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representatives of government, affected industry sectors, labor, and

academia, to review current offset policy, and to propose a plan for the reduction of the detrimental effects of offsets. I have made available

copies of the report for anyone who may be interested in reviewing it

In addition to the report, I was interested to learn the views of the executive branch, including the agencies that are part of the defense offset working groups. Toward that end, I wrote to President Clinton, Secretary of Defense William Cohen, United States Trade Representative Charlene Barshefsky, Secretary of Commerce William M. Daley, and Secretary of the Treasury Robert E. Rubin, urging them to establish as a primary goal in international trade negotiations the elimination of offsets imposed by foreign governments on defense and civil aerospace contractors.

From the responses that I received, it seems apparent that no consensus exists in the executive branch on the adverse effects of defense offsets.

A representative from the Department of Defense wrote to me that "although we agree that offsets are market distorting, the net effect of offsets on trade is unclear". A response from the office of the United States Trade Representative indicated that "although these agreements (offsets) have led to increased foreign participation in the manufacture of U.S. defense equipment, such as aircraft engines, they have also led to

the sale of U.S. equipment to foreign military agencies that would not otherwise have been purchased." Secretary Daley and a representative from the Department of State wrote to me in support of a reduction in the distorting influence of offsets on trade. Finally, a representative from the White House informed me of efforts to reach a domestic consensus

on offsets. Chairman Mica, I would like to request unanimous consent to submit the agency responses to my letters for the record.

(Thank you.)

I also believe that it would be useful for the government to have more

detailed information on the particulars of offset agreements. Toward that end, I am pleased that H.R. 973, the Security Assistance Act, which

recently passed the House, contains additional reporting requirements. Section 204 contains additional reporting requirements on offsets regarding government-to-government sales and commercial sales. Specifically, if known on the date of transmittal of such certification, a description of the offset agreement may be included in the classified portion of such numbered certification. Thus, the information would remain confidential and would not jeopardize American business interests. This is a positive step forward in efforts to obtain additional

information on the specifics of offset agreements.

I strongly believe that we need a national consensus on offsets, and that we should have a firm national offset policy that allows our defense contractors to sell their equipment abroad particularly to our allies, while at the same time ensuring that American defense workers--some of the very best workers in the world--are not sacrificed in the quest to make

the sale and seal the deal.

Again, I thank you Chairman Mica for the opportunity to examine further the issue of defense offsets, and I wanted to commend you and the staff on the Subcommittee on Criminal Justice, Drug Policy, and Human Resources for holding this hearing today. Thank you.

Mr. MICA. I thank the gentleman from Massachusetts and am pleased to proceed with our first panel. Our first panel consists of our colleague and distinguished Senator Russell Feingold from Wisconsin. I believe he is on the Budget, Foreign Relations Committee, Judiciary and Special Aging Committee in the Senate. We are so pleased to have you come across and provide us with your testimony and comments on this important issue. Welcome, and you are recognized, sir. STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR

FROM THE STATE OF WISCONSIN Senator FEINGOLD. Thank you, Mr. Chairman, for holding this hearing on the subject, and I want to thank Representative Tierney for his interest on this subject and his efforts to stimulate public discussion. He is so devoted to this, when he and I were stuck on an airplane waiting on the runway for several hours in Boston, he pursued this subject with me, and we renewed our commitment to doing this, although I did not make it to the vote that day. I stayed on the runway for quite a few hours. I do admire very much how quickly the Representative has become a major force on this issue, and I thank him for asking me to be here today.

As you may know, I first became involved in the offsets issue in February 1993, when I learned that a Wisconsin-based company, the Beloit Corp., a subsidiary of Harnischfeger Industries, Inc., had been negatively affected by an apparent indirect offset arrangement between an aerospace contractor, the Northrop Corp., and the Government of Finland. Beloit was one of only three companies in the world that produce this particular type of large papermaking machine. In its efforts to sell one of these machines to the International Paper Co., Beloit became aware that Northrop had offered International Paper an incentive payment to select, instead the machine offered by a Finnish company, Valmet, not the Wisconsin company. Northrop was promoting the purchase of the Valmet machinery as part of an agreement that would provide dollar-for-dollar offset credit on a deal with Finland to purchase 64 F-18 aircraft. This type of payment had the flavor of a kickback, distorted the practice of free enterprise, and I think, threatened U.S. jobs.

By lowering its bid, and thereby only barely breaking even on the contract, to take into account the incentive payment offered by Northrop, Beloit still did succeed in winning the contract. Nevertheless, for me, the incident demonstrated the potential for offset obligations to have an impact on apparently unrelated domestic industries, as the chairman mentioned. I became concerned that this could happen anywhere, in any industry, in the future without being recognized, much less remedied.

Mr. Chairman, one of the first things I did as a new Member of the Senate in 1993 was to offer an amendment to the Arms Export Control Act to prohibit incentive payments in the provision of an offset credit. I wanted to clarify the congressional disapproval of an activity that appeared to fall through the cracks of various existing acts. Neither the Anti-Kickback Act nor the Foreign Corrupt Practices Act seemed clearly to address the payment

being offered to International Paper in the Beloit case. My provision, which was enacted into law in 1994, prohibits the use of third-party incentive

payments to secure offset agreements in any sale that is subject to the Arms Export Control Act. The measure also expanded the requirements for congressional notification of the existence and, to the extent possible, the details of any offset agreement at the time of notification of a pending arms sale under the Arms Export Control Act.

Recognizing, too, that not enough information was available, I also initiated a request for a GAO review of the use of offsets in defense trade. I believe all of the members of the subcommittee received a copy of the most recent of the GAO studies, which is entitled Defense Trade: U.S. Contractors Employ Diverse Activities to Meet Offset Obligations. This was released in December 1998. Mr. Chairman, I ask unanimous consent that the text of that study be entered into the record following my remarks.

Mr. MICA. Without objection, so ordered.
Senator FEINGOLD. Thank you, Mr. Chairman.

Last year I offered additional language to expand further the prohibition of incentive payments and enhance the reporting requirement on offsets to include a description of the offset with dollar amounts. While my provisions were incorporated in the Security Assistance Act of 1998 as passed by the Senate Foreign Relations Committee, the legislation never made it to the floor. I was pleased, however, to see the House pass similar, if not identical, language in H.R. 973, which is your version of the Security Assistance Act of 1999.

Unfortunately, Mr. Chairman, while Congress has tried to address specific problems encountered by companies in our States and districts, efforts to date have barely scratched the surface of the difficult subject of offsets. In fact, neither the legislative nor the executive branches have a full grasp of the breadth and complexity of the issue, but I know that all of us are deeply concerned about the potential impact of the use of offsets.

I believe we have to focus on several broad issues related to the current and potential consequences of offsets; first, the impact on the domestic labor force and defense industrial base, particularly in the aerospace industries, of the increasing role of overseas production in the defense industries; second, the unintended harm to domestic nondefense industrial sectors as experienced by the Beloit Corp. of Wisconsin, when defense contractors engage in indirect offset obligations; third, the broad economic implications of the globalization of the defense industry; and fourth, the national security ramifications of joint ventures and growing reliance on foreign defense contractors, a concern, Mr. Chairman, that was recently highlighted in the Cox report on China's technology acquisition.

Mr. Chairman, we must tread carefully and seek a balance between the need for our defense industry to remain competitive in world markets and the potential loss of jobs and industrial capacity down the road due to the transfer of technology and the encouragement of overseas production capabilities. The perceived inevitability of globalization is not an excuse for us to avoid dealing with the hard issues.

I have had the opportunity to review a number of thoughtful proposals that touch on my concerns about offsets. I think we all agree that greater transparency and monitoring are essential to fully un

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