by 1979 Japan was importing approximately $165 million worth of machine tools while exporting $1.2 billion in metal cutting and forming equipment. Although it is dangerous to attribute such a trend to any one factor, it appears rather evident that as the Japanese machine tool industry itself became more sophisticated, Japan reduced its imports of U.S. machinery (as well as that from other countries) at the same time that it began a very aggressive export marketing program of its own. Looking at official Japanese statistical data, from 1960 to the present, we note that imports of foreign made machine tools into Japan have generally adhered to the fluctuations of the overall business cycle. However, in contrast, Japanese exports during these two decades have been rapidly on the increase, from a total of $10 million in 1960, to over $1.2 billion during 1979, well over a hundredfold increase. Such an aggressive export policy by an insular nation such as Japan is not difficult to understand. Indeed such export related policy is a matter of survivial, not just preference. Moreover, the statistics seem to indicate that more than a few countries have_met_with_severe resistance to sales of their capital equipment in reindustrialized, modern Japan. Of course the most striking and highly publicized manifestation of this aggressive Japanese export policy is seen in the automobile industry, with the extraordinarily high volume of Japanese imports in the United States. We are, of course, aware that many in U.S. industry have called for import quotas on such Japanese goods in the interest of protecting U.S. workers from "foreignborn" unemployment. Although we certainly sympathize with the objective of keeping as many American workers employed as possible, we must disagree with restrictive import quotas as the method of achieving the goal. We have seen the unfortunate consequences of restrictive trade practices in the past, and do not offer them as a solution to the current United States-Japanese trade imbalance. Moreover, we would urge caution in suggesting that we adopt wholesale the business and government practices employed in Japan in the hope that their use in the United States will yield results similar to those now enjoyed by our Japanese counterparts.1 Observing the similarities that exist between nations is important in formulating effective and competitive policies. However, often more significant are the differences that separate cultures and societies, and which render similar business practices and government policies extemely effective in one country and quite impotent and potentially harmful in another nation. V. TAX POLICY CHANGES Therefore, we urge support for the following proposals which we believe would be most effective in interacting with the current variables of the U.S. economy towards stimulating productivity and enhancing U.S. exports. First, and foremost, we strongly support and urge the adoption of more rapid capital cost recovery for investment in capital goods. Shorthandly known as “10-53," such a system of depreciation would enable American industry to make the massive investment necessary to modernize the aging industrial base of the United States. "The primary thrust of Japanese industrial policy in machinery is currently in research and development. The policy includes grants, loans, and tax subsidies. . . . The final series of measures the government uses to aid technology development involves tax incentives for research and development. . . . In addition, the government allows special depreciation on equipment. Finally, tax credits are allowed on the dues for establishing co-operative research associations among companies. Over 25 of these associations have been created and the funds paid into them can be subtracted from the individual company's income as depreciation." U.S. Congress, House, Committee on Ways and Means, Subcommittee on Trade, United States-Japan Trade Report, 96th Cong., 2d Sess., Sept. 15, 1980, p. 44. Japan MACHINE TOOLS IN USE IN SEVEN INDUSTRIAL NATIONS-Continued In this regard, we take this opportunity to commend the far-sighted leadership of Congressmen Jones and Conable in sponsoring H.R. 4646, the Capital Cost Recovery Act of 1979. We also applaud those other congressmen who have also lent their support to this proposal as cosponsors of the legislation. Under H.R. 4646 the current ADR system would be replaced by a capital cost recovery system calling for accelerated amortization of: Buildings over a 10-year period; Machine tools and other long-life equipment over a 5-year period; and The first $100,000 worth of rolling stock over a 3-year period. Adoption of this system would abolish salvage value requirements. Additionally, the 10 percent investment tax credit (ITC) would continue to apply to equipment with a 6 percent ITC for rolling stock. Furthermore, H.R. 4646 is devised to be phased-in over a period of years to minimize revenue loss to the Treasury. Improving the cash flow of industry through the changes provided in H.R. 4646 has never been more important than it is in today's inflationary times. As demonstrated by a recent NMTBA study of metalworking firms, current capital recovery mechanisms are inadequately dealing with the rising prices of new productive machinery. And every year that this unrealistic policy remains in effect results in a further shortfall between the cash flow generated by depreciation and the actual outlay needed to replace the depreciated equipment. The key feature to any of these changes in depreciation allowances is that they would attempt to treat capital spending in a more progressive sense. Depreciation charges generated by capital spending would be treated more rationally as a true cost of doing business rather than simply as a tax allowance for the wear and tear on equipment which is now effectively the case. A depreciation policy that allows business to more fully recoup the replacement cost of aging capital equipment over a shorter timespan also means that a firm's operating profits would not have to be utilized to replace obsolescent machinery. The current practice of inadequate depreciation allowances creates phantom profits, as depreciation expenses are far too low, and artificially inflates the bottom line of a firm's income statement. The changes which H.R. 4646 recommends, and we support, would simply move the source of funds used for capital spending out of the retained earnings ledger back into the depreciation expense accounts where they more accurately belong. Such a change in tax policy would reduce the tax liability of the average firm, but the tax reductions would not be unjustified. The tax applicable to the firm's reduced earnings would then be a true tax on profits, not an unwitting tax on improperly amortized capital assets. Focusing our attention on the area of research and development, we commend Congressman Vanik for his insightful leadership in sponsoring H.R. 6632, the Research Revitalization Act of 1980. H.R. 6632 recognizes that R. & D. spending can result in economic benefits similar to those brought about by capital investment, and is an essential factor in returning domestic and international economic strength to the United States. Specifically, in providing incentives for business firms to fund research performed at colleges and universities, the Research Revitalization Act would: (1) Allow a 25 percent tax credit for cash contributed to a research reserve during the taxable year (subject to a ceiling of 5 percent of taxable income and contigent upon the expensing of such funds within 4 years); (2) Provides that the research reserve will be tax exempt; and (3) Permits a deduction in the taxable year for aggregate payments from the reserve for research or experimentation performed by universities. The beneifts of H.R. 6632 are numerous. It will create a greater incentive for innovative and industrially useful R. & D.; by involving universities it will encourage more and broader based research; it will help refocus a portion of university research on industrially useful innovation; and finally it will contribute to expand ing the pool of highly trained engineers and scientists who are oriented to the ongoing research needs of industry. Moreover, we would especially emphasize that measures to revitalize our R. & D. efforts as exemplified by Congressman Vanik's bill are extremely important in strengthening the United States international economic and technological position. VI. CONCLUSION In conclusion, we believe that the productivity improving types of policies we have described above are the most effective means of meeting the increasing challenge of imports in our domestic market and of increasing our own export sales efforts. It is absolutely vital that American machine tool production capacity keep pace with the demand for more modern and productive metalworking machinery. Over the past decade we have seen the adverse effects of allowing our machine tool producing capacity to fall behind the domestic, let alone the foreign demand for such equipment. Statistics clearly show that every time U.S. capacity becomes inadequate to meet U.S. domestic demand, a certain percentage of the domestic market seeks foreign sources of supply (see chart 1). Although most of this segment of the market returns to U.S. builders when demand subsides and domestic capacity is again adequate, a certain share of the market remains with its new found foreign source of supply, and is thus permanently lost to U.S. machine tool builders. Therefore, we strongly urge measures that will allow the U.S. industrial base to expand its capacity in conformity with expanding demand. This in conjunction with improved R. & D. efforts are vital to the reindustrialization of the United States and the reestablishment of the United States as the world leader in global machine tool market. Thank you for the opportunity to testify on this most important subject. We would be pleased to answer any questions you may have at this time. Mr. VANIK. At this time I will move to Secretary Weil. I understand you have a plane you are trying to catch. STATEMENT OF FRANK WEIL, FORMER ASSISTANT SECRETARY OF COMMERCE FOR DOMESTIC AND INTERNATIONAL BUSINESS Mr. WEIL. Mr. Chairman, thank you very much. I was pleased to be invited to join you today. This is the first occasion I have had to appear before a committee of Congress since I left government a year ago. Mr. VANIK. The government has deteriorated even further since you left. Mr. WEIL. That is not possible. Thank you very much though. I would just make two or three points. I unfortunately have to catch a plane. I read very carefully this year's report of your subcommittee and without being fatuous I would like to say that it is an exceedingly interesting and well put together document. It is built obviously on last year's efforts and the efforts that preceded that. I think it will be a constructive help not only for the Congress but for the executive branch. I think it reveals something which is important. There has been progress. As borne out by the words I have just heard from the prior panel and this panel we are not dealing solely with economic problems but we are dealing with political problems on both sides of the Pacific. The fact that there is progress in Japan, albeit slow, is something worth noting and is something worth building on. One of the questions that you pose in the report is the utility of the Trade Facilitation Committee and whether it should be continued. I was there at its creation. I was there during the period when we were disappointed in the number and quality of the cases being brought before the committee. I can say based on my experience then and since that I think the Trade Facilitation Committee is something worth encouraging and continuing. I wrote an article with a member of the Department of Commerce some months ago that appeared in a scholarly journal on Japanese trade barriers in general and some cases in particular of the TFC. I have learned that the fact that we signed that article, published in this country, has sensitized-to some extent negatively-some of the people in the Ministry of Finance who are responsible for the Customs activities of Japan. They are defensive about some of the cases and feel some of the allegations may not have been fair. The fact, however, that they were sensitized is important because the Japanese, though they often do not realize it, have had an anti-import mentality. The sensitization process that is taking place through those cases and through the political process the TFC creates is helping create change. Even though the committee has not handled a great many cases involving a great volume of trade I think that as part of political process it should be encouraged to be continued. I would like to add to the encouragement that I already heard support for the Export Trade Company Act of 1980. It is generally believed that there is not as much enthusiasm on this side of the |