mote the development of some way by which the Japanese could expand their involvement, as far as capital placement is concerned in these Third World countries, which, if for no other reason, would be to ultimately provide additional markets for their products.

Does that ever come up for discussion in your area of jurisdiction-operation?

Mr. ÖLMER. Not directly in my area of responsibility, but I have been part of the effort to encourage the Japanese to do just that. If we were to look at Brazil, for one example, two-thirds to threequarters of Brazil's increase in exports have come to the United States. Precious little has found its way to Japan or even the European Community. I think that we could get a lot more cooperation out of the Japanese, both in terms of accepting exports from the developing world, those countries that are either desperately poor or are undergoing structural adjustment in a most fiercesome way, and in addition, that the Japanese Government could encourage their companies to invest in those countries more than they have, absolutely.

Mr. MCCANDLESS. Thank you, and I'd like to add to those remarks of my colleagues, my feeling about your public service. It's very much appreciated.

Mr. OLMER. I thank you, sir.

Chairman LAFALCE. Thank you. Mr. Levin.

Mr. LEVIN. Mr. Chairman, I'm sorry I've had to miss so much of this, and I don't have any questions. I'll catch up in other ways. I just have a brief comment. I think that there have been varying perceptions about the impact of the present structure on American business and commerce. Those differing perceptions had much to do with the level of concern about Japanese trade practices, and I think we're going to have to realize that. Basically, there was a lower level of concern about the impact of Japanese and other trade practices in the United States because there were differing feelings about how serious that impact was. And those of us from States which were very seriously impacted, were some of the earlier ones to cry foul. The perception is broadly held in the area that I come from that the Executive was considerably behind the Congress in being concerned about the end product of Japan and other trade practices.

I think there's been some change in recent weeks and perhaps in the last month and a half in this, Mr. Chairman, but for the people that I've heard in the district and throughout Michigan and in other States, I think what they're saying is that the proof will be not in the rhetorical negotiations but in the reality of practices. Your job, as arduous as it is, Mr. Olmer, will not have been done effectively in the eyes of constituents of mine anyway, until they see some differences in actual practice and a change in the imbal

ance.

Chairman LAFALCE. Thank you, Mr. Levin. Mr. McMillan.

Mr. MCMILLAN. Thank you, Mr. Chairman. I will obviously have to be very brief. I would like to express my thanks to you, Mr. Olmer. I've met with you on two occasions since becoming a Member of Congress, and I've been very impressed with your

knowledge and your dedication, and I'm sad to see you leave your present position.

Mr. OLMER. Thank you, sir.

Mr. MCMILLAN. I can say many things about my concerns about our trade policy over time. I come from North Carolina, perhaps the center of the textile industry, and we have perhaps lost close to a quarter of a million jobs in this country since 1980, as a result of imports into this country. Probably in that period of time, not primarily from Japan, but I think as the result of many of the same weaknesses in our trade policy.

Congressman McKinney alluded to it and you alluded to the very complex issue of various forms of government intervention in the businesses of their own countries, call it subsidy, call it variance in regulation, and so forth. And I think that has perhaps received the least attention in the discussion today, it is complex, but real quickly, I would be interested in your comments on the degree to which you think the imbalance, our current imbalance with the Japanese results from differentials in governmental policy or subsidy, as opposed to just pure lack of competitiveness, and then very briefly, to outline the potential remedies of dealing with that in our trade negotiations.

Mr. OLMER. I believe that we probably have more than half of our trade deficit caught up in the imbalance in the relationship between the yen and the dollar, and that perhaps as much as 25 percent of our deficit with Japan could be eliminated, if all barriers to trade were dismantled.

You've asked for somewhat of a subset of that, that is, of Japanese Government subsidies and certain other kinds of Japanese Government intervention. I do not believe that currently the Japanese Government expends on private sector companies a lot of money on direct subsidies. I believe that at one time they did in areas which ultimately grew up to haunt us in the so-called infant industries concept of the late 1960's and early 1970's. But as a matter of government practice, they do not currently, to the best of my belief, engage in the kind of massive subsidization that we see, for example, in a number of steel industries around the world.

Nonetheless, government intervention, government policies have an effect. They have an effect in the financial world, as Mr. McKinney pointed out. They have an effect in encouraging the kind of close relationship between and among Japanese industrial groups from a bank, through an export house. Some of that is not per se illegal, although it does reduce the chances of an American company making a sale.

I think we have the kind of political commitment that recognizes that okay, even if it isn't illegal per se under international rules, the size of our trade account with the United States has reached political proportions and more needs to be done to encourage the Japanese to buy foreign products. They have operated for many years with the strategy of export or die. A country that is largely bereft of natural resources, it was natural that they encourage that kind of philosophy. That situation hasn't changed, but their success has so overwhelmed other elements of the relationship that they have with many countries in the world, not just the United States, that I do believe that we are seeing the beginning of an effort to

encourage a different strategy, a strategy that is premised on the notion that in order to export sufficiently to maintain the Japanese economy, the Japanese Government and its business community must encourage imports as well.

Mr. MCMILLAN. Thank you, Mr. Chairman.

Chairman LAFALCE. Thank you very much, Mr. Olmer.

This is probably the last time you will appear before our subcommittee, at least as a governmental official. I regret that very, very much, but, as usual, your testimony has been outstanding and your insights very informative for this subcommittee.

The subcommittee will recess until 12:30, when we will reconvene to hear an outstanding panel. I encourage every member of the subcommittee to return. We have spokesmen for the Electronic Industries Association, the Semiconductor Industries Association, American Express and academia.

Thank you.

[Recess.]

Chairman LAFALCE. The Subcommittee on Economic Stabilization will reconvene.

I'd ask the four panelis to take the table.

We're going to go slightly out of order. I understand that Mr. Freeman has a time constraint so, although we will hold off questioning until all four of you have concluded your remarks, we will ask Mr. Freeman to testify first, followed by Mr. McDonnell, and Mr. Calder.

Mr. Myrick has arrived so he will be testifying for the Semiconductor Industries Association.

Gentlemen, we will put the entire text of your remarks in the record, and I ask you to summarize your remarks in no more than 10 minutes and if you can do it in 5 minutes, that would be even better.

Mr. Freeman.

STATEMENT OF HARRY L. FREEMAN, EXECUTIVE VICE PRESIDENT, THE AMERICAN EXPRESS CO., NEW YORK, NY Mr. FREEMAN. Thank you very much, Mr. Chairman. It's my pleasure to be here.

I'd like to focus my remarks today on what we think is one crucial aspect of bilateral services trade-financial services. In particular I want to discuss the ways in which the liberalization and internationalization of the financial service markets, particularly in Japan, could help the United States and, for that matter, the rest of the world, deal with its very rapidly developing international debt.

Sometime in the first quarter of this year, the United States became a net debtor country for the first time since World War I. We're all aware of the factors that have contributed to this: the strong dollar, the fiscal deficit, and as a consequence of this, a current account deficit of over $100 million, the biggest part of it with Japan.

The result of this has been a $100 billion balance of payments shortfall that must be financed either by borrowing, by exporting

much, much more or by importing much, much less or some combination of these.

The most likely cost is a continued trade deficit that must be financed by borrowing from abroad, with much of that being recycled from the proceeds of the Japanese export boom.

Moreover, under any set of assumptions about the future rate of growth of the U.S. economy and the strength of the dollar it is virtually inevitable, we think, that the U.S. current account deficit will stay big for at least a number of years. As a result, it is assured that there will be continued substantial buildup of our net foreign liabilities that will also persist for several years.

I've attached to my testimony a graph which demonstrates that condition. I'm sad to say that under any scenario we have, we're talking about a debt range of $300 billion to $900 billion over a time frame of 3 to 4 years-1988, 1989. We're talking about a huge development which has received very little attention.

There are a number of variables. According to our economists, if we have a continued strong dollar we'll see a net debtor position between $500 and $700 billion by 1988. That depends, again, on the strength of the U.S. economy.

Even under an optimistic condition for balance of paymentsand I put optimistic in big quotes-optimistic means a very painful recession starting almost immediately-we would still have something like a current account deficit building up to a net liabilities abroad of around $300 billion. I would not call having a recession an optimistic scenario.

The adverse trade balance in the United States and Japan is an appropriate concern for both governments and the private sector in both the United States and Japan. However, to my knowledge, little has been said about the emerging super debtor status of the United States and the super creditor status of Japan. This issue could be as important over time as the merchandise trade issue which was discussed this morning.

The other side of the coin of the United States becoming a very large external debtor is that Japan will quickly become an enormous creditor country, perhaps up to $500 billion in the next couple of years. That's the mirror image of the U.S. debtor position. Since it seems virtually inevitable that our reliance on foreign funds will continue to grow rapidly over the next few years, the challenge then is to fashion an international regime that encourages continued foreign capital flows into the United States but minimizes the volatility and uncertainties associated with those flows and also does not divert needed resources from the developing world.

An essential feature of this kind of regime is a very well-oiled international financial system that efficiently recycles the proceeds of our current account deficit in other countries into lending back to the United States.

First and foremost, this requires the development of an efficient Japanese financial institutional structure and the internationalization of Japanese capital markets to the extent they haven't been already.

As the United States has quickly become the world's largest debtor, Japan will rapidly become the world's largest creditor.

It's an anomaly, however, that despite Japan's position as a world industrial and trading power, Japanese financial institutions and markets until quite recently have been heavily regulated and somewhat insular.

This has been reflected in the highly limited use of the yen in international transactions and borrowing, and in the lack of full participation by foreign financial services firms in Japanese capital markets.

We are now seeing, however, a major transformation of the Japanese financial system. The Japanese are breaking down many regulatory barriers, injecting competition, developing a much more sophisticated consumer, and internationalizing what had once been a highly controlled capital market generally off limits to the outside world. My testimony lists some of the movements in this area.

One of the most significant developments in the internationalization and liberalization of the Japanese financial system is the Tokyo offshore banking facility that is now in the planning stages. Such an offshore facility in Tokyo will have major benefits for both Japanese and American companies alike, and will be one more important step toward increasing Japan's capacity for contributing to the international financial system. We commend the Japanese Ministry of Finance for this initiative and encourage them to launch the facility sooner rather than later.

All this adds up to substantial progress in Japan but we need more. This progress could mean a great deal as we explore new ways of accommodating the United States as a major debtor and Japan as a major creditor.

Indeed, Mr. Chairman, with the amounts we're talking about, debtor and creditor sometimes develop partnerships as we have seen over the years, with the United States being a creditor to many developing countries.

The amounts get so large that I think, for all practical purposes, we will have to cooperate and the Japanese will have to cooperate in order to manage this situation as it develops this year, next year, and over the next 2 or 3 years.

In closing I would say that we must realize that the United States and Japanese financial markets are closely related now and will become more interactive in the future.

The world is truly becoming one electronic village and global trading of all kinds, global financial markets of all kinds, and global financial interdependence are already very much with us. In that sense, whatever we suggest to Japan is also a suggestion to ourselves because we're all in it together.

Thank you, very much.

[Mr. Freeman's prepared statement on behalf of the American Express Co. follows:]