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And I suspect when I go out to my district, which you represented quite well as Lieutenant Governor and as Attorney General of Massachusetts, and you know the manufacturing base and what has happened to it over the course of the last two decades.

What the people in my area suggest, those that are in management and those that are in labor, is all they want is a level playing field, and that somehow the Japanese just don't take us seriously when we try to penetrate their markets.

Could you maybe give a response to that.

Mr. RICHARDSON. Yes, I would be glad to, Mr. Neal. I would just like to add that it's a pleasure to testify before a fellow citizen of Massachusetts whom I have known in your earlier years of contribution to the city of Springfield and the Commonwealth of Massachusetts.

I think the feeling of Americans, including your own constituents, that you reflect is very understandable, and in general terms the goal of achieving a level playing field is clearly a valid and justifiable goal.

It is the objective of the structural investment initiatives now subject to negotiation with Japan. We have gone beyond the stage simply of trying to reduce trade barriers to the import, for example, of citrus fruits and beef, and we are now addressing things like the impenetrability of the Japanese distribution system and whatever may be the barriers to foreign direct investment in Japan.

These things are difficult to get at. In the case of the latter, for example, the cross holdings of equity as between banks and affiliated companies makes it difficult for outsiders to acquire a substantial stake in a Japanese company, and it's not easy to dismantle that kind of structure, and it's probably not obvious to what extent it should be done.

In any event, the Japanese are conscious of these problems. They are conscious of the need to increase their imports of United States and other foreign-made products, and interestingly and ironically the ratio of exports to Japan from Japanese-owned companies is substantially higher than the ratio of exports abroad to Japan or anywhere else by non-foreign owned companies.

The Honda plant, and I'm not sure whether it's the one in Ohio that the chairman referred to, is beginning to export U.S. made Hondas to Japan.

Chair OAKAR. It's the one in Ohio.

Mr. RICHARDSON. They will be the largest number of U.S. made cars in fact to be sold in Japan in the coming year, although the beginning totals are relatively small.

Shifting from that aspect of balance, there are of course the questions arising out of the extent to which the United States has borne a much larger share of the burdens of military and mutual securities spending than Japan in particular and indeed our European allies as well.

But Japan is beginning to redress that imbalance through assuming a much larger share of support for economic development. Japan has now passed the United States as a donor and lender for economic development.

I have just been appointed as President Bush's representative to the multilateral assistance initiative for the Philippines, for example.

An amount of $3.5 billion was pledged at the Pledging Conference in Tokyo in July, and of that the Japanese total in the first year is $1 billion as compared with the United States's total of $200 million, and I think the Japanese will continue to expand their economic assistance.

On the military side itself, they are already doing a lot, and I'm not sure how good a case we can make for increasing that. They do cover all the costs of the U.S. presence in Japan, and they have been expanding their own military expenditures.

In any event, in principle the point you raise is a fair one, and I think it should be pursued further having in view the elements of fairness on both sides.

Mr. NEAL. As a followup question, and I don't mean to focus just upon the Japanese in this instance, but one of the contributors to the Atlantic, and the name escapes me at the moment, just wrote a fascinating little book called "More Like Us."

Mr. RICHARDSON. James Fallows.

Mr. NEAL. Yes, Jim Fallows. He was here recently on Capitol Hill for a luncheon, and he effectively made the argument that our European allies and our Japanese allies, simply don't take what we have to say seriously any more about trade and investment.

He said that essentially the American public lurches in the direction of an emotional issue from time to time, like the decision of the Japanese to purchase a controlling interest in Rockefeller Center, and that we get all worked up and that the political establishment and the political community makes some harsh statements, and 6 months later the Japanese believe that the argument has gone away and it's a continuation of the same practices.

You've had a distinguished career in international affairs, and you perhaps have a better understanding than anybody in the room of how our European allies and our Japanese allies react to public positions adopted by American political leaders.

Mr. RICHARDSON. I could say, Congressman Neal, that what is involved here is a set of reactions at rather different levels in different groups. On one plane are popular reactions both in Japan and the United States that are influenced by immediate events and often take emotional form.

In the United States this is manifested by a certain degree of resentment towards the penetration of Japanese products into the American market. The perception of the presence of Japanese capital in large concentrations, as in Hawaii or in Los Angeles real estate and visible investments like those by Sony and the Rockefeller Center sale, does create apprehensions about the loss of control of our own destiny and the penetration of foreign influence and so

on.

On the Japanese side there is a growing nationalistic reaction on the part of many people who think that the United States pushes and pushes and pushes and demands and demands and demands, and the Japanese Government gives too much and too continually, and it's really that the United States is just being childish and complaining when the problem really stems from the fact that we

haven't worked hard enough and that we haven't hustled to get foreign markets in the same degree to which Japan has done so, that we have let our quality slip and our focus become shortsighted, as Morita noted, and that they are tired of constantly yielding to us.

Apart from these short-term and immediate popular reactions, there is in the leadership of both countries a much steadier and clearer perception of the degree to which the United States and Japan have mutual interests and responsibilities.

This is why Ambassador Mansfield has so often pointed out that the U.S./Japanese relationship is the most important bilateral relationship in the world bar none. He is surely correct in this. The very manifestations of the global economy itself and the other global phenomena, including climate change, that require multilateral solutions present challenges to U.S./Japanese cooperation and leadership. We need to work together beyond the plane of purely bilateral frictions and concerns and get on with the business of addressing the realities of a world in which Japanese and the United States have together both the largest stake and the largest responsibility.

The Japanese leadership by and large today is committed to the effort to bring down the trade imbalance and to encourage U.S. imports.

I think what we need to do basically is to encourage and support these responsible leaders and voices and to try to introduce as best we can a note of moderation and rationality in responding to the outbursts of pettiness and concern that react to immediate developments.

Mr. NEAL. Thank you.

Thank you, Madam Chairwoman.

Chair OAKAR. Thank you.

Just one last bottom line question, and if it could be a yes or no that would be helpful in view of our time restraint.

Our committee has jurisdiction over the Defense Production Act, which is the Act that under certain emergencies we must have the necessary industrial base and energy security to deal with a crisis situation. Our committee is obviously very concerned about the Navy's shutdown for 48 hours in order review their safety procedures.

Mr. Secretary, in view of your experience in being past Secretary of Defense, among other things, are there any industries, such as industries related to national security where we ought to impose a certain degree of barrier or regulation?

Great Britain, for example, does this and they are the biggest investor I think in this country. They do this with respect to oil and energy security for their own country.

I'm wondering if you think that there are any instances where we ought to take a more specific look at this whole issue of foreign investment as it relates to national security?

Mr. RICHARDSON. The short answer, Madam Chairwoman, is yes. Pages 18 and following of my statement address the national security dimensions of the subject and point out that we do in fact have in place laws that address it.

I can't refrain from adding that the subject here needs to be subdivided between, on the one side, the implications of foreign acquisitions, which are addressed, for example, by the Exon-Florio Amendment, and the need for a productive base in the United States for given products regardless of who happens to own the plant that produces the product in question, and that of course is the immediate concern of the Defense Production Act.

Chair OAKAR. Well, I want to thank you very much. As I mentioned, we are going to be asking additional questions, but your statement was certainly very comprehensive and very much to the point, and we appreciate all the research and work that you and your distinguished colleagues put into the statement. It will be very helpful for our record.

Thank you very much, Mr. Secretary.

Mr. RICHARDSON. Thank you very much, Madam Chairwoman and Members of the subcommittee. I have welcomed this opportunity and appreciate very much the hearing you have given us.

Thank you.

[Further questions to be responded to for the record from committee members can be found in the appendix.]

Chair OAKAR. Our next witnesses, which we are very pleased to call forward, are Dr. Pat Choate and Professor Susan Tolchin.

Dr. Choate is vice president, Office of Policy Analysis of TRW. He received his Ph.D. in economics from the University of Oklahoma. He is a specialist in economic development and public policy, he studies long-term United States competitiveness and has wide experience in government, including positions with various economic development administrations and community development.

He is the author of numerous reports and papers on economic competitiveness, management and public administration. His books include "America In Ruins," "Being Number One: Thinking Strategically," "The High Flex Society," and he is now writing a book on foreign political influence in American trade and economic policymaking, and if he isn't writing it, he will be, I guarantee it.

Also joining him is an individual that has come before our caucus. She and her husband were distinguished guests of our caucus. Professor Susan Tolchin is on the faculty of George Washington University. She is a professor of public administration in the School of Government and Business Administration, and a nationally recognized expert in the field of American Government and politics.

Dr. Tolchin has written many articles and books, including best sellers such as "Buying Into America-How Foreign Money is Changing the Face of our Nation," and "Dismantling America-the Rush to Deregulate."

She received her Ph.D. from New York University and her MA from the University of Chicago. In the area of professional and community service she has served on many boards and worked for many groups.

I think that we're really leading off this hearing with really among the best witnesses we could get, and I'm just delighted that both of you were able to be here.

If you could summarize, and we'll have you back again, because of the problems we have with the Joint Session today, which we

are delighted to have such a distinguished speaker. But if you could summarize and leave some time for questions in the time we have remaining, I would be very, very grateful.

Dr. Choate, if you would like to proceed, we would be delighted to hear from you, and we will put your entire statement in the record. It was excellent, by the way.

STATEMENT OF DR. PAT CHOATE, VICE PRESIDENT OF POLICY ANALYSIS, TRW, INC.

Dr. CHOATE. Thank you very much, Madam Chairwoman. I am very pleased to have the opportunity to share some thoughts with you this morning, and I will try to hold my comments to 4 or 5 minutes to set it up for an exchange.

Chair OAKAR. Great.

Dr. CHOATE. I would like to bring to your attention a report that was released this morning by the Congressional Economic Leadership Institute called "Foreign Investment Barriers," a study which compares the investment barriers in the United States with those in 11 of America's trading partners. Copies of this report have been sent to the offices of each Member of the committee.

Chair OAKAR. Well, without objection, we would like to put the entire report in the record. It's a bipartisan group, and I'm a member of it, and I know it has worked in both avenues.

Dr. CHOATE. Thank you, Madam Chairwoman.

I would like to point out that the central conclusion of this report is that the United States market is more open to foreign investment than is any other country examined by the study.

I think that the basic point that we've got to consider when talking about issues related to foreign investment policy is not whether the United States will accept foreign imports and foreign investments-we do-but whether other nations take our exports and our investments.

Increasingly, it is also an issue of how does investment fit into a larger pattern of economic relationships between nations.

There are some points that I make in my testimony and some other points that I would just like to respond to in light of Mr. Richardson's comments.

First, I think we must start off with the understanding that, while investment is indeed an emotional issue, it is an emotional issue by and large because it is also an economic issue and a political issue. Moreover, and our system has not yet recognized the role of investment in international relationships.

What we are seeing today is a circumstance in which most of the foreign investment that is occurring inside the United States are buyouts of existing corporations rather than startups of new ones. We are seeing that, of the hostile, unwanted raids in the United States, roughly 75 percent in 1988 were raids by foreign firms. This disrupts American corporations. We are seeing that major theme of foreign investments in America is to acquire U.S. technology. I think that it is quite clear that more technology is going out of America than is coming in.

Second, we are seeing foreign investment permits foreign corporations, particularly from Japan and, to a lesser degree, from

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