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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/ NSIAD-99_35, may be found in subcommittee files.]

[The prepared statement of Senator Feingold follows:)

News From:

716 Hant Senate Office Building Washington, D.C. 20513-4904 (202) 224-5323

U.S. Senator
Russ Feingold

http://www.senate.gov/-feingold

Senator Russell D. Feingold

Opening Statement
Subcommittee on Criminal Justice, Drug Policy, and Human Resources

Hearing on Defense Offsets

June 29, 1999

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 that the Wisconsin-based Beloit Corporation, a subsidiary of Harnischfeger Industries Inc., had been negatively affected by an apparent indirect offset arrangement between an acrospace contractor, the Northrop Corporation, and the government of Finland. Beloit was one of only three companies in the world that produced a particular type of large paper-making machine. In its efforts to sell one of these machines to the International Paper Company, Beloit became aware that Northrop had offered International Paper an incentive payment to select instead the machine offered by a Finnish company, Valmet. 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 sixty-four F-18 aircraft. This type of payment had the flavor of a kickback, distorted the practice of free enterprise, and threatened U.S. jobs.

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. industrics. 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 conceros 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

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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 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 GAO review of the use of offsets in defense trade. I believe all the members of this Subcommittee received a copy of the most recent of the GAO studies, DEFENSE TRADE: U.S. Contractors Employ Diverse Activities to Meet Ofset Obligations, which was released in December 1998. I ask Unanimous Consent that the text of that study be entered in the record following my remarks.

Last year, I offered additional language to expand further the prohibition on 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, of which I am a member, 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, your version of the Security Assistance Act of 1999.

Unfortunately, Mr. Chaimman, 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 has a full grasp of the breadth and complexity of the issue, although I know all of us here are deeply concerned about the potential impact of the use of offsets.

I believe we must focus on several broad issues related to the current, and potential, consequences of offsets:

The impact on the domestic labor force and defense industrial base, particularly in the
aerospace industry, of the increasing role of overseas production in the defense industry;
The unintended harm to domestic non-defense industrial sectors, as experienced by the
Beloit Corporation in Wisconsin, when defense contractors engage in indirect offset
obligations;
The broad economic implications of the globalization of the defense industry, and
The national security ramifications of joint ventures and the 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.

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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 understanding the offsets issue. In that context, I believe that there are three key elements to effective handling of offsets – information, discussion, and 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 genuinely 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 must 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 a good step. 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 dialogue 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 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 8, the Wassenaar Arrangement, the World Trade Organization, and other organizations, we have established multilateral venues designed especially 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, on that note let me close out my remarks by again thanking your Subcommittee for taking on this difficult subject. You have gathered some of the premier experts in this field for today's hearing and I look forward to studying their testimony. I regret that I will not be able to stay for the rest of the hearing, but I believe all our efforts today will contribute to the promotion of greater information, discussion, and cooperation and help us tackle this difficult subject, that will be so critical to the future of American industry, trade, and national security.

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Mr. MICA. Thank you. We appreciate your leadership on this important issue and also your efforts to work with our colleagues on both sides of the Congress, the House and the Senate, to seek solutions and different approaches so we can have some of the things that you mentioned in your closing, the disclosure, the discussion and the international cooperation. We appreciate that. We realize that you have a time constraint.

Mr. Tierney.

Mr. TIERNEY. I thank you. I know that you have a time constraint, and I appreciate very much your participating this morning.

Mr. Chairman, before I forget, Mr. Kucinich was just here and asked that his remarks might be placed in the record.

Mr. MICA. Without objection, so ordered.

I am pleased that we have been joined by the gentleman from New York, the chairman of our International Relations Committee. Did you have an opening statement?

Mr. GILMAN. No, I just want to commend you, Mr. Chairman, for conducting this hearing in a very timely manner, and I think it is important that we take a good hard look at these considerations, and you have got a great panel, and we look forward to hearing from the panel.

Mr. Mica. I thank the gentleman.

I am pleased now to call our second panel. The second panel consists of Mr. Joel Johnson, vice president, International, Aerospace Industries International; Mr. Owen Herrnstadt, director, International Affairs, International Association of Machinists and Aerospace Workers; and Dr. Scott, international economist with the Economic Policy Institute. I am pleased to welcome all three of these panelists.

If you would stand, please, to be sworn.
[Witnesses sworn.]
Mr. MICA. The witnesses have answered in the affirmative.

I might also tell you, since I don't think that any of you have testified before our panel before, we run this timer. We give you 5 minutes and ask that your oral presentations be limited to that amount of time. By unanimous consent request we will be pleased to enter into the record any reports that you want to be part of the record.

With those comments, let me now recognize Mr. Joel Johnson, vice president, International, of the Aerospace Industries International. Welcome, and you are recognized. STATEMENTS OF JOEL JOHNSON, VICE PRESIDENT, INTER

NATIONAL, AEROSPACE INDUSTRIES INTERNATIONAL; OWEN HERRNSTADT, DIRECTOR, INTERNATIONAL AFFAIRS, INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS; AND ROBERT SCOTT, INTERNATIONAL ECONOMIST, ECONOMIC POLICY INSTITUTE

Mr. JOHNSON. Thank you. I gather that my mic is working. I will speak rapidly and in incomplete sentences to keep under my 5 minutes here.

I am testifying this morning on behalf of the Aerospace Industries Association, which is the trade association that represents the

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