I want to thank this panel for your time. We appreciate your very extended statements and the colloquy that was involved in the questioning by members. Mr. GIBBONS. Mr. Chairman, let me say hello to John Morgan. I have not seen him for a long time. I have read your testimony about the fine union-to-union work you are doing with the Japanese. I applaud and appreciate that. Mr. VANIK. It may be that the bridge to better relationships will be built by union-labor on each side. Mr. MORGAN. We are hoping so, Mr. Chairman. BRIEFING ON THE CURRENT STATE OF THE U.S. GOVERNMENT-NTT GOVERNMENT PROCUREMENT CODE NEGOTIATIONS Mr. VANIK. We will now proceed to hear from Ambassador Robert Hormats concerning the status of the Government Procurement Code-NTT negotiations with Japan. I want to point out that this testimony of the Ambassador will be public. Anybody who wants to remain is privileged to do so. Mr. Hormats discussed this issue before the subcommittee on August 26. Since then there have been numerous meetings and discussions on this issue. Additional meetings are scheduled. We would like to be brought up to date and we will now proceed with Ambassador Hormats. Mr. Ambassador, your entire statement will be included in the record. STATEMENT OF AMBASSADOR ROBERT D. HORMATS, DEPUTY U.S. TRADE REPRESENTATIVE Ambassador HORMATS. Thank you, Mr. Chairman. As you and this committee know, we have had numerous discussions with the Japanese on the issue of NTT and the inclusion of NTT under the Government Procurement Code. I would like to briefly go over with the committee again some of the background to those negotiations and tell you where we stand on this very sensitive and extremely important commercial issue. To begin, let me make a few remarks about the code itself: Negotiations under the procurement code are somewhat different from negotiations under other codes. They are not best considered in abstract terms, dealing as they do with the dollars and cents of trade. What we are really talking about here is the question of reciprocity, that is commercial opportunities which are relatively balanced between the various signatories. This is particularly important when one thinks about this code. With this as a background, we have in crafting our approach to these negotiations not attempted to parallel individual entities. Simply because one country is willing to include entity X under the code, doesn't mean it is necessary for another country to put the same entity under the code. The real question is reciprocity, the overall balance of commercial opportunity. One country can have one set of entities under the code, and another can have a totally different set of entities under the code. The key is reciprocal commercial opportunity and balance among the aggregates of these entities. This is particularly important when it comes to NTT. We believe we have worked out with most countries an appropriate reciprocal balance. We believe, as a result, that there are a number of export opportunities opened up for American firms-in particular for some of the firms that were just testifying before this committee. With respect to Japan, though, we have a somewhat more complex and difficult problem. Let me explain exactly what that problem is: Japan does not have a central purchasing agency, or large defense purchasing program, or units within the various governmental agencies which make very large purchases. In the United States, we have central purchasing. The Defense Department has very large purchasing programs, and some of our departments also make relatively large purchases. The Japanese purchase program is highly disaggregated. This is particularly important to keep in mind, and makes NTT all the more important. The average value of Japanese procurement is very small. As a matter of fact, many Japanese procurement purchases fall below the threshold of what is $150,000 special drawing rights, or at current exchange rates, $190,000. This disaggregation and the fact that many Japanese purchases fall below the de minimis provision mean in many cases we would not have benefited successfully from some of the the things Japan has agreed to put on the code. When we analyzed Japan's offer, it was quite clear that inclusion of NTT was essential in order to have the type of reciprocity that was expected by the Congress and was envisaged in the Government Procurement Code negotiations. NTT has also taken on, as the group preceding us indicated, a special significance because Japanese telecommunications and electronics firms in general have done quite well in the American market, and American firms have-let us face it-not had the opportunity to compete very actively in the Japanese market in large measure as the result of formal or informal Japanese restrictions. Resolution of the NTT problem is also important to give our electronics industries and our telecommunications industries a greater opportunity in the Japanese market. There is a long history of negotiations, and we have pressed the Japanese on the NTT issue. We got no real results in terms of significant progress in the MTN. As a result of some frustration in that specific negotiation, there was announced on June 2, 1979, the so-called Strauss-Ushiba joint statement. Under the terms of this document we agreed to agree on entity coverage by December 31, 1980, and to establish a work schedule beginning in July 1979. We have done the latter. Upon the basis of that work schedule, we have had a number of negotiations and formal discussions. They have made some progress, but there are still barriers that have not been crossed yet. I 'will discuss those very generally in a moment. Let me touch on the three major arguments that Japan has made with respect to the question of inclusion of NTT under code obligation: The first argument is that our respective offers are balanced without the addition of NTT's telecommunications purchases, since we both offered our principal central government department ministries. As I indicated a moment ago, we don't believe that there is commercial reciprocity simply on the basis of our departments versus their ministries as already offered. The evidence supports us on this matter. We are not looking for theoretical balance; we are looking for balance which is going to be beneficial in commercial terms. We stress that NTT is the only entity which Japan can offer to provide our exporters additional new market access. Its inclusion is necessary for reciprocity. The second Japanese argument is that the addition of NTT would result in lack of balance with other countries, since no other country has offered its telecommunications agency. We again pointed out that we are not really talking about entityby-entity comparison; we are looking at overall balance, and without NTT there was not overall balance. The last point that Japan makes is that the procedures of the code are not suitable for telecommunications purchases. We have gone through a long, long set of discussions with the Japanese to convince them that this is not the case. I think we have made considerable progress in explaining why the code has enough flexibility to insure that the procedures to be followed by NTT will result in no decline in performance requirements and no drastic problems for their system. To the contrary, we believe adoption of full code procedures by NTT could lead to improvement in NTT's service by creating an avenue for introduction of the best and most competitive technology which the world market can offer. NTT now confines virtually all its purchases to Japanese suppliers. We are saying that by opening up to other suppliers, American and European, which are very competitive in the telecommunications area, NTT will be better off; they will have a wider choice. As we have seen, the American industry in this area is very competitive. We believe it makes high-quality products. We believe American firms will win contracts in Japan if Japan opens up. The Japanese system will not be worse off. It will be better off by having the opportunity to use American telecommunications equipment. We have made some progress with the Japanese. There have been long discussions on purchasing procedures. Mr. Newkirk, sitting on my left, has spent the last 2 weeks of his life discussing with his Japanese counterpart these procedures. While there are differences, progress has been made. We believe NTT is willing to work with procedures that will permit full access, but I don't want to mislead this committee. It is not finalized yet, and we still have some way to go. The position of the U.S. Government remains that all NTT purchases must be subject to the obligations of the Government Pro curement Code. This is important to us, for all of the reasons that I have just cited. It is important in terms of overall balance and it is important in terms of a very important American industry which is competitive. Part of what we mean by positive adjustment is that as we take imports from other countries, we ought to be able to export goods in which we do have a comparative advantage. Telecommunications is an area in which we have a comparative advantage. We aim to see that other nations open up and provide opportunities in this area in which our industries are competitive. We hope that this issue will be resolved before our year-end deadline, which was set by the Strauss agreement; however, there is a considerable distance to go, and we recognize the possibility that agreement may not be reached. We hope it will be, and we will work to insure that it is. Nonetheless, we still have a distance to go. Ås a result of the discussions between the Japanese representative for External Economic Affairs, Dr. Okita, and Governor Askew, we think the Japanese have a better understanding of what we require in order to permit them to benefit from and bid on American Government purchases. We hope that the work that is done in Tokyo and the work that is done between our two governments over the next couple of months will lead to agreement, but hurdles remain to be crossed. Thank you. [The prepared statement follows:] STATEMENT OF DEPUTY U.S. TRADE REPRESENTATIVE ROBERT D. HORMATS I am pleased to appear before your subcommittee today to review where we stand on the opening of Japan's telecommunications market through the Government Procurement Code. The roots of this issue lie in the nature of the Government Procurement Code. Unlike the other MTN codes, the balance of rights and obligations under the Government Procurement Code should not be considered in abstract terms. This code deals with contracts-the dollars and cents of trade. Hence, any consideration of reciprocity requires that advantages be measured in terms of the commercial opportunities which each signatory to the Code is offering. To put it plainly, in order to arrive at an equitable arrangement under the Code, there has to be reciprocal commercial opportunities. This was approached through what came to be known as entity negotiations. First, each country offered a list of entities—that is, ministries, departments, and agencies-to be covered by the Code. Negotiation ensued to arrive at a mutually satisfactory list. Then each country had to make a judgement, in purely commercial terms, as to whether other countries were offering enough in return. This fact was recognized in the Trade Agreements Act of 1979. As might be expected, these coverage negotiations were difficult and complex. Governments differ in size and structure. For this reason, it was recognized from the start that you could not simply compare offers on an entity-by-entity basis. For instance, many countries do not have central purchasing agencies parallel to our General Services Administration. Instead, they allow individual ministries to do their own purchasing or have a group of agencies which buy the various types of products which governments need. Given these differences in structure and purchasing practices, it was recognized that each country would have to determine whether an appropriate balance of concessions existed by comparing entity offers as a whole. We have succeeded in achieving the appropriate reciprocal balance under the Government Procurement Code with all our major trading partners except Japan. The final package of agreements with these countries does not offer all that we had hoped, but we were able to offset what we saw as deficiencies by withdrawing our offer of coverage of entities such as the Departments of Transportation and Energy. On balance we see major new export opportunities being created by the agreements we have reached to date. In the case of Japan, our task was more difficult. Japan offered its central government ministries, as other countries had done. However, in Japan's case this was not enough. Japan does not have a central purchasing agency, a large defense purchasing program, or units within agencies which make large purchases. Its procurement system is highly disaggregated. Rather than having one entity do all its purchasing, Japan has a multitude of procurement units that make a large number of small purchases. As a result, the average dollar value of Japanese procurement is relatively small. This is important because the Government Procurement Code only applies to purchases above a threshold of 150,000 Special Drawing Rights-approximately $190,000. The disaggregated nature of Japan's procurement system meant that a large portion of its purchases would be below the threshold and therefore not be subject to the Code. Another factor we had to consider was that Japan has already shown how competitive it is in our markets. To date, our performance in selling to Japan has been less encouraging. This meant that to achieve balance with Japan we would have to gain access to purchases in areas where we know we are competitive. When we analyzed Japan's Government procurement market, we found that the one entity the inclusion of which could provide a balanced package was Japan's Nippon Telegraph and Telephone Company-NTT. NTT buys centrally in large quantities, meaning a high proportion of purchases above the threshold. It purchases high-technology products where the United States is highly competitive. NTT has taken on a special significance over the years because U.S. exporters have repeatedly found that NTT was unwilling to buy non-Japanese goods. This was hard to accept given that our firms were offering products equal to or better than the products being offered by their Japanese competitors. It was even harder to accept given our bilateral trade balance with Japan, and the extensive opportunities which Japanese high-technology firms have to sell in our market. In Geneva we pressed Japan to add NTT to its entity offer. This began the process of negotiation which is still going on today. Japan at first resisted our request, arguing that our offers were already balanced since we had each offered to place procurement by our central government agencies (e.g. the principle ministries and departments) under the Code. We, in turn, made it clear to the Japanese that we were judging reciprocity in purely commercial terms and that we did not believe that this balance existed without the addition of NTT. Eventually Japan came forward with an entity offer which included NTT. However, the offer was limited to the purchase of non-telecommunications related equipment such as paper, pencils, utility vehicles, and telephone poles. This was obviously unsatisfactory. It excluded the high-technology products which we were most interested in selling to Japan. Our response was that this was a useful first step, but that it was far short of being acceptable. In brief, we told them we could not settle for anything less than full access to NTT's telecommunications purchases. I must emphasize that we have made it clear to the Japanese that we are not looking simply for a stop-gap solution. We are looking for a guarantee of the opportunity to compete now and over the long-term. The U.S. telecommunications industry is as competitive as, if not more competitive than, any telecommunications industry in the world. Given open competitive conditions we are confident that this industry will succeed in selling abroad. The NTT issue became the major outstanding issue between Japan and the United States in the closing days of the Tokyo Round of Multilateral Trade Negotiations. Negotiations continued well into the 11th hour with, then Special Trade Representative, Robert Strauss, leading our team. Despite countless hours spent in negotiations we recognized it would not be possible to complete work on this issue before the close of the MTN. However, both the United States and Japan wished to continue discussions in the hope of reaching agreement before the Code entered into force on January 1, 1981. As a result, long hours of negotiations yielded the Strauss/Ushiba joint statement of June 2, 1979. Under the terms of this document we agreed to reach agreement on entity coverage by December 31, 1980. It was also agreed that we would establish a work schedule beginning in July 1979. Since July 1979 we have had numerous technical and substantive discussions with the Japanese. In these discussions the Japanese have forcefully argued their case for excluding NTT's purchases of telecommunications equipment. They have offered three basic arguments. First, they argue that our respective offers are balanced without the addition of NTT's telecommunications purchases, since we have both offered our principle central government departments and ministries. They have also pointed to comparisons of the dollar values of our respective offers to indexes such as gross national product in supporting this argument. We, in response, have explained that we are not looking for a theoretical balance. We are looking for an agreement which is balanced purely in commercial terms. In particular we pointed out the effect of the disaggregation of Japan's Government procurement market on the value of its offer. We stressed that NTT was the only entity which offered |