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a comprehensive national policy for an issue that affects so many workers now and will affect so many more workers in the future.

Mr. GILMAN. I thank our panelists.
Thank you, Mr. Chairman.

Mr. Mica. Thank you. I recognize Mr. Ose, the gentleman from California.

Mr. Ose. Thank you, Mr. Chairman.

I am curious about something with respect to the offsets. The information that is going to be compiled and reconciled and analyzed and digitized and all that sort of stuff, who is going to collect that?

Mr. SCOTT. I believe that information is currently being collected by Commerce and by the Department of Defense. I think that it needs to be channeled up to an organization like the National Economic Council in the White House. I believe that we need to have that information coordinated at a much higher level in the government so that it can be used for policy purposes.

Mr. HERRNSTADT. I agree. I think it is being collected currently in the Department of Commerce and elsewhere throughout government, but there needs to be more coordination through all of the Federal agencies, whether it is the Labor Department, Commerce, Defense Department, a clearinghouse, if you will, that can collect all of the information and sift it out and coordinate it.

Mr. OSE. Did I understand, Mr. Herrnstadt, from your comment that you think we need to expand it beyond the current arena to include all transactions, both of a government-private and a private-private nature?

Mr. HERRNSTADT. I believe Dr. Scott had mentioned that.

Mr. OSE. How big of an agency do you think we are going to create to compile and reconcile and analyze this data?

Mr. Scott. Well, it is relatively simple. We have essentially one aerospace prime in a commercial site and we could ask that one company simply to supply to the appropriate government office the reports and agreements that it is already making with foreign firms and foreign governments. So basically

this requires a copy machine in the appropriate departments at Boeing and a few of the other major suppliers.

Mr. OSE. What about the subtier companies, for instance? Do they not also have to-I think my point is that if you expand it beyond, say, Boeing to private-to-private transactions, I mean, you are going to open a huge area for data collection, if nothing else, which probably dwarfs even the-I can't even conceive of the agency, the Labor Department, perhaps.

Mr. Johnson, I would appreciate any comments you have on this. You referenced 45 companies being involved in these kinds of transactions where there is government involvement of one nature or another in the defense business, but what if we go outside, say, defense and do lumber or automobiles or oil or computers?

Mr. JOHNSON. You would have a matrix that would make MIT blanch. I mean, suppose you get credit for moving X number of wicker chairs from Thailand to Pier One. Then, are we going to examine the entire worldwide wicker chair industry to find out what impact you had on the wicker chair people? That is the problem.

When you get into direct offsets in general, what you find, even when Commerce looked at three areas that they thought might be heavily impacted offset transactions, is that offset activity amounted to less than 1 percent of the total activity of any of those three subsector industries in the United States.

Even with the narrow confines of the defense industry, suppose you get credit for buying X number of fasteners from Germany for aircraft. There are hundreds of distributors in the United States. They, in turn, draw from fastener manufacturers around the world, including the United States. How do you figure out what impact that had on all of the fastener activity in the world? You would have a matrix that MIT can't handle with supercomputers.

Mr. OSE. The question that comes into my mind, when I was building houses and I had partners in the deal, some of those partners also provided subcontracting services, and while I was sensitive to their needs, I didn't let them jab me for an extra 3 percent just because they were my partners. If it was a lumber guy and his bid was the equivalent, well, then, I gave him the benefit of the doubt. But if he was 3 or 5 or 2 or 1 or anything over what the market was, I mean, it was a “tough” kind of thing.

Now, the question I have is, I am the guy writing the check on these things. If I am buying it, don't I have the right to buy it from the person that I want to buy it from? I mean, if I am France buying X, Y or 2, don't I have the right to say, well, a component of X is going to be this?

Mr. Scott. I think there are two answers to that. One, part of what they are buying was, in part, paid for by the U.S. Government, and that is the party who doesn't sit at the table in many of these transactions. We are talking about technology developed with government funding.

And I think, No. 2, often parties from different countries play by different rules. I think we have the European governments intervening informally behind the scenes in the purchases made by private companies.

For example, we saw a huge share in Airbus shipments to European producers, and the United States share there plummeted, I think, much more rapidly than those exchanges happened in the United States. I think that does reflect a national interest as well as the search for the best deal. So, I think that we have to recognize that when we get into international trade, the rules are different, and we need different policies to respond.

Mr. OSE. Mr. Chairman, I see the red light is on and I am crushed. I yield back.

Mr. MICĂ. Thank you.
Mr. Tierney, did you have any additional questions?
Mr. TIERNEY. I do, and I thank you for that.

First of all, Mr. Johnson, I need to go at this one more time with you, because I am still puzzled.

You are fearful, I guess, or the industry is fearful that if we provide Commerce with the information that might be necessary to sort of monitor or police what is going on, that offsets will escalate. How can that possibly happen? I mean, already exports, you have indicated, in this area has an offset agreement attached to it. I have been to conferences where the room is packed with people whose sole responsibility for the corporation is to devise seemingly new ways to surreptitiously, and I think unseemingly to go around and find ways to do offsets, the most creative things that many people have ever seen. So what are you afraid of?

Mr. JOHNSON. Let me say one more time, we do not object to sharing some information with Commerce. Our concern is, when you publish it, you create a best practices for every other offset demander in the world.

Mr. TIERNEY. They are already-

Mr. JOHNSON. The other issue, I would say, as discussed with the gentleman from California, is that if you provided Commerce with wheelbarrows full of offset data, it doesn't give them a context to look at it in.

Mr. TIERNEY. You want to say that the only people that can give the context is the industry?

Mr. JOHNSON. No. I am just saying you have to come at it from the other direction. I sympathize. If you look at the trend across the board in industry, for example, one trend in automotive and aerospace, et cetera, is to slash the number of subcontractors as an efficiency means. How do you differentiate that overwhelming trend from some guys who think they were affected by offsets unless you know what the general trend is?

All I am saying is that you are taking information which is a teeny part of our industry without having a context in which to put it. I don't see how Commerce can do that if-that is why I think it is much more sensible to start at the bottom up.

Mr. TIERNEY. We are acting like we haven't already had a great deal of agreement on this, that offsets are not good. The agreement on government procurement already makes, I think, a pretty clear statement that offsets are not something that we think are great, it is market distorting, it is not favored. In fact, article 16.1: Entities shall not-shall not consider, seek or consider offsets.

Basically, the problem with that is, we then go ahead and exclude it on defense. Basically we say, well, you can do it in defense if you say it is for your national security. But you and I both know, Mr. Johnson, this has nothing to do with national security; it is to explain it to the people somewhere in the European Union that they spent dollars on American goods and the dollars didn't go to them.

We are fussing around with this a little bit and if we can prohibit offsets for virtually every other industry and just leave this loophole for defense, it seems to me that you could take another step. And if we have the information, we find out what we need to know about the statistics, and we go ahead and do it.

We have 45 companies; presumably they have some patriotism in their blood. Why don't they get together and come up with some standards in a joint effort about what they are going to do with this issue, which they say is a prisoners' dilemma-it seems to me like a lot of unwillingness on their part-and then maybe work on the national government to set a policy and start applying it to some of these multilateral and bilateral agreements in coming down on that to prohibit it, as we have for virtually every other industry, and I don't see them falling by the wayside or going out of business.

Mr. Herrnstadt, what do you say to that?
Mr. HERRNSTADT. I think you make a lot of sense.

Mr. TIERNEY. That is why I asked you.
Mr. HERRNSTADT. I will even turn on my microphone.
Mr. TIERNEY. I was going to ask Mr. Scott to turn his off.

Mr. HERRNSTADT. No, I think what you stated makes an awful lot of sense. Other countries have, as I mentioned before, well-developed offset policies. It is time we develop our own. It is also time that we stop considering this as a mere inconvenience or as a nuisance and look at it as the real threat it is. We need to be able to start with the data issues that you have talked about and formulate the comprehensive policy I have referred to before.

Mr. TIERNEY. Mr. Chairman, I will stop with that. It just seems to me when something is an inconvenience, seldom do you see people hire entire staffs and fill ballrooms full of people that deal with this inconvenience in more creative ways rather than just find out how to work the system, as opposed to doing something constructive about it.

Thank you.

Mr. MICA. I thank the gentleman. I want to thank this panel for their contribution and also for their willingness to participate with us and answer questions in helping us seek some solutions to the problem of offsets.

There are no further questions of the panel at this time, so you will be excused, and thank you again for your participation.

Our third panel I would like to welcome, consists of the Honorable Roger Majak, Assistant Secretary for Export Administration in the Department of Commerce; and the Honorable Alfred Volkman, Acting Deputy Under Secretary of Defense for Commercial and International Programs with the Department of Defense.

Gentlemen, as I mentioned to our first panel, I don't think you have been here before either. This is an Investigations and Oversight Subcommittee of Congress. If you would stand and be sworn, please.

Witnesses sworn.]

Mr. MICA. Let the record reflect that the panelists answered in the affirmative.

Welcome, gentlemen, representatives of the administration, to help us address the questions and problems surrounding defense offsets. As I mentioned to our previous panelists, we try to limit the oral presentations to about 5 minutes; as the red light goes on, you get about a minute to conclude. We do welcome any lengthy documentation or statements within reason, they will be made a part of the record by unanimous consent.

So, with that, you are recognized, first the Honorable Roger Majak, Assistant Secretary for Export Administration with the Department of Commerce.



Mr. MAJAK. Thank you, Mr. Chairman. I appreciate the opportunity to inform the subcommittee regarding the Commerce De

partments involvement in the issues surrounding offsets in defense trade.

As you know, the Defense Production Act directs the administration to prepare annual reports to Congress on defense tradeoffsets and also codifies the current policy, which was initiated by President Bush, of nonintervention in offset transactions by the Federal Government. Within Commerce, the responsibility for monitoring offsets has been delegated to the Bureau of Export Administration, with which I am associated.

We are presently working on our fourth report to the Congress, which will be submitted later this summer. We coordinate the collection of this data and the issuance of these reports with the Departments of Defense, Labor, State and Treasury, and the Office of the U.S. Trade Representative.

To help you better understand the scope of the offset issue, let me review just a few of the findings from our 1998 report to Congress.

New offset agreements from 1993 to 1996 total about $15 billion. That is about 52 percent of the value of the defense exports involved, which were about $29 billion. So in order to secure $29 billion in exports, we had to give back, in a sense, $15 billion in offsets.

Preliminary figures for 1997-you should keep in mind that our data are a couple of years behind in this area-our figures, preliminarily, for 1997 indicate that the average offset as a percentage of export value will be approaching 80 percent, and discussions with U.S. prime contractors indicate that number is continuing to go up, gradually approaching 100 percent. So we could be looking in the future at a situation where we are asked for $1 in offsets for every $1 in defense exports.

We also measure actual transactions under these offset agreements. Transactions reached $9.2 billion between 1993 and 1996; 38 percent were direct offsets, 58 percent were indirect offsets, and the rest were unspecified. About three-quarters of those transactions appeared to displace U.S. subcontracting work, and certainly it has been a consistent finding of our studies that the subcontractor base is most seriously and directly affected by offset requirements.

Three-fourths of all of the offset transactions we have tracked involve three industry sectors: Transportation, which includes aircraft and aircraft parts, that is about 48 percent of these transactions, electronic and electrical equipment, which is about 16 percent; and industrial machinery account for about 9 percent.

Between 1993 and 1996, over 90 percent of new offset agreements and transactions were triggered by U.S. aerospace deals, although nearly half of those offset requirements were actually fulfilled with nonaerospace products. Ship-building is an industry which appears to have been particularly hard hit by offsets. The machine tool industry has also been heavily affected, according to our figures, in the period 1993 to 1996. In total, more than 40 major U.S. industries, from food and food products to apparel, printing, stone-cutting even, have been hit by offsets, despite the fact that those industries have little or nothing to do with defense trade.

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