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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 up. 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.

How do you deal with that?

Mr. BERGSTEN. I think you deal with it two ways, and you may do the two simultaneously. One is to try very, very hard to negotiate the elimination of those barriers. That in fact is a major rationale for getting into a big new trade negotiation to deal with precisely the kind of nontariff barriers you are mentioning, the common agricultural policy in Europe, and nontariff barriers in Japan. You try to negotiate. But if you cannot negotiate with them, you hit them over the head.

Senator NELSON. But we have never hit them over the head. You can go to our State Department officials dealing with agricultural policy and they really do not care. Let the stuff come in, they say because their problem is negotiating NATO this or that, so the hell with the farmer. And they are the ones who determine what happens, not our Agricultural Department. We have fought that battle for years. Take subsidization and the tremendous invasion of the market by subsidized dairy products. Our Department of Agriculture tells our farmers to cut back production to bring it into conformity with demand. They cut it way back and then the Government floods the market with foreign imports. That is a good answer except we never do it.

Mr. BERGSTEN. Senator, I could comfort you in the sense of assuring you that

Senator NELSON. I am not just talking about dairy.

Mr. BERGSTEN. I understand that, but I can assure you that the State Department has not determined U.S. trade policy. I can tell you that both from my experience from being in the White House and from observing it outside.

Senator NELSON. Maybe nobody does.

[General laughter.]

Senator NELSON. On another dairy issue, I can recall during the middle of the Vietnam war, that, all of a sudden we gave a big import quota of cheese to Australia because Australia was sending boys over to Vietnam. That is the only connection I could make on it. It was cheddar cheese in violation of the import quota, there was no doubt about it.

We finally proved it, but that was a State Department operation. Now I do not know who determines it.

Senator NELSON. But the point is that your answer is, let's hit them over the head. What bothers everybody is that we never hit anybody over the head.

Mr. BERGSTEN. I think in writing the Trade Reform Act you can certainly add to the likelihood that we do hit them over the head in cases where they deal unfairly by requiring the application of countervailing duties against foreign export subsidies where they injure American interests. We should countervail against such instances. We should apply the antidumping duties in cases where foreign firms are unfairly dumping their products on our markets.

Senator NELSON. Does our country even know who is doing it and to what extent? I never could find out.

Mr. BERGSTEN. It is very difficult, Senator, to track down some of these export subsidies or unfair trade practices. A lot of industries in this country complain about a lot of such practices but when asked to come up and recite chapter and verse, they often are not very good at doing so.

I have tried that when I was in the Government. I know that successive administrations have tried to get U.S. industry to lay it on the line. They complain about foreign barriers and unfair foreign practices, but when asked to lay it on the line they often do not come up with any details.

Senator MONDALE. We have gone beyond our 5 minutes. Senator NELSON. Yes, but you are getting good questions. [General laughter.]

Mr. BERGSTEN. And good answers.

[General laughter.]

Senator MONDALE. Superb answers.

Senator NELSON. May I ask one more question?

Senator MONDALE. I don't object.

Senator NELSON. Thank you very much.

Senator FANNIN. Would you ask one for me? Ask about how they justify the 3-percent tariff on all those Japanese cars and other cars coming in, and still we cannot get a car into any other country of the world from anywhere to 2 to 5 or 10 times that much?

Senator NELSON. Do you want me to ask it?

[General laughter.]

Senator NELSON. Go ahead.

Senator FANNIN. It was along your line of questioning, I would like to have their thoughts on why we permit these cars to come in on a 3-percent tariff when the Japanese have 6 or more percent, 10 or 11 percent in the European economic community, plus nontariff barriers that are 10 times that much. That cannot be justified.

Mr. BERGSTEN. The structure of tariff and nontariff barriers differs very markedly from country to country. In some sectors our import barriers are of course much higher than those in some other countries. So while we would legitimately have the concern you expressed on automobiles, other countries would have them on textiles or steel.

Senator FANNIN. But in our unemployment, that is the problem we are facing in the automotive industry. This has come about over a period of years. You say it came about just because we did not build smaller cars. Well, that is not true. There are many factors involved and I think you will agree with me that there are contributing factors.

So I just ask you: can you justify all of these foreign cars coming in at 3 percent?

Mr. BERGSTEN. Senator, as I indicated in my statement, I really would not try to justify any of these import barriers. I really would think that getting into a multilateral trade negotiation now, with the primary objective of exactly what you say, negotiating down those foreign restraints, should have top priority.

Senator FANNIN. We just do not have the votes in GATT to get anything done, is that not right?

Mr. BERGSTEN. The votes in GATT are a real problem, I agree with you. I think there should be renegotiation of many of the rules, including voting procedures.

Senator FANNIN. Thank you very much.

Mr. GARDNER. Mr. Chairman, may I make one or two comments on the questions that have come up in the last few moments? Senator MONDALE. Certainly.

Mr. GARDNER. First of all, I think it is clear that we are not going to be able to succeed in renegotiating GATT from top to bottom since amendments require a two-thirds vote and we have a one-nationone-vote system and over 80 countries. Therefore, the way forward, it seems to me, is the approach suggested by the panel of the Atlantic Council recently, headed by Ambassador John Leddy, which is to negotiate a new code of trade liberalization among the key trading countries, the European community, the United States, Japan, perhaps Canada, and one or two others. That can be done without a formal amendment of the GATT. The 10 or 12 principal countries can get together and write some new rules which will be effective among themselves with some new decisionmaking and voting arrangements assuring approximate parity in voting between the Community, the United States, Japan and so on.

This can be done, and one reason we are in difficulty, in answer to Senator Nelson's question, is that the nontariff barriers have not been effectively dealt with for the last 30 years and it is partly the responsibility of the United States that they have not been.

It was our country that first carved out a big exception for agricultural, particularly dairy products, from article XI of GATT. It was not the Europeans that started it.

The reason that GATT is ineffective in agriculture, ineffective in Government procurement, subsidies, and many of these other things, is in large part traceable historically to U.S. policy.

Now I do not wish to say that we are more to blame than anyone else. But that, I think, is an historical fact that we have to contend with. We are now trying to renovate the whole system and deal with these major areas that for 30 years have not been effectively regulated by the international trade rules.

One other comment. I think the sectoral equivalence provision in the nontariff barrier authority is most unfortunate, and I would urge that this committee take a vary hard look at it. In my judgment it would make it difficult, perhaps even impossible, to negotiate new and effective rules about nontariff barriers in the areas that we have been discussing.

We have historically in this country and with our trading partners sought reciprocity across the board. If we are going to have to seek competitive equivalence in 40 different product sectors, as this is now interpreted by the President's Special Trade Representative and by the House Ways and Means Committee, we are going to put a terrible burden on our negotiators in fixing up the rules of the international trading game.

Senator NELSON. And your recommendation is what?

Mr. GARDNER. I would recommend that that section-it is in my testimony.

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