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Senator MONDALE. Are you talking about unemployment insurance ?
Mr. BERGSTEN. That is right. I think that is the response. I think any effort to put import quotas on now would be totally ineffective because American demand for automobiles has shifted from large to small cars. If you put quotas on imports of small cars, you are not going to significantly increase the demand for large cars. You simply reduce the demand for all automobiles, until the quotas are lifted or until Detroit has retooled itself to produce the small cars which are being demanded now by American consumers.
I think there is very little chance that import quotas of the type called for would have a very significant effect in increasing employment in our automobile industry, because the American consumer's demand for automobiles is simply not for the kind of cars that Detroit is now prepared to produce.
Indeed, I would think that putting on import quotas would slow the pressure on Detroit to convert to produce the kind of cars that they can sell here, and therefore, even in the relatively short run, would have an adverse impact on employment in the automobile industry.
Senator MONDALE. I am going to return with some other questions but for the moment, Senator Fannin.
Senator FANNIN. Mr. Chairman, just to get into that one subject, as far as what the automotive industry has done I think we have to realize the tremendous number of jobs that have been available over the year because they have been producing a larger car. And I do not believe that the American public is demanding a small car. But I do feel that they are demanding an efficient car, and I think this is shown by their willingness to buy expensive cars produced, for instance, in Germany that are more efficient.
As an illustration of what is being done, if we are going to have the jobs available in the automotive industry and the public is going to have the demand satisfied, I think we should look forward to producing both a small car and a large car or medium sized car that has a low utilization of fuel. I think that is what we really must look forward to. I do not think we want to just say, well, everyone wants a small car, because most people do not want a small car. They want comfort in the car and I think they are willing to pay for it, but they are concerned with the utilization of fuel.
Do you agree with that?
Mr. BERGSTEN. I fully agree with the focus on efficiency. But there is a pretty high correlation between efficient utilization of energy resources and the size of the car.
Senator FANNIN. Yes, but you can have lighter metals utilized. You can have many cutbacks as far as weight is concerned in the car, and you can have a much more efficient running car as illustrated by some of the foreign cars being sold in the United States today. Well, that is one matter that I think is important because if we are talking about jobs in the automotive industry, that is certainly a factor.
One thing I wanted to discuss with Mr. Gardner is concerning the current policy within the European economic community. Do you think we can attain a consensus among our trading partners to revise GATT to insure access to supply?
the very same problem that we have faced in oil--that foreign producing countries may develop cartels to try to gouge us on price, the same as they have done in oil—and that we have to respond to that very effectively. So I am with you on that.
Senator HANSEN, I am sure that Zaki Yamani needs no defense from me, but when we visited some of the Arab countries early this year in January and we talked about the commonality of interest that we and they had in keeping prices down so as to halt or slow down the possibility of a world-wide inflationary spiral, they said do not look at us. First compare the cost of American products that we are buying, and they spoke about a nuniber of things. And they had some pretty dramatic illustrations.
So let us not look at the Arabs and say quite insulated from any other consideration that the oil prices have risen. I think a point can be made that they are using a depletable resource. The time will come -I do not know how quickly—when they will be out of oil.
And to conclude, Mr. Chairman, the point that they were making is that when we compare the price of oil as it has escalated in recent months, they would like us also to compare the price of goods that they have been buying from us in recent months.
Mr. BERGSTEN. May I say I think you make one of the most important points that can be made in this discussion, because in a highly inflationary environment such as we now have everybody is trying to keep one leap ahead of the other guy in raising his prices. That is why I am calling for a U.S. trade policy, a new set of measures, a new set of mechanisms to try to cut that off because everybody loses very, very badly in both economic and social terms if the process continues.
Senator HANSEN. Thank you, Mr. Chairman.
Senator PACKWOOD. Mr. Bergsten, on adjustment assistance, we have had several witnesses testify as to the distinction among the words substantial, primary, and major. In your opinion, what should be the standard for adjustment assistance ?
Mr. BERGSTEN. Substantial.
Mr. BERGSTEN. I think the eligibility criteria in the bill as it now stands are quite good and would provide the basis for an effective adjustment assistance program.
Senator PACKWOOD. Were we to adopt the Mondale Amendment, should we have a provision for veto by Congress in the event the President exercises his power unwisely in using export retaliation powers?
Mr. BERGSTEN. I should certainly think you should careful proce dural safeguards that insure the open testimony of all interested parties before any decisions were taken.
Whether you would want to have a congressional veto, or rely on Tariff Commission procedures as we now do in the escape clause, is a hard question and really gets to whether the Congress feels it should
take up individual issues of that type. I would certainly have no objection to it. I think it would add to the basic purpose, to make sure that there are procedural safeguards and the whole issue is considered very carefully.
There are usually not very great time urgencies on these matters, so I would not be dissuaded by a concern that it would slow the processes.
Senator PACKWOOD. I think Senator Mondale has a good idea, but we make no particular provision one way or another and I wonder if there is any value in consistency when we are talking about trying to achieve the same end in toto, whether we are talking about tariff or non tariff barriers, or export limitations.
Mr. BERGSTEN. It would be consistent. I think the intimate involvement of Congress in trade policy is essential because trade is such a highly politicized issue in this country now, and Congressional input is the only way to insure that all aspects of the issue are always heard.
So as I say, I would certainly have no objection to that inclusion.
Senator Rori. A number of our witnesses in the past have expressed concern about preserving the industrial base of this Nation, that we should not permit ourselves to become a service country.
I wonder if you would care to comment on that, and if you agree that it is a problem, what we should do to make certain that we maintain the industry we need down the road.
Mr. BERGSTEN. I certainly share the concern that the United States retain a strong industrial base. I must say I am quite pleased and optimistic about our ability to do so.
In looking at our foreign trade performance, even during the period of massive overvaluation of the dollar in 1969 through 1971, our trade surplus in capital equipment, heavy production goods, the kind of things that make up an industrial base, remained very sizable and quite strong;
Since the exchange rate realinements have removed the artificial impediment to our competitive position caused by disequilibrium exchange rates, there has been of course the most dramatic improvement in our trade balance in a single year than has ever happened in the history of tradean $8 billion improvement in our commercial trade balance, some of it agriculture, but much of it, in addition, on the side of manufactured goods, with the volume of our industrial exports rising by almost 25 percent in a single year.
All of that, I must say, gives me a great deal of confidence in our industrial base. The question for the future is how one insures retaining that industrial base.
I for one would be reluctant to think that we could maintain it by erecting barriers to competition within our industrial base. I indicated before, on the automobile industry, that the impulse of external competition has forced our automobile industry to innovate, modernize, diversify itself. I would simply think that any kind of barriers to imports, or on the export side as well
, would undermine the objective of trying to maintain our industrial base.
Senator Roth. I just wanted to pose one further question.
To the extent that the international competition is based upon cheaper labor, can we necessarily expect our industry to maintain the kind of compensation we desire when it does compete with other countries where labor is far cheaper?
Mr. BERGSTEN. Of course economists will always tell you that cheaper wage rates reflect lower productivity and that it all balances out. In many cases that is true. But in some cases, one would have to admit that lower wages prevail beyond the time that productivity has remained low.
However, in a world of flexible exchange rates, that problem should not arise because any differential between wages and productivity in a particular country would immediately affect the exchange rate of that country. And if they are in an unfairly favorable competitive position, as a result of such a divergence, their exchange rate will rise. That will raise the prices of their goods to offset the divergence, and offset any unfair competitive advantage they might have.
Again, the dramatic improvement in our trade balance last year vis-a-vis Japan, vis-a-vis Korea, vis-a-vis Taiwan, countries that are cited as being low-wage exporters, are, I think, dramatic evidence that this analysis is in fact accurate.
Senator Roth. I am not an economist but I must say that I do have some concern that these self-adjustments do not come about as rapidly as may be desirable.
Let me ask you this question. It is expected on the part of many observers that Japan and even Western Europe, because of the higher price of oil, are going to aggressively push sales to our market. Do you see that this requires any special steps by us, in view of your testimony?
Mr. BERGSTEN. It certainly requires very tight vigilance over those countries. There is in fact exactly such vigilance going on in the international monetary forums, to avoid competitive depreciation of exchange rates, which is one way to do it.
I must say I have been encouraged. No country in the wake of the oil problem has competitively devalued its exchange rate. No one has put on import barriers. No one has been subsidizing exports. I keep my fingers crossed. But so far so good. We certainly must be very vigilant, though, in seeing that this continues. Senator Roth. My time is
Thank you. Senator MONDALE. Senator Nelson.
Senator Nelson. I have been in another meeting so I did not have the chance to hear your testimony. I do not want to be repetitious, but I would like to pursue that question of Senator Roth's on wage rates. I am not an economist either, but in the past 2 years I have talked to a number of people in the electronics business who say that they just cannot compete, and they are better off if they close down their business here. The business is highly labor intensive, and so they go to Taiwan or elsewhere. If they don't move, they say, they are getting the tar beaten out of them because of the wage differentials, the cost factor.
What is your observation about that?
Mr. BERGSTEN. I am reluctant to make much observation with two rows of representatives from the electronics industry sitting behind me. [General laughter.]
Senator NELSON. Is that so? I have never seen any one of them before, but anyway, let's hear what you have to say about that.
You can face them if you do not want to have your back to them when you talk. (General laughter.]
Mr. BERGSTEN. As I understand it, there are some significant differences within the electronics industry on the point that you raised.
On some components, for example, and even some final manufactured products, it does seem that competitive advantage has shifted to other countries who combine lower wage bases plus an ability to pick up the technology that is now available fairly widely.
So one, therefore, has to ask the question, if the United States firms did not pick up and invest abroad, as you say, what would happen otherwise? And what those firms usually suggest is that if they did not make those foreign investments, we would instead import the goods from the same countries but from firms centered in those countries, centered in Japan, centered in European countries which themselves invested in Taiwan, Singapore, wherever it might be.
One always does have the option of trying to put up import barriers to block that kind of import flow. That raises the fundamental question of trade policy.
I have mentioned at the outset, and it has been alluded to by a number of Senators, that it is a trade off. You can try to hold back the inevitable ebb and flow of economic structure of this or any other country by raising artificial barriers to it, be it import controls or price and wage controls. But when you do that you significantly raise your costs and your prices domestically, fueling inflation. You reduce the productivity of your own labor force in your own industry, and over the long term you can only have the effect of both raising inflation and undermining your own growth potential. You do have the choice; you can put up the barriers, but you must recognize that there are very high costs to doing it.
It is a policy option, there is no doubt about it. But it is a costly one and in my view, at this point in time, it is exactly the opposite of what we need.
Senator Nelson. If everybody did the same thing, maybe it would not make any difference. But we keep being told that, for example, the European countries subsidize. I hear it because I am from a dairy State. The Europeans subsidize the exportation of dairy products and set up barriers to our products. What does this country do in dealing with a country which sets up barriers to our products, or, if not barriers, subsidizes their exports. How do we deal with that?
For example, we have had testimony here in the Finance Committee that you can barely get an American car into the Japanese market because of all kinds of complicated marketing structure difficulties which they have set up. Yet our markets are open to all of their cars. You see them all over. How do you deal with that? You can talk free trade all you want, but we are dealing with a huge industrial power that keeps us out and wants to be in here.