Madam Chair, I am pleased to appear before this Subcommittee today to discuss the large and growing U.S. trade deficit. The very rapid increases in the trade deficit starting in 1998 are not something that can be ignored, but it is also important that the significance and causes of the deficit not be misunderstood. My objectives today are threefold. First, I would lay out what I see as the elements of the deficit in terms of its geographic and industrial composition. Second, I would like to review the key factors that have brought us to this point. And third, I would like to offer some thoughts on what this means for our economy and where we go from here. I would like to add that we look forward to working with the Congressionally-mandated Trade Deficit Review Commission which is charged with addressing, among other things, the extent to which we have fair market access in countries with which we have persistent and substantial bilateral trade deficits.

Earlier this week, the Commerce Department released the trade data for May 1999. These data show that for the first five months of this year the deficit in goods and services is running at an annual rate of $225 billion -- up 50 percent over the first five months of last year. The merchandise deficit so far this year is running at an annual rate of $307 billion. Imports were up 6 percent over the comparable period of 1998 -- not an unusual rate of growth. The real difficulty is that exports did not grow well. In fact, they didn't grow at all -- they fell 2.4 percent from the same period a year ago. Even worse, the data show American exports are no higher than they were two years ago. This stagnation is a serious matter. It is affecting jobs in America's factories and farms.

The Growth in the Trade Deficit

Before discussing the causes and effects of our deficit, I would like to begin by reviewing the course and composition of our deficit over the last few years.

The U.S. trade deficit in goods and services grew in the mid-1980's, reaching a peak of $153 billion in 1987 before beginning to decline. It reached a low of $31 billion in 1991 as the economy bottomed out. As the economy strengthened in the 1990s, and I might add that the economies of our trading partners languished, the deficit grew once more. By 1994 it had reached $100 billion and remained at about that level for the next three years. Both exports and imports grew strongly over this period, averaging around 10 percent for exports and 9 percent for imports.

But in 1998, the trade balance started to deteriorate sharply. During the first six months of 1998, the deficit ran at an annual rate of $150 billion, while in the second six months it ran at an annual rate of almost $180 billion. The Asian financial crisis hit hard. Our exports to the most affected Asian countries - Indonesia, South Korea, Malaysia, the Philippines and Thailand - dropped sharply in the June to December period of 1998 compared with the same period in 1997.

Despite the fact that the trade deficit has reached record levels, as a share of the country's GDP, the trade deficit in the first quarter of 1999 was equal to 2.2 percent of GDP -- up significantly from the 1.5 percent of GDP it registered in the first quarter of 1998, but significantly less than the record of 3.1 percent of GDP that was reached in the third quarter of 1987.

Geographic Composition

Where did these deficits originate? As I already noted, the Asian crisis was important. Our merchandise trade deficit with the so-called "Asian five" (the five countries named above) went from $18 billion in 1997 to $38 billion in 1998, an increase of $20 billion. That change was equivalent to 41 percent of the total increase in the deficit. Another important source of the deficit growth was Europe. Our bilateral deficit with Europe grew by almost $15 billion, equal to about 30 percent of the deficit. Additionally, our bilateral deficit with China, already large, grew another $7 billion -- reaching $57 billion, and our also already-large deficit with Japan increased about $8 billion -- reaching $64 billion in 1998. For the Western Hemisphere as a whole there was a small improvement of about $3 billion, due mainly to lower oil prices (primarily imports from Mexico and Venezuela).

Overall, we can see two distinct trends at work. The Europeans experienced a significant gain in exports to the United States, which allowed them to gain market share. For most of Asia, however, the picture was of a dramatic drop in their purchases of U.S. goods. The financial crisis in several of these countries resulted in severe economic contractions that precipitated large import declines.

Asia -- The most dramatic drop in exports took place in Asia where 1998 exports fell by 15.1 percent compared to 1997. During the preceding three years exports to Asia had grown at an average annual rate of 9.9 percent. In 1998 U.S. import growth from Asia fell to 3.6 percent from 6.8 percent in 1997.

The fall-off in U.S. exports to Asia was concentrated mostly in the Asian Five where they dropped by 28 percent. Imports from these five countries, on the other hand, did not surge; import growth dropped from 9.3 percent in 1994-97 to 5.8 percent in 1998. U.S. trade with

Japan exhibited some of the most unusual behavior. U.S. exports to Japan dropped by almost 12 percent while, U.S. imports from Japan grew by only 0.1 percent. Thus, virtually the entire Asian deficit increase was the result of falling exports.

On a bilateral basis, the largest deficit is with Japan. Since 1985, the U.S. bilateral deficit with Japan has fluctuated between a low of $41 billion in 1990 and a high of $66 billion in 1994. Over the last 12 months it has again reached $66 billion. The largest component of the deficit is motor vehicles and parts, currently more than $34 billion. In 1998, however, the increase was due entirely to lower U.S. exports to Japan; imports from Japan remained flat.

Our second largest bilateral deficit is with China. The key reasons for the continuing increase in that deficit increase are first that our exports to China are not keeping pace with our imports, and second that we import five times from China what we export to China -- meaning that just to keep the deficit with China from growing any more, our export growth rate has to be five times as large as the import growth rate. In the last three years, however, the import growth rate has been 16 percent a year while our export growth rate has been 6.6 percent. While there is no reason for bilateral trade to be in balance with each individual country, in the case of China the divergence between import and export growth far exceeds what should normally be expected. Last year the United States ran a $57 billion trade deficit with China while China maintained a global trade surplus of $44 billion.

Europe -- With all the talk of Asia and the trade deficit, it is frequently not realized how much our trade position deterioration since 1991 has been with Europe. In 1991, the United States had a surplus of $19 billion with Europe; in 1998, our deficit had reached $32 billion - a negative swing of $51 billion. Unlike other parts of the world, especially Asia, these swings in the trade balance with Europe are not uncommon. From 1986 to 1991, the United States went from a

$28 billion deficit to a $19 billion surplus. These wide fluctuations illustrate that economic forces are allowed virtually a free rein in determining U.S.-European trade. The trade position oscillates dramatically with changes in economic growth rates and exchange rates. Thus, if the EU ever begins to resume strong economic growth and the EURO shows some strengthening, that deficit could turn around.

With respect to our NAFTA partners, the story of strong domestic U.S. growth pulling in imports also applies. Given increasing economic integration among firms on both sides of the border, this is not surprising. For the year to date, the trade deficit with Mexico was $24 billion (annual rate) compared with $14 billion a year ago, with U.S. exports down 1 percent and imports up 11 percent. The deficit with Canada was $27 billion compared with $13 billion a year ago, with exports up 2 percent and imports up 10 percent. Particularly significant factors include rising oil prices and a strong U.S. dollar in relationship to the Canadian dollar. In addition, while Canada and Mexico have been growing well, the pace of growth lags that in the United States and as a result our trade deficit with those countries continues to widen.

Sectoral Composition

From a commodity standpoint, the deficit derives from three main areas -- imports of fuels, consumer goods, and motor vehicles. In 1998, the U.S. deficit in consumer goods was $136 billion, for motor vehicles the deficit was $ 78 billion and for mineral fuels $48 billion. On the positive side the United States has consistently run a surplus in capital goods ($29 billion in 1998). In 1998, the growth in the deficit was exacerbated by a decline in the trade surplus for services. For the first time since 1985, the surplus declined. Instead of the positive gains, we experienced a $9 billion deterioration.

In terms of broad commodity groups, consumer goods had the largest deficit increase in 1998, increasing by $21 billion to a total of $136 billion. The U.S. surplus in capital goods decreased by $11 billion to a $29 billion surplus; computers and parts and microprocessors are included in this group. Foods, feeds and beverages saw an historically small surplus of

$11.8 billion in 1997 whittled further to $5 billion. Sharp decreases in farm prices are a major factor behind the decline in the trade surplus in this category of goods. The deficit in autos was up by $11 billion to $78 billion, the second largest category. Industrial materials actually showed a small improvement with the deficit declining $3 billion to $52 billion, reflecting lower oil prices.

Overall, there is nothing on the immediate horizon to suggest changes in our recent trade trends. U.S. economic growth, even though expected to slow in 1999 from 1998, will still be relatively strong compared to most of our major trading partners. In Europe, expectations continue to be for growth of less than 2.5 percent. In Japan, a strong recovery still seems a long way off. There are some positive signs, however. The Asian financial crisis has bottomed out. Our exports to Korea are growing again. In the first five months of 1999 our deficit with Korea fell to $5.9 billion from $7.7 billion in the same period last year. But there is still a long way to go to get back to the surplus we had with Korea prior to 1998.

What Does This Mean for the U.S. Economy?

We cannot blame our deficit all on the recent economic crisis in Asia. Longer term forces are also at work -- including the continued existence of trade barriers that have held back U.S. export opportunities. Amazing though it may now seem, from 1894 to 1970 the United States had an unbroken string of trade surpluses, but since 1970 we have had virtually an unbroken string of merchandise trade deficits that have cumulated to over $2 trillion. Most of our trade growth, and most of our deficit occurred in the last ten years. Nearly 80 percent of the deficit is with Asia - and fully 40 percent of the total was with one country, Japan.

The short term rise in the trade deficit reflects the health of the U.S. economy and does not under present circumstances present a serious problem. Our unemployment rate is extremely low by historic standards, inflation is low, economic growth continues above its long term trend, and real incomes are rising strongly. The biggest negative is probably our personal savings rate which is close to zero. Thus despite the Federal surplus and state and local government surpluses, overall investment in the United States continues to outstrip savings. Our trade deficit has permitted us to continue a high level of investment while sustaining strong consumption expenditures -- but at the expense of incurring considerable debt. The net debtor position of the United States, in fact, stood at -$1.24 trillion in 1998 -- more than doubling in two years.

Currently, the factors that led to the recent growth in our deficit are largely macro economic: strong domestic growth, lower import prices -- largely the result of declining value of foreign currencies -- and economic developments abroad. Trade has helped the U.S. economy to continue to grow with low unemployment and low inflation. The trade deficit, and the foreign investment that must accompany it, allows us to consume and invest at a higher rate than we otherwise could. We are at virtually full employment and our overall economic performance is one of the best in the industrial world. Our economy has many competitive strengths, especially its flexibility and ability to adopt new technologies. These qualities are much admired by our industrial trading partners.

While current economic conditions, at least for the United States are excellent, we can't help but be concerned with running extremely high deficits long into the future. To finance these deficits we must borrow from abroad. Thus, we become ever more dependent upon receiving and retaining foreign capital.

Another serious problem is in employment. The drop off in our exports has had a serious effect on manufacturing employment in the United States. While overall employment in the United States is at record levels and has grown by 2 million jobs in the last year, there are 422,000 fewer manufacturing jobs than a year ago. Many of these losses are directly attributable to the decline in U.S. exports globally -- and especially to Asia.

The fact that our exports have dropped so significantly points out a significant factor in reversing the deficit. Few actions we can take domestically would have as great an impact as restoration of growth in our major export markets. We must increase the rate of growth of exports. The key here is in economic policies in Europe and Japan that would promote domestic-led growth. As an examination of the industrial production data in Exhibit 1 attached to my statement makes plain, economic growth in these economies is inadequate. In fact, Japanese industrial production is now less than it was ten years ago!

Former Secretary Rubin, speaking recently of the need for strong economic growth abroad, said, "It is also critically important that Europe and Japan do their part because the international system cannot sustain indefinitely the large imbalances created by the disparities in growth and openness between the U.S. and its major trading partners." More recently, Secretary Summers said, "We continue to watch the Japanese economy carefully and to believe that what's most important for Japan is the restoration of domestic demand-led growth and it is important that the basis for growth be firmly established. I may leave it at that..."

Along these same lines, Chairman of the Federal Reserve Board Alan Greenspan recently said, "There is a limit to how long and how far deficits can be sustained since current account deficits add to net foreign claims on the United States."

He went on to say, "It is very difficult to judge at what point debt service costs become unduly burdensome and can no longer be sustained. There is no evidence at this point that markets are disinclined to readily finance our foreign net imbalance. But the arithmetic of foreign debt accumulation and compounding interests costs does indicate somewhere in the future that, unless reversed, our growing international imbalances are apt to create significant problems for our economy."

We need to be working to bring the deficit down over the long term. As I have noted above, it is not rapid import growth that is the problem. Imports as a percent of GDP in fact, have not grown since the third quarter of 1997, and have remained at or below 13.2 percent. The problem has been in our stagnating exports. When growth prospects in our major markets improve, they will attract more imports, and our exports will grow. It is slow markets that are our problem -- not a drop in U.S. competitiveness. The U.S. share of world markets is strong, and our share of major country markets shows no deterioration. The U.S. share of foreign country imports last year, in fact, was 15.2 percent -- significantly above our average 14.1 percent share for this decade, and up from 1997's strong 14.8 percent share of foreign markets.

What is weak is foreign demand, and it is unrealistic to believe our exports will grow significantly until economic policies in our major markets begin to restore prospects for their economic growth. We must continue to urge such policies, and we must also foster conditions for a restoration of our trade position when foreign markets recover by assuring that foreign markets remain open, enforcing our trade laws and promoting exports.

While I do not believe that non-compliance is the major factor in the growth of the deficit, we must be sure that countries are keeping markets open and complying with the trade agreements they sign. We need to assure Americans that the agreements we negotiate are honored and that American firms and workers obtain the benefits and opportunities intended. Hence, compliance and enforcing our trade laws are a priority throughout the International Trade Administration. The Trade Compliance Center coordinates our compliance activities but all our country market access officers, our industry experts, as well as our Commercial Service officers overseas, are involved.

Our increased monitoring tells us that most countries are attempting to live up to their trade agreements, but we have seen some actions inconsistent with obligations. We have been trying to get Korea to live up to its obligation to allow American companies to compete fairly on contracts for its new $6 billion airport. Despite months of effort, we have had to turn to the dispute settlement process through USTR and a WTO panel has been formed to hear our complaint and we expect to prevail.

But we have successes too. We have been successful in getting Korea to reinterpret its standards so as to allow the sale in Korea of high efficiency washing machines that use a step-down transformer. Our team of MAC and TD as well as our US&FCS officers at the Embassy cleared the way for the U.S. company to begin exporting by successfully marshaling U.S. government technical and standards experts and working with the Koreans to resolve the issue without appealing to the WTO. Congressional interest in this issue also helped convince the Koreans to resolve it.

We helped a small company in Auburn, Indiana, making specialized bulk packaging products for the chemical industry, which was being shut out of the European market by a European competitor who got product standards changed to exclude its product design. We got European governments to remove the discrimination, and saved over 300 Indiana jobs.

The significance of compliance advocacy lies in attempting to resolve problems rapidly without the necessity of the United States having to enforce its rights through formal dispute settlement mechanisms. It also creates confidence that the United States is actively monitoring and ensuring that our exporters receive their rights under our trade agreements.

The Commerce Department is also committed to swift enforcement of the fair trade laws which ensure that U.S. industries and American workers are not injured by imports of unfairly priced or subsidized goods. Commerce vigorously enforces the fair trade laws - during the first six months of this year alone, we have either completed or are in the process of conducting more than 65 antidumping or countervailing duty investigations.

As you are aware, steel imports surged dramatically in 1998, up 33 percent over 1997, resulting in the loss of 11,000 jobs. In response, the Administration has pursued a two-prong strategy combining swift and vigorous enforcement of our trade laws with bilateral pressure on our trading partners to reduce steel exports. Commerce's strong and swift enforcement of the unfair trade laws is an integral part of the Administration's action plan on steel.

Commerce currently enforces more than 100 antidumping and countervailing duty orders on steel products from a number of countries, and since January 1999 is conducting or has completed 64 new steel investigations.

Commerce has taken a number of steps over the past year to enhance trade law enforcement. In the recent investigations of hot-rolled steel and of carbon steel plate we announced the preliminary determinations early, providing more immediate relief to the industry and its workers. We have also applied our new policy on critical circumstances, putting importers on notice soon after the investigation has begun that they could be liable for dumping duties retroactively. Prior to this change in policy, critical circumstances decisions were always made at the time of the preliminary determination.

Commerce continues to administer its enhanced early warning system to monitor imports of steel and other import-sensitive products. Such monitoring is designed to provide the Administration with an early warning on import trends for import-sensitive products, and to develop the information needed to help ensure that our trading partners bear their fair share of the burden of the global crisis.

Commerce's enforcement of the unfair trade laws has been a key factor in the decline of steel imports since November. In addition, strong bilateral pressure has been exerted on our trading partners to reduce their steel exports to the United States.

Beyond compliance and enforcement, we must be prepared to take advantage of export opportunities as foreign growth returns. U.S. firms need to take more advantage of overseas markets. Between 1992 and 1997, the number of exporters almost doubled from 113,000 to 209,000. Most of the exporters (just under 97 percent) are small- and medium-sized firms. While this has been a dramatic improvement, we know much more is possible. For example, half our small and medium sized exporters export to only one market.

The Commerce Department and its International Trade Administration, working with the Trade Promotion Coordination Committee, continue to press ahead with new strategies and approaches to assisting U.S. firms and workers. Our export promotion services are reaching out to an ever-wider universe of potential exporters to help them bring the benefits of exports to their communities.

Commerce is undertaking a number of new and innovative efforts to reach out to small and medium-sized enterprises. This year, our Advocacy Center is implementing an initiative to expand U.S. Government advocacy outreach to more small, medium and minority-owned businesses throughout the country. And we opened the U.S. Trade Center at the Ronald Reagan International Trade Center Building this year to make it easier than ever for a company to take the first step toward global export counseling and assistance from the Commerce Department and the other federal agencies providing export services and financing (1-800-USA-TRADE).

Commerce is also working hard to respond to the rapidly changing needs of the exporting community. Through our Innovation 2003 Initiative, we have begun shifting our product focus from a standard, off-the-shelf approach toward full customization based on the needs of clients.

We are engaging an array of new E-commerce products that will reduce market entry costs and open up a world of business opportunities. Virtual trade shows showcase U.S. products and services in distant markets at a fraction of the cost of on-site participation. Video conferencing puts American companies in front of prospective foreign business partners without costs of travel. And electronically delivered market research, trade leads, and business contacts will enable clients to receive information updates instantaneously.

We are also putting our global network of trade professionals in over 100 U.S. cities and more than 80 countries into the hands of traditionally under served or disadvantaged communities. The total number of businesses owned by minorities increased 60 percent, from 1.3 million to 2.2 million over five years. To better serve this growing business segment, through our Global Diversity and Urban Export Initiative we are working with national and local organizations, conducting outreach activities, and integrating minority-owned firms into our programs. This Initiative seeks not only to boost exports, but to enhance the economic development of minority communities through trade.

Our Rural Export Initiative is helping companies located in rural areas to enter into export markets via the Internet, satellite communications, and other state-of-the-art technologies. Our domestic network provides these companies with access to export assistance, global market research, and international trade services such as freight forwarding and banking otherwise unavailable to them.

Over the past year, Commerce sponsored a series of 12 conferences about the Euro and EMU preparedness. These conferences brought together leaders in business, education and government to discuss the euro and its implications for U.S. businesses in the future. There were also more than two dozen other Euro-related events initiated by U.S. export assistance centers across the country.

Conclusion

Before I close, I want to again thank the Chair and other members of the Subcommittee for your assistance, during the International Relations Committee's reauthorization of the Commerce Department's International Trade Administration, in drawing attention to the critical work done by the Market Access and Compliance (MAC) unit which I head. I am pleased that you and your colleagues appreciate our efforts to access foreign markets for American firms and workers and to achieve full compliance by our trading partners with the trade agreements they sign with our country. If we can obtain the increase in funding requested for us in the President's FY 2000 budget, we will be able to strengthen our efforts to help U.S. firms, particularly the small- and medium-sized firms that are the engines of growth in our economy.

Madam Chair, I want to emphasize the central element of my testimony today: Nothing will do as much to restore our export growth and reduce the deficit as an economic recovery abroad, especially in Asia. Meanwhile, we are committed at Commerce to doing everything thing we can from compliance to enforcement to trade promotion to helping address the deficit and put U.S. exports back on the growth path.

Thank you and I will be pleased to answer your questions.