April 17, 2007
HP-356
Deputy Secretary Robert M. Kimmitt’s
Remarks on Japan and the United States:
Indispensable Partners, in Asia and Beyond
Thank you, Charlie. It is a pleasure to be with you today, and especially to be hosted by the Maureen and Mike Mansfield Foundation. In the late 1930's, my father, Stan Kimmitt, was majoring in football and minoring in bartending at the University of Montana. Fortunately, he did attend relatively regularly the Asian History course taught by a young professor named Mike Mansfield. That began an almost 60-year relationship between these two Montanans, which included working closely together for over a decade in the Senate. And my father was later a strong supporter of the Mansfield Foundation.
I want to thank Gordon Flake and his entire team for arranging today's event. Since its inception, I have both observed and benefited from the work of the Mansfield Foundation, and during my years in the private sector I had the honor of being a member of the Mansfield Foundation Board. The programs of the foundation are rich and varied, and two in particular are especially beneficial. First, the foundation takes Members of Congress from both sides of the aisle to Asia -- not for quick visits but rather for in-depth conversations on areas of concern in the trans-Pacific relationship. And, second, perhaps the most important program developed by the Foundation is their Mansfield Fellowships. Over the years, the program has helped to strengthen the U.S.-Japan relationship by providing 70 officials from 20 U.S. government agencies with an opportunity to spend a year working in Japanese government offices. I am very pleased that we are joined today by seven Mansfield fellows, two of whom, Chris Winship and Logan Sturm, now serve at the Treasury Department.
My first visit to Japan was in April 1970, when the military transport aircraft on which 200 soldiers and I were passengers stopped at Yokota Air Force Base en route to combat duty in Vietnam. I returned in October 1983 as a passenger on Air Force One, when I accompanied President Reagan during his historic visit to Japan to meet with Prime Minister Nakasone. And I traveled frequently to Japan from 1989 – 1991 when I was Under Secretary of State for Political Affairs, as Japan and the United States worked in especially close cooperation as the Cold War came to an end. To this day, I stay closely in touch with my Japanese colleagues from those years. My teachers, or sensei, have included important Japanese government officials named Owada, Utsumi, Arima, Kuriyama, Murata, Satoh, and, of course, Kato, as well as private sector leaders like Hiroshi Okuda and Jack Murofushi. And I speak today as a friend and admirer of these men and the great country and people they represent and serve.
Over four decades, I have seen the relationship between Japan and the United States change in significant ways, and both the Asia-Pacific region and the world today look very different than they did when I first visited Japan. But one fundamental fact has remained constant: the U.S.-Japan partnership is and will continue to be the strong foundation for a more peaceful and prosperous Asia-Pacific region, and an essential contributor to peace and prosperity in regions far from Asia.
Indispensable Partners: Economic Priorities in the U.S.-Japan Economic Relationship
The indispensable partnership between Japan and the United States is built on mutual interests and common values. Our security relationship has been rock solid and constant, promoting peace and stability in the East Asian region and beyond. Our economic relationship, on the other hand, has gone through cycles, and this fact is particularly evident to those of us who remember the trade tensions of the 1980s. For today and the future, both security and economic relations must be integral, active, and strong components of our partnership and alliance.
Although bilateral issues remain in our economic relationship, today that relationship is more cooperative and less confrontational than in the past. The economic relationship remains critical to our mutual success and that of the global economy, and we must ensure that the relationship remains vital and active. In order for Japan and the United States to realize the full potential of our partnership, we must set our sights higher. Within our own borders and across the Pacific, we must take steps toward reform in order to reinvigorate our economic relationship and work together to address bilateral and global priorities.
The economic situation in the United States serves as a solid basis for enhanced cooperation. Even though growth has slowed to a more moderate pace, the prospects for the U.S. economy remain good. Our economy continues to perform well, and we expect GDP growth to rebound to 3 percent by the end of this year. Although the residential housing market has been sluggish, it appears to be stabilizing, and continued job creation and wage growth should prevent the housing market from spilling over significantly into consumer spending, which remains strong. And the rest of the economy is in good shape – unemployment is low, manufacturing production is up, and inflation risks appear to be contained.
One of our greatest economic assets is our flexible labor market: it fosters an innovative and productive workforce, motivated by healthy competition and merit-based compensation. Data on labor demand in the United States show that during 2006, hires exceeded separations by the widest margin since the U.S. government began tracking this information in 2000. In fact, 7.8 million jobs have been created in the United States since August 2003 – more jobs during that period than all the other major industrialized countries combined. I might note, since today is Tax Day, that August 2003 is when the economy began to feel the effects of the tax reform signed earlier that year. That reform reduced personal tax rates and cut taxes on capital gains and dividends. To continue the country's solid economic growth, it is important that this tax relief be made permanent.
The role of the United States as an engine of global growth is well-established. Still, the global economy clearly benefits from multiple engines running strongly. The recovery of the Japanese economy, and its continued growth in the future, is of utmost importance in sustaining strong global growth.
Japan is now experiencing the longest economic expansion in its post-war history, thanks in part to the reforms launched by former Prime Minister Koizumi. There are signs that domestic demand -- consumption in particular -- is beginning to serve as a stronger driver of growth. Prime Minister Abe described his economic agenda earlier this year, saying that Japan is seeking to "strongly advance a new growth strategy," with reform goals for the next five years designed to ride the wave of Asian growth and innovation. We welcome Prime Minister Abe's commitment to press forward with economic reform in Japan that seeks to raise productivity growth; create new investment opportunities; stimulate competition; and foster a stronger business climate. The challenge now is specifying and carrying out concrete reform measures that will ensure strong growth for the long term.
In our view, these reforms should include the following areas, which are now being actively discussed in Japan:
1. Japan needs to make it easier for workers to change jobs and re-enter the labor force during their careers. Full and efficient utilization of Japan's labor resources and the ability to shift workers to more productive occupations are critical in light of Japan's demographic challenges and a rapidly changing global economy. As Prime Minister Abe said in his policy speech last fall, Japan should aim to be "a society…where everyone has the opportunity to take on a new challenge." Greater labor force mobility would increase earning potential and raise the employment security of Japanese workers. Measures that could help create greater flexibility and more second chances include expanding the use of portable, defined-contribution pension plans and more rapid vesting of company-defined benefit pensions.
2. To raise productivity, the government of Japan should encourage competition, the entry of new firms, and the introduction of new technologies and products. We are all familiar with manufactured products in which Japanese technology leads the world. Yet some Japanese industries maintain surprisingly low levels of productivity relative to their foreign counterparts. In many cases, these are industries with extensive regulations on entry, products, and technologies. These regulations have sheltered industries from foreign and domestic competition, even though many of these regulated industries – such as business services, communications, and health care – offer the greatest potential for growth in today's economy. To raise productivity and realize the growth potential of these industries, Japan should implement structural reform and deregulation to remove barriers to competition, new entry, and new product introduction.
3. Both Japan and the United States recognize that efficient capital markets are the lifeblood of a strong economy, and investor confidence and appropriate regulation are necessary to ensure competitiveness in a rapidly changing global economy. The key is striking the right balance between market integrity and entrepreneurship – a balance that must be continually reviewed as markets evolve. In the United States, Secretary Paulson recently hosted a conference to examine issues affecting U.S. capital markets competitiveness. Japan has made progress in advancing financial market reform since the late 1990s and in improving the financial regulatory environment since the creation of the Financial Services Agency. But Tokyo still has a way to go to be competitive with other major financial markets. We welcome the goal of the Abe Administration to have Tokyo take its rightful place as a global financial center.
Greater regulatory transparency and predictability could help encourage financial services providers to introduce new savings and investment products that benefit Japanese consumers. Using regulatory safeguards rather than enforcing specific institutional structures would reduce compliance costs, allow for better risk management by firms, and enhance the ability of financial groups to provide comprehensive services to their clients. Lower costs and improved operations of exchanges would help attract more domestic and foreign listings, providing more choice for domestic and international investors.
4. Reduction of the government's role in financial intermediation is also critical for more efficient and competitive Japanese financial markets. The government of Japan has taken important steps in this regard with its plans to privatize Japan Post and to streamline or privatize a number of other government financial institutions. Since Japan Post operates the world's largest savings and life insurance operations, postal privatization will have an enormous impact on the Japanese economy -- and the manner in which this process unfolds is critical. In making this transition, it is important that Japan establish a level playing field for the privatized postal financial institutions before they introduce new products so that private sector firms from all countries can compete fairly.
The preceding points are not to suggest that only Japan needs to take action. The United States must do its part, especially regarding our low saving rate. Like Japan, we need to reduce our fiscal deficit in light of an aging population. In the United States, we have made substantial progress in cutting the U.S. fiscal deficit – it has already been cut in half three years ahead of President Bush's 2009 goal. The deficit was 1.9 percent of GDP in 2006 and is expected to come down further this year. The President's 2008 budget envisions further declines in the deficit over the next five years to produce a balanced budget by 2012.
But the recent progress on the budget deficit and efforts to boost private saving will have a limited impact if more is not done to address the long-term growth in spending on entitlement programs: Social Security, Medicare, and Medicaid. Without fundamental reform, entitlement spending as a percent of GDP is set to rise by nearly half from 2010 to 2040, thereby significantly impairing our fiscal sustainability by crowding out all discretionary spending over the next several decades. Without reform, these programs will also erode our competitiveness by placing massive obligations on the backs of 21st Century American workers and their families.
The Importance of Open Investment and the U.S.-Japan Relationship
As we work to address these important reforms in our economies, our common interests make Japan and the United States natural partners in advancing the fundamental principles of a healthy world economy: free and fair trade; flexible exchange rates set in open, competitive markets based on underlying fundamentals; and the free flow of capital across borders, based on open investment policies. But we must also confront the threat of growing protectionist sentiment and new obstacles to trade and investment. We often discuss protectionism in the context of trade. But since investment flows are many times larger than trade flows, we must also pay close attention to cross-border capital flows and maintaining open investment policies. We must come together to make clear on both sides of the Pacific that we are open to investment and trade, and actively reject the rise of investment protectionism across the Pacific or elsewhere in the world.
The United States greatly benefits from strong foreign direct investment inflows, which have averaged 1.6 percent of GDP over the past decade. Our cumulative stock of foreign investment now exceeds 28 percent of our GDP on a market value basis. That foreign investment translates into high-paying jobs for American workers, while promoting innovation and generating increases in productivity. In the United States, over five million Americans work for companies headquartered overseas. Although these jobs comprise only around five percent of our workforce, they account for 10 percent of our capital investment, 15 percent of our annual research and development, and 20 percent of our exports. And over 30 percent of these jobs are in manufacturing, roughly three times the overall U.S. workforce level in this sector.
Foreign direct investment flows into Japan, by comparison, have averaged just 0.1 percent of GDP over the same period, and the Finance Ministry estimates the stock value of foreign direct investment at just 2.4 percent of GDP. We welcome Prime Minister Abe's pledge to double incoming foreign direct investment by 2010. One tool that would help realize this goal is Japan's implementation of legislation to allow foreign firms to use their own stock as consideration in cross-border mergers and acquisitions, as they can do in the United States and other markets. Continued deregulation and structural reform to remove barriers to entry will also encourage foreign direct investment.
In the United States, we are focused on maintaining our open investment policy while addressing national security concerns, and we believe we are making significant progress in striking that important balance. Even in the wake of controversial cases like CNOOC and Dubai Ports World, the vast majority of foreign investments reviewed by the Committee on Foreign Investment in the United States (CFIUS) continue to be processed expeditiously and without controversy within the initial 30-day review period. In fact, since Dubai Ports World, more than 100 transactions have been reviewed by CFIUS without objection and notified to Congress.
Toshiba's acquisition of the Westinghouse Electric Company and its 6,000 U.S. workers is a good example. This transaction went through the CFIUS process just months after Dubai Ports World. Especially since the case involved U.S. commercial nuclear power, the companies understood the importance of discussing the implications of this transaction on both ends of Pennsylvania Avenue. The companies spent a significant amount of time informing lawmakers about the transaction as soon as it was publicly announced, and the CFIUS review was completed in a first-stage, 30-day investigation period. We are working to ensure that proposed changes to the process for reviewing foreign investments do not create unnecessary and counterproductive barriers to participation in the U.S. market. Let me make my message crystal clear: the United States is open to investment from abroad, and we hope Japan will become more open to investment as well.
Indispensable Partners: In Asia and Beyond
As both Japan and the United States strengthen the economic foundation of our relationship, we create increased opportunities for partnership around the world. One such opportunity for partnership is the Doha Round. As Secretary Paulson said following this weekend's meeting of G-7 Finance Ministers and Central Bank Governors, we are at a critical juncture for progress on the Doha Round. We believe that trade expansion is one of the most important catalysts for economic growth, and all countries must contribute through real market access commitments in manufacturing, services, and agriculture. Both Japan and the United States would benefit from an agreement, and, in some sectors, Japan has even more to gain from global trade liberalization than the United States.
While both countries will benefit strongly from freer trade in services, one study suggests that global free trade in manufacturing and agriculture would generate annual economic gains of more than $54 billion for Japan, compared to $16 billion for the United States. In spite of these potential benefits, domestic opposition to agricultural reform has prevented Japan from playing a leading role in the Doha Round negotiations and in other international trade liberalization efforts. Japan has taken some steps toward agricultural reform, but its agricultural sector still remains heavily subsidized and highly protected. This imposes a heavy burden on Japanese consumers, who pay much more for food and other basic daily necessities than citizens in other highly-developed economies. Japan's unique conditions on imports of U.S. beef are most prominent, and we continue to discuss ways that we can mutually agree upon scientifically valid and internationally recognized standards.
Even as we push for a successful conclusion of the Doha Round, we are also reviewing existing structures to reduce regulatory burdens in both Japan and the United States – and then converge, harmonize, and mutually recognize the lower level of regulation that remains. The Regulatory Reform Initiative launched by President Bush and Prime Minister Koizumi several years ago has been a good step in this direction, but more can be done. We have a number of other very important dialogues with Japan, and we need to ensure that these dialogues are active and results-oriented.
On global issues of concern to both our countries, such as energy security and climate change, Japan and the United States have taken a number of important steps. We recognize that tackling global climate change will require global solutions that include fast-growing countries such as India and China. This is why we together launched the Asia-Pacific Partnership on Clean Development and Climate with Australia, China, India, and South Korea – countries that represent 50 percent of the world's economy – to speed up the transfer of clean energy technologies. We have also recently made significant efforts to broaden and strengthen the U.S.-Japan nuclear energy partnership in support of global expansion of nuclear energy and specifically in support of a healthy, sustainable, and growing nuclear commercial sector. Japan was also one of the first countries to endorse our Global Nuclear Energy Partnership initiative, and will be the first to sign a joint action plan that supports the safe and secure expansion of nuclear energy in a manner that is commercially sustainable, proliferation resistant, and environmentally sustainable.
As the second-largest donor to the United Nations, the World Bank, and the International Monetary Fund, Japan leads the international community in action through multilateral organizations. The United States and Japan have worked closely together on bold and fundamental reform of the International Monetary Fund, to ensure that IMF governance reflects the changes in the global economy and that the IMF remains relevant in today's international financial system. The IMF Managing Director's decision to revise the 1977 Decision on Exchange Rate Surveillance – a decision welcomed by the G-7 last week – is a very important step in this process.
Japan is also poised starting next year to play a particularly important leadership role in multilateral organizations -- as the chair of the G-7 and the G-8 in 2008, and as the host of APEC in 2010. When I first starting working on these issues, there was a G-5. Subsequently, it expanded to a G-7, then to a G-8, and now we also have important institutions like APEC and the G-20, which provide excellent forums for us to reach out to increasingly influential countries with strong emerging economies – Brazil, Russia, India, and particularly, China.
As leaders in the global economy, both Japan and the United States have recently intensified the dialogue with China. Premier Wen Jiabao was in Tokyo last week, reciprocating Prime Minister Abe's visit immediately after he took office. And next month multiple Chinese ministers in a delegation led by Vice Premier Wu Yi will visit Washington for the second meeting of the new U.S.-China Strategic Economic Dialogue. It is in both our interests for bilateral relations with China to improve, for the benefit of both Asia and the rest of the world. But these initiatives with China proceed with a clear understanding that Japan and the United States are and will remain indispensable partners in Asia and throughout the world. And we must invest as much energy and initiative in the U.S.-Japan relationship as each of us will invest in our growing relationships with China.
Foreign Minister Aso has described his government's international efforts by saying that the Japanese are now "viewed as people who will stand alongside and undertake efforts hand-in-hand…" Japan continues to work hand-in-hand with countries such as Afghanistan – where it has contributed more than $1.45 billion since 2002 to enhance domestic security and promote economic development. This assistance has helped to build roads and airports, bolster health and education services, and implement the disarmament and demobilization of combatants.
In Iraq, Japan's C-130s provide vital airlift missions, and when Prime Minister Abe met last week in Tokyo with Prime Minister Maliki, he committed to extend the airlift activities by two years. Japan also continues to be an active partner in the reconstruction effort in Iraq, providing assistance to Iraqis on essential infrastructure such as water purification and electricity generation. Since 2003, Japan has pledged a total of $5 billion to Iraq, and this financial assistance will help Iraq to establish an economic foundation built upon good governance, the rule of law, a solid budgetary framework, and strong, credible institutions. We expect that Japan will be represented at the ministerial level at next week's launch in Sharm El Sheikh of the International Compact with Iraq, and that Japan will join us in making a significant new pledge of support for Iraq.
Japan has also joined forces with the international community in the fight against terrorist and proliferation financing. At the United Nations, we have worked together to pass critical resolutions to cut off the flow of illicit finance to weapons proliferators. Not only did Japan push for tough measures in UN Security Council Resolutions 1695 and 1718 on North Korea's proliferation network, the government followed through on its diplomatic commitments by implementing targeted financial sanctions. Japan is now in a unique position to exercise the same kind of leadership in the fight against Iranian proliferation activities. Iranian state-owned Bank Sepah, now designated under UN Security Council Resolution 1747, has facilitated business between North Korea's chief ballistic missile-related exporter, KOMID, and Iran's Aerospace Industries Organization, which we have designated under U.S. authorities.
Japan can again demonstrate its global leadership by taking swift action to implement UN Security Council Resolution 1747, which obligates states to freeze the assets of entities and individuals associated with Iran's nuclear and missile programs.
In the United States, we have worked hard, particularly since 9-11, to put into place the legal authorities and operational capacity to allow us to take prompt action both to respond to threats to our financial system and also to implement quickly UN Security Council resolutions and other international obligations. To help prevent the flow of illicit finance to terrorists and proliferators, Japan should ensure that it, too, can take action to freeze assets related to terrorism, proliferation, and other illicit activities. Japan should also improve its efforts to investigate and prosecute financial crimes-related offenses when its institutions knowingly launder money. We cannot allow terrorists and proliferators to gain any advantage because of a failure to enact laws and procedures that target illicit finance, the lifeblood of their dangerous activities.
Ladies and gentlemen, let me close by reiterating that our common values, convergent interests, and combined weight in the global economy make Japan and the United States indispensable partners for good in Asia and beyond. But our security and economic relationship is one that requires careful tending, active management, and continuous renewal. An important milestone in this ongoing effort will take place next week when President Bush and Prime Minister Abe meet in Washington. But all of us – both in government and the private sector – must complement the work of our leaders by doing our part to broaden and deepen this partnership, to the benefit of our two countries, the region, and the rest of the world.
Thank you for your attention.