[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
UNITED STATES -JAPAN
ECONOMIC AND TRADE RELATIONS
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 28, 2005
__________
Serial No. 109-35
__________
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
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.
C O N T E N T S
__________
Page
Advisory of September 20, 2005 announcing the hearing............ 2
WITNESSES
Moran, Hon. Jerry, a Representative in Congress from the State of
Kansas......................................................... 10
______
Office of the U.S. Trade Representative, Wendy Cutler, Assistant
U.S. Trade Representative for Japan, Korea and Asia-Pacific
Economic Cooperation Affairs................................... 16
U.S. Department of the Treasury, David Loevinger, Deputy
Assistant Secretary for Africa, Middle East, and Asia.......... 22
U.S. Department of Agriculture, Foreign Agricultural Service, A.
Ellen Terpstra, Administrator.................................. 26
California Department of Food and Agriculture, A.G. Kawamura,
Secretary of Agriculture....................................... 31
______
American Council of Life Insurers, Hon. Frank Keating............ 46
Advanced Medical Technology Association, Edwards Lifesciences
Corporation, Michael A. Mussallem.............................. 51
National Cattleman's Beef Association, Jim McAdams............... 57
General Motors, Mustafa Mohatarem................................ 63
American Chamber of Commerce, Japan Market Resource Network,
Deborah Howard................................................. 68
SUBMISSIONS FOR THE RECORD
American Farm Bureau Federation, Washington, DC, statement....... 82
Automotive Trade Policy Council, Inc., Washington, DC, statement. 82
Damond, Joseph, PhRMA, Washington, DC, statement................. 88
Gillenwater, Todd, California Healthcare Institute, La Jolla, CA,
statement...................................................... 90
International Roundtable for Trade and Competition Policy, Inc.,
Miami, FL, statement........................................... 92
MacCarthy, Timothy, Association of International Automobile
Manufacturers, Arlington, VA, statement........................ 97
UNITED STATES-JAPAN
ECONOMIC AND TRADE RELATIONS
----------
WEDNESDAY, SEPTEMBER 28, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 2:06 p.m., in
room 1100, Longworth House Office Building, Hon. Bill Thomas
(Chairman of the Committee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
September 20, 2005
No. FC-13
Thomas Announces Hearing on United States-Japan Economic and Trade
Relations
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
economic and trade issues with Japan. The hearing will take place on
Wednesday, September 28, 2005, in the main Committee hearing room, 1100
Longworth House Office Building, beginning at 1:00 p.m.
Oral testimony at this hearing will be from both invited and public
witnesses. Invited witnesses will include Wendy Cutler, Assistant U.S.
Trade Representative (USTR) for Japan, Korea and Asia-Pacific Economic
Cooperation Affairs; A. Ellen Terpstra, Administrator, Foreign
Agricultural Service; and David Loevinger, Deputy Assistant Secretary
of the Treasury for Africa, Middle East and South Asia. Any individual
or organization not scheduled for an oral appearance may submit a
written statement for consideration by the Committee and for inclusion
in the printed record of the hearing.
BACKGROUND:
The World Bank lists Japan as the second-largest economy in the
world after the United States, and the U.S. Department of Commerce
lists Japan as the fourth-largest trading partner with the United
States after Canada, China and Mexico. The United States is Japan's
largest export market. In 2004, imports from Japan to the United States
totaled $129 billion. United States exports to Japan were $54 billion,
resulting in a deficit of $75 billion. Major U.S. imports from Japan
are passenger cars and parts, computers and components, office
machinery parts and electrical machinery. Major U.S. exports to Japan
include computers, computer components, gas turbines, office machinery,
electrical machinery, optical and medical equipment, and agricultural
products.
Japan has maintained a significant trade surplus with the United
States for many years. The surplus was generally increasing during the
1990s, however it dropped abruptly from $81 billion in 2000 to $69
billion in 2001 and 2002. During the same period, Chinese exports to
the United States began significantly increasing. The sectors in which
the United States runs the largest trade deficits with Japan are
automobiles and automobile parts.
Japan presents many areas of concern. Japan's persistent trade
surplus with the United States, coupled with its staunchly
protectionist attitudes reflected in high tariffs, non-tariff barriers,
and discriminatory government action toward foreign products, has led
to frequent tension in the trade relationship. For example, Japan only
recently announced it would eliminate discriminatory sanitary and
phytosanitary standards against U.S. apples after a protracted World
Trade Organization (WTO) dispute. Japan has not reopened its market for
U.S. beef (nor announced a definite time for doing so) despite
extensive testing and safety protections in the United States to
prevent bovine spongiform encephalopathy in cattle. Many other similar
barriers remain, however, but do not receive the same degree of
attention.
Japan's economy went into recession in 1990, averaging only 1.2
percent growth between 1993 and 2003. Growth picked up in 2004 to 2.7
percent. However in July 2005, various economic data suggested that the
recovery, despite improvement, has not yet become firm--household
spending dropped 3.7 percent from 2004, unemployment surged to 4.4
percent, and prices continued to deflate by 0.6 percent from 2004
levels. In an effort to improve the business climate in Japan, USTR and
Japanese officials continue to participate in the U.S.-Japan Regulatory
Reform and Competition Policy Initiative launched in 2001. USTR's
recommendations cover key areas such as information technologies,
telecommunications, medical devices and pharmaceuticals, energy, and
competition policy. USTR also recommended privatization of the $3
trillion Kampo, a government agency performing various functions of a
postal service, national insurance agency, and retirement savings bank
among others. Indeed, the recent election in Japan that returned the
ruling Liberal Democrat Party (led by Prime Minister Junichiro Koizumi)
to a strengthened position of power was brought about in part because
of controversial legislative proposals to privatize and reform Kampo.
The heavy government involvement in these areas has led to objections
from the U.S. couriers, insurance, and financial services industries,
which seek to compete in Japan.
The goal of this hearing is to discuss Japan's continuing
importance as an economic partner to the United States and the issues
surrounding the U.S.-Japan economic and trade relationship.
In announcing the hearing, Chairman Thomas stated, ``Japan remains
one of our most important trading partners, and recent political and
economic reform movements in Japan raise our hopes that our trade
relationship will greatly improve. Yet after all these years, U.S.
firms do not have full access to Japanese markets. For example, the
U.S. agriculture, automobile, insurance, healthcare, and express
delivery industries are only a few of the competitive industries that
have long sought fair access to the Japanese market. If Japan becomes a
`normal' country, as its leaders are now emphasizing as their goal, we
anticipate trade improvements that will benefit both U.S. firms and
Japanese consumers.''
FOCUS OF THE HEARING:
The hearing will focus on U.S.-Japan economic and trade relations
and Japan's role in the world economy, with a narrower focus on the
following: (1) Japan's economic problems, their causes, and the impact
on the United States and the world economy; (2) Japan's barriers to
trade including sanitary and phytosanitary barriers to agriculture
imports such as the ban on U.S. beef, discriminatory government actions
against U.S. products, and general non-tariff barriers; (3) Japan's
role in the current WTO negotiations; and (4) the recent economic and
regulatory reforms attempts in Japan, including the proposed
legislation to privatize major components of Kampo.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Requests to be heard at the hearing must be made by telephone to
Michael Morrow or Kevin Herms at (202) 225-1721 no later than the close
of business Thursday, September 22, 2005. The telephone request should
be followed by a formal written request faxed to Allison Giles, Chief
of Staff, Committee on Ways and Means, U.S. House of Representatives,
1102 Longworth House Office Building, Washington, D.C. 20515, at (202)
225-2610. The staff of the Committee will notify by telephone those
scheduled to appear as soon as possible after the filing deadline. Any
questions concerning a scheduled appearance should be directed to the
Committee staff at (202) 225-1721.
In view of the limited time available to hear witnesses, the
Committee may not be able to accommodate all requests to be heard.
Those persons and organizations not scheduled for an oral appearance
are encouraged to submit written statements for the record of the
hearing in lieu of a personal appearance. All persons requesting to be
heard, whether they are scheduled for oral testimony or not, will be
notified as soon as possible after the filing deadline.
Witnesses scheduled to present oral testimony are required to
summarize briefly their written statements in no more than five
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full
written statement of each witness will be included in the printed
record, in accordance with House Rules.
In order to assure the most productive use of the limited amount of
time available to question witnesses, all witnesses scheduled to appear
before the Committee are required to submit 300 copies, along with an
IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, of
their prepared statement for review by Members prior to the hearing.
Testimony should arrive at the full Committee office, 1102 Longworth
House Office Building, no later than close of business on Monday,
September 26, 2005. The 300 copies can be delivered to the Committee
staff in one of two ways: (1) Government agency employees can deliver
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WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:
Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing
for which you would like to submit, and click on the link entitled,
``Click here to provide a submission for the record.'' Once you have
followed the online instructions, completing all informational forms
and clicking ``submit'' on the final page, an email will be sent to the
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submission for the record. You MUST REPLY to the email and ATTACH your
submission as a Word or WordPerfect document, in compliance with the
formatting requirements listed below, by close of business Wednesday,
February 23, 2005. Finally, please note that due to the change in House
mail policy, the U.S. Capitol Police will refuse sealed-package
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encounter technical problems, please call (202) 225-1721.
FORMATTING REQUIREMENTS:
The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
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written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
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1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Witnesses and submitters are advised that the
Committee relies on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
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3. All submissions must include a list of all clients, persons,
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materials in alternative formats) may be directed to the Committee as
noted above.
Chairman THOMAS. Good afternoon. Today the Committee is
examining the United States' trade relationship with Japan
because it is so important to U.S. producers, workers,
consumers, farmers, and ranchers, particularly at a time when
self-protectionism and isolationism threaten the current World
Trade Organization negotiations and possibly poison the
atmosphere for free trade. This Committee last held a hearing
on Japan in July 1998. I think it is more than appropriate to
look at the relationship again to measure the degree of change,
if measurable, between 1998 and today, and also to look at the
recent elections in Japan and other developments.
China attracts a great deal of media and congressional
attention, but China is right now only a developing market. The
World Bank lists Japan as the second largest economy in the
world. And then when we look at our trading partners, other
than those in which we have a common border--Canada and
Mexico--China and Japan are next in order. The United States is
Japan's largest export market, and Japan's large, thrifty,
modern, and wealthy population should be a major buyer of
American goods today, but it is not, in large part because the
Japanese have built a wall of complex protectionist practices
and regulatory systems.
Today we will hear from witnesses from various U.S.
industries and a Member of Congress to discuss the difficulties
they have in selling to the Japanese market, including beef,
medical devices, and insurance, to name only a few.
Much has been written and much speculation has been
presented about the results of the recent Japanese election,
and especially the change in the membership of the Diet. Once
again that is about the possibility for ``tomorrow.'' In the
Chair's opinion, too much of our relationship with Japan has
been waiting for ``tomorrow.'' Pick your cliche: ``Tomorrow is
forever,'' or ``Tomorrow never comes.'' Either one pretty well
represents the relationship that we have had with Japan.
All of us are in hopes that the election indicates that
there will truly be a new ``tomorrow.'' The purpose of this
hearing, primarily, is not to speculate about ``tomorrow,'' but
to determine what ``today'' looks like, and especially in
comparison with what ``today'' looks like and what
``yesterday'' looked like--from 1998 until today. Just what
movement has been evident in the Japanese willingness to open
up their markets, notwithstanding all the promises of a bright
tomorrow?
And with that, I will yield to the Chairman of the Trade
Subcommittee, the gentleman from Florida, Mr. Shaw.
Mr. SHAW. Thank you, Mr. Chairman.
This afternoon we once again gather in a bipartisan manner
to help comprehend the practices and policies of a vital
trading partner. In recent months, this Committee has been
proactive in providing members the opportunity to hear from
Government, business, and industry leaders on trade relations
with specific foreign governments. Today we turn our attention
and focus on United States trade relations with Japan. It is
time for Japan to know that the United States is serious about
a free, fair, and transparent trading relationship.
According to the World Bank, Japan is the world's second
largest economy. The Department of Commerce lists Japan as the
United States' fourth largest export market behind Canada,
China, and Mexico. In addition, Japan is a key partner in our
efforts to expand American products into the Pacific Rim.
However, it is most unfortunate that the protectionist views in
Tokyo have placed American business and industry at a severe
disadvantage.
I have heard directly from a number of industries,
including the automobile industry, the medical device industry,
and the insurance industry, to name only three. I have
discussed with them the issues surrounding trade with Japan.
Overwhelmingly, the serious concern that I share with these
industry leaders is the numerous and unfair tariff and
nontariff barriers which exist today.
The Office of the U.S. Trade Representative produced a book
entitled ``Barriers to Trade.'' This document provides detailed
country-by-country barriers on a host of products. The United
States Trade Representative, USTR, section on Japan, which I
have here, is an astounding 30-page document. Protectionist
measures currently in place include high tariffs, support
programs, quotas, and discriminatory standards. Japan's average
bound tariff rate on agricultural goods stands at 51 percent
compared to 12 percent for the United States. The average
applied tariff rate for agricultural products in Japan is 29.4
percent compared to 2.4 percent for the United States.
The United States has always been and will always be a
leader within the World Trade Organization in seeking the
removal of trade barriers, including those unfair barriers in
Japan. We must pressure our Japanese friends to negotiate in
good faith toward moving its market to one that is fair,
transparent, and less regulated.
On September 11th, the Prime Minister was re-elected with
tremendous support. An issue that he based his re-election on
was the privatization of Japan's post-insurance arm, the Kampo.
I understand legislation will move toward the Diet to reform
Kampo by offering a competitive environment for the United
States insurance industry. United States life insurers make up
an estimated $38 billion in annual policy premiums in Japan. As
Tokyo moves forward in privatizing Kampo, a transition period
will take place. Regardless of the amount of time the Japanese
deem necessary to transition into a competitive market, I urge
the Japanese to conduct the Kampo reform in an open and
transparent process which will eliminate any hint of unfair
practices. A transparent process is tremendously important.
I am also concerned about regulations imposed on the
medical device industry. The decision to establish
reimbursement rates based on foreign pricing is perplexing. I
look forward to hearing from our witnesses addressing this area
as well.
Finally, during our focus on China and its currency peg, I
have heard a number of times that we should not overlook the
Japanese yen. Over a 3-year period, 2000 to 2003, the Japanese
Government took steps that thwarted the yen from appreciating
significantly against the dollar, making U.S. exports to Japan
more expensive and Japan imports to the United States less
expensive. While the yen has raised almost 15 percent against
the dollar in the last 2 years, many economists feel that it is
still undervalued. I look forward to hearing from our witnesses
regarding the Japanese yen.
Mr. Chairman, I appreciate today's witnesses and their
willingness to educate us on this bilateral relationship. I
hope to hear their views about whether the recent election will
usher in reforms. I look forward to working with my friend, Ben
Cardin, in addressing these concerns and others raised this
afternoon. And I yield back.
Chairman THOMAS. The Chair now recognizes the gentleman
from Maryland, the Ranking Member on the Trade Subcommittee,
Mr. Cardin.
Mr. CARDIN. Thank you very much, Mr. Chairman, and let me
thank you for holding this hearing and say that I am in total
agreement with the statements that have been made by our
Chairman and the Chairman of the Trade Subcommittee.
My concern has been that with all the attention on China,
we may have lost focus on Japan and making sure that we have
enforcement of our trade rules with Japan and opening up more
markets. So, this hearing, I think, is an important step in
establishing the record as to the current relationship between
our two countries as it relates to commerce.
It has already been pointed out that Japan is our next
largest trading partner outside of North America behind China.
We had a $75 billion trade imbalance in 2004. I think all of us
are very concerned about that. Japanese investors are the
leading foreign holders of U.S. Treasury securities. At the end
of 2003, they held 15 percent of all privately held Federal
securities.
As Mr. Shaw pointed out, there is serious concern as to the
intervention of Japan into the currency market that is used in
a way to manipulate the currency in order to give Japanese
imports into our market an unfair advantage. We need to take a
look at that and see, in fact, what is being done here and look
at the impact it has not only on the market today but on the
future vulnerability of our Nation.
Mr. Chairman, I appreciate the witnesses that you have,
particularly on the private sector panel, because I think they
represent the challenges that we have in our relationship with
Japan in trading. We have representatives from the auto and
auto parts industry, and we know that nontariff barriers in
Japan have worked to the detriment of the auto and auto parts
industry here in the United States. We have representatives
from the agriculture/beef industry. We know about the high
tariffs in Japan on agricultural products and the use of
sanitary requirements, the standards that go well beyond the
protection of the health of the people of Japan. We need to
look at that and see how these distortions are affecting the
market here and in Japan.
Representatives from the life sciences are here to talk
about the medical equipment issue that has been mentioned by
both the Chairman and the Ranking Member. And representatives
from the life insurance or service industries are here. Mr.
Shaw mentioned the privatization of Kampo. It has been delayed
for a long time. We would like to know the reasons why. And as
the Chairman said, we are losing patience in promises that have
been made and not kept. And the issue goes well beyond just
Kampo. It has to do also with opening up opportunities in other
service areas.
Mr. Chairman, these issues are very important. I have,
along with many of my colleagues on the Democratic side of the
aisle, been urging the Administration to be more aggressive in
enforcing our trade rules. In March of this year, I joined
Ranking Member Rangel and other Members of the Democratic House
leadership in urging the administration to take action in the
WTO and under section 301 of the U.S. trade laws to address
some of our trade issues with Japan, particularly in the area
of nontariff barriers.
Mr. Chairman, I can assure you and I can assure our
witnesses today that we are united to work with all the Members
of this Committee to make sure that we pay strict attention to
our relationship with Japan, with the goal of removing
distorting practices that are now being imposed in Japan, that
affects access of U.S. companies to the markets in Japan. We
want to see action, and we look forward to the testimony of the
witnesses today.
Chairman THOMAS. I thank the gentleman.
Before we hear from those panels that the gentleman from
Maryland described, it is our pleasure to hear from a senior
Member of the Agriculture Committee, our friend and colleague
Jerry Moran, from the State of Kansas, for, as far as the Chair
is concerned, two principal reasons: one, being a Member who is
not on this Committee, the depth and breadth of the rank-and-
file's attitude about this issue; and, two, because he does
come from the heartland. The question of agriculture is
probably as egregious as any in the United States-Japan
relationship.
I would tell the gentleman from Kansas any written
statement he may have will be made a part of the record,
without objection, and he can address the Committee in any way
he sees fit.
STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF KANSAS
Mr. MORAN. Mr. Chairman, thank you so very much for those
remarks and for allowing me the opportunity to join you and the
other distinguished Members of the House Committee on Ways and
Means and for this opportunity to testify. While I know this
hearing will cover a number of Japanese trade concerns, I want
to focus my comments and remarks on the economic harm that U.S.
farmers, ranchers, processors, and retailers have experienced
because of a Japanese embargo on American beef.
Japan has prohibited the import of beef from the United
States since December of 2003, when a single case of BSE was
found in a Canadian-born animal. Since that time, we have had
only two cases of BSE in our country, yet the market remains
closed.
Since 2003, the United States has undertaken rigorous and
thorough surveillance programs for BSE testing and has
implemented safeguards to protect human and animal health. That
list is lengthy. We have removed SRMs from the food supply.
From June 1st of 2004 to August of 2005, we have tested more
than 450,000 animals. They have tested negative for BSE. We
have placed a ban on imports of live cattle and most ruminant
products from high-risk countries; FDA's 1997 prohibition on
the use of most mammalian protein in cattle feed; an aggressive
surveillance program has been in place for more than a decade;
the banning of non-ambulatory cattle from the human food chain;
requirements for establishing the use of advanced meat recovery
systems; prohibition against air injection stunning of cattle;
and if an animal is presented for slaughter and is sampled for
BSE, they hold the carcass until the test results have been
confirmed negative.
These safeguards have exceeded internationally recognized
standards promoted by the World Organization on Animal Health,
of which Japan is a Member. And while the Sanitary and
Phytosanitary Agreement provides members of WTO the right to
take measures to protect human, animal, and plant health under
the principles of sound science, the SPS Agreement does not
provide WTO members the right to discriminate and restrict
trade arbitrarily.
So, despite the discovery of only two animals, despite all
these steps taken, Japan continues to refuse to purchase meat
products from the United States.
The Department of State, the Office of the USTR, and the
U.S. Department of Agriculture have worked tirelessly to open
this export market, and I commend them for their efforts. And
on October 23, 2004, almost a year ago, the United States and
Japan concluded an understanding that established a process to
lead to the resumption of beef imports from the United States.
Despite these efforts, the Government of Japan continues to
delay imports of beef from the United States on the basis of
factors not grounded in science or consumer safety.
We are losing $1.7 billion of export market to Japan. It is
the largest export market for the livestock industry. The 2-
year delay has now totaled more than $3.4 billion in losses.
And whether you are a farmer or a rancher or a retailer or
processor, the loss of those markets have a detrimental effect
upon many communities and the agriculture economy. We are
losing $100 million each month Japan remains closed to the
United States, and we have lost an estimated 10,000 jobs.
Mr. Chairman, this issue is very important in Kansas. I
know we are thought of as a wheat State, but my district
produces approximately 5 billion pounds of beef a year, making
it the largest beef-producing congressional district in the
Nation.
It is estimated by my cattlemen that we are losing $6 to $8
a hundredweight as a result of the Japanese ban. There is no
more important trade issue in Kansas than resumption of beef
sales, livestock sales to Japan.
In March, Mr. Chairman, as you know, I introduced House
Resolution 137 which has approximately 80 cosponsors of our
colleagues. That resolution is a sense of the House of
Representatives that if Japan fails to meet its obligations
under that agreement reached nearly a year ago, USTR should
immediately impose retaliatory economic measures against Japan.
While I do not wish for the U.S. and Japan to enter into a
drawn-out trade dispute, the reality is that Japan must be
encouraged, must uphold its trade agreements. I urge this
Committee to bring this resolution to the floor and show Japan
the serious nature of this trade issue.
Congress works to promote trade agreements. Mr. Chairman,
as you indicated, I am a Member of the House Agriculture
Committee. We are often asked to support trade agreements,
CAFTA being the most recent example. And among my colleagues
and among my constituents, I don't see any problem in reducing
tariffs, but they wonder what happens after we enter into that
trade agreement. Why doesn't it result in additional sales? So,
reducing that tariff, leveling the playingfield in that regard
is important, but our failure to make certain that the markets
are open once the agreement is entered into creates a real
interest on the part of Members of Congress and my constituents
as to whether trade agreements--what the value of a trade
agreement is.
Mr. Chairman, in my opinion, Japan cannot have it both
ways. They benefit from exports to the U.S. while denying
imports, such as beef, with no scientific evidence to support
their actions. In 2004, as Mr. Cardin indicated, our trade
deficit with Japan was in excess of $75 billion. I urge support
of House Resolution 137 and ask that this Committee bring that
resolution to the House floor for a vote.
I again thank the Chairman for the opportunity to be here
on behalf of the Agriculture Committee and on behalf of Kansans
back home.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Moran follows:]
Statement of The Honorable Jerry Moran, a Representative in Congress
from the State of Kansas
Good Morning and thank you Chairman Thomas, Ranking Member Rangel,
and distinguished members of this Committee for the opportunity to
testify today. While this hearing will cover a number of Japanese trade
concerns, I will focus just on the economic harm that U.S. farmers,
ranchers, processors, and retailers have experienced because of the
Japanese embargo of American beef.
Japan has prohibited imports of beef from the United States since
December 2003, when a single case of Bovine Spongiform Encephalopathy
(BSE) was found in a Canadian-born animal. Since that time, there have
only been two cases of BSE in this country compared to 20 BSE cases in
Japan. With a herd size of only 1.5 million beef and dairy cattle in
Japan, this same ratio would translate to over 560 cases of BSE in a
U.S. herd size of over 42 million.
Since 2003, the United States has undertaken a rigorous and
thorough surveillance program for BSE testing and has implemented
safeguards to protect human and animal health. These safeguards have
exceeded internationally recognized standards promoted by the World
Organization for Animal Health (OIE), for which Japan is a member.
While the Sanitary and Phytosanitary (SPS) Agreement provides
members of the WTO the right to take measures to protect human, animal,
and plant health under the principles of sound science, the SPS
Agreement does not provide WTO members the right to discriminate and
restrict trade arbitrarily.
The U.S. State Department, the Office of the United States Trade
Representative and the U.S. Department of Agriculture have worked
tirelessly to reopen this export market for U.S. beef, and they should
be commended for their efforts. On October 23, 2004, the United States
and Japan concluded an understanding that established a process to lead
to the resumption of beef imports from the United States. Despite these
efforts, the Government of Japan continues to delay imports of beef
from the U.S. on the basis of factors not grounded in science or
consumer safety.
Losing our annual 1.7 billion dollar export market to Japan is
having a large and negative impact on our entire beef industry and it
also puts at risk our well-established bilateral trade relationship.
This two year delay has now totaled almost $3.4 billion in losses.
Whether you are a farmer or rancher, a beef processor or retailer, the
loss of these markets is having a detrimental effect on our rural
communities and our agriculture economy. The U.S. cattle and beef
industries are losing $100 million each month Japan remains closed to
U.S. beef. Since December, 2003 the U.S. meat industry has lost 10,000
jobs, mostly attributed to lost export markets.
Mr. Chairman, this issue is very important to my constituents of
the First Congressional District in Kansas. When you think of Kansas
you probably think of mostly wheat growing on the plains. However, my
district produces approximately 5 billion pounds of beef a year, making
it the largest beef producing congressional district in the nation.
In March of this year I introduced House Resolution 137 which
currently has 80 cosponsors. This Resolution is a sense of the House of
Representatives that if the Government of Japan continues to delay in
meeting its obligations under the understanding reached with the U.S.
on October 23, 2004, the U.S. Trade Representative should immediately
impose retaliatory economic measures on Japan. While I do not wish for
the U.S. and Japan to enter a drawn out trade dispute, the reality is
Japan must be encouraged to uphold its trade agreements. I urge the
committee to help bring this resolution to the floor and show Japan the
serious nature of this trade issue.
Before the August recess, I also had the opportunity to discuss
this issue with President Bush and Ambassador Portman. As Congress
works to promote free trade agreements throughout the world, it is
important for our trading partners to honor current agreements and
international standards. Without these assurances, support for future
free trade agreements will erode.
Just this week, I was also joined by over 100 members of Congress
in sending a letter to President Bush asking that he make restoring
market access for U.S. beef to Japan his highest economic priority. I
support our government's efforts to reopen our beef exports to Japan
but the Japanese continue to unjustifiably delay the process.
The Senate has voiced similar concerns with letters to the
President, Senator Thune's companion resolution, and amendments in the
agriculture appropriations process.
Mr. Chairman, Japan cannot have it both ways. They cannot benefit
from exports to the U.S. while denying our imports, such as beef, with
no scientific evidence to support their actions. Congressional patience
has been exhausted. I urge you to support House Resolution 137 and help
bring this resolution to the House floor for a vote.
Thank you Mr. Chairman again for the opportunity to come before you
today to discuss an issue of great importance to the state of Kansas
and of the nation.
Chairman THOMAS. Thank you very much, and as a Member from
California, I think that beef on the plate would go well with a
starch and quality vegetable or fruit, with a glass of wine, so
that the Japanese consumer can appreciate the full agricultural
blessings of this country.
Any Member wish to inquire of the gentleman from Kansas?
The gentleman from Pennsylvania.
Mr. ENGLISH. I want to thank the gentleman for his
testimony, and I wonder for context, because you have obviously
been a leader in this effort, have you experienced any other
markets that have been as protectionist as Japan with regard to
our agricultural products?
Mr. MORAN. Well, I am not sure how to compare the two, but
certainly the European Community has created a significant
number of trade barriers for agricultural products being sold
into the European Community. But at the moment--and that is a
longstanding dispute. At the moment, clearly the issue in
agriculture today is the failure of Japan. And I cannot see how
they can stand on any ground for their position, no basis, no
scientific basis, no consumer safety, no food safety issue. We
exceed the standards by the agreement which they have entered
into. And so, clearly, Japan is at the top of the list in my
mind.
Mr. ENGLISH. I want to thank the gentleman for his advocacy
and the fine work he has done with this resolution, and I yield
back the balance of my time.
Mr. MORAN. Thank you, Mr. English.
Chairman THOMAS. Any additional--the gentleman from North
Dakota.
Mr. POMEROY. Mr. Chairman, I want to commend my colleague,
Jerry Moran. It is my privilege to serve on the Subcommittee he
leads in the House Agriculture Committee. I strongly agree with
his testimony this morning--this afternoon, I should say.
One question is this business of the U.S. Department of
Agriculture seeming to open the door to Japanese beef imports
to us. It seems to me most curious that that would move forward
while they are holding our product out. That was a measure--
they announced the proposal in August of 2005. The Senate voted
as part of the 2006 agriculture appropriations bill to prohibit
implementing this proposal. Do you have a thought specifically
on that action by the U.S. Department of Agriculture?
Mr. MORAN. Mr. Pomeroy, clearly a question that should be
asked of USDA as to their thinking. My guess, as I explain it
to my constituents, is that USDA wants to have the United
States' trade regimen operate based upon sound science, abide
by the rules so that we have no--so that Japan has no
opportunity to claim that we are not doing something we should
be doing. I have explained this at home that my guess is USDA
was trying to provide a carrot to Japan, but what I would
suggest that we need is a stick, not a carrot. This is stick
time, not carrot time.
Mr. POMEROY. I have explained it slightly differently. I
have said it is totally crazy for the United States to bring in
Japanese beef when we cannot get our beef out, and perhaps it
is part of the explanation as to how we have dug ourselves into
this current account deficit in trade. We have to simply be
much more aggressive, I believe, in demanding fair treatment. I
very much appreciate the gentleman's leadership on this issue.
You are terrific on these matters.
Mr. MORAN. Mr. Pomeroy, I have not been in Congress quite
as long as you, but I have been here nearly 10 years, and every
one of these instances, the conversation I have with colleagues
but, more importantly, with people at USTR, at USDA, is we
cannot rock the boat. And I think we simply have heard this
expression, we have this attitude it has gone on far too long.
We have to rock the boat or we remain with the status quo. And
in my opinion, it is time to rock the boat.
Mr. POMEROY. I agree with you completely. I think that
those watching this exchange should note bipartisan Members of
Congress have had their belly full and we intend to rock the
boat, as you say.
I yield back, Mr. Chairman.
Mr. MORAN. Mr. Chairman, Mr. Pomeroy is one of my most
difficult Subcommittee members, and I am glad we are in
agreement today.
[Laughter.]
Chairman THOMAS. Well, the Chair only wants to indicate
that if anybody wants any carrots, we have quality carrots in
the old-fashioned version.
[Laughter.]
Chairman THOMAS. Or the ever more popular small carrots in
bags available, even in Japan, if we could get them in.
Does the gentleman from Missouri wish to be recognized?
Mr. HULSHOF. I do, Mr. Chairman. Thank you, and I, too,
wish to associate myself with my friend from Kansas' remarks,
just as I am on his resolution and just as I was proud to be a
signatory of the letter that you sent to the President of the
United States, and to echo what my friend from North Dakota has
said.
You know, at the time when there was a bit of controversy
here in our country about reopening the border, beef coming
across the Canadian border, and there was a lot of angst about
this, and probably in the gentleman from North Dakota's home
State, I know that there was a lot of concern among cattle
producers in my home State of Missouri about this. And my
response to constituents was, the science is there. We cannot
have a different set of standards dealing with our partners to
the North if, in fact, we are wanting to push the Japanese
market on beef. And so at least that was the story that I had
as far as why the USDA was pushing so hard to have Canadian
beef flow back South into our country.
So, again, not to belabor the point, but I would say to my
friend from North Dakota, just as we had a meeting--what was
it, Mr. Chairman?--10 days ago with the European Union Ag
Commissioner, and the gentleman from Kansas is absolutely
correct as far as protectionist measures with the European
Community. You know, we are the most open country on the face
of the Earth as far as having access to our markets. And when
you see other nations that have thrown up protection barriers
simply to keep our products out of their markets, it is time
that I think the administration--and we have shared this not
only with the EU Ag Commissioner but with our own former
colleague of this Committee, the U.S. Trade Representative,
that it is time for us to be much more aggressive, and that is
why I commend the gentleman again for the resolution, for the
letter, for all of your efforts, because I think the science is
on our side, and this is an issue that we must be aggressive.
And I appreciate the Chairman yielding me time.
Mr. BEAUPREZ. Mr. Chairman?
Chairman THOMAS. The gentleman from Colorado, would you
yield briefly?
Mr. BEAUPREZ. I would, Mr. Chairman.
Chairman THOMAS. I have heard it told that the Japanese
actually do rely on science in terms of allowing products in.
The trouble is it was weather science. And whenever there was
bad weather in short supply in Japan, somehow the market was
open; when the weather is good, the market is not open. So,
they may be relying on science, but it is weather science
rather than the science we usually refer to in terms of quality
and protection under sanitary and phytosanitary reasons.
The gentleman from Colorado, thank you.
Mr. BEAUPREZ. I thank the Chairman. I thank my colleague
from Kansas, Mr. Moran, as well for his outspokenness and
leadership on this issue and for the resolution you have
introduced as well.
Being a neighbor from Colorado and having an economy that
is very, very similar, we finish a little beef in Colorado,
too, as the gentleman knows. And I don't think that there is a
more raw nor sensitive subject right now among Colorado
ranchers and farmers and beef growers than the one that you
raise today.
Unfortunately, it is too symptomatic of other trade
barriers, trade problems we have, and probably the reason why
we are having this hearing today, with our friends in Japan. I
have some personal familiarity with the issue that you raise,
Jerry. Back through the eighties, we were in the dairy cattle
business, pure-bred dairy cattle, and we exported cattle all
over the world. The Japanese market was much coveted because if
you could manage to get it over there, they always wanted the
best, and they were willing to pay for it.
Unfortunately, they had a barrier--not just a tariff
barrier, which we are all familiar with, but we called it a
functional barrier with unbelievably restrictive health
requirements. I am going to guess that my colleague from Kansas
would agree with me that the American farmer--and I think
rightfully--always prided themselves in producing the best and
the finest and the safest food in the world, and in abundance,
I might add. And it absolutely confounded me that these
artificial barriers were put up against U.S. ag products then
and, unfortunately, they still exist today.
So, again, I applaud you. I associate myself with your
comments and your fine leadership on this, and I hope that
maybe today's hearing brings some light to a subject that is
causing otherwise very good friends and allies to have a
considerable point of disagreement right now, and that is this
issue of truly fair and free trade.
Mr. MORAN. I thank the gentleman from Colorado for
associating himself with my remarks, as well as the gentleman
from Missouri. And, Mr. Chairman, I failed to mention that even
as late as this week, the Japanese Commission chief that is
reviewing the science on this issue has announced that there is
no hurry to make a decision. There is no need to give into the
pressure to a rush. Again, I think the message ought to be that
there is a reason and that people simply cannot continue to
ignore agreements that have been entered into with impunity.
Chairman THOMAS. The Chair recognizes the gentleman from
Iowa, Mr. Nussle.
Mr. NUSSLE. Thank you, Mr. Chairman.
My question is--maybe it underscores something that you
said already. I would ask my friend from Kansas, we are coming
up on the 1-year anniversary of the agreement that was made to
resume these commitments, and I guess my first question to the
gentleman is--and I am a cosponsor of your resolution. Are you
aware whether or not the United States has--my understanding is
we have fulfilled our part of the bargain here, that we have
fulfilled our part of the commitment when it comes to this
agreement that was made in October of 2004. Is that your
understanding?
Mr. MORAN. It is my understanding.
Mr. NUSSLE. And if it is true that, in fact, the
Commissioner in Japan has indicated that there is no rush and a
year is not long enough for Japan to fulfill its part of the
bargain when, in fact, I believe 70 other markets have now been
reopened to American beef--and I am asking this from a
strategic standpoint, recognizing that the Senate last week, as
part of their appropriations process, if I am not mistaken,
adopted a resolution that is very similar to the one that you
wrote here in the House. What should our strategy be from a
congressional standpoint? Obviously, we are going to have
administration witnesses before us today, but what is your
suggestion or your proposal of how the House could or should
proceed as we not only try and deal with this but also put
pressure on Japan short of locking down markets and initiating
what would be tantamount to a trade war?
Mr. MORAN. I thank the gentleman from Iowa. I don't think
the Senate has yet passed this resolution. It has been
introduced. The Senator from South Dakota, Mr. Thune, has
introduced a companion resolution. The Senate this week did
take steps in the appropriations process, in the agriculture
appropriations bill, to deal with this issue. Mostly I think
their effort was to prohibit the importation of Kobe Japanese
beef into the United States until the reverse market is open
for us.
So, the Senate is taking steps in regard to their
displeasure with our trading relationship with Japan,
particularly as it relates to beef.
I do think that this is--a year is a long time. In fact,
Mr. Nussle, I got most interested in this topic when I was
reading that the Food Safety Commission was meeting once every
4 weeks. This is back in February of this year. The Committee
that was designed to determine how to implement the October of
2004 agreement was only meeting once every month. It seemed to
me that the expediency demanded of this process should be
greater than that. And so this resolution was introduced last
March.
I think it is time for the House of Representatives to pass
this resolution or a similar resolution, appropriately worded,
determined by the Ways and Means Committee, and that
particularly in light of a potential visit by the Prime
Minister of Japan to the United States in the near future, an
awfully good time for the House of Representatives to express
it opinion in this regard.
We often talk in Congress about, delivering a message, and
I am happy to deliver the message. The last thing I would want
is a trade war, an unnecessary trade war, difficult trading
relations with the Japanese. But, again, I go back to what I
indicated to Mr. Pomeroy, that we cannot always take the
position that rocking the boat, creating dissension, creating
difficulties--we have to go through that process to have a
desirable outcome, and the status quo, again, remains
unsatisfactory.
So, I think the timing for action by this Committee and by
the House of Representatives is here. My own constituents, your
constituents, Mr. Nussle, would say it is past time, that this
has gone on too long.
Mr. NUSSLE. And I would say to my friend from North Dakota,
I am not sure we are rocking the boat. The boat is rocking. It
is a matter of trying to prevent it from tipping over
completely, because that is where we are at at this point in
time. And my judgment is that we are--the boat is--we are in a
storm right now, and we have got to figure out how to get out
of this storm, and it is about time that that occur. Otherwise,
this, in fact, may capsize and we may get into a situation that
neither country, particularly countries that are friends and
that have had a longstanding relationship, a good relationship
in certainly the last number of decades--we need to prevent
that from happening. But it appears that most of that onus is,
unfortunately, outside of our control other than to express our
displeasure and put whatever pressure we can. And I think we
should--I think that process should continue, and I appreciate
your leadership in giving us advice on how we could continue
that pressure.
Thank you.
Mr. MORAN. I thank the gentleman, and I appreciate his
analogy.
Chairman THOMAS. I thank the gentleman.
The Chair thanks the gentleman from Kansas and appreciates
his focusing on one particular aspect of an ongoing festering--
--
Mr. MORAN. Mr. Chairman, thank you, and I would be
politically inept and remiss if I did not mention that
California is the largest agriculture-producing State in the
Nation, although Kansas is thought to be an agriculture State.
We are that, but California is much more, and between you and
Mr. Herger and Mr. Nunes, I recognize that these issues have
huge consequences to your economy.
Chairman THOMAS. Quality beef and quality wheat is always
appreciated to augment the broad and vast agricultural wealth
found in California.
I thank the gentleman very much.
Chairman THOMAS. The Chair would ask the first panel to
come forward: Wendy Cutler, who is the Assistant U.S. Trade
Representative for Japan, Korea, and Asia-Pacific Economic
Cooperation Affairs, Office of the U.S. Trade Representative;
David Loevinger, who is the Deputy Assistant Secretary for
Africa, the Middle East, and Asia, United States Department of
Treasury; A. Ellen Terpstra, who is the Administrator, Foreign
Agricultural Service, U.S. Department of Agriculture; and Mr.
A.G. Kawamura, who is the Secretary of Agriculture in the
California Department of Food and Agriculture.
The Chair would indicate that any written statement that
the panel has will be made a part of the record. You can
address the Committee in any way you see fit. The microphones
are in front of you. They may need to be turned on
individually. And beginning, with Ms. Cutler, we move then
across the panel.
STATEMENT OF WENDY S. CUTLER, ASSISTANT U.S. TRADE
REPRESENTATIVE FOR JAPAN, KOREA, AND ASIA-PACIFIC ECONOMIC
COOPERATION AFFAIRS, OFFICE OF THE U.S. TRADE REPRESENTATIVE
Ms. CUTLER. Thank you, Mr. Chairman. On behalf of the
Office of the U.S. Trade Representative, I would like to thank
you, the Ranking Member, and other members of the Committee for
convening today's hearing. I am Wendy Cutler, Assistant USTR
for Japan, Korea, and APEC Affairs, and I very much welcome the
opportunity to provide testimony today.
Japan is currently our fourth largest trading partner with
$180 billion in total two-way goods trade, our third largest
export market, and our third largest market for U.S.
agricultural exports.
Over the years, the bilateral trade relationship has grown
from one dominated by acrimony to one where we are increasingly
seeking ways to work together to find win-win solutions. That
said, old ways die hard in Japan. While we continue to make
progress, we still run into heavy resistance to change. So, let
me start with some good news.
Since your last hearing in 1998, Japan has become one of
the most competitive broadband markets in the world, which has
really been a boon to U.S. suppliers. Japan has dramatically
reduced customs processing fees at its ports. It has
significantly strengthened its IPR regime. It has liberalized
its energy sector. And it has fostered the independence and
staffing of the Japan Fair Trade Commission.
More recent reforms will be detailed in our next soon-to-
be-completed annual Report to the Leaders under our Regulatory
Reform Initiative. Mr. Chairman, you will find in this year's
Report to the Leaders a new section on agriculture, where we
are addressing specific ongoing concerns with Japan's
phytosanitary regime, and we attained encouraging progress.
Japan, for example, has removed three citrus pests from its
fumigation list, eliminating over $1 million in annual costs on
imports of U.S. citrus. And I should add that Japan last month
eliminated its unjustified fire blight measures on imports of
U.S. apples, following a resounding U.S. victory for the United
States in the WTO.
There are, nevertheless, formidable problems in our
bilateral trade relationship with Japan. Foremost among them is
Japan's continued ban on U.S. beef imports. The administration
shares your frustration over Japan's glacial speed at reopening
its market. We have repeatedly and consistently engaged Japan
at all levels on this issue. Ambassador Portman has devoted
considerable time to this problem. He raised this issue just
yesterday with Ambassador Kato after reading press reports
coming out of the Food Safety Commission's deliberations on
Monday.
The Food Safety Commission appears to be in the final
stages of its deliberations. Unfortunately, it is not there
yet, and this is very disappointing. By any reasonable measure,
Japan has had ample time to reach a conclusion on this issue
and reopen its market. We will continue to press hard on Japan.
Another priority issue for the administration is Japan Post
privatization. We are urging Japan to take three steps to
ensure fair competition for its market participants in the
banking, insurance, and express delivery sectors. We want Japan
to completely eliminate the tax, regulatory, and other
advantages that Japan Post continues to enjoy over its
competitors. We want Japan to ensure that Japan Post is not
allowed to make new product offerings in these markets until a
fully level playingfield is achieved. And we want to ensure
full transparency throughout the process.
We are also devoting much attention to Japan's health care
reform efforts and specifically what they mean for the U.S.
medical device and pharmaceutical industries. Our focus right
now is on the biennial review of the reimbursement prices Japan
assigns to devices and drugs, a process that in the past has
presented many problems and one that should be done in a fair
and transparent manner and in a manner which rewards
innovation.
Working with industry and in close cooperation with the
Department of Commerce, we will continue to press Japan to find
solutions to the pricing and product approvals issues in these
sectors.
Before closing, allow me to turn to the Doha Development
Agenda. Ambassador Portman has been urging Japan to play a more
forward-learning role. To be sure, Japan has been doing some
good work, particularly with respect to the industrial tariff
or NAMA negotiations. But with respect to agriculture, the
Japanese regrettably have allowed their protectionist domestic
agriculture interests to prevail, and this is disappointing. As
a result, they have bee incapable of finding a solution at home
that would permit them to take a constructive position on the
market access piece of agriculture. If the DDA is to succeed,
Japan will have to substantially reduce its tariffs on
agricultural products and ensure meaningful improvements in
market access.
Mr. Chairman, we have come a long way with Japan over the
years and have found ways of doing business on the trade front
that are increasingly yielding positive results. This has been
an incremental process in sector after sector, and while we
welcome the progress we have made, we cannot and will not
become complacent. We have some very real trade problems with
Japan today that are subject to this hearing, and they require
our focus and constant attention and engagement with Japan at
all levels. I can tell you that USTR will do everything in its
power to ensure these problems are resolved in a timely and
fair manner.
Thank you.
[The prepared statement of Ms. Cutler follows:]
Statement of Wendy Cutler, Assistant U.S. Trade Representative for
Japan, Korea and Asia-Pacific Economic Cooperation Affairs, Office of
the U.S. Trade Representative
On behalf of the U.S. Trade Representative, I would like to thank
the Chairman, Ranking Member, and the other members of this Committee
for convening this hearing today. I am Wendy Cutler, Assistant USTR for
Japan, Korea and APEC Affairs and I very much welcome this opportunity
to provide testimony on the state of our economic and trade
relationship with Japan.
As you point out in your announcement for this hearing, Japan is
currently our fourth largest goods trading partner with $180 billion in
total two-way goods trade during 2004. It is a huge magnet for the
things we produce and grow. Overall, Japan is our third largest export
market. It is also our third largest market for U.S. agricultural
exports.
Not only is our trade relationship enormous in volume, it is also
rich in complexity and it has significant ramifications for the Asian
region and the world. Over the years, that relationship has grown from
one dominated by acrimony to one where we are increasingly working
together to find win-win solutions where possible. There is much that
underlies this shift, including our changed world in the post-9/11 era
and the spectacular economic dynamism of the Asian region. There is
also the close friendship President Bush shares with Prime Minister
Koizumi, which has helped create an environment conducive to good
cooperation between our two Governments. And I should add that the
Prime Minister, who just won re-election by an historic landslide, has
done his part to accelerate economic reform in Japan, which in turn
makes our job a little easier.
That said, old ways die hard in Japan. While we continue to make
good progress up and down the trade front, we still run into heavily
reinforced bulwarks against change.
Today, I would like to sketch out some of the progress we have made
in recent years with Japan as well as underscore that there remains
substantial inertia at work in the enormous and critically important
Japanese market--inertia that continues to frustrate our efforts to do
business there. Japan's inability to move expeditiously to reopen its
beef market is an example of this.
Achieving Progress
So let's start with the good news. In recent years, Japan has
significantly lowered retail rates for calling mobile networks, and by
reducing monopoly control over networks and equipment, Japan has
created conditions for one of the most competitive broadband markets in
the world. It has dramatically reduced certain customs processing fees
at its ports,thereby lowering the cost of doing business for U.S.
exporters and express carriers. Japan has undertaken significant
liberalization of both its electricity and gas sectors. It has
significantly strengthened its intellectual property rights regime by,
for example, extending the term of copyright protection for
cinematographic works from 50 to 70 years. And it has bolstered the
independence and staffing of its antitrust watchdog, the Japan Fair
Trade Commission or JFTC, so that it can better promote a competitive
environment in the Japanese market for domestic and foreign companies
alike.
More recent progress will be detailed in our next annual Report to
the Leaders under the Regulatory Reform and Competition Policy
Initiative, which was established by President Bush and Prime Minister
Koizumi in 2001. That Initiative is the chief mechanism we use to
manage our trade and economic relationship with Japan. The Leaders
Report, which should be finished shortly, will include a myriad of
regulatory reform steps Japan has, or will be taking, in the key
sectors.
In the telecommunications sector, Japan is poised to make
substantial blocks of spectrum available primarily for new wireless
entrants, helping break a longstanding oligopoly and thereby creating
opportunities not only for U.S. telecommunications companies wanting to
expand into the wireless business in Japan, but also equipment
suppliers to those companies.
Japan is also removing numerous regulatory impediments to e-
commerce, further strengthening copyright protection, cooperating
closely with the private sector to combat spam, improving government
network security, ensuring effective and transparent implementation of
its new Privacy Law, and improving foreign firms' access to bidding on
government IT systems.
Though not going far enough, the Japanese have finally made the
decision to reduce landing fees at Narita International Airport, a step
that will lower costs in Japan for U.S. airlines and express delivery
companies.
Mr. Chairman, you will also find in this year's Report to the
Leaders a new section on agriculture where we are addressing specific,
ongoing concerns with Japan's phytosanitary regime--and we have
obtained very encouraging progress. As you know, for years we have had
problems with Japan's requirements to fumigate fruits and vegetables
upon import for pests that that are also reportedly present in Japan.
That fumigation has either adversely affected the quality of the
product (particularly for lettuce) or added unnecessary costs (for
example on citrus) or both.
In response to U.S. concerns, we have recently obtained Japan's
commitment to take steps to bring its phytosanitary measures in line
with international standards. Japan has committed to conduct import
risk assessments for quarantine pests in accordance with the relevant
International Plant Protection Convention standard to use science to
determine if these pests should be subject to quarantine measures. In
concrete terms, Japan has removed three citrus pests from its
fumigation target list, thereby eliminating over $1 million in annual
fumigation costs on imports of U.S. citrus. In another step in the
right direction, Japan also has agreed to assess certain pests of
lettuce to determine if fumigation requirements for them are really
necessary. All told, we believe this effort under the Regulatory Reform
Initiative is a positive and constructive path to addressing systemic
phytosanitary regulatory impediments in Japan.
While I am on the issue of agriculture, I might add that we finally
reached resolution with Japan on a long-standing WTO dispute over
apples. (You may recall that we won a related case against Japan on
testing of varietal fruits in the late 1990's.) Last month, Japan
eliminated its unjustified fire blight measures on imports of U.S.
apples, following a resounding victory for the United States in the
WTO. As a result, we expect U.S. apples will be shipped to Japan later
this year.
Turning to some more comprehensive cross-cutting areas, this year's
Report to the Leaders specifies that Japan has taken further steps to
strengthen the JFTC's enforcement capabilities through recent
amendments to the Antimonopoly Act that will increase penalties on
companies participating in price-fixing and introduce a leniency
program to combat cartels effective January 2006.
In addition, Japan passed legislation just last June to strengthen
its Public Comment Procedures. That legislation was not as robust as we
would have liked, but it should help increase transparency in the
development and implementation of regulations in a system that has been
notorious in the past for its opaqueness.
In another step forward, the Japanese Corporate Code has been
amended in ways that will ultimately permit U.S. and other foreign
firms to use modern merger techniques (such as triangular mergers) when
making acquisitions in Japan.
Achieving progress in these cross-cutting areas is crucial for our
companies as these are the areas where some deeply ingrained
impediments to trade and investment remain. The automotive industry,
for example, continues to face systemic issues such as regulatory
transparency and competition policy concerns that can make Japan a
difficult place to do business. That is why the cross-cutting issues
are such a priority for us.
In sum, we have and will continue to make good progress in our
efforts to further open markets in Japan in key sectors such as
telecommunications, information technologies, medical devices and
pharmaceuticals, energy, and agriculture. And we will continue to go
after the hard-to-get-to impediments to trade in cross-sectoral areas
such as competition policy and transparency.
That said, there are some formidable problem areas in our bilateral
trade relations.
Fighting Inertia
Foremost among these is Japan's continued ban on beef imports from
the United States. I know my USDA colleague Ellen Terpstra will have
much to say about this, but allow me to offer a few words here as
Ambassador Portman has devoted significant time to this problem and
raised it on every possible occasion with his Japanese counterparts. In
fact, he just delivered a strong message on the beef ban to Japan's
Trade Minister, who was here in Washington earlier this month. This
issue also remains a top priority for President Bush, who has raised it
directly with Prime Minister Koizumi on several occasions.
We share your frustration over the glacial speed with which Japan
has been moving to reopen its market to U.S. beef. We have repeatedly
and consistently engaged Japan at all levels on this issue. This
Administration has transmitted a huge amount of scientific information
to the Japanese Government on the safety of U.S. beef.
The Food Safety Commission (FSC), charged with conducting the risk
assessment of the safety of U.S. beef, appears to be in the final
stages of its deliberations. But unfortunately, it is not there yet and
this is very disappointing. Once the FSC completes its work, we
understand that will initiate a 30-day public comment period, followed
by a reopening of the market shortly thereafter.
By any reasonable measure, Japan has had ample time to reach a
conclusion to this issue. We will continue to press hard on Japan at
all levels until it does the right thing in line with science and fully
reopens its market to U.S. beef.
Another item high on our bilateral agenda is the privatization of
Japan Post. Whether or not privatization should be enacted is of course
Japan's choice. Certainly Prime Minister Koizumi has pursued this major
reform with great determination, and he has been most articulate about
the broad domestic objectives that underpin his commitment to seeing
his initiative achieved.
The ripple effects of these reforms are substantial, however, and
the Administration is focused on the impact they will have on
competition in Japan's banking, insurance, and express delivery markets
where Japan Post is such a major player. Unequal conditions of
competition in these markets between Japan Post and U.S. and other
private companies have long been high on our list of concerns. The
Administration is urging Japan to take this opportunity to make the
policy choices that are necessary to finally achieve a level playing
field.
In order for Japan to achieve fair play for all participants in
these key markets, we are urging Japan to take three steps. First, we
are calling on Japan to fully eliminate the web of legal, tax, and
regulatory advantages that have allowed Japan Post to grow its
businesses while putting U.S. and other companies at a substantial
competitive disadvantage. Second, it is important that Japan Post not
be permitted to expand its product offerings in those businesses where
it competes with the private sector until a level playing field has
been established. Third, it is imperative that Japan undertake the
privatization process in manner that is fully transparent to all
parties.
The Administration has been responding with a concerted interagency
effort, using every opportunity at all levels of government, to urge
Japan to embrace the three basic elements I have just described to you.
Importantly, our views are also echoed by others, including key
Japanese insurance companies, as well as Japanese, European, and
Canadian business associations. We will remain vigilant as the process
unfolds and urge Japan to do the same in its efforts to ensure that
fair competition is actually achieved.
We are also devoting much attention to issues related to health
care reform in Japan, particularly how these reform policies impact
U.S. medical devices and pharmaceuticals industries. Over the years, we
have worked very closely with these industries to ensure they get a
fair shake in Japan. And we have seen some success as Japan has taken
steps to expedite regulatory approvals and make its reimbursement
pricing process more transparent than in the past.
Japan is currently cycling into yet another biennial review of the
reimbursement prices it assigns to medical devices and pharmaceuticals,
a process that has presented many problems in the past. Our chief
concern is that the process is done in a transparent and fair manner.
While we fully understand the need for Japan to reduce rising costs
related its national healthcare system, we also strongly believe
innovation should be rewarded for these products. Indeed, by rewarding
innovation, Japan ensures that Japanese patients can obtain the best
drugs and devices, which in turn shortens the time they stay in
hospitals, improves their lives, makes them more productive to society,
and contributes to economic growth.
Even so, it is crucial these devices and drugs get to Japanese
patients in a timely fashion. As I believe you will hear later today
from industry, Japan's recent efforts to speed regulatory approvals
through a merger of administrative agencies have, to our dismay,
yielded poor results. Approvals, in fact, are slower now than before--
thus undermining some past achievements.
Many important decisions on these pricing and approvals issues will
be made in the coming months in Japan. Working closely with industry
and in close cooperation with the Department of Commerce, we will
continue to press Japan to find solutions in these problem areas that
are both fair and equitable.
Before closing, I would like to highlight two other, broader
aspects of our economic relationship with Japan.
Doha Development Agenda
First, as you know, Ambassador Portman is working hard in the run-
up to the Hong Kong Ministerial meeting in December to set the stage to
complete the Doha Development Agenda, or DDA, by the end of 2006. He
spent most of last week in Paris conducting intensive discussions with
the European Union and other WTO Members on this.
With the two largest economies in the world, the United States and
Japan share a special responsibility to work together to use the power
of open markets to pull people up and expand political as well as
economic freedom. And there may be no other single action we could take
to deliver the broad and long-term economic benefits of trade than
successfully concluding the current round of global trade talks.
To this end, Ambassador Portman has been urging Japan to be more
constructive and play a more forward-leaning role in the DDA. The good
news is that we have begun seeing some positive efforts by Japan in
recent months. Japan has, for example, stepped forward by focusing the
attention of other Asian capitals on the non-agricultural market access
(NAMA) issues to help set the stage for more progress this fall and has
been an important leader in sponsoring and helping to push our agenda
on sectoral initiatives. Japan will also be showing some leadership by
hosting a Senior Officials Meeting in Geneva later this week to discuss
the DDA. In addition, Japan, like us, has been utilizing the APEC
process to help build momentum for Doha.
These steps are welcome, but as Ambassador Portman has been
reminding Japan and others, all countries must pitch in to make
substantial progress in the three agriculture pillars of export
subsidies, market access, and domestic support. Frankly, the Japanese
have allowed their protectionist domestic agriculture interests to
prevail, and this has been disappointing. As a result, they have been
incapable of finding a solution at home that would permit them to take
a forward-leaning position on the market access piece of agriculture,
which is the key concern of the U.S. agricultural community when it
comes to Japan. If the DDA is to succeed, Japan will have to
substantially reduce its tariffs on agricultural products and ensure
meaningful improvements in market access. It's now up to Japan to
decide whether or not it wants to get on the train as it leaves the
station.
U.S.-Japan Cooperation in Asia
The other broader aspect of our economic relationship I would like
to comment on is the importance of U.S.-Japan cooperation vis-`-vis
Asia.
With its vibrant economies, able work forces, and enormous consumer
markets, Asia has assumed greater economic, strategic and political
relevance to the United States and Japan than ever before. For a whole
host of reasons, it is very important that our two countries promote
more growth and development in the region. And it is important that we
set a good example in the way we conduct our trade relations, opening
our markets to goods and services from around the region, and above
all, ensuring fair play in the marketplace.
In particular, the United States and Japan are working together to
help ensure China's integration into the global economy is a smooth
one. One of the ways we have been doing this is by working closely
together to strengthen intellectual property rights protection and
enforcement in China and around the region. Over the past year,
officials from the U.S. and Japanese Governments have met on numerous
occasions to discuss this topic. Those discussions have led to Japan's
endorsement of an important new IPR initiative we have been promoting
in APEC.
My central point here is that while we do have several difficult
bilateral trade issues with Japan, we are still friends and allies with
a great deal to gain from close cooperation on matters of global
concern, such as advancing DDA, as well as matters of regional concern,
such as strengthening intellectual property rights protection and
enforcement.
Continued Vigilance Necessary
We have come a long way with Japan over the years and have found
ways of doing business on the trade front that are generally yielding
good results. This has been an incremental process occurring in sector
after sector. The Japanese market is more open than it used to be.
Japan's ministries are coming to grips with the importance of
transparency in policy-making and are taking steps to improve this. And
its IPR regime has seen vast improvements over the years. While we very
much welcome all this progress, we should not be complacent. We have
some very real trade problems with Japan today that require our focused
and constant attention and engagement at all levels. I can tell you
that USTR will do everything in its power to ensure these problems are
resolved in a timely and fair manner. Thank you.
Chairman THOMAS. Thank you. Mr. Loevinger?
STATEMENT OF DAVID LOEVINGER, DEPUTY ASSISTANT SECRETARY FOR
AFRICA, MIDDLE EAST, AND ASIA, U.S. DEPARTMENT OF THE TREASURY
Mr. LOEVINGER. Thank you, Mr. Chairman, other Committee
members, for this opportunity to talk about the
administration's engagement with Japan. Mr. Chairman, as you
mentioned, this hearing is timely, as it is taking place at a
time both of growing optimism about the possibility of
sustained domestic demand-led growth in the Japanese economy
and about the prospects for more rapid economic reforms
following this month's elections.
My colleagues have testified and will testify today on a
number of sectoral trade issues. The Treasury Department works
closely with USTR, Commerce, and other agencies on these
issues. Treasury has focused particularly on access to the
Japanese market for U.S. financial services providers.
In addition to these sectoral issues, Treasury pays very
close attention to the overall growth of the Japanese economy.
Strong, sustained, and domestic demand-led growth in Japan--and
as many of you have mentioned today, which is the second-
largest economy in the world and one of our largest trading
partners--would boos growth in U.S. exports and jobs and
contribute to more balanced global growth.
Japan has struggled for the past decade and a half to
overcome the effects of the collapse in the late eighties of
the asset price bubble. The Government responded to the
economic downturn with a series of fiscal stimulus packages,
mostly public works spending that yielded low results.
Regulatory forbearance allowed banks to remain technically
solvent without dealing with their growing bad loans. This led
to the eventual failure of many banks.
Japan's slowness in dealing with failing banks and
delinquent corporate debtors kept it, until now, from achieving
sustained domestic demand-led growth. Evergreening loans to
what we call zombie borrowers locked resources up in non-
productive activities, and heavy debt burdens limited new
investment in new activities. Short-lived economic rebounds in
1993, 1995-96, and 1999-2000 faded quickly back into recession
once the initial fiscal or export stimulus faded. The
protracted economic slowdown led to persistent deflation.
Japan's struggle to emerge from deflation, sluggish growth,
and banking sector problems may be finally coming to an end.
The Koizumi Administration made clear that restoring growth
would require structural reforms and Japan could no longer rely
on fiscal stimulus. The Koizumi government also brought tougher
banking regulation, which forced banks to raise capital and
deal with their problem borrowers.
There are growing signs that the labor market is finally
strengthening. While exports, especially to China, helped fuel
the early stages of Japan's current recovery, household
consumption and investment have been key engines of growth in
recent quarters. So, Mr. Chairman, at least for the Japanese
economy, after several false dawns, a new day may finally have
arrived.
But the Japanese economy still faces numerous headwinds.
Deflation still persists. Many small banks are still weak. And
after years of failed fiscal stimulus, Japan now has the
largest fiscal deficit and government debt, relatively to its
economy, of any G7 economy. Moreover, a rapidly aging
population will necessitate increased public spending on health
care and pensions, while a shrinking work force will limit the
growth of income and payroll tax receipts.
Japan's long-term growth potential is estimated to be only
about 1.5 percent a year compared to over 3 percent for the
U.S. Given these headwinds, far-reaching structural reforms are
needed to boost growth so Japan can make a larger contribution
to global growth.
On financial sector issues, there have been regular
discussions between Treasury, Japan's Ministry of Finance, and
Japan's financial services agencies. These have continued to
expand opportunities for U.S. firms.
Ten years ago, foreign participation in Japan's domestic
financial market was almost unthinkable. Now U.S. investors own
several Japanese banks, and market share of U.S. and other
foreign securities firms is growing. U.S. direct investment in
Japan in the financial services sector has grown from about $6
billion 10 years ago to over $38 billion last year.
On exchange rate policy, an issue which you, Mr. Chairman,
and many other members have raised, we are aware that Japan has
intervened in the foreign exchange market in the past,
sometimes in large amounts. We have discussed foreign exchange
market issues with Japanese officials, and they are fully aware
of our views that the world economy works best with free trade,
free flow of capital, and flexible exchange rates in large
economies. The Japanese authorities have not intervened in the
foreign exchange market since March 2004. Japan has also
supported the U.S. in the G7 on exchange rates, and this has
been expressed in a series of G7 communiques calling for
greater exchange rate flexibility. Japan is also working with
us to bring about greater exchange rate flexibility in China
and in other large economies in East Asia. We will continue to
express our view that major economies should have flexible
exchange rates, with market intervention kept to a minimum.
Thank you.
[The prepared statement of Mr. Loevinger follows:]
Statement of David Loevinger, Deputy Assistant Secretary for Africa,
Middle East, and Asia, U.S. Department of the Treasury
Chairman Thomas, Ranking Member Rangel, and other Committee
members, thank you for this opportunity to talk about developments in
the Japanese economy and the Administration's engagement with Japan on
macroeconomic and financial issues. This hearing is timely, as it is
taking place at a time of growing optimism both about the possibility
of sustained domestic demand-led growth in Japan and more rapid
economic reforms following this month's elections.
My colleagues have testified on a number of sectoral trade issues.
The Treasury Department works closely with USTR, Commerce, and other
agencies on these issues through the Trade Policy Review Group.
Moreover, Treasury has focused particular attention on access to the
Japanese market by U.S. financial services providers.
In addition to these sectoral issues, Treasury pays close attention
to the overall growth of the Japanese economy. Strong, sustained, and
domestic demand-led growth in Japan--the world's second largest
economy--would boost U.S. exports and jobs and would also contribute to
more balanced global growth. For the last decade Treasury has consulted
closely with Japanese authorities on ways to achieve this.
Japan has struggled for the past decade and a half to overcome the
effects of the collapse of the late-1980s asset price ``bubble.''
Falling property prices--with commercial land prices down more than 80%
in Japan's major metropolitan areas between 1991 and 2004--hit
corporate and household balance sheets. Banks were hit by the financial
stress of their customers and by falling collateral values when they
tried to foreclose.
Firms that had built up capacity and staffing during the latc-1980s
boom reduced their investment spending. They also held down hiring, cut
back on overtime and bonuses, and replaced permanent employees with
part-time workers. The resulting drop in wages slowed household
consumption.
The government responded to the economic downturn with a series of
fiscal stimulus packages, mostly public works spending yielding low
returns. Regulatory forbearance allowed banks to remain technically
solvent without dealing with their growing bad loans. This led to the
eventual failure of many banks, including some systemically large
institutions, and large infusions of public funds since the late 1990s.
Japan's slowness in dealing with failing banks and delinquent
corporate debtors kept it, until now, from achieving sustained domestic
demand-led growth. Evergreening loans to zombie borrowers locked
resources up in non-productive activities, and heavy debt burdens
limited investment in new activities. Short-lived economic rebounds in
1993, 1995-96, and 1999-2000 faded quickly back into recession once the
initial fiscal or export stimulus faded. The protracted economic
slowdown led to persistent deflation.
Over the past decade U.S. engagement with Japan focused on
resolving banking sector problems; overcoming deflation, and restoring
sustained, domestic demand-led growth. At times this discussion was
acrimonious. The Bush Administration established a quieter, more
cooperative dialogue with Japan, focused on creating the fundamentals
for sustained growth rather than encouraging fiscal stimulus to pump up
growth over the next few quarters.
Japan's struggle to emerge from the deflation, sluggish growth, and
banking sector problems may finally be coming to an end. The Koizumi
Administration made clear that restoring growth would require
structural reforms such as increasing competition in domestic markets
and improving the efficiency of financial intermediation, and could no
longer rely on fiscal stimulus. The Koizumi government also brought
tougher banking regulation, which forced the banks to raise capital and
deal with their problem borrowers. Corporate restructuring has
strengthened firms' finances and reduced excess debt and capacity.
There are also growing signs that the labor market is finally
strengthening: the number of full-time employees rose recently for the
first time in seven years, and the number of part-time workers fell for
the first time in a decade. While exports, especially to China, helped
fuel the early stages of Japan's current recovery, household
consumption and investment have been the key growth engines in recent
quarters. So, at least for the Japanese economy, after several false
dawns, a new day may have finally arrived.
But the Japanese economy still faces numerous headwinds. Deflation,
though diminished, still persists. Many small banks and small firms
still remain weak. After years of stimuli, Japan now has the largest
fiscal deficit and government debt, relative to GDP, of any G7 country.
A large fiscal retrenchment is inevitable. Moreover, a rapidly aging
population will necessitate increased limit the growth of income and
payroll tax receipts, making the fiscal retrenchment more difficult. By
2025, public spending on health care and pensions, while a shrinking
workforce will . . .
Japan is projected to have more than half as many elderly as
working-age people, up from less than one-third today. In the United
States, in contrast, that ratio is projected to rise from about one-in-
five today to about one-in-three by 2025.
Japan's long-term potential growth rate is estimated to be only
about 1Yz percent per year, vs. 3Yi-4 percent in the United States. We
share Prime Minister Koizumi's view that, given these headwinds, far-
reaching structural reforms are needed to boost productivity so that
the Japanese economy can navigate the challenges of the 21st century
and make a larger contribution to global growth.
Financial Sector Issues
The length of the post-bubble economic troubles and the high costs
of cleaning up the banking sector owe much to the financial system that
Japan maintained after the Second World War. Bank-dominated, heavily
segmented and regulated, and closed to outsiders, the Japanese
financial system failed to innovate and develop the credit analysis and
risk assessment tools that financial institutions in the United States
introduced.
For the past two decades, starting with the Yen-Dollar talks in the
1980's, the Treasury has pressed Japanese financial regulators to
reform and modernize Japan's financial system and open the sector up to
foreign investment. The U.S.-Japan Financial Services Agreement,
negotiated in 1995, opened up a number of sectors for U.S. financial
services firms, including the management of public pension funds. The
``Big Bang'' financial liberalization decontrolled prices and fees,
opened up financial markets to new entry and new products, and shifted
regulation and supervision to a modern market--and risk-based system.
Regular discussions between Treasury, Japan's Ministry of Finance and
Japan's Financial Services Agency have continued to expand
opportunities for U.S. firms--in managing the assets of Postal Savings
system and offering 401K pension products, structured asset products,
investment advisory and custodial services, and many others.
Ten years ago, foreign participation in Japan's domestic financial
market was almost unthinkable. Today, market access and national-
treatment are no longer prominent issues in our financial sector
dialogue. U.S. investors own two large Japanese banks and several small
ones. And the market share of U.S. and other foreign securities firms
is growing, as it is for foreign pension and mutual fund managers.
Those developments are reflected in the rapid growth of U.S. direct
financial services investment in Japan, which has grown from $6Yi
billion in 1994 to more than $38 billion last year on a historical cost
basis. Income from those investments has grown even more rapidly, from
around $400 million in 1994 to nearly $5 billion last year.
We still have a very active engagement with Japan on financial
sector issues, but the issues have shifted from market access to market
development. These have included restrictions on short sale
transactions, the ability to conduct global risk management across
financial entities, participation of global custodians in government
bond settlement, and taxation of mutual funds.
One recent example illustrates the importance of this engagement. A
revision of section 821 of Japan's proposed Corporation Law, submitted
to the Diet this year, could have required many foreign financial and
non-financial firms to reincorporate as Japanese subsidiaries, in many
cases with substantial tax liability on realized capital gains. Our
Financial Attache in Tokyo worked closely with U.S. firms and the
Japanese Diet to craft a legislative history exempting foreign firms.
We continue to monitor this issue to determine if this will suffice or
if corrective legislation is necessary.
The most important financial sector issue now is the privatization
of Japan's Postal financial institutions--Postal Savings and Postal
Life. These are huge institutions, by far the world's largest savings
bank and life insurer, accounting for a third of Japan's deposits and
40% of its life insurance policies. We believe Prime Minister Koizumi's
postal privatization bills can help increase the efficiency of
financial intermediation, and potentially reduce the need for such high
precautionary savings, boosting growth and imports. One key to success,
as Secretary Snow and other Treasury officials have stressed to our
Japanese counterparts, will be ensuring a level playing field so that
the competitive advantages enjoyed by the privatized postal savings and
postal life insurance firms are eliminated. Another key will be strict
regulation, especially to limit risk transfers or cross-subsidization
among the privatized financial and non-financial corporations.
But postal privatization will not be enough, as Prime Minister
Koizumi recognized when he called for sweeping reforms including labor
and product market deregulation and fundamental reforms of government
lending institutions. Japan also needs continued progress in capital
market and corporate governance reforms to ensure that corporate
managers are focused on shareholder value. Our own experience shows
that allowing the full range of foreign and domestic M&A activity helps
develop the market for corporate control, which can contribute to
better resource allocation, higher returns on investment, and faster
growth and impoi1s.
Exchange Rate Policy
Japan has intervened in the foreign exchange market in the past,
sometimes in large amounts. We have discussed foreign exchange market
issues with Japanese officials, and they are fully aware of our views
that the world economy works best with free trade, free flow of
capital, and flexible exchange rates for large economies. Japanese
authorities have not intervened in the foreign exchange market since
March 2004. Japan has also supported the G7 position on exchange rates,
expressed in a series of G7 Communiques, calling for greater exchange
rate flexibility. And Japan has worked with us to bring about greater
exchange rate flexibility in China and in other large economies in East
Asia. We will continue to strongly express our views that major
economies should have flexible exchange rates, determined in the market
with intervention kept to a minimum.
Thank you again for this opportunity to testify before you.
Ensuring vigorous, domestic demand-led growth, increased financial
sector dynamism and opportunities for U.S. firms, and flexible, market-
determined exchange rates in Japan and other large economies will
continue to be priorities for the Treasury and the Administration.
Chairman THOMAS. Ms. Terpstra?
STATEMENT OF A. ELLEN TERPSTRA, ADMINISTRATOR, FOREIGN
AGRICULTURAL SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Ms. TERPSTRA. Thank you, Mr. Chairman. Members of the
Committee, I am pleased to be here with my colleagues today to
discuss trade with Japan.
For the past 45 years, United States agriculture has posted
a positive trade balance. In 2004, exports reached a record
$62.4 billion, and this year we expect strong sales of $62
billion. For 2006, we are forecasting yet another historical
record--$63.5 billion. And this is while major markets,
including most notably Japan, remain unjustifiably closed to
the United States products.
While we highly value Japan as an important market, we have
had major difficulties in maintaining that market. The source
of many difficulties is protectionism reflected through
unjustified use of sanitary and phytosanitary regulations. The
inconsistent use of a scientific underpinning for an SPS
regulatory structure has resulted in many disputes, some very
protracted.
None of the disputes has been of the same magnitude as the
closure of Japan's market to our beef and beef products. Until
recently, Japan was the leading market for U.S. beef, buying
$1.4 billion worth in 2003. This issue has received the highest
level of attention in our Government, involving the President,
Secretary Johanns, Ambassador Portman, and many other high-
level officials. Many Members of Congress, including some on
this Committee, have been very actively involved in this issue
as well.
We have worked hard to restore the market. We have
responded to requests for information, hosted technical teams,
and traveled to Japan for countless meetings. We have stressed
the use of international standards and the propriety of
science-based decisions. We have urged Japan to promptly
complete review of its import rules and to reopen the market to
our beef.
The Japanese assure us that they are working through the
process, but as time quickly passes, those assurances ring
hollow. The time to resume trade has long passed.
Let me address another priority issue: Japan's official
control policy. This policy calls for fumigating for pests that
are present in Japan but are neither being eradicated nor
contained as required by international standards. This
longstanding issue particularly affects fresh fruits and
vegetables, such as citrus and lettuce.
This year we have made some progress toward changing the
quarantine status of these pests, a critical first step toward
eliminating unnecessary fumigations. For example, in April,
Japan removed fumigation requirements for certain citrus pests,
a priority issue for our citrus industry. Also in April,
Japan's official control policy was raised at the Regulatory
Reform Dialog, an initiative launched by President Bush and
Prime Minister Koizumi. These talks resulted in Japan agreeing
to bring its official control policy into compliance with
international standards.
Japan has also agreed to assess certain pests of lettuce
with the aim of removing fumigation requirements for them. We
continue to press for improved market access to U.S. lettuce
into the Japanese market.
I would also like to talk about the WTO negotiations and
Japan's role in those talks. Throughout the summer, despite the
best efforts by many, little progress was made on key issues in
the negotiations. It is my perception that Japan has taken a
protectionist approach, especially on market access, and it
has, thus, been of little help. We have significant differences
in the approach to tariff reductions. The United States is
seeking substantial reductions in tariffs. Our tariffs average
12 percent on agricultural products, in comparison to Japan's
average of 51 percent. Japan strongly opposes progressive
tariff cutting and any tariff cap. We advocate for an
aggressive formula that cuts the highest tariffs the most, and
we insist on a cap on tariffs that are unreasonably high.
As in the past, Japan appears primarily interested in
protecting its agricultural industries from import competition.
It has lobbied for continued use of safeguards and to expand
product eligibility for the safeguard currently available. In
contrast, the United States and other ambitious countries would
like to eliminate developed countries' use of such safeguards.
We also differ on sensitive products. We want to limit the
number of products a country may identify as sensitive, while
Japan wants to maximize the use of such products.
We have made very clear what we are seeking in these talks.
Our goal is to level the playingfield for our farmers and
ranchers. Our markets are relatively open. Our domestic
supports are relatively low. We insist upon substantial
progress in all three pillars in the agriculture negotiations.
We are encouraging Japan to constructively engage in these
negotiations, to work with us to obtain a Doha outcome that
will underpin our continuing, mutually advantageous trading
relationship.
Mr. Chairman, Japan is an important market for U.S. farmers
and ranchers, our number three market in calendar year 2004. We
highly value that commercial relationship, and we want it to
contribute to a further strengthening of our overall bilateral
relationship.
That concludes my statement. I would be pleased to answer
questions. Thank you.
[The prepared statement of Ms. Terpstra follows:]
Statement of A. Ellen Terpstra, Administrator, Foreign Agricultural
Service, U.S. Department of Agriculture
Mr. Chairman, members of the Committee, I am pleased to come before
you today with my colleagues from the Department of Treasury and the
Office of the U.S. Trade Representative to discuss trade with Japan.
Importance of Exports to U.S. Agriculture
My focus today is the agriculture and food sector of our economy. I
will discuss the importance of agricultural exports to our economy,
trade issues with Japan, and Japan's role in the agriculture
negotiations in the World Trade Organization's (WTO) Doha Development
Agenda.
Agriculture long has been a true bright spot in our nation's trade
balance. For the past 45 years, agriculture has posted a positive trade
balance. U.S. sales abroad have grown from $4.5 billion in 1960 to a
record $62.4 billion in 2004. This year, we foresee still strong sales
of $62 billion, just shy of the record. We now are forecasting yet
another record--$63.5 billion--for 2006. And, I should add that these
estimates reflect the fact that several major markets--including most
notably Japan--with additional sales of some $3 billion remain
unjustifiably closed to the United States.
The benefits of agricultural exports extend far beyond the
farmgate. Last year's sales of $62.4 billion generated $158 billion in
overall economic activity. These sales support additional services to
harvest, process, package, store, transport, and market the products.
High-value fresh and processed foods and beverages--which have become a
bigger share of our overseas sales--now represent more than 40 percent
of total export value, and they generate more additional economic
activity than bulk commodities.
Agricultural exports also mean jobs. Our research indicates that
every billion dollars in agricultural exports supports 15,300 jobs--in
trade, transportation, services, food processing, and other
manufacturing sectors. That means our total exports support nearly one
million jobs. These are good jobs--with one third in rural areas and
two thirds in metro areas. In our rural communities, agricultural
exports generate more employment benefits than any other export
industry.
I cannot emphasize enough that the future financial health of
American agriculture depends on its success in the international
marketplace. Historically, we have been the world's largest
agricultural exporter. U.S. farmers last year earned 27 percent of
their total cash receipts from foreign customers. For many products,
the dependence is far greater--up to 70 percent for some items. And,
increasingly, we are exporting more livestock and horticultural
products, high-value products that further stimulate our economy.
Trade with Japan
Now, let me turn to Japan which long has played an important role
in American agriculture's success story. In the early post-war years,
Japan was a U.S. food aid recipient, but soon grew to be the top export
market for our farmers and ranchers. It remained there for over 20
years, but recently has been replaced by Canada and Mexico, our two
partners in the North American Free Trade Agreement. In fiscal year
2004, Japan purchased $8.5 billion worth of U.S. food and agricultural
products. This year, sales to Japan are forecast at only $7.7 billion,
reflecting in part lower prices for corn and soybeans.
While we highly value Japan as an important market, we have had
major difficulties in maintaining the market and mixed success in
trying to enable it to reach its full potential. The source of many
difficulties is the arbitrary use of sanitary and phytosanitary (SPS)
regulations. This has resulted in many disputes, some very protracted,
over the years.
Reopening the Japanese Market to U.S. Beef
None of the disputes has been of the magnitude nor of the
intensity as one still pending before us. That, as everyone here today
well knows, is the closure of Japan's market to our beef and beef
products owing to the discovery of BSE in the United States in 2003.
Japan was the leading market for U.S. beef, buying some $1.4 billion
worth in 2003.
This issue has received the highest attention in our government,
involving the President on several occasions--and has commanded the
full attention of Secretary Johanns and his predecessor Secretary
Veneman, Vice President Cheney, Secretary of State Rice and her
predecessor Secretary Powell, U.S. Trade Representative Portman and his
predecessor Ambassador Zoellick, and many other high-level officials.
Many Members of Congress, including some on this committee, have been
very actively involved in the issue, as well.
We have worked diligently from the outset to restore this market.
We have responded to numerous requests for information, hosted several
technical teams, and traveled extensively to Japan for countless
meetings. We have emphasized the role and guidelines of the
international standard-setting body, the World Animal Health
Organization (OIE) and the need for science-based decision-making. We
have urged the Japanese Food Safety Commission to complete its review
of import rules expeditiously and the Government of Japan to take
prompt action to reopen the market to our beef.
We have repeatedly told the Japanese government that it is
critically important to resolve this issue so that we can eliminate
this source of friction between our countries and instead focus on
broadening and deepening our overall trade and economic relationship.
The Japanese assure us they are working through the process to reopen
their market to safe U.S. beef. As time quickly passes, those
assurances ring hollow--the time to act is now.
Official Control
Beyond beef, let me address another trade priority, and that is
Japan's official control policy that frustrates our ability to ship a
variety of fruits and vegetables. This policy, which calls for
fumigating pests that are not being eradicated or contained in Japan as
required by international standards, has been an issue of longstanding
concern. This particularly affects fresh fruits and vegetables such as
citrus and lettuce.
In December 2004, Japan's official control policy was raised at the
Regulatory Reform Dialogue, an economic reform initiative launched by
President Bush and Prime Minister Koizumi. These talks resulted in
Japan agreeing to bring its official control policy into compliance
with international standards.
As a result of raising this matter through the Regulatory Reform
Initiative, this year we have seen some progress toward changing the
quarantine status of these pests, a critical first step toward
eliminating unnecessary fumigations. In April, Japan removed fumigation
requirements for certain citrus pests, a priority issue for our citrus
industry. This action significantly reduced fumigation costs for citrus
traders and will enhance product quality, greatly improving consumer
acceptance in the local market.
Japan also has agreed to assess certain pests associated with
lettuce production, with the aim of minimizing the need for fumigation.
Japan confirmed earlier this year that it is conducting a pest risk
assessment for several different pests, including Western Flower
Thrips, one of the most frequently intercepted pests on lettuce. We
will continue to press for improved market access for U.S. lettuce into
the Japanese market.
USDA also remains active in addressing market issues for many other
products. For example, we work closely with our rice industry to ensure
that Japan meets its WTO commitments for market access. To date, they
have purchased the required amounts. However, we are seeking to secure
improved access, particularly to reach Japanese consumers more
directly.
Fire Blight
I can report one success among our many, long-standing efforts to
open Japan's market. As you know, we were successful in our WTO
challenge of Japan's fire blight restrictions against our apples to
bring its restrictions into conformity with the WTO SPS agreement.
On August 25, Japan published the detailed rules for U.S. apple
imports, which comply with the WTO fire blight ruling. We have reviewed
the work plan described in the rules and can confirm that the work plan
will be in operation for the upcoming season.
Japan's compliance with the WTO decision is a clear victory for the
United States, for our apple industry, and most importantly for the
credibility of the international trading rules. As a result, the
Japanese market now is open to our apples under reasonable and science-
based terms. This outcome also signifies the importance of WTO SPS
obligations and the need for commitment from WTO members to adhere to
science-based, risk-based import and export standards and to apply them
equitably without discrimination.
Doha Negotiations
Before concluding, I want to mention the WTO negotiations and
Japan's role in the talks. Throughout the summer, despite the best
efforts by many, little progress was made on key issues in the
negotiations. It is my perception that Japan has taken a protectionist
approach, especially on market access, and thus has not helped move the
process forward.
As in past negotiations, Japan appears primarily interested in
protecting its agricultural industries from import competition. It has
actively lobbied for continued use of safeguards and to expand product
eligibility for the safeguards currently available to members. In
contrast, the United States and other countries with high ambition
would like to eliminate developed countries' use of such safeguards.
We also differ on use of ``sensitive products''. We want to limit
the number of products a country may identify as sensitive, while Japan
wants to maximize the use of such products.
We also have significant differences in the approach to tariff
reduction. Our agricultural tariffs only average 12 percent in contrast
to Japan's average of 51 percent. Japan strongly opposes use of any
type of progressive tariff-cutting formula and any tariff cap. It still
prefers the old fashioned, go-slow approach of the Uruguay Round. In
sharp contract, we advocate an aggressive formula that cuts the highest
tariffs the most, and we insist upon a cap on tariffs that are
unreasonably high.
We have made very clear what we are seeking. We simply want to
level the playing field for our farmers and ranchers. Our markets are
relatively open, and yet, we have stepped forward and put our domestic
supports on the table. We insist upon substantial progress in all three
pillars of the negotiations: market access; trade-distorting domestic
support; and export competition. We are encouraging Japan to
constructively engage in the negotiations, to work with us in obtaining
a Doha outcome that will underpin our continuing, mutually advantageous
trading relationship.
Conclusion
Mr. Chairman, Japan is an important market for U.S. farmers and
ranchers--our number three market in calendar year 2004. We highly
value that commercial relationship--and we want it to contribute to a
further strengthening of our overall bilateral relationship.
To accomplish this, for our mutual benefit, we want to find ways
to expand our cooperation with Japan--to focus on our bilateral
relationship and also to find ways to cooperate more effectively in the
international arenas. As we move forward in the Doha talks, we intend
to aggressively seek additional market access gains, including
important markets like Japan.
Mr. Chairman, that concludes my statement. I would be pleased to
answer any questions.
Chairman THOMAS. Mr. Kawamura?
STATEMENT OF A.G. KAWAMURA, SECRETARY OF AGRICULTURE,
CALIFORNIA DEPARTMENT OF FOOD AND AGRICULTURE, SACRAMENTO,
CALIFORNIA
Mr. KAWAMURA. Thank you, Chairman Thomas, Ranking Member
Shaw, and members of the Committee, for calling this hearing to
discuss the importance of our trading relationship with Japan.
I am A.G. Kawamura, Secretary of the Department of Agriculture,
and I am here today as Governor Schwarzenegger's
representative. In California, we are working very hard to
share our understanding that access--and it is an important
word, ``access``--to nutritious California-grown foods or U.S.
foods is an essential component of a healthy lifestyle and is a
key part of our State and national economy.
As you know, California's agricultural production--$31.8
billion in 2004 in farm-gate value--if ranked separately would
rank economically as the fifth largest agricultural region in
the world.
California is the number one dairy State in the Nation,
accounting for more than 20 percent of this Nation's milk
supply. And California is also the number two producer of
cheese, rice, poultry, and cotton for the Nation. We are the
sole producer of 12 commodities and the national leader in 81
other commodities. And in terms of global markets, the
important part for this discussion, California is the national
leader accounting for 10 percent of U.S. agricultural exports.
All of this leads to an economic impact in the State--and, of
course, for the Nation--of more than $130 billion, if the
multiplier could be used conservatively. Clearly, given these
important facts, any opportunities to expand California
agriculture's success in access to foreign markets, including
Japan, would benefit our entire Nation.
The critical importance of Japan as an economic partner to
the United States, especially to our State of California, is
clear when you look at the numbers. Japan consistently ranks as
the number two or three market for California's agricultural
exports. In 2003, this totaled $913 million. Our top five
commodities for that year were rice, almonds, beef, hay, and
wine. Additionally, in 2003, as was mentioned throughout,
California's share of that beef production number was $86
million in beef and beef products exported to Japan, more than
half of the 2003 number. This figure comprises 40 percent of
all California beef exports for that year, and as Congressman
Moran mentioned, that is a $1.5 billion loss for the 2004-05
for zero shipments during the ban.
This continuing ban on U.S. beef, despite our rigorous
surveillance and testing protocols, is of great concern to all
of us who believe in the validity of science-based measures to
ensure food safety.
In fact, the harmonization of sanitary and phytosanitary
standards and other trade barriers between the U.S. and Japan
can greatly enhance the potential for export of many crops. For
example, as was mentioned, California's stone fruits, lettuce,
and rice face restrictive policies that significantly limit
shipments of those commodities into Japan. In California, we
understand the need for phytosanitary caution. Our Department
of Agriculture expends approximately $197 million per year to
protect our agricultural commodities and ensure that only
quality food products reach the consumer. All agricultural
trade then can suffer from foodborne disease and pest
outbreaks. And for this reason, all nations have a stake in
being alert to the enormous challenges caused by introduction
of unwanted species of pests and diseases. However, with
California's stringent environmental and conservation practices
and with strict Federal guidelines that ensure food safety and
quality, our farmers and ranchers produce a finished product
that meets or exceeds the highest standards in the world. These
exacting standards are just what the Japanese consumer demands.
As the WTO process works to promote market access, we would
clearly expect the agricultural trading relationship between
Japan and the United States to continue to expand. Working
together, I am confident that the issues that we face today
with Japan can be resolved to our mutual benefit.
In fact, we look forward to building upon the relationship
between our Governor and Prime Minister Koizumi and his new
government.
Over the last 2 years, Japan has been in the process of
transitioning maximum residue limited from a negative list
system to that of a positive. This will result in determination
of allowable chemical residues for a wide variety of
agricultural products, especially those from the specialty crop
arena and value-added foods. We have faith that this new
process will be a facilitation of our ability to send products
to Japan and not restrict the access to these high-quality,
safe, and nutritious U.S. products.
The clear benefits of trade are often more than just
impressive numbers, though. We live in a time where
California's farmers and ranchers comprise one of the largest
delivery systems of food and fiber in the world. And it is this
extraordinary and dependable supply of farm products that
provides all consumers with food security and stability. It is
this food security and stability that Japanese consumers
demand. The existence of trade barriers limits our ability to
enjoy full access to the market. The goal of every Nationshould
be to provide a wide array of safe and nutritious farm products
throughout the year to its citizens. So, choice, affordability,
and availability help to create and maintain a nation's health,
not just our Nation's health but Japan's as well.
California, again, is committed to ensuring the economic
security and competitiveness for our growers while providing a
safe and secure food supply. We are all witness to the amazing
globalization of this very small planet of ours. Globalization
is not a threat but an opportunity. Human progress then will be
measured by every nation's ability to deliver an abundance of
affordable goods, including those products that are essential
to health and well-being. We believe that the Japanese consumer
deserves access to high-quality foods that this Nation so
expertly produces. Trade policies that limit the availability
of these goods should be revisited and revised.
The 21st century will bring many challenges but none
greater than achieving a renewed commitment to agriculture and
its fundamental role in all societies. We are all stakeholders
in this future, and I thank you for this testimony opportunity
today.
[The prepared statement of Mr. Kawamura follows:]
Statement of A.G. Kawamura, Secretary of Agriculture, California
Department of Food and Agriculture, Sacramento, CA
Introduction
Thank you Chairman Thomas, members of the committee, for calling
this hearing to discuss the importance of our trading relationship with
Japan. I am A.G. Kawamura, Secretary of the California Department of
Food and Agriculture. I'm here today as Governor Schwarzenegger's
representative. In California, we are working hard to share our
understanding that access to nutritious California grown foods is an
essential component of a healthy lifestyle and is a key part of our
state and national economy.
California feeds the world
As you know, California's agricultural production--$31.8 billion
dollars in farm-gate value--if ranked separately would make it
economically the fifth largest agricultural region in the world.
California is the No. 1 dairy state in the nation, accounting for
more than 20 percent of the milk consumed by Americans. California is
also the No. 2 cheese, rice, poultry and cotton state in the nation. We
are the sole producer of 12 commodities and the national leader in 81
other commodities. In terms of global markets, California is the
national leader accounting for 10 percent of U.S. agricultural exports.
All of this leads to an economic impact in the state of more than $130
billion dollars. Clearly, given these important facts, any
opportunities to expand California agriculture's access to foreign
markets, including Japan, would benefit our entire nation.
U.S-Japan trade relations are of vital importance
The critical importance of Japan as an economic partner to the
U.S., especially to the state of California, is clear when you look at
the numbers. Japan consistently ranks as the No. 2 or No. 3 market for
California's agricultural exports. In 2003, this totaled $913 million
dollars. Our top five commodities for that year were rice, almonds,
beef, hay and wine. Additionally, in 2003 California beef producers
shipped $86 million in beef and beef products to Japan. This figure
comprised 40 percent of all California beef exports that year.
The continuing ban on U.S. beef, despite our rigorous surveillance
and testing protocols, is of great concern to all of us who believe in
the validity of science-based measures to ensure food safety.
Harmonization of staandards
In fact, the harmonization of sanitary and phytosanitary standards
and other trade barriers between the U.S. and Japan can greatly enhance
the potential for export of many crops. For example, California's stone
fruits, lettuce and rice face restrictive policies that significantly
limit shipments of those commodities into Japan. In California, we
understand the need for phytosanitary caution. The California
Department of Food and Agriculture expends approximately $197 million
per year to protect our agricultural commodities and ensure that only
quality food products reach the consumer. All agricultural trade can
suffer from food borne disease and pest outbreaks. For this reason, all
nations have a stake in being alert to the enormous challenges caused
by introduction of unwanted species of pests and diseases. However,
with California's stringent environmental and conservation practices,
and with strict federal guidelines that ensure food safety and quality,
our farmers and ranchers produce a finished product that meets or
exceeds the highest standards in the world. These exacting standards
are just what the Japanese consumer demands.
As the WTO process works to promote market access, we would clearly
expect the agricultural trading relationship between Japan and the U.S.
to continue to expand. Working together, I'm confident that the issues
that we face today with Japan can be resolved to our mutual benefit.
Over the last two years, Japan has been in the process of
transitioning maximum residue limits from a negative list system to
that of a positive. This will result in determination of allowable
chemical residues for a wide variety of agricultural products,
including specialty crops and value-added foods. With full faith in
scientific standards, recognizing food safety and security, California
stresses that these standards must reflect production needs and
establish criteria for new compound evaluations that facilitate, not
restrict, the access to high quality, safe and nutritious U.S.
agricultural products.
Increased consumption of nutritious foods
The clear benefits of trade are often more than just impressive
numbers. We live in a time where California's farmers and ranchers
comprise one of the largest delivery systems of food and fiber in the
world. It is this extraordinary and dependable supply of farm products
that provides all consumers with food security and stability. It is
this food security and stability that Japanese consumers demand.
However, the existence of trade barriers limits our ability to enjoy
full access to the market. The goal of every nation should be to
provide a wide array of safe and nutritious farm products throughout
the year to its citizens. Choice, affordability and availability help
to create and maintain a nation's health--whether it is here in the
U.S. or in Japan.
Conclusion
California is a major gateway in providing both domestic and
imported agricultural goods to the nation. Governor Schwarzenegger is
committed to ensuring economic security and competitiveness for our
growers, while providing a safe and secure food supply. We are all
witness to the amazing globalization of this very small planet of ours.
Globalization is not a threat but an opportunity. Human progress will
be measured by every nation's ability to deliver an abundance of
affordable goods, including those products that are essential to health
and well-being. We believe that the Japanese consumer deserves access
to high-quality foods that this nation so expertly produces. Trade
policies that limit the availability of these goods should be revisited
and revised.
California agriculture is leading the world in achieving a safe and
reliable supply of farm products produced through responsible
stewardship of our resources under the watchful eye of caring farm
families. The 21st century will bring many challenges, but none greater
than achieving a renewed commitment to agriculture and its fundamental
role in all societies. We are all stakeholders in this future. Thank
you for taking testimony today and for your support.
Chairman THOMAS. Thank you very much.
Let me say initially, in terms of the Administration
testimony, I just flat out couldn't be more disappointed. I
said at the beginning of this hearing that we didn't want to
talk about tomorrow, I didn't want to hear a lot of verbiage in
terms of positive spin.
Let me give you a feeling of what I heard from your
testimony in terms of the high points. Ms. Cutler, ``removal of
unjustified ban.'' Wow. I call that progress. ``Appears to be
in the final stages of deliberations.'' Aggressive.
Mr. Loevinger, optimism. ``Prospects for the future based
upon recent elections.'' That is tomorrow. You brag about the
fact that in March of 2004 they finally quit spending hundreds
of billions of yen trying to artificially shore up their
currency. You talked about zombie loans. I guess you meant it
may be morning in the night of the living dead. ``May finally
be coming to an end.'' ``A new day may have finally arrived.''
Now, in the second largest economy in the world, you held
up, I assume admirably, a five-fold growth in a decade from $6
billion to $35 billion, at a time when the world in terms of
truly open trading partners had multiplied far beyond that
shabby number.
Ms. Terpstra, they ``remain unjustifiably closed.'' Well,
the question is: If they remain unjustifiably closed, how long
are you going to let them remain unjustifiably closed? And when
are you going to do something about the fact that they are
unjustifiably closed? ``This year we made some progress . . .''
``With the aim of . . . we have been very clear on what we are
seeking.'' ``Seeking.''
Seeking, seeking, seeking. When are you going to find it? I
am a little disappointed in you folks coming here and being
apologists for whatever Japanese regime happens to be in.
Now, if you are not result-oriented, I want to assure you
that this Congress in a bipartisan way is going to be. The
world has changed, and the world is changing. The Government of
Korea is interested in a free trade agreement, and I am
interested in working a free trade agreement with the country
of Korea.
China--we are going to examine China. In the short time
that they have been in, they have made more promises and
actually honored more commitments than Japan has in the decades
in which Japan has promised a better tomorrow.
And for you to come here and to talk about tomorrow and
seeking and possibly hoping that things will be better, in
other areas of interpersonal human behavior, that is called
``enablers.'' And we expect something different. And if we
don't get something different, you will get clear,
understanding, behavioral measures from this Congress.
And this is coming from someone who is more than willing to
let people try, but that is all we have ever done, and that is
all we have ever gotten, and that is ``try,'' ``tomorrow.'' I
said at the beginning of this hearing I am not interested in
tomorrow. Changes have to be made. Yes, there has just been an
election, but I think at some point you draw the line.
This hearing today, at least under whatever power I have,
is drawing the line. There are no more tomorrows.
The gentleman from Florida?
Mr. SHAW. Thank you, Mr. Chairman.
I am somewhat confused as to the motivation of the Japanese
in some areas. We have heard from several witnesses now the ban
on American beef coming into Japan, and we know that there are
no logical sanitary barriers that could be put up, and that we
have a better situation than they have certainly in that
regard. Also, I have been told and I understand that we are not
really competing with their markets.
So, would one of you like to tell me what is their
motivation in blocking American beef coming into Japan? Who
wants to take that? Ms. Terpstra, you testified in that area.
Ms. TERPSTRA. Thank you. I will try to answer that
question. You are very right, I think, in the history of our
working to export U.S. beef to Japan. Early on, it used to be
to protect their domestic producers. Today it seems to be, I
think, symptomatic of a larger problem, and that is their lack
of an effective regulatory system that generates confidence in
it by their consumers. They seem to be, I would say, somewhat
adrift in terms of how to deal with SPS measures.
Some of their actions I think are continuing to try to
protect, perhaps more in the fruit and vegetable area, their
own producers. But with regard to beef, you have made the point
that we are not competing with their producers. Their consumers
enjoy our products. There seems to be no good economic reason
for keeping out our product. I think Japan is truly struggling
with how to deal with consumer concerns over the food safety
system.
Chairman THOMAS. Would the gentleman yield?
Mr. SHAW. Yes, I will yield.
Chairman THOMAS. Have you ever heard of stonewalling?
Ms. TERPSTRA. Yes.
Chairman THOMAS. Wouldn't it be very difficult for Japan if
they had scientific tests and allowed beef, in which there is
no true competitor, and wouldn't they, therefore, have to
respond in a number of others areas with scientific tests to
open up the market and that once they start, there is no
stopping it? And that rather than some confusion or inability
to understand what is going on, it is an absolute stonewall in
which if they show any movement whatsoever, they have to show
movement across the board. That is not hard to understand, and
it is not confusion. It is stonewalling.
I thank the gentleman.
Mr. SHAW. You hit right on the point. In fact, many years
ago when I was a Mayor, I was trying to--we were looking to
have an experimental rail system put in by the Japanese, and I
was told at that time--given sort of instructions on how to
negotiate with the Japanese. And I was told that it was like
there is a curtain and you throw an idea over and just wait for
something else to be thrown back, and you never knew how long
it was going to take for it to come back.
Our way of negotiation in the West is more or less we want
to sit down and make a deal. We want to discuss it and work it
out and make a deal.
I think our difference in our negotiation tactics has
probably worked very much to our disadvantage. And this brings
up the stonewalling because that is exactly what is involved.
While we are waiting for them to come back and them saying that
they are in no hurry to respond to us, I think we need to put
in place some penalties for stonewalling so that we will be
believed as doing something. When we make an agreement, we
stick with it, and we should expect and require other countries
to do that.
Where are they getting most of their beef, by the way? Does
anybody know that?
Ms. TERPSTRA. In the interim, without U.S. product, I would
say from Australia.
Mr. SHAW. One last question. If all of these tariffs and
barriers were to come down and they were to mirror our
structure here in the United States, what effect would that
have on our balance of trade? Does anybody care to----
Mr. KAWAMURA. Those of us in California believe there would
be tremendous results in terms of the value-added products that
we can send over there, everything from salad in a bag to the
fresh fruits and stone fruits that we have, including rice
would be an immediate winner in that arena. Of course, you know
that beef would be a large part of that product line that we
can send there. We would be very happy--including the different
nut products we have. We would be very excited. It is a
wonderful, developed, as a previous speaker mentioned, mature
economy that can afford to buy so many of our products, and
much of their economy can afford to buy even our more
affordable products as well. And so these trade barriers limit
that potentiality tremendously.
Mr. SHAW. Mr. Chairman, just to sum up, I think that it is
very apparent from what you are hearing from the dais up here,
from both sides of the aisle, is that we are out of patience,
and it is time to move.
Thank you.
Mr. LEVIN. Thank you very much.
In my opening statement, I mentioned a series of concerns,
three of them--the appeal issue, the beneficiary rights issues,
and also the evidentiary record issue. Let me start with one of
them, and I am going to stick within 5 minutes. I think the
Chairman might insist on that anyway. Then others can pick up
these other concerns.
Let's take the evidentiary issue, the appeal process. The
proposed limitation would apply to what would be, what, the
third step of the process?
Ms. BARNHART. It would be the third step of the process,
the DDS, the reviewing official, and then the administrative
law judge, yes.
Mr. LEVIN. Now, what percentage of the cases more or less
goes to the ALJ?
Ms. BARNHART. If I could describe it a little differently
than that, I have some numbers I think may make it clear. If
you look at initial claims and you take a hundred cases, Mr.
Levin, the number that go to the second level, which is
reconsideration, is 22. So, 22 out of the 63 that are denied at
the first level move on to the DDS level. Of those 22, 19 move
on to the ALJ level of appeal.
Mr. LEVIN. So, of the hundred cases----
Ms. BARNHART. Sixty-three are denied at the first step by
the DDS, 37 allowed. Of those 63, 22 of those appeal for
reconsideration. Of those 22, 3 are allowed, 19 are denied.
Nineteen appeal--virtually all appeal to the next stage.
Mr. LEVIN. Now, in what percentage more or less of these
cases is there an attorney, do you know?
Ms. BARNHART. In terms of representation?
Mr. LEVIN. It doesn't have to be an attorney.
Ms. BARNHART. Representation in general for--I can give it
to you by Title 2 as well as SSI. In Title 2 it is 74 percent
are represented. The vast majority of those are attorneys, I
would point out. I don't have that breakout for you, but I can
get that for the record. And for SSI, 47 percent are
represented.
Mr. LEVIN. Now, is there any evidence now of a problem of
submittal of evidence? You are changing the rule. You are
proposing to change the rule, and what evidence is there that
it is now a problem?
Ms. BARNHART. Well, it is not a matter of what--I cannot
categorize the evidence for you, Mr. Levin, but I do know that
based on the number of postponements and rescheduling of
hearings that are requested, a number of them the request is
made because of things other than a no-show, for example, by
the claimant.
Chairman THOMAS. Thank the gentleman. If you want an
absolute number, in visiting with a sake maker outside Tokyo,
he indicated that if he could import cow rose rice from
California versus the price he is forced to buy domestic
Japanese rice for, he could cut the price of his sake by 50
percent and not diminish quality whatsoever.
Gentleman from Michigan.
Mr. LEVIN. Thank you, Mr. Chairman. It was good that you
called this hearing. You mentioned that you thought in many
sectors the Japanese have been stonewalling the U.S., and I
must say, listening to your testimony, I think you are
stonewalling us and the American people, because maybe it is
because they are the largest holder, the Japanese, of U.S.
Treasury Securities, that you come here and you are afraid to
kind of tell it like it is. I don't think you have done that.
Ms. Cutler, you say we have come a long way, I quote, with
Japan over the years. A long ways. I don't know, in view of the
facts, how you can say that. I was just looking at the trade
figures, the merchandise trade figures, and in dollar terms
they are worse than they were 7, 8 years ago. You know this.
The surest figures, if you look at those--and you kind of
lauded it--the change in the trade balance has been so small.
The '97 figures merchandise trade, the trade balance was 56.1
billion. Now it is 75.2 billion. I looked at the auto figures.
You know, we have been working on this for 15 years. The total
passenger exports in 1990 were 2.2. Then they went down to 1.2
billion. Now they are up to 1.7 billion from Japan to here. Our
trade deficit has gone from 30 billion in the auto sector to
$43 billion. That has come a long ways.
And then, Mr. Loevinger, you talk about the currency
manipulation. I forget the billions that they spent in '04, the
billions. The reports of Treasury always hesitated to say that
Japan was manipulating. Tell me in a word why? I don't
understand that. I think Treasury was stonewalling the American
people. When they spent all of those billions and billions, you
say that--they were manipulating their currency, weren't they?
Yes or no?
Mr. LOEVINGER. Thank you, Congressman.
Mr. LEVIN. Maybe you don't want to thank me.
[Laughter.]
Mr. LOEVINGER. No, no, no. Also I want to say to you and
other members of the Committee that we hear the message.
Mr. LEVIN. Tell me, were they manipulating the currency in
'03-'04?
Mr. LOEVINGER. As you know, Mr. Congressman, the Treasury
reports for those periods concluded that no country met the
technical requirements of the 1988 Trade Act, but as I said, we
were very aware of the intervention going on. We had very clear
and tough discussions with them. We made our views known, and
in March of 2004 they stopped and they have not intervened
since then.
Mr. LEVIN. We will get into that first. I have not met a
Member of Congress who buys the Treasury Department explanation
about technical compliance. So, in my last 30 seconds, Ms.
Terpstra, in terms of beef, do you think Japan has been
violating its WTO obligations?
Ms. TERPSTRA. I think that their policies are not
consistent with the international obligations under the SBS
agreement, and----
Mr. LEVIN. So, the answer is?
Ms. TERPSTRA. Yes.
Mr. LEVIN. Why did we not file action with the WTO? Why are
we here so much longer? Just tell our constituents. We worked
on the WTO. We worked to change the dispute settlement system.
We worked to give it finality. A lot of us here worked hard to
bring that about. Why did we not use it?
Ms. TERPSTRA. Because the first stage in the WTO is having
bilateral consultations. last October we felt that we had a way
forward for both of our countries to move toward resuming trade
in a manner that was consistent with our obligations.
Mr. LEVIN. That was a year ago.
Ms. TERPSTRA. Yes. And we share the frustration. Secretary
Johanns has also said enough is enough. That process has run
its course.
Mr. LEVIN. American will believe enough is enough only when
there is action, not rhetoric. I for the life of me don't
understand the hesitation to use our WTO rights.
Thank you, Mr. Chairman.
Mr. SHAW. [Presiding.] The time of the gentleman has
expired.
Mrs. Johnson?
Mrs. JOHNSON OF CONNECTICUT. Thank you very much, Mr.
Chairman.
Ms. Cutler, in your testimony you make the statement on
page 4 that in sum, we have and will continue to make good
progress in our efforts to further open markets in Japan and
key sectors such as telecommunications, information technology,
medical devices and pharmaceuticals, energy and agriculture.
Just in medical devices Japan has the slowest and most
costly system of approving new medical technologies of any
developed country, and on top of that, they have just added a
new very burdensome regulatory regime that will require our
companies to expend $1.5 billion just to comply with yet
additional regulatory requirements by 2010.
In addition, the Japanese Government has made significant
reductions. In fact, in some cases deep cuts in the price they
will pay for medical technology, signifying that they have
absolutely no intention of providing research and development
resources that medical technology depends on to make life-
saving changes in how we are able to help people who need
medical devices for survival and for a functional life.
Now, what makes you think we are making progress? How can
you even include medical devices in the list of things in which
we are making good progress, because it looks to me like we are
going backward.
I would say the same about life insurance. You know, Kampo
is not supposed to put in any new products, they put out new
products, which they are still paying no taxes and while the
Government still takes responsibility for backing risk.
So, it is not just that they are continuing to do the kinds
of things that they have done that represent non-tariff
barriers. It is no wonder we have a trade deficit; it is a
wonder it isn't deeper. But there are many areas in which we
currently trade, where we could be trading in a fair regimen
and not have a trade deficit. So, I see them as going backward.
Furthermore, I see their actions as duplicitous. To say
that we are going to have Kampo privatized and compete, and
before they do that, give it a new advantage in new products. I
don't know how you can be as optimistic as you have been in
your presentations. I can see that maybe the relationship isn't
as hostile as it has been before that. Maybe now you get a
response in weeks rather than years. But where do yo see the
opportunity for progress on now the many pressing fronts on
which their behavior is grossly, totally unacceptable as part
of the world trading community?
I am directing this to Ms. Cutler first, but if any of you
want to comment afterward, I would be happy to hear your
comments.
Ms. CUTLER. I have been at USTR working on Japan trade
issues since 1991, and perhaps--it has been quite a long time,
and I think in a lot of these sectors maybe I have a good
recollection of the starting point and how bad things, really
bad things used to be. So, for example, in the medical device
industry we made enormous breakthroughs in terms of achieving
transparency improvements for industry so they could provide
input into the pricing deliberations, to they could have a seat
at the table when other decisions were being taken that would
affect their industry.
That said, I totally understand that we have a lot of work
ahead of us. In the past we have worked closely with industry,
and a number of cycles of these biennial pricing reviews to
head off some of the worst price cuts that were under
consideration. We are determined to work with industry and to
work with Congress again in this cycle to head off price cuts
that are discriminatory, unfair, and that disproportionately
ask our companies to take on the burden of Japan's desire to
reduce its health care cost.
I have work for many years on the Japan insurance issue,
including on the negotiation of the '94 and '96 bilateral
insurance agreements. I don't have statistics from back then,
but in 1998 U.S. market share in the life insurance market in
Japan, the private sector market, was 4.6 percent. In 2004 it
was 18.8 percent. That is progress, and perhaps in my view that
is good progress, but maybe I have been working with Japan for
too long if I think that is good progress.
That said, the challenges presented by postal privatization
and the implications it might have for our industry is a
priority issue on our agenda. We are working very closely with
industry.
Mrs. JOHNSON OF CONNECTICUT. Let me, because my time is
about to expire and I know you can't go through the whole list
of things you would like to go through.
Let me just say that a group of us backed Secretary
Baldridge when he was negotiating with the Japanese on machine
tool issues and later on auto issues. We saw what it was like
then. It has changed a little, but not enough for the modern
world, and Japan is a major economy of the modern world. They
have simply got to change their ways at a speed that has not
been traditional in their society because if they don't we will
have to use the tools at our disposal to override the
negotiating process. That would not be good for us or for them,
but it will be necessary if we can't change the style and the
process and the speed at which problems between us are
resolved.
Thank you.
Mr. SHAW. Mr. Cardin?
Mr. CARDIN. Thank you very much, Mr. Chairman.
It is a pleasure to have you before us. I think the
frustration is--and you saw the passion of our Chairman, and I
must tell you, those on my side of the aisle don't always agree
with our Chairman, but we always admire his passion on issues.
We would like to see some of that from the Executive
Department, particularly as it relates to trade issues.
I think we would feel more comfortable if we felt that
there was outrage as to the delaying tactics being used by
Japan and other trading partners to resolve issues. We don't
see that. We don't see that in your testimony. We don't see
that in your action.
On Treasury, on currency manipulation and China's
intervention into the currency market if I am correct, I think
since 2000 the intervened somewhere around 150 times, and, yes,
now you have gotten some action on their part, we believe,
after a lot of damage has been done. It took 150 interventions
before we could get any action done? And we never filed claims.
I think we are concerned as to whose side are you on. I say
that with a great deal of respect for the public service of the
people who serve in your agencies. We have been waiting a long
time on beef, waiting too long.
And on Kampo, you mentioned that we have greater
penetration in the insurance market, but how would you like to
be a company in the United States competing against a company
in Japan that has the relationship with its government so it
doesn't have to pay taxes, it doesn't have to do anything else
and you have to compete with them. That is wrong. You know it
is wrong, we know it is wrong. And they are delaying dealing
with it and we don't do anything about it. Japan files claims
against us, Byrd amendment. WTO claims filed. They are taking
retaliatory action. They don't have the niceties of saying,
well, gee, we will wait and talk and talk.
You talk about consultation before you file a WTO case. Let
me just ask you, Ms. Cutler, are we in consultation before
filing a WTO? Have we put them on notice that we are going to
be filing a WTO claim?
Ms. CUTLER. With respect to insurance?
Mr. CARDIN. Beef, insurance, you pick the ones. Where are
we in the queue to file WTO claims actions against Japan? Have
we told them we are in our consultation period before filing
claims? Are we prepared to claim or are we going to continue to
wait?
Ms. CUTLER. With respect to insurance, we are working with
our industry, exchanging information in terms of the strength
of the case we might have in the WTO, but I think--and Governor
Keating will testify later--I think we are in agreement that
the best strategy now is to try and work with the Japanese
Government to head off the harmful implications of postal
privatization that would impact our companies and make them
compete, as you said, on an unfair basis with a huge entity
that gets special advantages.
Mr. CARDIN. So, we are not in the process of seriously
preparing for a WTO challenge?
Ms. CUTLER. We are keeping that option open, and our
lawyers are working with our insurance industry lawyers,
looking at a case, but once again, we look at the most
appropriate avenue for trying to solve the issue and gain
access and forestall barriers put up against our companies so
they can compete in the market.
Mr. CARDIN. Japan as a developed Nationhas historically
supported the U.S. position on rules, countervailing duties and
antidumping duties. Many of us think that because of these
barriers that they have, and protectionist policies, that they
can get the benefit of profits by protecting their market so
that they can join the developing countries in trying to weaken
the anti-dumping rules. What action have you taken wilp in the
Doha Development Agenda on the rules agenda, the rules issues?
Ms. CUTLER. You are correct. In the rules area Japan is
working with a number of other countries to try and weaken our
dumping and countervailing----
Mr. CARDIN. Doesn't that get you? Aren't you outraged by
that?
Ms. CUTLER. We are----
Mr. CARDIN. It is counter-intuitive that they are doing
this. There is something wrong.
Ms. CUTLER. We are working in the rules group to forestall
this and to make sure that we can continue using these rules in
accordance with the WTO rules.
Mr. CARDIN. I can tell you, you are going to have a lot of
problems with Democrats who have supported trade legislation
historically if we find that you are making compromises on
rules because you have a tough going because you don't have the
allies that you need because you haven't done the necessary
preparation with our allies on this issue. It seems to me if we
were tougher on the trade distortions with Japan, we wouldn't
have the same problem we are having now in the Doha Development
Agenda. I think it is going to have serious ramifications if we
don't take a tougher position with our traditional friends.
Thank you, Mr. Chairman.
Mr. SHAW. Mr. Herger?
Mr. HERGER. Thank you, Mr. Chairman.
Mr. Kawamura, it is good to have you from California. Thank
you for the great job you are doing representing us in
agriculture. All of this panel, I am sure sense the frustration
that we have in the Ways and Means Committee, which is
responsible for trade.
And I represent one of the most productive, fertile
agricultural districts in the world in Northern California, and
certainly I am hearing not only from my agriculture, but as you
know, Mrs. Cutler and others, that California has a number of
companies that would like to be doing business on a more fair
basis with our friends in Japan, which aren't able to. I have
heard concern from some of the groups that Mrs. Johnson
mentioned, the medical device industry, which leads the world
in life science research and is encountering regulatory
obstacles in Japan now. I have heard from the life insurance
industry, which has a very large interest in the direction of
deregulation of Japan post, and I have heard from some of my
dairy people in my district and livestock industry.
But what I would like to focus on, my question to you, Ms.
Cutler, is the many rice growing constituents in my Northern
California district, which is the second largest rice growing
area in the Nation, it is my understanding that the Japanese
Government recently announced a new discriminatory policy that
will provide selected end users in Japan with access to
imported rice stocks held by the Japanese Government, and that
these rice stocks are mostly of U.S. origin. I understand that
Japan's Food Department will make imported rice available to
industrial users in Japan if these users agree to reduce
imports of a product called rice cake.
I have two concerns with this proposed policy. First, Japan
appears to be in possible violation of its WTO obligations by
treating imported rice differently than domestic rice; and
second, Japan is apparently pursuing an import substitution
policy by targeting approximately 20 million in the trade of
rice cake mixes. Japan will reportedly make this new policy
operational in late October or November.
Ms. Cutler, I would like to find out from you how the USTR
and the Administration plan to move forward in addressing this
discriminatory policy?
Ms. TERPSTRA. Congressman, if I could first attempt to
answer that.
Mr. HERGER. Please.
Ms. TERPSTRA. I think you very well described the new
proposal from the Japanese Government that would seem to be
undermining the access we have for our rice and rice products
into Japan. This is something we just recently learned about.
We will be working with the rice industry. We have raised it
through our embassy in Tokyo, but we will go and fully explore
what the WTO issues are here and pursue it. We don't want to
see our access undermined any further than it already is.
Mr. HERGER. I would like to continue our discussion, and I
am very interested in what the results are. Again, this is one
more example of something--not only are we not making progress,
but we are actually digressing in this areas, so I would like
to have you report back to me as soon as you can on what you
find out.
Thank you.
Mr. SHAW. Mr. Neal.
Mr. NEAL. Thank you, Mr. Chairman.
Ms. Cutler, let me congratulate you. The panel today, as
assembled and the answers you have given, this is the only time
in 10 years we have all agreed on something. I think it speaks
to the seriousness of the matter that is before us.
A simple question to begin with. What can Congress be doing
to speak to some of these issues? Then I will address a couple
of specific questions to you on the life insurance and medical
devices fields.
Ms. CUTLER. I think the letters we receive and the letters
that are sent directly to Japanese Ministers and the Japanese
Ambassadors really help underscore that it is Congress and the
Administration that are concerned in a wide range of areas. I
also believe a hearing like the one you are holding today is
very useful in underscoring to our Japanese colleagues the
seriousness that Congress attaches to all of these issues.
Frankly, I think sometimes they think that Congress is not
paying attention to them, and so hearings like this and the
letters help us do our job.
Mr. NEAL. Specifically in the insurance industry, as Kampo
moves down the road, to what some of us believe will be
privatization, what assurance can you give the life insurance
industry here in America, that as they proceed to
privatization, that we are not going to be in an unfair
position, given opportunities for growth here in America?
Ms. CUTLER. The assurance we can give them is that we will
work hand in glove with them at senior levels of this
Administration to make sure that the inroads that we have made
into this market over the years are sustained, and that our
presence in Japan in the life and non-life market will continue
to grow. This is an issue of high priority for the
Administration. It is not just USTR that is attaching the
highest concern to this issue. I am working closely with my
colleagues in the White House, at the Treasury Department, at
the State Department. Our embassy is holding weekly meetings
with key players who work on this subject in Japan.
So, we are attaching top priority and doing everything we
can, and working with the insurance industry. And also, this
time around in the insurance area we have allies within Japan,
and we are working with them, so we have domestic support for
our position as well in Japan, and that is very helpful.
Mr. NEAL. Are you prepared to name any of those allies that
we have?
Ms. CUTLER. They are business groups in Japan. They are the
Japanese life insurance companies that are supporting our
position. Our industry is working--and I am sure Governor
Keating will talk about this later--closely with the European
and Canadian insurance providers who also share our position,
and there are many, frankly, in the Japanese Government that
are very sympathetic to our position.
Mr. NEAL. Part of what you are hearing today is the tension
that exists between the Legislative Branch of Government and
the Executive Branch, and as you know, the Framers intended
that we would respond more quickly than the executive branch to
concerns that we hear, but the frequency with which we receive
these complaints is very important. I think that as we pass
them on to you, it was pretty clear today that we would like
some action. And as the next panel arrives we are going to have
a chance to talk to them about medical devices as well.
But where I live, Ms. Cutler, these are substantial issues.
The whole question, as Mr. Cardin, I think, accurately depicted
of the notion of free trade, where we are constantly on our
side asked to take that leap of faith--and most of us
frequently do, incidentally--oftentimes the reward for it is to
run up against these sort of obstacles which make it in the end
much more difficult for us to convince our own constituents of
the merits and worthiness of free trade.
Thank you, Mr. Chairman.
Mr. SHAW. Mr. Camp?
Mr. CAMP. Thank you, Mr. Chairman.
I guess I will address my remarks to the entire panel, but
as I listen to this testimony, I agree with all that I have
heard my colleagues say. I don't think the lack of progress
have been for lack of trying, and it doesn't seem as though we
have a Government that is responsive to the numerous
negotiations that we have put forward. I look at my State of
Michigan and I look at autos and auto parts, and it seems as if
we have gone backward. The bilateral agreement expired in 2000,
where the Japanese had agreed to change the regulations that
discourage the import of U.S. made cars and parts, and that
agreement expired. There has been no renegotiation of that.
They have overly restrictive regulations. They lack
transparency. They have a unique and complex set of rules for
certifying foreign automobiles in that country, which just
doesn't stand public scrutiny.
I look to the areas of beef, which we have heard discussed.
There is a lot of beef in Michigan, and apples particularly,
where I don't know that they are allowing imports yet, even
though the WTO has ruled decisively in our favor. Before the
WTO ruling, the Japanese failed to even meet with or respond to
us for 3 years.
It seems to me as though they are using rules, regulations
and sanitary and phytosanitary standards as trade barriers and
restrictive trade practices, and I for one would like to hear
your comments on the general merits of these agricultural
standards in Japan, and any comments you might have on how we
can make improvement, because we have not seemed to move
forward in the channels that you have all been working on for
so many years. Those have not been successful.
While incremental progress is being made, we are in an era
where that just isn't good enough. I think to compare back to
15 years ago, the world has changed in 15 years, and we really
need to see quicker progress, more substantial progress in all
of these areas, whether it be auto, auto parts, beef, apples,
agricultural products, insurance products. This is significant.
We would hope to have a productive trading relationship with
the Japanese, but I wonder if that is really being called into
question, and it might even be in something that we should
seriously act.
So, I would be interested in any one who would care to
comment. Yes?
Mr. KAWAMURA. Congressman Camp and Committee members, I
think it would be fair to mention that in the course of 10, 15
years a lot has changed in the way the world operates, and in
the area of agriculture certainly we have seen world class
competitors come out of countries that we never thought 15
years ago would be competing in our arenas of agricultural
products. In the arena of beef, we certainly are alarmed and
concerned at the lack of progress in that arena, but at the
same time the fact that there is another country that has an
adequate supply of beef that can quickly be a replaceable
supplier of our U.S. product line makes us all take pause as
how we look at the future of U.S. agriculture.
And as I look at these members here in this Committee and
all the different Committees within Congress, about our future
in agriculture, one of the things that I would encourage all of
us to think long and hard about is, is that future--are we just
replaceable suppliers in this Nation, or are we part of the
resource base, if you will, are we part of the environment?
So, with that, I think where we need to help--two things--
understand in this difficult trade arena, in this international
globalization of how things move around the world, we recognize
that there are winners and losers, sometimes for no reason of
our own.
Mr. CAMP. I am about ready to lose my time. I appreciate
your comment.
Mr. KAWAMURA. Sorry about that.
Mr. CAMP. I don't think we are afraid of competition, but
we are afraid of competition from people who don't follow the
rules, who create false sanitary and phytosanitary standards,
and are even reluctant to explain the rationale for these rules
and standards.
So, I guess my message is, I don't think we have done
enough, whether it be in the Trade Office or Agriculture or
Treasury, or the State Department. We need to do more. And I
think we need to hammer hard and not just sit back and say,
well, let us have another meeting. We haven't made enough
progress in any of the areas I mentioned, and I would like to
see all of you go back--I don't necessarily fault all of you.
Clearly, we are not negotiating with somebody who is coming to
the table in good faith. So, I think we need to change tactics
and do everything we can to move forward.
Thank you, Mr. Chairman.
Chairman THOMAS. [Presiding.] Thank the gentleman.
The Chair will announce that--with apologies to the other
members--that the Chair will dismiss this panel. Thank you very
much.
Any Member may submit questions in written form to expect a
response in written form. And the Chair will indicate to those
individuals who are to comprise the second panel, that the
Committee will recess to the call of the Chair, and the Chair
anticipates, if at all possible, that the Committee will
reconvene within the hour.
The Committee stands in recess.
[Whereupon, at 2:55 p.m., the Committee recessed, to
reconvene at the call of the Chair.]
Mr. SHAW. [Presiding.] If the guests would take their
seats. To the second panel, my apologies, but there has been a
lot of things going on outside of this room that have required
our presence.
The second panel right now is the Honorable Governor Frank
Keating, who is President of the American Council of Life
Insurers; Michael A. Mussallem, Chief Executive Officer,
Edwards Lifesciences Corporation; Jim McAdams, President of the
National Cattlemen's Beef Association. You are going to have to
help me. I was introduced to you earlier, but I am having
problems.
Mr. MOHATAREM. Mustafa Mohatarem.
Mr. SHAW. Yes. He is Chief Economist for General Motors in
Detroit; and Deborah Howard, who is President of Japan Market
Resource Network, Tokyo, Japan, and she is here on behalf of
the American Chamber of Commerce in Japan.
Welcome, all of you. As is our custom, your entire
statement is made a part of the record, and you may proceed as
you see fit. Governor?
STATEMENT OF HON. FRANK KEATING, PRESIDENT, AMERICAN COUNCIL OF
LIFE INSURERS
Mr. KEATING. Chairman Shaw and Congressman Levin, thank you
for the opportunity for us to be able to appear before you. I
have two studies that are referenced in my formal testimony
that has been made a part of the record. I would appreciate it
if those two studies could be made a part of the record as
well.
I represent the American Council of Life Insurers, as you
have noted, Mr. Shaw, which represents some 400 life insurance
companies in the United States. A number of our companies do
business in Japan. Those businesses are significant to the
companies involved. As has been referenced, some $38 billion in
premium income has been provided to those companies as a result
of product sales in Japan.
We have been successful in moving our market share from
some 3, 4 percent of the market to over 15 percent of the
market. We think a competitive opportunity for us good for the
people of Japan, it is good for the consumers and policy
holders of Japan, because it gives them more product at less
cost.
I was there in late January and early February and spoke to
a number of members of the Diet as well as ministerial
officials about the postal privatization initiative of Prime
Minister Koizumi. We did not take a position for or against
privatization. That is a decision of the Japanese people. But
it is very important, consistent with GATS. The market does
require, the statute does require that national treatment be
afforded our companies as well as the Japanese companies that
are doing business in that country.
We are very concerned because the conduct that we have
observed has been violative of GATS. It is the position of our
British friends, it is the position of our Canadian friends, it
is certainly the position of the life insurance companies that
I represent that the conduct of the Japanese Government with
respect to Kampo's size and weight and breadth and bulk and
conduct is violative of their GATS agreements.
Why is that? Well, because, as has been noted, they don't
pay taxes. They are not under FSA regulation as we are. They
enjoy the full faith and credit of the Japanese Government,
something obviously we do not do. And they don't have to pay
into a policy holder protection fund in the event of insolvency
or some other risk event. That gives them an enormous
advantage. They are some 40 percent of the Japanese market.
Now, during the course of the privatization, we are
concerned about two things:
First, that there will be partial privatization, and that
is not good. We think consistent with the law, which is being
drafted, that there should be full privatization and during
that privatization period that there be no new or modified
products introduced to the Japanese public to put us at a
further competitive disadvantage and further violate the GATS
agreement.
Second, we are very concerned about transparency, that the
structure that will be constructed around this privatization
model will not be such that we cannot and other competitors
cannot see what is going on so that there cannot be the
opportunity of sending money from one ailing part of the ship
to another.
So, we have worked very closely with the USTR. I want to
say that the Trade Rep has been very good, Wendy and her staff,
as well as the senior officials, Mr. Portman, and before him
Mr. Zoellick. They have been very helpful. The same thing with
the Department of Commerce, the same thing with the Department
of State. They have been our advocates and friends. But this is
a devil-in-the-details moment.
So, we would hope that the Committee--the comments made
from both the minority and the majority we embrace. We think
that this is a very concerning time during the transition
process. We want to see a successful and a competitive
marketplace, which means no new or modified products introduced
to the Japanese market until such time as privatization is
complete.
As has been noted, in 2004, there was a product introduced,
in spite of our objections, in spite of the objections of our
Government, and that product now is 10 percent of Kampo's
sales. So, we are very concerned about that, and we
congratulate the Committee on its vigilance, and we hope that
our Government will continue to be vigilant during the course
of this process.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Keating follows:]
Statement of The Honorable Frank Keating, President, American Council
of Life Insurers
Reform of Japan Post's Insurance Business
Mr. Chairman, Members of the Committee, Ladies and Gentlemen:
My name is Frank Keating, President and Chief Executive Officer of
the American Council of Life Insurers (ACLI). I speak today on behalf
of many of our members who have operations in Japan's vibrant life
insurance marketplace. We welcome this opportunity to briefly discuss
with you our observations and concerns with regard to implementation of
the privatization of Japan Post, and in particular, its life insurance
arm, Kampo, which is the largest life insurer in the world.
Mr. Chairman, it might be useful for the Committee to focus briefly
on the importance of the U.S. presence in Japan's life insurance
marketplace. That presence has grown over more than three decades from
a very small toehold in an otherwise closed market to 15% of what is
now a far more open market. To put it into perspective, U.S.
pharmaceuticals account for sales in Japan of slightly over $14 billion
annually. The U.S. medical devices export market to Japan is just over
$3 billion annually. Beef exports to Japan from the United States are
approximately $1.5 billion annually. By contrast, U.S. life insurers
account for $38 billion annually in policy premiums in Japan. This is
truly an American success story.
This success has not come easily. There is a long history of trade
friction and negotiations with Japan regarding the conditions of
competition in its life insurance marketplace. Year after year, through
successive U.S. administrations, USTR has urged Japan to ``level the
playing field'' so as to counteract Kampo's looming presence. Kampo was
originally established in 1916 to provide life insurance to consumers
who could not acquire insurance from private suppliers. The private
sector can now fully meet all consumers' insurance needs and the
original reason for Kampo's existence is long gone. However, despite
regulatory constraints competition from this government insurance
entity has weakened and impeded the development of Japan's private
insurance industry.
In the 1990's, there were two bilateral agreements that were in
part designed to set forth the limits of Kampo's ability to market
commercially competitive products given its special government-provided
advantages. There were later discussions concerning the pace and
conditions of opening up all sectors of the market pursuant to those
agreements. The U.S. expressed a high level of concern in late 2003
about a product Kampo planned to market which appeared to require Diet
approval under the bilateral agreements. Before discussions could be
completed Japan Post went ahead and issued a new product in direct
competition with private insurers. Also during this period, U.S.
companies were faced with extremely high contribution requirements to
the Life Insurance Policyholder Protection Fund (LIPPC) caused by the
failures of several domestic Japanese insurers. Kampo is not required
to make such payments, and questions persist about the level of
exposure it may impose on current private sector contributors should it
be made subject to the LIPPC. Despite these hurdles, some of which
continue as problems, U.S. companies have introduced innovative
products in Japan, and Japanese consumers have responded with
extraordinary enthusiasm. We have made significant gains in market
share. U.S. insurance suppliers are also admired in Japan for their
stability and soundness.
In March of 2004, ACLI issued a comprehensive study of Japan's
Expanding Postal Life Insurance Business, which outlined in detail
Kampo's inconsistencies with the GATS and its impact on the goals of
Japanese economic reform. The study pointed out several policy concerns
regarding the continuation of Kampo's preferred position:
It undermines economic reform efforts.
It is inconsistent with longstanding bilateral
understandings.
It is inconsistent with Japan's commitment to Article
XVII of the GATS, providing that ``each Member shall accord to services
and service suppliers of any other Member, in respect of all measures
affecting the supply of services, treatment no less favorable than it
accords to its own like services suppliers.''
Despite having some restrictions on what products it can offer,
Kampo, the insurance arm of Japan Post, has captured 40% of the
marketplace. It pays no taxes, contributes nothing to policyholder
protection funds, enjoys separate and more lenient regulation and
oversight, and receives full, unique government guarantees for all of
its products. These many government-provided benefits have greatly
contributed to the growth of Kampo, and its unprecedented size is
itself an advantage. The continuation of these advantages over the
years, in the face of repeated U.S. and other nations' entreaties to
remedy the situation, calls into question Japan's commitment to the
GATS.
ACLI's study addressed Japan's assertion that it could offer Kampo
preferential treatment ``in the exercise of governmental authority''
(using the GATS definition to show that the term does not apply to
Kampo's operations); rebutted the notion that because other Japanese
suppliers were equally disadvantaged ``national treatment'' does not
apply (under GATS only one preferred domestic supplier [Kampo] is
necessary to trigger a violation); rebutted the alleged need to
demonstrate ``adverse effects'' in order to establish a national
treatment violation; successfully rejected the notion that Japan's
``intention to discriminate'' was relevant; and characterized Kampo's
special privileges, which led to the erosion of the private insurance
sector, as ``anti-prudential.'' ACLI is submitting the study to this
Committee with a request that it be made part of the record of this
proceeding. The prospect of postal privatization, which requires
revision of existing legislation with respect to Japan Post, offers an
opportunity for Japan to bring itself into conformity with its national
treatment commitments under GATS.
As you know, the matter of privatization of Japan Post was the
central reason for the recent elections in Japan. Those elections
resulted in a resounding mandate to Prime Minister Koizumi to follow
through on his privatization initiative. Key for U.S. companies in
Japan is the fact that privatization legislation will at some point
clear the way for Japan Post to sell products it is now not permitted
to market. Now that it is clear that postal privatization will go
forward, it is vital that U.S. market participants be reassured that
Japan will comply with its international trade obligations before new
or modified postal insurance products are introduced. It is also
required by the General Agreement on Trade in Services (the ``GATS'').
Prime Minister Koizumi should be complimented on attempting reforms
of Japan Post--an entity that clearly impacts the whole of Japan's
economy. ACLI recognizes the enormous challenge that the Prime Minister
and his government have accepted in tackling postal reform, and view
the reform process as a vehicle for Japan to ``level the playing
field'', and thereby bring itself into compliance with its national
treatment commitments.
However, a partial or incomplete ``reform'' of Kampo should not be
allowed to deprive U.S. and other foreign market participants
of the market presence they have worked so hard to develop in
Japan.
How could that happen? Japan Post employs 280,000 people and has
thousands of post office outlets for the exclusive sales of its
products throughout Japan. In terms of its distribution capacity, it
dwarfs Japan's next largest life insurers, as well as the several
American companies operating in this market. Our fundamental concern is
the prospect of an ``incomplete privatization'' under which the postal
insurance corporation would retain some of its special privileges
(including the benefits of its unprecedented size) but at the same time
would enjoy greatly enhanced freedom to compete (offer new products)
with the private sector. Unleashing Kampo's enormous size and any
retained government privileges would jeopardize the market developed by
sustained innovative effort by U.S. companies.
It is the very real prospect of sanctioned, unbalanced, competition
that makes Japan Post privatization the number one trade issue
for our association.
In the wake of its recent election Japan is about to pass postal
privatization legislation which may require Kampo to pay taxes, operate
under the same regulations and regulators as its competitors, make
contributions to a policyholder protection fund, and drop its
government guarantees from products to be issued in the future. While
this sounds positive, the problem is that it could take up to 10 years
under the legislation to achieve those objectives, if in fact they are
achieved. At present, it is not clear under the legislation whether
during this potentially long interval Kampo's successor will be
permitted to sell products that compete with U.S. and other companies'
offerings before a level playing field is achieved. If it is
prematurely granted that ability (referred to often as ``management
freedom''), while still enjoying some form of advantages, the result
could be serious damage to the $38 billion level of premiums generated
annually by U.S. life insurers in Japan.
An excellent monograph on this subject was prepared by the
Privatization Task Force of the American Chamber of Commerce in Japan
(ACCJ) in August of 2004. Applying Privatization Global Best Practices
to Japan Post looks comprehensively at establishing an effective
regulatory framework, providing transparency, and appropriate
government oversight and concludes that it is within Japan's power to
successfully employ the best experiences of other countries that have
made similar efforts to privatize. Again, we are submitting this White
Paper to the Committee with a request that it be made part of the
record.
The U.S. government agencies involved in this matter have been
persistent in their efforts to persuade Japan's government to ``do the
right thing'' with respect to GATS. ``Doing the right thing'', which
means achieving a market regime consistent with GATS requirements,
would also better ensure the soundness of Japan's insurance market and
financial system. We are grateful for the efforts of the Office of the
United States Trade Representative, which has been untiring in its
efforts, the Departments of State, Treasury and Commerce, the U.S.
Embassy in Tokyo, and others in the federal government--including
numerous members of this Committee--for the continuing concern you have
shown our industry regarding this issue.
This is not a partisan issue, or even a U.S.-national issue. It is
a fundamental trade policy issue. At its core it asks the question
whether one of the United States' best trading partners will live up to
its international trade commitments. This is an issue that the whole
world is watching given the high profile privatization in Japan has
achieved. Several of its major trading partners have asked Japan to
comply with its GATS obligations. The industry association of the
European Union, Canada and others have taken positions similar to ours,
as has the Life Insurance Association of Japan (LIAJ). Other countries,
going through or considering similar privatization initiatives, are
carefully watching what Japan will do and what the trade community will
accept. We believe we all have a stake in the outcome.
We believe it is key that Japan make a commitment on this.
Representatives of USTR have been negotiating on the issues in the
context of the language of the annual Report to Leaders. The Report
provides Japan with the opportunity to achieve a mutual understanding--
the ball is certainly in their court to demonstrate their intentions.
We view the timing of the introduction of any further new or
modified postal products and the requirement of an open, transparent
process to evaluate the activities of the new Japan Post as fundamental
issues. The timing of new products must be appropriate to avoid
unfairness. Transparency in financial reporting and public disclosure
by all of the postal businesses must also occur, since without a clear
picture of the industry giant and its internal operations our industry,
and our government will be greatly limited in efforts to articulate
what is happening in the marketplace.
Perhaps U.S. insurers would be less concerned had Japan not
introduced a new postal life insurance product in 2004 over the strong
objections of the U.S. government and in violation of existing
bilateral commitments to the United States. That product competes
directly with U.S. companies' products and has secured unusually
impressive sales since its introduction.
We feel a sense of urgency in this regard since executives of Japan
Post have recently stated that it must, in order to survive, soon begin
selling the kinds of products our companies have developed. Indeed,
there are very recent press reports that top Japanese government
officials may have already made commitments on early ``management
freedom'' to the leadership of Japan Post.
Mr. Chairman, we welcome competition, but it must be fairly
premised.
Our request to you Mr. Chairman, and to the rest of the Committee
on Ways & Means, is to assist us and the rest of our government in
making sure that Japan does not, by accident or by design, seriously
harm what has become a real ``American Success Story'', and that it
abide by its international trade commitments. We pledge to keep you
informed to the best of our ability.
Mr. Chairman, let me again thank you and those members of the
Committee on Ways & Means who have assisted us thus far in this very
important effort. We look forward to your continued interest and
involvement, and we thank you for permitting us to testify today.
STATEMENT OF MICHAEL A. MUSSALLEM, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, EDWARDS LIFESCIENCES CORPORATION, IRVINE, CALIFORNIA,
AND CHAIRMAN OF THE INTERNATIONAL BOARD COMMITTEE, ADVANCED
MEDICAL TECHNOLOGY ASSOCIATION
Mr. MUSSALLEM. Hello, I am Mike Mussallem. I am the
Chairman and CEO of Edwards Lifesciences, and today I am here
as the Chairman of the International Committee of AdvaMed, our
trade association.
By way of background, AdvaMed represents over 1,300 medical
technology companies that manufacture medical devices,
diagnostic products, and medical information systems. And our
products save and improve lives and enhance economic
productivity by allowing workers to recover from illnesses
faster, remain longer in the work force, and live without
costly long-term care. A recent study indicated that for every
dollar that America invests in medical technology, the returns
are between $2 and $3 in real health gains.
Now, to deliver these high-quality and innovative products,
we invest heavily in R&D. As a matter of fact, we invest 11
percent of our sales in R&D, which is about 3 times the U.S.
industry average. And within AdvaMed, our members manufacture
nearly 90 percent of the $90 billion of U.S. health care
technology and about half of the $220 million global market. In
2004, U.S. exports in medical devices and diagnostics totaled
over $24 billion. In terms of work force, the medical
technology industry employs nearly 350,000 workers across the
United States.
Now, regarding today's hearing, AdvaMed and its members
would like to thank the Committee for drawing attention to the
U.S.-Japan trade relations. Japan is our industry's largest
overseas market, and the obstacles that we face there are
coming more onerous every year. And let me provide you a little
background on that.
Japan's system for approving the use of new medical
technologies is the slowest and the costliest in the world. As
a result, the medical technologies that Japanese patients
receive are several generations behind those available in the
U.S. and Europe, and even developing countries like China and
India and Thailand and Mexico.
Japan is compounding the problem with even more burdensome
and costlier regulations. In addition to the customary
regulatory expenses, Japan recently enacted new regulations
that will cost our industry about $1.5 billion over the next
few years. And at the same time that it raises our regulatory
costs, Japan is cutting reimbursement for medical technologies.
Between April of 2002 and May of 2006, total revenues lost from
recently enacted reimbursement cuts will be about $3 billion.
In terms of how these payment reductions are made, Japan
issues price cuts every 2 years, actually in two different
ways: One is it surveys its hospitals and reduces reimbursement
to reflect the pricing hospitals are paying for all medical
technologies. At least this approach is based on conditions in
Japan. Second, since 2002, Japan has also begun using a foreign
average price, or FAP process, to cut prices for selected
devices. Now, FAP aims to base reimbursements on average prices
paid for medical technologies in the U.S., France, Germany, and
the U.K. And under this model, they base technology prices not
on the expensive Japanese market but on the unrelated
conditions in foreign markets. And we have a very strong
objection to FAP. Japan's market is vastly different and it is
much more expensive than the other four countries that they use
to compute the FAP, and the products that we sell there are not
the same products that we see in the U.S. and Europe, and the
terms and conditions are different.
In addition, the three European countries impose relatively
low price ceilings or price controls on the medical
technologies, which further distorts the prices. So, from our
perspective, Japan appears to be seeking ever lower prices for
American medical technologies, in part to avoid correcting the
massive inefficiencies in the health care system, such as long
hospital stays. As you may know, Japanese patients stay in
hospitals 5 times longer than other developed countries, which
really drives up costs.
And while changes in other areas might have real impact on
Japanese health care spending, the threatened cuts in our
industry actually would have no perceptible effect of really
impacting total health expenditures. Our medical devices
account for only 8 percent of their total health spending, and
the targeted products actually account for less than 1 percent.
And while we believe that payment reductions for our
technologies will not help solve the underlying problem, it
also seems inappropriate that virtually all of the technologies
targeted for cuts are produced by non-Japanese companies. In
general, we believe payment reductions to medical technology
are counterproductive to Japan's goals, as studies show that
investing in health care reduces long-term health care costs.
And our products will actually become part of the solution as
their population gets older.
We have recommendations to help address these issues. With
respect to the regulatory environment, we ask the Japanese
Government to simplify and speed the approval processes while
they continue to ensure that products are safe and effective.
And regarding reimbursement, we seek a fair, transparent, and
predictable system based on operating conditions and the costs
of doing business in Japan.
As an industry, we seek to work with the Japanese
Government on a system that would limit the size of the price
reductions in any given year and allow us to build such cuts
into our long-term planning.
Thank you again for inviting us to raise these issues. We
hope that you will continue to recognize the important role
that our industry plays in improving and extending patients'
lives, and we hope you will work with us to ensure the
continued access to foreign markets. As you may know, the
engagement of the Congress and the Administration is critical
to maintaining our exports into this important market. So,
thank you again.
[The prepared statement of Mr. Mussallem follows:]
Statement of Michael A. Mussallem, Chief Executive Officer, Edwards
Lifesciences Corporation, Irvine, CA, and Chairman of the International
Board Committee, Advanced Medical Technology Association
AdvaMed and its member companies would like to thank the Chairman,
Ranking Member, and Members of the Committee for holding this timely
and important hearing today. Japan is our industry's largest overseas
market, second only to the United States. We applaud the Committee for
recognizing Japan's continued importance in the global economy, world
trade, and U.S. foreign trade. We also greatly appreciate the work
Executive Branch agencies have done on our industry's behalf.
The Medical Technology Industry
AdvaMed represents over 1300 of the world's leading medical
technology innovators and manufacturers of medical devices, diagnostic
products and medical information systems. AdvaMed is proud to represent
an industry that brings new hope to patients around the world, and U.S.
companies are still benchmark manufacturing leaders in terms of total
production, innovation and highest quality products. Our member
companies manufacture nearly 90% of the $94 billion U.S. health care
technology market, and nearly 50% of the $220 billion of medical
technology products that are purchased globally each year. In 2004,
U.S. exports in medical devices and diagnostics totaled over $24
billion. The medical technology industry directly employs about 350,000
workers in the U.S.
Our industry is fueled by intensive competition and the innovative
energy, driving very rapid innovation cycles that in many cases can
lead to new product iterations every 18 months. About 70% of AdvaMed's
membership is comprised of small and medium sized enterprises.
Accordingly, our industry is most successful in fair, transparent,
global markets where products can be adopted in a timely fashion and on
their merits.
Innovative medical technology saves and enhances peoples' lives.
Our products enrich patients' productivity and quality of life, thereby
improving living standards and benefiting society overall.
Medical technology also contributes substantially to economic
growth. Our products increase productivity by allowing workers to
recover from illness faster, remain longer in the workforce, and thrive
without expensive long-term care. Studies show that funds invested in
health care yield far greater benefits than costs to a nation's economy
over the long term.
The use of medical technology will become even more important as a
nation's population ages. According to the 2002 Commission on Global
Aging, medical advances will bring ``longer, healthier, more productive
lives with declining rates of disability for the elderly.'' Innovative
medical technologies offer an important solution for nations that face
the challenges of balancing serious budget constraints and the demands
of serving aging populations.
To deliver this value to patients, our industry invests heavily in
research and development (R&D). Today, our industry leads global
medical technology R&D, both in terms of innovation as well as
investment. The level of R&D spending in the medical devices and
diagnostic industry, as a percent of sales, more than doubled during
the 1990s--increasing from 5.4% in 1990 to 8.4% in 1995 and over 11%
last year. In absolute terms, R&D spending has increased 20% on a
cumulative annual basis since 1990. Our industry's level of spending on
R&D is more than three times the overall U.S. average.
Global Challenges
Despite the great advances the medical technology industry has made
in improving patient quality of life and delivering considerable value
for its innovations, patient access to critical medical technology
advances can be hindered by onerous government policies. Patients and
health care systems experience much less benefit from our industry's
R&D investment when regulatory procedures are complex, non-transparent,
or overly burdensome--all of which can significantly delay patient
access and drive up costs. In the future, patients will be further
disadvantaged if reimbursement systems fail to provide appropriate
payments for innovative products--which will subsequently affect the
availability of R&D funds and the stream of new technologies.
The medical technology industry is facing these challenges around
the world as governments enact more regulations. While we support those
regulations that ensure product safety and efficacy, many others are
being imposed without scientific justification, and in non-transparent
processes, which only adds to costs and delays without improving
patient outcomes.
As governments prioritize difficult budget decisions, they
sometimes look to short-term decreases in health care expenditures
without accurately assessing the long-term implications. In most cases,
governments do not effectively measure the contributions medical
technology makes in enhancing patient outcomes and productivity as well
as expanding economic growth, which would more than offset the costs of
providing these products. Instead, governments often inappropriately
include reduced reimbursement rates as part of overall budget cuts.
The Challenge in Japan
This is the situation we are facing in Japan, and it is getting
more difficult every year. Japan's system for approving use of new
medical technologies is the slowest and most costly in the developed
world. Although Japan is one of the wealthiest countries in the world--
the second largest economy in the world--its spending on health care is
among the lowest of major developed countries. On a per capita basis,
Japan's spending of 7.8% of GDP is lower than 17 other Organization of
Economic Cooperation and Development (OECD) member countries.
Japan is compounding the problem by imposing more burdensome and
costlier regulations, thereby penalizing the U.S. medical technology
industry. Japan's latest regulations are expected to cost our industry
over $1.5 billion just to achieve compliance to 2010. \1\
---------------------------------------------------------------------------
\1\ Treasury's methodology was confirmed by the GAO in an April
2005 Report (GAO-05-351). The GAO concluded in the Highlights section
of the report that ``Treasury has generally complied with the reporting
requirements for its exchange rate reports--'' On page 13 of the
report, GAO stated ``Treasury did not find that Japan was manipulating
its currency in 2003 and 2004. Treasury officials told us that they
viewed Japan's interventions as a part of macroeconomic policy aimed at
combating deflation in Japan and they expressed skepticism about the
efficacy of intervention to affect the yen's value.''
---------------------------------------------------------------------------
At the same time, Japan has made significant reimbursement
reductions for medical technologies that impact the medical device
industry in many ways, including limiting the availability of funds
that could be devoted to R&D of new and innovative products. Inventing
products that save and enhance lives requires large investments. Deep
cuts for medical technologies in Japan have put downward pressure on
companies' ability to invest in R&D. For the period April 2002 to March
2006, the total revenue loss from these reimbursement reductions is
expected to be about $3 billion--a significant share of which would
have gone toward R&D. \2\
---------------------------------------------------------------------------
\2\ An Assessment of the Impact of Japanese Foreign Exchange
Intervention: 1991-2004, by Alain P. Chaboud and Owen F. Humpage, Board
of Governors of the Federal Reserve System, International Finance
Discussion Papers, Number 824, January 2005.
---------------------------------------------------------------------------
Japan appears to be making these changes, in part, as a way to
avoid correcting the existing inefficiencies in its health care
delivery system. Yet, because of its country's practices, Japanese
patients often must wait two, three, or even five years longer for
access to technologies that are already available in most other
countries. Japanese patients are being denied access to our most
advanced medical technologies.
An Inefficent Health Care System in Japan
Japan's hospitalization practices are the major contributor to high
healthcare expenditures in Japan, with patients staying five to six
times longer in hospitals than in other developed countries. For
example, the average hospital length of stay in the U.S. is 6 days
compared to 37 days in Japan, and these additional days clearly
escalate the cost of care without significantly contributing to the
quality of patient care. Japanese doctors own the hospitals in Japan,
so there appears to be little incentive to diminish costs by better
managing hospital stays.
The monetary cost of the inefficiencies of this system is huge.
Japan's MHLW has estimated that excessively long hospital stays alone
inflate annual costs by at least $20 billion. This figure was found by
comparing the average length of stay for Japan in total to a ``best
practice'' length of stay in its most efficient district--leading to a
reduction of stay length to 28 days. Using this same methodology, we
estimate that Japan could save over $68 billion by bringing its
hospitalization lengths of stay down to the average in other developed
countries (7.3 days) and $71 billion if Japan reduced its
hospitalization durations to the U.S. average of 6 days.
In addition, Japan has the highest ratio of beds to population of
any of the 30 OECD nations and four times the number of hospital beds
per person than in the U.S., which increases costs and reduces
efficiency in several ways. First, Japan maintains many hospitals that
would otherwise be closed. While we are sensitive to cultural
differences between Japan and the U.S. or Europe, even the country's
own Ministry of Health, Labor and Welfare (MHLW) has recognized that
the current number of beds is excessive.
Second, Japan's diffuse hospital settings prevent the cost savings
offered by specialized centers. A source of savings in specialize
centers is the enhanced expertise doctors achieve when performing
specific operations many times. The Japanese system limits the
opportunities for Japan's health care professionals to develop optimal
skills for performing complex medical procedures. Doctors who implant
only a few devices each year would not receive as much training to
perfect their skills as doctors practicing in specialized surgical
hospitals, where a doctor might perform several implants (such as
pacemakers) on a daily basis.
Unquestionably, this system substantially drives up costs for our
industry. Since clinicians in Japan are often less familiar with the
technical specifications and use of our products, service costs--
including physician training and assistance during procedures--are much
higher for industry. Medical technology products are often handled by
two or more layers of distributors in Japan, each adding their own
mark-up or margin. In comparison, the vast majority of medical
technologies in the U.S. are sold directly without distributors.
A Slow Regulatory Process for Medical Devices in Japan
In addition to the overall inefficiencies of its health care
system, Japan's new technology approval process remains the slowest and
most costly in the developed world. Even after creating a new agency
last year to process applications for medical technology products,
Japan had a backlog in February of over 491 applications filed before
April 2004. When new applications are included, the backlog is
reportedly much longer. A problem for this new agency is the number of
staff reviewing applications for approval of medical technology
products--about 40 officials, compared to over 700 in the U.S. Due to
the long approval process, the medical technologies patients receive in
Japan are often several generations behind the products in the U.S.,
Europe, and even developing countries like China, India and Thailand.
Lengthy approvals also translate to higher costs for the U.S. medical
technology industry, which must maintain out-of-date product lines just
for Japan.
Japan should be examining ways to streamline its regulatory system,
achieving greater efficiencies and facilitating patient access to the
most advanced technologies available. We have made such suggestions to
the Regulatory Reform Council, established by Prime Minister Koizumi,
on some changes. We also have been working with MHLW officials and are
willing to continue doing so.
So far, however, instead of facilitating patient access to medical
technology, Japan has been compounding the problem by imposing more
burdensome and costlier regulations that discourage innovation. Its
revised Pharmaceuticals Affair Law (PAL), which covers medical
technology products, went into effect on April 1, 2005. Even our
largest companies are experiencing difficulties meeting PAL's
complicated provisions. Some of our smaller companies have indicated
they may have to exit the Japanese market because of PAL requirements.
The initial and on-going costs of $1.5 billion through 2010 are monies
that otherwise could have been invested in furthering innovation for
patients who need it most.
Continued Reduction in Reimbusrements for Medical Devices in Japan
At the same time our industry is facing these onerous and costly
regulations, MHLW is threatening severe reimbursement rate cuts. In
Japan, the government sets the maximum reimbursement rates, which
usually act as ceiling prices for all medical technology products.
These prices are reviewed and usually reduced every two years.
Before 2002, Japan adjusted prices according to a process it called
``reasonable-zone'' or ``R-zone.'' In brief, MHLW surveys its hospitals
for prices paid to distributors, and allows for a reasonable margin (or
``zone'') for discounts off of the government's reimbursement rate.
While there are some difficulties with this system--as identified in
bilateral Market-Oriented, Sector Specific (MOSS) negotiations between
the U.S. and Japanese governments--our industry recognizes that it is
at least based on factors in the Japanese market.
In 2002, however, Japan also adopted a system called Foreign
Average Pricing (FAP). This system calls for the establishment and
revision of reimbursement rates on the basis of prices paid for medical
technology products in the U.S., France, Germany, and the United
Kingdom (U.K). The prices of medical technology products in Japan are
designed to be based not on that market's requirements, but on
completely unrelated conditions in foreign markets.
The U.S. medical technology industry has several strong objections
to this method of calculating reimbursement rates.
As a methodology for setting reimbursement rates, it is
not economically sound to compare prices in foreign markets that
operate under vastly different conditions. Japan's regulatory system is
far costlier to comply with than European or U.S. regulations. In
addition, the overall cost of doing business in Japan is far higher
than in the U.S. or Europe. Just in terms of basic cost of living,
Tokyo is ranked the most expensive city in the world, with Osaka number
2. Tokyo is about twice as costly in general as New York City and about
2.5 times as expensive as a mid-western city, like Minneapolis. No U.S.
city is in the top 20 cities on this list. \3\
---------------------------------------------------------------------------
\3\ The yen behavior in 2003 and 2004 is especially interesting
because the Japanese Ministry of Finance reports that interventions by
the Bank of Japan in 2000 amounted to 1,528.9 billion yen; 3,210.7
billion in 2001; 4,016.2 billion in 2002; 20,425 billion in 2003; and
the final intervention was 14,831.4 billion in the first quarter of
2004. Thus, despite the largest intervention over this period, the yen
went strongly in the opposite direction.
---------------------------------------------------------------------------
Operating in Japan compounds costs by our industry
compared to selling in other countries. For example, the added
expenditures for product redesign, development, distribution, research
and marketing all increase the cost of supplying Japanese patients by
hundreds of millions of dollars each year.
Conditions in the three European countries included in
the FAP analysis are different from both the U.S. and Japan. The
European Union member states use a product approval system that, in
many cases, is more streamlined than the U.S. process. However, France,
Germany and the U.K. also maintain pricing interventions that place a
ceiling on medical technology pricing.
Comparing prices even within markets--let alone across
national boundaries--is difficult. Our member companies sell products
under a variety of terms and conditions. In the U.S., our companies can
often offer lower prices to buyers willing to commit to much larger
volumes for longer periods of time, but Japan does not have such buyers
and offers minimal channels for efficient selling and distribution of
medical technologies. Additionally, Japan's FAP system is an attempt to
compare prices for products that are not the same in Japan as they are
in other countries. Due to Japan's regulatory delays, U.S.
manufacturers must incur the cost of maintaining older or outmoded
production lines for sale in Japan.
Japan established its FAP system and continues its plans
to cut reimbursement rates because of the ``perception'' that prices
for certain medical technology products are much higher in Japan than
in other countries. As previously noted, there are many reasons prices
are higher in Japan than in other countries. In addition, Japanese
doctors and others in Japan, often obtain this perception by comparing
U.S. hospital purchase prices to the official Japanese reimbursement
rates, which are usually higher that the prices medical technology
products are sold in Japan.
As previously mentioned, the net effect of Japan's
reimbursement rate cuts could have a detrimental effect on the funds
available for research and development (R&D) of innovative products
that are intended to lessen the time, pain and expense of treatments
for a wide range of illnesses.
Ironically, Japan's planned reimbursement decreases are likely to
have no perceptible effect on moderating Japan's health care budgetary
expenditures. While some of the other practices mentioned in this
testimony are very inefficient and obvious drivers of inflation of
Japan's health care costs, medical technology products account for only
about 8% of Japan's total health care spending, and products targeted
for price cuts represent less than 0.7% of all health care expenses.
Virtually all technologies targeted for these cuts are made by non-
Japanese companies.
Instead of trying to balance its budget on the backs of the medical
technology industry, Japan should look to major reforms of its
inefficient hospital system. Such reforms would provide huge savings
and would be good for Japanese patients and for Japan's economy.
U.S. Government Support
The U.S. Government has provided our industry with tremendous
support in trying to convey this message to the Japanese government. We
have enjoyed bipartisan Congressional support, with these hearings
serving as just the most recent manifestation of that support.
Our industry has also benefited from continuous support from the
Executive Branch. We want to thank the Departments of Commerce, State
and Treasury, the Office of the U.S. Trade Representative (USTR), and
the U.S. Embassy in Tokyo for their hard work on our behalf. Since the
mid-1980s, Executive Branch agencies have included regulatory and
reimbursement issues in the MOSS negotiations. More recently, these
issues have also been a topic for high-level USTR-Commerce negotiations
with Japan under the Regulatory Reform Initiative.
We believe that U.S. government support has been a major reason
that total U.S. medical technology exports have flourished world-wide
for many years, exceeding imports. In fact, this past year was the
first time that total U.S. imports of $25.2 billion ever exceeded
exports in the medical technology sector.
While U.S. exports of medical technology have enjoyed a surplus
with Japan, we see disturbing signs that this too could change. During
the 1980s and 1990s, our industry's exports rose steadily. Since Japan
introduced its FAP system in 2002, U.S. exports have basically
stagnated at essentially the same level of exports in 2004 as in 2001.
At the same time, Japan's exports of medical technology products in
2004 rose by 10%, contributing modestly to Japan's burgeoning total
trade surplus with the U.S. of $75 billion--an increase of 14% last
year. With added regulatory hurdles and reimbursement reductions, U.S.
exports to Japan could deteriorate further.
The World Trade Organization (WTO) recognizes that standards and
regulations can be non-tariff barriers (NTBs). While we are not
alleging a WTO violation, we do believe that Japanese policies are
essentially creating new NTBs for our industry to try to overcome.
Recommendations
We have several recommendations to help ameliorate the situation in
Japan and, at the same time, facilitate patient access to advanced
medical technology products. AdvaMed members want to cooperate with the
Government of Japan to find solutions that are mutually beneficial to
patients, Japan, and our industry. We have met frequently with
officials from MHLW and other government agencies, including at senior
levels, to seek such solutions. We respectfully request that such
solutions be based on actual operating conditions in Japan and not on
circumstances in other countries.
In terms of the regulatory environment, AdvaMed members will
continue our efforts to understand and comply with existing
regulations. At the same time, we ask that MHLW seriously examine our
suggestions to facilitate patient access to advanced technologies.
Regulatory Improvements. Japan should urgently address
the growing backlog of product applications and to reduce the review
times of new product applications--particularly in light of Japan's
User Fee system and its commitment to meet performance measures. One
concrete step would be to quickly expand the number of experts employed
in Japan to review product approval applications for product safety and
efficacy, which would help reduce the considerable backlog. As part of
this effort, the expertise and training of reviewers could be broadened
to include necessary skill sets, such as a background in engineering
and biostatistics. Another step would be for Japan to accept results of
scientific studies conducted in the U.S. We have made recommendations
of this nature to the Government of Japan, and we would hope they
receive serious consideration.
Reimbursement Improvements. We seek a fair, transparent
and predictable system based on actual operating conditions in Japan.
We believe such a system should reward innovation by providing higher
payments for truly innovative products. If there is a clear
demonstrable reason to reduce some product prices, we would welcome the
opportunity to work with MHLW on a transparent system that would limit
the size of reductions in any given year and would allow us to build
such cuts into our long-term planning, instead of being unpredictable
and dictated every two years.
Conclusion
Thank you, Mr. Chairman, and the other members of this Committee
for providing us the opportunity to submit the views of our industry in
the context of a hearing on overall U.S.-Japan trade relations. We hope
you and other members of Congress will continue to recognize the
importance of the medical device industry, as well as access to foreign
markets for the sustained growth of our industry and U.S. jobs. In our
relationship with Japan, Congressional and Administration involvement
is critical to maintaining our exports to this important market.
Mr. SHAW. Thank you. Mr. McAdams?
STATEMENT OF JIM McADAMS, PRESIDENT, NATIONAL CATTLEMEN'S BEEF
ASSOCIATION
Mr. MCADAMS. Thank you, Mr. Chairman. I am Jim McAdams. I
am a cattle producer from Adkins, Texas, and I am President of
the National Cattlemen's Beef Association. We represent our
25,000 members, and through our affiliates we represent over
230,000 cattle and beef producers in the United States. We
appreciate the Committee allowing us the opportunity to share
our thoughts regarding beef trade with Japan.
Prior to the identification of a case of BSE in the United
States, international trade had been a great benefit to U.S.
beef producers. We were enjoying on average every year over a
$1 billion trade surplus. Japan was our largest export market.
In 2003, we sold them $1.7 billion worth of beef and beef
products.
But after December 23, 2003, when the case of BSE was
identified, we lost 90 percent of those export markets. It has
been nearly 2 years now since we lost those markets, and with a
lot of hard work, we have only been able to open up about one-
third of them. Japan still is not open. They were our primary
market, and the Administration developed a strategy to get that
market open. We supported that strategy, and we feel like the
Administration has done everything they could to make that
strategy work.
But next month, it will be a year ago since Japan and the
United States announced that we had a framework for agreement
allowing the resumption of beef trade. And in the over 11
months since that agreement was announced, we haven't shipped
the first pound of beef to Japan. We were asked at that time to
be patient and to allow Japan the time to work through their
domestic process.
We have been patient, but the time for patience is gone.
There is no more need for any words. We need to act. For us,
this is a bigger issue than just opening the Japanese border
for our beef. American agriculture has been the foundation of
this country when we were founded and we needed to be able to
sell our agricultural products, and that has not changed.
Agriculture is more than a part of our heritage. It is a vital
component of our future.
We in agriculture and in the beef industry realize that we
have to be part of this international market if we are going to
be able to grow our industry and have a prosperous industry.
But when we see the chaos that has been created by the
disruptions in trade, we are wondering should we even support
additional trade agreements.
We are entering a critical timeline in the WTO
negotiations, and the agriculture component has been an
impediment to progress. We realize that. We see this Japanese
beef issue as a litmus test as to if we can't resolve this
Japanese issue, how can we have confidence in our ability to
negotiate and enforce trade issues in the future?
So, where we are today is this: We either solve this
problem quickly and correctly, or it just does not make sense
for U.S. cattle and beef producers to be supporting any future
trade negotiations. The producers of our industry have been
patient, but while we have been patient, we have absorbed
billions of dollars in losses. And we can no longer wait for a
process that seems bent on delay.
We are anxious to work together to achieve our end goal,
and that is reopening these markets, because we realize that
the alternative is protectionist policies, it is trade wars,
and it is chaos in commerce. But we cannot be satisfied with
the status quo. We feel the United States has played by the
rules. We have negotiated fairly. We have based our policies on
sound science, and it is time for the Japanese to reciprocate.
The Japanese Food Safety Commission has not worked to expedite
this process. Instead, we feel they have delayed it. They have
even stated, ``What is the rush?`` Instead of working with us
to solve this, they have denigrated the safety of our product
and the effectiveness of our firewalls.
We believe strongly that the time for the Japanese to open
their markets to our beef is now. It is time for them to start
working with us and not against us. And it is time for our
Government, all segments of our Government, to assure that this
happens. We are asking this Committee to work with us to take
whatever steps are necessary to get this market open.
We appreciate once again the time that you have given us,
and I will be glad to answer your questions at the appropriate
time.
[The prepared statement of Mr. McAdams follows:]
Statement of Jim McAdams, President, National Cattleman's Beef
Association
Chairman Thomas, Ranking Member Rangel, and members of the
Committee: On behalf of cattle producers nationwide, the National
Cattlemen's Beef Association (NCBA) appreciates the opportunity to
present our views on U.S. and Japan Economic and Trade relations. I am
Jim McAdams, a cattle producer from Adkins, Texas. I am privileged to
serve as President, representing more than 25,000 beef producers and
more than 230,000 members through our state and breed affiliates. Today
I would like to focus on Japan's sanitary and phytosanitary barriers to
trade for agricultural imports, specifically the ban on U.S. beef and
beef products.
Access to the Japanese market for U.S. beef and beef products has
been restricted for nearly 21 months despite many proactive measures
taken by the U.S. government and beef industry to demonstrate the
safety of U.S. produced beef.
Beginning in 1989, the United States was the first country without
Bovine Spongiform Encephalopathy (BSE) within its borders to begin a
series of interlocking safeguards to prevent this disease from ever
taking hold in the United States. The U.S. was also the first country
without BSE to test cattle for the disease. Eight years ago in 1997,
the U.S. instituted a ruminant-to-ruminant feed ban when it was
determined that this was the vector that allowed for the spread of this
disease between cattle. After the December 23, 2003 discovery of BSE in
Washington state, the U.S. began an aggressive policy of specified risk
material (SRM) removal to ensure additional levels of safety. Removal
of SRMs combined with an effective feed ban, are the principal
components to our system of interlocking firewalls.
The Japanese did not put comparable measures into place until they
had identified their first case in 2001; to date, they have identified
20 positive cases of BSE in a cow herd that is only 3.6 percent the
size of the UnitedStates cattle population.
Since June 2004, the U.S. Department of Agriculture's (USDA's)
Enhanced BSE Surveillance Program has tested more than 471,691 cattle
in highest risk category for BSE and has found only one confirmed case,
evidence that U.S. firewalls are working and the prevalence of this
disease in the U.S. is extremely low. Testing 268,500 animals can
detect BSE at a rate of 1 in 10 million adult cattle at a 99 percent
confidence level.
Nearly one year ago, October 23, 2004, the U.S. government and the
government of Japan issued a joint press statement outlining the
conditions and modalities by which the two countries would begin
resuming two-way trade in beef and beef products,. This agreement was
subject to their respective regulatory approval processes and based on
science.
We saw the implementation of this agreement as an interim step in
resumption of trade with Japan and believed it would lead to science-
based trade consistent with the World Animal Health Organization's
(OIE) guidelines in an expeditious manner.
Yet, today, 11 months after this framework agreement was announced
by the two governments, the ban on U.S. beef and beef products remains
in place, and U.S. cattle producers' patience with Japan's Food Safety
Commission (FSC) has been exhausted.
Cattle producers consider October 2005 a significant milestone in
the push for resumption of U.S. beef exports to Japan. The
Administration has fully responded to all of the government of Japan's
requests for information in a science-based manner. The United States
has been extremely patient with Japan, giving them a generous amount of
time to work through internal processes, but we have yet to see a
timeline regarding re-opening of Japan's borders to U.S. beef. Quite
simply, Japan has not followed through on what it committed to in
October 2004.
A continued ban on U.S. beef is not based on science. In recent
weeks, Japan's FSC has made erroneous claims regarding the safety of
U.S. beef. These continued delay tactics represent nothing more than a
trade barrier and these statements must be rebuked. We are extremely
proud of all that has been done in the United States to keep beef safe
from BSE. Extensive U.S. leadership regarding this disease is now
leading toward the eventual eradication of BSE. We cannot accept the
safety of U.S. beef to be questioned in such a way.
The National Cattlemen's Beef Association, on behalf of cattlemen
nationwide, supports the recent measures taken by members in the U.S.
House of Representatives and U.S. Senate to ensure fair treatment for
our product in this trade agreement. And with no end in sight, we
encourage our lawmakers to evaluate every measure possible to regain
access to Japan for U.S. beef and beef products.
Trade Benefits Beef Producers
International trade is a key to economic growth and creates
opportunities to help U.S. cattle producers grow demand for our product
and enhance our profitability. With the vast majority of the world's
population living outside our borders, we must look abroad to generate
new markets and expand existing ones. Prior to the discovery of BSE in
December 2003 in the United States, and the subsequent closure of over
two-thirds of our export markets, the United States was the largest
importer of beef in the world and one of the largest exporters. We
exported our high value beef and beef products, and imported lower
value products of which we had a deficit.
In 2003, the United States imported $2.62 billion of beef and
variety meats and exported a record $3.86 billion in beef and beef
variety meats. In that year, the average per pound value of U.S. beef
exports was $1.66 while the average per pound value of our imports was
$1.21. Overall, the United States enjoyed a record $2.2 billion beef
and beef product trade surplus in 2003. Such success in the export
market is nearly unprecedented in any agriculture commodity when one
considers that the U.S. beef industry also experienced record domestic
prices in 2003.
Following the announcement on December 23, 2003, many countries
shut their borders to our products, including our largest export
market: Japan. In 2003, the United States exported $1.4 billion worth
of beef and beef variety meats to Japan.
Overall, the cumulative swing in the net balance of beef trade
since then will result in a more than a $7 billion loss to our industry
by the end of this year. Japan and South Korea currently account for
approximately 80 percent of our lost export markets that are worth $175
per head to U.S. beef cattle producers. That's $60 million per week in
lost income.
Science-based Protocol for Trade with Countries with BSE Necessary
Prior to the discovery of BSE in Canada and the United States,
countries did not want to trade with other countries known to have even
one case of BSE within their borders. However, this practice did not
follow OIE guidelines on how to trade products safely under those
circumstances. In fact, the new BSE health code, published in August
2005 by the OIE, states that boneless skeletal beef from animals less
than 30 months of age can be traded regardless of the BSE risk status
of its country of origin. It is time for a new order in world beef
trade. One of the lessons the United States learned is that we must
treat others as we would like to be treated in similar situations. As
such, NCBA calls for an international commission to establish a
science-based protocol in which all countries are accountable in
resuming trade.
If we would have had such a commission prior to December 23, 2003,
we might have been able to prevent much of the economic losses that the
cattle producers of this great nation have experienced since.
In no way does this proposal intend to suggest errors have been
made or that these government to government negotiations to reopen our
exports markets have been mismanaged. We see this as a ``next step''
effort to further instill confidence and reliability in scientifically-
sound regulations. In order to prevent any future collapse in the
confidence and safety of beef, anywhere in the world, because of policy
decisions based upon political perception rather than sound science.
On September 10, 2001 when Japan discovered its first case of BSE,
Japanese consumers didn't stop buying just Japanese beef; the
undisputable fact is that they significantly curtailed buying all beef,
regardless of its origin. (U.S. exports to Japan fell by roughly 40
percent in 2002, which played a part in the dismal U.S. cattle prices
of that year.)
Japan's decision to test 100 percent of the cattle slaughtered was
not based upon science but rather an attempt to begin to reassemble the
Japanese consumers' shattered confidence in beef. Nearly four years
later, on August 1, 2005, Japan finally began its return toward a
science-based path as it repealed its 100 percent testing requirement.
Japan now requires BSE tests for cattle 21 months of age and older. As
a result of this change, it also requested as an interim step that U.S.
beef exports to Japan come from cattle 20 months of age or younger.
While we realize that this is by no means a science-based criterion
for beef trade, we also understand the necessity of rebuilding Japanese
consumers' confidence in beef. We are committed to this effort as long
as Japan is committed to a path that will lead to trade in beef based
upon scientifically-sound and internationally accepted regulations and
protocols. However, the reopening of Japanese market to U.S. beef from
cattle under 21 months must be a short-term interim step that allows us
to resume commerce. Trade must then be expanded in an expeditious
manner following OIE guidelines.
No Japanese Beef Imports Until U.S. Exports to Japan Resumed
While we believe any decision to prevent trade should have science-
based reasons, NCBA cannot support the reopening of the U.S. market to
imports of Japanese beef until Japan reopens its market to U.S. beef.
In this particular case, it's the principle of the thing. We'll agree
to take Japan's half a semi-load of beef it ships us each year, at a
value of $45 per pound, simultaneously and on the same terms as our
$1.7 billion in exports to Japan, BUT NOT BEFORE. Nowhere in the
framework agreement does it say we have to go first.
Summary
Several years ago, Europe decided to shut its doors to U.S. beef by
manipulating and then flaunting international trade rules. If Japan,
the world's second largest economy, does the same, how can we view
international trade positively? Rapid resolution of this Japanese trade
issue is critical to moving forward in the reality of today's
international agricultural marketplace. If we don't get positive
resolution on this issue, the alternative is an ugly drawn out trade
war that benefits no one and results in protectionist policies and
chaos in commerce.
America's cattlemen realize that our future depends upon how
international trade is conducted, and re-opening this valuable market
remains our highest trade priority. Given a fair chance, we are willing
and able to compete with anyone in the world with the highest quality
and safest beef. All we're asking for is the opportunity to sell the
same beef we feed our families every day to the world's consumers.
We understand this is a government-to-government negotiation. All
we're asking from our government leaders is that they stand committed
to resolving this issue based upon sound scientific principles. There
is a difference between deciding to make a decision and actually doing
something--we simply need to see some action.
The United States has played by the rules and honored its
commitments, and now it is time for Japan to do the same and to lift
its ban on U.S. beef.
Attachment 1:
U.S._Japan Progress Report
Action Taken to Resolve Japanese Import Ban on U.S. Beef
NCBA Fact Sheet: Fall 2005
----------------------------------------------------------------------------------------------------------------
What did the October 2004
Agreement between U.S. and What Has Been Done and Where We are Now . . .
Japan call for?
----------------------------------------------------------------------------------------------------------------
``Specified risk materials A Japanese government study-mission visited the U.S. and Canada in May 2005 to
(SRMs) must be removed examine BSE preventative measures for Japanese exports. The group consisted of six
from animals of all ages'' officials from the Ministry of Health, Labor and Welfare, the Ministry of
Agriculture, Forestry and Fisheries and the Foreign Ministry. The group found and
reported that both Canada and the United States have taken strict steps to remove
specified risk materials from cows.
----------------------------------------------------------------------------------------------------------------
``Animals must be verified As stated in a USDA press release dated October 2004, two methods will be used to
at 20 months of age or verify that animals are 20 months or younger.(1) Production records that indicate
younger'' birth dates. These include records for individual animals; records from
insemination; group age verification plans; and records from already existing USDA-
certified special programs. (2) The USDA physiological grading system. A special
study is being conducted to examine the correlation between chronological age and
physiological characteristics. This information then will be used to define the
parameters of the USDA grading criteria that will be used in determining animal
eligibility for export.Also, a new BSE health code, published in August 2005 by
the OIE, states that boneless skeletal beef from animals less than 30 months of
age can be traded regardless of the BSE risk status of its country of origin.
----------------------------------------------------------------------------------------------------------------
``BSE testing requirements Many believed the United States could speed the process of resuming beef trade with
finalized'' ``BSE testing Japan if the USDA would perform 100% testing of cattle for BSE. On the contrary,
requirements finalized'' this request was never made by the Japanese government, and Japan and the U.S.
(cont.) never agreed to 100% percent testing as terms of agreement.
----------------------------------------------------------------------------------------------------------------
``Japan's domestic approval In September 2005, Japan's FSC had its sixth meeting since May to discuss
process to include resumption of U.S. beef trade with Japan. The FSC was required by the Japanese
deliberation by the Food government to speed up its process by increasing the size of the committee and its
Safety Commission (FSC)'' staff and holding meetings more frequently.
----------------------------------------------------------------------------------------------------------------
``Other international In May 2005, the World Organization for Animal Health (OIE) changed its
experts including the recommendations for standards on trade status in regards to BSE. Risk profiles of
World Organization for countries that have experienced BSE in their national herds will now be based on
Animal Health (OIE) and what steps the country is taking to manage the disease. They also expanded the
the World Health list of tradable, non-risk products to include boneless beef.
Organization (WHO) invited
to participate in
consultations with
Japanese and U.S.
government officials''
----------------------------------------------------------------------------------------------------------------
``Both the United States In June, both Japanese Prime Minister Junichiro Koizumi and Japanese Chief Cabinet
and Japan to have food Secretary Hiroyuki Hosoda said the confirmation of a second case of BSE in the
safety systems in place United States ``will not directly affect'' deliberations on reopening Japan's
that are sufficiently market to U.S. beef. But still, the Food Safety Commission continued to request
robust such that a few more information in July 2005 from the USDA regarding the second American case of
additional BSE cases will BSE so it can make a risk assessment on U.S. beef.
not result in market
closures and disruption of
beef trade patterns
without scientific
foundations''
----------------------------------------------------------------------------------------------------------------
Mr. SHAW. Thank you. Mr. Mohatarem?
STATEMENT OF G. MUSTAFA MOHATAREM, PH.D., CHIEF ECONOMIST,
GENERAL MOTORS, DETROIT, MICHIGAN
Mr. MOHATAREM. Chairman Shaw, Congressman Levin, thank you
for providing me the opportunity to testify this afternoon.
2005 is shaping up to be another banner year for auto sales
in the U.S. Calendar year-to-date sales have been running at a
pace just over 17 million, a level that was considered
unattainable a few years ago. But despite these strong sales,
U.S. auto manufacturers and suppliers are struggling to turn a
profit. Autoworkers have been laid off, credit ratings for the
auto companies have been downgraded, and many suppliers are
facing bankruptcy.
Now, there are many reasons for our current challenges, but
the legacy of Japan's mercantilist trade policies and the
impact of Japan's sustained currency manipulation stand out
among the primary causes.
With the progressive lowering of tariffs and other barriers
to trade, exchange rates have taken on a larger component of
competitive advantage. Indeed, Japan is demonstrating that
elimination of tariffs and removal of nontariff barriers are
meaningless if a country is allowed to offset these actions by
artificially depreciating its currency.
No industry better exemplifies the effects of Japan's
mercantilist post-war trade policy than the U.S. automotive
industry. Last year, the U.S.-Japan automotive trade deficit
reached $44 billion, representing over two-thirds of our total
U.S.-Japan deficit, and this is not a new development. This has
been going on for almost 25 years.
In 1995, the U.S. Government negotiated an agreement, a 5-
year agreement with Japan that was designed to address many of
the barriers we had identified. It was a good agreement, and it
immediately resulted in an increase in not just our exports,
but the exports of our suppliers to Japan. But just as we had
finished making significant investments to take advantage of
this agreement, the Japanese Government began to intervene in
currency markets to deliberately weaken the yen. The impact of
this was to make U.S. exports to Japan prohibitively costly. In
pursuing this weak yen policy, Japan effectively nullified the
value and commercial significance of the 1995 U.S.-Japan Auto
Agreement.
Now, the IMF clearly states that members should avoid
manipulating exchange rates in order to gain an unfair
competitive advantage over other members and defines such
manipulation as protracted large-scale intervention in one
direction in exchange markets. Since 2000, Japan has intervened
over 400 times, spending over $420 billion. As a result, Japan
has seen a massive increase in its reserves, growing from $345
billion in July of 2000 to over $840 billion.
Now, we heard from the earlier panel that Japan has not
intervened since the first quarter of 2004. That is true. But
it is important to keep in mind that Japan spent $150 billion
in that one quarter alone and announced that they had budgeted
another $1 trillion to intervene in currency markets. With an
intervention of that magnitude and a commitment to continue
intervening, is it any surprise they have not needed to
intervene further?
Now, this intervention, the cheap currency translates
directly into competitiveness. We estimate that in the last
year alone, the cheap yen resulted in a subsidy to Japanese
manufacturers of approximately $3,000 on a small car going up
to $12,000 on a large luxury car. For those who question
whether this matters, all you have to look at is the first-half
results announced by the Japanese auto companies. Collectively,
they reported $1 billion in additional earnings as a result of
the weak yen.
It is precisely for this reason that the WTO, the IMF, and
the Omnibus Trade Act address the issue of currency
manipulation, yet Japan has been able to do that without any
consequences.
On behalf of General Motors, I urge the Committee to give
greater attention to our ongoing trade and currency problems in
Japan and to see how directly these issues are related to the
competitive problems American manufacturers face. There are
responsible actions that Congress and the Administration can
take. You can insist that these unfair currency practices
cease, and if Japan or another trading partner continues, they
must understand there will be consequences. The Congress and
the Administration should make clear they will make full use of
U.S. and international trade laws to discipline unfair currency
manipulation. The bottom line is in a world where we have much
more open trade, currency valuation makes a tremendous
difference, and when we allow a country like Japan to
manipulate its currency to the advantage of their
manufacturers, it comes as the detriment of our manufacturers,
us and our employees.
Thank you again for the opportunity.
[The prepared statement of Mr. Mohatarem follows:]
Statement of Mustafa Mohatarem, Ph.D., Chief Economist, General Motors,
Detroit, MI Chairman Thomas, Ranking Member Rangel, Members of the Ways
and Means Committee: Thank you for providing me with the opportunity to
provide testimony at the hearing this morning.
General Motors Corporation, founded in 1908, is the world's largest
automaker and has been the global industry sales leader since 1931. GM
has employees in all 50 states for total U.S. employment of 166,000
people. GM's worldwide employment is approximately 317,000. Last year
GM spent over $6.5 billion in pension payments to 456,000 retirees and
surviving spouses, and provided health care benefits of over $5.2
billion to more than 1.1 million retirees, workers, and their
families.GM has manufacturing operations in 32 countries and its
vehicles are sold in virtually every country. In 2004, GM sold nearly 9
million cars and trucks globally.
2005 is shaping up to be another banner year for auto sales in the
United States. Calendar year-to-date sales have been running at a pace
just over 17 million units. Annual auto sales have hovered at or
exceeded 17 million units--a level that was considered unattainable as
recently as the early l990s--for seven straight years.
Given the strength of auto sales, one would think that U.S. auto
manufacturers, auto suppliers and their workers would be celebrating.
But we are not. Despite the strong sales, U.S. auto manufacturers and
suppliers are struggling to turn a profit, autoworkers have been laid
off, credit ratings for U.S. auto companies have been downgraded and
many suppliers are faced with bankruptcy.
While there are many reasons for the current challenges facing
American-owned auto manufacturers, the legacy of Japan's unfair and
mercantilist trade policies and the impact of Japan's sustained
currency manipulation stand out among the primary causes. With the
progressive lowering of tariffs and other barriers to trade, exchange
rates have taken on a larger component of competitive advantage.
Indeed, Japan has demonstrated that elimination of tariffs and the
removal of non-tariff barriers are meaningless if a country is allowed
to offset these actions by artificially depreciating its currency.
Thus, for example, the artificially weak yen has provided Japanese auto
companies a cost advantage ranging from $3,000 on a small car to
$12,000 on a luxury sport utility. This subsidy has both facilitated
the expansion of Japanese companies in the U.S. and succeeded in
keeping American-built automobiles out of Japan.
The world's acceptance of Japan's postwar export-based economic
growth model has long been debated here in Congress and elsewhere.
However, it is frustrating, really unbelievable, to many of us in this
business and the American manufacturing sector that the Japanese
government's extraordinary $420 billion currency manipulation program
has gone unquestioned and unchallenged, while China has become the sole
focus of attention as the threat to American competitiveness.
Let me assure you--when it comes to working to secure the health
and viability of American auto jobs and the future well being of this
industry, there is nothing more important to consider than the U.S.-
Japan relationship.
U.S.-Japan Automotive Trade
No industry better exemplifies the effects of Japan's imbalanced,
mercantilist postwar trade policy than the automotive sector. Last
year, the U.S.-Japan bilateral automotive trade deficit reached $44.2
billion, making it the largest sectoral trade deficit the United States
maintains with any country. In 2004, automotive trade represented over
two-thirds of the total U.S.-Japan deficit. And this is not a new
development. This has been the case for more than twenty-five years,
confirming the deep historical and structural nature of the chronic
trade imbalance between our two countries.
A quick glance at the trade numbers confirms this pattern. In 2004,
Japan exported to the United States over 1.7 million passenger vehicles
and a substantial amount of auto parts worth a total of $46 billion.
During the same time, Japan imported just 15,000 passenger vehicles and
auto parts from the United States worth a total of $1.8 billion. The
market share of Japanese nameplate brands reached over 30% of the total
U.S. light vehicle market in 2004--including nearly 40% of passenger
cars. In contrast, sales of U.S. nameplates in Japan reached only 2% of
the total market.
It didn't have to be this way. The reality is that Japan built and
grew its economy based on exports, and has fueled that export machine
by restricting demand in its domestic market. It is a mercantilist
model that others have sought to follow, and it has succeeded, in large
part, at the expense of its trade partners. In an effort to address the
obvious problems in automotive trade, in 1995, the United States and
Japan signed a five-year agreement intended to address the huge
structural imbalance in our automotive trade by improving the access of
U.S. automakers to the Japan market. It was a good agreement, and
resulted initially in a modest increase in sales for U.S. auto and auto
parts companies in Japan.
It was a good agreement that made a serious effort to address the
very broad range of non-tariff barriers that had successfully
maintained Japan as a closed market, even after Japan reduced its
vehicle tariffs to zero. These non-tariff barriers included the
interlinking collusive business practices such as the `keiretsu'
relationships between Japanese auto manufacturers and their family of
suppliers, and the restricted distribution arrangements between
Japanese manufacturers and their dealers that prevented Japanese
dealers from establishing contractual relationships with U.S. and other
foreign auto companies.
Additionally, Japan's regulatory system that governs certification
to safety and emission standards was, by any objective standard,
clearly designed for the convenience of Japanese automakers and to make
it expensive, difficult, and very time consuming to sell imported cars
in Japan.
In the 1995 Auto Agreement, the United States set out a specific
course of action that included a detailed set of measures that the
Japanese government and industry agreed to take to remove the labyrinth
of non-tariff barriers that had been used to successfully keep the
market closed. Among the major commitments made by Japan in the 1995
Agreement were:
1995 U.S.-Japan Auto Agreement
The Japanese government agreed to:
``Demonstrate the commitment of the Japanese vehicle
manufacturer to support open and competitive distribution systems for
vehicles in Japan'';
``Eliminate concerns that Japanese vehicle dealers may
have about the consequences associated with carrying competing foreign
motor vehicles''; and
Confirmed that the government ``supports open and
competitive distribution systems for motor vehicles in Japan.''
``The Government of Japan will provide guidance to auto
parts distributors that ``they refrain from any form of discrimination
when handling foreign made auto parts;
Deregulation of Disassembling Repair Requirements
(Critical Parts Requirements);
Deregulation of Certified and Designated Garages;
Deregulation of Modification Inspection Requirements;
Notification of Regulatory Changes; and
The Government of Japan agreed to 23 specific commitments
intended to ease the burden, cost and overall disproportionate process
required of foreign automakers to achieve certification of vehicles for
sale in Japan.
Many of these measures and commitments contained in the 1995 U.S.-
Japan Auto Agreement were potentially important positive developments.
If fully tested and implemented, they could perhaps have made a
significant difference in improving sales opportunities for U.S. auto
and auto parts companies in the Japanese market. However, just as the
U.S. companies began to undertake the extensive capital investments to
test these commitments, the Japanese government moved in a major new
policy direction that totally changed the terms of trade.
In l996, it began to use massive resources to intervene in currency
markets to deliberately manipulate the value of the yen in order to
weaken its value to promote exports. The impact of this was to make
U.S. exports to Japan significantly, and for many, prohibitively
costly. In pursuing this weak yen policy throughout the late l990s,
Japan effectively vitiated the value and commercial significance of the
1995 U.S.-Japan Auto Agreement. As a result, to this day, we have no
way of knowing whether Japan's commitments made in 1995 to remove its
web of non-tariff barriers restricting access to its auto and auto
parts markets were met.
Currency Manipulation
Japan's weak yen policy has given its exporters a huge subsidy and
competitive advantage in the U.S. market, causing significant harm to
U.S. manufacturers. One clear sign that a country is manipulating its
currency is a substantial increase in its foreign currency reserves,
which occurs as it buys and holds dollars. Japan has seen a massive
increase in its foreign currency reserves since 2001, growing from
$344.8 billion in July 2000 to $840 billion in July 2005.
In a January 2005 Working Paper, the U.S. Federal Reserve reported
that ``Since the early 1990s, the monetary authorities of the major
industrialized countries, with one notable exception, have greatly
curtailed their foreign-exchange interventions. That exception has been
Japan, where the Ministry of Finance has continued to intervene
frequently--and at times massively--in foreign exchange markets.''
There are several international agreements that preclude or limit
the use of currency intervention for trade-distorting purposes. These
agreements seem to put Japan's currency intervention actions on the
level of a non-tariff barrier. Of particular interest are the rules
governing the IMF and the original GATT. Section IV of the IMF charter
states without reservation, that ``members should avoid manipulating
exchange rates in order to gain an unfair competitive advantage over
other members'' and defines such manipulation as ``protracted, large-
scale intervention in one direction in exchange market.''
Perhaps more relevant, GATT Article XV (Exchange Arrangements)
states that contracting parties shall not, by exchange action,
frustrate the intent of the Agreement. The intent of the Agreement, as
stated in the preamble, is the objective of ``entering into reciprocal
and mutually advantageous arrangements directed to the substantial
reduction of tariffs and other barriers to trade.'' Japan is clearly
violating GATT Article XV by manipulating its currency to keep it
artificially weak. Japan is in effect providing a substantial subsidy
to its exporting industries. These practices are clearly inconsistent
with the intent of the IMF and GATT, and likely violate both the IMF
and the GATT Agreements, causing major distortions to international
trade.
As a result of Japan's massive and disruptive currency
interventions, the value of the yen fell from 101 yen/dollar in January
2000 to 136 yen/dollar in 2002. Market forces, helped by Bush
Administration officials' statements, had pushed the yen to slightly
more reasonable levels of 105 yen/dollar in early 2005. However, due in
part to ongoing ``jawboning'' and verbal intervention by high-ranking
Japanese officials, the yen is currently in the 111 yen/dollar range.
The damage caused to key sectors of the U.S. economy has been deep and
in many cases permanent.
Japan's artificially weak currency provides a significant per-
vehicle cost advantage that amounts to an outright annual subsidy of
between $3,000 for small car to $12,000 for a luxury sedan or SUV for
every vehicle exported to the United States. Cars produced here by
Japanese companies also benefit heavily from this subsidy because of
their high use of imported parts and components. Japanese automakers
have used this cost advantage to:
Dramatically increase investment in technology and
production worldwide;
Minimize, and in some cases reduce, prices on new models;
Dramatically increase spending on advertising;Offset
tariffs, taxes and other fees; Increase incentives to boost market
share; and
Enhance spending on research and development.
For those who may question whether the exchange rate policies of
our trading partners are important factors affecting U.S.
competitiveness, half-year earnings statements just released by Japan's
automakers answer that conclusively. Toyota, Nissan, Honda, Subaru, and
Japan's other auto companies announced last week that they earned
nearly $1 billion in unanticipated windfall profits in the first half
of fiscal year 2005. These were due exclusively to the artificial
weakness of the yen.
Most Japanese automakers set a projected exchange rate of 105 yen/
dollar as their benchmark at the beginning of the 2005 fiscal year.
But, because Japanese government policies resulted in a yen/dollar
exchange rate much weaker than that, Japanese automakers' total profits
increased by 112 billion yen--over $1 billion--above what they
projected. Much of that profit increase came as a result of sales in
the United States. According to the Nikkei news service, the breakdown
of these additional weak currency-driven profits include 50 billion
yen/$452 million for Toyota, 28 billion yen/$253 million for Nissan,
and 14.2 billion yen/$127 million for Honda.
With no sign that the Japanese government will change its exchange
rate policy to allow the yen to rise to its true market level (90 to
100 yen per dollar is the commonly accepted range), the full-year
windfall provided by the Japanese government's currency policy could
likely be a check for $2 billion written to Japan's automakers.
Is it any surprise then that the relative competitive performance
of the Japanese and U.S. auto companies is so dramatically different?
Armed with a significant per-vehicle subsidy, the Japanese companies
have embarked on a period of rapidly escalating profits, which they
have directed toward increasing market share in the United States.
Intervention on the scale that Japan has engaged in is no different
from other forms of subsidies that governments offer. That is why the
WTO has explicit provisions against currency manipulation. And that is
why the Omnibus Trade Act of 1988 required the U.S. Treasury to monitor
currency manipulation by other countries and to take appropriate
measures to prevent other countries from manipulating their currencies
to gain unfair competitive advantage for their products.
Conclusion
Automotive trade between the United States and Japan has been
chronically and structurally unbalanced for decades. It has
consistently made up the vast majority of the United States' total
deficit with Japan. Contrary to claims that the opening of Japanese
auto plants in the United States would cause Japanese auto exports to
decline, Japan's automakers have sharply increased their exports to the
United States. Even a hard-fought and sound 1995 U.S.-Japan Auto
Agreement has been rendered useless because of reckless Japanese
currency policies. Over the last five years, subsidized by an
artificially weak yen funded by $420 billion in Japanese government
currency interventions, Japan's automakers have exported an annual
average of 1.8 million cars and trucks into the United States, 13%
higher than the average from 1996-2000.
On behalf of General Motors, I urge the Committee to give greater
attention to our ongoing trade and currency problems with Japan--and to
see how directly these issues are related to America's slipping
industrial competitiveness. There are responsible actions the Congress
and the Administration can take to respond. You can insist that these
unfair competitive currency practices cease. And if Japan or another
trading partner continues, they must understand there will be
consequences. The Congress and the Administration should make clear it
will make full use of U.S. and international trade laws to discipline
unfair currency manipulation. And the United States will refuse to
consider any further overtures, such as Free Trade Agreements or tariff
reductions to countries like Japan that are engaged in such practices,
until such time as those governments commit publicly to cease engaging
in currency manipulation and intervention in the future.
Mr. SHAW. Thank you, sir. Ms. Howard?
STATEMENT OF DEBORAH HOWARD, PRESIDENT, JAPAN MARKET RESOURCE
NETWORK, TOKYO, JAPAN, ON BEHALF OF AMERICAN CHAMBER OF
COMMERCE IN JAPAN, TOKYO, JAPAN
Ms. HOWARD. Mr. Chairman, Congressman Levin, thank you for
the opportunity to appear before you today on behalf of the
American Chamber of Commerce in Japan, or ACCJ. My name is
Debbie Howard, and I am the founder and President of a market
research firm based in Tokyo that has been in business for 17
years. I also currently serve as the elected President of the
ACCJ. I would like to discuss some key structural challenges
confronting Japan and what we believe must be done to ensure
Japan's sustained economic growth.
The first challenge is Japan's rapidly aging population,
the most extreme of all industrialized nations. Japan's birth
rate is also flattening, and the downward trend shows no sign
of stopping. Japan will likely increase consumption taxes in
2007 and implement other tax reforms to help cover the
anticipated costs, but these measures are unlikely to be
adequate.
The second major challenge confronting Japan is its
unprecedented fiscal crisis. Japan's public debt exceeds 163
percent of GDP, over 2 times that of the U.S. Japan has
basically reached its limit on borrowing and must look to other
solutions to deal with its aging demographics. Considering
these challenges, Prime Minister Koizumi has decided to
introduce private sector-driven reforms that will enhance
efficiency in the overall economy of Japan.
The centerpiece of Prime Minister Koizumi's reforms is the
privatization of Japan Post. This Committee has been involved
in postal reform from the very beginning and has issued a very
strong joint letter to Japan calling for equal treatment
between private companies and the privileged, government-run
postal companies, as well as for a standstill on new product
offerings until such equal treatment is achieved. Even after
the legislation passes in October, though, this Committee's
continued engagement will be essential to obtain commitments
from Japan to ensure equivalent conditions of competition and
transparency of the process by which the postal entities will
be allowed to expand the range of their businesses. This is
critical to the future viability of many U.S. financial
institutions that generate tens of billions of dollars annually
in Japan. They will also ensure Japan's compliance with its
national treatment obligations under the GATS.
Japan has also begun to consider broad reform of its health
care system. It is important that health care reform
incorporate market-based measures that make efficient use of
limited resources and enable innovative companies, including
U.S. companies, to provide cost-effective solutions that
improve patient access to the most advanced treatments, as well
as improve diagnostics and patient quality of life. In addition
to hastening approval times for pharmaceuticals and medical
devices, ACCJ members would very much like to see private
companies permitted to own or manage medical institutions on a
for-profit basis.
It is also important for Japan to continue to strengthen
its corporate governance. Progress has slowed dramatically in
this area. Rather than protecting the interest of Japanese
management, the government should be focusing on improving
corporate governance through active shareholder participation
and through the introduction of modern merger techniques that
create a market for corporate control and facilitate corporate
restructuring and investment.
The U.S. Government has for many years been encouraging
Japan to take measures to improve the transparency of its
policymaking process. Progress has been made with the
establishment of public comment procedures and no action letter
systems, as well as improved access to advisory groups. On the
downside, however, government agencies often provide
unreasonably short comment periods and ignore comments
submitted during the public comment process. Most agencies also
remain reluctant to respond to no action letter requests, and
the quality of access to advisory groups varies depending on
the agencies and officials involved.
In conclusion, Mr. Chairman, U.S. business interests in
Japan have become much more complicated. In addition to the
priority areas I have outlined today, the ACCJ is seeking
policy improvements in areas as wide-reaching as labor
mobility, personal information protection, taxation,
competition policy, and even Narita airport management. While
we have come a long way, there is still much work to be done,
and it is critical that Japan implement further reforms in a
manner that creates a level playingfield.
In terms of trade policy, it is essential that the U.S.
Government remain engaged multilaterally in the WTO, APEC, and
other forums, and bilaterally in the Economic Partnership for
Growth and other processes, to ensure that reform in Japan
stays on track and that Japan lives up to its trade
commitments.
On behalf of the members of the ACCJ, I would like to thank
you again and the members of your Committee for this
opportunity to present our views.
[The prepared statement of Ms. Howard follows:]
Statement of Deborah Howard, President, Japan Market Resource Network,
Tokyo, Japan on behalf of American Chamber of Commerce in Japan, Tokyo,
Japan
Mr. Chairman and members of the Committee, thank you for the
opportunity to appear before you today on behalf of the American
Chamber of Commerce in Japan, or ACCJ, at this important hearing on
U.S.-Japan economic relations. My name is Debbie Howard. I am the
founder and president of a market research firm based in Tokyo that has
been in business for 17 years. I also serve as the elected President of
the ACCJ. The ACCJ's mission is to promote commerce between the United
States and Japan, promote the interests of U.S. companies and members,
and improve the international business environment in Japan.
Established in 1948, the ACCJ has grown into one of the most
influential business organizations in Japan, with 3,000 individual
members and 1,400 companies, ranging from Fortune 500s to
entrepreneurial ventures like mine.
We are delighted that the Committee is carefully examining the
U.S.-Japan economic relationship and appreciate the strong leadership
demonstrated by this Committee on this very important issue. Japan has
the world's second largest economy--three times larger than that of
China and larger than those of the U.K., France, and Italy combined.
Our two economies are inextricably intertwined. As a result, Americans
have a huge stake in Japan's continued economic growth and in
strengthened economic ties between the two countries. For example,
Japan is the largest overseas market for America's farmers, and is the
United States' largest overseas export market overall, purchasing $54
billion in American goods in 2004, up from $52 billion the year before.
Japanese companies also employ approximately one million Americans at
home. In addition, Japan is by far the largest holder of U.S. Treasury
securities. Japan is also an important global partner in many other
ways, for example, by committing funds and troops to Iraq and actively
contributing to international relief efforts such as tsunami recovery
and aid to Africa. The United States and Japan also have shared
interests in strengthening the global trading system and in particular
in working together to constructively respond to the challenges and
opportunities presented by China's rapid growth and emergence as a
major trading nation and in ensuring that China lives up to its
commitments under the WTO agreements.
In the next few minutes, I would like to briefly discuss some key
structural challenges currently confronting Japan and what must be done
to ensure sustained economic growth in Japan. A robust Japanese
economic and financial system governed by market-based principles and
transparent rules is a crucial building block for continued growth and
prosperity in the United States and must be a key factor when
considering U.S. trade policy for Asia and indeed the world.
Structural Challenges
The first challenge is that Japan's population is rapidly aging and
is in fact shrinking.
Japan's population will peak in 2006 at 127.7 million and by 2050
decline to just over 100.6 million. In 2000, the ratio of productive to
dependent members of society stood at four to one. By 2050, that ratio
will drop to one to 1.5.
Japan's birthrate has plummeted from 3.65 children per woman in
1950 to less than 1.29 today, and the downward trend shows no signs of
stopping. These demographic trends are straining Japan's social safety
net systems to the breaking point and the government is scrambling to
figure out how to respond. In 2004 government expenditures for
pensions, medical expenses, and nursing care totaled 86 trillion yen or
$825 billion. By 2025, that total is expected to jump to 152 trillion
yen or $1.5 trillion. Japan will likely substantially increase
consumption taxes in 2007 to help cover some of the costs, but measures
currently being contemplated are unlikely to adequately cover the
anticipated expenses.
This brings me to a second major challenge confronting Japan--that
is, its government's unprecedented fiscal crisis. In the decade
following the collapse of its asset bubble in the early 1990s, Japan
attempted to spend its way out of a prolonged economic slump with
public works spending. The result is a public debt that exceeds 163
percent of GDP, compared to U.S. public debt of 63.5 percent of GDP.
The Government of Japan has basically reached its limit on borrowing
and must look to other solutions to deal with its aging demographics.
Accordingly, the Government of Japan must take decisive, private-
sector-driven measures to enhance efficiency in its economy overall and
to create a new social safety net system able to cope with an older
society. In the recent election, the Prime Minister ran on a platform
of reform; his basic position was that slimming the bureaucracy and
bringing vitality to the private sector was the only way to create
sustainable economic growth and reform of Japan's healthcare, pension,
and other social safety net systems in the face of Japan's falling
birthrate and declining population. Indeed, the Japanese public's
strong support for Prime Minister Koizumi in the election is seen by
many as a clear signal that the people of Japan understand the need for
reform and are ready to move forward.
Postal Reform
The centerpiece of Prime Minister Koizumi's revitalized reform
platform is the privatization of Japan's postal operation, Japan Post.
I would like to note that this Committee has been involved in postal
reform from the beginning and, among other things, has issued a very
strong joint letter to the Government of Japan calling for equal
treatment between private companies and the privileged government-run
postal companies and for a standstill on new product offerings until
such equal treatment is achieved. We very much appreciate the
Committee's involvement and credit much of the progress made on this
issue to your active oversight.
During the election, the Prime Minister's message was that smaller
government through postal privatization is the only way to overcome the
challenges now confronting Japan. He has called Japan Post
privatization Japan's most important reform since the Meiji Era. It is
hard to disagree--indeed, Japan Post privatization is the ACCJ's top
advocacy priority. In addition to delivering the mail, Japan Post
operates the largest bank and life insurance company in the world.
Japan Post accounts for approximately 40 percent of Japan's life
insurance assets and 30 percent of the country's individual savings
deposits. A quarter of Japanese households' total financial assets are
held by Japan Post, and a quarter of all Japanese government bonds are
owned by Japan Post.
The postal entities compete directly with the private sector, yet
receive government privileges, including tax exemptions, government
guarantees of their products, and separate, more lenient regulatory
supervision, all of which unfairly disadvantages their private
competitors. More importantly, the exemption of these mammoth
institutions from the Financial Services Agency's comprehensive, rules-
based system of financial regulation undermines the ability of the
Government of Japan to provide a sound regulatory environment essential
to the future growth of Japan's financial sector.
The Prime Minister has pledged to reform and privatize Japan Post
by 2007. When his postal privatization legislation was rejected early
last month, Mr. Koizumi dissolved the Diet, calling a snap election in
which postal privatization was the key issue--almost the only issue.
Now armed with a more than two-thirds majority in the lower house, the
Prime Minister has re-introduced the legislation and hopes to have it
enacted into law by mid October.
It has been the longstanding position of the U.S. government, as
expressed in the National Trade Estimate and other documents, that
Japan Post should not introduce any new products or services until
equivalent conditions of competition with private sector competitors
are established. This is consistent with language in the Japan Post
legislation, which provides that ``measures shall be implemented to
ensure equivalent conditions of competition between [the privatized
postal companies] and other companies engaged in like business
operations.''
Despite this language, it is vital that we obtain specific
commitments from the Government of Japan to faithfully implement this
language and prohibit product expansion until a level playing field is
established and to ensure transparency of the process by which the
postal entities will be allowed to expand the range of their
businesses. These duel commitments are essential to the future
viability of many U.S. financial institutions who generate tens of
billions of dollars annually in Japan, and to the sound regulation of
the world's second largest financial sector. They will also ensure
Japan's compliance with its national treatment obligations under the
GATS. After the legislation passes, this Committee's continued
engagement will be essential to ensure full implementation of the
promised measures to ensure equivalent conditions of competition.
Healthcare Reform
Japan has recently begun to consider broad reform of its healthcare
system recognizing that the current system is financially unsustainable
given the rapid aging of Japanese society and low birth rate.
Consistent with the Prime Minister's theme of ``letting the private
sector do what it can do,'' it is essential that these reforms
incorporate market-based measures that make more efficient use of
limited resources and enable innovative companies--including U.S.
companies--to provide cost-effective solutions. Under the current
rules, for example, private companies are not permitted to own or
manage medical institutions on a for-profit basis. This restriction is
a substantial trade barrier to U.S. companies and denies Japanese
consumers of potential efficiency gains that for-profit management
could bring. It is also essential that healthcare reform include wide-
reaching measures applying market-based pricing premiums for
pharmaceuticals and medical devices that reward and stimulate advances
in drug research and medical technology and which accurately reflect
the value of innovative products. The current system, which is more a
political negotiation than a market pricing mechanism, stifles
innovation and denies Japanese consumers access to the most advanced
treatment.
Corporate Governance
Continued measures to strengthen sound corporate governance are
essential to improving corporate performance in Japan. Such measures
would ensure that management works to maximize shareholder value
through increased productivity and economically sound business
decisions. Keys to improving corporate governance include the active
shareholder participation as well as the introduction of modern merger
techniques that create a market for corporate control and facilitate
corporate restructuring and investment.
Unfortunately, a growing fear of hostile foreign takeovers sparked
by a recent series of domestic events quite unrelated to foreign
investors has slowed progress in this area substantially, leading to
the recent amendment of the Japanese corporate code allowing a range of
new takeover defenses and to a delay in the adoption of rules allowing
cross-border triangular mergers that companies overseas could use to
acquire companies in Japan. Rather than protecting the parochial
interests of Japanese management, the Government of Japan should be
focusing on enhancing corporate governance in Japanese companies and
creating a regulatory framework that emphasizes shareholder value and
efficient capital markets. Such measures would promote Japanese
consumer welfare; create a better business environment for all
companies, domestic and foreign; ensure Japan's continued economic
growth; and enhance Japan's ability to contribute as a global citizen
to the international economy.
Transparency
For many years, the United States Government and the ACCJ have been
encouraging the Government of Japan to take measures to improve the
transparency of its policymaking process. Much progress has been made.
For example, public comment procedures and no action letter systems
have been established in most areas of government, and our member
companies have improved access to the advisory council deliberative
process, which is central to the legislative and regulatory drafting
process in Japan.
The fact remains, however, that Government agencies often provide
unreasonably short comment periods and ignore comments submitted during
the public comment process, and most agencies remain reluctant to
respond to no action letter requests. Further, while we are grateful
for improved access to the advisory council process, the quality of
that access varies widely depending on the agencies and officials
involved.
A case in point is Article 821, a recently enacted amendment to
Japan's Corporation Law, which may force foreign companies operating
branches in Japan whose sole business is in Japan to transform their
branches into Japanese corporations, resulting in millions in
additional expenses to those companies. Even though the provision was
aimed at foreign companies, it was drafted without sufficient
consultation with the foreign business community, and the public
comment procedure was effectively circumvented, because the version
adopted was completely different from that submitted for public
comment. Most firms became aware of the new amended Article 821 only
after it had passed the Diet's lower house. Unfortunately, we were
unable to get the Article amended prior to its passage into law and had
to settle for legislative history aimed at narrowing its application
and a supplemental resolution promising to consider revising the
provision as necessary.
Article 821 casts into doubt the legal and corporate structure by
which foreign companies have operated as good corporate citizens in
Japan for more than 50 years, and it must be amended before its
scheduled implementation date next year. The ACCJ will be working to
achieve such an amendment during the upcoming legislative session this
fall.
Although we applaud the significant progress on transparency to
date, much work remains to be and we look forward to the Committee's
continued support on this front.
Conclusion
Over the past 60 years, the United States and Japan have forged a
remarkably close bilateral relationship that continues to yield
tremendous benefits to both sides--economically, politically, and
culturally. This relationship is not always easy, but it is always
worth it. Access to Japan's markets for U.S. goods and services has
improved substantially over time, but there is still work to be done,
and meaningful progress on the issues I've just outlined will help
continue moving the ball forward. In terms of trade policy, it is
essential that the U.S. Government remain engaged multilaterally in the
WTO, APEC, and other forums and bilaterally in the Economic Partnership
for Growth, U.S.-Japan Insurance Talks, and other processes to ensure
that reform in Japan stays on track and Japan lives up to its trade
commitments. Accordingly, the ACCJ firmly supports the U.S.
Government's efforts to make meaningful progress under the Doha
Development Agenda. History shows that government-to-government
engagement on regulatory issues has had a substantial impact on the
course of reform in Japan--indeed, this Committee has played a vital
role. Continued active involvement by the U.S government remains key.
Also, we believe that careful investment in the U.S.-Japan relationship
will enhance our ability to leverage our relationship with Japan to
collaboratively address issues related to China's integration into the
global economy to the great benefit of both the United States and
Japan.
In closing, I would like to point out that the business environment
in Japan has changed for the better in many important ways over the
past six to seven years. It is much more open to imports. Foreign
direct investment has grown substantially, and the Japanese government
is more open and receptive to ideas from the ACCJ and foreign business
community. In short, it is easier to do business in Japan now.
At the same time, U.S. business interests in Japan have become much
more complicated. In addition to the large priority areas I have
outlined today, we are seeking policy improvements in areas such as
labor mobility, personal information protection, taxation, competition
policy, and even Narita airport management.
Fortunately, and most important, Prime Minister Koizumi's landslide
victory indicates that a consensus has emerged among the Japanese
people and its leaders that even more reform is necessary for Japan to
meet the challenges of the future. The ACCJ stands ready to engage both
the U.S. and Japanese governments in finding the right solutions.
On behalf of the members of the ACCJ, I would like to thank you and
the members of your committee for this opportunity to present our
views. We look forward to working with this Committee to improve
economic relations with Japan.
Mr. SHAW. Thank you.
Mr. Levin?
Mr. LEVIN. Thank you very much, Mr. Chairman, and thank you
for your testimony.
I think a lot of our colleagues are not here--I just was
shown on the BlackBerry there was another session called. The
Secretary of Defense is having a briefing right now, as I
understand it, and so we regret that so many of our colleagues
went there. They will fill us in on what was said there. It was
a secret briefing, so they will tell us directly. We will fill
them in on what you have had to say.
Let me just ask, in view of your important testimony,
Governor Keating, you have talked about the challenge of their
reform and what it could mean for American industry. Mr.
McAdams, you discussed so thoroughly, as did the Governor, the
challenge relating to agriculture. You kind of lauded our
Government or said they were doing--they were working on it.
But here it is almost a year later, and nothing has happened.
Dr. Mohatarem, you have spelled out so clearly the problems
with the currency, and it was not so long ago that they were
rigging their currency, or whatever word one wants to chooses,
very harmfully to the U.S.
So, tell us--now we have votes--what do you want us to do
that has not been done? Take each of your fields. If postal
reform, jawboning has not worked very well. I remember the
Motorola case--and I will be very brief--where the Japanese
said to Motorola you can sell this in northern Japan, but not
in Tokyo. And the company was willing to stand up and say, no
way, we are not going to settle for that, or settle for a lot
of jawboning.
So, in a word, tell us what you expect of this Government,
and what happens if it is not working well? Take each of the
three cases as examples.
Mr. KEATING. Mr. Levin, as I mentioned in my formal remarks
and in my summary remarks, this is a very fragile time because,
for our industry, this is huge. Japan is the second-largest
life insurance market in the world. Kampo is the largest life
insurance company in the world, and for Japan to honor its GATS
commitment and permit all of this to be on a level playingfield
and compete is good for Japan, as well as good for the American
people.
We have seen our market share advance, unlike some of these
other representatives at the witness table. We are happy with
that. We have also seen, as a result of some very good work on
the part of the Trade Rep, Department of Commerce, Department
of State, that this legislation--and as I mentioned, I spoke to
a number of members of the Diet as well as ministerial
officials--has the elements in it that we want, namely, we
hope--because it has not been introduced yet--the FSA
regulation, taxation, no full faith and credit, and product
holder protection fund. What it does not have is transparency.
That worries us. And the devil is in the details.
So, right now we are cautiously optimistic with a small
``c'' and as this process is completed, hopefully that will be
a capital ``C.'' But they are in violation of the GATS
agreement right now, and they did last year introduce a product
that is a very significant product and a competitive product to
the United States companies that are there.
So, we are concerned, we are alarmed, but we have not
panicked yet. If this hearing were 6 months from now, perhaps
our reaction would be different.
Ms. HOWARD. And may I add one point to that? This
privatization will probably take place over the course of about
10 years, so if we do not get it right, it is really quite a
long period of time where our industries are going to be
suffering. And we are really on the case watching the details.
I think we are all very concerned about that.
Mr. LEVIN. Now, Mr. Chairman, if we want to give the others
a brief--do you want to have time for your questions, too?
However you want to handle it. Should we just ask each of the
others to give a very brief answer?
Mr. SHAW. I think that is good.
Mr. LEVIN. Take beef and then currency.
Mr. SHAW. I am going to ask this panel if they would answer
written questions that we will be submitting to you. And I also
would like to say that I along with Mr. Cardin and the rest of
the Trade Subcommittee are looking forward to following up on
this. We are not going to just drop it. We are going to watch
it very closely, and some of you may be invited back to
testify. And I would hope that you would keep us advised,
Governor Keating, you with what is going on with regard to the
transparency, and keep this Committee advised as to exactly
what is happening. Too often we come and we visit a subject,
and then go on and do something else and don't come back to it.
And I think that the Japanese really have to know that it is in
their best interest to move forward and cooperate and allow our
business to compete just as we allow their businesses to
compete.
What was your suggestion?
Mr. LEVIN. Just quickly if we could have a quick response
on the beef issue and currency. What next? What do you expect?
Mr. MCADAMS. Well, from the beef standpoint, there is a
strong inclination on our part, our hearts are saying, we are
not being treated fairly and we need to retaliate. But when we
think with our heads, we look at what has happened with our
beef trade to Europe. For all practical purposes, we have none.
They have manipulated and flaunted the international rules to
the point that we don't have access to that market.
So, whatever we do, we want to see a positive result
quickly, and I am going to use a cowboy analogy, because I
don't know how to give you a straight answer other than this.
What I do know is when you are training a horse, what you never
want to do is use one ounce of pressure less than needed. What
you want to do is just use only one ounce of pressure more than
is necessary. And so I am dependent on you in Congress, and we
are willing to work with you to figure out what that is. But
that is where I see we are right now.
Mr. SHAW. I think even somebody from Michigan could figure
that out.
[Laughter.]
Mr. LEVIN. Or Florida.
Mr. MOHATAREM. Congressman, the 1988 Trade Act clearly lays
out a procedure for the Treasury to identify countries that
might be manipulating the currency. The IMF has a process and
the World Bank has a process. But we have to be willing to step
up and ask that that process be utilized.
One thing we have to remember is that with Japan, as you
have dealt with them for a long time, being identified as a
currency manipulator I frankly believe would be more than
sufficient to get them to stop because that is the one thing
they do not want. Yet we have been very reluctant, and as the
Director of the IMF noted in a Washington Post article today,
we have been very reluctant to go to the IMF and to make that
request.
So, I think that is where it has to start, that we have to
be willing to say this is inappropriate, this is unacceptable,
and that we will use our laws and our international agreements.
Mr. LEVIN. Amen. Thank you.
Mr. SHAW. Mr. Mussallem, let me ask you one question with
regard to medical devices and the extensive process that you
have to go through. Have we had any instances where a device
has been approved by the FDA that has not met the standards
required of the Japanese?
Mr. MUSSALLEM. Thank you for that question, Mr. Chairman.
This happens routinely. As a matter of fact, I can just speak
of our own company. We have several heart valves that are
approved in this country that are not approved yet in Japan,
and----
Mr. SHAW. Is that because of red tape or have they been
turned down?
Mr. MUSSALLEM. It is generally because of red tape.
Mr. SHAW. So, there are Japanese people who are dying
because these life-saving devices are just not approved.
Mr. MUSSALLEM. That is absolutely true.
Mr. SHAW. Answer specifically, though, what I asked. Has
any device been actually turned down by the Japanese after
going through their extensive process that was approved here
that you can recall?
Mr. MUSSALLEM. Well, what happens along the way is they do
get turned down, and then we resubmit data, and ultimately
these generally get approved. So, what we find in general is
that product lines get approved in Japan, but somewhere 3 to 5
years after they are approved in this country, often. So, we
are oftentimes even producing products uniquely for Japan
because they are out of date by the standards that would be
employed in the rest of the world.
Mr. SHAW. Somewhere along the line we have got to in our
country, as well as other countries, countries that have a
vigorous process, up to the standard of our own, allow
companies to have an abbreviated process once it has been
approved and whatever the gold standard is with the other
country, because it is crazy to make you guys go through it
all, and it just runs the cost of health care up. We are going
to have to adjourn this hearing right now because we are out of
time. There are a number of questions, including a couple that
I know the Chairman wanted to submit, that we would be
submitting to you, and we will keep the record open for that
purpose. Thank you very much.
[Whereupon, at 5:29 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Thomas and
Representative Thompson to Ms. Wendy Cutler, Ms. A. Ellen
Terpstra, and Dr. Mustafa Mohatarem, and their responses
follow:]
Question Submitted by Chairman Thomas to Ms. Wendy Cutler
Question: Thank you for testifying before the Committee on Ways and
Means during the September 28, 2005, hearing on U.S.-Japan Economic and
Trade Relations. In addition to your testimony before the Committee,
please submit written responses to the following questions:
The United States was ultimately successful in the World Trade
Organization apples case, but that case does not appear to have broader
application to sanitary and phytosanitary barriers on other products.
Is there a potential and appropriate broad-based WTO case that could be
brought against the Japanese for its sanitary and phytosanitary
barriers to trade, and what cases would have the broadest results in
opening the Japanese market for many U.S. goods?
Answer: WTO dispute settlement cases generally need to address
specific measures of a WTO member. On an ongoing basis, the United
States monitors Japan's compliance with WTO obligations and is prepared
to take WTO dispute cases as appropriate. The United States has taken
two dispute cases against Japan for its phytosanitary measures and we
won them both: (1) a dispute on Japan's varietal testing requirements
for fruit in the late nineties, which opened Japan's market to tomatoes
and resolved barriers related to fumigation of fruit, and (2) a dispute
with Japan for its fire blight measures on imported U.S. apples that we
expect will result in a resumption of apple shipments to the Japanese
market later this year.
In response to U.S. concerns, we recently obtained Japan's
commitment to take the necessary steps to reform its phytosanitary
measures so that these decisions are science-based and more
predictable. Under the auspices of the U.S.-Japan Regulatory Reform and
Competition Policy Initiative, Japan has committed to conduct import
risk assessments for quarantine pests in accordance with the relevant
International Plant Protection Convention standard using science to
determine if these pests should be subject to quarantine measures. In
concrete terms, Japan has removed three citrus pests from its
fumigation target list, thereby eliminating over $1 million in annual
fumigation costs on imports of U.S. citrus. In another step in the
right direction, Japan also has agreed to assess 11 more pests,
including pests found in lettuce, to determine if fumigation
requirements for them are necessary. We believe our work under the
Regulatory Reform Initiative is a positive and constructive path to
addressing systemic phytosanitary regulatory impediments in Japan.
Nevertheless, we will continue to monitor Japan's actions and take
appropriate and necessary steps to ensure Japan meets its international
obligations.
Question: Please provide an update on the status of specific
agriculture barriers in Japan including whether Japanese government
officials have provided U.S. officials with adequate scientific
information and risk assessments to justify the barriers as well as
whether the laws, regulations, and legal guidance on the standard and
the appropriate controls, if any, are available. In each instance that
the information has not been made available by the Japanese government,
what is the U.S. government's strategy for obtaining the information to
determine whether the standards and controls are appropriate and WTO
compatible? Please identify the timeline for actions needed by U.S. and
Japanese officials in this regard.
Answer: Clearly the most critical barrier that Japan maintains is
its import prohibition on U.S. beef. We have repeatedly and
consistently engaged Japan at all levels on this issue. This
Administration has transmitted a huge amount of scientific information
to the Japanese Government on the safety of U.S. beef. By any
reasonable measure, Japan has had ample time to reach a conclusion to
this issue. We will continue to press hard on Japan until it does the
right thing in line with science and fully reopens its market to U.S.
beef.
In addition to beef, as noted in the previous question, USTR and
USDA have been working with the Japanese Government to eliminate
unjustified phytosanitary restrictions by bringing Japan's
phytosanitary regime in line with international standards. Further,
USTR and USDA are working to resolve sanitary and phytosanitary issues
on U.S. cherries, chipping potatoes, and poultry. If USDA is unable to
resolve issues at a technical level, USTR can engage the Japanese
Government bilaterally and through the World Trade Organization, as
appropriate.
__________
Question Submitted by Chairman Thomas to Ms. A. Ellen Terpstra
Question: Thank you for testifying before the Committee on Ways and
Means during the September 28, 2005, hearing on U.S.-Japan Economic and
Trade Relations. In addition to your testimony before the Committee,
please submit written responses to the following questions:
1. The United States was ultimately successful in the World Trade
Organization apples case, but that case does not appear to have broader
application to sanitary and phytosanitary barriers on other products.
Is there a potential and appropriate broad-based WTO case that could be
brought against the Japanese for its sanitary and phytosanitary
barriers to trade, and what cases would have the broadest results in
opening the Japanese market for many U.S. goods?
2. Please provide an update on the status of specific agriculture
barriers in Japan including whether Japanese government officials have
provided U.S. officials with adequate scientific information and risk
assessments to justify the barriers as well as whether the laws,
regulations, and legal guidance on the standard and the appropriate
controls, if any, are available. In each instance that the information
has not been made available by the Japanese government, what is the
U.S. government's strategy for obtaining the information to determine
whether the standards and controls are appropriate and WTO compatible?
Please identify the timeline for actions needed by U.S. and Japanese
officials in this regard.
Answer:
Dear Mr. Chairman:
Thank you for your letter of October 4, 2005, regarding the
Committee hearing on U.S.-Japan Economic and Trade Relations of
September 28, 2005, and requesting additional information in connection
with my testimony.
As you know there have been some key developments since the hearing
was held. Most notable, of course, was the reopening of the Japanese
market to U.S. beef products on December 11, 2005. Resumption of beef
trade with Japan is, indeed good news for American producers and
Japanese consumers, and an important step toward normalized trade,
based on scientifically sound, internationally recognized standards.
While we are currently addressing issues of compliance with Japan's
import requirements, we believe that the measures Secretary Johanns
recently announced will prove satisfactory to the Japanese officials.
You asked if there was a broad-based World Trade Organization (WTO)
case that could be taken against the Japanese on sanitary and
phytosanitary (SPS) barriers to trade. We have successfully brought two
SPS cases against Japan in the plant health area. One involved Japan's
measures concerning codling moth and the other involved a pathogen
known as fireblight. In each case, the United States successfully
challenged scientifically unjustifiable measures that improperly
restricted market access for U.S. apples and certain other fruits. The
balance of rights and obligations under the SPS agreement is to permit
WTO members to adopt SPS measures necessary for the protection of
human, animal and plant life or health without unnecessarily
restricting trade with other members. Consequently, the SPS agreement
requires risk assessments associated with particular products coming
from particular countries and sufficient scientific evidence to support
the measures applied as a result of such risk assessments. Therefore,
the SPS agreement contemplates examination of individual measures as
applied to particular goods from members, among whom different risks to
the importing country may exist because of differing occurrences of
diseases, pests, and other health risks. Some of Japan's measures
applied with respect to U.S. goods or goods from other trading partners
may be scientifically justifiable. Others may not be. The United States
has been more aggressive with Japan than with any other country in the
WTO in terms of bringing two formal WTO disputes to challenge
scientifically unjustified SPS measures.
Regarding your request for an update on the status of specific
agriculture barriers, please see the enclosed list which provides
information on the status of key trade issues. In addition, we are
seeing progress in other areas. Japan publishes its quarantine taws,
maintains a website in English, and provides timely WTQ notifications
on a number of issues. We fully expect these practices to continue. We
also have an ongoing dialog with Japan on many levels, including
through the U.S. Embassy in Tokyo, which has been vital in our
information sharing and collecting.
Progress on all of these issues has also been advanced by the
timely intervention from many Members of Congress, including yourself
and other members of the Committee on Ways and Means. We must continue
to work together to resolve issues with Japan since it represents an
extremely important market for U.S. farmers and ranchers (at $8.14
billion, our number three market in calendar year 2004). We highly
value our commercial relationship with Japan and want it to contribute
to strengthening our overall bilateral relationship.
Thank you again for the opportunity to testify before the Committee
and respond to your follow-up questions related to that hearing.
Sincerely,
A. Ellen Terpstra
Administrator
Japan Key Trade Issues January 2006
------------------------------------------------------------------------
ISSUE STATUS NEXT STEPS
------------------------------------------------------------------------
Aflatoxin Currently, all U.S. USDA continues to
corn bound for work with Japan's
food processing in Ministry of
Japan are subject Health, Labor and
to ``test and Welfare (MHLW) to
hold'' inspections alleviate any
at import arrival delays and
because of a increased costs
single finding of due to Japan's
a U.S. corn sample requirements for
that had an aflatoxin
aflatoxin level inspection for
exceeding Japan's U.S. corn
established shipments.
maximum level.
Japan is our top
market for corn.
------------------------------------------------------------------------
Bt10 Syngenta's Bt10 USDA will continue
corn was released to work with grain
in limited traders and
quantities and was Japan's Ministry
not commercially of Agriculture,
approved at the Forestry and
time of its Fisheries (MAFF)
release. However, to ensure that
in March 2005, Japan's proposed
U.S. regulatory guidelines and
agencies procedures for
determined that Bt10 testing will
there were no not cause
food, feed, or unnecessary and
environmental costly trade
safety issues disruptions for
associated with corn shipments.
Bt10 and that Bt10
is legal to be in
food and feed in
the United States.
Currently, FDA is
responding to
Syngenta's formal
request for a food
safety
consultation of
Bt10.
------------------------------------------------------------------------
Cherries USDA is currently Studies will be
working with Japan conducted in
to develop a California
systems approach orchards in 2006.
alternative to
costly methyl
bromide fumigation
for U.S. cherries.
Japan is reviewing
data collected
from studies on
the presence of
codling moth in
Pacific Northwest
cherry orchards.
------------------------------------------------------------------------
Chipping potatoes Japan is in the Japan is expected
final stages of to open the marker
granting market for chipping
access for U.S. potatoes in early
chipping potatoes. 2006, pending
In July 2005, successful
Japanese officials revision to their
completed regulations and
inspections of visits to
U.S. potato supplying States
fields. The in the United
Japanese Ministry States.
of Agriculture,
Forestry and
Fisheries (MAFF)
is currently
soliciting public
comment on revised
regulations to
allow market
access for U.S.
chipping potatoes.
------------------------------------------------------------------------
New Maximum Residue Levels Japan is revising USDA's foreign
(MRL) system its MRL Agricultural
regulations to Service is working
improve its system with the U.S.
to limit the agricultural
distribution of industry, the U.S.
foods that contain Environmental
agricultural Protection Agency,
chemicals above and Japan's
established Ministry of
tolerances. In Health, Labor and
this action Japan Welfare (MHLW) to
is proposing to avoid proposed
adopt numerous new MRLs which could
MRLs involving create trade
over 700 disruptions.
pesticides,
veterinary drugs,
and feed additives.
------------------------------------------------------------------------
Heat-treated poultry Japan conducted USDA is working
inspections of a with Japan to
sampling of U.S. implement
poultry plants in protocols for heat-
March 2005. Japan treated poultry
provided an audit products to avoid
report of these trade disruptions
inspections, and caused by
USDA and the U.S. detections of
poultry industry avian influenza in
are currently the United States.
preparing for a When fully
follow-up audit. implemented, the
Most recently, protocols are
USDA and USTR expected to
officials, during eliminate avian
trade discussions influenza related
held in Seattle on trade disruptions
December 7, 2005, to U.S. heat-
raised this issue treated poultry
with senior product exports.
Japanese
officials, and
pressed for a
timely resolution.
------------------------------------------------------------------------
__________
Question Submitted by Chairman Thomas to Dr. Mustafa Mohatarem:
Question: Thank you for testifying before the Committee on Ways and
Means during the September 28, 2005, hearing on U.S.-Japan Economic and
Trade Relations. In addition to your testimony before the Committee,
please submit written responses to the following question:
Please outline in detail any specific legal or regulatory
requirements placed upon U.S. automobiles when sold in Japan that are
not in place for autos produced in Japan. Identify any known
justification by Japanese officials for these requirements and the
steps taken by U.S. auto firms to contest the requirements. In each
case explain the rationale as to why the requirement is not WTO
compatible and the evidence that might be used to support any U.S.
claim against Japan.
Answer:
Dear Chairman Thomas:
Thank you for giving me the opportunity to testify before the
Committee on Ways and Means on the challenges American auto
manufacturers face in competing with Japanese manufacturers-- in the
United States and around the world.
In your letter of October 4, 2005, you requested information on any
specific legal and regulatory requirements that impede the sale of
U.S.-made vehicles in Japan. As I noted in my testimony, American
automakers are unable to sell vehicles in substantial volume in the
Japanese market as a result of the persistent policy of the Japanese
government to intervene in currency markets to weaken the value of the
yen relative to the U.S. dollar. As a result, U.S. auto manufacturers
are relegated to the position of niche, low-volume players in Japan.
Our low volumes place us at a distinct disadvantage when complying with
local regulatory requirements as compared to Japanese manufacturers who
can spread the regulatory costs over a much higher volume.
The problem is that Japan has promulgated several safety and
emission regulations that are not harmonized with either the U.S. or
European regulatory systems. Examples include pedestrian head
protection, driver visibility requirements, an advanced OBD system,
enhanced emission standards for NOx and particulate matter, and a new
fuel economy standard. These and other regulations that are specific to
Japan are burdensome to importers because the costs that American
manufacturers incur to make the engineering and design changes
necessary to comply are prohibitive when sales volume per model are in
the hundreds of units. Not surprisingly, Japanese manufacturers are
able to spread these costs over a huge volume base in their home
market.
In short, a weak yen that is the direct result of currency
intervention by the Bank of Japan prevents us from profitably selling
high volumes of products in Japan. The low volumes, in turn, lead to
much higher per unit costs of complying with Japan's unique regulatory
standards. Thus, even though Japanese manufacturers must comply with
the same requirements, the compliance burden is much greater on
importers.
The key to opening the Japanese market for American products thus
lies in persuading the Japanese government to cease its policy of
currency manipulation. While elimination of regulatory burdens will
help, a market determined yen dollar exchange rate is essential to the
success of American auto manufacturers, in Japan and in the U.S.
Sincerely,
G. Mustafa Mohatarem
__________
Question Submitted by Representative Thompson to Ms. Wendy Cutler
Question: Wine
Japan is the second largest export market for American wine.
However, it has one of the higher tariffs for wine in Asia, with a
15.3% tariff rate for bottled wines. This tariff rate exceeds China's
tariff rate, which is 14%, or Taiwan's rate, which is 10%. How does a
developed country like Japan justify such a high rate, especially when
the purchasing power for the average Japanese is approximately 36 times
greater than that of the average Chinese?
Answer: Japan's agricultural tariffs generally are significantly
higher than other countries' tariffs. In fact, Japan's average
agricultural tariff is 51 percent, compared to the United States'
average agricultural tariff of 12 percent. During the Uruguay round of
negotiations, Japan did reduce its bound tariff on wine from 55 percent
to 15 percent. Significant improvement in market access for U.S. food
and agricultural exports is a top priority for the agriculture
negotiations in the WTO. In the Doha Development Agenda, the United
States is seeking a significant cut in Japan's food and agricultural
tariffs, including for exports of U.S. wine.
Question: Timber
In the 1990 U.S.-Japan Wood Products Agreement, Japan committed to
take the necessary steps to reduce overall tariff rates on wood
products. This doesn't appear to be the case, with Japan's tariff rates
on timber products as high as 10%. By contrast, both China and
Indonesia charge zero rate of duty on logs and lumber. What steps is
the USTR taking at the Doha round to get Japan on board in support of
U.S. trade liberalization objectives?
Answer: In the industrial goods market access negotiations in the
Doha round--where forest products are covered--the United States is
pressing for a robust tariff-cutting formula that reduces tariffs on a
line-by-line basis with no flexibility from application of this formula
for developed countries, including Japan.
Question: Medical Devices
In 2002, Japan implemented a new ``foreign reference pricing''
system for medical devices. The pricing system links prices in Japan to
those prevailing in the United States, France, Germany and the United
Kingdom. Is it appropriate for Japan to base prices for medical devices
on comparisons with overseas markets?
Answer: We continue to press Japan's Ministry of Health, Labor and
Welfare to implement reimbursement pricing policies that reward U.S.
companies for developing innovative, life-enhancing medical technology.
We will keep urging that Ministry to ensure its policies do not
unfairly discriminate against American medical devices and that
reimbursement levels are determined in a way that is transparent,
predictable, and fair. Over the years, we have had a long and
cooperative relationship with the U.S. medical device industry on
reimbursement pricing issues in Japan. We share U.S. industry's
concerns about the Foreign Average Price rule for medical devices and
we are prepared to ratchet up our approach to the Japanese Government
on this matter as necessary.
Question: Rice
In June, the Japanese government announced a new policy to sell
large stockpiles of imported rice at discounted prices for the
production of rice/flour premixes called ``cake mixes.'' Does this new
policy violate Japan's WTO obligation not to treat imported rice
differently than domestic rice? If so, shouldn't Japan offer the same
discounted price to all other end users, including retailers,
foodservice and other industrial buyers? What plans, if any, does the
Administration have for addressing this discriminatory policy and
preventing it from being implemented?
Answer: On June 29, 2005, Japan's Ministry of Agriculture,
Fisheries, and Forestry announced new guidelines for the sale of
imported rice from government held stocks. While we strongly support
the release of government held stocks of imported rice into commercial
markets in Japan, we are very concerned about the restrictions that
these new guidelines impose on these sales.
These guidelines establish complex rules that base the volume of
imported rice cake mix that each company is eligible to purchase on the
amount of imported rice cake mix it has historically imported. The
guidelines also create incentives for processors to reduce their
purchases of imported rice by linking increases in the quantity of
imported rice that processors are permitted to purchase from government
stocks to reductions in the quantity of imported rice cake mix.
Further, the guidelines impose penalties that reduce the amount of
imported rice stocks a processor may purchase if it fails to reduce its
imports of imported rice cake mix by the amount claimed.
USTR and USDA are currently evaluating whether the new guidelines
raise WTO concerns and are working closely with U.S. industry to
resolve this issue.
[Submissions for the record follow:]
Statement of The American Farm Bureau Federation
The American Farm Bureau Federation is pleased to submit for the
record our views on the economic effects of the closure of the Japanese
market to U.S.-produced beef.
The discovery of a BSE-infected cow in Washington state in December
2003 resulted in serious disruptions in beef and cattle trade between
the U.S. and other beef producing and consuming countries. Following
the identification of the BSE-infected animal, more than 60 countries
banned the importation of U.S. beef. Since that time, the U.S. has
resumed trade at levels that account for roughly one-third of the pre-
BSE volume. However, two of the traditionally largest export markets,
Japan and South Korea, still remain closed to U.S. beef. Losses to the
U.S. cattle and beef industry resulting from the discovery of BSE
conservatively total $4 billion.
In 2003, the U.S. exported 2.5 billion pounds of beef and beef
variety meats valued at $3.8 billion. Japan and South Korea alone
accounted for 1.2 billion pounds of beef and beef variety meats
totaling $2.2 billion in value. The domestic discovery of a BSE-
infected cow resulted in market closures and a reduction of U.S. beef
exports in 2004 to less than 500 million pounds. A primary consequence
of the reduced market access for U.S. beef is that other world beef
exporters were able to gain global market share that they will not
easily relinquish once the U.S. regains access to traditional trading
markets. Although the U.S. is slowly regaining access to previous
export markets, it will likely be several years before U.S. beef is
traded at volumes attained prior to the discovery of BSE.
More specific to the Japanese beef market, the U.S. and Japan
reached an agreement in October 2004 to facilitate the resumption of
U.S. beef exports to Japan. Japan's Food Safety Commission (FSC), which
makes the final determination on resuming imports of U.S. beef, has
been reviewing the safety of U.S. beef since the agreement was signed.
Despite aggressive negotiations on the part of the U.S. government and
extensive scientific information that has been provided by the U.S.
Department of Agriculture, academia and the beef industry, the time for
a final report from the FSC is uncertain. Without a decision from the
FSC, trade remains halted and the financial losses to U.S. beef
producers continue to mount.
The U.S. has provided all the data necessary to demonstrate that
U.S. beef can be safely imported and enjoyed by Japanese consumers.
Furthermore, we have advanced our part of the October 2004 agreement
which entailed amending our regulations to permit the limited import of
certain types of low-risk Japanese beef. Given the overwhelming amount
of scientific evidence that shows U.S. beef is safe and the efforts
that have been made to share that information with Japan, the American
Farm Bureau Federation strongly believes Japan should move as quickly
as possible to reopen their market to imports of U.S. beef. Thank you.
Statement of The Automotive Trade Policy Council
2005 is shaping up to be another strong year for auto sales in the
United States. Based on vehicle sales thus far, U.S. car and light
truck sales should reach just over 17 million units. Annual U.S. auto
sales have hovered at or exceeded 17 million units--a level that was
considered unattainable as recently as the l990s--for seven straight
years.
Given the strength of auto sales, one would think that U.S. auto
manufacturers, auto suppliers and their workers would be in a strong
economic position. However, this is not the case. Despite the strong
sales, U.S. auto manufacturers and suppliers are struggling to turn a
profit, autoworkers have been laid off, credit ratings for U.S. auto
companies have been downgraded and many suppliers are faced with
bankruptcy--including the largest auto supplier in the world, which
filed Chapter 11 last week.
While there are many reasons for the current challenges facing
American owned auto manufacturers, the long history of Japan's unfair
and mercantilist trade policies and the most recent impact of Japan's
currency manipulation stand out as among the primary causes. While the
world's acceptance of Japanese postwar export-based economic growth
model has been a long debate here in Congress and elsewhere, it is
frustrating, if almost unbelievable, to many of us in this business
that the Japanese government's extraordinary S400 billion currency
manipulation program has gone unquestioned and unchallenged--by the
press, academics, and to a large degree Congress and the
Administration--while China has become the sole focus of the attention
as the challenge to American competitiveness.
U.S.-Japan Automotive Trade
No industry exemplifies the imbalanced, mercantilist history of
Japan's postwar trade policy more than the automotive sector. Last
year, the U.S.-Japan bilateral automotive trade deficit reached $43.7
billion, making it the largest trade deficit in any sector the U.S.
maintains with any country in the world. In 2004, automotive trade
represented over two-thirds of the total U.S.-Japan deficit. And this
is not a new development: it has been the case for more than twenty
years, confirming the deep historical and structural nature of the
chronic trade imbalance.
A quick glance at the trade numbers confirms this unbalanced
pattern: in 2004, Japan exported to the U.S. over 1.7 million passenger
vehicles, as well as auto parts, worth a total of $46 billion. During
the same time, Japan imported just 15,000 passenger vehicles as well as
auto parts from the U.S., worth a total of $1.8 billion.
The market share of Japanese nameplate brands reached over 30% of
the total U.S. light vehicle market in 2004--including nearly 40% of
passenger cars. In contrast, sales of all foreign nameplates
(worldwide) in Japan reached only 4.5% of the total market or 272, 880
import sales.
Japan's motor vehicle manufacturing industry, led by Toyota, Honda
and Nissan, produced over 10 million vehicles in 2004. In the same
year, just about 6 million motor vehicles were sold in Japan. Buffeted
by a persistently stagnant economy, sales of domestically produced
passenger cars have basically been flat for a decade or more. Domestic
manufacturers dominate the market with Toyota, Honda, Nissan,
Mitsubishi, Mazda, Fuji Heavy, Suzuki, Daihatsu, and Isuzu accounting
for nearly 95% of Japan's market in 2004. U.S. nameplates continue to
represent less than three percent of Japan's total market.
The reality is that Japan has built and grown its economy based on
exports, and has fueled that export machine by restricting and
controlling its domestic market. It is a mercantilist model that others
have sought to follow, and it has succeeded in large part, at the
expense of its trade partners. A major factor in the past years that
has compounded and sustained this imbalanced trade relationship has
been the Japanese government's policy of maintaining an artificially
weak value of the yen against the dollar. This policy has been fueled
by massive interventions--over $400 billion--by the Japanese government
in currency markets since 2000 [see attachment 1]. This artificially
weak yen has provided a subsidy amounting to thousands of dollars per
vehicle for every car exported to the United States [see attachment 2].
It has given a significant competitive cost advantage to Japanese
vehicle makers, who have used this windfall to increase investments in
technology and plants worldwide, offer higher sales incentives, broaden
and deepen advertisement campaigns, and enhance research and
development.
In 1995, the U.S. and Japan signed a five-year agreement intended
to address the huge structural imbalance in our automotive trade by
improving the access of U.S. automakers to the Japan market. It was a
good agreement, and resulted in modest positive progress for U.S.
companies selling into the Japanese market. But in 2000 the Japanese
government engaged in a renewed policy of major currency manipulation
that negated or reversed much of those gains. At the same time, pushed
by a weakened yen which made its exports more cost competitive,
Japan's automotive imports to the U.S. renewed a substantial upward
trend, continuing to rise every year, while ATPC member companies'
combined market share in Japan remains below 3%, unchanged from the
l995 level.
Japan's history of discouraging direct foreign investment and the
close business relationships (keiretsu ties) between Japanese firms
traditionally made it difficult for outsiders to participate in the
market. This is now changing. In the last few years, foreign auto
companies have acquired controlling interest in a number of Japanese
auto companies. This change, however, is still too recent to determine
whether it will have a lasting effect on opening access to the Japanese
auto market.
Today's auto industry is a global one that is intensely
competitive. ATPC and its member companies believe that it is
critically important that the U.S. continue to press countries such as
Japan to eliminate artificial trade barriers, such as currency
manipulation, that provide them an unfair competitive advantage.
The Economic Impact of the U.S. Auto Industry
The U.S. automakers--DaimlerChrysler Corporation, Ford Motor
Company, and General Motors Corporation--are a critical component of
the manufacturing and industrial base of the United States. Our
companies have been instrumental in the growth and prosperity of the
American economy in the 20th century and continue to serve as an engine
of economic growth.
Our companies face unprecedented competitive challenges from auto
producers around the globe. We are meeting these challenges by
investing billions of dollars in the United States in new products,
facilities, advanced technologies, and education and training. The
following are highlights of the vital role DaimlerChrysler, Ford, and
General Motors play in our economy, our communities, and the major
challenges we face.
The auto industry is essential to the health of the American
economy, accounting for 4% of U.S. GDP and 11% of manufacturing
shipments. DaimlerChrysler, Ford, and General Motors comprise the
majority of that contribution. They:
Manufacture 74% of all the cars and trucks made in
America
Employ nearly 400,000 workers across the United States
Have 176 major automotive facilities in 34 states
Purchase 80% of all U.S. auto parts--totaling $155
billion
Are among the largest purchasers of U.S. semiconductors
and electronics, rubber, aluminum, iron, and steel
Invested over $176 billion in the U.S. auto industry
since 1980--85% of the total investment made by all automakers
Spend over $16 billion annually on research and
development--significantly more than any other industry sector
Provide health care benefits to over 2 million U.S.
employees, retirees, and their families at an annual cost of $9.3
billion (2004)
Pay over $11 billion in pension payments each year to
over 800,000 retirees and surviving spouses, providing economic
stimulus in every state in the United States
Specific Areas of Concern
Traffic: Japan has a 0% tariff rate on motor vehicles. The fact that
Japan maintains a 0% motor vehicle tariff, yet is among the
most difficult and unwelcoming markets in the industrialized
world for imports is the classic example of how powerful non-
tariff barriers can be in severely limiting trade.
Financial Services: Credit companies cannot act as
insurance agents in offering credit products that incorporate insurance
features. The credit industry continues to be subject to
``administrative (METI) guidance'' rather than specific, well-
documented and transparent rules and regulations.
Standards: In the 2003 Annual Trade Report, USTR states
``Further opening of the Japanese auto and auto parts markets remains
an important objective of the United States. Access to Japan's
automotive market continues to be impeded by a variety of overly
restrictive regulations, a lack of transparency in rule making, and
lackluster enforcement of antitrust laws. While there has been a trend
toward closer integration and important technological advancements in
the global automotive industry over the past several years, the effect
these changes will have on market access and competition in this sector
remain unclear.''
Japan has made attempts to improve the transparency of its
standards regime over the years, however some serious problems still
remain. Certification of import autos remains costly & difficult. Two
systems are allowed, with limited vehicles (PHP type) and expensive and
extensive testing required (TDS type). In both cases, imports need to
meet unique standards. This means that imported vehicles must undergo
expensive modification to meet unique standards; limited imports under
PHP prevent free importation of vehicles; long delay in approval
process for TDS type inspections. Also, unique homologation
requirements are discriminatory to imported vehicles. Currently, for
example, three areas are of concern in ongoing standards issues
impacting U.S. imports including: driver visibility, pedestrian
protection, and VIN stamping.
Trade-Distorting Taxes: A tax system with a number of
different automobile-related taxes, including a consumption tax, an
annual engine-displacement based tax that ranges from 7,200 to 111,000
yen, and an acquisition tax of 3% to 5% based on vehicle size and use,
which has the cumulative effect of impacting imported motor vehicles
more than domestic vehicles, unfairly discriminating in final sale
prices.
Structurally Closed Market: The results of this unusually
imbalanced trade model are seen most clearly in the Japan experience.
Japan's pursuit of aggressive worldwide market expansion for its auto
exports from a protected domestic automotive market base has resulted
in the most vivid example in the WTO history of severe distortion of
the principles and expectations of the founding Charter of the General
Agreement on Tariffs and Trade.
Currency Manipulation
Currency manipulation is a policy used by the governments and
central banks of some of America's largest trading partners to
artificially set the value of their currency to gain an unfair
competitive advantage for their exports. The IMF defines currency
manipulation as ``protracted large-scale intervention in one direction
in the exchange market.'' Japan's interventions in currency markets--
over 150 times in five years in the amount of $400 billion--without
question meets that definition. Countries that manipulate their
currencies effectively protect jobs in their home country at the
expense of jobs and economic growth in their trading partners' markets.
Japan, in particular, has been using currency manipulation to avoid
making much-needed domestic economic reforms.
In effect, Japan's weak yen policy has given its exporters a huge
subsidy and competitive advantage in the U.S. market, causing
significant harm to U.S. manufacturers. One clear sign that a country
is manipulating its currency is a substantial increase in its foreign
currency reserves, which occurs as it buys and holds dollars. Japan has
seen a massive increase in its foreign currency reserves since 2001--in
fact, Japan holds more forex reserves than any other nation, including
China--growing from $344.8 billion in July 2000 to $840 billion in July
2005 [see attachment 3].
In a January 2005 Working Paper, the U.S. Federal Reserve reported
that ``Since the early 1990s, the monetary authorities of the major
industrialized countries, with one notable exception, have greatly
curtailed their foreign-exchange interventions. That exception has been
Japan, where the Ministry of Finance has continued to intervene
frequently--and at times massively--in foreign exchange markets.''
There are differences in how countries manipulate their currency to
gain unfair trade advantages for their export industries. The intent,
however, is always the same--to artificially weaken their currency to
provide their industries with a cost advantage. Japan has regularly and
actively intervened in global exchange markets, purchasing massive
amounts of dollars in order to ``push down'' the value of their own
currency to give their exports a price advantage. Japan also
manipulates its currency by less transparent actions, such as
encouraging domestic pension funds and large corporations to sell yen
and buy dollars at strategic times. Since 2000, Japan has intervened
over 150 times in global currency markets, spending over $400 billion
in the process. In 2004, Japan spent over $139 billion, all in the
first quarter.
As a result of Japan's massive and disruptive currency
interventions, the value of the yen fell from 101 yen/dollar in January
2000 to 136 yen/dollar in 2002. Market forces, helped by Bush
Administration officials' statements, have pushed the yen to slightly
more reasonable levels of 105 yen/dollar in early 2005 [see attachment
4]. However, due in part to ongoing ``jawboning'' and verbal
intervention by high-ranking Japanese officials, the yen is currently
in the 111 yen/dollar range. The damage caused to key sectors of the
U.S. economy have been deep and in many cases permanent.
Japan's artificially weak currency provides a significant per-
vehicle cost advantage that amounts to an outright subsidy of thousands
of dollars for every car exported to the United States. Cars produced
here also benefit heavily from this subsidy because of their high use
of imported parts and components. Japanese automakers have used this
cost advantage to:
Minimize price increases on new models and in some cases
reduce prices on new models;
Dramatically increase spending on advertising;
Offset tariffs, taxes and other fees;Increase incentives
to boost market share; and
Enhance spending on research and development.
For those who may question whether exchange rate policies of our
trading partners are important factors affecting U.S. competitiveness,
half-year earnings statements just released by Japan's automakers this
month answer that conclusively. Toyota, Nissan, Honda, Subaru, and
others announced last week that they earned nearly $1 billion in
windfall profits in the first half of their fiscal year due to the
artificial weakness of the yen.
Most Japanese automakers set a projected exchange rate of 105 yen/
dollar as their benchmark at the beginning of the 2005 fiscal year.
But, because Japanese government policies resulted in a yen/dollar
exchange rate much weaker than that, Japanese automakers' total profits
increased by 112 billion yen--over $1 billion--above what they
projected. Much of that increase came as a result of sales in the
United States. According to the Nikkei news service, the breakdown of
these additional weak currency-driven profits include 50 billion yen/
$452 million for Toyota, 28 billion yen/$253 million for Nissan, and
14.2 billion yen/$127 million for Honda.
With no sign that the government will change its exchange rate
policy to allow the yen to rise to its true market level (90 to 100 yen
per dollar is the commonly accepted range), the full-year windfall
could be a check for $2 billion to Japan's automakers.
There are several international agreements that preclude or limit
the use of currency intervention for trade-distorted purposes. These
agreements seem to put Japan's actions on currency intervention on the
level of a NTB. Of particular interest are the rules governing the IMF
and the original GATT. Section IV of the IMF charter states without
reservation, that ``members should avoid manipulating exchange rates in
order to gain an unfair competitive advantage over other members'' and
defines such manipulation as ``protracted, large-scale movement in one
direction in exchange market.''
Perhaps more relevant, GATT Article XV (Exchange Arrangements)
states that contracting parties shall not, by exchange action,
frustrate the intent of the Agreement not by trade action, the intent
of the provisions of the Articles of Agreement of the IMF. The intent
of the Agreement, as stated in the preamble, is the objective of
``entering into reciprocal and mutually advantageous arrangements
directed to the substantial reduction of tariffs and other barriers to
trade.''
Japan is clearly violating GATT Article XV by manipulating its
currency to keep it artificially weak. Japan is in effect providing a
substantial subsidy to its exporting. These practices are clearly
inconsistent, and likely violate both the IMF and the GATT Agreements,
cause major distortions to international trade and should validly be
questioned and challenged as part of an Automotive NTB Vertical
Initiative in the NAMA as the largest single non-tariff barrier that
Japan maintains with the U.S. in automotive trade. (Also GATT XXVI >
Nullification and Impairment).
Conclusion
Automotive trade between the United States and Japan has been
chronically and structurally unbalanced for decades. Over the past
twenty years, automotive trade has represented 66% of our total deficit
with Japan. Contrary to claims that the opening of Japanese auto plants
in the U.S. would cause Japanese auto exports to decline, Japan's
automakers have sharply increased their exports to the United States.
Over the last five years, subsidized by an artificially weak yen funded
by $450 billion in Japanese government currency interventions, Japan's
automakers have exported an annual average of 1.8 million cars and
trucks into the United States, 13% higher than the average from 1996-
2000. Japan's auto trade with the U.S. is a one-way street that, if
left unchecked, will continue to see our largest single-sector trade
deficit grow even more imbalanced. Japan's government needs to take the
steps necessary--steps it pledged originally in the 1995 Auto Agreement
but which have never been truly tested in a market environment due to
the widespread use of currency manipulation--to reduce friction in
automotive trade.
__________
1) Japan's Currency Manipulations Have Been Massive
[GRAPHIC] [TIFF OMITTED] T6370A.002
Source: Bank of Japan
__________
2) The Weak Yen Provides Japanese Automakers With a Significant
Cost Advantages in the U.S. Market
[GRAPHIC] [TIFF OMITTED] T6370A.001
Source: ATPC Member analysis
Statement of Joseph Damond, PhRMA
Recognizing the Value of Pharmaceutical Innovation: Putting Patients
First
Mr. Chairman, Members of the Committee, Ladies and Gentlemen:
On behalf of PhRMA, I want to express our appreciation for the
opportunity to present written testimony to the Committee. PhRMA
represents America's leading life sciences companies. Our business is
pioneering new ways to save lives, cure disease, and promote a
healthier aging process. We are businesses, but our broader mission is
to enable patients around the world to live longer, healthier, and more
productive lives. In 2005, America's pharmaceutical and biotechnology
companies will invest over $38.5 billion in advanced scientific
research to develop new medicines. The fruits of our efforts are new
and more effective innovative medical treatments for use around the
world, bringing life, cures, and hope to patients and their families
where currently there is none.
Japan is the world's second-largest pharmaceutical market.
America's pharmaceutical companies have been doing business in Japan
for decades. On an annual basis, sales of U.S. medicines currently
total about $14 billion, and represent about 25 % of the Japanese
market. We are proud of our leadership in supplying Japanese patients
with breakthrough medicines.
Japan's health care system has long been admired for its
achievements in delivering universal access to quality health care
services at a reasonable cost. However, more than any other
industrialized nation, Japan now faces a difficult demographic and
economic challenge as it rapidly transitions to an ``aging'' society.
Bridging this transition--while continuing to provide Japanese patients
with quality health care and access to the latest medical discoveries--
will require changes in the way that health care services are financed
and delivered.
PhRMA has been pleased to work with the Japanese Government and the
Ministry of Health Labor and Welfare (MHLW) to explore constructive
ways to support life sciences discovery and expand access to innovative
medicines. Our paper--Putting Patients First: A Program for 21st
Century Health Care Reform in Japan--represented a comprehensive effort
to show that competition and choice are fully compatible with the NHI
system's core principles of equity and universality. Working within the
NHI system, PhRMA sought to show that a virtuous cycle of reform--one
that links private sector incentives to advance medical progress with
regulatory efficiencies in the delivery and financing of essential
health care services--is in the interests of Japan as a nation and
Japanese patients, who like patients everywhere want access to the
latest advances in medical science. We welcome many of the MHLW's
policy proposals in its bold 2002 Vision: ``Towards Reinforcing the
Global Competitiveness of the Pharmaceutical Industry, Mainstay of the
`Century of Life.'''
Over the past four years, PhRMA has been privileged to work with
the Commerce Department and the Office of the U.S. Trade Representative
on the Bush Administration's Regulatory Reform and Competition
Initiative. This initiative, which was launched by President Bush and
Prime Minister Koizumi in 2001, built on the Clinton Administration's
Enhanced De-Regulation Initiative and the Reagan Administration's
Market-Oriented Sector Specific Initiatives. It seeks to promote
economic growth and open markets to American products by focusing on
sectoral and cross-sectoral regulatory barriers. Our industry views the
1998 Birmingham Agreement as a major breakthrough. In the Birmingham
Agreement, Japan committed to ``recognize the value of innovation of
pharmaceuticals and medical devices, so as not to impede the
introduction of innovative products which bring more effective and more
cost-effective treatments to patients. It committed to ensure
transparency in the consideration of health care policies'' and to
allow foreign pharmaceutical manufacturers ``meaningful opportunities
to state their views in the relevant Councils . . .''
The Birmingham Agreement has transformed our industry's
relationship with MHLW. Japan's commitment to improved transparency has
proven invaluable, as it has allowed PhRMA companies to participate
directly in MHLW's biennial price revision process and in the
consideration by the Ministry of potential changes to the NHI drug
pricing rules. In 1999, the Ministry created a new MHLW Study Group to
facilitate more effective consultation with PhRMA, the Japanese
Federation of Pharmaceutical Manufacturers (FPMAJ), and the European
Federation of Pharmaceutical Industry Associations (EFPIA) prior to
meetings of the Ministry's chief advisory council--the Chuikyo. Such
transparency would have been unthinkable a decade ago when we were
often on the outside looking in, when key rule and policy changes were
discussed behind closed doors with Japanese stakeholders. We believe
MHLW has taken its transparency commitments seriously. For its part,
PhRMA has worked hard to come forward with thoughtful, constructive
policy proposals, as in ``Putting Patients First.'' We believe the
Ministry appreciates its dialogue with U.S. industry, and sees us as a
source of constructive advice on ways to promote life sciences
innovation and modernize Japan's new drug approval process.
Japan's commitment in the Birmingham Agreement to recognize the
value of pharmaceutical innovation has been useful, although so far
there has been only limited progress on this score. We continue to be
deeply concerned that the NHI reimbursement system is contributing to a
downward spiral in Japanese pharmaceutical prices, because the prices
of new drugs are based on the devalued prices of much older comparator
products. Japan's low prices have contributed to a steep decline in
Japanese competitiveness in the life sciences and an increasing drug
lag. Recent studies confirm that many of the world's leading medicines
still are not available to Japanese patients. The decline in Japan's
life sciences sector, moreover, is accelerating. Many of Japan's
leading pharmaceutical companies are now shifting their most advanced
biomedical research and development to U.S. laboratories and
introducing their best and most innovative drug discoveries in the U.S.
market before bringing them to Japan.
Above all, I want to express PhRMA's appreciation to our U.S.
negotiating team --the Department of Commerce, Office of the U.S. Trade
Representative, State Department, and U.S. Embassy in Tokyo. Our
negotiators secured the Birmingham commitments for our industry.
However difficult the situation in Japan, we know it would be a lot
worse if they had not negotiated forcefully on our behalf and worked
tirelessly to hold Japan to its commitments on transparency and
recognition of the value of innovation.
We are deeply concerned about certain near-term and long-term
developments in Japan.
Near-Term Developments
In the near-term, policy proposals from MHLW threaten to roll-back
some of the gains achieved through the bilateral dialogue. Of
particular concern in the near-term are: (1) calls to abolish, reduce
or restrict the application of the Foreign Price Adjustment for
Pharmaceuticals (FPA-P); (2) suggestions that downward pharmaceutical
price revisions be conducted annually--a major change from current
biennial price reviews; and (3) increasing regulatory delays at the
Pharmaceuticals and Medical Devices Agency (PMDA).Foreign Price
Adjustment
The proposed changes to the FPA-P would accelerate the downward
spiral in Japanese prices for leading innovative medicines. While PhRMA
does not support foreign reference pricing as a general principle, the
peculiarities and distortions of Japan's NHI pricing system mean that
the FPA-P has become an important corrective mechanism for ensuring
that Japanese prices are at least somewhat aligned with prices in the
U.S. and Europe. If FPA-P is to be revised, it should only be in the
context of overall reforms to the NHI system which address other
underlying distortions, e.g. the practice of basing the prices of
innovative new drugs on older, and less effective ``comparators'' that
do not reflect the latest advances in biomedical science.
The proposed changes to the FPA-P would further erode Japan's
recognition of the value of life sciences innovation and worsen the
drug lag. If the rule is altered or eliminated, the Japanese
pharmaceutical market is likely to become even more isolated and
anachronistic, as NHI reimbursement prices grow increasingly out of
line with those in other advanced industrial economies, i.e. the United
States, Germany, France, and the U.K. Ultimately, the proposed changes
to the FPA-P would hurt Japanese patients, who would experience even
longer delays in access to advanced medicines.
Annual Price Revisions
Currently, NHI price revisions are instituted every two years based
on a survey of drug prices. We understand that MHLW is considering
changing from a biennial to an annual process. Again, while there may
be legitimate reasons for the price revision process, such a change to
annual revisions should only take place as part of a comprehensive
reform of the current NHI pricing system, which addresses a host of
rules and practices, such as the comparator system and various
repricing rules, e.g. market expansion, that artificially depress the
prices of breakthrough U.S. medicines. Otherwise, changing to an annual
price revision process will only accelerate the downward spiral in
Japanese new drug prices, and worsen the current delays in bringing the
most innovative global medicines to Japanese patients.
Regulatory--PMDA
In the Birmingham Agreement, Japan committed to ``[s]horten the
approval processing period for new drug applications to 12 months by
April 2000, with steady and continuous improvement between now and
then, and to further speed the introduction of innovative new
pharmaceuticals, significantly shorten approval times, particularly for
priority drugs.'' In addition, Japan committed to ``[e]xpand acceptance
of foreign clinical test data for pharmaceuticals.'' Since 1998, PhRMA
has worked closely with MHLW on the establishment of a new and
independent regulatory agency--the PMDA--modelled on the U.S. Food and
Drug Agency and the European Medicines Evaluation Agency (EMEA. As part
of this process, we worked closely with MHLW on a new system of user
fees and benchmarks for speeding up the traditionally slow and
cumbersome Japanese new drug evaluation process to the time frames
achieved by FDA and EMEA.
While we welcomed the creation of the PMDA, we are deeply concerned
by the increasing delays in the new drug approval process; and
increasing indications that the agency is experiencing serious
difficulties in assembling the trained personnel, expertise, and
resources to carry out its mission. Such delays carry a serious human
cost. America's biopharmaceutical companies are leaders in developing
innovative treatments for crippling and life-threatening diseases. With
each new breakthrough medicine we produce, we offer new hope to
countless people. However, such advances cannot help patients if they
remain tied up in endless and regulatory processes. We are also
concerned by the increasingly dire shortage of Japanese capacity for
advanced clinical trials. Absent such capacity, it is vital the MHLW
further expand the acceptance of foreign clinical data. In short, we
urge an intensive effort by MHLW and PMDA to address the growing delays
in the new drug approval process.
Long-term Developments: Comprehensive Health Care Reform
We understand that the Prime Minister has directed the Council on
Economic and Fiscal Policy (CEFP) to begin developing proposals to
reform Japan's social security and health care systems. Mr. Chairman,
as the Ways and Means Committee knows, it is exceedingly difficult to
successfully foster far-reaching reform legislation. We applaud the
Prime Minister Koizumi's bold leadership in seeking to grapple
decisively with the long-term challenges facing Japanese society. The
task, though difficult, offers great potential benefits for Japan's
economy and for U.S. health care companies.
However, we need your immediate help to ensure that the U.S.
industry is brought into the CEFP's process of developing health care
reform proposals in a meaningful and timely way. Specifically, in the
Birmingham Agreement, Japan committed to provide meaningful
opportunities for U.S. companies to state their concerns in the
``relevant Councils'' on an equal basis with Japanese stakeholders. The
GOJ's broad Birmingham commitment clearly covers the CEFP.
Accordingly, we seek your support in urging GOJ to bring us into
the CEFP process, so that we have a meaningful opportunity to share our
ideas and views, consistent with the Birmingham Agreement. For our
part, we pledge to approach our dialogue with the CEFP in a
constructive and positive spirit, and to bring our best ideas,
information, and experts to the table. We have much to contribute to
the upcoming dialogue over reforming Japan's health care system, and
are important stakeholders in the outcome. As always, our objective
will be to ensure that Japanese patients continue to benefit from
improved access to the latest advances in medical treatment and to
life-saving cures for disease and disability.
Conclusion
Mr. Chairman, we applaud the Committee's leadership in scheduling
this hearing. U.S.-Japan trade relations have changed dramatically in
the past decade. Much progress has been achieved. Many challenges
remain. We look forward to working with the Committee to continue to
improve recognition of the value of pharmaceutical innovation in Japan;
to ensure the continued transparency of Japan's pricing and health care
policy processes; to speed the approval of innovative new medicines;
and to lock in the benefits of the Birmingham Agreement for Japanese
patients and global life sciences innovation. Thank you.
Statement of Todd Gillenwater, California Healthcare Institute, La
Jolla, California
The California Healthcare Institute (CHI) appreciates the
opportunity to present its views for this important hearing.
CHI represents more than 250 of California's leading biotechnology,
pharmaceutical, and medical device companies as well as our state's
premier academic and non-profit research institutions. California
medical device and diagnostics companies lead the world in life
sciences R&D, accounting for nearly one-third of all medical technology
innovators in the United States. Medical device and diagnostics firms
in the state employ over 75,000 workers, account for over $4.5 billion
in exports, and, in 2003, received nearly 20 percent of the total life
sciences venture capital dollars invested in the U.S.
The research these firms conduct holds tremendous promise for
patients and their families. Already, advanced technologies such as
replacement heart valves, implantable defibrillators, and coronary
stents have helped reduce deaths from heart disease and stroke by more
than half over the past 30 years. Medical technology products also
contribute to our nation's economic health, increasing productivity by
allowing workers to recover from illness faster, remain longer in the
workforce, and thrive without expensive long-term care.
Important as these contributions have been, experience elsewhere is
that patient access to critical medical technology advances can be
hindered by onerous government policies.
This is increasingly the situation in Japan.
Experiences and Challenges in Japan
Japan's system for approving new medical technologies is the
slowest and most costly in the industrialized world. During the past
decade, the Japanese regulatory process has grown progressively more
complicated and burdensome. At the same time, Japan has significantly
cut payments for medical technologies. The effect of lower margins has
been to reduce the capital available for research and the development
of new and innovative products.
Even after creating a new agency last year to process applications
for medical technology products, Japan had a backlog in February of
over 491 applications filed before April 2004. When new applications
are included, the backlog is reportedly much longer. Due to the long
approval process, the medical technologies Japanese patients receive
may be generations behind state-of-the-art products in the U.S.,
Europe, and even in developing countries like China, India and
Thailand. Prolonged regulatory processes translate to higher costs for
the U.S. medical technology industry, which must maintain out-of-date
product lines for Japan.
Likewise, Japan's revised Pharmaceuticals Affair Law (PAL), which
covers medical technology products and went into effect on April 1,
2005, has caused difficulties for medical technology companies. While
larger firms may be able to absorb higher costs associated with
compliance, some smaller firms, with limited resources, have indicated
they may have to exit the Japanese market altogether because of PAL
requirements.
At the same time industry is facing these burdensome and costly
regulations, Japan's Ministry of Health, Labor and Welfare (MHLW) is
threatening severe reimbursement rate cuts.
Before 2002, Japan adjusted prices according to a process it called
``reasonable-zone'' or ``R-zone.'' In brief, MHLW surveys hospitals for
prices paid to distributors, and allows for a reasonable margin (or
``zone'') for discounts from the government's reimbursement rate. While
there are some difficulties with this system--as identified in
bilateral Market-Oriented, Sector Specific (MOSS) negotiations between
the U.S. and Japanese governments--industry has recognized that it has
been based on factors within the Japanese market.
In 2002, however, Japan adopted a system of Foreign Average Pricing
(FAP). This system calls for the establishment and revision of
reimbursement rates on the basis of prices paid for medical technology
products in the U.S., France, Germany, and the United Kingdom (U.K).
The result is that prices of medical technology products in Japan are
designed to be based not on that market's requirements, but on
completely unrelated conditions in foreign markets.
As a methodology for setting reimbursement rates, it is
economically unsound to compare prices in foreign markets that operate
under vastly different conditions. For instance, Japan's regulatory
system is far costlier to comply with than European or U.S.
regulations. In addition, the overall cost of doing business in Japan
is far higher than in most of the developed world.
Furthermore, comparing prices within national markets--let alone
across international boundaries--is difficult. Medical technology
companies sell products under a variety of terms and conditions. In the
U.S., firms can often offer lower prices to buyers willing to commit to
larger volumes for longer periods of time, but Japan does not have such
buyers and offers minimal channels for efficient selling and
distribution of medical technologies. Additionally, Japan's FAP system
is an attempt to compare prices for products that are not the same in
Japan as they are in other countries. As noted above, due to Japan's
regulatory delays, U.S. manufacturers must incur the cost of
maintaining older or outmoded production lines for sale in Japan alone.
Conclusion
Together, reimbursement reductions and regulatory hurdles in Japan
have had a damaging effect on the ability of California's medical
technology industry to expand further in that important market. In
fact, since Japan introduced its FAP system in 2002, total U.S. medical
technology exports have stagnated. Meanwhile, Japan's exports of
medical technology products in 2004 rose by 10 percent, contributing
modestly to Japan's burgeoning total trade surplus with the U.S. of $75
billion--an increase of 14 percent last year.
Congressional and Administration attention and involvement, as
exemplified by this hearing, is critical to maintaining and expanding
access for the U.S. medical device and diagnostics industry to the
Japanese market.
CHI again appreciates the importance of these proceedings and
thanks the Chairman and the other members of the Committee for
providing the opportunity to submit the views of the California medical
technology industry in the context of a hearing on overall U.S.-Japan
trade relations.
Statement of International Roundtable for Trade and Competition Policy,
Inc., Miami, Florida
Developing Competition in the Japanese Postal System
We are pleased that the House Ways and Means committee is looking
at the issue of Japan's economy in general, and in particular at the
issue of postal privatization. The International Roundtable for Trade
and Competition Policy, Inc a 501(c)(6) organization is a privately
funded non-government organization (the ``Roundtable'') that looks
particularly at the link between internal market and regulatory issues
and their impact on international trade and economic development. The
Roundtable looks at these issues across all markets, but has a strong
focus on markets that are in the process of undergoing privatization or
market liberalization.
We are firm advocates of pro-competitive privatization and
liberalization processes. We see great opportunities for the Japanese
postal privatization in this regard. We believe that if the postal
liberalization truly unleashes the forces of competition, this could
lead to greater efficiency in the postal system in Japan, and also more
opportunities for new entrants in this and related sectors, wherever
they are from. The results have the promise to be good for Japanese
consumers as well as competitive companies. However, if the
liberalization does not succeed in unleashing pro-competitive forces,
then it poses the danger of merely converting public monopoly with
regulation to private monopoly without regulation. This would have a
negative impact on competition, and on consumers. The decision to
privatize, alone, does not guarantee competitive markets. The end
result depends on the quality and design of the regulatory framework.
Postal Privatization
Perhaps the most important argument in favor of postal
privatization is often lost when the issue is discussed, and critically
when the regulatory framework is decided upon and implemented. While
the argument that the postal company will become more efficient, with
resulting benefits for investors is often raised, the impact on
consumers of privatization is often ignored. This is a pity as the
benefits to consumers are the most valuable benefits for society as a
whole provided that the privatization is accompanied by competition as
well as liberalization.
The benefits of privatization are that public sector postal
monopolies tend not to be as efficient as private entities. It is to be
hoped that privatization will lead to more efficiencies, because
managers will be able to keep costs down and quality up. Managers will
be able to ensure workers maximize output and minimize waste. These are
things that are not easily done in a public sector context. But these
greater efficiencies do not just arise because of the fact of
privatization. They arise because of the restraints that competition
imposes on managers to discipline and also get the most out of their
workforce. Postal prices have generally risen in countries where the
postal service is a government owned monopoly. This is in contrast to
other sectors where prices in communications and transportation have
fallen.
Key Areas That Need to be Addressed
There are a number of key areas that need to be addressed. These
can be regarded as benchmarks to assess whether the regulatory design
is indeed pro-competitive or not. We will examine these in turn.
Reserved Sector
While the postal law covers the fact of privatization, there will
be implementing regulations under the postal privatization that will
address more specific aspects of the privatization. A key area here is
how the reserved sector will be treated. Too large a reservation could
have a very negative impact on competition in the market. Typically
postal companies reserve as part of their postal monopoly all goods up
to a certain weight limit. This weight limit varies considerably around
the world (among postal agencies). Recent European directives set the
reservation at 100g, declining to 30g over time. Clearly a reservation
that is significantly more than this could have adverse competitive
impacts.
There is a market impact of such reservations. These reservations
can lead to the following anti-competitive effects:
1. Where there is competition between the postal company and other
providers of non-postal services. The reservation prevents the non-
postal service providers from functioning in the market at all.
2. The fact that there is a reservation enables the postal company
to lower its costs in the non-reserved sector. This can distort the
market for provision of services in the non-reserved sector.
As a result, we believe that the appropriate weight limit for the
reserved sector should be a maximum of 100g progressively reduced over
time.
It should be the goal of the reservation not to lead to potential
anti-competitive harms in sectors that can be impacted by the postal
sector, but are not postal in and of themselves. The larger the
reservation, the greater the pool funds that could be available to the
Post Office to anti-competitively cross-subsidize in certain areas
outside of the postal sector. Given the development of the internet,
and other methods of information delivery (see post), Post Offices are
feeling more and more pressure to diversify into other businesses.
Nothing should prevent them from doing so. However, they should not be
given governmental aids or benefits to succeed.
Quality and Access Issues
Universal Service Issues
Japanese Cabinet Decision on Basic Policy on Postal Privatization
(Sept 10, 2004) (the ``Cabinet Decision'') states that ``Preferential
measures shall be established if necessary to maintain universal
service''. While universal service is a laudable goal, this statement
presents a number of problems as our studies of the universal service
obligation (``USO'') in a number of different areas demonstrates. These
studies show that the universal service commitment may actually lead to
cost advantages for the incumbent that is subject to the USO. This is
because the universal USO means that the Post Office has a built-in
infrastructure that can be used to lower costs for the provision of
certain services outside the reserved sector. For example, the Post
Office can use its infrastructure to lower the costs associated with
sending packages through express mail, if it has an express mail arm.
Instead of having to pay costs of C for utilization of infrastructure
which the private competitor must build out, the Postal Company must
pay only C-X (the cost of elements that are needed but have already
been built out under the USO). This reduction of costs means that the
Postal Company is at a cost advantage over the private competitor. The
USO therefore becomes more like a State Aid to use the language of
European competition law. Applying the concepts that are applicable
under European State Aid law, the USO becomes a governmental benefit
that alters the cost base of the postal company.
European State Aids Law and Its Application
Neither Japan nor the United States has a set of disciplines like
European state aids law. However, analysis of how these rules are
applied and the jurisprudence that has developed under them prove
instructive in understanding how a regulatory system could be crafted
in Japan to avoid potential anti-competitive harms. We therefore look
at European rules and their interpretation to assist us in ensuring
that the laws and regulations are properly crafted to move the Japanese
postal economy to a more competitive one.
Under European terms, the aid is an ``economic advantage which it
would not have obtained under normal market conditions.'' Under
European law there is an exemption for services of general economic
interest. However, European courts have interpreted how the state aids
rules apply in Altmark Trans GmbH and Regierungsprasidium Magdeburg v
Nahverkehrsgesellschaft Altmark GmbH [2003] ECR I-nyr. In the case, the
court ruled that in order for a benefit to be classifiable as a state
aid, it must be capable of being regarded as an ``advantage'' conferred
on the recipient undertaking which that undertaking would not have
obtained under normal market conditions. Four conditions (the so-called
Altmark conditions) would have to apply in order for a state financial
measure to escape classification as a state aid if it is for services
to a recipient to discharge public service obligations. First, the
recipient undertaking must actually have public service obligations to
discharge and those obligations must be clearly defined. Second, the
parameters on the basis of which compensation is calculated must be
established in advance in an objective and transparent manner. Third
the compensation cannot exceed what is necessary to cover all or part
of the costs incurred in the discharge of the public service
obligation, taking into account the relevant receipts and a reasonable
profit. Fourth, where the undertaking is not chosen in a public
procurement, the level of compensation must be determined by a
comparison with an analysis of the costs which a typical transport
undertaking would incur (taking into account the receipts and a
reasonable profit from discharging the obligations).
In other words any USO that exceeds this level would be a state aid
under the Altmark test. This would mean that any USO Fund which is
based on a tax that competitors of the postal company would pay would
almost automatically violate the Altmark principles because a fixed tax
rate would be contingent on the variable of the revenues of the
companies from which it is accrued, and that would have nothing to do
with the actual cost of providing the universal service. We understand
in Japan the proceeds of privatization will be used to set up a
Universal Service Fund. While this is a marginally better situation
than taxing potential competitors, it could still have market
distorting consequences unless it is carefully and rigidly accounted
for. The precise amount must also be calibrated to the actual level of
USO, so that it cannot be used for other purposes.
The allocation of such funds would, under European law, also
constitute special and exclusive rights under Article 87 of the Treaty
on European Union (``TEU''). In ascertaining whether the services are
in the general economic interest, it is necessary to ask whether the
service has special characteristics that distinguish it from other
economic activities, and the transfer of funds must be shown to be
connected to that specific characteristic. One of the relevant factors
is a financial advantage beyond the cost of covering the USO being
given to one of the undertakings. Hence in order for a USO fund not to
be caught under these provisions, it would need to be clearly defined.
Even if a political decision is taken to impose a Universal Service
Obligation and obtain monies for that obligation from other parties,
this has to be carefully handled in order to make sure that the
incumbent company does not hide behind the USO as a way to engage in
more anti-competitive practices. This has been dealt with in numerous
ways across multiple network industry sectors. In general a number of
themes emerge:
1. The USO has certain benefits and certain costs. The costs and
the benefits must be weighed against each other. The historical USO in
the case of the Post Office will be an advantage as it has enabled the
Post Office to build out the necessary infrastructure in rural and
remote areas in Japan.
2. The Universal Service Obligation should be supported by those
who benefit from it. Clearly people in the rural areas themselves
benefit from the Universal Service Fund. Clearly, people in rural areas
cannot be expected to support the Universal Service fund entirely on
their own. The obligation should therefore rest with taxpayers, but
should be made explicit, so that the people make a decision as to
whether they are prepared to pay the cost of the universal service
benefit.
3. Universal Service Fund obligations should not be imposed
generally on competitors or potential entrants to market. This is
because this damages competitive markets. These public sector
restraints are effectively state aids to the Post Office which may be
used to help it compete against other new entrants in sectors that are
broadly competitive.
New Communications Economy
In order to properly understand postal privatization in the context
of a modern internet economy, one must fully understand where postal
fits into the broader area of information delivery. In the past, postal
delivery was the only means of keeping different communities connected.
There was a real national security dimension to the work of the postal
service. It was also the only way of sending documents for business
purposes, and so there was also an economic security dimension to its
work also. In the 21st century, the way information is delivered to
consumers is undergoing a rapid and total change. People are organizing
themselves around information and content, and less on materials and
delivery. In this age, downward pressure on delivery costs brought
about by the costless delivery of information over the internet and e-
mail is very high. This has caused a shift to the actual content--a
complete reversal from a world where ``medium is the message''. It is
hard to explain the full impact of this information revolution. Suffice
it to say that costs reductions brought about by the printing press
were of the order of 1,000. Costs reductions brought about as a result
of the invention of the microprocessor has dropped 10 millionfold. The
printing press led to the industrial revolution as the microprocessor
has led to the information revolution.
In many ways, there is a new communications economy which applies
to the way that all manner of products are transported across borders.
In this new communications economy, the activities of a
telecommunications provider, carrying information across the e-mail, or
a mail carrier carrying the same information in documentary form, or an
express delivery provider carrying the same document must be weighed.
Since these different platforms in some senses compete against each
other, it is important that nothing is done that damages one or the
other in the government's regulatory supervision of any one of these
sectors. In order to ensure the most efficient and effective delivery
channel, it is important that the channels are allowed to be as strong
competitors as possible. Economists have described the theory that
underpins such competition the theory of monopolistic competition.
Under this theory, individual platforms (which may dominate very narrow
market segments, but are not monopolies in the antitrust or economic
sense) can compete better against each other and promote overall
consumer welfare in an economic sense.
All of this has important consequences for postal companies. In the
case of Japan Post, it is necessary to ensure that the regulations
which are under the Postal Law ensure that Japan maximizes this new
communications economy, so that all the different information delivery
platforms can function as competitively as possible. Regulations in the
postal sector could have important impacts in these related sectors.
Public Goods Theory
The original motivation for a letter mail monopoly was that
communications were a vital part of ensuring national identity. The
Postal service satisfied the public goods theory, because consumers
that benefited from the service did not deprive others of its benefits
or limit supply. Because the postal service had a role to play beyond
pure commerce (see above), it was deemed that any possibility of market
failure should be dealt with by some form of government action. Under
ordinary public goods theory, there is an incentive for a monopoly to
be declared because of the market failure brought about as a result of
the fact that we are dealing with public goods. Market failure occurs
because the marginal cost curve of these kinds of public goods
decreases to zero (instead of being a U-shaped curve as is the case
with other goods). This occurs because they generally have very high
fixed costs, such as infrastructure and so forth that means that the
average cost curve declines. This means that as more and more services
are provided, costs decline to zero as does price. This prevents the
service provider from functioning and hence explains the request for
state subvention or in extreme cases, state-mandated monopoly.
However, with the advent of things like e-mail, the internet and
telecommunications services, the arguments favoring public goods models
are less and less persuasive. There is no longer a compelling public
interest in ensuring that people have access to postal service because
of the many other ways that information is transmitted. Furthermore,
even if those arguments held up, there would be no reason not to permit
competition, rather competition with regulated rates would be the norm
in cases that are supposedly natural monopolies.
Conventional public goods analysis is frequently given as the
reason supporting a natural monopoly. In this world, competition is
shunned for fear that it will give rise to duplicated networks and less
rather than more efficiency. In this context, it is important to note
that legislated monopolies were created before the development of
public goods theories. In other words, much of the economics to justify
natural monopoly theory occurred well after the political forces that
gave rise to natural monopoly did. The reality is that natural monopoly
theories never did hold much weight. Viewing the competitive process as
a dynamic one, we can see that few industries could say that the free
market, applying a natural monopoly would allow consolidation to
monopoly without the potential for new entrants or future competition
acting as a restraint. Even if there are still adherents to the concept
of natural monopoly, the number of industries that do not now have
substantial infrastructural bypass capabilities is small and declining.
One can look at the impact of wireless technology on the wired market
and the arguments for natural monopoly there that were based on the
high fixed costs of building the network. In the case of postal, this
is even further removed from the realm of natural monopoly because of
the ways that competing methods of getting information to people do not
rely on or in any sense interconnect with the Postal Service's network.
A major issue is the notion of whether in a dynamic competitive
environment, there is such a thing as excessive competition.
``Ruinous'' or ``excessive'' competition frequently harms high cost
producers and benefits consumers. Consumers are only harmed if the low
cost producers are actually producing below cost, and hence setting up
the conditions for monopoly later. The whole concept of public goods
theory rests on the presumption that in certain cases monopoly is the
preferred market condition, because competition would invariably be
excessive and lead to duplication. However, there is no reason in a
public goods context why free competition as opposed to a legislatively
granted monopoly might not lead to a large provider, and there is no
inconsistency with normal competitive conditions that this should
occur. It certainly does not mean that certain industries are prone to
natural monopoly, or that the market fails in certain cases.
Even during the high water mark of public goods theory or public
utility theory, economists did point out that state privileges granted
to state monopolies led to corruption and higher prices. In most
network industries that had previously been thought to be natural
monopolies, such as the electric utilities industry, competition has
been an important element in keeping downward pressure on price.
Network Industries and Natural Monopolies
While the notion of natural monopoly in general has broken down,
even if one accepts the notion of natural monopoly, postal services are
the least likely entities to qualify for such treatment. In
electricity, telecom or gas facilities, one can see the very high fixed
capital costs of building out complex wire or pipe networks. We do not
see such high fixed costs for postal services. However, this is not to
assume that these energy and communications industries are natural
monopolies. In the case of telecom, as has been noted above the advent
of wireless telephony has rendered some of the difficulties in building
infrastructure less critical in this sector. In the case of Postal the
higher fixed costs are represented by requiring a postal office in
multiple jurisdictions. However data shows that labor is a substantial
component of these costs, perhaps as high as 80% in the case of the
U.S.
The notion that the Postal service is somehow to be equated with
very intensive capital cost industries such as electricity,
telecommunications and gas is therefore misleading. The industry is
closer to trucking or airlines, where a large percentage of the costs
is actually labor cost, as well as any legacy labor costs. Neither of
these industries sink much capital into a network. In the comparable
industries of airlines and trucking, deregulation has taken place and
has led to dramatic changes in pricing and cost structures. The Postal
service does have to contend with inflated labor costs (at least in the
U.S.) and a large amount of political power derived from the size of
the labor force.
Future mail delivery is a platform that admittedly now competes
with other ways of sending out information, or, for example, paying
bills. There are advantages to conventional ``snail mail'', above e-
mail such as privacy and identity theft concerns. It is possible that
in the future that postal bill paying might be competitive with e-bill
paying. The important thing in terms of delivery of benefits to
consumers is that these platforms are able to compete well against each
other, following the theory of monopolistic competition, set out above.
Ensuring Pro-Competitive Market in Postal and Related Areas
The Japan Postal Privatization bill does contemplate a separation
between the various lines of business of Japan Post. This is very
important, and it is good that separation of these revenue streams is
in the bill. It will be important to ensure no possibility of cross
subsidization, so in implementing regulations, it would be important to
see safeguards against this. This includes both De jure and de facto
separation, including having separate price caps, if price caps are
contemplated. Rigid accounting separation between these entities would
also be required. However the separation currently contemplated is what
one would expect from a Postal company that is also one of the world's
largest banks and insurance companies. The separation currently
referred to in the Postal Law is a separation of the postal from the
financial services and savings branches. While this is good, it does
not necessarily address the possibility that the postal monopoly can be
used, especially if accompanied by anti-competitive universal service
obligations and an overly broad reserved sector, to anti-competitively
cross-subsidize into related areas, such as new businesses that the
Postal company is active in.
The threat of anti-competitive cross-subsidization is a very real
one, and can only be addressed by:
1. Developing rigid accounting separation of the different aspects
of the Postal company's business.
2. Developing an appropriate cost methodology that builds in
elements of cost that Japan Post has as a result of its historic
government ownership and statutorily endowed privileges. This can
include including an element of costs to account for parking
privileges, favorable customs treatment, favorable tax treatment and so
forth. This ensures that when evaluating whether an attempt to enter
into a new business line is below cost, we are using an appropriate
measure of cost.
3. Recognizing the government owned legacy, and result of the
statutory monopoly. Since governments are not profit maximizers, and
the statutory monopoly confers quasi-governmental status even after the
privatization, we must recognize, as European competition law does,
that there should be no need to recoup lost profit in the future in
order to make out a below cost pricing case.
Japan Postal Privatization Commission
The Postal Bill contemplates a Postal Privatization Commission,
which would be a body that oversees and guides the privatization
process. This group does not currently have within its number
representatives of the Competition Agency. This would be very important
to ensure pro-competitive concerns are addressed in the privatization
process itself. Too often ``competition'' issues are raised by other
ministries without paying due regard to what the competitive process
actually entails. Indeed there is great danger in confusing the terms
``competition'' with ``competitiveness''. While having a competitive
market will doubtless, all other things being equal, lead to greater
economic competitiveness for the country as a whole, adopting a
regulatory design designed to make specific companies more competitive
probably will not. Competition agencies are in the best position to
evaluate and filter what are truly ``competition'' considerations.
There are also special exemptions that are contemplated in the
privatization during the preparatory period for Japan Post. These
include the ability of Japan Post to provide financing for
international cargo transport. There are provisions that provide that
this must be approved by the privatization commission, and that this
activity must not unfairly harm those who provide like activities. This
is a step in the right direction, but again these issues need to be
evaluated properly and underlying regulations need to be carefully
drafted. This applies with equal particularity to the privatization of
the financial and insurance arms of Japan Post.
Conclusion
Competition Red Flags
There are certain competition red flags which denote specific areas
of competition policy where policymakers should be concerned to ensure
pro-competitive regulatory solutions. The key areas where the
regulatory design for Japanese postal privatization should be watched
are as follows:
1. Use of the USO as a shield for anti-competitive practices.
Frequently, as noted above, the USO is so used. Particularly attention
should be paid to ensure that any universal service fund is limited to
the specific regulatory purpose for which it was intended.
2. A rigorous accounting separation mechanism among the various
businesses is required to ensure that any anti-competitive cross-
subsidization is limited. In considering the costs for provision of a
service, we recommend using a hypothetical private firm, and adding to
that cost base the benefits accrued from being government owned,
including all exemptions from taxes, licenses or any other regulatory
process that private firms would have to engage in. All these costs
should be added to the hypothetical benchmark. If the postal company is
charging below these costs in any of the related businesses, then a
case should be made for anti-competitive cross-subsidization.
3. Particular attention should be paid to the size of the reserved
sector.
Statement of Timothy MacCarthy, Association of International Automobile
Manufacturers, Inc., Arlington, Virginia
This statement for the record with respect to the above-captioned
hearing is submitted for the Committee's consideration. The Association
of International Automobile Manufacturers, Inc. (AIAM) is concerned
that some of the testimony received by the Committee concerning the
yen/dollar exchange rate relationship misrepresented the situation
existing today in U.S.-Japan automotive trade. Contrary to some of
these assertions, the evidence demonstrates that the yen/dollar rate
has had no short-term impact on U.S.-Japan automotive trade and does
not constitute a subsidy. The current yen/dollar relationship arises
from the overall strength of the U.S. economy and the resulting flow of
investment dollars into the U.S. from foreign countries. Significantly,
only one witness testifying at the hearing expressed concerns about the
yen/dollar relationship.
AIAM is a trade association representing 14 international motor
vehicle manufacturers who have invested over $27 billion to manufacture
approximately 30 percent of all passenger cars and light trucks
produced in the United States. AIAM members directly employ over 93,000
Americans, and generate an additional 500,000 U.S. jobs in dealerships
and supplier industries nationwide. AIAM members include Aston Martin,
Ferrari, Honda, Hyundai, Isuzu, Kia, Maserati, Mitsubishi, Nissan,
Peugeot, Renault, Subaru, Suzuki and Toyota. AIAM also represents
original equipment suppliers and other automotive-related trade
associations.
THE FACTS
U.S. Government Findings
Two recent U.S. government reports directly contradict the
assertion that ``Japan's sustained currency manipulation'' and the
resulting ``artificially weak yen'' provide a subsidy to Japanese
automobile manufacturers. As noted during the Hearing by Treasury
Deputy Assistant Secretary for Africa, Middle East and Asia, David
Loevinger, the Treasury report on International Economic and Exchange
Rate Policies released in May 2005 stated that Japan was not a currency
manipulator.[1] Mr. Loevinger further said that in response to a U.S.
request, Japan had not intervened since March of 2004, and that Japan
has consistently supported the positions taken by the United States in
the Group of Seven.
A second U.S. Government study, a Federal Reserve Staff Study of
January 2005, concluded that interventions by the Japanese Government
since 2002 have little or no impact on the yen/dollar rate.[2] Based on
the findings of these two eminent studies, it seems clear--contrary to
the claims heard by the Committee--that there has been no subsidy.
Indeed there is further concrete evidence that such a subsidy does
not exist. For example, if the Japanese Government were providing a
subsidy to its auto manufacturers, evidence of such action should
appear in the annual financial statements of these corporations.
However, an examination of the statements of Honda, Nissan, and
Toyota--the three largest Japanese automakers--shows a mixed result.
During the period since 2000, only Toyota reported that the impact of
exchange rates on its operations was consistently positive before
reversing in FY2005 (-140 billion yen). Honda and Nissan reported that
with the exception of 2002, when the yen was the weakest, and, despite
consistently increasing annual net profits, they lost money on currency
each year. This data does not support the assertion that a large
subsidy has been granted to the Japanese auto companies.
We also note that the Committee heard testimony suggesting that for
the first six months of the current fiscal year, Toyota, Honda and
Nissan earned additional profits in excess of $1 billion due to a
weaker than anticipated yen value. This assertion is not supported by
the facts, since none of the Japanese auto makers have issued their
financial reports for the first six months of their fiscal years.
Beyond this fact, it is also true that even if these companies have
earned these additional profits, such profits can be considered as
evidence of conservative financial practices, rather than a subsidy.
U.S.-Japan Vehicle Trade
The assertion that the yen has weakened and caused U.S. imports of
Japanese vehicles to increase and the bilateral motor vehicle trade
deficit to worsen is not supported by the facts.
U.S. Trade Data
----------------------------------------------------------------------------------------------------------------
Factor 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Y/D Rate 107.8 121.57 125.22 115.94 108.15
----------------------------------------------------------------------------------------------------------------
U.S. Imports of Japanese Vehicles ($s billions) 32.1 31.1 35.0 32.2 32.2
----------------------------------------------------------------------------------------------------------------
U.S./Japan Motor Vehicle Trade Deficit ($s billions) 31.3 30.5 34.6 31.7 31.7
----------------------------------------------------------------------------------------------------------------
U.S. Imports of Japanese Vehicles (Millions of Units) 1.82 1.79 2.05 1.77 1.72
----------------------------------------------------------------------------------------------------------------
Value per Unit ($s) 17,637 17,374 17,073 18,192 18,720
----------------------------------------------------------------------------------------------------------------
Sources: Trade data from the Office of Automotive and Aerospace
Industries in the U.S. Department of Commerce. The currency data is
from the Federal Reserve System. The unit values are calculated.
This data gives the appearance that exchange rates may have had
some effect on U.S.-Japan trade flows over this period, but the impact
has been mixed, not long-lasting and remarkably small. When the yen
weakened through 2002, U.S. imports of Japanese vehicles increased.
However, when the yen strengthened strongly in 2003, U.S. imports fell
and then stabilized in 2004, despite a further strengthening of the
yen. The fact that the changes in trade over this period have been so
small merely demonstrates that consumer demand is the real driver in
the market. AIAM member companies do not respond to short term
movements in exchange rates, but do respond to changes in consumer
demand.
Exchange Rates and the U.S. Light Vehicle Market
Developments in the U.S. light vehicle market show that the yen/
dollar rate cannot be a subsidy.
U.S Light Vehicle Sales (millions of units)
----------------------------------------------------------------------------------------------------------------
SALES 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Total U.S. Market 17.332 17.118 16.808 16.622 16.648
----------------------------------------------------------------------------------------------------------------
Big 3 11.341 10.806 10.345 9.999 9.864
----------------------------------------------------------------------------------------------------------------
Total Japanese 4.431 4.577 4.706 4.796 5.154
----------------------------------------------------------------------------------------------------------------
Japanese From NAFTA 2.825 2.939 2.953 3.077 3.522
----------------------------------------------------------------------------------------------------------------
Japanese From Imports 1.606 1.638 1.753 1.719 1.632
----------------------------------------------------------------------------------------------------------------
1y/d rate 107.8 121.57 125.22 115.94 108.15
----------------------------------------------------------------------------------------------------------------
Source: Office of Automotive and Aerospace Industries, U.S.
Department of Commerce
Over the period 2000-2004, the Detroit Three (DaimlerChrysler
Corporation, Ford Motor Company and General Motors Corporation) lost
1.477 million units of sales while Japanese automakers gained only 723
thousand units, or about half of what the Detroit Three lost (the
market decline of about 648 thousand units cost them most of the
remainder). Of this gain by the Japanese automakers, 697 thousand units
have come from the member countries of the North American Free Trade
Agreement (NAFTA)--the U.S., Canada and Mexico. Another way to look at
this is that over 94 percent of the increase in Japanese light vehicle
sales in the United States has come from plants located in the NAFTA
countries where the yen/dollar exchange rate has no effect.
Foreign Currency Behavior Against the U.S. Dollar
Did the yen behave in a different fashion against the U.S. dollar
than other currencies? Federal Reserve data provides an overall picture
of what has actually happened between the U.S. dollar and our major
trading partners.
Currencies per U.S. Dollar
----------------------------------------------------------------------------------------------------------------
%Change
Currency 2000 2001 2002 2003 2004 in $ +or-
----------------------------------------------------------------------------------------------------------------
Australia* 0.5815 0.5169 0.5437 0.6524 0.7365 -26.65
----------------------------------------------------------------------------------------------------------------
Canada 1.4855 1.5487 1.5704 1.4008 1.3017 -12.37
----------------------------------------------------------------------------------------------------------------
Euro* 0.9232 0.8952 0.9454 1.1321 1.2438 -34.72
----------------------------------------------------------------------------------------------------------------
Japan 107.8 121.57 125.22 115.94 108.15 +0.32
----------------------------------------------------------------------------------------------------------------
Korea 1130.90 1292.01 1250.31 1192.08 1145.24 +1.23
----------------------------------------------------------------------------------------------------------------
All Major Currencies** 98.34 104.26 105.98 93.04 85.42 -13.14
----------------------------------------------------------------------------------------------------------------
* U.S.$s per currency unit // ** This is an index where March 1973
equals 100
The assertion that interventions by the Japanese government have
caused aberrant exchange rate behavior and a subsidy to their exporters
is not supported by the data. During the most recent five year period,
the U.S. dollar initially strengthened slightly against the yen and the
won, and fell against the others. Beginning in 2001, the dollar fell
against all these currencies (it fell 11.04% against the yen).
Interestingly, the Bank of Japan made its largest interventions during
this period in 2003 with the intention of maintaining a weak yen. [3]
The yen, however, continued its steady rise against the dollar. This
outcome clearly does not support the allegation.
Direct Government Expenditures in Foreign Exchange Markets Do Not Work
The principal reason governments cannot permanently affect exchange
rates without altering basic economic fundamentals is that governments
simply do not have enough currency to significantly move the markets.
For example, in the 1st quarter of 2004 Japan purchased nearly $140
billion in an attempt to reduce the value of the yen. However, even
this action failed to change the yen's value because it was miniscule
in relation to the size of the yen/dollar market. The Bank of
International Settlements estimates that every day approximately $230
billion are exchanged for yen. This translates to a market during the
quarter of about $22 trillion or $84 trillion for the year. It is clear
therefore that even $140 billion, while large, has little chance to
influence such a massive market.
The Impact of ``Verbal Intervention''
Although Japan's Ministry of Finance (MOF) has not intervened in
the markets since the 1st quarter of 2004, allegations have been made
that Japan and Korea are now using ``verbal intervention'' to drive
down the value of the yen or prevent it from strengthening further.
However, many governments make comments about the value of their
currencies in the market, the United States among them. It is a policy
tool which governments sometimes use. Sometimes it works for a little
while, more often it does not. In the case of Japan, it seems unlikely
that, following the failure of monetary intervention, a few well-chosen
words regarding the need for currency stability and orderly adjustment
would have anything more than a temporary effect.
The job of central bankers is to seek stability, not disrupt it.
There is nothing to suggest that Japanese bankers are doing otherwise
or acting differently than the many other national economic managers
and leaders around the world.
CONCLUSIONS
It is clear from the facts that Japanese governmental
intervention in exchange rate markets did not have a significant impact
on exchange rates and did not constitute a subsidy.
Even if intervention had more than a temporary effect,
such intervention would make no difference in the competitive
relationship between automobile companies in a global market.
Currently, about 70 percent of all cars and light trucks sold by
Japanese automakers in the United States are built in the NAFTA
countries. Over 94 percent of the increase in Japanese light vehicle
sales in the United States since 2000 has come from local manufacturing
in NAFTA countries. Local content rates for these vehicles average 70
percent and many exceed 90 percent. The yen/dollar rate has no effect
on these vehicles.
Private foreign trade and investment flows have a far
greater impact on currency values than government intervention. The
size of the yen/dollar market is simply too large to enable government
attempts at intervention to have any more than a temporary effect.
While exchange rates impact trade over the long run and
are used to make business decisions, they are not the sole basis for
those decisions, nor are they the most important factor in those
decisions. Building and offering the right products that fit the needs
and desires of consumers is the goal of AIAM member companies and is
the basis on which the business decisions of these companies are made.