WASHINGTON – Democratic Sen. John Kerry will target market distortions — including Japanese currency-market intervention — if he is elected president, one of his policy advisers said in a recent interview.
“Because the distortions in the global economic structure are so large, they cannot be ignored,” said Clyde Prestowitz, founder and president of the Economic Strategy Institute, a Washington-based think tank.
Prestowitz cited Japan’s massive currency-market intervention, aimed at stemming the yen’s appreciation against the dollar, as one such distortion.
Japan fears that a strong yen may adversely affect its economic recovery by making Japanese products more expensive on overseas markets, and therefore less competitive.
“We know that the dollar has been declining in value vs. the euro but not so much vs. the yen,” Prestowitz said. “Why is that? Because the Bank of Japan has been buying dollars.
“In free trade, we assume the Bank of Japan does not buy dollars, but the Bank of Japan is buying dollars so this means that free trade is being distorted.”
Prestowitz, who served as counselor to the commerce secretary in the Ronald Reagan administration, said China’s dollar-pegged foreign-exchange system is another market distortion.
With a string of victories in Democratic nomination contests, Kerry, a four-term Massachusetts senator, has virtually assured his selection at the party’s national convention in July as its challenger to Republican President George W. Bush in the November election.
Prestowitz said Kerry is a strong supporter of the U.S.-Japan relationship, though his approach to Japan issues is unknown.
“In any particular negotiation, it is impossible to forecast what specific tactics or discussions might take place,” he said.
The Bush administration pledged not to use “gaiatsu” — meaning foreign or outside pressure — in dealing with issues related to Japan.
Yet Prestowitz claimed that Bush has used gaiatsu for geopolitical purposes.
“I think that President Bush very much wanted to have Japanese Self-Defense Forces in Iraq, and it seemed to me that he used gaiatsu to pressure Japan to send Self-Defense Forces to Iraq,” he said.
Apart from the currency-intervention issue, Prestowitz said Japan needs to achieve a domestic demand-led economic recovery and serve as an engine for global economic growth.
“I think that there is an aspect of the Japanese economy that has been at issue for a very long time and has not yet been resolved,” he said. “That is Japanese consumption.”
Prestowitz said Japan’s ratio of personal consumption to gross domestic product is lower than the ratio for European countries and well below that of the United States.
“The Japanese recovery continues to be export-led, which means Japan is not really playing a role as an engine of growth in the global economy,” he said.
Regarding China, Prestowitz said Kerry is expected to use the World Trade Organization mechanism to open up its markets to American products and reduce what the U.S. views as unfair trade practices.
“I think Sen. Kerry’s approach to China would be one to try to expand market opening and I think we would attempt to reduce some of the distortions in the global marketplace,” he said.
“I think that he would attempt to use the WTO on the one hand to apply the rules . . . on the other hand to submit disputes settlement to the WTO,” Prestowitz said.
He said a Kerry administration would likely persuade China to reduce financial incentives introduced to attract foreign investment and promote banking and capital market reforms.
China would also be urged to establish the objective of abandoning the dollar-pegged foreign-exchange system, and to float the yuan, he said.
On the issue of outsourcing U.S. jobs to other countries, including China and India, Prestowitz said this phenomenon would be acceptable if was a result of free competition under fair rules.
“If we are going to have free trade, outsourcing may be part of it,” he said.
But Prestowitz added that jobs are sometimes outsourced to China and other locations because foreign governments provide financial incentives, such as preferential tax treatment and capital grants, to those who move their factories.
The jobs issue, including outsourcing, is a key matter heading toward the presidential election, with Kerry criticizing Bush over his perceived failure to keep jobs in the domestic market.
“If the adjustment is taking place as a result of market forces, maybe you don’t like the pain, but at least you can accept the pain,” Prestowitz said.
“But if the adjustment is taking place because of some subsidy or artificial industrial policy, then not only do you not like the pain but maybe you won’t accept the pain and you protest and you demonstrate and you go through your Congress and you say ‘hey, I need protection.’
“Therefore, I think it is very important for all the governments to minimize the distortions in the free-trade system,” he added.