S. HRG. 107–881 U.S. DEPARTMENT OF THE TREASURY’S REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED SEVENTH CONGRESS SECOND SESSION ON THE U.S. DEPARTMENT OF THE TREASURY’S REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY MAY 1, 2002 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( U.S. GOVERNMENT PRINTING OFFICE 85–735 PDF WASHINGTON : 2003 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 11:02 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 85735.TXT SBANK4 PsN: SBANK4 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS PAUL S. SARBANES, Maryland, Chairman CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming ZELL MILLER, Georgia CHUCK HAGEL, Nebraska THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky JON S. CORZINE, New Jersey MIKE CRAPO, Idaho DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada STEVEN B. HARRIS, Staff Director and Chief Counsel WAYNE A. ABERNATHY, Republican Staff Director MARTIN J. GRUENBERG, Senior Counsel THOMAS LOO, Republican Senior Economist JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator GEORGE E. WHITTLE, Editor (II) VerDate 11-MAY-2000 11:02 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 85735.TXT SBANK4 PsN: SBANK4 CONTENTS WEDNESDAY, MAY 1, 2002 Page Opening statement of Chairman Sarbanes ........................................................... 1 Opening statements, comments, or prepared statements of: Senator Bunning ............................................................................................... 2 Senator Johnson ............................................................................................... 2 Senator Miller ................................................................................................... 3 Senator Corzine ................................................................................................ 4 Senator Akaka .................................................................................................. 4 Senator Gramm ................................................................................................ 12 Senator Stabenow ............................................................................................. 51 Senator Hagel ................................................................................................... 51 WITNESSES Paul H. O’Neill, Secretary, U.S. Department of the Treasury ............................. 4 Prepared statement .......................................................................................... 52 Report to Congress .................................................................................... 57 Response to written question of Senator Akaka ..................................... 137 Richard L. Trumka, Secretary-Treasurer, American Federation of Labor and Congress of Industrial Organizations ................................................................. 25 Prepared statement .......................................................................................... 66 Report submitted ....................................................................................... 68 Response to written questions of Senator Bunning ................................ 137 Jerry J. Jasinowski, President, National Association of Manufacturers ............ 27 Prepared statement .......................................................................................... 101 Response to written questions of Senator Bunning ................................ 138 Bob Stallman, President, American Farm Bureau Federation ............................ 29 Prepared statement .......................................................................................... 115 Response to written questions of Senator Bunning ................................ 139 C. Fred Bergsten, Director, Institute for International Economics ..................... 31 Prepared statement .......................................................................................... 123 Ernest H. Preeg, Senior Fellow in Trade and Productivity, Manufacturers Alliance/MAPI, Inc. .............................................................................................. 35 Prepared statement .......................................................................................... 127 Response to written questions of Senator Bunning ................................ 140 Steve H. Hanke, Professor of Applied Economics, Johns Hopkins University ... 37 Prepared statement .......................................................................................... 130 Response to written questions of Senator Bunning ................................ 141 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Prepared statement of the American Forest and Paper Association ................... 142 Prepared statement of the American Textile Manufacturers Institute, (ATMI) 154 Prepared statement of the Coalition for a Sound Dollar ...................................... 156 Miscellaneous letters submitted for the record by Senator Paul Sarbanes ........ 159 (III) VerDate 11-MAY-2000 11:02 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 85735.TXT SBANK4 PsN: SBANK4 VerDate 11-MAY-2000 11:02 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 85735.TXT SBANK4 PsN: SBANK4 U.S. DEPARTMENT OF THE TREASURY’S REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY WEDNESDAY, MAY 1, 2002 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:02 a.m. in room SD–538 of the Dirksen Senate Office Building, Senator Paul S. Sarbanes (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES Chairman SARBANES. The hearing will come to order. We are very pleased to welcome Treasury Secretary O’Neill to the Committee this morning to testify on the Treasury Depart- ment’s Report to Congress on International Economic and Ex- change Rate Policy. He will be followed by a panel of representatives of American manufacturers, workers, farmers, and academics, who will com- ment on the impact of the exchange rate of the dollar on U.S. trade, employment, and long-term economic stability. Mr. Secretary, we apologize. We had a vote and we had no alter- native in terms of when to start. And I understand that you have some time pressures and we are mindful of those. So when the time comes that you have to leave, we will certainly recognize that. The Omnibus Trade and Competitiveness Act of 1988 requires the Treasury Department to submit a report to Congress annually in October, with an update after 6 months, on international eco- nomic policy, including exchange rate policy. The Banking Committee originally planned to hold this hearing last October, at the time of the submission of the annual report, but delayed it because of the events following September 11. This morning’s hearing is technically on the 6 month update of that annual report, but obviously, will encompass the report as well. It is important to just take a moment, and I will be very brief here because I know we want to move along, to understand the origin of this reporting requirement, so we can understand its purpose. The report required in the 1988 Act was a response to the experi- ence in the early 1980’s when the exchange rate of the dollar rose (1) VerDate 11-MAY-2000 11:02 Mar 31, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 85735.TXT SBANK4 PsN: SBANK4 2 to very high levels and there was a sharp deterioration in the U.S. trade and current account balance. Initially, there was a denial that there was any issue, any con- cern. But the Treasury Department—this is in the Reagan years, Secretary Baker—shifted positions and organized an effort by the Group of 7 industrial countries in 1985, known as the Plaza Ac- cord, to address lowering the value of the dollar and begin to ease the deterioration in the U.S. current account. In the aftermath of that experience, the Congress realized that it did not have a mechanism by which the Treasury Department would regularly report or testify on the conduct of international economic policy. There was a recognition that this was a critical area of economic policy and that a mechanism similar to the re- quirement that the Federal Reserve report to Congress semiannu- ally on the conduct of monetary policy, was needed. This report was the result of that rationale. We regard this report as a serious mat- ter. We intend for the Committee to conduct regular oversight on this important issue. I want to commend Secretary O’Neill and the Treasury Depart- ment for the timely submission of the report and its 6 month up- date since the current Administration took office. In this regard, they have been quite responsive to the requirements of the statute. I am not going to go through the different requirements of that statute, many of which have been met specifically in the reporting requirement. There are some that were not addressed