Date: 03 Mar 2000
Time: 17:20:08
Remote Name: 156.29.145.175
DO UNILATERAL ECONOMIC TRADE SANCTIONS UNFAIRLY PENALIZE SMALL BUSINESS?
Thursday, June 24, 1999
House of Representatives, Subcommittee on Tax, Finance, and Exports, Committee on Small Business, Washington, D.C.
The Subcommittee met, pursuant to call, at 2:06 p.m., in Room 311, Cannon House Office Building, the Honorable Donald A. Manzullo [chairman of the subcommittee] presiding.
Chairman MANZULLO. The Subcommittee will come to order.
Imposing unilateral economic sanctions is foreign policy on the cheap. For the past six years, both the legislative and executive branches have been all too quick to impose unilateral economic sanctions. The National Association of Manufacturers estimated that in just a four-year period between 1993 and 1996, 61 U.S. laws and executive actions enacted unilateral economic trade sanctions against 35 countries. The Institute for International Economics and the Congressional Budget Office agree that the cost of sanctions to our country is as high as $20 billion, resulting in the loss of up to a quarter of a million jobs.
American workers and sound U.S. foreign policy are the losers in this vain exercise. Small businesses are particularly hurt either directly as exporters or indirectly as supply orders to large firms dry up because of these sanctions.
Most of our economic sanctions focus on denying our agriculture, manufacturing, or service exports to the offending country to send a message that we do not like their behavior. Yet many countries of the world grow or make similar products. The real-life practical effect of our sanctions is simply to shift production away from the U.S. to another country. Plus the offending country does not change its ways.
Last year Congress received a stark lesson on sanctions. Because Congress was in session -- that was one of the few times in history that we were grateful Congress was in session -- we intervened just in the nick of time to preserve the sale of $37 million worth of winter wheat from the northwest part of our country to Pakistan. Yet few know that since last November the U.S. did not export over $65 million worth of manufactured products to India and Pakistan because of the remaining sanctions on those two countries. The ripple effect on other U.S. exports not subject to direct sanctions to India and Pakistan remains to be seen. Thus, the sanctions process reform bill is needed now more than ever.
We have a record trade deficit. We should seek to maximize every export opportunity within the boundaries of the national security concerns. That is why we need to know the costs and ramifications of potential unilateral economic sanctions. The U.S. seems to keep forgetting the lessons of previous sanctions. It is time we finally learned from our mistakes and passed this legislation.
This is a big issue, especially in light of the figure I just heard yesterday, that the U.S. consumption of locally manufactured machine tools has decreased by 45 percent within the past several months. So we have a very difficult situation on our hands.
Our first witness is one of my mentors in this great body -- the Honorable Phil Crane from an adjoining district. He used to represent McHenry County. He is the chairman of the Subcommittee of Trade on the Ways and Means Committee.
Mr. Chairman.
[Mr. Manzullo’s statement may be found in the appendix.]
STATEMENT OF HON. PHILIP M. CRANE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. CRANE. Thank you, Mr. Chairman, for this opportunity to testify regarding H.R. 1244, the "Enhancement of Trade, Security, and Human Rights through Sanctions Reform Act," legislation that you, Congressman Cal Dooley, and I along with nearly 90 of our colleagues now on a bipartisan basis have sponsored to reform the process by which Congress and the administration consider future unilateral sanctions. Reform is necessary because the proliferation of unilateral sanctions is causing lasting damage to America's reputation as a reliable supplier in the global marketplace. U.S. unilateral sanctions cost $15 to $19 billion annually in lost U.S. exports, and over 200,000 high-wage U.S. jobs.
Let us put this into perspective. The U.S. has applied sanctions for foreign policy purposes more than 115 times since World War I. More than 100 of those times have occurred since World War II, and more than 60 of those since 1993. More than half of the sanctions imposed in the last 80 years have been imposed since the mid-1990's.
In 1997 the President's Export Council reviewed the number of sanction countries and found that 75 countries around the world are covered or threatened by U.S. unilateral economic sanctions.
Small businesses are particularly vulnerable to sanctions because the consequences to them of losing even a small contract can be so severe. Sanctions act as a disincentive for small businesses to enter the global marketplace due to the complexities involved in navigating the sea of laws and regulations governing the ability of U.S. firms to engage in business with sanctioned countries.
On May 27 the Ways and Means Trade Subcommittee held a hearing on unilateral economic sanctions. Among our witnesses was Peter Bowe, president of Ellicott Machine Corporation International, a small business employing 125 individuals in Baltimore, Maryland. Ellicott produces dredges, and more than half of its sales are in export markets. Mr. Bowe told us that the cost of U.S. unilateral sanctions against the former Soviet Union, Vietnam, India, Iran, and China in some years has exceeded $10 million in lost sales for Ellicott. This cost in turn directly impacts job creation at Ellicott and benefits its foreign competitors whose home governments fully support their activity in these countries.
Instead of acting alone, the better policy is to pursue our goals through multilateral fora with our allies and trading partners. By developing a consensus approach, we increase the likelihood of success and ensure that the full brunt of the sanctions is felt by the targeted government.
If we are to maintain credibility and effectiveness in the foreign policy arena, we must examine our use of sanctions as an all-purpose foreign policy tool and the notion that the cost of unilateral sanctions is borne by those responsible for behavior we are seeking to change. That is why I have introduced legislation, H.R. 1244, which seeks responsible reform of the decision making process associated with U.S. unilateral sanctions. The bill's primary goal is to ensure that Congress and the administration have better information for more informed decision making on sanctions bills and initiatives.
Before imposing a unilateral sanction, H.R. 1244 requires Congress and the President to address certain common-sense questions. One, is the proposed unilateral sanction likely to be effective? Secondly, is the goal clearly defined and is it a realistic objective? And, third, will the sanctions undermine other U.S. objectives, including our relationships with our key allies? In addition, H.R. 1244 requires cost-benefit analysis and requires the consideration of other alternatives before unilateral sanctions are imposed. If unilateral sanctions are used, the bill would establish regular reporting and sunset requirements to ensure that action taken remains the most appropriate tool to address the problem at hand. Finally, H.R. 1244 would provide permanent waiver authority to the President under the Glenn Amendment with respect to the mandatory sanctions required by current law against non-nuclear countries that are conducting nuclear tests.
Under Secretary of State Stu Eizenstat testified at our hearing in May and stated that the administration believes that sanctions reform legislation would be constructive. I hope to work with the administration on refinements to H.R. 1244 so that we can work jointly toward the passage of this legislation. Without the information that H.R. 1244 would provide us about future sanctions, we risk taking action that is not in our interest, may be counterproductive, and has a very small chance of success. This bill is about establishing effective procedures that will lead to effective results in the way we respond to behavior by nations with which we have concerns.
Thank you for allowing me this opportunity to testify on this important subject, and I would be happy in the brief time we have to try and respond to any questions you may have.
[Mr. Crane’s statement may be found in the appendix.]
Chairman MANZULLO. I appreciate that, Mr. Chairman. We are joined by Carol McCarthy, who is our ranking minority member. If you have an opening statement, could we save that till the beginning of the second panel?
Mrs. MCCARTHY. I will even save that for you and just submit it.
[Mrs. McCarthy’s statement may be found in the appendix.]
Chairman MANZULLO. Okay. That would be fine, without objection.Carol, did you want to go first on questions of Congressman Crane?
Okay. Chairman, you have been a Member of Congress for some time, longer than my four terms, and you have seen a lot of sanctions come and go. Based on your experience, for example, with the Siberian pipeline or with the Russian wheat, could you relate to us how those sanctions came to pass and the results from them?
Mr. CRANE. Well, they are responses to international outrage, and there are ways in which you can bring a sanction bill to the floor and get everybody foaming at the mouth because we are going to pop in the chops that rogue or whoever is responsible for this behavior. And so everyone can vent, and then you introduce the bill for a vote, and everybody gets on board and boy, we smash them.
But the fact is -- and this is especially true more recently when we have had the majority of our sanctions in this global economy -- all you do is inflict injury on your own domestic exporters. I mean, they can turn anywhere else around the world in most cases and get supplied. And I think another thing that is so unfortunate about it, once you get the sanction in place, going back at a later time and trying to undo it is an infinitely more difficult task than getting it in place in the first instance. And so these sanctions go on and on forever without a sunset or shelf life. And so I think that while it may seem like good politics to put forth a proposal like that in response to some outrage, and you have punched them, and wow, back home everybody loves it until they start feeling the economic impact. And a lot of them are not even sure of what caused the economic impact.
You know, I hesitate to bring this up because it is still a hot, controversial issue, but on that subject of the sanctions against Cuba, at the very least what we should have done was to permit the export of food. And that has frankly taken a toll with our agricultural States. The estimated cost I think is about $700 million so far. And what has it accomplished? I mean, the people who pay for that in those countries almost invariably are the innocents, the poor, innocent people. Fidel has no problem getting whatever he wants at the expense of those people. And medical supplies of course is another one that should not come under any sanctions consideration. But at any rate, it is seemingly good politics, but what this bill does is slow that process down and force us to weigh and evaluate what may be consequences unanticipated when you are releasing your rage on the floor through a sanctions bill.
Chairman MANZULLO. That is how they come to pass.
Mr. CRANE. Um-hum.
Chairman MANZULLO. Mrs. McCarthy.
We are also joined by Congress Chabot.
Mrs. MCCARTHY. Thank you. Actually I was going to talk to you about Cuba, because right now there are a number of bills that are going to be coming up. One has to do with food and medicine, and those that are against it are saying they are taking that and selling it and making money. Cuba -- oh, gosh, it has to be 40 years now, isn't it?
Mr. CRANE. I think '60. Yes, it has been --
Mrs. MCCARTHY. I'm not old enough for that. I remember when they put sanctions on Cuba. But with that being said, there are many things that I agree with you on, and sometimes it does come down to the politics. And I think we are going to be seeing that when we deal with China on what we are going to do with China. And yet we are seeing all of our allies go around and certainly do what is best for their economy.
What would you suggest -- how, if we are outraged with a country, what would you suggest that we do, if we could get around these sanctions?
Mr. CRANE. In dealing with a rogue country?
Mrs. MCCARTHY. Yes.
Mr. CRANE. As I indicated, and I mentioned this with regard to Kosovo, rather than bombing, try and reach an agreement with all of the major trading partners in the world that we are going to impose multilateral sanctions against Belgrade. And I think that could have accomplished one of the paramount objectives theoretically behind the bombing, and that was to get people just totally turned off with Milosevic. And instead, even his political foes in Serbia rallied behind him because of the attack on their country. And if you had done the economic sanctions, it would have produced over time economic dislocations that the people would have risen up, I think, and overthrown him for putting his country in that kind of an isolated state. But, as I say, that's multilateral sanctions. They can have an impact. But when you do it unilaterally in this climate today you are not accomplishing anything except injury to your own domestic exporters.
Mrs. MCCARTHY. Which brings us to the case of China and how are we going to deal with them. There are many of us that happen to believe if we have continue trading with them, democracy will be promoted. It might be long-term, and having people see what goes on in the rest of the world. There are many who, because of the inhumane treatment of many people there, say we shouldn't do anything. How do we get around trying to teach some of our colleagues that we are actually helping the people of China?
Mr. CRANE. Well, I think it is an educational problem, and it is a big one. And I have mentioned that historically the Republicans were the protectionists. We were the ones that wanted the Great Wall of China around the United States. And the Democrats were the free-traders. And those two positions prevailed until World War II.
After World War II the Republicans started to lift the blinders up and check the realities and realized that protectionism is just plain stupid. But unfortunately because of the privileged position of some in the industrial world here in the United States that came out of us being the only industrial nation left, they figured put the walls up and you are protecting special dispensations. And that had some influence on the Democratic side of the aisle. Not totally, because our sides are still about -- well, I mean, we are divided, but I remember not that far back when at least 50 percent of the Democrats were still free-traders.
And you hearken back to in 1890 when the McKinley tariff went in place, it produced a very severe economic dislocation that really did not hit until '93. It was called the Panic of '93. And Grover Cleveland, who had been out for a term, got reelected in '92, sworn in, and the depression hit. And he got blamed for it. And he immediately started dismantling that stupid McKinley Act and getting the economy back on track. And he said at the time when you impose those kinds of barriers, economic barriers on your country, you impose the greatest pain and suffering on that man who earns his daily bread with the sweat of his brown. To which I say amen.
Republicans -- it took them a long time because it was not until the next century, we got the Smoot-Hawley, as you know, and that guaranteed that our Depression went worldwide for a decade. But this is something that really does not belong in partisan debates. It is not a partisan issue. It is an issue that we can debate the merits of, but it has to do with what is in the best interest for the United States and our trading partners. And your point is well taken about what the advancement of an economic foundation in a country can do in advancing also democratic institutions.
The Caribbean Basin Initiative, which Reagan pushed through in '83, was designed expressly for that purpose. It was to guarantee that our Caribbean neighbors did not succumb to what happened in Cuba, and to do that we would help them build up their economies and in the process that would advance democratic institutions, and it worked for all of the Caribbean countries except Cuba. I mean, of course it was after Castro was in power. But if you go over and visit -- and that is something we should encourage more of our colleagues to do. I know we catch flak from the media for taking committee trips. But taking committee trips to places like China to witness firsthand what that economy has managed to do by moving down the line of free markets -- and Zhu Rongji, for example, unilaterally has been privatizing over there with a vengeance. Now that is not the most popular political thing for him to do, but he did that. And what it has the practical effect of doing is providing those expanded opportunities to have contacts, personal contacts. And what is the best way to advance our values but to be able to have the personal contacts and to talk and visit with people.
I talked to the head of a Motorola plant in Shanghai – Motorola’s corporate headquarters in my district -- and he was explaining to me that in their plant they have clean working conditions. If you work more than a 40-hour week, they pay overtime. They provide health care benefits to their employees. And they went a step further and built a huge apartment complex so that if you are with them five years, you move in; ten years, you own your own apartment. And I said gee, did you bring all of our standards over here and impose them on yourself that way? And they told me no, those were the standards imposed on a foreign company doing business in China.
Now, it applies to foreign companies over there, but not to the domestics. But I said if you and I are neighbors and you are working in some grungy Chinese factory that is filthy, you do not get overtime pay, you do not get any health care benefits, and I am working for Motorola, then at the end of the work day we are having a Tsing Tao together, and I hear you going on about that place where you work, I am going to tell you well, come on, work for Motorola. Why are you working there? And Ben Franklin made the observation a good example is the best sermon. And having those good examples over there provides that, and it provides the incentives for them also domestically to start getting up to speed.
Mrs. MCCARTHY. I happen to agree with you as far as going over and traveling. I have taken three trips so far. And if the press thinks they are fun, they should travel with us.
Mr. CRANE. Yes, indeed. I agree.
Mrs. MCCARTHY. It takes us about 48 hours. When we come home --
Mr. CRANE. Um-hum.
Mrs. MCCARTHY. Just to try and get back to a normal routine. So I challenge any press person to go on any of our trips, and I think that they would see that we are not there to have fun.
Chairman MANZULLO. Thank you.
Mr. Chabot.
Mr. CHABOT. Thank you.
Phil, you have already mentioned a few, but are there any other historical examples of ineffective sanctions that you would like to mention or perhaps any sanctions that might have worked?
Mr. CRANE. Well, there is one that Don mentioned there, and that was when Congress acted when the sanctions were about to go into effect to hurt our farmers last year, and we gave the waiver to the administration. But, I mean, these are going on repeatedly. It would be hard to properly calculate and tabulate the impact worldwide of the sanctions that are in place when there are small businesses that have finally made decisions not to go exploring worldwide. And we have no calculation of how many, but I will tell you something interesting that happened to me.
A fellow came into my office doing business in the Persian Gulf and he said Congressman, do you know how many businesses from your district are doing business in the Persian Gulf. And I said no, I haven't the vaguest idea. And he handed me a little notebook and said here, over 150 of them. And I looked at the list.
Now, I have the corporate headquarters of Motorola, Sears, Ameritech, United Air Lines, Kemper, I have Baxter and Abbott right on my border, and Allstate. And so, you know, I knew that we have big giants in the world of trade. These 150 I looked at the list and not a single name did I recognize. And he told me afterwards, he said those are little companies. You know, 100 to 200 employees. And this is a fact that is not properly being disseminated and explained to colleagues here when you talk about taking these kinds of actions it has a ripple effect that is hard to define.
We had a Trade Subcommittee hearing in my district about, well, it was two years ago, I guess, but we had representatives from some of the big corporations there to testify, and we are the fifth largest export State in the Union, and I think my district exports more than yours, Don. I am not positive about that.
Chairman MANZULLO. I don't think so --
Mr. CRANE. Well, yours exports a lot, I know, too. But the fact is, we discovered that better than 90 percent of Illinois exporters are companies employing 500 or fewer. And, you know, it is these little guys that are aggressively involved in this, but it is the little guys that get timid because of not anticipating the political ramifications of having made that adventure abroad and then having somebody in Congress impose a sanction and put you out of business there. And these are things that are unanticipated consequences, but there are things that we should not take lightly. If we study in advance and get the input, appropriate input, we will think of some more effective way of dealing with rogues.
Chairman MANZULLO. Mr. Chairman, I want to thank you for sharing part of you day with us.
Mr. CRANE. Well, no, thank you.
Chairman MANZULLO. I look forward to working with you on the Crane-Dooley-Manzullo legislation.
Mr. CRANE. You betcha. And Cal, I hope, is going to get here before your hearing is over.
Chairman MANZULLO. Did Cal call? I think he is tied up in another subcommittee. He is going to try to make it.
Mr. CRANE. Oh. Well, the reason I say is to make sure that, you know, we get our bipartisan presentation here.
Chairman MANZULLO. Right.
Mr. CRANE. Because the good thing about the bill is we have good, down the line, I mean almost 90 sponsors, and it is about 45-45. And that is the kind of thing that is encouraging. And I thank you for this opportunity.
Chairman MANZULLO. Thank you, Mr. Crane. I appreciate it very much.
If we could have the staff prepare the table for the second panel, please.
Chairman MANZULLO. Is Mr. Ledge or Mr. George here? Do you want to come up and have a seat, please, at the table?
Our first witness on this panel will be Gary Hufbauer, who is formerly a Professor of International Finance Diplomacy at the Georgetown University, Deputy Director of the International Institute at Georgetown University, Deputy Assistant Secretary for International Trade and Investment Policy at the U.S. Treasury, plus a host of other positions. He has written several articles involving NAFTA, "Economic Sanctions Reconsidered," and "Trade Policy for Troubled Industries."
It is with great pleasure that we welcome you to appear on our panel, Mr. Hufbauer.