust Japan into a period of political

transition. Japan must now focus on identifying new leadership capable of navigating a more credible record to economic recovery.

Because Japan is our largest trading partner, and perhaps most

important ally in Asia, accounting for over two-thirds of the region’s GDP, the stakes are high not only for the Japanese people,

but also for the United States and the rest of the world. At this

time of uncertainty, it is critically important that the USTR’s trade

agenda with Japan, including broad structural reforms such as deregulation of its economy, fundamental reform of the banking system, improved transparency, and the opening of its distribution

system to eliminate exclusionary business practices remain steady

and undeterred.

I firmly believe that successful implementation of these same

measures will contribute substantially to moving Japan in the direction of economic health and long-term growth. The danger of inaction in terms of Japan’s participation in multi-lateral organizations such as the WTO and APEC and in Japan’s implementation

of existing trade agreements remains a real threat to the welfare

of the Japanese people and to U.S. economic and security interests

in the region.

I want to warmly welcome our colleagues, Sandy Levin and Doug

Bereuter, both long-time observers of Japan. Their comments

should help us put the recent history of Japan’s economic ups and

downs, ranging from the booming 1980’s to the stagnant recessionary lost decade of the 1990’s into better perspective. And I also

want to recognize, too, the testimony we will receive in this first

panel from our distinguished colleague, Lindsey Graham, from

South Carolina.

I might mention that Members will want to turn their attention

to Doug’s resolution H. Res. 392, which has been sequentially referred to the Ways and Means Committee until July 17. Sandy and

Amo also have a bill, I know, they will want to discuss. We will

then hear from a strong panel of academics that will discuss the

economy and bilateral relationship more generally and a panel of

witnesses from the private sector.

Earlier this afternoon, the subcommittee held an executive session with Deputy USTR, Richard Fisher, and we had a good discussion about the U.S. trade agenda with Japan.

I now would like to yield to our distinguished ranking Minority

Member, Mr. Matsui.

Mr. MATSUI. Thank you very much, Mr. Chairman. I’m going to

submit my statement for the record. I appreciate your holding this

hearing today.

Thank you.

7

[The opening statement was not available at the time of printing.]

Chairman CRANE. Thank you.

And now if our witnesses will please sit down at the dais there.

I think it’s Sandy in the first one. Right. Okay, we’ve got Doug in

his seat. And, Lindsey, you’re at the far end here.

And we’ll proceed in order with—oh, wait. No, no. You guys got

turned around. No, that’s okay. He can change. I mean, we want

to make sure everyone addresses you properly. Because the people

here on the panel may not recognize you offhand.

All kidding aside, let’s get on to serious business, and we’ll proceed first with Sandy Levin. And, guys, as I’ve mentioned before

try and keep your oral testimony to 5 minutes or less. All written

submissions will be made a part of the permanent record.

Sandy.

STATEMENT OF HON. SANDER M. LEVIN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. LEVIN. Thank you, Mr. Chairman.

As you mentioned in your opening statement that I think very

well describes the issue, much has changed since you originally

scheduled this hearing. As you mentioned, Doug Bereuter and Mr.

Houghton and I have presented resolutions that were an effort to

keep the spotlight on the problem areas within trade matters with

Japan. The election has occurred. Japan is in transition, and, as a

result, I think, we need to be careful and perhaps brief about what

we say.

Let me just say a few words. At some point, it was clear, I think,

that the Japanese policy seemed more than not a win-lose proposition—a win proposition for the Japanese, and a lose proposition

for those who were excluded from their market. But in recent

years, I think it’s been increasingly clear that more than not their

policies have been a lose-lose proposition, losing for them and losing for everybody else.

Until now—and this subcommittee has been so much a part of

this—there have been so many efforts by the United States to try

to pry open the Japanese market to help them deregulate. And

we’ve tried virtually everything: 301—changing it. Super 301. All

kinds of agreements.

Now, with the election, the Japanese appear to be at another

crossroads. And I just want to say, I think we should do everything

that we can, though we have to realize the limitations to try to

help Japan decide on its own the correct options. There was an article today in the Washington Post which talked about the presently prevailing parties split on whether they should fix their economy or ensure their reelection. I think it’s important for the world

that they fix their economy. And there are several legs to that:

bank restructuring, the whole issue of the weakness of their currency, and trade deregulation. And we’re here today, and our resolutions addressed it, to express the strong belief that trade deregulation has to be part of the reform of the Japanese economy. The

argument may be that they’re in a weakened position, but actually

with the weakness of the yen, this is a more opportune time for the

Japanese to deregulate over a reasonable time on a broad basis.

8

Enough said. I’m not going to go, Mr. Chairman, members, into

specific areas like automotive or flat glass or whatever it is. You

have, as mentioned, two resolutions before you. I don’t think it’s

clear when would be an opportune time to bring these up on the

floor—whether they should be combined. There’s no pride of authorship here. But I do think at an opportune and appropriate moment the Congress, the House should once again consider this

whole issue of trade policy with Japan—the essential need for them

to deregulate, to open up their markets, to terminate their exclusionary policies. It will be much better for the Japanese consumer,

who can then participate in the renovation or the rejuvenation of

the Japanese economy. And it will surely be better for the business

people and the workers, as well as, in the end, the consumers of

America.

Thank you very much.

[The prepared statement follows:]

9

10

11

12

13

Chairman CRANE. Thank you, Sandy.

Our next witness will be our colleague, Doug Bereuter.

STATEMENT OF HON. DOUG BEREUTER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEBRASKA

Mr. BEREUTER. Thank you, Mr. Chairman, Mr. Matsui, members

of the subcommittee, and Mr. Rangel. Thank you for permitting me

to be here for the testimony today. I want to commend you for holding this timely hearing after the shocking elections in Japan, and

Prime Minister Hashimoto’s recent resignation.

I’ve got a couple of paragraphs you can read for yourself about

what a recent top political pundit in Japan, Mr. Neufer, had to say

about the implications of that.

Mr. Chairman, I think it’s important to note that the people of

Japan have spoken to their government officials about the need for

economic reform. It’s now more important than ever that the

United States send a clear and unequivocal message, seconding

that call for reform.

As the chairman of the Asia Pacific Subcommittee, I’ve been concerned about the impact of the Asian financial crisis on the United

States for some time. Approximately a year ago, Thailand’s financial crisis was described by the President of the United States and

many other experts as a ‘‘small glitch in the road.’’ Now, one year

later, Japan and Hong Kong are in recession. Indonesia’s 32-year

ruler, Suharto, is gone. Russia stands in desperate need of more

international assistance. And the world is pleading with China not

to devalue its currency. Despite Chairman Greenspan’s intentional—I think intentional—downplaying of the crisis so as not to

disrupt the markets, the Asia financial crisis threat is real, significant, and unfortunately not a short-term problem. Mr. Chairman,

I felt compelled to testify before you today, not to extol, however,

the dangers of the Asia financial crisis to the United States. Most

members do have some appreciation for this problem.

Instead, I’m here to discuss the important role that Japan can

play in alleviating the effects of that crisis. They should be second

engine of growth in the region. And they’re not. They’re a drag on

the economy. They’re cutting back on their imports dramatically

from east and southeast Asian countries. They’re headed for a negative GNP next year, according to all predictions. Only the Japanese have the resources to help themselves. And they do not have

a record of having the necessary resolve to make those changes.

Though the financial crisis presents a serious threat to our national interest, it also provides an opportunity for the U.S. Government to pursue a more consistent and balanced trade and foreign

policy agenda with Japan. Even more important, the crisis provides

an opportunity for Japan to act responsibly and bolster the perception within the American public that it’s a partner as well as an

economic competitor.

Now, first, we do need to acknowledge that Japan has responded

to the crisis by acting to protect its self-interests in the region in

several meaningful ways. And I list those there. I’m not going to

go over them because of time. But they are significant.

14

But there’s another troubling side to all Japan’s effort and its

traditional response to the crisis. The reality is that neither Japan

nor any other country has actually dispersed second-line credits.

Moreover, all of Japan’s financial assistance—commitments,

structural adjustment loans, and export-import credits—even taken

altogether are still an inadequate alternative to a strong Japanese

economy. Therefore, the primary question remains is the Japanese

government prepared to make the fundamental economic, structural, and regulatory changes necessary to strengthen its economy.

Now the resolution that I’ve offered, to which referred to International Relations Committee, a subsequent referral to Banking

and to this committee, is broad as reflecting those jurisdictions. It

is not strictly trade. It goes to a number of important issues.

U.S. officials representing both Republic and Democratic administrations have long called for Japan, for example, to deregulate its

economy and remove informal barriers to trade. More recently, U.S.

Treasury and Federal Reserve officials have called upon Japan to

take the tough steps necessary to reform the financial sectors of

their economy. Those officials calls for deregulation are being belatedly and grudgingly heated. Under Prime Minister Hashimoto’s

leadership, the seemingly all-powerful Minister of Finance bureaucrats finally proposed an ambitious but problematic financial sector

big-bang and a bridge loan—a bridge bank to close bankrupt financial institutions. While these moves are in the right directions,

knowledgeable observers have frankly been underwhelmed by the

scale and scope of these and other proposed reforms. To paraphrase

Secretary Rubin, ‘‘it’s time for Japan to move beyond virtual reforms to real reforms.’’ And that certainly does involve a permanent tax cut for individual Japanese because they’re not—they’re

not confident in their economy, and they’re not investing. And

they’re not saving in financial institutions at least. Reportedly the

biggest single consumer item in Japan is home safes. I invite your

attention to the last section in my remarks related to House Resolution 392. I think it’s the appropriate advice for the House to give

to the Japanese, not to pile on, but to let them know how very important we think their partnership in dealing with the Asian financial crisis really is—for their sake, for east and southeast Asia, and

also because of its implications on us. And the details are

forthwritten in that section.

Thank you, Mr. Chairman.

[The prepared statement follows:]

15

16

17

18

Chairman CRANE. Thank you, Doug.

And our final witness: our distinguished colleague from South

Carolina, Lindsey Graham.

STATEMENT OF HON. LINDSEY GRAHAM, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF SOUTH CAROLINA

Mr. GRAHAM. Thank you, Mr. Chairman.

I come to the committee today with a little different approach to

the problem. And I know the problem is real and I want to be part

of the solution to maintain a good, strong relationship with Japan.

And I hope Japan can make the corrections they need, with our assistance, to get economy in that part of the world going.

But when you talk about U.S.-Japanese trade relations, people in

the third congressional district of South Carolina take notice for a

variety of reasons. But one of the dominant reasons is that in my

district we employ 1,200 folks with Fuji Photofilm U.S.A., making

a variety of products, including photographic film, paper, quicksnap

cameras, and videocassettes.

Fuji Film U.S.A., Mr. Chairman, has invested over a $1 billion

in my district. About every other week, we expand, and it has

brought a quality of life and good paying jobs to my district that

would be very hard to duplicate. And we’re very much appreciative

of what Fuji Film has done in South Carolina. Fuji Film and Kodak

were in a dispute, I think some of our friends from New York will

recall, about the idea of whether or not the film market was open

and available in a fair manner to Kodak film. Kodak and Fuji

share about the same market share in each other’s country—9 or

10 percent Fuji market share in the United States; about the same

for Kodak in Japan. The dispute was brought to the attention of

the U.S. Trade Representative, and the U.S. Trade Representative,

at Fuji’s request, picked an impartial arbitrator. And the U.S.

Trade Representative chose to take the dispute between Kodak and

Fuji and send it to the WTO. And, as you know, Mr. Chairman, the

WTO ruled not very long ago that basically the concerns of Kodak

were not founded in law or fact. And I’ve been to Japan myself to

look at the availability of Kodak film. What I want this committee

to understand is that what problems we have with Japan, they are

real. But let’s focus on the real problems. And one of those problems is not film access. The WTO has ruled. Let’s take the film

case and put it on the shelf, roll up our sleeves, and go to work

on the real problems facing both countries. And I would just like

to submit my comments for the record.

And I appreciate you very much listening to how U.S.-Japanese

trade relations affect a small town in South Carolina.

Thank you very much.

[The prepared statement follows:]

19

20

21

Chairman CRANE. Thank you, Lindsey. And I thank all of you.

Are there any questions? Mr. Matsui.

Mr. MATSUI. Well, no, I would just like to thank all three of the

witnesses. I might just point out that I’m on Mr. Bereuter’s bill and

the Houghton-Levin legislation as well. I’ve looked at the bills, as

one might expect, and I don’t see anything particularly inflammatory in them. They’re very thoughtful resolutions, and they really deal with existing problems. And so, certainly it’s something that

we need to look at; that obviously the timing issue is one that is

somewhat unfortunate. But this is something that I think we need

to make some statement on.

Thank you.

Mr. LEVIN. Thank you. I think, Mr. Matsui, they’re probably

more salient today than they were when they were introduced. The

timing we need to be sensitive to.

Chairman CRANE. I think Mr. Houghton wanted to make a statement.

Mr. HOUGHTON. Thank you very much, Mr. Chairman.

Just a couple of comments.

First of all, thanks very much for holding this hearing. Thank

you, gentlemen, for being here.

It’s really a sad day because Japan is such a good friend of ours,

and they’re going through very difficult times. And we don’t want

to do anything to kick them when they’re down. But at the same

time, there are some things which we feel very deeply about; that

mention was made of the WTO case as far as the film industry is

concerned. However, in the resolution of that case, Japan claimed

that the distribution system was open and that they encouraged

imports and didn’t tolerate restraints on competition, which certainly is not right.

The bill, H. Con. Res. 233, which Mr. Levin and I have put in,

really goes to film, but that spreads out to a more generic basis.

I mean, I think that, you can’t get away from the facts; that you

can have an impression and philosophy and different changing policies, and listening to the words. But in the case of Kodak, you

know, wherever they’ve gone in the world, they have either 40 or

70 percent or 80 percent of any market. And Japan, despite the

protestations of the Japanese government, they’ve got about 10 percent and cannot move off the dime—absolutely cannot do this. And

Fuji is able to bring business and money into this country. They

can buy up accounts, and they can do everything they want. But

we can’t do it there. So, clearly, there’s an imbalance. I don’t know

how it’s resolved. And whether we go ahead on these two bills individually, Mr. Chairman, or whether we combine the two, I don’t

know. But I think we’re going after the same issue, and I think

that as responsible citizens, the Japanese really ought to know how

we feel, not just say, I know you’re having a difficult time. We

want to be your friend, which, of course, we do. But they ought to

know what’s happening here. And it just isn’t right. And so, I think

these bills put a sharp lens on that. And I think they’re great. And

I applaud Mr. Bereuter and Mr. Levin for their work.

Thank you.

Chairman CRANE. Thank you.

Mr. Camp.

22

Mr. CAMP. Thank you, Mr. Chairman. I would just ask unanimous consent to enter into the record an op-ed piece from the

Asian Wallstreet Journal, and would like to call the members’ attention to the testimony of Peter Walters, of Guardian Industries,

whose testimony has been submitted for the record. And I think he

very succinctly explains the problems that the U.S. glass manufacturers face with Japanese trade barriers, and it explains the

failings of the 1995 U.S.-Japan flat glass agreement. I hope that we

can continue to work constructively with the U.S. Trade Representative to ensure that the terms of this agreement are abided by all

parties.

Thank you, Mr. Chairman.

[The information follows:]

23

24

Mr. LEVIN. Mr. Camp. Mr. Camp.

Mr. CAMP. Yes?

Mr. LEVIN. I’ll take 30 seconds. I think it’s so, if I might say, appropriate that you raised it. Anybody who has any question about

the comparable openness of the U.S. and Japanese distribution and

regulatory systems needs only to look at flat glass, among many

other examples, including photography. Our flat glass companies

have been trying to get into the Japanese market with as good a

product if not better and a lower price for years. And you—and the

article you cite spells that out. And anybody who wants to deny the

difference—look, we’ve got to help push Japan to open up, to deregulate. And if they don’t, it’s going to harm them and harm the

rest of Asia, as Mr. Bereuter has said, and us eventually. It already

has.

Mr. BEREUTER. Mr. Chairman, if I could——

Mr. CAMP. Well, I appreciate those. Yes, I’d be happy to yield.

Mr. BEREUTER. Mr. Chairman, if I could comment on your remarks. You brought up a particular industry and a company within

it. And in my own testimony, you may have noticed there is an illustration. On March 28 of 1996, USTR Deputy Ira Shapiro came

up here and testified that the U.S. flat glass exports to Japan had

increased 93 percent due to USTR’s efforts. What he failed to note

is that the U.S. flat glass sales are in a notoriously closed construction industry. So the percentage that we have of the market has

gone up a whopping one-half percent. They had one-half percent,

but a 96 percent increase gives them a whole one percent of the

Japanese market today, despite the fact that, as Mr. Levin said,

they are extremely competitive and, in fact, should be a very dominant player in the field.

Mr. CAMP. Well, I——

Mr. BEREUTER. So those statistics can really be misleading.

Mr. CAMP. Yes, and I appreciate both of your comments on this

area. And it is one that needs more attention, and I thank the

chairman for the time.

Chairman CRANE. Ms. Dunn?

Ms. DUNN. Mr. Chairman, I’d just like to ask unanimous consent

to enter my statement into the record.

Chairman CRANE. Without exception, so ordered.

[The opening statement of Ms. Dunn follows:]

25

26

27

28

And, Richie, do you have any questions of our panelists? Well, I

express appreciation to all of our panelists——

Mr. GRAHAM. Mr. Chairman? Excuse me. Could I make one quick

comment just for the record, and I know you’re very busy. The

problems that have been expressed in other areas of the economy

I’m sure are very real, and I’m sure they’re problems with the Japanese market. But I want to leave the committee with this thought

and this fact: in the regards to film, the dispute between Kodak

and Fuji, which resides in my district with a billion dollar investment, the WTO heard the case. The WTO was selected as the arbitrator by the USTR. And if it’s appropriate, I would like to have

their decision entered into the record. In the area of film, it’s about

competition. It’s about investment. It’s about who’s working the

hardest, and who’s putting the most money into the marketplaces.

It’s not about these other issues.

Thank you, Mr. Chairman.

[The material is being retained in the committee files.]

Chairman CRANE. Does anyone else have questions for this

panel? I yield to Mr. Houghton.

Mr. HOUGHTON. With all due deference to my colleague here, the

World Trade Organization is about words, and the marketplace is

about facts. And the facts are not particularly very good.

Chairman CRANE. Thank you, Mr. Corning. And with that, our

panel will be adjourned. And our next panel consists of Robert D.

Hormats, vice chairman of Goldman Sachs; Douglas Paal, president

and founder, Asia Pacific Policy Center; Clyde Prestowitz, Jr.,

president, Economic Strategic Institute; Brink Lindsey, director,

Center for Trade Policy Studies, Cato Institute; and Kenneth Pyle,

professor of history and Asian studies, University of Washington,

and president of the National Bureau of Asian Research in Seattle.

And, gentlemen, as I indicated to colleagues earlier, if you could

try and confine your oral testimony to roughly 5 minutes. All printed statements will be made a part of the permanent record. And

we’ll proceed in the order in which I introduced you.

Dr. Hormats, you will be first.

STATEMENT OF ROBERT D. HORMATS, VICE CHAIRMAN,

GOLDMAN SACHS, NEW YORK, NEW YORK

Mr. HORMATS. Thank you, Mr. Chairman, Mr. Matsui, Mr.

Houghton, and other members. It’s good to be back to testify before

this committee.

Let me be brief and make a few key points.

First, in my judgement, the world economy today faces greater

danger than at any time since the oil crisis of the 1970’s. There’s

an enormous threat to the global economy. As I say, the dangers

are greater than at any time since the oil crisis. Let me identify

the three major reasons why.

First, recession, a weak yen, and serious banking problems in

Japan. We’ll discuss those in greater detail a little bit later.

Second, faltering growth, recession, or depression in much of the

rest of Asia. I’ve been to Asia very recently. Confidence is collapsing. Currencies are under pressure. A number of countries, Indonesia being the most difficult situation, are facing depression.

Growth expectations are being steadily and dramatically downVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
29

graded. And for many countries, unemployment is going to skyrocket over the next several months.

A third element of the problem is sharply lower energy and commodity prices. Now those, in a way, are of great tax benefit for the

United States. It’s like a big tax cut for Americans. But it also is

very harmful for the countries that export oil and export raw materials. Many large countries, Russia is a good example, have been

hit badly by the collapse in energy and raw material prices.

So this is a very dangerous period for the world economy. And

one has to feel pessimistic, particularly if you visit various countries of Asia.

This is also a pivotal period for the world economy. Many of

these crisis countries need to come up with measures to halt the

deterioration. All over Asia, major reforms are being implemented

or planned. The question is: Will they be adequate and will they

be implemented quickly enough? Here’s where Japan’s reforms

must play a central role. Japan has a short time, a very short time,

in which to decide whether to take the additional steps needed to

boost growth, strengthen its banking system, and thereby restore

confidence in its markets and its currency and become an important part of the solution to the Asian problems, or to continue to

put off tough decisions and thereby suffer further erosion of its own

economy and pose a growing threat to the Asian region.

I’d also make the point that the Asian crisis has not really had

much of an effect on the U.S. Some would say it’s beneficial, because it has helped to lower interest rates and lower prices, and

thereby stave off an increase by the Fed. On the other hand, the

crisis has adversely affected a large number of American companies

that sell in Asia. And if the American economy were to turn down

at a point in time when the Asian economies are still as weak as

they currently are, that would have a devastating effect on the

global economy. An interest rate increase by the Fed would also

have a very adverse global effect.

A few points on the impact of Japan on Asia. First, Asia and

Japan are very closely interrelated. For most countries, Japan is

the biggest market for their exports—for virtually every other

Asian country. They export 20 to 25 percent of their goods to

Japan. But more importantly, the collapse of the yen makes Japanese goods more competitive vis a vis its neighbors in bilateral

trade. And, it makes Japanese exports more competitive in third

countries like the United States. One example: Korea. Seventeen

percent of Korean trade is directly with Japan, but about 30 percent of Korea’s exports compete head to head with Japanese exports in third country markets. China sells Japan 20 percent of its

exports directly and competes with Japanese exports in third markets with about 20 percent of its exports. So, that’s why the decline

in the value of the yen has been so harmful in terms of its impact

on these other countries—and why their currencies and their markets go down when the yen depreciates.

Let me turn to a couple of points about reform. Japan has opened

up in the financial services area to a very significant degree. The

foreign exchange law of April 1 and the Big Bang. Both are pluses.

There are concerns, however, that I do have about Japan’s new securities investor protection fund, which is meant to help out the seVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
30

curities companies that have gotten into trouble. I think that puts

a disproportionately large share of the costs on the large international firms that operate in the Japanese market. There are

ways of improving that, which I can elaborate on.

Two areas of assistance that I’ll close on.

One, it seems to me, that it is extremely important today for the

United States to use the expertise it has in dealing with bank

workouts. We developed a lot of expertise during the savings and

loan crisis. There are a lot of experienced individuals—Bill

Seidman is one. There are many others in the regulatory area and

the banking area that have a lot of experience. The Japanese and,

indeed, every economy in Asia needs to restructure its banking system, restructure its bad loans; and particularly to get real estate

collateral now frozen off the books of the banks. The U.S. can provide enormous expertise. And it seems to me that is an extremely

important thing.

The second is provide some general advice on opening up their

markets, and particularly ways of deregulating their economies so

that they become more efficient. We’ve had a longstanding engagement on the trade front with the Japanese in this area. And it

seems to me that a more open, efficient economy of the kind we’ve

been urging them to do still ought to be very high on our agenda.

Thank you, Mr. Chairman.

[The prepared statement follows:]

31

32

33

34

35

36

37

38

39

40

41

Chairman CRANE. Thank you, Dr. Hormats.

Dr. Paal.

STATEMENT OF DOUGLAS H. PAAL, PRESIDENT AND

FOUNDER, ASIA PACIFIC POLICY CENTER

Mr. PAAL. Thank you, Mr. Chairman. It’s a pleasure to be here.

Having had the case made by previous witnesses that the situation is quite serious, I’d like to address the question of what do you

do under these circumstances with respect to Japan.

Japan is at an impasse. It’s in a period of incomplete political reform and incomplete economic and financial services reform. And

in this period of imperfection, they’ve been hit by a financial crisis

for which the economic system and the political system appear inadequate to deal with the situation. Under these circumstances, we

face a question of what do we do as a nation. Do we do nothing?

After all, it’s mostly Japan’s problem to solve. Or do we do something? If we decide as, typically, Americans do, that we ought to

do something, the question is do we do it in a negative fashion? Do

we scold or levy sanctions to find some way to put pressure on

Japan. Do we combine that with a more positive approach that we

adopted—generally positive approach? I think for the moment a

generally positive approach toward the Japanese is the appropriate

one.

The range of required actions to address the crisis in Japan is

broad and primarily requires self-help by the peoples of the countries concerned in the region. But they are literally finding the

ground washing out from under them as Japan’s crisis deepens.

First, we should avoid the temptation to assess blame or take delight in Japan’s problems, coming as they do after a period of

1980’s Japanese triumphalism. An American display of

triumphalism now over our own improved circumstances is equally

out of place.

We need publicly to avoid the finger-pointing of recent months,

which has built a negative image in Japan among the Japanese

public about American officials. Rather, we should treat the Japanese as the friends they truly are. We know our friends in our

times of need, and so will they in their time of need.

Second, the U.S. administration needs to pull its Japan policy together in a fashion worthy of the name. Lacking anyone of personal

authority or expertise on Japan in its senior ranks, the administration’s policy now is an adjunct of the Treasury Department’s concerns. Treasury has many fine people trying to do the right thing,

but they need the help of the rest of governmental establishments.

The National Security Council, for example, lacks a senior director

to manage overall Asian affairs right now. It’s essential that whoever is chosen for this position have the capacity to pull together

a coherent Japan policy as part of overall policy toward an Asia in

crisis.

Third, the President and Congress should work together to demonstrate to the Japanese people that we are on their side as they

struggle to overcome the situation. I think that by creating a visible and high-ranking interagency team, consisting of the appropriate representatives from around the government, and naming a

private bilateral advisory commission, which takes Bob Hormats’

42

recommendation a slight step farther by making it more organized

and official, and have them go to the Japan and offer advice and

assistance where possible, we can redress some of the damage done

by angry words and verbal shoving in recent months.

Let me stress again that in the end, this is Japan’s problem to

solve. But as many veteran observers of the Japanese scene have

noted, Tokyo is currently beset by a pattern of exceptionally weak

political leadership, disconnected uncharacteristically from a discredited bureaucratic elite. It’s very hard to see the mechanisms

whereby policy will be formed and executed expeditiously. If our

help can accelerate this political process, we should give it.

Current technical advice to Japan can be supplemented by systematic visits to a broad range of the leadership. A bilateral commission, preferably led by former Federal Reserve and Resolution

Trust Company officials, can create psychological pressure on the

Japanese elites as they’re televised going from office to office, offering ways out of their circumstances.

And what should they tell the Japanese? My fourth recommendation is to urge that the Bank of Japan be pressed to increase the

money supply. For example, by buying up Japanese government

bonds, they can release yen into the economy, reversing the deflationary slide that has helped erode consumer confidence. I might

note that just last night the central bankers meeting in Tokyo

agreed on a new yen facility for the region which would do just that

with foreign purchasers of the Japanese government bonds.

Obviously, accelerated banking reform is necessary. Japan’s proposed ‘‘bridge bank,’’ meant to function like our RTC, is a necessary

ingredient and should be enabled to function as soon as possible.

That may be in danger in the current circumstances in Japanese

politics. Bad debts and failed banks need to be confronted and liquidated. Depositors should be protected with public funds as necessary.

Taxes need to be reduced. High marginal income taxes should be

reduced to G–7 levels, and capital gains taxes on real estate transfers lowered to the same sorts of levels.

Financial services need deregulation. And the Japanese markets

need to be open. Japanese past assistance in the post-war era to

its Asian neighbors is being wiped out, and its effect, as they linger

in the patterns of the past, is being felt at home. It’s time for

change. But this should be done—addressed—I think at the moment in a positive sense.

Fifth, more concerted efforts are needed to deal with specific crises in the region. There is scope, for example, for a combined humanitarian and political relief initiative for Indonesia as outlined

some weeks ago by former ambassador Paul Wolfowitz.

Members of the committee, in closing I want to stress that the

collapse of the Japanese economic bubble seems for the moment to

have been more of benefit than harm to short-term U.S. interests.

But we must not overlook the aspects of our own situation that

look more like a bubble everyday. Our own financial institutions

have been made more healthy after the S&L crisis. American firms

are increasingly productive and so on. But American stock markets

are dizzyingly high and real estate values are rising. In a very real

sense, the choice before us today is to let the air out of our bubble

43

slowly and relatively harmlessly or wait for a swing in market

forces to scythe through our financial institutions. The sooner we

can help the Japanese stabilize their situation by facing up to the

extremely tough and painful choices they themselves face, the sooner asset flows will become more stable for ourselves and the friends

in Asia we have worked so hard for generations to help grow and

prosper.

Thank you.

[The prepared statement follows:]

44

45

46

47

48

49

Chairman CRANE. Thank you, Dr. Paal.

Mr. Prestowitz.

STATEMENT OF CLYDE V. PRESTOWITZ, JR., PRESIDENT,

ECONOMIC STRATEGY INSTITUTE

Mr. PRESTOWITZ. Thank you, Mr. Chairman. I’d like to reiterate

the warning issued by some of the early commentators. At the moment, it seems to me that the situation in Asia is something that

we haven’t seen in the world since about 1930. Hundreds of millions of people are being pushed back into a poverty they only recently escaped.

The bulk of Asia and perhaps much of the rest of the world is

teetering on the brink of disaster, and the key to how that turns

out—whether, in fact, we do have a disaster or whether we manage

to snatch victory from the jaws of defeat—is Japan. It is virtually

impossible to imagine that Asia can recover without a revitalization of the Japanese economy. And it may also be the case that the

global trading system cannot stand the impact of continued contraction and decline of the Japanese economy.

Over the last 25 or 30 years, the United States has had an almost unending series of trade frictions with Japan. And the United

States is not alone. The European Union and, indeed, the countries

of the rest of Asia have had similar kinds of disputes with Japan.

And these have often been discussed in terms of market opening;

in terms of possible sanctions or threats. There have been endless

negotiations, and a number of agreements have been reached. Most

of those agreements, according to a recent survey by the American

Chamber of Commerce in Tokyo, are either not working at all or

not working fully. And we could spend a lot of time talking about

each one of them. Some of them have been raised already in testimony this afternoon. But I think the fact is that they are all, in

fact, manifestations of a much bigger issue. And the much bigger

issue is now evident from the systemic problems of the entire Japanese economy. The problem here is not a banking problem, although there is a financial crisis. It’s not just a lack of stimulating

in the Japanese economy, although there is a lack of stimulation.

It’s a systemic crisis. And I think that it has to be addressed in

that manner, both by the Japanese and by those outside of Japan,

including the United States, who care about this issue.

Surely, Japan needs to carry through the banking reforms that

have been described. Surely, Japan could use a tax cut. I would

prefer an abolition of the consumption tax, as opposed to a cut in

income taxes because most Japanese don’t pay income taxes. But

you can quibble about that. The point is yes, they need a tax cut;

yes, they need to fix the banks. They need to take whatever it is,

$500 billion, a trillion dollars, and pay off the bad loans. And yet,

all of that will not fix the problem in Japan.

It’s a little bit like giving a blood transfusion to a patient who

needs a heart transplant. He needs the blood transfusion to stay

alive, but he needs the heart transplant to really get well. And the

heart transplant in this case is a thorough restructuring and deregulation of the Japanese economy. It’s land reform. It’s creating

a real market for real estate so that real estate actually trades at

market values. It’s getting rid of the main bank system and lifeVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
50

time unemployment so that you create a real labor market. It’s

decartelizing the structure of much of the distribution system so

that manufacturers cannot tie distributors to them. It’s a whole

range of issues, and perhaps most importantly is establishment of

a true rule of law so that bureaucrats do not have the ability to

administer administrative guidance.

These are very far-reaching changes that imply very substantial

social and political adjustments. They will not be easy. And it

seems to me that the best thing the United States can do is to meet

quickly with whoever the new Japanese leadership is to outline our

own thoughts about the direction Japan might profitably go and

perhaps to convene a—several meetings—an extraordinary meeting

of APEC leaders to develop an Asia recovery plan on which Japan’s

recovery would be the central part; a meeting of the World Trade

Organization to address the question of how to insulate the trading

system from the impact of a continuing Japanese decline.

Thank you very much.

[The prepared statement follows:]

51

52

53

54

55

56

Chairman CRANE. Thank you, Mr. Prestowitz.

Mr. Lindsey. Dr. Lindsey, excuse me.

STATEMENT OF BRINK LINDSEY, DIRECTOR, CENTER FOR

TRADE POLICY STUDIES, CATO INSTITUTE

Mr. LINDSEY. Mr. Chairman, it’s Mr. Lindsey.

Chairman CRANE. Oh, it is Mr. Lindsey.

Mr. LINDSEY. Mr. Chairman, Members of the Trade Subcommittee, I appreciate the opportunity to come before you today

and discuss the situation in Japan and what, if anything, the

United States can do about it.

The other witnesses in their written and oral testimony have

sketched a grim portrait of economic conditions in Japan. I generally concur with that assessment. Today, I’d like to spend a little

bit of time, before talking about the proper U.S. response, I’d like

to spend a little bit of time putting today’s conditions in Japan in

context. Because while Japan’s serious problems are certainly

cause for concern, they also ought to be some cause for embarrassment on the part of those Japan experts who not so long ago

thought that the Japanese economy was a vastly superior economic

model to our own.

As we discussed in a paper, to be published shortly by the Cato

Institute, the so-called revisionists, including Clyde Prestowitz, sitting beside me, believed that they had discovered in Japan a new

and superior form of capitalism. Well, the revisionists turned out

to be wrong. In particular, they completely misread the significance

of Japan’s distinctive system for allocating capital. They thought it

was a source of Japan’s strength. But, in fact, it turned out to be

an Achilles’ heel.

The Japanese financial system systematically insulated decisions

about allocating capital from market signals. With a heavy reliance

on bank lending, an absence of transparency and full financial disclosure, and a suppression of equity markets through stable crossshare holding, the Japanese system allocated funds according to established relationships and government targeting of strategic industries rather than in pursuit of the highest market return. Revisionists praised this system for its long-term focus. In fact, the absence of market discipline and feedback produced the wild speculation of the bubble economy during the 1980’s and the resulting bad

debt mess of the 1990’s. It has wasted the hard-earned savings of

the Japanese people on a truly mind boggling scale.

To regain economic health, Japan must address the bad debt crisis. Insolvent institutions must be allowed to fail. Weak institutions must be merged into stronger ones. Good assets must be separated from bad. Bad assets must be foreclosed on and written off.

Without resolution of this central problem, the Japanese financial

system will remain paralyzed, and many other beneficial reforms

are, therefore, unlikely to do much good. After all, it’s hard to have

capitalism without capital.

Well, is Japan going to do the right thing? On the positive side,

the recently announced total plan does at least create a structure

for dealing with the bad debt crisis that could work. But implementation is everything, and the political obstacles that stand in the

way of effective follow-through are formidable. Those political obVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
57

stacles may have been eased or may have worsened by the recent

election results. It’s too early to know. At this point, a healthy

skepticism about expeditious reforms remains in order.

Whatever happens, though, we must face the fact that the

United States can do very little to affect this situation. This is not

a trade dispute. I disagree with the suggestion that this matter be

referred to the WTO. The WTO has neither the mandate nor the

competence to address domestic economic policy issues such as

those that are currently afflicting Japan. This is a matter of purely

domestic economic policy, albeit with international ramifications.

And it will be handled or not by the Japanese in accordance with

domestic political realities. It’s argued, of course, and truly that Japan’s problems do affect the rest of the world. Japan’s economic

weakness is worsening the larger crisis in east Asia. And a fullscale Japanese meltdown could drag the rest of the world into recession.

Well, while it’s true that we live in an interdependent world, this

is also a world of sovereign nations. As much as it pains us, we do

not control the domestic economic policies of other countries. Western Europe, for example, has suffered for years now from chronic

double-digit unemployment. This problem saps the vitality of that

continent and may, over the long term, breed serious social

pathologies.

At the root of the problem are bad policies—rigid labor market

regulations and dependency-generating social insurance programs.

Although we as Americans and other people around the world

would surely benefit from a more dynamic Europe, we realize that

we have little standing or leverage to affect domestic policies there.

We need to come to the same kind of humble realization with respect to Japan.

If Japan does make necessary reforms, the process is going to be

driven not by foreign political pressure, but rather by economic

pressure. Japan announced its ‘‘Big-Bang’’ reforms not because of

U.S. haggling, but because of the perception that Tokyo was becoming a financial backwater by comparison to the more competitive

and dynamic markets of London and Tokyo.

Likewise, the pressure of yen leaving the country in search of a

decent return will do more to promote financial restructuring than

any amount of U.S. table pounding. Over the long term, the most

effective thing that we can do to encourage market-oriented reforms in Japan is to set a good example. If the United States keeps

its own house in order, our superior economic performance will act

as a spur to the Japanese and other countries around the world to

follow our lead. Apart from a good example, we can provide expertise and advice, but we ought to have appropriately humble expectations regarding what they can accomplish. Because, in the end,

we cannot force the Japanese to do what’s good for them.

Thank you very much for inviting me here today.

[The prepared statement follows:]

58

59

60

61

62

Chairman CRANE. Thank you, Mr. Lindsey.

Dr. Pyle.

STATEMENT OF KENNETH B. PYLE, PROFESSOR, HISTORY AND

ASIAN STUDIES, UNIVERSITY OF WASHINGTON, AND PRESIDENT, NATIONAL BUREAU OF ASIAN RESEARCH, SEATTLE,

WASHINGTON

Mr. PYLE. Thank you, Mr. Chairman. As I understand, my assignment in this hearing it is to discuss the political background

of our relations with Japan at this time. I will not attempt to discuss specific trade issues per se but rather the broader context of

Japan-U.S. relations within our present—within which our present

trade negotiations are set. As a result of Sunday’s election, the resignation of the Prime Minister, present gaping vacuum of political

leadership have further exacerbated what I believe had already become the greatest political economic crisis Japan has faced since

World War II.

It is a systemic crisis. The problem is not only the prolonged economic slump, the unresolved banking crisis, and the uncertain

progress of deregulation, but rather in a long succession of crises

in this decade, since the end of the Cold War, Japan has shown a

bewildering lack of purpose and direction, a pattern of paralysis

and immobilism in its policy making, and a dismaying lack of leadership.

In addition to the failures, to deal with the economic and financial crisis, there are many other examples of immobilism. At the

beginning of the decade in the Gulf War, there was the utter failure of Japan to muster coherent support for the international coalition. And then, during our standoff with North Korea over its nuclear program in 1994, Japan was unable to decide whether it

could provide backup assistance for U.S. forces should there be a

conflict right next door on the peninsula.

Japan has reluctantly agreed to our insistence on a revision of

the Defense Cooperation Guidelines, but there is a mountain of legislation that will be required to make these guidelines operational.

And the whole issue of whether Japan is willing to engage in collective self-defense remains unresolved.

In the Kobe earthquake and the nerve gas attack in the Tokyo

subways in 1995, and then in the 1996 Peruvian hostage crisis at

the Japan ambassador’s residence, Japan demonstrated an appalling lack of effective crisis management. Japanese leadership has

also failed to reach consensus about responsibility for its militarist

past, at great cost to Japan’s international standing.

In short, there is a broad pattern of systemic stalemate, a paralysis of institutions and policymaking that cast doubt on the likelihood of Japan’s ability to contribute to solution of the Asian financial crisis, or to achieve any time soon the long promised opening

of Japanese markets to trade and investment.

The Japanese system, which worked so well during the highgrowth period and during the unique circumstances of the Cold

War, and which only a decade ago was widely expected to offer

world leadership, is floundering. The Japanese ship of state today

is adrift, and there’s presently no one at the helm.

63

Five years ago, when the LDP was overthrown after 38 years of

one-party rule, many observers in Japan and abroad thought the

upheaval would lead to sweeping reforms and bring to power new

faces, reformers with new ideas of openness and change and a new

sense of national purpose.

Since then, however, politics have been in a rudderless state.

Parties have experienced a dizzying display of realignments. In less

than five years, we’ve had four changes of government, six prime

ministers, and the sharing of power by 11 political parties. The opposition parties proved even less able than the LDP to provide decisive leadership.

Today, the LDP again has a majority in the lower house, but has

just lost its hope of controlling the upper house. The opposition

parties are fragmented, the reformers in disarray, and the electorate so alienated that fully half of the voters support no party.

Moreover, the LDP itself is internally divided over fundamental

issues of reform and economic policy.

The bureaucracy, which gave Japan strong purposeful leadership

through the post-war decades, is today demoralized and disoriented

by scandals, turf struggles, and a lack of clear direction. At the

same time, it is holding fast to its power and influence.

How are we to account for the paralysis of Japan’s political leadership since the end of the Cold War? There are, of course, immediate causes, such as fundamental disagreement over whether tax

cuts and stimulative spending would worsen already substantial

government deficits and undermine the fiscal discipline required to

deal with Japan’s rapidly aging population. But if we look for deeper causes of this immobilism, they are to be found in the legacy of

the policies and institutions that remain from the catch up period

and the unique role that Japan played in the international system

during the Cold War period. The century-long campaign to catch up

with western industrial economies left many deeply entrenched interests and institutions, especially the iron triangles among bureaucracy, industry, and ruling party, which are resistant to reforms.

Moreover, the post war exclusive concentration on economic

growth left many political strategic institutions undeveloped, including the weak prime ministership.

Another fundamental reason is the consensual decision making

process of Japan. It is ponderous in times of uncertainty. And in

Japan’s post Cold War external environment, there are huge uncertainties, including the globalization of capital markets, the rise of

China, the prospect of Korean unification, and so on.

Historically, in such times of uncertainty in its external environment, Japan has typically held back, watched and waited for

trends to clarify. Japan is not disposed to international leadership.

It is typically adaptive to its environment, opportunistic and pragmatic, moved by national self interests. It has a powerful conservative tradition in its society and politics. Most Japanese policy

makers are deeply resistant to American-style, market-led reforms,

which they are believe are too unpredictable in their social consequences. Many policy makers, such as Mr. Sakakibara, the key

MOF official in international trade matters, still have faith in a

Japanese-style capitalism.

64

What all this adds up to in my judgement is a continuing and

prolonged period of drift and instability in Japanese politics, making Japan a difficult and uncertain partner for the U.S. in world

political economic affairs. Despite the fact that many of its fundamentals are good, there is little prospect that Japan will muster

the leadership to quickly stimulate its economy, boldly reform its

financial institutions, and thereby strengthening the yen and help

lead Asia out of regional contagion.

On the contrary, Japan appears to be cutting back in critical

ways. Accordingly, this systemic fatigue and gridlock in the politics

of our principal ally in the region enhances the imperative for

American leadership. We will have no choice but to continue prodding and pressuring Japan, both bilaterally and, when possible,

multilaterally to take steps its system is resisting. There is very

deep resentment of American hectoring, and we need to be wise in

how we do it.

Fortunately, as a result of America’s restored economic and political influence, Japan has a renewed appreciation of the indispensability of its alliance with us. And we possess very considerable

leverage.

Thank you.

[The prepared statement follows:]

65

66

67

68

69

70

71

72

73

Chairman CRANE. Thank you, Dr. Pyle.

Dr. Hormats, the resignation of Prime Minister Hashimoto has

created uncertainty about the future direction of economic policy in

Japan, and it’s clearly too soon to tell what will happen yet. But

do you have any sense of the prospects for continuing reform and

deregulation?

Mr. HORMATS. I think, Mr. Chairman, that we know a few

things. I’m always hesitant to make judgements about other countries’ politics. But there are a couple things we knew.

One is that a large—far larger number of people voted in this

election that had been anticipated. The general view was that

maybe 35 percent or 40 percent of the electorate would vote. Fiftynine percent actually voted.

Chairman CRANE. Ten percent more than we.

Mr. HORMATS. That’s right.

And in the urban areas, the LDP won virtually no seats—none,

if I’m correct. Or a very small number. So there was clearly two

things happening: one, a lot of people went out of their way to express frustration and disappointment and annoyance with the LDP.

And second, in the urban areas, as opposed to the rural areas,

where there is strong LDP constituencies in the urban areas, the

LDP was a disaster. So this must convey some signal to the LDP

about frustration.

What it portends about future reforms is harder to determine,

however. As the testimony that we’ve heard today, I think, would

indicate one should not make the judgment that the frustration

with the LDP means that the electorate supports the kind of bold

reforms that most here would advocate, which is to say particularly

a very dramatic adjustment—reform of the banking and the real

estate sectors—or these systemic kinds of reforms that have been

discussed here. On the contrary, there are probably a lot of Japanese who regard those as so wrenching and so disruptive of labor

markets that they would not support them. So I don’t think we can

necessarily make the judgment that this election result means that

they’re going to proceed quickly down the road toward bold stimulus, reform of the banking system, or reform of the property markets. The stock market, I think, began to believe that the day afterwards—certainly, the Japanese stock market did. Ours did as well.

But I’m a lot more cautious and circumspect than that.

Chairman CRANE. Mr. Prestowitz, in your book, Trading Places,

you advanced some arguments about the Japanese economic success in the 1980’s that I didn’t agree with you on, but I wonder if

you still hold the same view that you expressed in Trading Places.

Mr. PRESTOWITZ. Thank you.

Yes, basically, I do. And I think that—let me pose a question

back to you. Mr. Lindsey here made the comment that I, as a revisionist, was wrong about Japan. And both he and you have proceeded on the assumption that I was praising the Japanese system

as a superior system. I’m kind of baffled by this because I’ve been

attacked in the press. I’ve been attacked by Mr. Lindsey’s institute

as a Japan basher. I mean, I’m one of the well-known Japan

bashers. I can’t figure out how I can be a Japan basher on the one

hand, and an advocate of the Japanese system on the other hand.

It’s not logical.

74

Chairman CRANE. Oh, I didn’t accuse you of it.

Mr. PRESTOWITZ. So let me try to explain this. I lived in Japan

in the 1950’s and the 1970’s and worked in the government and negotiated with Japan in the 1980’s. In those years, the Japanese system was doing very well and was displacing U.S. industry in a

number of areas. And I described how the Japanese system worked

and how it was doing that. Now, a very interesting point is that

I said at that time that Japan’s was a mercantilistic, crony capitalist system. And when I said that, I was attacked by Mr.

Niskanen, who’s the head of Mr. Lindsey’s institute, and by other

leading economists who said, ‘‘no, Japan is just like us.’’ It’s a good

neoclassical economy. Well, now it turns out that, in fact, it was

a mercantilistic, crony capitalist system, and we’re now seeing that

not only did it imply some damage to the U.S. in the 1980’s, but

it now, the system now threatens not only the U.S. but itself and

the rest of Asia.

Chairman CRANE. Are you arguing that nothing that you said in

Trading Places was a recommendation that we might emulate

Japan in some areas?

Mr. PRESTOWITZ. No, of course, not. I mean, look. I wasn’t 100

percent right. Even I make mistakes. And, you know, there were

some things in Trading Places, if I had to write it over again, I’d

write it differently. By the same token, the fact that Japan now has

problems doesn’t mean there’s nothing we can learn from Japan.

Japan’s not all wrong. It has just got some significant structural

issues.

Chairman CRANE. Okay, we’ve got to give Mr. Lindsey equal

time.

Mr. LINDSEY. Well, it’s good to see that Mr. Prestowitz remains

a revisionist. Now he’s revising what he used to say.

The debate back in the 1980’s was in the context of Japanese economic success, and the question was what’s causing that success.

The revisionists thought it was due to the hand in glove relationship between industry and government, occasional targeting of specific industries for support, and for the closed financial system that

allocated capital on what was thought to be a patient and longterm view.

Those of us on the other side, who were then called naive, freemarket ideologues, said, ‘‘no, Japan’s economic success is due primarily to market factors’’—to low taxes and low spending for many

decades after the war—low government spending and also to the

entrepreneurial ingenuity of Japanese corporations which devised

new and superior manufacturing techniques, which did, indeed, in

specific industries, though not across the board, knock American

companies back on their heels for a number of years, until, American companies learned to mimic and adopt those practices on their

own.

So the issue was what caused Japan’s success. The free market

folks never denied that Japan had interventionist elements. We

simply said that Japan was succeeding in spite of those elements

and now it is sadly apparent that those interventionist aspects of

the Japanese system, which won high praise from the revisionists,

have now been Japan’s undoing.

Chairman CRANE. Thank you.

75

And Dr. Paal, you mentioned that the replacement of Hashimoto

is not necessarily bad. How long do you think it will be before the

newly chosen leaders can take serious steps to correct the problems

in the Japanese economy and banking sector?

Mr. PAAL. Well, as I discussed earlier, Mr. Chairman, there’s a

difference between theory and reality here. In theory, they could

begin very soon. They have a due date of getting a new cabinet together by the 26th of July and getting the bridge bank legislation

through in a very hurried-up session at that time, and then addressing tax reductions later in the year.

I think the chances of those things happening in lock step are

rather small. As an observer of the Japanese scene for quite a long

time, I think that the array of Japanese leaders ready to take the

bit in the teeth and go with it is so narrow and waiting so long to

be senior enough to take the top leadership posts that I would

think we’d have to keep our expectations low. It’s for that reason

that I recommend we adopt as a nation a more activist policy.

Japan has in its history had four occasions when its economy has

gotten into real trouble and it has needed help. The first was the

1880’s, and they had an internal strong man who led the charge

to fix it, Count Matsugata. It happened again in the 1930’s, and

the Japanese turned their policy over to the military. The military

marched on until they lost the war. It happened again in the 1940’s

when Horace Dodge from the United States was brought in to

straighten out Japanese economics. And today, we’re witnessing

the fourth time.

Given the peculiar circumstances of this versus the previous occasions, I think this is a time when we ought to take a proactive,

constructive, all-embracing approach. It may fail. But the alternative of doing nothing is likely to lead to nothing.

Chairman CRANE. And one question that I’d like to put out to all

of you folks, and it’s a—from a written statement that we received

from Richard Fisher, who’s Deputy USTR. And it was at the recent

APEC ministerial meeting in Malaysia. He stated that Japan, this

is a quote, ‘‘Japan pursued a course of action that could undermine

the entire APEC initiative and cast doubt not only on Asia’s recovery, but also on APEC’s effectiveness.’’

And I’d like to throw that out to all of you. Do you basically

agree with that assessment? I mean, is that your reading?

Fire when ready, Gridley.

Mr. PRESTOWITZ. I’m not sure we understand. Would you repeat

that?

Chairman CRANE. Yes, at the APEC ministerial meeting in Malaysia, he said, ‘‘Japan pursued a course of action that could undermine the entire APEC initiative and cast doubt not only on Asia’s

recovery, but also on APEC’s effectiveness.’’

Mr. PAAL. Mr. Chairman, I know something about what I think

is being referred to by Mr. Fisher’s statement, and that is that at

the APEC ministerial, the Japanese raised reservations about the

voluntary sectoral trade liberalization measures that had been

promised by the APEC leaders at their previous meeting. Japan, at

the previous meeting, had introduced reservations in the areas of

agriculture and fisheries, because that’s always been a difficult and

sensitive area in their ministry. And they raised them again this

76

time in a context when other countries were coming forward with

liberalizations that they had promised in the November meeting

last year.

In some ways, it should not have been a surprise to the international community that they did this, because it’s always been a

sensitive issue. It was the wrong note to sound at the wrong time,

in an era when everyone is being stricken by closing markets and

other kinds of economic difficulties. And that I think goes back to

the point many of us were making earlier, which is that Japan

today is not in a—its leadership appears not to be a position to be

able to override this narrow sectoral interest, such as agriculture

and fisheries posed inside Japan.

Chairman CRANE. Anyone else have a comment on that?

Mr. LINDSEY. Just assuming that that was, indeed, what was at

issue, and I wasn’t able to pick that up from that one comment—

however unconstructive Japan has been with respect to voluntary

sectoral liberalization within the APEC process, I think those kinds

of sectoral issues must be put in context, and they pale in importance next to the huge central issues that face Asia today: Japan

dealing with its bad debt crisis; and the rest of Asia dealing with

their broken and dysfunctional financial systems. So I think putting too much emphasis and too much heat on Japan with respect

to narrow sectoral issues is simply bad prioritization. We ought to

keep our eyes on the ball, and the ball is getting the financial system back into operation.

Chairman CRANE. All right. Dr. Pyle, why does Japan continue

to play such a reticent stand-on-the-sidelines role in the WTO and

in APEC?

Mr. PYLE. Well, Japan, as I said, is not disposed by its nature

to be an international leader. Some people, for example, have said

that Japan is leading from behind in organizations like APEC.

Doug Paal is absolutely right in what he described here as Japan’s

failure to play a leadership role on this very important issue. It’s

still really governed by narrow private interests, and those private

interests too often collide with the kind of free-trade leadership

that is required in WTO and other such international efforts.

Chairman CRANE. Thank you. Mr. Matsui.

Mr. MATSUI. Thank you, Mr. Chairman.

Clyde, I might just add with respect to your book and some of

the writings I read over the 1980’s, I don’t—I frankly think you

were right. I think what’s happening in Japan right now bears out

some of the things you were saying about the Japanese economy.

You were mainly talking about how to open up the Japanese market because there was a certain amount of controls through the

regulatory process and obviously the banking system. And I think,

you know, from what happened recently, over the last few years,

it bears out your concept of what the Japanese economy was actually like.

I might just want to pose maybe to all of you, particularly Mr.

Hormats, each one of you said something that was very important

and very interesting. So I’m going to take parts of it. Dr. Pyle

talked about the fact that the Japanese government drives the system as the bureaucracy and obviously it requires a consensus. And

it’s a very slow process. At the same time, I believe the other four

77

of you, talked about the fact that the Japanese need to do something on both the financial institutions, which are in deep trouble

at this time. And the fix that they made a few months ago is not

sufficient. They need to stimulate its economy. And until there’s a

permanent tax cut or some direction, probably nothing substantive

will, in fact, happen. And obviously, the whole issue of deregulation.

And then, there’s also an attitudinal problem in terms of permanent employment and things of that nature. The problem I see is

that each one of these three or four requires dislocation and a great

deal of turmoil in the Japanese economy, which they’re really unwilling to face up to. And that’s why, perhaps, the Prime Minister

had to resign, and that’s why there’s some uncertainty and instability going on now—both the political system and in the economy.

Given those elements and given the fact that you’re not going to

see them solved probably anytime soon, and then you all talked

about, and I think it was almost unanimous, that we’re seeing

something that we hadn’t seen since perhaps the 1930’s, at least

prior to World War II, prior to the war, and during the time of the

Depression. What are the prospects? I mean, what can we do? Amo,

I wish Amo Houghton was here because when he spoke with Mr.

Fisher, he suggested that we need to talk about macroeconomic policy and members of Congress will have to show a little discipline

and not speak so much about our specific commodities and specific

issues, which I’m sure the next panel is going to do, just as we

would probably expect them to do. That’s not what we really need

to do right now.

But that being the case, what should the United States do, given

the limited amount of control? We can hector, as I believe Mr.

Rubin is trying to do in a way that is very moderate and at the

same time a lot of stability in our market. What can we do? What

are the steps that we can take? Obviously, we have to do something with the IMF—probably fully fund that. But beyond that,

what can the U.S., in fact, do? Mr. Hormats, and then maybe each

of you.

Mr. HORMATS. Okay, let me just try a couple of thoughts. One,

I think funding IMF. I very much agree. I think the numbers are

getting dangerously low. The Fund has to put money into Russia,

and who knows what’s coming down the road. And this is a something that really needs to be done, at least to help bolster confidence—not that the Fund is perfect, but that we don’t have any

substitute for it at this point.

Second, I would make a point about the World Trade Organization. One of the very positive elements in this otherwise terrible

carnage in east Asia today is that the countries have avoided

wholesale retreat to protectionism, this is something that might not

have been possible perhaps 10, 15 years ago. Then you might have

had a lot of countries reverting toward protectionist measures. The

fact that there are World Trade Organization rules and penalties

toward protectionism have helped to provide a counterweight to

those in these countries who might have advocated that course.

Also the IMF and the Treasury and the USTR have moved in that

direction as well. So, keeping the World Trading Organization rules

before these countries and avoiding protectionism abroad is imporVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
78

tant. The same is true here: avoiding a lot of restrictions against

these countries. We’re going to have a big trade imbalance with the

rest of Asia for quite some time to come. And if we succumb to

measures to protect our economy, as strong as it is, then these

weaker economies are going to use that as a pretext. So that’s a

second thing.

Third, the point I made in my written testimony, when I mentioned earlier—I think it’s very critical now that we—urge Japan

to move at a rapid rate to deregulate the real estate sector and improve the banks. I think they’ve got to determine how to do that,

given their own political circumstances. I think they should do it

more rapidly, but we don’t know how quickly they feel they can tolerate it in terms of their own domestic politics.

I think we can provide a lot of expertise to the Japanese regulators, to the Japanese banking system, to the people who are in

charge of these bridge loans. There are a whole new series of institutions that have been set up or are going to be set up to address

the bad bank problem, the bad loan problem, and the frozen real

estate collateral problem. We have a great many people here—

former RTC people, bank people, Fed people, regulatory experts—

who can help them do that. That can expedite the process. It’s not

only true in Japan. It’s true all over Asia. And it’s not money.

Japan doesn’t need our money—but our expertise, our experience

in this area, I think, could be of vital significance. And that’s one

of the things I would very much recommend.

Mr. MATSUI. Thanks very much.

Dr. Paal?

Mr. PAAL. Mr. Matsui, the drift in Japan, the lack of focus is just

hard to believe for someone who’s a frequent visitor there. And that

drift has become more conspicuous in recent months. In many

ways, Japan is where Great Britain was at the turn of the 20th

century. They have a choice. They can have their tea ceremonies

and funny hats and live off their savings for the next 80 years, and

hope to make it as a nation. Or they can really undertake reforms.

I think the best thing we can do as an ally, friend, and sharing the

economic universe with them is to let them make that as informed

a choice as possible. We need to have this kind of conversation in

Japan, where it’s not frequently held as a conversation. And I

think the teams of experts—and just getting in their face with this

issue is the responsible thing to do at this time.

Mr. MATSUI. Thank you.

Mr. PRESTOWITZ. Could I just add two things? I second what Bob

Hormats proposed, and I also agree with Doug Paal that one of the

striking aspects of this is that in Japan the sense of urgency about

this problem is much less than it is outside of Japan. I, therefore,

think it’s very important for the administration to convey in every

way possible, and I think this means the President ought to go as

soon as the new prime minister is named, go meet him. And say,

‘‘hey, you know, things are really getting out of hand here.’’ I also

think the U.S. can orchestrate APEC and the G–7 and the WTO

and the OECD—all of the international organizations—all to convey a sense of urgency to Japan so that in a way, you kind of push

the Japanese leadership to rise to the occasion.

79

The second thing I think is that I don’t really think the Japanese

know what to do. And here Bob’s idea of sending experts is good.

And I would just extend that and say I think it’s important for the

U.S., in conjunction with the Europeans and the other international organizations, to put together a pretty explicit road map.

We gave a road map to the Chinese telling them what they had to

do to get into the WTO. You know, a road map here that everybody, not just us, but everybody gives to the Japanese and says,

‘‘Hey, you know, guys, this is how to do it.’’ I think would be very

useful.

Mr. LINDSEY. I think that technical advice could be useful, and

we certainly have expertise in some of the areas that are of greatest challenge to Japan right now. But I think really the most important thing that the United States can do over the coming

months and years is to avoid taking actions that will make matters

worse. In particular, we need to avoid bilateral confrontations and

showdowns, which could end up actually being very perversely selfdefeating, triggering a market panic that ends up sending Japan

over the edge. So we definitely want to stay away from that.

Furthermore, though, on the more positive kind of engagement,

I think there is a chance that that also can end up being self-defeating. I don’t see any way that Japan is going to change until it

absolutely has to. And when market forces give them no alternatives, governments make sweeping reforms that upset vested interests and important constituencies when there’s no choice at all.

And these days very surly and impatient markets are starting to

box in Japanese policymakers. If we go in and launch some kind

of bilateral initiative to sort out Japan and give it a road map for

the future, it’s going to be terribly tempting to declare success,

even if the result is really just temporizing and papering over problems, which could end up delaying ultimate accountability of Japanese policymakers for the problems in that country. We need to

avoid taking steps that take market pressure off the Japanese policy makers—in particular the reforms this April that all but eliminate foreign exchange restrictions and allow Japanese to move

their money overseas or to move it into foreign-managed hands. I

think will be a marvelously positive lever of pressure because as

that money starts escaping from the country, it’s going to put

downward pressure on the yen and put political pressure on the

Japanese government to do something to make Japan be an attractive place to invest money.

Mr. MATSUI. Dr. Pyle, would you.

Mr. PYLE. Congressman, I’ve just come back from Japan. I’ve

been going there regularly for 35 or more years. I came back with

several impressions. One was Japan today is feeling very isolated

and self-absorbed, resentful of foreign hectoring, not really feeling

deeply a sense of crisis yet. The kind of sense we have. At the same

time, there’s also something that struck me really strongly on this

visit is a renewed respect for the United States and for the value

of the alliance, which in the 1980’s was diminished and even in the

early 1990’s there was a lot of brave talk about Japan joining with

Asia. That’s pretty much gone now. Japan really has a great deal

of renewed respect for this country’s leadership. And I think, thereVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
80

fore, that we have considerable leverage. And that we should use

it in the way that the other panelists have suggested.

I was there when President Clinton was in China, and there was

a great deal of sensitivity in Japan to the kind of things that the

President and Jiang Zemin were saying and intimating about China’s great stature in resisting devaluation. And the implication was

that Japan was not showing this kind of stature. So I would agree

with Clyde that we have an obligation to the leadership, and we

can orchestrate through multilateral channels considerable pressure on Japan to face up to the responsibilities that it has.

Mr. MATSUI. I’d like to thank all five of you. I appreciate it.

Thank you.

Mr. HERGER [presiding]. Anyone else wish to inquire?

Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman.

I was interested in Mr. Lindsey’s comments, having been on the

Banking Committee here ten years ago in the middle of the S&L

crisis. I’m struck by the unreason that often prevails in this institution. When we spoke to the issue at that time of the S&L crisis,

the S&L bailout was much larger than it turned out to be with a

$500 billion price tag. There are even some bestsellers that were

written about the banking situation that was going to occur after

the presidential election. I think the suggestion was that all the big

banks were going to go belly-up shortly after the election. Recall

how popular that notion was?

What was equally popular at the time was the time was the prevailing suggestion that if we could just restructure our economy

along the lines of what the Japanese had done so skillfully. In fact,

they lectured us a number of times, if you recall, about the things

that we could do. They lectured us hard about the size of the Federal deficit, and I’d be interested if you would like to go on a bit

more with your comments. I thought they were right on target.

Mr. LINDSEY. Sure, first on the S&L crisis in the United States.

There are many parallels between that situation in the United

States and the situation that currently afflicts Japan, although the

Japanese problems do seem to be both substantially larger in magnitude and in national scope than those of the S&L crisis. But

nonetheless, at the time, there was a lot of talk about not just the

S&L crisis, but a general crisis in the banking industry and that

we could face a kind of systemic financial meltdown. That makes

me somewhat hopeful that some of the more apocalyptic talk that

we’re back at the verge of the 1930’s that we’re hearing today with

respect to the east Asian crisis may be similarly overdrawn; that

it may be that some particular prudent reforms in the financial

sector may be enough to stave off what could be a real catastrophe.

As to the talk back in the late 1980’s and early 1990’s that our

financial system ought to mimic the Japanese, there was very

widespread—I don’t mean to just single out Clyde Prestowitz—

there was very widespread feeling at the time that the United

States’ main problem, its main competitiveness problem was a

short-term focus; that we had impatient equity markets and we

had to report to stockholders every quarter; and that, boy, wouldn’t

things be better if we had a system like the Japanese where all the

money goes through banks and everybody knows everybody, and no

81

one is pressing anyone to make short-term returns, and therefore,

everyone can concentrate on strategic objectives and building market share and making investments in new technology and so forth.

Well, as it turned out, our short-termism really now looks like

accountability. And the long-term focus that we were praising or

that some were praising in the Japanese system turned out to be

a lack of accountability; that saying you have a long-term strategic

vision is very convenient when you’re not earning return. You can

say, ‘‘Well, just wait until the long-term. Everything is going to

work out okay.’’ Well, the long-term has arrived now in Japan, and

it’s very ugly.

So, I think there’s a lesson for many people that the market-oriented system of the United States in which banks are not the central intermediary for allocating capital, but rather we rely much

more heavily on arms-length equity markets, I think that model—

the western model—is going to be ultimately adopted by east Asia

rather than the reverse which was predicted five, ten years ago.

Mr. NEAL. Anybody else wish to comment?

Mr. HORMATS. Let me just add one point because I think that

point about equity is an interesting issue. One of the real problems

all over Asia, except for one economy which I’ll mention at the end

it’s gotten itself into trouble by relying too little on equity and too

much on debt. Japan that’s certainly true. It’s really not an equity

culture. It’s not a risk-taking culture. The average Japanese puts

a huge amount of their savings into super-secure assets like bank

deposits, which are still secure, and short-term money market

funds, but not equities. Now the opening of opportunities to invest

through mutual funds and foreign companies is making them a little bit more equity-oriented. But all over Asia, enormous amount

of leveraging took place—huge amounts of debts and that’s why

this problem is so difficult. It’s true in Japan. It’s true in Korea.

It’s true in most parts of Asia.

It’s very interesting to contrast Taiwan with Korea in the sense

that Taiwan and Korea have the same kinds of industries generally. But Taiwan’s industries were financed largely through equity—much less debt, much more equity than most other parts of

that region. And I think that to the extent you can improve the efficiency of equity markets in the area, you can help to avoid these

big buildups of debt, which were big problems. And equity, when

you make an equity investment, as long as it’s based on the kind

of rules we understand, there’s a lot of accountability based on it.

You have to do quarterly reports and things like that. So, management is much more accountable in that kind of environment. So it

brings with it not only less leverage, but also more accountability.

Mr. HERGER. Thanks. Would anyone else? Yes, Mr. Jefferson.

Mr. JEFFERSON. I’m afraid there have been so many responses I

can’t recall who said what with respect to my question, but I’ll ask

it anyhow and maybe you can remember.

I think two panelists said that we should avoid making matters

worse. I know Mr. Lindsey said it over here on this side. And someone said that we should avoid making decisions that would limit

access to our market for Japanese products and so on. Is that a recipe for our responding to the Japanese with regard to their importing to us as usual? Won’t this result in higher deficits? And, if it

82

does, when do you say that’s a problem? How high is—I mean, how

high should they go? Do we talk about deficits any more? Is it too

ruinous?

I know these are separate questions, but how we handle the

trade issues and how we handle the issue of soundness of the Japanese economy, but they are, in the one sense, separate, another

sense, when you get back to your issue of making matters worse,

they’re connected. So if you don’t want to make matters worse,

what do we do about the deficit issue? Do we talk about it? How

do we handle that?

Mr. LINDSEY. Well, I’ll take the first crack at this. You raise a

number of different questions. First on the trade deficit, I don’t

think bilateral trade deficits are economically meaningful. The

global trade deficit that we run with the rest of the world is also

not a function of trade policy differences around the world, but

rather a function of macroeconomics, the difference between domestic savings and domestic investment. My colleague Dan Grizwald

wrote a very good paper recently on the trade deficit and going

through those kinds of issues. I might recommend that.

Right now, the combination of our strong economic performance

and the weak economic performance in Japan is widening our trade

deficit with Japan. That’s reflected mostly by a decrease in Japanese imports from the U.S. rather than an increase in Japanese exports to the United States. The Japanese economy is stagnant,

therefore imports are going down.

I don’t think that fact, in and of itself, should be a bone of contention. It simply reflects the fact that the Japanese economy is

weak. Everyone recognizes that and we’ve been talking about the

kinds of things Japan ought to do to fix that situation.

As far as trade disputes are concerned, certainly Japan and other

countries and the United States have policies that discriminate

against goods and services of foreign origin. With respect to the

Japanese policies that do so, I think we have the option of taking

those kinds of disputes to the World Trade Organization. We did

that, for example, with respect to a discriminatory tax system

Japan had on spirits, alcoholic spirits. We took it to the WTO; we

won. So if we have discrete commercial disputes regarding Japanese policies that discriminate against foreign goods and services,

I think we have recourse and we have options. But in general, the

trade deficit, I don’t think, should be the focus of our concern.

Mr. JEFFERSON. What do you mean when you say, And don’t

make matters worse by taking actions against the Japanese economic system?

Mr. LINDSEY. Well, if, for example, we said, Japan, you must reform your economy by date X or we’re going to slap 100 percent duties on products X, Y, and Z, first, that could very well precipitate

a financial panic that would be the exact catalyst to push Japan

over the cliff. That is a possible outcome and, therefore, it’s playing

with fire to engage in that kind of confrontation.

At the very least, all it accomplishes is harming American businesses and consumers that use and benefit from Japanese products

and harming the Japanese companies that earn revenues from selling abroad. So it doesn’t do anything to make the situation better.

83

Mr. JEFFERSON. Let me ask you one other thing, if I might.

There’s been some discussion about what the Japanese electorate

doesn’t support. Does anybody have a feel for what it does support

with respect to reforming the system or changing the way the Japanese economy’s performing? What does the electorate support?

Does anyone know? The Japanese electorate, not ours.

Mr. PYLE. Well, I think the Japanese electorate is desirous of

changes in many aspects of its political economic system. The problem has been to find political leadership that will be responsive to

this kind of generalized sentiment that the Japanese have, which

is a recognition that they do have to make fundamental changes,

that they do have to do more to respond to needs for international

leadership.

But the Japanese electorate—for example, there are now four or

five major candidates to take Hashimoto’s place. It’s going to be decided in the back room. It’s going to be decided in jockeying among

factional leaders and there will be a new face there in a couple of

weeks. But the likelihood that this will be a leader who has a reform agenda is very, very slim in my judgment. So the political system is not really responsive to a kind of generalized recognition on

the part of the electorate that change and reform is necessary.

Mr. PAAL. Mr. Jefferson, I think it’s fair to say too that, while

the Japanese electorate has signaled a desire for change, they’ve

repeatedly also signaled a desire to avoid pain and there’s no

change without pain in the current circumstances. And so politicians there are in a situation in which some of you in this Congress

may recognize, which the voters want something at the lowest possible cost. When it comes to bankruptcies, for example, you have

to declare winners and losers. If you call in bad loans and you put

people out of business, you put people out of work and that’s very

hard to do in a Japanese context. That reinforces, I think, the view

of most of the panelists here, if not all of them, that it’s going to

be very, very hard to get the Japanese to bring about this kind of

change on their own; about the situation getting much worse.

Mr. LINDSEY. Let me just add that certainly that voter turnout

and the results indicate a high degree of voter frustration with the

ruling Liberal Democratic Party. But we don’t know whether people are frustrated because the LDP has done too little or whether

they’re frustrated because they’ve done too much. Or whether

they’re simply frustrated because the LDP has been vacillating and

inconsistent. I’m sure different parts of the electorate had different

motivations. So, while I would like to be optimistic and read these

election results as a mandate for change, and perhaps it is possible

that they will used as such, it’s not necessarily so.

Also, even if frustration with one party is incoherent, in other

systems it nonetheless does have clear policy ramifications because

there’s an opposition party that takes advantage. In the Japanese

system, unfortunately, there isn’t a strong, cohesive opposition

party that will be able to take advantage of these particular election results.

Mr. HERGER. I thank you, Mr. Jefferson. I thank our panelists.

We do have about three minutes left for this vote. Thank you very

much for appearing and your very good and helpful testimony.

84

We will recess now, subject to the call of the Chair. And when

we return, we’ll conclude with our third panel. Again, thank you

very much.

[Recess.]

Mr. HERGER. We will now reconvene the Ways and Means Subcommittee on Trade.

And if we could have our last panel—it looks like it’s gathering.

Mr. Brad Smith, director of international relations, American

Council of Life Insurance; Shannon S. Herzfeld, senior vice president, international affairs, Pharmaceutical Research and Manufacturers of America; and Mr. Wendell Willkie II, senior vice president, general counsel, of Westvaco Corporation, New York, New

York.

Mr. Smith.

STATEMENT OF BRAD SMITH, DIRECTOR, INTERNATIONAL

RELATIONS, AMERICAN COUNCIL OF LIFE INSURANCE

Mr. SMITH. Thank you. Mr. Chairman and members of the subcommittee, we’d like to thank you on behalf of our 532 member

companies for the opportunity to raise this important issue. In addition to my written comments, with your permission, I’d also like

to submit for the record a further explanation of the violations that

we believe are currently underway with the 1994 and 1996 U.S.-

Japan Bilateral Insurance Agreements, along with a concurrent

document produced by our sister association, the American Chamber of Commerce in Japan Insurance Committee.

Mr. HERGER. Without objection.

Mr. SMITH. Thank you.

At the beginning of 1998, our international committee authorized

the creation of a new task force to review current and future insurance trade agreements with regard to compliance and implementation. Its first project was to answer a request from the United

States Trade Representatives’ office for industry input on the Japanese government’s implementation of the 1994 and 1996 U.S.-

Japan Insurance Agreements.

The U.S. ensures the Japanese insurance market remains highly

restrictive and extremely difficult to penetrate. At $407 billion a

year in annual premium volume, it is the largest life insurance

market in the world, yet the foreign share of Japan’s market is a

mere 3.9 percent. By contrast, the foreign market share of every

other G–7 country is at least 10 percent and, in some cases, it exceeds 30 percent.

In 1994 and 1996, our respective governments undertook two

agreements designed to promote transparency and deregulation of

the Japanese insurance market and to open it to meaningful foreign participation. However, the overall goals of these agreements

are far from being achieved until such time as Japan fully implements the commitments it has made to substantially deregulate

the primary sector areas of its insurance market in a transparent

manner. It is obliged to maintain existing protections for foreign

firms that have created significant market niches within the socalled third sector, which I’ll explain in a moment.

In terms of liberalizing the primary insurance sector, which represents 95 percent of the Japanese market, I have listed the many

85

specific items of non-compliance in my written testimony, although

I’ll be pleased to answer any questions you might have. In sum,

this not only means that the Japanese insurance market remains

effectively closed to U.S. insurers, but that Japanese consumers

continue to be denied the benefits of a competitive marketplace.

Similarly, we are extremely concerned with the diminution of the

third-sector safeguards caused by increased activity of Japanese insurance firms and subsidiaries in this segment of the market. The

desire of Japanese business to participate here provides our negotiators with significant leverage to encourage liberalization of the

first sector, which is life, and the second sector, which is property

and casualty.

Until the 1994 agreement, the government of Japan pledged to

continue longstanding limitations on entry by Japanese large insurance companies into the life portion of the third sector, as well

as specific restrictions on third-sector activities by Japanese life

and non-life subsidiaries. These limitations must continue until primary sector liberalization has been achieved and a transition period of two-and-a-half years has expired. The purpose being to enable foreign firms to establish some toehold in the primary sectors

which, as I said, represents 95 percent of the market, before they

are faced with onslaught in the third sector from large Japanese

insurance companies. Without enforcement of this provision, the

foreign market share in Japan’s insurance market may actually

fall.

ACLI member companies report that the Ministry of Finance has

failed to live up to this key provision in several critical ways. First,

it has allowed the second-largest Japanese non-life insurance company, Yasuda, to create, by agreement, a de facto subsidiary

through its partial ownership of INA Himowary, thus creating radical change in the agreement, which is specifically prohibited. This

circumvention has created pressure on the Ministry of Finance to

also allow other Japanese companies into third sector, specifically

by approving a cancer insurance rider product for Tokio-Anshin,

which is owned by Japan’s largest insurance company, Tokio Fire

and Marine. Even as we speak, companies are reporting potential

new problems in Japan’s third sector. The specific concern is that

protected products, like group personal accident and cancer insurance, are being marketed through new sales channels, creating radical change in the insurance sector which is a serious violation of

the agreement.

With all this in mind, we firmly agree with USTR’s July 1 conclusion that, as things stand today, the two-and-a-half-year countdown to the opening of the third sector should not begin. The

countdown should not begin until, as the bilateral agreements require, there is substantial deregulation of the overall Japanese insurance market. The objective of the bilateral agreements was to

increase American insurance companies’ opportunities in the Japanese market by improving market access for foreign companies, improving market competitiveness, and promoting consumer choice.

When Japan lives up to its commitments, the real beneficiaries will

be Japanese consumers who, for the first time, will be able to buy

innovative and competitively priced insurance products.

I’d be pleased to answer any questions you might have.

86

[The prepared statement and attachments follow. Attachments

are being retained in the committee files.]

87

88

89

90

91

92

93

94

Mr. HERGER. Thank you, Mr. Smith.

Ms. Herzfeld.

STATEMENT OF SHANNON S.S. HERZFELD, SENIOR VICE

PRESIDENT, INTERNATIONAL AFFAIRS, PHARMACEUTICAL

RESEARCH AND MANUFACTURERS OF AMERICA

Ms. HERZFELD. Thank you very much, Mr. Chairman. Thank you

for the opportunity to present our industry’s views.

As you know, I represent PhRMA, the Pharmaceutical Research

and Manufacturers of America. We are America’s leading researchbased pharmaceutical and biotechnology companies. Many of the

members of this committee are quite familiar with PhRMA’s members. Companies like Searle have their headquarters in Illinois.

Pfizer and Bristol-Myers Squibb are headquartered in New York.

Warner Lambert has a state-of-the-art research facility in Michigan. And, of course, California and Massachusetts have clusters of

high-tech biotech companies such as Amgen and Genzyme,

Genentech, and Biogen.

The lifeblood of our industry is research, taking America’s best

ideas and turning them into innovative medicines. PhRMA companies alone will invest more than $20 billion in research and development in 1998. That is one-fifth of our total world sales. This ensures that the American pharmaceutical industry remains the leader in the development of innovative medicines and, indeed, half of

all new medicines now are discovered here in the United States.

This not an easy task. On average, it takes 12 to 15 years and approximately $500 million to go from the discovery of a new drug

to your medicine cabinet. For every 15,000 compounds that are investigated, only 3 ever make it to your medicine cabinet and of

those 3, only 1 will turn a profit. So that’s 1 profitable compound

out of every 15,000. This is a risky and challenging business.

The Japanese market is very, very important to our members. It is a $64 billion market and Japan is the second-largest pharmaceutical market in the world. American companies, however, have

managed to capture only 15 percent of this market. In contrast, for

example, we have about twice that market share in Europe. Since

America is undeniably the leader in innovative medicines, this relatively small market share percentage is a disappointment.

Professor Lacey Glenn Thomas of the Emory University Business

School recently studied the Japanese pharmaceutical market. He

found that, since 1991, for every 10 new medicines that were

launched in the United States and Europe, only 3 have become

available in Japan. That means that 7 out of 10 new medicines

launched in this decade remain unavailable in Japan.

For example, none of the three leading medicines available here

to treat depression are available in Japan. Nor are major medicines

for epilepsy, migraine headaches, prostate disease, or leukemia. We

in America have begun to expect new medicines and new therapies

to be available to us but, in contrast, the Japanese patient and

their doctors wait as the gap increases between what is therapeutically possible and what is administratively available.

Like everything in Japan, the underlying reasons are complicated, but the entrenched bureaucracy remains at the core. Foreign clinical data is still not generally accepted by Japanese reguVerDate 11-MAY-2000 12:44 Jun 21, 2000 Jkt 063468 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HEARINGS\63468 pfrm07 PsN: 63468
95

lators. In order to launch your drug in Japan, Phase III clinical

trials—that’s when you use thousands of volunteers—must be repeated on ethnic Japanese persons residing in Japan. This requirement, which we hope to see modified in the relatively near future,

is time consuming, costly, and extremely redundant. And there is

no analogous requirement here in the United States. When you finish your trials, it now takes approximately 40 months from the

time you file your new drug application until its approval. In the

United States, it takes 15 months and that time is dropping.

And, finally, the Japanese bureaucracy sets a reimbursement

price for drugs. Let me state this again: There is no free market

price for our pharmaceuticals in Japan. The Japanese bureaucracy

sets the reimbursement price. And they do so in an antiquated

fashion that ends up propping up older, less-effective medicines

and holding down the price available for new and innovative medicines. And this robs innovators of their economic incentive.

Last May, President Clinton and Prime Minister Hashimoto

agreed to deregulate pharmaceuticals within the context of the Enhanced Initiative on Deregulation and Competition Policy. This was

very important. The Japanese finally recognized that innovative

medicines need to be a part of a modern health care system and

they agreed they needed more transparency in their health care reform. And, indeed, they agreed to allow the foreign pharmaceutical

companies to finally participate in their reform discussions. We are

optimistic and we realize we would not have even gotten very far—

not this far—without steadfast support from this committee, from

your colleagues in the Senate, and the Clinton administration, and

the U.S. Embassy in Tokyo.

We are cautiously optimistic, but we know far too well that

agreements that look terrific on paper are sometimes a disappointment when implemented. Japan continues to experience difficult

economic times and we are quite concerned that the entrenched bureaucracies will respond by circling the wagons, holding off reform,

and postponing deregulation and this is precisely why we need

your support in order to combat.

We hope that we will continue to have your support in this endeavor as we look to see last May’s agreement turn into a reality.

We will be coming back for your continued support and I wish to

thank you very much, Mr. Chairman, for your kindness and opportunity to appear today. Thank you.

[The prepared statement follows:]

96

97

98

99

100

101

102

103

104

105

Mr. HERGER. Thank you. Thank you very much, Ms. Herzfeld.

Ms. HERZFELD. Thank you.

Mr. HERGER. Mr. Willkie.

STATEMENT OF WENDELL L. WILLKIE II, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, WESTVACO CORPORATION

Mr. WILLKIE. Yes, thank you, Mr. Chairman. We appreciate the

opportunity to appear before you today. I appear on behalf of not

only Westvaco corporation, but also the American Forest and Paper

Association.

Westvaco is a major manufacturer of paper packaging and specialty chemicals. During the last decade, our international sales

have nearly tripled. International business is the fastest-growing

segment of our company and last year our business outside of the

United States accounted for 25 percent of our total sales.

The American Forest and Paper Association represents an industry that accounts for 8 percent of U.S. manufacturing output. The

U.S. is the largest producer of paper and wood products in the

world and Japan is the second-largest market for paper products.

Simply put, Mr. Chairman, export sales are critical to the future

growth and well-being of our industry and access to the Japanese

market is an essential part of this equation.

Unfortunately, however, Japan’s continuing refusal to open its

markets adversely affects trade and economic growth in the Asia

Pacific region and now threatens to stall an important trade liberalization initiative in the APEC forum, as Mr. Fisher’s testimony

before the committee earlier today indicated.

In Vancouver last November, APEC leaders, including President

Clinton and then-Prime Minister Hashimoto, endorsed a proposal

to eliminate tariff and non-tariff barriers in nine priority sectors,

including wood and paper products accounting for over $1.5 trillion

in regional trade. With some of its members already deeply in crisis, the APEC leaders opted for a bold trade liberalization plan to

stimulate regional trade and boost the confidence of world financial

markets.

The APEC initiative is of vital importance if we are to open

Japan and other Asian markets to U.S. forest products. In 1997,

the Far East region attracted 40 percent of U.S. paper and wood

product exports at a dollar value of about $8.5 billion. Statistics

from the first quarter of 1998, however, as compared to the first

quarter of 1997, illustrate what our industry, Mr. Chairman, is

now up against. For the first quarter of 1998, wood product exports

are down 44 percent. Paper and paper board exports are off 77 percent. Newsprint exports are down 25 percent and printing and

writing papers are down 36 percent. And in the same time frame,

wood product imports have increased 18 percent; paper and paper

board by 44 percent; printing and writing imports have increased

138 percent; and newsprint imports are up an alarming 700 percent.

In other words, the Asian economic crisis is having a significant

and very negative impact on the forest products industry. In this

context, trade liberalization through the APEC initiative is urgently needed if we are to preserve American jobs in our industry

106

and establish a level playing field which will enable us to compete

in Japan and other Asian markets over the long term.

Last month, APEC trade ministers met in Kuching, Malaysia.

Country after country agreed that the crisis was not an excuse to

stall further trade liberalization, but on the contrary, a compelling

reason to move forward. These ministers agreed that eliminating

trade barriers must be a part of any long term solution to the region’s economic problems. All countries agreed, that is, except for

Japan. Citing the fact that its industries cannot stand up to international competition, Japan is seeking to exclude as many as six

of the nine sectors from its market opening commitment, with forest products topping the list.

The irony in the Japanese position is striking. By continuing to

protect non-competitive industries, Japan is refusing prescriptions

being taken by weaker economies, smaller economies in the region.

What message is Japan now sending by its actions to other important APEC countries? The CEOs of our industry, members of Congress, numerous governors, and the leaders of our unions have

written to the President, urging him to hold Japan to its APEC

commitment.

If the past is any guide, we can expect Japan’s leaders to argue

that politicians cannot challenge the powerful economic interests

arguing for continued protection, especially in the country’s current

turbulent political climate. But there is no reason for the United

States to concede this and very large reasons to press even harder

for an immediate and firm commitment by Japan to open its market, including a commitment to eliminate tariffs and reduce nontariff barriers in all sectors being negotiated in APEC. Internal politics notwithstanding, Japan can no longer duck its obligations to

its partners in the region and to the global trading community. As

with other leaders throughout the region, it is hoped that Mr.

Hashimoto’s successor will make market reform the first order of

business.

Thank you, Mr. Chairman.

[The prepared statement follows:]

107

108

109

110

111

112

Mr. HERGER. Thank you very much, Mr. Willkie.

Mr. Smith, the administration has emphasized the implementation of existing trade agreements. In your written statement, it

shows that the 1992–1997 paper agreement—and, excuse me, I

want to address this to Mr. Willkie——

Mr. WILLKIE. Sure.

Mr. HERGER [continuing]. Paper agreement with Japan failed to

increase the market access. Do you feel this was a problem with

implementation?

Mr. WILLKIE. Well, I think that the last administration’s U.S.

Trade Representative Ambassador Hills did a terrific job in negotiating that agreement. And I think that our industry, as with others, have also been well-represented. Our interests have been welladvocated by Ambassador Barshevsky and her predecessor, Ambassador Kantor.

But the political intransigence and the resistance in Japan has

simply, to date, precluded our making the progress that we think

it’s reasonable to anticipate. We have—foreign firms have a 4 percent market share in forest products in Japan and the U.S. industry has a 2 percent market share. In every other market in the

world, we have a much more substantial market share than that.

The agreement has not yielded the results we had anticipated and

now we see that Japan is refusing to participate in this APEC

trade liberalization process.

So we think it’s important that we keep up the pressure. This

is the right way to go. It’s the way the whole rest of the world is

going and, Mr. Chairman, we appreciate the leadership that you

and other members of Congress have taken in articulating the interests of our industry. We know you’ve been a good friend to our

industry. And we just think we need to keep the pressure on.

Mr. HERGER. Thank you, Mr. Willkie. Ms. Herzfeld, you described the U.S.-Japan Enhanced Initiative on Deregulation and

Competition as a constructive step in this area. As we have learned

over the years, agreements are only as good as their implementation. What steps do you believe will lead to adequate implementation?

Ms. HERZFELD. Thank you very much, Mr. Chairman. We think

it was a breakthrough agreement in that it got the Japanese to recognize formally that there is a role for innovative medicines in

health care reform. We, though, are very uneasy that during this

time of economic difficulty, the bureaucracy, which is really responsible for the slow change in Japan, is going to entrench; is going

to be obstructive.

The bureaucracy needs to be led from the top. We are looking for

continued pressure, like we have received from this committee,

from your colleagues in the Senate, from the administration, at

every step. Japan is going through a major health care reform,

quite independently of their financial crisis. They have pledged to

have a massive new health care system in place by April, 2000.

And that will either be a health care system which is inward-looking and bureaucracy-driven or a health care system which is modern.

We will get to a modern health care system if we keep the pressure on, day-in and day-out, from the Embassy to the Department

113

of Commerce to the U.S. Trade Representative, through members

such as yourself and your committee and through the Senate.

Without it, the progress will stop in its tracks.

Mr. HERGER. Thank you, Ms. Herzfeld. Now, Mr. Smith, does the

extreme weakness of the yen affect your members’ ability to sell insurance in Japan?

Mr. SMITH. No, not at all. The U.S. insurance companies, because

of the very competitive nature of the United States market, have

been very successful in markets around the world. The purpose of

these agreements is to create the opportunity for U.S. companies

to be able to compete in Japan on price. The historical regulation

of the Japanese market is everybody has to sell the same product

at exactly the same price. Actually, in times of economic difficulty,

price competition would add to increased sales by U.S. companies,

so this should actually be an advantage to us, if we’re truly allowed

to compete in the market, as the agreements are intended to

achieve.

Mr. HERGER. Thank you very much. I do thank our panelists and

your participation. These are concerns for not only your companies,

but many other companies that are in our districts throughout our

nation and I agree with you that we have to continue to keep the

pressure on, to continue to work on this issue together. I believe

only by doing so will we see the progress that we deserve and

which has to come about.

I thank you. With that, this Subcommittee will stand adjourned.

Thank you.

[Whereupon, at 5:05 p.m., the hearing was adjourned subject to

the call of the Chair.]

[Submissions for the record follow:]

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134