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 derstand the offsets issue. In that context, I believe that there are three key elements to effective handling of offsets: first, information; second, discussion; and, third, international cooperation. First, information. To fully understand the implications of offsets and the breadth of their impact, we must have more information on offset agreements, particularly the indirect offset obligations that are otherwise invisible. Although I recognize the need to protect the genuine proprietary information of defense contractors, we must seek greater transparency in the process through which contractors negotiate and fulfill offset obligations so that we may better analyze the possible downstream consequences. While many of us can cite anecdotal evidence of companies harmed or jobs lost, we have to develop a more effective mechanism to accurately quantify the impact of offsets. Unfortunately, the work that has been done so far is insufficient. Second, discussion. There needs to be broader public awareness and debate on the implications of offsets. I believe this hearing is an important step in that direction. Beyond these efforts, I support the concept of a national commission to analyze the implications for our economy and national security and to recommend potential policy alternatives. A commission can galvanize concerned parties and demonstrate our interest in achieving a broad and coherent strategy to combat the negative effect of offsets. Finally, international cooperation. With international dialog and coordination, we can arrive at multilateral standards for the use of offsets in defense trade agreements. Whether you believe that offsets are merely an annoying, but standard business practice or you hold the view that they pose a major long-term threat to our labor force industries and national security, I believe it is possible to develop some common ground for business practices worldwide. Through the Group of Eight, Wassenaar Arrangement, the World Trade Organization and other organizations, we have established multilateral venues designed specifically to deal with international trade issues. Certainly, one of these venues could serve as a forum for international cooperation to consider this global problem. Mr. Chairman, let me conclude by thanking your subcommittee for taking on this difficult subject. You have gathered some of the premier experts in the field for today's hearing, and I look forward to studying their testimony. I regret that I cannot stay for the rest of the hearing, but I believe all of our efforts today will contribute to the promotion of greater information, discussion and cooperation and help us tackle this difficult subject that may well be so critical to the future of American industry, trade and national security. I thank you very much for your courtesy. [NOTE.-The report entitled, "Defense Trade, U.S. Contractors Employ Diverse Activities to Meet Offset Obligations," GAO/ NSÍAD-99-35, may be found in subcommittee files.] [The prepared statement of Senator Feingold follows:] News From: U.S. Senator 716 Hart Senate Office Building http://www.senate.gov/-feingold Senator Russell D. Feingold Subcommittee on Criminal Justice, Drug Policy, and Human Resources Mr. Chairman, Ms. Mink, and other members of the Subcommittee, I am pleased to join you for today's hearing on the important, if little understood, issue of defense offsets. I particularly want to commend Chairman Mica and Representative Tierney for their interest in the subject and their efforts to stimulate public discussion on this complex topic. As you may know, I first became involved in the offsets issue in February 1993 when I learned By lowering its bid - barely breaking even on the contract – to take into account the incentive payment offered by Northrop, Beloit did succeed in winning the contract. Nevertheless, the incident demonstrated to me the potential for offset obligations to have an impact on apparently unrelated domestic U.S. industries. I became concerned that this could happen anywhere, in any industry, in the future without being recognized, much less remedied. Mr Chairman, to address some of the immediate concerns raised by Beloit's experience, in 1993 I offered an amendment to the Arms Export Control Act to prohibit incentive payments in the provision of offset credit. I wanted to clarify the Congress' disapproval of an activity that |