Ambassador Schieffer Speaks at ACCJ

Ambassador J. Thomas Schieffer
Speech to the American Chamber of Commerce in Japan
The Westin Tokyo Hotel
Tokyo, Japan

February 14, 2007

AMBASSADOR SCHIEFFER: It is a great pleasure to be here. This is a terrific organization. The American Chamber of Commerce in Japan has provided a vital link between business leaders of the world's two largest economies for nearly six decades. Since its founding in 1948, the ACCJ has provided a forum for leaders to express their views on ways to deepen the relationship between the United States and Japan, and I am honored that you would ask me to speak today. I hope to share with you some thoughts on how we can further integrate these two great economies so that both Japan and the United States have a better chance to enjoy the benefits of a peaceful, prosperous, and democratic world.

In my view, measures to advance economic integration between the United States and Japan provide an opportunity to demonstrate to the world that our talk of shared values is more than rhetoric and reflects a real determination to change the world we now know. In this regard, we welcome Prime Minister Abe's agenda of promoting growth through innovation, technology, openness, and regulatory reform, and we look forward to the development of specific plans that will carry forward his agenda.

Whether we are Japanese or American, the accelerating effects of an increasingly globalized world are having a profound effect on each of our economies. Often globalization is portrayed as the villain closing local plants and exporting jobs to foreign countries. Less often do we hear about the benefits derived from greater economic integration. Look, for instance, at the record here in Asia.

Perhaps in no other region has globalization had such a profound effect in so short a time. According to the World Bank, 250 million East Asians left the ranks of the poor in the last five years alone. In 1990, the countries of East Asia - minus Japan - had a combined gross domestic product of $1.2 trillion. In 17 short years that number has more than tripled to more than $4 trillion. That is an enormous accomplishment. Those hundreds of millions of people no longer live in a world of destitution. Now they live in a world where dreams can come true and hope can have basis in their daily lives.

This is not to say that tremendous challenges do not still exist in the region. Grueling poverty is still a part of too many lives. 550 million people - close to a third of the entire overall population in East Asia - are still living on less than $2 a day. China - the recent star performer in the global economy - still has over 340 million people who live on less than $2 per day, and of that number 106 million live on less than a dollar a day. Nevertheless, progress is being made that gives us all hope for a better world.

Key to this progress has been East Asia's involvement in the global economy. Even if Japan is excluded, the other countries of East Asia still account for 20% of the global export market, which is double their share of global GDP. Open trade and investment policies have underpinned this achievement. Although tariffs for selected items like rice and other agricultural products remain high, the weighted average import tariff in East Asia is just over 5%. South, East, and Southeast Asia - again excluding Japan - also accounted for over 18% of global foreign direct investment flows between 2003 and 2005. FDI in the United States was a bit under 13%.

But here in Japan, FDI had less than 1%, the lowest number of all the countries in the OECD. We do not think it is a coincidence that robust economic growth has come in places where foreign direct investment is encouraged rather than resisted.

In addition, trade within Asia has been growing at about 10% per year over the last decade, despite the economic crisis of the late 1990s. East Asian economies now get over half their imports from other countries in Asia.

This regional trade is dominated by intermediate imports of parts and components moving between countries in complex production networks, the focus of which is often China. The emergence of China as a global economic player has propelled much of this growth. China's GDP has basically tripled since 1995. But China is not the only major player in Asian growth.

Japan has also played a tremendous role. Not only did Japanese firms establish the initial production networks in Southeast Asia that are now feeding China's export growth, they also made huge direct investments in China itself. Japan has in fact become the largest investor in China among OECD countries. Japanese firms are producing final goods in China using imports from Japan and Japanese subsidiaries elsewhere in Asia. This symbiotic relationship between Japan and China in the manufacturing sector is having an impact in the American marketplace.

For example, according to a recent OECD paper, only 16% of Chinese exports to the United States competed with Japanese products in the US market, while 38% competed with Korean products, 49% with Malaysian products, and 83% with Indonesian products.

So what impact will these trends likely have on our future? At the end of last year, the World Bank released a study on the projected world economy in the year 2030.

The bank's central scenario assumed annual GDP growth in developing countries of 3.1%, compared with 1.9% in developed countries. At those rates, the global economy will more than double by the year 2030. Although the share of global output generated by developing countries would triple under these assumptions, the rankings of the top four countries or regions in terms of GDP would remain the same as they are today, namely the United States first, the European Union second, Japan third, China fourth, and India would move up from tenth to seventh in the world.

While the global economy will grow, so too will global population. There will be one-and-a-half billion more mouths to feed in 2030 than there are today. But the rate of growth will vary significantly from country to country. The phenomenon of lower birth rates in more developed countries will continue. Many high-income countries will see absolute declines in their populations. Japan's population, for instance, will fall from about 128 million in 2005 to around 117 million in 2030. The EU-15 will likewise lose about 10 million people. The United States will likely see a slower population growth rate, but because of higher fertility rates and greater immigration than in other developed countries, its population will actually increase to about 345 million. More than 20% of the nearly 1.5 billion new people in the world will live in India. Those 320 million new Indians will be joined by another 170 million new Chinese.

Advances in health and prosperity will allow more and more people around the world to live longer, healthier lives. In virtually every part of the world we can expect the demographic profile of a nation to change.

In the most developed countries, the number of elderly will probably double over the next 25 years to almost one billion people. If you take out the number of children living in society and compare only the number of workers to the number of persons age 65 and older, some truly startling numbers begin to emerge. The number of elderly per 100 workers in developed countries as a whole will rise from 30 to 53. The problem will be the greatest here in Japan, where there will be 63 people 65 or older for every 100 workers in the workplace. In the EU, the number will be 59. In the United States, the number will be 44. In China, 25. And even in India, where the largest number of births will occur, the elderly population will be increased by almost 50% to 16 per 100.

So what must we do to survive in an older, more crowded world? Part of the answer is a simple one: We need to trade more.

The World Bank predicts that, assuming there is no change in current trade policies, the level of global exports will more than triple. But if all countries reduced tariffs on merchandise goods and domestic agricultural protection programs by three-quarters, exports would increase by $2 trillion in 2030. Trade produces jobs, and jobs produce wealth, and wealth produces health and democratic values. Men and women who can find work are men and women who become consumers. They are also men and women who demand their economic and political rights through the democratic process.

This brings me back to the topic of economic integration and the importance of meeting those challenges for the United States and Japan. There is no single thing that each of us could do that would have a greater impact on global prosperity than a successful conclusion of the Doha Round of the World Trade Organization. A settlement in the WTO would lay the foundation for a new international trade regime that would benefit the citizens of developed and developing nations alike. Each of us - the United States and Japan - must do everything within our power to achieve this goal.

At the same time, we in the United States have been actively working to advance free trade with all willing partners through bilateral and regional trade agreements. Nowhere is this truer than in the Asia-Pacific region. If we look at the membership of APEC, the United States now has free trade agreements in place or under negotiation with eight of those economies, plus trade and investment framework agreements in place with another four, including with ASEAN as a whole. For the United States, free trade agreements go far beyond simple trade liberalization through tariff reductions. They set the rules for a comprehensive and profound economic integration with each of our partners. We see them as a substantial contribution to promote global prosperity.

It is in this spirit that President Bush at the APEC leaders' meeting in November put forward the proposal for APEC to begin to explore the possibility of a Free Trade Area of the Asia-Pacific. The United States wants to build a foundation for a true Asia-Pacific Economic Community. Such a community would focus on creating opportunities for sustainable growth and prosperity for all its members. Moreover, it would include dynamic regional economic actors such as Taiwan and Hong Kong.

Such a community needs more than just economics to survive; it needs common principles. Most fundamentally, this community must be open, proactive, and forward-looking. It should not simply be a mechanism to consolidate existing trade and investment relationships or to form alliances against perceived global enemies.

Security will be an important principle of any economic community. Whether from natural disasters, pandemic disease, or violent extremism, our common desire for prosperity must also recognize common threats, which could defeat us. At the heart of our challenge is a desire for good governance.

Business cannot long prosper in an environment where the rule of law is enforced by whim or not at all, where corruption is the rule and not the exception, and where property, both physical and intellectual, is neither respected nor protected.

Foreign Minister Aso was exactly right when he said in a recent speech that Japan wanted to promote the universal values of freedom, democracy, human rights, the rule of law, and the advantage of market economies in its foreign policy. The United States could not agree more with this line of thought. We will continue to advocate these same principles around the world.

The United States and Japan can do more in other areas to integrate our two economies, and that integration will have a positive effect on both our countries. For example, even though the evidence all shows that foreign-invested firms in Japan enjoy far higher productivity than the national average in both services and manufacturing, Japan still has the lowest ratio of foreign direct investment to gross domestic product in the OECD. Despite the government's pledge to double the amount of FDI in the coming years - a pledge that was realized the first time Prime Minister Koizumi made it - the recent debate over triangular mergers highlights the ongoing resistance to cross-border mergers and acquisitions that would increase the flow of foreign investment in Japan.

In light of Japan's growing burden of an aging population, rejecting the benefits of foreign investment that would increase productivity does not appear to be a realistic option. Labor productivity per hour in Japan is 31% below that in the United States. It is the widest gap of any of the major industrial countries that are a part of the OECD. Facilitating cross-border mergers and acquisitions will increase Japanese productivity, not reduce it.

In addition, educated, productive foreign workers in Japan can stimulate the Japanese economy with new ideas and ambitions. In 2002, foreign residents in Japan with work permits constituted only one-third of 1% of the entire Japanese total labor force, the lowest among OECD members and well below the average rate of 9% in other developed economies.

Finally, let me say something about a sector of the Japanese economy that remains a stumbling block to greater economic integration between our two countries, and that is agriculture. Japan imports about 60% of its caloric intake today. The average age of Japanese farmers is 70. Common sense seems to indicate that Japan will import even more food in the future. If that is the case, does it not make sense to now open Japanese markets further to countries like the United States, Canada, and Australia so that Japan's food supplies will come from countries that share Japan's values of democracy and tolerance? We need Japan as an agricultural market, and Japan needs us as an agricultural producer.

It is a marriage advantageous to both of us and we should pursue it in the months and years ahead. In so doing, we will also further the aims of those among us who want to increase our chances of a comprehensive free trade agreement.

One of the most tangible things that Japan could do to increase agricultural trade is to adopt international standards on food safety and security. Japan is not alone in wanting to protect its citizens from substandard practices, disease, and impure products. All of us want to do that, and science provides the best path. Regulating the enormous world trade in agriculture through science and not politics is the best policy for everyone.

The concerns of the Japanese people regarding food safety and food security are understandable. The issue is whether the policies currently in place are truly providing that security and safety and at what cost. The Japanese government itself has estimated that the cost of its agricultural protection policies borne by Japanese consumers amounts to as much as 2% of the entire Japanese gross domestic product, and that is a truly staggering number. It is a figure that amounts to the entire gross domestic product of Egypt in 2005. Increasing American agricultural imports will substantially reduce the cost of food to Japanese consumers, and that winds up being good for Japan and good for the United States.

Of course, agriculture is not the only area where we can do more. Right now, there is an imbalance in Japan's economic relationship with the United States. That the United States runs a trade deficit with Japan is not news. The United States currently runs a trade deficit with nearly all of its top trading partners, and the 2006 deficit with Japan alone topped $80 billion. Nor is it news that the United States has less investment in Japan than Japan has in the United States - $44 billion for America compared to $150 billion for Japan. Toyota alone has invested some $18 billion in the United States over the past 10 years.

What is worth noting, though, is how imports appear to follow investment. For example, majority-owned US affiliates of Japanese firms imported about $137 billion worth of goods into the United States in 2004. That is roughly 9% of the value of all goods imported by the United States from the entire world that same year. Imports to the United States by affiliates of Japanese companies actually exceeded the total amount of goods imported directly from Japan itself. In contrast, the majority-owned Japanese affiliates of US companies only accounted for $9.4 billion worth of US exports shipped to Japan in 2004, just a bit over 1% of all US exports abroad but, nevertheless, 17% of US exports to Japan.

Obviously, the United States has been exceptionally open to Japanese producers and investors. That is not a complaint. It has made the American economy strong. The United States enjoys higher productivity, better job growth, and greater increases in gross domestic product than any of the other major industrialized countries of the world. We welcome the tremendous Japanese involvement in the US economy. What is disappointing is that the reverse does not appear to be the case. Ultimately, I would argue that this harms Japan.

Social and political opposition to economic integration has been a historical constant in all countries. All of us know the arguments of protectionism. This is because the changes in the patterns of production and competition brought about by greater economic integration inevitably threaten the livelihoods of some workers and some firms. Their natural reaction is to resist change and fall back on protectionism. To succumb to this reaction, however, not only deprives a country's citizens of the benefits of greater integration, it invites retaliation. No one benefits when we close our markets to competition. On the contrary, everybody loses.

The fact is that globalization will continue whether we approve of it or not. It is here to stay. With political will, however, we can manage it. I believe that if the United States and Japan take on this task together, we can mitigate the negative and accentuate the positive. Conversely, if the political will is not forthcoming, both countries risk losing the benefits of globalization, which will harm our citizens.

Ideally, a decade from now substantial progress will have been made toward realizing a Free Trade Area of the Asia-Pacific. Even before that, I would hope that the United States and Japan will have taken concrete steps toward a much closer economic relationship than we now enjoy. If this is to happen, however, Japan must continue on a path of economic reform to sustain the current recovery, raise productivity, and deal with the dual challenges of an aging, diminishing population and a mountain of accumulated public debt. Reform of the agricultural sector must also be a part of this effort.

This obviously is no small task. Many will say that neither Japan nor America is ready for such a big challenge. Yet many others - the ACCJ included - argue that the United States and Japan must begin the process that will lead to a bilateral FTA if we are to compete in the world of the future. Your leadership and your thoughtful contribution to this discussion have been extremely important in helping to frame the argument. Let me assure you that your ideas are being talked about in both Washington and Tokyo, and they are having a positive effect.

No two countries in this region share a better combination of economic power, common interests, and shared values than do the United States and Japan. No other partners could bridge the Pacific in a better way. The power and prosperity of the United States and Japan can advance the kinds of policies and measures, both bilaterally and globally, that Asia and the world need to meet the challenges of the 21st century.

Winston Churchill was once asked which he thought was the greatest virtue. He said it was courage, because it made all the others possible. If we summon the courage to integrate our two economies, we can change the world and earn the gratitude of generations to come. Now all we have to do is to go out and do it. Thank you.