Date: 03 Mar 2000
Time: 17:20:53
Remote Name: 156.29.145.175
Continued from Part one...
STATEMENT OF GARY CLYDE HUFBAUER, SENIOR FELLOW, INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. HUFBAUER. Thank you very much, Mr. Chairman, for inviting me to speak, and apologies for my hoarse throat and voice.
Chairman MANZULLO. Mr. Hufbauer, if you could put the microphone close to you --
Mr. HUFBAUER. Is that a little bit better? Thanks very much.First of all, I very much agree with all the remarks made by Congressman Crane. I am delighted the bill which he has authored and you have co-authored is coming along. I would note that we did have a really good legal victory just the other day when the appeals court in the First Circuit upheld the District Court in the case brought by the National Foreign Trade Council involving the Massachusetts law over Burma. This appeals court decision, if it stands -- if it is tested in the Supreme Court and if it stands in the Supreme Court -- will do a great deal to ensure that this country speaks with one Federal voice in terms of foreign affairs, and that we cut out much of the thicket of state and local sanctions. But that still leaves plenty of room for Congressional and Administration reform and that is what your business is about today.
You have my statement, so let me summarize a few key points. We find in our research at the Institute for International Economics that there has been a declining effectiveness of sanctions over the postwar period, as Congressman Crane noted. There are certainly some successes but there are far more failures in foreign policy terms. The costs of sanctions are pretty high, even for very light sanctions that involved, let's say, cutting off of some bilateral military aid. Our statistical analysis indicates that overall trade between the U.S. and the target country would fall about 27 percent in those cases. When you consider very heavy sanctions in some of the cases that have been mentioned, trade practically disappears – it drops by about 90 percent -- so that translates into the kind of numbers that Congressman Crane emphasized.
The small gloss I would put on these numbers is that our exporting sector pays better on average, and export jobs are more stable on average than in the economy as a whole. The "on average" translates into about $4,000 more wages per year per person in manufacturing employment in exports by comparison with the economy as a whole. This is the area of our competitive advantage, so jobs are going to be better paid. When we cut off our export jobs we are not doing ourselves a great national favor.
Small business firms are of course particularly hard hit. If you take a large business firm such as General Electric -- and my fellowship at the Institute is named after the former president of General Electric, Reginald Jones -- well General Electric does business all over the world in thousands of products. Of course they are subject to a lot of sanctions and they lose money, but they can shift.
A small business firm, which is only doing business in one or two products in a few countries, when it is hit either in terms of its supplies or in terms of its exports, it truly suffers and oftentimes that may be the straw that breaks the back. Let me just conclude by urging this bill forward. I think it really is in the national interest. Thank you.
[Mr. Hufbauer’s statement may be found in the appendix.]
Chairman MANZULLO. Thank you. Our next witness is Steve Ledger. Steve is from Addison, Illinois, which I believe is in Mr. Hyde's district --
Mr. LEDGER. That's right.
Chairman MANZULLO. And he is the president of ROTEC Industries from Elmhurst, a manufacturer of belt conveyer systems, tower cranes and mobile construction equipment that is marketed worldwide.
He received his degree from Northern Illinois University Business School and Purdue University School of Aeronautical Engineering. His company is no stranger to Capitol Hill, having testified several times and our Committee having used ROTEC Industries as the example of a company that has been singled out essentially in terms of sanctions hurting a company, so it is with great pleasure that we welcome you to appear before our panel, Mr. Ledger.
STATEMENT A. STEVEN LEDGER, PRESIDENT, ROTEC INDUSTRIES
Mr. LEDGER. Thank you, Mr. Chairman.
I am a little bit of a stranger here but my predecessor has laid some pretty definite tracks I think.As you mentioned, ROTECH is a small company. We are out of Elmhurst. We make a unique line of equipment and we operate as a classic American entrepreneurial company. We have really no, up until recently, we had no direct competition for our specific products anywhere in the world and our success was keyed on several things -- our product line, our hard work, lots and lots of travel and frequent flyer miles, and most of our business, especially in the last 10 years, has been export and sometimes as much as 90 percent per year.
So a big job for us, usually in a foreign country, is often the key to what is a good year or is a not so good year not only for our company but for our subcontractors and suppliers who live off of the fruits of our labor as well.
Our equipment is usually used on large civil projects, typically dams, hydropower plants, and these are the types of projects that tend to benefit the people of a region, the economy of a region. It is the type of projects that the Third World countries, the developing countries do need to bring the standard of living of the people that live there to a higher level.
Those of you who have been to China, if you have gotten away from Shanghai and Beijing into the central part of the country, even the people who aren't being mistreated by the government don't have a very nice life. I am not trying to be the world's savior, but I think my equipment can help bring in electricity, flood control, and water to many people around the world.
The sanctions, particularly the unilateral sanctions that we are discussing, have hurt us in the past. Three Gorges in China is one example. We were faced with lack of support from Ex-Im to provide financing for this project. We went in there, spent several years cultivating that order and eventually were successful in receiving three major orders for a total of about $85 million worth of equipment -- sorry, $65 million. The total U.S. exports for that project are $85 million and the total international acquisition for that project is $1.5 billion, so the U.S. companies got a very small slice of that pie and the result is the job is going on, on schedule.We didn't stop them. We didn't even slow them down. We only cost jobs for U.S. businesses and U.S. workers.
We have faced similar problems in Iran last year. There was a major project there where we had I think a great chance of success, but because of the embargo we weren't allowed to touch that, and I understand there is future business for our type of equipment in Iran that we are still stepping back from and waiting for the green light.
A small company like ours, we invest a lot in one of these orders, even after we receive the order. Beforehand of course, but after we receive the order we may take six to 12 to 15 months before we can ship and get paid for the equipment. If an embargo was put in place during that time, we would stand the risk of not only losing the order but losing all the money we had invested in the order, so I want to emphasize that the effects on U.S. businesses are very real from these embargoes.
We are out there working hard. We are out there taking risks and trying to do something that is a little bit different, yet brings profit, jobs and hopefully a little enjoyment to us, ourselves, at the same time.
I think I better quit because I have got a red light.
[Mr. Ledger’s statement may be found in the appendix.]
Chairman MANZULLO. Usually I go on a crusade every six months over Ex-Im's failure to grant the ability to guarantee loans in China and the repercussions of that still are being felt here in the United States.
Our next speaker is Mr. Varghese George.
Mr. GEORGE. Yes.
Chairman MANZULLO. Mr. Varghese George. I bet people turn that around, don't they?
Mr. GEORGE. They do.
Chairman MANZULLO. Mr. Varghese George is president of Westex International, Incorporated, and is a Director of the Small Business Exporters Association, with which we have worked quite frequently here in Washington. We are very much interested in some compelling testimony as to which you have some very intimate knowledge and look forward to your testimony, Mr. George. Go ahead -- if you could put the mike as close to your mouth as possible, thank you.
STATEMENT OF VARGHESE GEORGE, PRESIDENT, WESTEX GROUP, INC.
Mr. GEORGE. Thank you, Mr. Chairman, and members of the Subcommittee for the opportunity for me to testify here. My name is Varghese George -- and you were very close. I am the president of Westex Group. I am an export company operating out of Washington since 1983, and I am a supplier of American equipment, machinery and materials to clients all over the world.
I am also an active member of the Small Business Exporters Association and I have been privileged to serve on the board of the organization for many years.
During the last 16-plus years of our operation Westex has been responsible for over $80 million worth of exports either as a direct exporter or a facilitator. Westex lost approximately $25 million in sales due to unilateral sanctions over the past few years. Likewise, members of our association may have lost billions of dollars in lost sales.
Recently we were forced to abandon our targeted marketing and sales operations in a country under sanction, primarily due to the uncertainty it poses because of the sanctions. The market potential is enormous for American products in this country right now and for the future. Speaking as the owner and operator of a small business, an exporting business, and as a member of the Small Business Exporters Association, I am against unilateral sanctions.
I would like to make the following remarks about sanctions common to the members of the Small Business Exporters Association. Unilateral sanctions adversely affect small business in terms of lost opportunities and wasted efforts and resources. All things considered, it is our experience U.S. brands have the highest market recognition and will be purchased if the price is competitive. We are only hurting ourselves by not allowing the free market to prevail in international commercial transactions.
What is perhaps more disruptive to American business interests is the stop-and-go nature of the sanctions policy. We have been involved in transactions in which we have to disengage midstream in order to comply with our government policy at a considerable loss of time and money. European and Far East competitors were only too happy to step in and fill the vacuum caused by our departure. We are always at a disadvantage to re-enter these markets once the sanctions are lifted.
Our credibility as a dependable source of supply is threatened by the sanctions. I encounter prospective clients in countries where sanctions have been lifted who are wary of working with American firms. Sanctions, to be fair and effective, require the participation of all developed countries, especially our historical allies. Competition from European and Far East companies has eroded the market share of U.S. exports in many markets. Adding the sanctions policy to the scenario only weakens U.S. business interests. In order to remain competitive in the global marketplace, we must refrain from declaring unilateral sanctions.
We also believe America's economic well-being and prosperity will very much depend on our ability to sustain and increase our exports. Any dilution of our efforts through unilateral sanctions will indeed pose a threat to our economic security now and in the future.
We, as small business exporters, must be given more opportunities, not less, by our government to develop new markets without the threat of future disruptions by sanctions. We believe the unilateral sanctions prior to implementation should be subject to comprehensive impact studies, especially on small companies like Westex.
The impact of sanctions on jobs and families must be considered prior to any decision by the U.S. Government to invoke sanctions. Thank you, Mr. Chairman, for this opportunity.[Mr. George’s statement may be found in the appendix.]
Chairman MANZULLO. We appreciate your testimony.
I have a question to Mr. Hufbauer. The Congressional Budget Office has stated that sanctions on foreign commerce have had a negligible effect on the overall U.S. economy. I am sure you have seen that report. It claimed that $19 billion in lost exports does not mean that much in a $6.6 trillion economy. Only an agency of Congress can say $19 billion means nothing. It's just amazing.
You are smiling and I would like your reaction to that CBO study.
Mr. HUFBAUER. Well, the Congressional Budget Office and the Institute have a disagreement on this point. Sure, if you measure anything relative to the U.S. economy, it is small. This is not an exaggeration. If Mexico were to disappear from the face of the earth, relative to the U.S. economy it is small, because it is about 5 percent or 8 percent of our economy, but you can't size up everything relative to the U.S. economy. That is ridiculous. Twenty billion dollars worth of lost exports -- about 70 percent of that in small and medium size companies and a third of that in truly small companies as measured by the Small Business Administration -- that is a lot of money. It represents a very concentrated impact on those firms and on those communities. In any event, all economic progress is accomplished step by step, and you are taking away some of those steps when you put on economic sanctions.
I will size it up another way. The total budget of the State Department is less than the cost of these sanctions. Well, Congress goes over that budget line item by line item. But sanctions are as big a budget as on top of that. I could make a few other comparisons along those lines. The amounts are not at all trivial. I was a little bit surprised by the CBO rhetoric on that point.
Chairman MANZULLO. I imagine Mr. Ledger would agree with you, because 90 percent of your manufacturing is exports, is that correct, Steve? Is that what you said?
Mr. LEDGER. Yes -- well, the last few years especially, a great majority of our business has been export business.
Chairman MANZULLO. Do you agree with this $19 billion figure, or do you think it is a lot greater than that?
Mr. LEDGER. Me, personally? I think our company, we are a $30-40 million a year company, and I think it has probably cost us $19 million or more in the last two to three years --
Chairman MANZULLO. In sanctions.
Mr. LEDGER. And I don't -- right, exactly -- between China and Iran. I don't see how I'm only one out of a thousand. I think more I am one out of 10,000 or one out of 100,000.
Chairman MANZULLO. I have problems with these figures because there is no way that you can qualitatively state the loss of sales due to a reputation for being a poor supplier. I mean how do you state in quantitative economic terms how much we have lost because other countries simply will pass us by and go somewhere else where there is a more reliable supply on it?
Mr. George, did you have any specific examples of how sanctions have hurt your company in particular?
Mr. GEORGE. Yes. In the last three or four years, during Ron Brown's tenure as the Commerce Secretary, there was this big presentation of 10 emerging markets as the "in" thing for exporters, and I jumped on the bandwagon and I looked at the markets, you know. This map is very illustrative of the size of the markets that we are losing because of sanctions, if you really look at it.
We are leaving out probably a couple billion people and I looked at India, the country of my birth, as a very good prospect for export, and there is almost a billion people and I go there quite often because my parents still live there, and I got very, very excited about the prospect of Americans and the Indians integrating their economy in some way, and I spent a lot of money and time, which I can least afford, while building up businesses, into that project. I think somehow things have waned because of the relationship, and now with the nuclear proliferation issues involved, it is not a good bet for me, so everything I have done so far -- if you want me to quantify in real terms what I lost, close to about half a million dollars -- and that is a lot of money for a small guy, and that's why it hurts.
I was involved in nothing other than consumer products. You know, I want a stable place where I can slowly build up brand awareness and the American way of doing things into the markets that I am so familiar with, in which I have a lot of contacts, but there is politics and I don't control the government of India policy. They have their own reasons why they do things. But it hurts me in the pocketbook and it hurts my chances to make it as a small business.
I employ about 14 people, and that is a lot of burden -- continuing to feed them, enough work, and if you cut out a couple billion people from the face of the planet that is less that I have to work with. So it is real -- only in these forums we can come in and express our disappointment in these things.
Chairman MANZULLO. Well, you know, the issue here is, first of all, whether or not the sanctions work, and, Gary, you attached a chart to your testimony that talked about whether or not a sanction was, quote, "successful" -- could you explain a little bit more what criteria you used to determine the success of the sanction?
Mr. HUFBAUER. Yes, indeed, Chairman, and I think you are eligible to buy the first copy of the third edition of our book.
Chairman MANZULLO. Well, let us know when it comes out.
Mr. HUFBAUER. Yes, it will be out --
Chairman MANZULLO. I will get one from the Library of Congress -- no, I will buy one, autographed, from you.
Mr. HUFBAUER. We go into a lot of detail but briefly, for each case we try to look at two things. One, whether the foreign policy objectives which were stated by responsible officials were realized in part, and I emphasize "in part" because you very seldom get a slam-dunk in foreign policy, especially where sanctions are involved. Then secondly, whether the sanctions, according to on-the-spot observers, close observers of the episode at the time, succeeded or were partially successful in the outcome. So the measure has two components and we scale those and we multiply them to judge success.
Let me just take a very obscure case which nobody follows, Angola. We have sanctions against one of the factions in Angola, Mr. Savimbi's faction -- in I think it is the MPLA. We have had them for some time. Savimbi at a time was willing to negotiate with the government, the elected government of Angola, and that was one of our objectives. When we looked at the situation more closely, we concluded that the negotiations, such as they were, did not resolve the civil war that is going on there. The negotiations were a very temporary sort of thing and just provided an opportunity for Savimbi to move some troops to a more advantageous position. We didn't score those sanctions as successful.
That is illustrative of the kind of detail we get into. We tried to use a consistent scoring method across these cases that span a long period of time. When I look at other academics who have commented on our work we get more criticisms from people who think we are too generous in our scoring than people who think we are not generous enough. I think it is fair to say these are liberal estimates of the success ratio, that is, the percentage of cases where there is some success, taking those two components, and it is rather low in recent years, as you can see.
Chairman MANZULLO. Did you have any more questions, Carolyn?
Mrs. MCCARTHY. Thank you, Mr. Chairman. We have had this battle here in Congress before, but frequently American economical interests are threatened by actions of foreign countries. The example that we were fighting here in Congress was when one country did not respect our intellectual property rights, copyrights, patents, trademarks and the like. American interests were definitely suffering from these actions, and they felt victimized, and they wanted to seek retribution.
How do all of you feel about the U.S. utilizing sanctions to retaliate against other nations whose policies really do victimize our own businesspeople?
Mr. HUFBAUER. Briefly, Congressman, on that point, our research at the Institute indicates that retaliation or sanctions, if you will, where there is a straight-out commercial dispute, have been far more successful than in these political disputes, and I think the rationale is pretty straightforward.
When you are talking of commercial disputes you are talking basically money, and you don't embroil the whole power structure in the country, or spark nationalistic reactions.
When you talk nuclear explosions in Pakistan, events are just a totally different order of magnitude and so sanctions have initially far less chance of success in foreign policy episodes than they do in commercial episodes.
Mr. GEORGE. In the case of India, I think once a country passes a certain threshold, it is irretrievable, and I think it is futile, just like closing the gate after the chicken has escaped -- I don't know whether I said it right or not -- but it is too late. You know, it should have happened much before for the diplomacy to work.
I think it is very difficult to employ sanctions and ask them to retrieve their course. Some other methods have to be used, and I concur greatly on this issue. I mean quid pro quo or commodity by commodity or product by product, I think it has got a better chance of success than unilateral declarations of sanctions, total sanctions.
In my experience as a small businessman, it hasn't worked. I think we should think seriously about it before we do it, because we are at the short end of it. We always lose.
Mrs. MCCARTHY. And just a follow-up question. When we implement sanctions, do you get involved personally by calling your Congressperson and explaining what it was going to do to you personally as far as your business?
Did they know how you felt, your Congressman from your area?
Mr. GEORGE. Yes. My Congressperson that I deal with is Connie Morella.
Mrs. MCCARTHY. Okay.
Mr. GEORGE. I live in her district and I send e-mails and express that, but it is a much bigger issue, and she is sympathetic. I happen to support her policies and her method of approach, but it in this case it is too big for somebody to help. I mean I am looking for immediate remedy for a situation I am in and I think I am very hesitant to go into these countries which have got big problems on the State Department level.
It is beyond me. And, I mean, the process takes time. Once sanctions are applied, it is very difficult to move the machinery, bureaucratic machinery and all the procedures back in place to enjoy the benefit of no sanctions. It is very difficult as a small business. And I do try, I do go through the channels which are available in the democratic process that we have. But I do not think it is very effective.
Chairman MANZULLO. If I could interject -- would you yield for a second?
Mrs. MCCARTHY. Oh, certainly.
Chairman MANZULLO. If I could interject for a second, the Crane-Dooley-Manzullo legislation would give notice to the various groups that the President is about to impose a sanction. Now you have absolutely no idea that a sanction is about to be imposed and really have little opportunity to get involved because the sanction normally is imposed by way of regulation as opposed to a vote of Congress where there is even an opportunity to contact your Member of Congress.
Thank you.
Mrs. MCCARTHY. Thank you, Mr. Chairman. I also believe in that particular amendment that anyone that is already in contract or going through business there can continue, if I read that correctly. So it seems like a pretty fair thing to go for.
Thank you, Mr. Chairman. Thank you.
Chairman MANZULLO. Well, we want to thank you for coming here this afternoon. You know, we continue to try to get more and more Members of Congress involved on this particular piece of legislation. Sometimes bad things happen. They get reversed. That brings people's attention to what is going on. But obviously the imposition of the Glenn amendment that temporarily stopped wheat exports to Pakistan, which required a special vote of Congress to repeal, really brought to the attention of many Members of Congress the need for sanctions reform. Our proposed piece of legislation simply gives the President opportunities to choose from a cafeteria list of exactly what sanction is appropriate and what is not appropriate, and it gives Congress the opportunity to become involved in that choice.
So again we want to thank you. Thank you, Mrs. McCarthy. Your statement will be made part of the record. And all of your statements will also be made part of the record. And thank you for sharing this afternoon with us.
This Subcommittee is adjourned.
[Whereupon, at 3:06 p.m., the Subcommittee adjourned subject to the call of the Chair.]