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DEFENSE OFFSETS: ARE THEY TAKING AWAY

OUR JOBS?

TUESDAY, JUNE 29, 1999

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY,

AND HUMAN RESOURCES,
COMMITTEE ON GOVERNMENT REFORM,

Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. John L. Mica (chairman of the subcommittee) presiding.

Present: Representatives Mica, Gilman, Hutchinson, Ose, Kucinich, and Tierney.

Staff present: Sharon Pinkerton, deputy staff director; Steve Dilingham, special counsel; Mason Alinger, professional staff member; Andrew Greeley, clerk; David Rapallo and Michael Yeager, minority counsels; and Jean Gosa, minority staff assistant.

Mr. MICA. Good morning. We will call this meeting of the House Criminal Justice, Drug Policy, and Human Resources Subcommittee to order.

I will begin this morning with an opening statement and then will yield. We have three panels today, we will recognize them as soon as we finish our opening statements.

This morning the topic of our hearing is defense offsets, are we giving away our jobs?

Over the past decade, both small and large businesses have increasingly relied on international trade for growth and job creation. International factors must be considered when

conducting business for almost every company, from Ford Motor Co., with its roughly 350,000 employees worldwide, to a small software company in my district in Florida.

Our focus today falls upon the U.S. aerospace industry, an industry particularly affected by globalization. Companies like McDonnell Douglas and Lockheed Martin have led the world in technological advancements in the defense and aerospace industries. Such companies have made it possible for the U.S. aerospace industry to enjoy a trade surplus exceeding $40 billion while the overall U.S. economy faces a record trade deficit approaching $300 billion.

Recently, the worldwide demand for both defense and aerospace products has escalated. Many foreign governments are now officially mandating offsets from U.S. companies to help alleviate the impact on the foreign country's economy of contracting out the business to the United States. Offsets can range from foreign demands that an aerospace company produce at least part of the

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product in the foreign country, to obligating the aerospace company to purchase its office furniture from a company in the foreign country.

Offsets have gained increasing attention in recent years because of the controversial impact they may have on the U.S. economy. More specifically, some labor interests charge that defense offsets send American jobs overseas.

The argument has also been made that offsets adversely affect industries completely unrelated to the defense and aerospace industries.

While on a case-by-case basis, the aerospace industry might agree that some smaller companies have been injured, they would also argue that offsets help to keep alive an industry faced with increasing international competition. By refusing to negotiate offsets, U.S. companies run the risk of losing the contracts to international competitors that are willing to accept the offset requirements.

We are here today to listen to the concerns raised about offsets in the defense and aerospace industries, and to determine whether Congress should modify its policy of limited involvement in offset agreements.

After reading today's testimony, it appears that none of the witnesses champion the practice of offsets in foreign military sales. Rather, the issue seems to be whether Congress needs to change our current policy to protect against the negative impacts of offset agreements or whether the benefits of jobs created by the exports outweigh the losses to other companies.

The panel of experts before us today will discuss whether offsets adversely impact the U.S. economy, and, if so, what can be done about it. Currently, the U.S. Government's role regarding offsets is simply to monitor the offset agreements and issue a yearly report. Also, when technology transfers are involved, the necessary licenses are approved.

Several options have been suggested to help alleviate the impact of offsets. We will hear some of those proposals today, and also some of the difficulties in implementing those proposals.

Are offsets detrimental to the U.S. economy? Are American jobs being sent overseas? Should Congress modify the current policy of limited involvement? I look forward to hearing from the experts to help answer some of these questions.

[The prepared statement of Hon. John L. Mica follows:)

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DEFENSE OFFSETS: ARE WE GIVING AWAY OUR JOBS?

OPENING STATEMENT
Chairman John Mica (R-FL)

June 29, 1999

Over the past decade, both small and large businesses have increasingly relied on international trade for growth and job creation. International factors must be considered when conducting business for almost every company, from Ford Motor Company, with its roughly 350,000 employees worldwide, to a small software company in my district in Florida.

Our focus today falls upon the U.Ş. aerospace industry, an industry particularly affected by globalization. Companies like McDonnell Douglas and Lockheed Martin have led the world in technological advancements in the defense and aerospace industries. Such companies have made it possible for the U.S. aerospace industry to enjoy a trade surplus exceeding $40 billion while the overall U.S. economy faces a record trade deficit approaching $300 billion.

Recently, the worldwide demand for both defense and acrospace products has escalated.

Many foreign governments are now officially mandating offsets from U.S. companies to help alleviate the impact on the foreign country's economy of contracting out the business to the United States. Offsets can range from foreign demands that an aerospace company produce at Icast part of the product in the foreign country, to obligating the aerospace company to purchase its office furniture from a company in the foreign country.

Offsets have gained increasing attention in recent years because of the controversial impact they may have on the U.S. economy. More specifically, some labor interests charge that defense offsets send American jobs overseas.

The argument has also been made that offsets adversely affect industries completely unrelated to the defense and aerospace industries.

While on a case by case basis the aerospace industry might agree that some smaller companies have been injured, they would also argue that offsets help to keep alive an industry faced with increasing international competition. By refusing to negotiate offsets, U.S. companies run the risk of losing the contracts to international competitors that are willing to accept the offset requirements.

We are here today to listen to the concerns raised about offsets in the defense and aerospace industries, and to determine whether Congress should modify its policy of limited involvement in offset agreements.

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After reading today's testimony, it appears that none of the witnesses champions the practice of offsets in foreign military sales. Rather, the issue seems to be whether Congress needs to change our current policy to protect against the negative impacts of offset agreements or whether the benefits of the jobs created by the exports outweigh the losses to other companics.

The panel of experts before us today will discuss whether offsets adversely impact the U.S. economy and if so, what can be done about it. Currently, the U.S. government's role regarding offsets is simply to monitor the offset agreements and issue a yearly report. Also, when technology transfers are involved, the necessary licenses are approved.

Several options have been suggested to help alleviate the impact of offsets. We will hear some of those proposals today and also some of the difficulties in implementing those proposals.

Are offsets detrimental to the U.S. economy? Are American jobs being sent overseas? Should the Congress modify the current policy of limited involvement?

I look forward to hearing from the experts to help answer some of these questions.

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Mr. MICA. At this time I am very pleased to recognize the gentleman from Massachusetts, who requested this hearing, and I was pleased to comply. I apologize for the delay. We have had a couple of other national issues which take precedence, but I thank him for his interest in the issue, and I would like to recognize him at this time.

Mr. TIERNEY. Thank you, Chairman Mica. I thank you for holding this hearing on defense offsets. You have shown a great ability to lead in a bipartisan way by acceding to having this hearing and participating in it.

I also want to thank Senator Feingold for taking the time out to share with us his experiences in the defense offsets of his home State of Wisconsin, and I thank our other distinguished witnesses who will be joining us from the administration, the defense industry and the labor community.

Most people are, in fact, not familiar with defense offsets, how they work, why we have them and what they are intended to do, although many businesses and employees are impacted, and many are sometimes adversely impacted by their use. This phenomenon takes place regardless of whether the business or the worker is actually in the defense industry, as you will see. For those people out there who are not familiar with the topic, offsets are the conditions sought by foreign governments in their negotiations for purchase of U.S. defense equipment. More often than not, these stipulations require U.S. manufacturers, as a condition of doing business with these foreign governments, to transfer taxpayer-funded defense technologies, in some instances to make direct investments in foreign companies, to purchase foreign-made components or to provide other forms of assistance. These offsets or sweeteners range from direct offsets, such as exporting jobs overseas for subsequent contracting, to indirect offsets, such as buying furniture or some other product from foreign manufacturers at higher prices than those offered by American companies.

I first became interested in defense offsets from listening to small businesses and contract employees prior to my election in 1996. In November 1997, a defense contractor located in my district won a foreign military sales contract to produce 104 military fighter engines for the Korean KTX-2 Advanced Trainer/Light-Fighter aircraft. This contract was well received locally by me, the defense contractor, and the men and women who would be doing the work. However, just a few weeks later, it was related to me that the defense contractor revealed the other side of the story to the work force. As a part of the offset agreement, only the first 25 of the 104 engines would be fully made in the United States. The next 10 engines would be made with United States parts, but 100 percent of the engines would be assembled, inspected and tested in Korea. The final 69 engines under the contract would consist of 70 percent United States parts, 30 percent Korean parts, and would be completely assembled, inspected and tested in Korea.

The euphoria quickly faded and turned to disappointment as we learned these facts. People simply could not understand why a defense contractor would allow this important engine work to be performed abroad with foreign components and foreign workers. But we know now that despite making the finest military equipment in

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