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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.

Welcome, sir. You are recognized.

STATEMENTS OF ROGER MAJAK, ASSISTANT SECRETARY FOR
EXPORT ADMINISTRATION, U.S. DEPARTMENT OF COM-
MERCE; AND ALFRED VOLKMAN, DEPUTY UNDER SEC-
RETARY OF DEFENSE FOR COMMERCIAL AND INTER-
NATIONAL PROGRAMS, U.S. DEPARTMENT OF DEFENSE
Mr. MAJAK. Thank you, Mr. Chairman. I appreciate the oppor-
tunity to inform the subcommittee regarding the Commerce De-

partment's 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.

While virtually all governments engage in offsets to one extent or another, five countries account for about 72 percent of new offset requirements, by value-the United Kingdom, the Netherlands, Switzerland, Saudi Arabia, and Taiwan. In the period that I have mentioned, 1993 to 1996, European countries demanded 94 new offset agreements worth about $10 billion in return for $11.3 billion in defense purchases. That is about a 90 percent offset rate.

The United Kingdom, I would note, has one of the most aggressive offset programs. Not only does Britain demand nearly 100 percent offsets against their United States military purchases, but the British Government also has established a program to assist their companies meet offset requirements demanded by other countries. Canada's offset program is also quite aggressive, and is designed to enhance its general economic development, rather than its national security or defense industries in particular. Again, Canada tends to require 100 percent offsets, most of them indirect. It does so despite the fact that we offer special access to Canadian firms in our markets.

Is there a better way of sharing the benefits of defense trade than resorting to these offsets? Probably. The development and production of extensive weapons systems through international partnerships would be a better approach, in our view, for example.

Our allies have been reluctant to discuss and negotiate limits on offsets for a variety of reasons. I think some of them regard offsets as an economic win; others are responding to political factors; overcapacity and excess employment in the European defense industries have increased pressure for offsets in order to keep European defense facilities operating.

So where do we go from here, Mr. Chairman and members of the subcommittee? Official U.S. Government policy, as has been noted, is to avoid government involvement in offsets and to actively consult with friends and allies to limit the adverse affects of offsets in defense procurement. We have had discussions over the last few years with officials of the Dutch Government and the Canadian Government. It is particularly important, I think, to make progress with the Canadians, because they are a part of our North American industrial base, and they are our closest neighbor, of course, and largest trading partner.

Our objective remains to reduce and restrict offsets where possible. It will be difficult to stifle the demand for offsets, at least in the short term. It is a buyer's market for defense systems. We are unlikely to restrain or eliminate offsets by just complaining about them. We certainly will not eliminate them by unilaterally restricting our own defense contractors.

If we are serious about further constraining offsets, I think we need to consider ways to increase our leverage, including the following.

We need to continue our efforts at international negotiations on offset rules, both on transatlantic trade with our European allies and on Third Country markets where we compete with European manufacturers. As I have mentioned, recent discussions have indicated some receptivity to our ideas in this area. We need to collect accurate information on all foreign sourcing of parts and components and weapons systems down to the subcontractor level.

Finally, Mr. Chairman, we may need to take a closer look at the British program. I mentioned, in passing, that the British Government actually assists its companies in responding to offset requirements in order to make them more competitive and to bring the demanders of offsets to the negotiating table. That's fighting fire with fire, which we may need to consider under these circumstances.

That summarizes my statement, and I thank you for your patience on the time.

[The prepared statement of Mr. Majak follows:]

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