*EPF404 02/24/00
Text: Deputy USTR Fisher on U.S. Trade Policy and Trade Deficit
(Says trade policy success measured by opening markets) (2320)

Deputy U.S. Trade Representative Richard Fisher says the success of trade policy should be measured by its effectiveness in removing foreign barriers to U.S. goods and helping to increase U.S. exports rather than achieving a certain trade balance.

"Trade policy is likely to have only a small effect on overall U.S. trade balance levels," Fisher told a February 24 meeting of the U.S. Trade Deficit Review Commission, a panel created by the U.S. Congress.

In 1999, the U.S. trade deficit was $271,000 million, the largest ever, as exports and imports both reached record levels. The 1999 deficit -- 65 percent higher than the 1998 deficit -- was equal to 2.9 percent of U.S. gross domestic product (GDP), less than the 1987 record of 3.2 percent of GDP.

Behind the rapid increase in the trade deficit last year was the continued strong growth in the U.S. economy, compared with weaker economies abroad, and stronger U.S. national investment rates, Fisher said. The difference in growth between the United States and the rest of the world has increased the U.S. trade deficits with nearly all major trading partners, he said.

Erecting higher trade barriers, however, would not help, Fisher said, because it would prompt foreign retaliation against U.S. exports. "By threatening foreign economies and reducing demand overseas, it would simply shrink both exports and imports," he said.

The Clinton administration has sought to increase trade and reduce barriers by completing nearly 300 separate trade agreements, Fisher said. These include the North American Free Trade Agreement, the Uruguay Round agreements that established the World Trade Organization, 38 separate market-opening agreements with Japan and others.

"Trade policy -- together with a strengthening commitment to education and job training, investments in science and technology at home, and a restoration of fiscal discipline -- has helped to fundamentally improve our country's situation," he said.

Following are terms and abbreviations used in the text:

-- WTO: World Trade Organization.

-- ASEAN: Association of South East Asian Nations.

-- trillion: 1,000,000 million.

-- billion: 1,000 million.

Following is the text of Fisher's testimony as prepared for delivery:

(begin text)

AMERICAN TRADE POLICY AND THE TRADE BALANCE

Testimony of Ambassador Richard Fisher
Deputy U.S. Trade Representative

U.S. Trade Deficit Review Commission
Washington, D.C.

February 24, 2000

Good afternoon, I thank the Commission and Ambassador Hills for this opportunity to discuss the U.S. trade balance and its implications for American trade policy.

Let me begin by saying that I applaud the Commission's work, and believe the results of your hearings and research can be immensely valuable as the public and Congress debate American trade policy in the years ahead.

U.S. TRADE RECORD AND PHILOSOPHY

I will open by making a few points about the general philosophy of American trade policy, and then discuss the interplay of trade policy and the trade deficit.

U.S. trade policy generally has not set the goal of achieving particular levels of trade balance. To begin with, as previous Administration witnesses before the Committee have noted, overall balance levels are mainly the result of macroeconomic factors. For example, the robust growth in the United States in the past two years, in contrast to weak growth and recessions abroad, have helped to increase the trade deficit.

Our view, therefore, is that U.S. trade policy should be measured by its success in achieving goals such as removing foreign barriers to our exports; and by fundamental results such as expanding exports and the high paying jobs they support, raising real purchasing power and living standards for Americans, and encouraging long term growth. This has been the guiding principle of American trade policy since the New Deal under the Administration of Franklin Roosevelt.

CLINTON ADMINISTRATION RECORD

Since then, Administrations of both parties have designed trade policy less to achieve particular levels of import-export balance than to contribute to larger economic goals of rising living standards and long-term growth. And the Clinton Administration's trade policies have been squarely in this tradition.

Building upon a bipartisan record of achievement, for which Ambassador Hills among others deserves a great deal of credit, we have completed nearly 300 separate trade agreements.

These include five which have fundamentally changed our country's trade environment, both through further opening our own economy and through greatly increasing the opportunities available to us in foreign markets.

First, we cemented our most important relationships -- those with our immediate neighbors, Canada and Mexico, which make up more than one dollar in three of all our trade with the world -- through passage of the North American Free Trade Agreement in 1993.

Second, we strengthened the rule of law and opened markets worldwide through the completion of the Uruguay Round Agreements and creation of the WTO in 1995. Together with this are 38 separate market-opening agreements with Japan, and similar agreements with major trading partners such as Europe, Canada, Latin America and Korea. Our agreement on China's WTO accession is a similar step forward, opening the markets of the world's most populous nation to a degree unprecedented in the modern era.

Third, after the creation of the WTO, we completed a get of agreements on information technology products, telecommunications, financial services and most recently electronic commerce, that open the world to the high-tech products and services in which our country excels.

Thus, trade policy -- together with a strengthening commitment to education and job training, investments in science and technology at home, and a restoration of fiscal discipline -- has helped to fundamentally improve our country's situation. Over the past decade, America has built a record of:

-- Growth: Our economy has expanded from $7 trillion to $9.2 trillion in real terms, during the longest economic expansion in America's history. The expansion of exports during this period, totaling well over $300 billion, accounted for a third of our growth until the recent financial crisis. Especially impressive has been the growth in American manufacturing, with production rising from $1 trillion to $1.4 trillion during this period.

-- Job Creation: We have created over 20 million new jobs, including a net gain of 259,000 manufacturing jobs, as unemployment rates have fallen from 7.3 percent to 4.0 percent. This is the lowest unemployment rate since January of 1970. These benefits have been shared widely throughout our economy, with African-American and Hispanic unemployment rates the lowest ever measured. Nearly 12 million American jobs are related to exports.

-- Technological Progress: Our economy is more competitive, with unprecedented technological advance and rising rates of investment. Impartial observers have rated us the world's most competitive economy for the past seven years.

-- Rising Living Standards: Our families enjoy higher living standards, with average wages for non-supervisory workers reversing a twenty-year decline to grow by 6.8 percent in real terms since 1992; record rates of home ownership; sharp declines in the poverty rate; and unprecedented growth of family assets, investment in mutual funds, and other measures of financial well-being. Over 80 million Americans are now invested in equities. This is a dramatic statement of the evolution of our society: as many people need read the green section of USA Today as do the red section. The American dream used to be owning a home; now it is to also own a well-performing mutual fund.

-- Economic Security: While trade is often considered a factor promoting change, trade policy has also helped to give us guarantees of economic security in crisis. This was made very clear during the Asian financial crisis, when our network of trade agreements helped to prevent a worldwide cycle of protection and retaliation that would have done immense damage to American farmers, manufacturing exporters and our overall economic health.

Finally, a comment that is particularly relevant to my generation. I mentioned above that our unemployment rate has fallen to its lowest level since 1970, when we last had 4 percent unemployment. In 1974, trade as a fraction of GDP -- the sum of exports and imports of goods and services -- was 13 percent. Today it is 31 percent. Then, at the height of the Vietnam War, defense spending accounted for 8 percent of GDP. Today it accounts for 3 percent. We have accomplished since 1970 a shift from creating employment and structuring our economy through conducting and preparing for war to an economy driven by the more-peaceful challenge of competing internationally on the economic front.

THE TRADE DEFICIT

Based on these most fundamental criteria, therefore, trade policy should be judged a success. The record of the past seven years, however, has also coincided with a sharp increase in our trade imbalance, from a rough balance during the last recession in 1991, to a deficit (goods and services) of about 1.4 percent of GDP in the period between 1994-1997 (compared to 3.2 percent of GDP in the late 1980s); and then to last year's level of $271 billion, or 2.9 percent of GDP.

Administration officials appearing in previous meetings of the Trade Deficit Review Commission, notably Dr. Robert Lawrence of the Council of Economic Advisors, have ably laid out the reasons for this increasing deficit. As Dr. Lawrence noted, the growth of the deficit has been driven by many factors, most notably:

-- The strong growth of the U.S. economy coupled with weaker economies abroad. This reflects the recent financial crisis, which cut U.S. exports to South Korea, the ASEAN states and much of South America; the recession in Japan, leading to a decline of approximately $8 billion in exports; and a period of slower growth in Europe. Thus, while imports have continued to grow at rates comparable to those of the mid-1990s, exports remained at levels between $917 billion and $932 billion from 1996 to 1998, and have only recently begun to grow again.

-- Stronger U.S. national investment, given that investment rates have risen more rapidly than national savings rates (since 1991 national investment rates have grown by 4.4 percent points while national savings rate are up by 2.5 percent points).

The difference in growth between the U.S. and the rest of the world has led to an increase in our trade deficits with almost all of our major trading partners:

Goods Trade Deficit ($Billions)

Country/Region 1997 1999* Change
Japan 56.1 bil. 73.9 bil. 17.8 bil.
China 49.7 68.7 19.0
Other Asia 15.8 44.1 28.3
EU-15 16.8 43.7 26.9
NAFTA 30.0 54.9 24.9
Latin America 9.3 surplus 3.2 12.5
(excluding Mexico)

Looking ahead, it appears likely that strong growth in the U.S. market will keep imports growing. This is not a cause for regret; as noted earlier, imports tend to promote competition, raise living standards and keep inflation low.

U.S. exports of goods and services appear to be resuming their earlier rapid growth as prospects for the world economy are beginning to brighten, and global growth accelerates. Exports of American goods and services have risen from year earlier levels for the last 8 months (through December 1999) with an average monthly gain of 3.7 percent, whereas in 11 out of the preceding 12 months (May 1998 to April 1999) they had fallen.

TRADE POLICY AND FUTURE TRADE BALANCE LEVELS

As this analysis and statistical review indicates, trade policy is likely to have only a small effect on overall U.S. trade balance levels.

Conceptually, a return to substantially higher trade barriers, while very damaging to America's poor and likely to prompt retaliation against American farmers and manufacturing workers, would have at most a minimal effect on U.S. deficit levels. In fact, by threatening foreign economies and reducing demand overseas, it would simply shrink both exports and imports, and would be likely to force American workers to move from higher-wage, higher-skill fields to less rewarding jobs.

A further program of market-opening -- as we have laid out in our negotiating agenda at the WTO, with our major bilateral trading partners, and with respect to China's WTO accession -- will allow us to build upon the successes we have achieved thus far in terms of fostering higher-wage jobs and long-term, sustainable growth and rising living standards. Trade policy will not, however, be the principal factor neither in determining the different rates of growth at home and overseas, nor in changing national savings and investment patterns. Therefore, it will have relatively little effect on overall trade balances.

It will, however, contribute to the more fundamental goals of all our economic policies: sustainable long-term growth; rising standards of living at all levels of American society; and our broader aspirations for the rule of law and strengthening international peace.

CONCLUSION

As we consider the questions raised by the trade deficit, and by trade policy more generally, the counsel of logic, and the lessons of experience, are clear. Open markets and free trade are of fundamental importance to America's economic and strategic interests.

To turn our back on open trade would be to accept a lower standard of living, loss of export opportunities, reduced rates of investment in plants and hiring, and ultimately a loss of national strength and influence worldwide.

To accept an open economy for ourselves, and to promote freer trade worldwide, is to set high standards for ourselves; to open new possibilities for our working people and industries; to reduce the cost of the essentials of life for the poor; and to accept our responsibility for world leadership.

That is the policy of the Clinton Administration, and it is one we are proud to maintain.

Thank you very much.

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: usinfo.state.gov)
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