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firms which need capital today to retool to meet the demands of the 1980's.

It would also put more people to work here, and I think for the Japanese it would be a good investment because in most cases it is more economical to produce the parts here than to produce them in Japan. In short, I believe there is mutual benefit to be served by encouraging the Japanese to consider joint venture licensing.

Mr. VANIK. Do you think that will come out of the trade missions?

Mr. HORMATS. First, we would like to start them off by encouraging them to invest for exports of parts to Japan so that Japanese firms become use to parts produced in the United States and their incorporation in new cars. We think there is an important market there.

Second, we believe it will be also important to have the parts produced here for the replacement market as that market grows.

Mr. VANIK. I personally do not rejoice in the fact that we might be increasing our sales in automobiles to Japan 100 percent. That would be 15 minutes on the line at Lordstown. I do not really look upon that as a real trade balancing factor.

I think that where we do it is in the replacement parts business and in the component parts business along with some investment in this country. I do not look for the balance of trade to be very much affected by getting a few more American automobiles on the streets of Tokyo.

They have them there to point out to American trade missions, “Look there is an American car.” They might as well put it in a museum, because I do not get any feeling that there is going to be any great extensive market for American automobiles in Japan.

I think they are oriented toward their own product.

Mr. HORMATS. I think you are right. The chances of a significant increase in parts exports are greater than a significant increase in auto exports. This is reflected in the objective of the mission.

Mr. VANIK. I yield to my colleague, Mr. Gibbons.
Mr. GIBBONS. Thank you, Mr. Chairman.

Ambassador Hormats, you are so correct to point out that we have to be careful about how much screaming and hollering we do because we have the shoe on the other foot as far as the Europeans are concerned. Now what is your current surplus with the Europeans?

Mr. HORMATS. Let me give you the figures over the last several years.

With the EC we had a trade surplus of $4.9 billion in 1977. In 1978, it was $3 billion. In 1979, it was $9.3 billion. If you annualize the first 6 months of this year it will be something in the order of $18 billion, although I do not think it will get up that high.

Mr. GIBBONS. I certainly do not want to start a fire in the house in order to heat water. You say it probably will not go to 18 but we are looking at a 9.6 with Japan deficit and 18 surplus with Europe. I think the best American strategy right now would be to play it cool. That is the way most merchants in my area make a living.

Mr. HORMATS. In fact, there have been occasions when the Europeans have raised this surplus and we have made the point that you have just made, that is that we are not in the business of bilateral balancing. If we got too fixed on the idea of bilateral balances as opposed to dealing with specific trade problems, it could be used against us by some countries and could hurt products, particularly agricultural products, the export of which we want to increase.

Mr. Starkey can attest to some of the pressures in Europe to restrict exports of agricultural products.

Mr. GIBBONS. With the 9.6 deficit with Japan and let us say 12 to 18 surplus with Europe, why are we going to have such a big deficit this year?

Mr. HORMATS. Oil.

Mr. GIBBONS. With a 9.6 deficit with Japan and 12 to 18 percent surplus with Europe, why are we going to have such a big deficit this year?

Mr. HORMATS. A three-letter word, “oil.” The oil deficit will be something on the order of $80 billion. In fact, in the manufacturing sector we have done reasonably well and improved our balance over the last several years. This is particularly the case in the area of high technology exports.

We have done extremely well also in Mr. Starkey's area, agriculture. We have increased our surplus in the area of high technology products and agriculture over the last couple of years—particularly last year. The main problem in our current account and in our trade deficit is oil.

I think it is fair to say that if all countries were to trade to offset their oil-related deficit by promoting exports of manufactured goods, there would be a problem because the absorptive capacity of the OPEC countries is not that great.

Part of the difficulty is export credit, where a number of countries try to outdo one another by cutting interest rates. It is very wasteful, and it will lead to a progressive undercutting of one country by another.

Mr. GIBBONS. I do not want to leave the record showing that I was in any way favoring any kind of unfair practices that the Japanese have. I hope even if we have to run a surplus with them, I wish some day we could, that they would be absolutely free and fair and reciprocal in our agreements. I hope that it will be the negotiating position of the administration that we expect reciprocity from the Japanese. Is that the position of the administration?

Mr. HORMATS. That is exactly it. We do not focus on the bilateral imbalance as much as the multilateral balance; however, this should not be read by the Japanese as a signal that we are not going to be and are not in fact very tough on the individual trade problems. As I said before, there are a number of areas where we feel that we do not have adequate access to the Japanese market.

The resolution before this subcommittee mentions these areas. Whether there is a surplus or deficit between the United States and Japan, we would be just as insistent on the right of our sectors, the sectors involved, to have an opportunity to compete fairly in the Japanese market.

I will give you an example, the Government procurement code. We have insisted in our negotiations with Japan, as well as countries with which we have a trade surplus, that we ought to get reciprocity in the area of Government procurement. We intend to maintain this position. If the Japanese do nothing in the area of telecommunications, then they simply in order to provide reciprocity in the area of Government procurement, will not be given access to our Government procurement, as of January 1.

Mr. GIBBONS (presiding). I think that is a good tough position and I endorse it. Mr. Frenzel.

Mr. FRENZEL. Thank you, Mr. Chairman.

Mr. Ambassador and gentlemen, we are delighted to have your testimony. I want to congratulate State and Commerce on the brevity of their statements, some of the most brilliant testimony we have had before the subcommittee in years.

In your statement, Mr. Ambassador, you did discuss the NTT problem and just a moment ago you referred to your negotiations under the Government procurement code. As you know, this subcommittee and Japan's task force element feels very strongly about this matter and believes that NTT bids must come under the procurement code and I personally would urge you to maintain a very firm position in that regard.

I understand from material just supplied me by our staff that the relationship in trade of telephone terminal and switching equipment has become more unfavorable in the first half of 1980. Does that conform to your understanding?

Mr. HORMATS. I do not have the figures in front of me, but I am sure that is right.

Mr. FRENZEL. You are not aware that we have made any big sales over there lately?

Mr. HORMATS. That is right. None were brought to my attention.

Mr. FRENZEL. Mr. Chairman, I ask unanimous consent that I might introduce into the record at this point a statement on the balance of terminal and switching equipment with Japan, indicating that the ratio of trade between 1976 and 1979, which has varied from 15 to 1 to 20 to 1, now seems to have jumped to about 27 to 1, or in negative terms it has become more negative by about 60 percent in the first half of 1980, indicating that our trading partners are able to bid on jobs over here as contrasted with our total inability to bid in Japan.

I hope that that will be a little more incentive for our negotiators to maintain the position that they have maintained.

Again I want to thank the gentlemen for this testimony and to suggest to Mr. Starkey that while 90 percent of our trade is unfettered and 10 percent carries some change along with it, it is the trade that does not exist that worries us the most.

What we are trying to do is change some attitudes on the part of Americans and to continue what we perceive as a positive attitude on the part of Japan in becoming more and more open and making the market at least closer to that of a free market which we would like to have.

Mr. GIBBONS. Without objection, the request will be granted. [The information follows:]

68-676 0 - 81 - 3

BALANCE OF TRADE WITH JAPAN TELEPHONE TERMINAL AND SWITCHING

EQUIPMENT SUPPLIED BY USITC)

SUMMARY The overall balance of trade with Japan for all apparatus used in the U.S. telephone system is estimated to be considerably worse than the balance of trade figure for just telephone terminal and switching equipment given below.

The balance of trade with Japan for telephone terminal and switching equipment alone has been and is negative.

The balance of trade with Japan is increasingly negative. In 1976 imports exceeded exports by $25.7 million. In 1979, the balance of trade was a negative $77 million.

Compared to the first half of 1979, the negative balance of trade with Japan in the first half of 1980 has increased (become more negative) by 60 percent.

In the first half of 1980, the ratio of imports to exports (trade with Japan only) took a significant jump. In the first half of 1980, the ratio was 26.6 to 1. Between 1976 and 1979, imports divided by exports had ratios of from 14.8 to 1 to 19.4 to 1. TELEPHONE TERMINAL AND SWITCHING EQUIPMENT: U.S. IMPORTS, EXPORTS, AND BALANCE OF

TRADE WITH JAPAN

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Switching equipment and parts:

Imports.
Exports

Balance of trade.
Telephone instruments:

Imports.
Exports.

Balance of trade.
Other telephone apparatus:

Imports.
Exports ......

Balance of trade.
Total:

Imports.
Exports.

Balance of trade.
Ratio imports to exports.

[blocks in formation]

35,167

2,170 32,997

73,240

3,768 -69,472

56,476

2,127 - 54,349

60

- 25,698

16.2

19.4

26.6

18.6

- 77,005

14.8

- 33,900

17.0

Source: Official statistics of the U.S. Department of Commerce.

* The data do not include the value of telephone transmission equipment such as radio lines, satellite antennas.

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Source: Official Statistics of the US Department of Commerce

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