curement Code. This is important to us, for all of the reasons that I have just cited. It is important in terms of overall balance and it is important in terms of a very important American industry which is competitive. Part of what we mean by positive adjustment is that as we take imports from other countries, we ought to be able to export goods in which we do have a comparative advantage.

Telecommunications is an area in which we have a comparative advantage. We aim to see that other nations open up and provide opportunities in this area in which our industries are competitive. We hope that this issue will be resolved before our year-end deadline, which was set by the Strauss agreement; however, there is a considerable distance to go, and we recognize the possibility that agreement may not be reached. We hope it will be, and we will work to insure that it is. Nonetheless, we still have a distance

to go.

As a result of the discussions between the Japanese representative for External Economic Affairs, Dr. Okita, and Governor Askew, we think the Japanese have a better understanding of what we require in order to permit them to benefit from and bid on American Government purchases.

We hope that the work that is done in Tokyo and the work that is done between our two governments over the next couple of months will lead to agreement, but hurdles remain to be crossed. Thank you.

[The prepared statement follows:]

STATEMENT OF DEPUTY U.S. TRADE REPRESENTATIVE ROBERT D. HORMATS

I am pleased to appear before your subcommittee today to review where we stand on the opening of Japan's telecommunications market through the Government Procurement Code.

The roots of this issue lie in the nature of the Government Procurement Code. Unlike the other MTN codes, the balance of rights and obligations under the Government Procurement Code should not be considered in abstract terms. This code deals with contracts-the dollars and cents of trade. Hence, any consideration of reciprocity requires that advantages be measured in terms of the commercial opportunities which each signatory to the Code is offering. To put it plainly, in order to arrive at an equitable arrangement under the Code, there has to be reciprocal commercial opportunities. This was approached through what came to be known as entity negotiations. First, each country offered a list of entities-that is, ministries, departments, and agencies-to be covered by the Code. Negotiation ensued to arrive at a mutually satisfactory list. Then each country had to make a judgement, in purely commercial terms, as to whether other countries were offering enough in return. This fact was recognized in the Trade Agreements Act of 1979. As might be expected, these coverage negotiations were difficult and complex. Governments differ in size and structure. For this reason, it was recognized from the start that you could not simply compare offers on an entity-by-entity basis. For instance, many countries do not have central purchasing agencies parallel to our General Services Administration. Instead, they allow individual ministries to do their own purchasing or have a group of agencies which buy the various types of products which governments need. Given these differences in structure and purchasing practices, it was recognized that each country would have to determine whether an appropriate balance of concessions existed by comparing entity offers as a whole. We have succeeded in achieving the appropriate reciprocal balance under the Government Procurement Code with all our major trading partners except Japan. The final package of agreements with these countries does not offer all that we had hoped, but we were able to offset what we saw as deficiencies by withdrawing our offer of coverage of entities such as the Departments of Transportation and Energy. On balance we see major new export opportunities being created by the agreements we have reached to date.

In the case of Japan, our task was more difficult. Japan offered its central government ministries, as other countries had done. However, in Japan's case this

was not enough. Japan does not have a central purchasing agency, a large defense purchasing program, or units within agencies which make large purchases. Its procurement system is highly disaggregated. Rather than having one entity do all its purchasing, Japan has a multitude of procurement units that make a large number of small purchases. As a result, the average dollar value of Japanese procurement is relatively small. This is important because the Government Procurement Code only applies to purchases above a threshold of 150,000 Special Drawing Rights-approximately $190,000. The disaggregated nature of Japan's procurement system meant that a large portion of its purchases would be below the threshold and therefore not be subject to the Code.

Another factor we had to consider was that Japan has already shown how competitive it is in our markets. To date, our performance in selling to Japan has been less encouraging. This meant that to achieve balance with Japan we would have to gain access to purchases in areas where we know we are competitive. When we analyzed Japan's Government procurement market, we found that the one entity the inclusion of which could provide a balanced package was Japan's Nippon Telegraph and Telephone Company-NTT. NTT buys centrally in large quantities, meaning a high proportion of purchases above the threshold. It purchases high-technology products where the United States is highly competitive. NTT has taken on a special significance over the years because U.S. exporters have repeatedly found that NTT was unwilling to buy non-Japanese goods. This was hard to accept given that our firms were offering products equal to or better than the products being offered by their Japanese competitors. It was even harder to accept given our bilateral trade balance with Japan, and the extensive opportunities which Japanese high-technology firms have to sell in our market.

In Geneva we pressed Japan to add NTT to its entity offer. This began the process of negotiation which is still going on today. Japan at first resisted our request, arguing that our offers were already balanced since we had each offered to place procurement by our central government agencies (e.g. the principle ministries and departments) under the Code. We, in turn, made it clear to the Japanese that we were judging reciprocity in purely commercial terms and that we did not believe that this balance existed without the addition of NTT. Eventually Japan came forward with an entity offer which included NTT. However, the offer was limited to the purchase of non-telecommunications related equipment such as paper, pencils, utility vehicles, and telephone poles. This was obviously unsatisfactory. It excluded the high-technology products which we were most interested in selling to Japan. Our response was that this was a useful first step, but that it was far short of being acceptable. In brief, we told them we could not settle for anything less than full access to NTT's telecommunications purchases. I must emphasize that we have made it clear to the Japanese that we are not looking simply for a stop-gap solution. We are looking for a guarantee of the opportunity to compete now and over the long-term. The U.S. telecommunications industry is as competitive as, if not more competitive than, any telecommunications industry in the world. Given open competitive conditions we are confident that this industry will succeed in selling abroad. The NTT issue became the major outstanding issue between Japan and the United States in the closing days of the Tokyo Round of Multilateral Trade Negotiations. Negotiations continued well into the 11th hour with, then Special Trade Representative, Robert Strauss, leading our team. Despite countless hours spent in negotiations we recognized it would not be possible to complete work on this issue before the close of the MTN. However, both the United States and Japan wished to continue discussions in the hope of reaching agreement before the Code entered into force on January 1, 1981. As a result, long hours of negotiations yielded the Strauss/Ushiba joint statement of June 2, 1979. Under the terms of this document we agreed to reach agreement on entity coverage by December 31, 1980. It was also agreed that we would establish a work schedule beginning in July 1979.

Since July 1979 we have had numerous technical and substantive discussions with the Japanese. In these discussions the Japanese have forcefully argued their case for excluding NTT's purchases of telecommunications equipment. They have offered three basic arguments. First, they argue that our respective offers are balanced without the addition of NTT's telecommunications purchases, since we have both offered our principle central government departments and ministries. They have also pointed to comparisons of the dollar values of our respective offers to indexes such as gross national product in supporting this argument. We, in response, have explained that we are not looking for a theoretical balance. We are looking for an agreement which is balanced purely in commercial terms. In particular we pointed out the effect of the disaggregation of Japan's Government procurement market on the value of its offer. We stressed that NTT was the only entity which offered

important new market access opportunities for U.S. firms, and that its inclusion was therefore necessary for reciprocity.

Japan's second argument was that the addition of NTT would result in a lack of balance with other countries, since no other country has offered its telecommunications agency. In response we pointed out that entity negotiations under the Government Procurement Code had been designed to avoid meaningless entity comparisons. The approach taken was to compare overall balance. This approach was designed to provide the flexibility necessary to work towards roughly comparable aggregate market access opportunities.

Third and finally, Japan has argued that the procedures of the Government Procurement Code are not suitable to telecommunications purchases. They argue that purchases in this area are so complex and special in nature that they require procurement methods specifically tailored to their needs. We are convinced that this is not the case, and we have been working with the Japanese to explain why. The Government Procurement Code was designed to provide the flexibility which procurement officers need in meeting the full range of possible procurement situations. The Code was not designed to require a set of inflexible procurement procedures. Rather, the Code provides guidelines which permit a broad range of procedures. The guidelines assure that any of these procedures will provide for maximum competitive opportunities with the openness necessary to allow firms, regardless of nationality, to be certain they are being treated in an equitable manner. We are not asking Japan to adopt procurement procedures which would lead to a reduction in the quality of its telecommunications system. Quite the contrary, we believe that the adoption of Code procedures by NTT could lead to an improvement in NTT's services by creating an avenue for the introduction of the best and most competitive telecommunications technology which the world market can offer.

I believe that the discussions which we have had to date with the Japanese have been useful. Through these discussions we have gained a deeper mutual understanding of our respective telecommunications markets. In particular we have taken this opportunity to stress the importance we attach to improved market access opportunities in Japan for our high technology products. In addition, we have had useful discussions on the flexibility of the Government Procurement Code. Differences in interpretation of the Code have been narrowed.

We have made some progress with the Japanese. Up until recently NTT has been adamantly opposed to any changes in its purchasing procedures. It appears that NTT is willing now to work towards developing procedures which will permit international access to its purchases.

In order to come to agreement with Japan, all of NTT's purchases must be subject to the obligations of the Government Procurement Code. This continues to be the firm position of this administration. I cannot overemphasize the importance which we attach to the resolution of this issue. It is our strongest hope that it will be resolved well before our year-end deadline. However, there is still a considerable distance between us and we must recognize the possibility that agreement may not be reached.

Japan and the United States have a great deal to gain in resolving this issue and we are continuing to work toward this end.

Mr. VANIK. Do we have much telecommunications apparatus which is really competitive? Haven't they leaped over us and bypassed us?

Ambassador HORMATS. There is no evidence at all to that effect. They have sold in certain areas of the United States.

Mr. VANIK. I asked this question because in the Government study last week on U.S. competitiveness, it appears that over the last 20 years the U.S. telecommunications industry has lost a significant part of its competitiveness and has gone from one of comparative advantage, to one of disadvantage. Is this true? I think you have that study. What is your response in view of that study? Ambassador HORMATS. We have spent many hours with our industry, and we have also spent many hours trying to figure out in what areas NTT will be purchasing over the next several years. We have every reason to believe, for instance, from all of our discussions, excluding those with neutral experts, that our industry can

sell in a key telecommunications area such as visual switching equipment.

I don't know the field in great detail. I can only rely on those experts who do, and the judgment they provide is that, in fact, we will be able to sell-not simply sell, but sell important mainstream items.

Let me say, also, that the point here is that we are asking for the opportunity and, in fact, we can't guarantee-no one can guarantee that we will be able to sell X item or Y item. We want the opportunity to have a fair shot at these sales; and if American industry can sell, which I believe it can, we will do well. If it can't, and it is competing on fair terms, it will have to improve its product.

I don't believe that the latter is the case. I think it can do it now. Mr. GIBBONS. I can't answer the question you posed, but I think the best evidence is that we must be able to compete or the Japanese wouldn't be resisting so strongly. We have never had any formal vote on this, but certainly we have discussed this a number of times among ourselves, and the committee backs you up 100 percent in this negotiation. We think that this is the bottom line, crucial negotiation.

I hope that it can be successfully and fully completed by the deadline that we mutually set.

I can't really understand the Japanese position on this.

Mr. MOORE. I agree with everything that the gentleman from Florida has just said.

I would like to ask one question: This disaggregation of procurement, is that one of their intentional barriers that they have thrown up, like they did standards in the past?

Ambassador HORMATS. I don't think so. I think it is the product of the way the system has evolved. It precedes the debate over this code or trade in general. I haven't gone into the origins of it, but it is rooted deeply in the way the Japanese ministries govern themselves. Each little ministry and office buys its own things. I don't think there is any evidence that this is an intentional way of getting around the code.

Mr. MOORE. Thank you.

Mr. GIBBONS. That concludes our hearing for today, and the hearing record will be open until September 26 for receipt of additional statements and for materials for inclusion in the subcommittee records.

Thank you very much.

[Whereupon, at 1:15 p.m., the hearing was adjourned.] [The following was submitted for the record:]

STATEMENT OF HON. RICHARDSON PREYER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NORTH CAROLINA

Chairman Vanik and members of the subcommittee are to be commended for considering the unfair trade restrictions faced by American exporters of tobacco products to Japan. I wish to state my full support for any efforts the subcommittee may initiate to see that U.S. tobacco manufacturers are allowed to compete fairly in the Japanese market.

As we become more aware of the need to increase U.S. exports in order to maintain a high level of economic prosperity, the importance of the tobacco industry to the American economy strikes us with renewed force. Tobacco and tobacco products are natural U.S. exports. According to Fortune magazine, three tobacco companies-Philip Morris, R. J. Reynolds Industries, and Universal Leaf Tobacco

were among the top 30 U.S. corporations in export sales in 1979. These three corporations alone had export revenues of over $1.3 billion last year. There can be no question that tobacco is already one of our major export industries, and that there is potential for even greater sales of tobacco and tobacco products abroad. We must do all we can to encourage development of this potential.

U.S. governmental action is, of course, particularly appropriate when foreign governments unfairly restrict access to their markets, and this has clearly been the case in Japan's treatment of U.S. exports of tobacco products. Cigarette retail prices are set by the Japanese Government, and imported brands, subject to a 90 percent import duty, are now priced over 60-percent higher than domestic ones. Yet American manufacturers are forced by the government monopoly to sell at prices below their worldwide export prices. In addition, even under tentative agreements now being worked out, imported cigarettes could be sold at only 8 percent of the retail cigarette outlets in Japan. Finally, imported cigarette brands face severe restrictions with regard to advertising and a mandatory test-market period for new brands.

Imported cigarettes now hold 1.2 percent of the Japanese market. Industry sources estimate that if the present trade barriers were eliminated, imported cigarettes could be expected to account for 10 percent of that market. This increase could improve our balance-of-trade position with Japan by nearly one-half billion dollars a year, according to an industry figure, and would mean that U.S. manufacturers would be purchasing an additional 45 million pounds of leaf tobacco from American farmers.

Progress has been made in negotiations with the Japanese regarding American exports of tobacco products, but we must continue to work until all the unfair trade barriers now imposed by Japan are eliminated. The U.S. Congress must make its position clear-that we expect Japan to deal fairly with our export industries, just as we have done with theirs.

STATEMENT OF HON. CHARLES ROSE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA

Mr. Chairman, I appreicate the opportunity to express my concerns regarding the status of trade relations between the United States and Japan. I am especially interested in the efforts to correct the discriminatory practices imposed by the Japanese on U.S. tobacco products. Ambassador Askew has made some progress thus far to correct this unfortunate situation, I commend and thank him, however, we are still quite a distance from achieving equitable consideration for our tobacco products.

In view of the sizable trade deficits with Japan, the tobacco situation is extremely disheartening. In Japan, the distribution and marketing of manufactured tobacco products are controlled by a government monopoly, Japan Tobacco and Salt (JTS), under the jurisdiction of the Ministry of Finance. Imported cigarettes have been limited to 1.2 percent of the Japanese market as a result of trade barriers in the areas of pricing, distribution, and marketing. Absent these restrictions, imported cigarettes could reasonably be expected to hold 10 percent of the Japanese market. Traditionally, prices in Japan have been established for domestic as well as imported cigarettes by the JTS. The price differential has averaged around 100 yen for domestic tobacco products over imported. Effective April 1, pricing policies were transformed into a 90 percent import duty. This import duty will increase the retail price of imported cigarettes from 250 yen to 290 yen per pack. Concurrently, the retail price of domestic cigarettes in Japan was increased from 150 yen to 180 yen, effectively maintaining the 100 yen discriminatory price differential and controlling competition.

Despite the concession permitting higher retail prices, the Japanese force U.S. tobacco manufacturers to sell to the JTS monopoly at prices below worldwide export prices. This price includes a 17 percent manufacturers increase granted only after extensive negotiation.

The distribution mechanism for imported cigarettes distresses me further. Sale of imported tobacco products are limited to a fixed number of retail outlets. Advertisement has been confined to newspapers that are striclty printed in the English language. The Japanese have printed new, less restrictive advertising guidelines that would allow foreign tobacco companies to conduct limited advertising and promotional activities under supposedly equal rules. However, the alleged equality could be contended since these guidelines are applicable only to imported tobacco products and would not apply to JTS products.

The introduction of new imported tobacco products is curtailed by a requirement that all of these products be market "tested" prior to entrance into "normal"