Ambassador Schieffer Addresses Yomiuri International Economic Society

Tokyo Kaikan
June 15, 2007

AMBASSADOR SCHIEFFER: Thank you very much for inviting me today. It's a great honor to be here with Yomiuri again. It is also a particular honor to be here in the presence of Watanabe-san, who has brought so much pleasure to Japanese baseball fans over the years. And I am particularly glad that I could come and speak to you this year when the Giants are doing well. I have a feeling that my message will be received in a much more warm and friendly way than it would have been if they were not doing so well.

The United States and Japan have far and away the two largest economies in the world. What we each do and say has far-reaching consequences. What we say and do together, however, can really be profound. Representing 40% of the world's gross domestic product, we have a duty to consult and coordinate our economic efforts so that both our citizens and the world will benefit.

Today I'd like to share some thoughts with you on opportunities I see for further cooperation in the future. Let me begin by echoing a thought often expressed these days - Japan is back. Recently, Japan has enjoyed real economic growth, with one of its longest expansions in postwar history. Much of the credit for that expansion should go to the reforms launched by former Prime Minister Koizumi. The negative impact of the "bubble" in the early 1990s has largely been overcome today, and the Japanese economy has taken on renewed vitality.

It is encouraging to note that there are signs that domestic demand - consumption in particular - is beginning to serve as a strong driver of growth. If this trend continues, it will guarantee the sustainability of Japan's recovery and contribute substantially to global prosperity.

Often we hear talk that China will be the new engine for global economic growth. Sometimes we forget that Japan has already built an economy two-thirds larger than that of China's. It will be a long, long time before China can equal or exceed the impact Japan already has on the world economy. A healthy, growing Japanese economy almost guarantees a healthy, growing world economy, and a stagnant, ossified Japanese economy will make it almost impossible to achieve the kind of world economy we all want. Japan counts today, and Japan will continue to count far, far into the future.

The size of the Japanese economy ensures that even a modest expansion here will have enormous economic consequences elsewhere. Putting that into perspective, with a growth rate of just over two percent, Japan in 2006 generated an absolute increase in gross domestic product nearly equal to the entire GDP of Romania.

If the Japanese growth rate were to double to say the 4.4% that it had in the late 1980s, Japan's growth alone would almost equal the entire gross domestic product of New Zealand. Thought of in another way, Japan could be creating a new New Zealand every year, and that would create thousands of jobs not only here but around the world.

The immediate beneficiary of Japan's recovery has been and will likely remain its neighbors here in Asia. East Asian exports to Japan have increased by 32% in just the past five years and account now for more than 20% of Japanese imports. These exports have been driven by increased demand for primary commodities, as well as a modest rise in consumer demand for final goods. The ASEAN economies, which are particularly favored by Japanese enterprises as overseas manufacturing bases, are well placed to benefit from increased demand for consumer products.

Of course, the country that has become the most important manufacturing base of all is China. The ways in which the economies of China and Japan complement each other are striking. This reflects the new reality of the multinational production chains that exist in East Asia. Put simply, many Japanese enterprises are producing final goods in China, which have been assembled using imports from Japan or Japanese subsidiaries elsewhere in Asia. The resulting products are being sold in the United States, Europe, and Japan. China, if Hong Kong is included, has been Japan's leading trading partner since 2004 and currently accounts for 20% of Japan's total trade. The United States accounts for another 17% of that trade. Japan is China's third largest trading partner after the United States and the European Union, with close to 13% of China's total trade. China is by far Japan's largest source of imports, accounting for about 20% of Japan's total imports in 2006. These developments confirm how the economic prospects of Japan and China are now inextricably linked, with the impact that will be felt throughout Asia and the world.

Not surprisingly, Japan has been reaching out to Asia and the rest of the world through the various economic partnership agreements it has either concluded or is in the process of negotiating. If all the negotiations underway come to a successful conclusion, Japan would enjoy preferential trade and investment agreements with over 20 countries either through direct bilateral arrangements or through regional organizations, such as ASEAN and the Gulf Cooperation Council. It is our hope that these agreements will stimulate liberalization, growth, and prosperity for all the parties concerned. It is our belief that the more these agreements embrace free trade principles and the more they reject protectionism, the better chance they will have of impacting the world economy favorably.

As proof of that proposition let me offer the experience of Japan in America. Japan has and will continue to hold a special place in American life in the consciousness of the American people. It is certainly a position that is unmatched in Asia and perhaps unmatched by any other country in the world.

The Japanese presence in the US economy today is fundamental. Despite the growing prominence of China as a trading partner of the United States, Japan was still the third-largest market for US exports in 2006. As of 2003, when our Commerce Department's most recent survey of foreign firms in the United States was taken, US affiliates of Japanese companies employed 600,000 Americans who received over $38 billion annually in compensation. The share value of investment by Japan in the United States exceeded $190 billion at the end of 2005 and accounted for nearly 12% of total US inward foreign direct investment, which was second only to the investments made by the United Kingdom.

Japanese investors have provided a large part of the capital needed to finance economic growth in the United States. At the same time, the United States has offered much higher returns than those that investors could receive here in Japan.

Japanese brands are now so common in the United States marketplace that often Americans forget that they are foreign. Perhaps nowhere is this more noticeable than in the automobile industry. Japanese manufacturers produced nearly 3.4 million automobiles in the United States last year and accounted for 35% of all automotive sales.

The US Commerce Department projects that by next year, Japanese investment in the automobile industry in the United States will exceed $30 billion. The expansion of Toyota Corporation's facilities in the United States, in particular, has been quite dramatic. Toyota now employs more Americans than Texas Instruments or Cisco Systems. Americans appreciate the investments Toyota has been making in the United States, because they know those investments create good jobs and produce good products at affordable prices.

We also should not forget about another human dimension of Japan's footprint in the United States. Over time, hundreds of thousands of Japanese have lived and studied in America. In the 2005-2006 academic year, there were more than 38,000 students from Japan studying in the United States, making Japan the fourth-leading country of origin for foreign students.

In the late 1990s, Japan had more students in the US than any other country, but has recently fallen to fourth as a result of surges coming from India, China, and the Republic of Korea. Nevertheless, Japan continues to have more of its young people studying in the United States than any other major developed country. Even Canada, with which the United States shares a common border, a common language, and common historical roots, has far fewer students in American educational institutions than Japan.

Japanese pop culture is also huge in America. Publishers sell about $300 million worth of manga in the United States each year - nearly all of which represents translations of Japanese originals. As of 2004, there were nearly 9,000 Japanese restaurants in the United States, helping to make America the biggest importer of Japanese sake in the world. Almost one-third of all your sake exports go in fact to the United States, which may help to explain why Japanese negotiators are so successful in doing deals with Americans - especially late at night.

This all goes to say that Japan has become a part of American life. Americans eat Japanese food, drive Japanese cars, read Japanese stories, teach Japanese youth - and we do almost all of it without any sense of it being foreign. Consequently, the image of Japan in the United States is very positive.

According to a survey by Japan's Ministry of Foreign Affairs, 91% of American opinion leaders and 69% of Americans in general consider Japan to be a dependable ally or a dependable friend. When it comes to the question of sharing common values with the United States, Japan ties the United Kingdom among both ordinary citizens and opinion leaders as being a country with the same values as Americans.

Over the years the global partnership we have developed with Japan reflects the closeness of our relationship and the common values we share. Our joint efforts run the gamut of issues facing the world today. No other partnership carries a greater potential for a positive impact in the world than that between the United States and Japan.

The Japanese-American alliance is the linchpin for both our security postures in Asia. Americans appreciate the Japanese government's strong support for the transformation of United States Armed Forces in Japan and in the region. We reached a comprehensive agreement last year that will prepare our alliance for the 21st century, and we look forward to implementing it. We sincerely believe that agreement will provide greater security for Japan and America while decreasing the threat of conflict in other parts of this region. Let me also say we are very supportive of Japan's regional diplomacy, including Prime Minister Abe's early visits to China and South Korea, as well as Japan's very positive role in the six-party talks. These efforts complement our bilateral partnership and strengthen Japan's role in the international community.

A nuclear-free Korean Peninsula continues to be an objective of both the United States and Japan. The six-party talks have not been easy, but America appreciates the vital role that Japan has played. Let me also say America realizes the importance of addressing the abduction issue within the framework of the six-party talks. No civilized nation can accept the abduction of innocent citizens by another state. It is simply wrong in every moral and ethical sense.

The United States and Japan can rightly take pride in being the two largest donors of development assistance in the world. We look forward to even more cooperation based on our shared values of freedom and democracy. Foreign Minister Aso has described your government's international efforts by saying that the Japanese are now viewed as "a people who will stand alongside and undertake efforts hand-in-hand with their friends and allies."

Japan contributed over $18 billion in official development assistance in 2005. Japan has made the largest financial commitment of any nation besides the United States to the rebuilding of Iraq, with a total commitment of over $12 billion in grants, loans, and debt relief. Japan is also the third-largest contributor in Afghanistan, with an overall commitment of $1.45 billion since 2002. This money has been used for the building of roads and airports and the boosting of health and educational services. But Japan has provided much more to maintaining international peace and security than just money. We note that Japan has about 5,700 people involved in peacekeeping operations worldwide.

As the second-largest donor to the United Nations, the World Bank, and the International Monetary Fund, Japan is a leader in 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.

Japan, starting next year, will play a particularly important leadership role as the chair of the G-7 and the G-8, and as the host of APEC in 2010. These fora will provide an excellent opportunity for Japan to showcase its leadership abilities on a global scale. We are looking forward to working closely with you to ensure that these meetings deliver robust, positive results.

On a purely bilateral basis, the recent Camp David summit between President Bush and Prime Minister Abe set an economic course for both of us. Our leaders pledged enhanced bilateral efforts to promote and protect intellectual property rights, strengthen energy security, make trade flows more secure and more efficient, and increase the transparency of government regulatory processes. We also expressed our desire for achievement of a successful outcome to the Doha Round of negotiations in the World Trade Organization, which we both believe will stimulate growth and development by creating new trade.

We also pledged support for APEC's efforts to accelerate trans-Pacific economic integration, including a possible Free Trade Area of the Asia-Pacific, and agreed to additional sharing of information on each other's free trade agreements and economic partnership agreements with third countries. We also agreed to closer cooperation on an integrated approach to energy security and climate change.

Underlying this ambitious agenda is a recognition that we cannot wait to begin tackling the looming economic challenges of the future. Prime Minister Abe described his economic agenda earlier this year, as 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. The challenge now is specifying and carrying out concrete reform measures that will ensure strong growth for the long term.

As many commentators here have observed, even though Japan's recovery has been underway for several years, it has not been as robust as it might have been. Because of Japan's rapidly aging society and the growing fiscal burdens that that phenomenon will impose, new measures to increase productivity, reduce regulation, stimulate demand, and foster growth are not only preferable but unavoidable. I would argue that these steps will prove easier if we, the United States and Japan, take them together.

While both our 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 in Japan alone and $16 billion in the United States. These potential benefits should temper domestic opposition to greater reform in all sectors of the Japanese economy. Hopefully, protectionism will not prevent Japan from playing a leading role in the Doha Round of negotiations and in other international trade liberalization efforts.

Here in Japan, greater flexibility in the labor market would also go a long way toward helping Japan meet the challenges of the future. Full and efficient utilization of Japan's labor resources, especially among women, could result in enormous gains in productivity. Increasing the ability to move workers from protected, inefficient sectors to more productive occupations could also be critical to finding solutions to the demographic challenges Japan will face in the years ahead. 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.

We are all familiar with manufactured products in which Japanese technology leads the world. Yet some Japanese sectors maintain surprisingly low levels of productivity relative to their foreign counterparts. You may be aware, a recent study by your Cabinet Office found that Japan's productivity is the lowest among industrialized nations - just 70% of that of the United States. In fact, Japan's productivity has only grown by an average of 1.5 percent for the last 15 years. The chief reason for this is that average productivity in the service sector, which generates two-thirds of GDP here in Japan, is abysmal - it is only 40% of that of the United States. In many cases, extensive regulations on entry, products, and technologies have sheltered sectors from foreign and domestic competition, even though many of these regulated industries - such as business services, communications, agriculture, civil aviation, and health care - offer the greatest potential for growth in today's economy. That's why structural reform and deregulation aimed at removing barriers to competition, new entry, and new product introduction hold such attractiveness to Japanese businesses.

Both Japan and the United States also 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. 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. The United States welcomes the Japanese government's goal of having Tokyo become a greater global financial center.

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 the world's life insurance companies, postal privatization will have an enormous impact on the Japanese economy, and the manner in which this process unfolds will be critical to the world economy.

In making this transition, it is important that Japan establish equal competitive conditions for the privatized postal financial institutions before they introduce new products so that private sector firms - both foreign and domestic - can compete fairly. Finally, Japan should continue efforts to increase its inward flow of foreign direct investment, particularly via mergers and acquisitions. We welcome Prime Minister Abe's reaffirmation of the Japanese government's commitment to increase the size of FDI in Japan. The United States has been exceptionally open to Japanese producers and investors. This 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 nations. Japanese involvement - Japanese presence - in the US economy has yielded countless benefits to Americans.

What is difficult to understand, however, is the lingering anxiety among many Japanese about increasing the foreign economic presence of America here in Japan. Ultimately, I would argue that this anxiety, particularly insofar as it becomes actual policy, harms Japan because it diminishes Japan's capacity to take full advantage of the vitality and creativity of the global economy. It also risks backlash against Japanese investment in other countries.

Social and political opposition to economic integration has been a historical constant in all countries. All of us know the arguments of protectionism, which play to visceral fears of losing what we already have. Changes in the patterns of production and competition brought about by greater economic integration inevitably threaten the livelihoods of some workers and some firms. And it is understandable that their natural reaction is to resist change and fall back on protectionism. But to succumb to this reaction would not only deprive Japan's citizens of the benefits of greater integration, it will rob them of future growth and invite retaliation. No one benefits when we close our markets to competition. On the contrary everybody loses.

So what does this mean for the United States and Japan? Ideally, a decade from now substantial progress will have been made toward realizing a Free Trade Area of the Asia-Pacific. Even before that, we hope that the United States and Japan will have taken concrete steps toward a much closer economic relationship than we now enjoy. Of course, greater openness and greater interaction will ultimately lead to greater competition, which in turn will cause even greater "change." But that is precisely the point. It is through embracing change that we can discover the efficiencies, opportunities, and dynamism that will enable us to meet the challenges of the 21st century. If this is to happen, however, Japan must renew efforts to 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.

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 a new world. Let us resolve to work together for the prosperous, peaceful world we all want for our children and grandchildren.

Arigato gozaimashita.

QUESTION: I am Miyoshi. I was with Keidanren until ten years ago. I am a professional organization person, and from 1957 I was in the United States as a Fulbright fellow. Well actually, I was only half Fulbright. In 1961 I took Kissinger's seminar at Harvard University for two-and-a-half months, and I was brainwashed. I understood then that we can never go beyond US. And then I was in the Washington office of Keidanren from '64 to '68 with my family. For five years I lived in the Washington, DC, area. As a Japanese, there is no way to express sincere gratitude to the United States. Japan was defeated in World War II, and [inaudible] that we were occupied by the United States - it was not the Soviet Union or China who occupied us or maybe I think Australia may have felt the same way. But because the history was the way it was, I think we see Japan as we see now, so we're very grateful.

Now what kind of issues are we confronted with? We heard from the perspective of the economy and finance. My question is during World War II, after the occupation by the United States and in the process of reaching the stage that we are in at present, there are a few areas in which I sometimes question the position of the United States. I have two or three areas in which I'm somewhat doubtful, and I would like to raise them right now. One is related to the environmental issue. You are always of course aware of the Kyoto Protocol, and the United States did not accept or be part of the Kyoto Protocol, and we now have to move on to the next stage, but as you were not part of the Kyoto Protocol, what is your view on this US position? The second issue is very closely related to the presentation we just heard, and that is there are many, many different funds in the Japanese market, which is stimulating the Japanese economy, and Japanese financial market was very stagnant for many years but is now rejuvenating and is undergoing various reform. And productivity in the financial-service area is moving ahead, although productivity in the services area is not that high yet. In the financial sector, I believe that productivity is growing, improving very rapidly. But from the standpoint of ordinary common Japanese public, these funds, such as hedge funds - I know some of the people who lead those hedge funds - their remuneration maybe tens of billions of dollars. Many of the Japanese presidents and directors of Japanese financial institutions or manufacturing companies, or they are somebody from major construction companies, all they earn is maybe 100, maybe 200, or even 300 million yen. But these hedge funds, I don't know, [inaudible], for example that I know him very well, but he earns about 50 billion annually. Why is it that there is such a big gap? There was a Davos conference, and I think a cartel among the people and they introduced to each other the remuneration committee of these groups. How are Americans in general looking at these huge remunerations that the US fund managers, for example, are receiving? Next is related to South Korea and Chinese Taipei or Taiwan. I would like you to give us a very brief comment on South Korea and Taiwan. Thank you. First, it's about the Kyoto Protocol, and then next is the investment fund, and the third is your comment on South Korea and Taiwan. Maybe you could start with the Kyoto Protocol. Thank you.

AMBASSADOR SCHIEFFER: I think that's a very good question, and a good question to start with when we talk about the environment. It has been quite frustrating to me to be the ambassador of the United States in both Australia and Japan, because invariably a question that I am asked in virtually every audience that I address is, "Why is the United States not trying to do something about the environment?" But the fact of the matter is that the United States has been trying to do something about the environment. What we objected to on the Kyoto Protocol was not that it came into existence but that it left out so much of the world. And our view was that you couldn't have an effective environmental treaty if you left out developing countries like India and China. And I think our view has basically been borne out by the facts. This year, 2007, China will have more CO2 emissions in an economy one-fifth the size of the United States than the United States has. To think that you could have a global environmental solution and not include China in it is, I think, not realistic.

Now what the president said the other day prior to the G-8 conference, I think, was the first time that he has been able to get any kind of, what we would say, "traction" in the United States or in the world on this issue. It was very interesting to watch happen. He made a very fundamental proposal prior to the G-8, and the initial reaction was that this was a stalling tactic, this was insincere, and all that. That was the reaction, particularly in Europe. And then a funny thing happened. People read the proposal. And what the president was basically saying is that we need to take the top 15 or so emitters of CO2 gas, and let's have a meeting in Washington, and let's figure out what we're going to do to realistically address this problem. And when people read it and people saw it, and the president had a chance to talk about it at the G-8, I think he got a tremendous amount of support, because the reality of the Kyoto Protocol is, while it's well intentioned, almost no one, including Japan, is going to meet their Kyoto targets. So what the president is trying to say is that it's one thing to have an agreement - because that's good politics to have an agreement - but a good political agreement doesn't solve the problem. The agreement has to produce less CO2 emissions, and what the president hopes this conference in Washington in the fall will do is bring the developed countries and developing countries who emit CO2 together to talk about how they can create more efficiencies, more innovative approaches, increase the technology, and increase the production of alternative fuels - all of those things that will have a real impact on climate change in the world. And as I said, I think that's the first time that the president has been able to make a speech in which he's gotten that kind of response on a worldwide basis. He has made very strong speeches in the last two State of the Union messages in America.

And the United States, for instance, spends more on hydrogen research than any other country in the world. We're spending more on trying to develop alternative fuels than any other country in the world, and yet people take little notice of that, because there is a perception that this president and this administration don't care about the environment. And that's just not the case. So, hopefully, this latest proposal and the meeting that will occur in the fall will have a dramatic impact on designing a program for a post-Kyoto world that will not only have good political rhetoric attached to it but will have practical ways that we can solve this very vital issue in the world.

Now with regard to the compensation that chief executives receive in the United States, whether they're hedge fund managers or others, all of that is determined by free-market principles. If someone invests in your hedge fund and they make money and the terms of investment are that you get a part of whatever you make for somebody else, that's kind of what free enterprise is all about. Now what I would say with regard to compensation in a larger sense is when executives make money for their companies, and when they grow their companies, and when they create more jobs and better products, and they sell more in the marketplace, then I think they'll be compensated for it. The objection that I have is when they basically loot a company, because they don't create more jobs, they don't create more products, they lose money and still get the pay. That I think is wrong. And the way that I think the American shareholder has a say in that is through voting on management. And I think you see more and more investors like Warren Buffett, who is a huge financial investor, taking a very strong position that the pension funds that are huge players in our equity market; they are more and more saying, "We're not going to accept these kinds of compensation packages if you don't perform." And that in essence is the bottom line to me - if the company is performing, its one thing for the CEO to make a lot of money. If the company is not performing, then it's quite another. And I think that is something that is working itself out within the context, and I think that people are looking for ways to ensure that that is the end result. It's kind of a work in progress, but hopefully some progress can be made on it.

With regard to Taiwan, the United States continues to take the same position, I think, that Japan takes, and that is that we believe in a one-China policy, and that we want neither side to take provocative action that would cause a conflict to result. We believe that the issue of Taiwan can be resolved in a peaceful way, and we hope and encourage the parties to sit down together. And what we also urge both parties is not to take unilateral action on either part that would result in a confrontation or a conflict that could turn from a peaceful to a military solution. That would not be in anybody's interest. We don't believe that would be in China's interest, in Taiwan's interest, in Japan's interest, or in the United States' interest.

With regard to South Korea, obviously South Korea is an ally of the United States, and we look to the South Koreans as friends. From time to time, we have had differences with the South Koreans, sometimes at various points in the six-party talks. But I believe that overall we remain close and dedicated allies and friends, because we believe in the same things and we're trying to accomplish the same things around the world, because I think the embrace by South Korea of democracy and institutions that promote freedom, free speech, free association, free-market - those are things that I think have taken root in South Korea. And I think that the future is quite bright for our alliance in our friendship.

QUESTION: Thank you, Ambassador Schieffer, for the very interesting presentation. I am the Israeli ambassador. The equation of the United States, Japan, and China - I felt maybe missing one country, like India. How do you look at India in the short term - five years - and in the intermediate term of 10 years in this equation of three or four countries?

AMBASSADOR SCHIEFFER: I think you're exactly right. India is a huge player on the world stage. You see the Indian economy now emerging with terrific growth and reform that is occurring. I think that the Indians have a way to go on eliminating regulatory issues and opening their markets to other investments, foreign investment. But they've come a long way, and the Indian institutions, particularly of higher learning, are producing some of the best engineers, mathematicians, scientists in the world. And that will have a long-term impact on not only India but the world because of that. I think the United States, Australia, Japan have all taken notice of the developments that are occurring in India and have tried to strengthen their ties individually. With regards to United States itself, our relationship with India is better than it has been since independence. We look to the Indians and we counsel with the Indians more than we ever have before, and I think you see a deepening relationship. I think a lot of that relationship occurs because of the shared values and belief in democracy. India is the largest democracy in the world, and it is a democracy that is firmly rooted and has existed for a long, long time.

And I think the interesting thing that has occurred with regard to the United States is that the best relationship we've ever had with India has not come at the expense of our relationship with Pakistan. And that, in my judgment, proves that what America has been doing in Asia has been pretty good. I would also add that with regard to our relationship with China, there's no question in my mind that the United States has the best relationship it has ever had with China. There is also no question in my mind that there has ever been a time when the United States and Japan have not been closer, and the alliance that we have between our two countries has never been healthier. I would argue that the cause of the closeness, and the strength, and the health of the Japanese-American alliance that has made our relationship with China that much easier. I think that it is a two-step process - strong American-Japanese alliance equals openings to China for Japan and United States that they otherwise might not have.

QUESTION: I'm Glenn Fukushima of Airbus. Thank you very much, Ambassador Schieffer, for a very comprehensive and informative talk. You started your talk by talking about how important the two countries are in the world economy, constituting 40% of the world's GDP. You talked about the many opportunities. One could argue that the next logical step is to have an FTA between the US and Japan. You made reference to perhaps an Asia-Pacific FTA within the next 10 years or so. But with regard to the US-Japan FTA, there are many private-sector groups in both the US and Japan that have argued that it would be a good idea, and it would seem to be a good way to try to further facilitate and enhance the economic ties, including investment, trade, financial flows, and so forth. When this issue has been mentioned, I know that your answer has been that the Japanese side is not willing to discuss agriculture, and this is the big blocking point that really prevents a serious discussion of an FTA between the US and Japan. But as you well know, the agriculture issue is a political issue in Japan, and as someone who's had a life in politics in Texas, you must be aware of ways in which you can address those political issues. And I'm just wondering if you would have some ideas as to how an FTA discussion could begin between US and Japan, leaving aside the question of ultimately what happens in agriculture, and whether that might be a way to really further the discussion first on nonagricultural issues but eventually agriculture, and thereby bring about an FTA that would really help to cement of the relationship economically between the US and Japan?

AMBASSADOR SCHIEFFER: Thank you, Glenn, for raising that issue. I have spent a lifetime around politicians, if not in politics myself, and I've also noted from time to time the calendar, when elections are going to occur or when it just occurred. And I note that there is one coming up on July 22, and I wouldn't want to do anything to interject myself or the United States into the election. But I would say that what I think I've tried to say today was that there are advantages for both countries when they cooperate and when they open each other up to each other's economies.

And I'll kind of answer your question with something I said when I was ambassador to Australia, and people would ask me about a free trade agreement with Australia - and by the way, we negotiated a free trade agreement with Australia while I was the ambassador there. And the analogy that I would use was this: Australia has about 20 million people. The state of Texas, my home state, has about 21 million people - I think it's closer to 23 million now, but that was a while back. In any event, what I would point out to them was that the Australian economy, which is the 13th-largest economy in the world, is about half the size of the Texas economy. So people would ask, "Well, how could that be?" And if I were making this speech in Texas, I would say it's because Texans work hard, and we're smart, and we know how to make money and all those kinds of things; but the truth of the matter is that the reason the Texas economy is almost twice as large as the Australian economy is because the Texas economy of 21-plus million people has access to the other 280 million Americans, so that the Texas economy operates inside a free-market access of 300 million. And the thing that I would point out to Australians is that when you are an economy of 20 million, having access to another 300 million will give you the opportunity to find all kinds of markets that a smaller economy wouldn't.

So when you think about the largest economy in the world and the second-largest economy in the world, if you had greater access between those two economies, I think that the opportunities are unlimited. And unlimited in a way that the world really has not seen in any other context, because you have not had free trade agreements between these giants before. I believe in free trade. I believe the American people believe in free trade, and I believe that when you have free trade, you create prosperity, you create jobs. You don't contract them. You may change jobs, but overall you create wealth; you create jobs; you create prosperity, and that winds up being good for every citizen in every country. And with that, I'll just kind of leave it at that for today.

QUESTION: I usually do not ask questions when I come to these kinds of meetings, but today, because of the relationship between baseball, and economy, I would like to ask you about the situation in the United States. The Japanese economy - well actually, I am from the Nomura Institute, and I think the Japanese economy has entered into a new phase of growth. Some economists are very pessimistic still, but I personally believe that as of Nomura, my personal view is that Japan has entered into a new stage of economic growth. There is IT revolution, and there is globalization in the backdrop of this, and so Asian countries are showing great growth as well. And in such an environment, I believe that as was experienced by the V-9 of the Yomiuri Giants - nine straight years of victory - and the victory of the Giants of Yomiuri and the Japanese economic growth have always come together. When the Japanese economy is good, the Yomiuri Giants always win, and when the Yomiuri Giants attained victory, it is good for the Japanese economy. The correlation between the two, according to my conclusion, is very, very high.

Therefore, I have a question. This kind of view - is there anyone with such a view in the United States? How about the case with the Texas Rangers? When the Texas Rangers win, does the Texas economy improve? Or when the Texas Rangers are not doing very well, what happens to the Texas economy? Does it go down? This is my question.

AMBASSADOR SCHIEFFER: It's a very good question. I think when the Rangers win, the economies of the players' households go up dramatically, but I don't know about the rest of them. I was on the paying end of those salaries at one point in time, and my income didn't always go up as quick as the players' did. But I note that the Japanese players themselves are having an incredible impact in Major League Baseball today, and it is fun for me to watch that, and I get to see a lot more American baseball here because the Japanese sports shows include all the results of the Japanese players and the teams that they are on. But I must say, I really enjoy Japanese baseball itself, and Watanabe-san has been - he's really the godfather of Japanese baseball, and he has made such contributions over the years. And it's really fun to be here and to see how much Japan and the Japanese people enjoy baseball. And we had a great conversation at lunch about our mutual hope that we can spread some baseball diplomacy to China, and that the Chinese will one day embrace baseball in the same way that the American people and the Japanese people have. I think if they were to do that, we'd have a peaceful world.

QUESTION: I am Miura from the research headquarters of Yomiuri Newspapers. I have one question: The recent exchange rate - there is somewhat of a weaker yen. Does that reflect the fundamentals of the two economies of the US and Japan? What do you think about the trends that we see on the exchange rate? What is the reaction by the industries and businesses of the United States regarding the recent developments?

AMBASSADOR SCHIEFFER: You're really trying to get me in trouble now. I'll answer that question in the way that Jack Snow, who was the Secretary of the Treasury when I first came to Japan, asked me to answer that question. He said when people ask you about exchange rates, would you please just say, "The United States believes in a strong dollar, and check with Jack Snow for details." Hank Paulson has told me the same thing. Now, as I was also going around and getting my briefs, I called Jim Baker to ask him what I should do when I got to Japan, and I related that story to him, and I said what Secretary Snow had said. He said when anybody asks you about interest rates, well, you say that the United States believes in a strong dollar, and check with the secretary of the Treasury for details. So I asked Baker, who had been secretary of the Treasury, if that was good advice, and he said, "Absolutely. The only person that should be commenting on interest rates should be the Secretary of the Treasury." And then he told me that when he was secretary of the Treasury, and George Shultz was Secretary of State, that they had some ... they did something - I forgot what it was, but he did not tell George Shultz about it before he did it. And so Shultz was very upset about it and called him and said, "You can't be doing things like this without telling me about it." And he said, "I told him, 'George, the secretary of the Treasury has to be the only person that comments on these kind of things. I'm sorry, it was just too dangerous to try to say anything to you beforehand for fear that there would be a leak.' " And I said, "Well, that's very interesting, Mr. Baker. And when you were Secretary of State after that, did you still hold to that same view?" And there was a long pause, and he said, "Well, that's different." So my comment on the current situation with interest rates and the value of the yen and the value of the dollar is that I believe - and the United States believes - in a strong dollar, and check with Hank Paulson for details.

QUESTION: Thank you. I'm Sato. I was the vice minister for defense, and I was very impressed by the presentation today. There is the US-Japan alliance, and its importance has been stated in your presentation. There is a transformation going on in the US bases here in Japan, and there are new regulations being enforced by the Japanese government. And Prime Minister Abe has led the move to streamline the legal structure, including the Constitution, and I am part of the members to discuss these issues, and every time we have a meeting, Prime Minister Abe stays for the entire session of the meeting. In other words, he is very sincere in his efforts. So in that sense, we must both make efforts for the US-Japan alliance so that we can make it even stronger than in the past.

My question here today is that the relationship between Japan, the US, and Australia - would you be able to elaborate on the relationship between the three? Recently there was a two-on-two meeting between the foreign minister and defense minister of Australia. In the past, we only had 2+2 with the United States, but this time we had one with Australia. The stability of this region, as well as international community, must be dealt with based on not only the US-Japan but also the US-Australia-Japan relationship. In that sense, you have also served as the ambassador to Australia, and therefore, what would you say about the future development of the relationship between the US, Australia, and Japan and its potential and opportunities, and in what area would you want to see more relationship, and how about including India to this relationship? I would like to ask for your view on this.

AMBASSADOR SCHIEFFER: Well, I appreciate your asking me about that very much. When I first came to Japan, I quietly said to many Japanese officials that I would meet with, I have been in Australia, and the United States and Australia have an extraordinary relationship. I came to Japan knowing that Japan and the United States have an extraordinary relationship. And there is nothing that I can see that would prevent Australia and Japan from having the same kind of relationship with each other that they each have with us. So I think we were very heartened by the fact that Japan and Australia are talking more together, are counseling more together, have this 2+2 meeting the other day. We applaud that, because we think it is a great thing for Australia and Japan - who share the same values, who share the same belief in democracy, who share the same belief in free markets - to get together and talk about things that they can do to enhance their relationship. And I think that the relationship that is developing in what we call the strategic dialogue that exists between the United States, Japan, and Australia is a very positive development in this relationship, because I think we all seek the same things, not only in this part of the world but around the world. And I think that the more that we talk to each other, the more that we share, the more that we cooperate, the better off all three of us will be.

I know that Prime Minister Abe is a very strong personal interest in increasing ties with India. I think that Prime Minister Howard in Australia has the same view, of strengthening the ties between Australia and India, and I know that President Bush wants to strengthen and has strengthened the ties between the United States and India. So it seems to me that it's a natural that somehow these four great democracies talk about how they can cooperate together more and the various things that they might be able to do. I don't know exactly what that would be specifically, I mean with specific issues. It might be something like tsunami relief or acting together in the world on energy issues or something like that, but I think that those four great democracies, talking together, discussing, cooperating together, would be a positive development for all of us individually and for the region, so I know that we would encourage that kind of cooperation and sharing of information with the four.

QUESTION: Ambassador Schieffer, I am the Norwegian ambassador. One of the interesting things to me today has been the many references to baseball as a great unifier and bridge-builder between the United States and Japan, particularly since this is a virtually insignificant sport in my part of the world.

AMBASSADOR SCHIEFFER: Baseball is never insignificant anywhere. (Laughter.)

QUESTION: There have also been references to baseball in the Japanese economy. You yourself called for further structural reform during your tenure here, and there have been very interesting changes in Japanese baseball, with new entrants, and such things. Is this the kind of structural changes you would like to see in Japan? And have they gone far enough?

AMBASSADOR SCHIEFFER: Well, I think there are a lot of similarities between the United States - between Major League Baseball and Japanese baseball. And Watanabe-san is the real historian here. He would be able to describe it to you better than me, but I think it is great the way Japanese players are now going to the United States. Literally, when I was involved in baseball back in the 90s, that was not the case. I remember when Nomo came to the United States and had an incredible impact, and he was really the pioneer in that regard. Now you see much more interchange, and you see more American players. I guess the rule used to be two foreign players on Japanese teams. What is it - five now? So you have seen an increase in foreign players here. One of the little-known things about major league baseball, and some of the Latin American ambassadors here today would know what I'm talking about, but anywhere from 25 to 30 percent of the players that play Major League Baseball in America today are from foreign countries. So while I make kind of light remarks about the impact of baseball, baseball has really become more international, and the ease with which foreign players can come into the United States and make American baseball better is a good example for all of us to follow in many, many walks of life. So I'll just leave it at that.

QUESTION: It is a witness of how popular baseball is in Japan, because last year when the Mexico team defeated the US team, and that allowed Japan to become the winner of the championship, I received hundreds and hundreds of emails congratulating Mexico. But more seriously, Ambassador, I have a comment: this month, the G-8 had a summit in Germany with the participation of five so-called emerging economies including Mexico, China, India, Brazil, and South Africa. And since next year the G-8 summit will take place in Japan, I think it is important that the dialog that has started between the G-8 members and the G-5 countries continues. If you can say a comment on that, I would appreciate it.

AMBASSADOR SCHIEFFER: I think, Miguel, that that too is important, and it is very important for us to have the kind of meetings that we are having on a regular basis on the G-8. One of the problems that we do get into in world fora is that when you have so many people to comment, then it winds up with nobody has a chance to talk, but I think the addition of the G-5 to the G-8 has made a very positive contribution, and I hope it will continue.