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 Offset 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. 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 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, INTERNATIONAL, 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

producers of commercial and military aircraft, helicopters, missiles, et cetera. A couple of notes about the aerospace industry. We produced about $140 billion worth of product in 1998, about 3 percent of the U.S. industrial manufacturing activity. The industry currently employs about 860,000 Americans.

What is perhaps most remarkable about our industry is its continuous export performance. In 1998, we exported $64 billion worth of product. Our imports were $23 billion. That gives us a net of $41 billion in exports. That is the largest of any manufacturing sector.

I should point out these exports are critical to our industry. Ten years ago our total output was about what it was today in real terms. At that time, the government accounted for 60 percent of purchases of our production, and exports were about 24 percent. Primarily because of the rapid drop-off in defense procurement, today the government buys about 30 percent of our output; exports are 40 percent. All of our growth is in the export arena. We depend on those exports in order to keep our employment where it is today. From an industry perspective, offsets are certainly a nuisance. Most of us would prefer to compete on the basis of quality and price of our primary product. That is what we do. We are not in the consulting, technology transfer, risk capital or trading business. However, just as in the commercial aerospace arena you have needed to find imaginative financing arrangements, in the military arena you need to find imaginative offset arrangements.

These obviously are not a new invention, but another form of the age-old practice of barter and countertrade. While they may be inefficient, I think one does need to step back and recognize that for every export, someplace, sometime there will be an import, or you are giving the stuff away, and when you have an import, somebody in the U.S. economy will be negativity affected. Overall, however, society benefits. Offsets don't change basic math. What they do is close the loop in a reasonably visible fashion.

I should note that offset requirements are not unique to dealing with overseas customers. When government spends taxpayer revenue, they often want more than just the product. In this country, our industries require domestic offsets, e.g., setasides, for small businesses, setasides for minority businesses, and you tend to spread the work around in as many districts and States as possible. Both informal and formal offset, in other words, is also true in this country. Similarly, when foreign governments spend their money, they want to see some jobs and a piece of the action in their couintry, even when they spend it overseas for foreign military products.

Let me jump forward perhaps to save time and note that there are really five things that we would like to see in government policy. First and foremost, and I think most people agree with us, you should not take unilateral measures through statute or regulation to control offsets, would which simply transfer jobs to our foreign competitors.

Second, direct offsets, we would agree, should not be allowed when a purchase is wholly financed by U.S. assistance on grant terms. Now, I should note that this is almost irrelevant. Today there are only two countries that receive grant military assistance, Israel and Egypt.

We certainly would support efforts by the United States to obtain multilateral accords on disciplining offset practices. I must admit, however, we are somewhat skeptical of the success of such efforts, mainly because I am not sure what are will willing to lay on the table ourselves. When we recently held a competition for a joint primary training aircraft for the United States Navy and Air Force, the winner was basically a Swiss aircraft. That aircraft will be built almost entirely in the United States, assembled in Wichita, probably 99 percent U.S. content. I suspect that had the Swiss Parliament said you can only buy that airplane if it is produced in Switzerland, the United States Congress would have suggested mildly where they could go with their demand, and we would wind up with a United States alternative. That is the real world. If you look at each of the U.S. DOD procurements, they are almost invariably all produced by a U.S. prime in the United States, not because of formal requirements, but that is because the U.S. system works for exactly the same reasons.

Fourth, in instances where the only competitors for our foreign contracts are United States firms, the government might place some useful role in arbitrating and limiting what our companies offer, but you have got to be very careful that you don't create foreign competitors or create domestic solutions to a country's procurement or increase the value, the actual quality of the offset, which is essentially what happened when the government stepped in in Korea and limited United States companies' offset offers. What happened is the quality of the offset offered went up considerably.

Finally, let's be very careful about how we collect and publish information on offsets. We don't have a problem sharing information with the U.S. Government on offsets. What we do have a problem with is providing a cookbook to our foreign competitors and to our customers as to what the best current offers are out there. The largest readers, I suspect, of an annual Commerce Department report on offsets are foreign embassies in Washington, DC.

In general, we tend to think that offsets are highly overrated issues. Let me note, for example, that DOD procurement went from $100 billion a year to $42 billion a year. Were DOD procurement at the same level today as it was 10 years ago, we would have 400,000 more workers. There is nothing in the offset realm that remotely touches on those kinds of numbers. That is the major impact, and we are not arguing that we ought to have a larger defense budget, we are arguing take a look at what is effective, the subcontractor base and the prime base, it has very little to do with offsets. It has to do with much larger trends.

In summary, I would say starting with offsets is probably the wrong starting point. If there are subsectors of our economy that are in trouble, we ought to find out what is wrong. My own guess is that you will find it has to do with underinvestment; it has to do with a variety of things of which offset may be a symptom, very seldom will be the cause. Thank you very much, Mr. Chairman. [The prepared statement of Mr. Johnson follows:]