[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




            DEFENSE OFFSETS: ARE THEY TAKING AWAY OUR JOBS?

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON CRIMINAL JUSTICE,
                    DRUG POLICY, AND HUMAN RESOURCES

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 29, 1999

                               __________

                           Serial No. 106-114

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                                 ______

                     U.S. GOVERNMENT PRINTING OFFICE
64-306 CC                    WASHINGTON : 2000




                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH, Idaho                   (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Criminal Justice, Drug Policy, and Human Resources

                    JOHN L. MICA, Florida, Chairman
BOB BARR, Georgia                    PATSY T. MINK, Hawaii
BENJAMIN A. GILMAN, New York         EDOLPHUS TOWNS, New York
CHRISTOPHER SHAYS, Connecticut       ELIJAH E. CUMMINGS, Maryland
ILEANA ROS-LEHTINEN, Florida         DENNIS J. KUCINICH, Ohio
MARK E. SOUDER, Indiana              ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio           JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
DOUG OSE, California

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                Sharon Pinkerton, Deputy Staff Director
                Mason Alinger, Professional Staff Member
                         Andrew Greeley, Clerk
                    David Rapallo, Minority Counsel
                    Micheal Yeager, Minority Counsel
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 29, 1999....................................     1
Statement of:
    Feingold, Hon. Russell D., a U.S. Senator from the State of 
      Wisconsin..................................................    67
    Johnson, Joel, 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.........    73
    Majak, Roger, Assistant Secretary for Export Administration, 
      U.S. Department of Commerce; and Alfred Volkman, Deputy 
      Under Secretary of Defense for Commercial and International 
      Programs, U.S. Department of Defense.......................   157
Letters, statements, et cetera, submitted for the record by:
    Feingold, Hon. Russell D., a U.S. Senator from the State of 
      Wisconsin, prepared statement of...........................    70
    Herrnstadt, Owen, director, International Affairs, 
      International Association of Machinists and Aerospace 
      Workers, prepared statement of.............................   122
    Johnson, Joel, vice president, International, Aerospace 
      Industries International, prepared statement of............    76
    Majak, Roger, Assistant Secretary for Export Administration, 
      U.S. Department of Commerce, prepared statement of.........   161
    Mica, Hon. John L., a Representative in Congress from the 
      State of Florida, prepared statement of....................     3
    Scott, Robert, International Economist, Economic Policy 
      Institute, prepared statement of...........................    85
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts:
        Letter dated April 26, 1999..............................    52
        Minority staff report....................................     7
        Prepared statement of....................................    61
    Volkman, Alfred, Deputy Under Secretary of Defense for 
      Commercial and International Programs, U.S. Department of 
      Defense, prepared statement of.............................   172

 
            DEFENSE OFFSETS: ARE THEY TAKING AWAY OUR JOBS?

                              ----------                              


                         TUESDAY, JUNE 29, 1999

                  House of Representatives,
Subcommittee on Criminal Justice, Drug Policy, and 
                                   Human Resources,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. John L. Mica 
(chairman of the subcommittee) presiding.
    Present: Representatives Mica, Gilman, Hutchinson, Ose, 
Kucinich, and Tierney.
    Staff present: Sharon Pinkerton, deputy staff director; 
Steve Dilingham, special counsel; Mason Alinger, professional 
staff member; Andrew Greeley, clerk; David Rapallo and Michael 
Yeager, minority counsels; and Jean Gosa, minority staff 
assistant.
    Mr. Mica. Good morning. We will call this meeting of the 
House Criminal Justice, Drug Policy, and Human Resources 
Subcommittee to order.
    I will begin this morning with an opening statement and 
then will yield. We have three panels today, we will recognize 
them as soon as we finish our opening statements.
    This morning the topic of our hearing is defense offsets, 
are we giving away our jobs?
    Over the past decade, both small and large businesses have 
increasingly relied on international trade for growth and job 
creation. International factors must be considered when 
conducting business for almost every company, from Ford Motor 
Co., with its roughly 350,000 employees worldwide, to a small 
software company in my district in Florida.
    Our focus today falls upon the U.S. aerospace industry, an 
industry particularly affected by globalization. Companies like 
McDonnell Douglas and Lockheed Martin have led the world in 
technological advancements in the defense and aerospace 
industries. Such companies have made it possible for the U.S. 
aerospace industry to enjoy a trade surplus exceeding $40 
billion while the overall U.S. economy faces a record trade 
deficit approaching $300 billion.
    Recently, the worldwide demand for both defense and 
aerospace products has escalated. Many foreign governments are 
now officially mandating offsets from U.S. companies to help 
alleviate the impact on the foreign country's economy of 
contracting out the business to the United States. Offsets can 
range from foreign demands that an aerospace company produce at 
least part of the product in the foreign country, to obligating 
the aerospace company to purchase its office furniture from a 
company in the foreign country.
    Offsets have gained increasing attention in recent years 
because of the controversial impact they may have on the U.S. 
economy. More specifically, some labor interests charge that 
defense offsets send American jobs overseas.
    The argument has also been made that offsets adversely 
affect industries completely unrelated to the defense and 
aerospace industries.
    While on a case-by-case basis, the aerospace industry might 
agree that some smaller companies have been injured, they would 
also argue that offsets help to keep alive an industry faced 
with increasing international competition. By refusing to 
negotiate offsets, U.S. companies run the risk of losing the 
contracts to international competitors that are willing to 
accept the offset requirements.
    We are here today to listen to the concerns raised about 
offsets in the defense and aerospace industries, and to 
determine whether Congress should modify its policy of limited 
involvement in offset agreements.
    After reading today's testimony, it appears that none of 
the witnesses champion the practice of offsets in foreign 
military sales. Rather, the issue seems to be whether Congress 
needs to change our current policy to protect against the 
negative impacts of offset agreements or whether the benefits 
of jobs created by the exports outweigh the losses to other 
companies.
    The panel of experts before us today will discuss whether 
offsets adversely impact the U.S. economy, and, if so, what can 
be done about it. Currently, the U.S. Government's role 
regarding offsets is simply to monitor the offset agreements 
and issue a yearly report. Also, when technology transfers are 
involved, the necessary licenses are approved.
    Several options have been suggested to help alleviate the 
impact of offsets. We will hear some of those proposals today, 
and also some of the difficulties in implementing those 
proposals.
    Are offsets detrimental to the U.S. economy? Are American 
jobs being sent overseas? Should Congress modify the current 
policy of limited involvement? I look forward to hearing from 
the experts to help answer some of these questions.
    [The prepared statement of Hon. John L. Mica follows:]
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    Mr. Mica. At this time I am very pleased to recognize the 
gentleman from Massachusetts, who requested this hearing, and I 
was pleased to comply. I apologize for the delay. We have had a 
couple of other national issues which take precedence, but I 
thank him for his interest in the issue, and I would like to 
recognize him at this time.
    Mr. Tierney. Thank you, Chairman Mica. I thank you for 
holding this hearing on defense offsets. You have shown a great 
ability to lead in a bipartisan way by acceding to having this 
hearing and participating in it.
    I also want to thank Senator Feingold for taking the time 
out to share with us his experiences in the defense offsets of 
his home State of Wisconsin, and I thank our other 
distinguished witnesses who will be joining us from the 
administration, the defense industry and the labor community.
    Most people are, in fact, not familiar with defense 
offsets, how they work, why we have them and what they are 
intended to do, although many businesses and employees are 
impacted, and many are sometimes adversely impacted by their 
use. This phenomenon takes place regardless of whether the 
business or the worker is actually in the defense industry, as 
you will see. For those people out there who are not familiar 
with the topic, offsets are the conditions sought by foreign 
governments in their negotiations for purchase of U.S. defense 
equipment. More often than not, these stipulations require U.S. 
manufacturers, as a condition of doing business with these 
foreign governments, to transfer taxpayer-funded defense 
technologies, in some instances to make direct investments in 
foreign companies, to purchase foreign-made components or to 
provide other forms of assistance. These offsets or sweeteners 
range from direct offsets, such as exporting jobs overseas for 
subsequent contracting, to indirect offsets, such as buying 
furniture or some other product from foreign manufacturers at 
higher prices than those offered by American companies.
    I first became interested in defense offsets from listening 
to small businesses and contract employees prior to my election 
in 1996. In November 1997, a defense contractor located in my 
district won a foreign military sales contract to produce 104 
military fighter engines for the Korean KTX-2 Advanced Trainer/
Light-Fighter aircraft. This contract was well received locally 
by me, the defense contractor, and the men and women who would 
be doing the work. However, just a few weeks later, it was 
related to me that the defense contractor revealed the other 
side of the story to the work force. As a part of the offset 
agreement, only the first 25 of the 104 engines would be fully 
made in the United States. The next 10 engines would be made 
with United States parts, but 100 percent of the engines would 
be assembled, inspected and tested in Korea. The final 69 
engines under the contract would consist of 70 percent United 
States parts, 30 percent Korean parts, and would be completely 
assembled, inspected and tested in Korea.
    The euphoria quickly faded and turned to disappointment as 
we learned these facts. People simply could not understand why 
a defense contractor would allow this important engine work to 
be performed abroad with foreign components and foreign 
workers. But we know now that despite making the finest 
military equipment in the world, U.S. defense contractors say 
they are forced to make these offset deals with foreign 
governments or else run the risk of losing the defense contract 
to another foreign country that is willing to agree to such an 
arrangement. As we looked into the issue, we learned that some 
offset deals are more than 100 percent of the total contract 
price.
    To learn more about defense offsets, I requested the 
minority staff of the Committee on Government Reform look into 
these issues and offsets. The result was a report entitled 
Foreign Offset Demands in Defense and Civil Aerospace 
Transactions. Chairman Mica, at this time I would like to ask 
unanimous consent that that report be entered into the record.
    Mr. Mica. Without objection, so ordered.
    [The information referred to follows:]
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    Mr. Tierney. Thank you.
    The report includes a number of findings and 
recommendations. One finding was that the U.S. offset policy, a 
policy now of noninvolvement, is weak. The report recommended 
that the U.S. policy be strengthened by establishing a high-
level offsets commission composed of representatives of 
government, affected industry sectors, labor, and academia to 
review current offset policy and to propose a plan for the 
reduction of the detrimental effects of offsets. I have made 
available copies of the report.
    In addition to the report, I was interested to learn the 
views of the executive branch, including the agencies that are 
part of the defense offset working groups. Toward that end I 
wrote to President Clinton, Secretary of Defense William Cohen, 
United States Trade Representative Charlene Barshefsky, 
Secretary of Commerce William Daley and Secretary of the 
Treasury Robert Rubin urging them to establish, as a primary 
goal, international trade negotiations, the elimination of 
offsets imposed by foreign governments on defense and civil 
aerospace contractors.
    From the responses that I received, it seems apparent that 
there is no consensus in the executive branch on the adverse 
effects of defense offsets. A representative from the 
Department of Defense wrote to me that although we agree that 
offsets are market-distorting, the net effect of offsets in 
trade is unclear. A response from the Office of the U.S. Trade 
Representative indicated that although these agreements have 
led to increased foreign participation in the manufacture of 
U.S. defense equipment, such as aircraft engines, they have 
also led to the sale of U.S. equipment to foreign military 
agencies that would not otherwise have been purchased. 
Secretary Daley and a representative from the Department of 
State wrote to me in support of a reduction in the distorting 
influence of offsets on trade. Finally, a representative from 
the White House informed me of efforts to reach a domestic 
consensus on offsets.
    Chairman Mica, I would like to request unanimous consent to 
submit the agency responses to my letter.
    Mr. Mica. Without objection, so ordered.
    [The information referred to follows:]
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    Mr. Tierney. Thank you. I also believe it would be useful 
for the government to have more detailed information on the 
particulars of offset agreements. Toward that end, I am pleased 
that H.R. 973, the Security Assistance Act, which recently 
passed the House, contains additional reporting requirements. I 
know, in fact, that the Senator has also made an effort in the 
Senate to have those reporting requirements put into law. 
Section 204 contains additional reporting requirements on 
offsets regarding government-to-government sales and commercial 
sales. Specifically, if known on the date of transmittal of 
such certification, a description of the offset agreement may 
be included in the classified portion of such number 
certification. Thus the information would remain confidential 
and would not jeopardize American business interests. This is a 
positive step toward an effort to obtain additional information 
on the specifics of offset agreements.
    Mr. Chairman, 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 and small 
businesses that do out-source work from these people in the 
industry, the manufacturers, to allow them, some of the best 
workers in the world, to make sure that they are not sacrificed 
in the quest to make the sale and seal the deal.
    Again, I want to thank you, Chairman Mica, for examining 
further the issues of the offsets, and I want to commend you 
and the staff of the subcommittee for holding this hearing 
today. Thank you.
    [The prepared statement of Hon. John F. Tierney follows:]
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    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 understand 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:]
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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:]
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    Mr. Mica. Mr. Scott, you are recognized.
    Mr. Scott. Good morning, Mr. Chairman and members of the 
committee. Thank you for inviting me to testify here today.
    The future of the industry may differ significantly from 
the past, particularly regarding employment. The debate over 
the impact of offsets is contentious because of the interplay 
of several closely related questions that can be difficult to 
disentangle. Over the past decade, this industry has gone 
through a massive downsizing, which has been driven by declines 
in defense expenditures. In the past, offsets were a relatively 
small contributor to the problem. However, defense 
restructuring is over. In the future, trade, and offsets in 
particular, are likely to be much bigger factors in employment 
loss than in the past.
    I have prepared several reports on these subjects. The most 
recent was published by the National Research Council, and that 
is appended to my statement as appendix A. We have updated 
several figures from that report, statistical figures, for this 
hearing, and I have attached as a separate exhibit B or 
appendix B, those updated tables and figures, and I will refer 
to several of those by their original figures in my testimony 
here today.
    Mr. Mica. Without objection we will make both of those a 
part of the record.
    Mr. Scott. Thank you very much.
    Turning specifically to employment, the impacts of offsets, 
and in particular total aerospace employment, peaked in 1989, 
as Mr. Johnson mentioned. Approximately one-half million jobs 
were lost between 1989 and 1995, which was the last trough in 
this industry. Employment recovered for a few years, but it 
peaked in April 1998, which I think it is important for us to 
note today. This is shown in my new figure A, which is included 
in the text of the testimony itself.
    There are several major reasons why employment declined in 
the past. Between 1989 and 1995, there were three major 
factors. Decline in defense sales accounted for about half of 
the job losses. Outsourcing, which includes the effect of 
offsets and all other forms of increasing import of parts and 
components, accounts for about 6 to 10 percent of job loss in 
that earlier period. And productivity growth accounted for the 
rest.
    In the past year, the Asian financial crisis has been a 
very significant cause of employment loss in the industry. 
Economy-wide, we have lost over 440,000 jobs in manufacturing 
since April 1998. In aerospace alone, we have lost 29,000 jobs 
in this period, as shown in figure A in my testimony.
    Offsets contribute to both commercial and military job 
losses in the aerospace industry. One important measure of the 
impact of outsourcing is the ratio of imported engines and 
parts to total aircraft sales. That is, commercial and military 
sales. This is shown in figure 4 in my appendix, which you may 
want to look at briefly. You will note that shows a very 
steadily rising trend of foreign components essentially to U.S. 
aircraft sales. It has gone up almost every year for the past 
decade. It has doubled in the last 10 years or so, and this 
growth ratio has accelerated in the last 3 years. This ratio 
essentially is a measure of the foreign content of U.S. 
aircraft. It is quite rough, but it is an approximation of that 
measure.
    Now, in the NRC paper, I estimate the likely threats to 
future employment in the industry. To save time, I will just 
note that we are going to lose perhaps as many as 45,000 jobs 
in the next 15 years or so to outsourcing, perhaps twice that 
many to increased foreign competition, principally from Airbus, 
for a total loss of about 123,000 jobs, about 15 percent of 
employment in the industry.
    Let me move quickly to my policy implications section to 
save time for discussion.
    Given these estimates of future job loss, I think that this 
industry is at great competitive risk. I think it is important 
for us to craft a policy that includes offsets, but goes beyond 
to look at the broader issues of industry competitiveness for 
the reasons explained in the NRC paper. Domestic and foreign 
producers are caught in what economists refer to as a prisoners 
dilemma with respect to offset agreements in particular. When a 
foreign customer demands an offset in exchange for a sale, 
firms feel they have to comply or risk losing contracts. They 
are engaged in a desperate race to the bottom that will 
accelerate the transfer of jobs and technology to foreign 
producers.
    There are several ways to attack this problem. First, I 
think the United States and European Union should, on a 
bilateral basis, agree to restrict the use of offsets, perhaps 
through an extension of something like the Foreign Corrupt 
Practices Act.
    Second, I think the United States and the E.U. are raising 
the stakes in the aerospace battle. We have seen a number of 
conflicts in the last year in issues like aircraft noise, new 
subsidy programs and so on. I think we may be approaching a 
time where we have to consider something like a market share 
agreement with the E.U.
    Finally, I think we have to expand the treatment of offsets 
in the WTO. Currently, government offset requirements are 
prohibited. I believe that we also have to restrict firm-to-
firm offset requirements. It is private offset agreements, 
because the line between public and private firms has become 
extremely blurred, in areas like East Asia and China in 
particular, where we are dealing with essentially government-
owned companies. I will close at that point. Thank you very 
much.
    Mr. Mica. Thank you.
    [The prepared statement of Mr. Scott follows:]
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    Mr. Mica. We will now hear from Mr. Owen Herrnstadt, 
director of international affairs, International Association of 
Machinists and Aerospace Workers. Welcome, and you are 
recognized.
    Mr. Herrnstadt. Thank you very much, Mr. Chairman.
    The International Association of Machinists and Aerospace 
Workers represents workers in a variety of industries, 
obviously aerospace and manufacturing playing a significant 
role in our membership. Given the nature of these industries 
and the negative effects that offsets are having and will 
continue to have on our members in these and other industries, 
the IAM has, for several years, been concerned about the use of 
offsets by U.S. industry. Accordingly, we are grateful, Mr. 
Chairman, for your invitation to appear before you today, and 
we are especially grateful for the excellent work that 
Congressman John Tierney has done in this area.
    Offsets create a serious threat to workers throughout U.S. 
industry, particularly workers in the aerospace industry. 
Indeed, the transfer of production and technology abroad has 
had and will continue to threaten U.S. workers as their jobs 
and the production techniques they have developed as workers 
move to other countries.
    While more information is needed regarding offsets, what we 
do know about them is highly disturbing. Indeed, the little 
information that we have should raise alarms for anyone who is 
interested in maintaining and expanding the success of the U.S. 
aerospace industry. Research clearly indicates that offsets 
dominate the defense aerospace industry. Research also 
indicates that in attempts to satisfy offset demands, U.S. 
contractors are becoming more and more creative. More and more 
jobs will be sacrificed in the future to offset demands by 
other countries. In addition, studies have concluded that 
offsets have contributed to the ability of other countries to 
establish their own industries which in turn compete with U.S. 
companies, and this trend will become more problematic in the 
future.
    Finally, in addition to employment issues, as Senator 
Feingold mentioned at the outset, offsets also raise serious 
concerns about our national security. Let me briefly explain 
some of these points.
    First of all, as we all know, offsets are direct in nature, 
indirect in nature, and I will add a third category, voluntary 
at times, as more and more companies voluntarily look for 
marketing schemes. They are extensive. The Bureau of Export 
Administration reports that an overwhelming number of offsets 
involve aerospace products, and they are growing.
    While we know that offsets are extensive, we also know that 
inadequate reporting requirements concerning offsets and all of 
their variations prevent us from knowing exactly how widespread 
they are.
    Aerospace workers have suffered huge job losses over the 
past several years. As reported many years ago, in work done by 
my colleague on this panel, Rob Scott, between 1989 and 1995, 
over 500,000 jobs were lost in the U.S. aerospace industry, and 
1 million jobs were lost in related industries. The AIA's own 
statistics report that in 1989, 153,500 workers were employed 
in the production of aircraft engines and parts, but by 1998 
the numbers of aerospace workers in that category had dropped 
to 103,500.
    Estimates predict that over 200,000 jobs in the U.S. 
aerospace and related industries will be lost in the future, 
with offsets accounting for several thousand of these jobs 
directly related. To make matters worse, these estimates don't 
reflect all of the indirect offsets, all of the unrelated 
industries that Senator Feingold mentioned during his 
testimony, as well as all of the convoluted voluntary marketing 
schemes that are taking place.
    Of course, there are many reasons for the job losses that 
have occurred and will occur. However, given the importance of 
the U.S. aerospace and related industries to the Nation's 
economy, the staggering job losses that workers have suffered 
and the significant job losses that economists predict they 
will suffer, any factor that could prevent or mitigate these 
losses should be carefully examined. Offset policy is a key 
factor that could help limit losses and should be made a 
priority.
    Let me refer to my statement to refer to industries that 
have suffered a decline in offsets and ask the question, ``will 
the U.S. aerospace industry follow suit?'' Without a national 
comprehensive policy on this issue, that could happen, and that 
is why the IAM has urged government, for several years now, to 
initiate a national comprehensive policy on this issue; to 
establish a permanent review committee that would be made up of 
members of labor, academia, government and, of course, industry 
to discuss these issues, to figure out ways we can look at 
outsourcing, subcontracting, tech transfer, production 
transfers, licensing procurement, research and development and, 
of course, information gathering; and also to advise on 
multilateral and bilateral negotiations regarding offsets, 
particularly with the World Trade Organization and other 
international arenas.
    Calling offsets a nuisance is unacceptable to the thousands 
of U.S. workers, their families and the communities where they 
live that have suffered from these losses. We need to take 
action now as a government. It is government's responsibility. 
Thank you.
    Mr. Mica. Thank you for your testimony.
    [The prepared statement of Mr. Herrnstadt follows:]
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    Mr. Mica. I thank all of our panelists for their 
statements.
    First I have a question for Mr. Johnson. What happens to a 
company that fails to fulfill its offset requirements, and how 
enforceable are offsets?
    Mr. Johnson. Offset agreements will frequently have some 
financial penalty that will be imposed on a company for not 
completing its offsets. Quite frankly, I don't know of any U.S. 
company that has paid such liquidated damages. Generally, if 
there is a problem fulfilling them, you normally renegotiate 
the offset agreement because the country is not interested in 
getting paid a financial penalty, they are really interested in 
obtaining some kind of tech transfer or new capability they 
don't have.
    Companies do have contractual legal arrangements which 
would involve financial penalties. But, in point of fact, I 
don't know of any company that has ever paid one.
    Mr. Mica. We heard Senator Feingold talk about one of the 
things that he helped institute legislatively, but what has 
been the effect of prohibitions against the third-party 
incentive payments in offset negotiations?
    Mr. Johnson. Probably very little in that that was--in over 
a decade of reporting, this is the only case of this sort of 
smoking gun that I know of, and it happened in a very narrow 
market where the buyers and sellers are extremely few. And we 
urge offset managers to avoid those situations when we have 
meetings of offset managers because you like to see indirect 
offsets spread about, just like you like to see normal trading 
relations.
    If anything, it may have slightly increased real offsets. 
One of the practices that had occurred in the past, there were 
several operators who would look at normal companies that 
imported a great deal, a Pier One, for example, find out what 
they were importing from a country like Thailand, and who had 
an offset obligation in Thailand. You would go to the company 
and say, for 2 or 3 percent, I can get you a large offset 
obligation liquidated. They would go to Pier One and say, I can 
buy down what you are already doing for 1 percent, and 
basically nothing whatsoever would happen except a company 
would get a lot of offset credit. Nothing changed in the real 
world. The Feingold rule basically knocks those guys out of the 
picture. So you probably have more real offset now than when he 
passed his law, in point of fact. A law of unintended 
consequences.
    Most offset doesn't involve financial stimuli. It involves 
basically the ability to bring a buyer and seller together. 
When you have companies that do $20, $30, $40 billion a year 
with extensive networks around the world and a lot of offsets 
accomplished by offshore activity that never would have 
affected the United States at all.
    Mr. Mica. Additionally, we have had recent or offset 
reporting requirements. Can you tell us how they have affected 
industry?
    Mr. Johnson. As I said in my statement, we have no problem 
sharing with the government information as to what we are 
doing. What we do have problems with is sharing with a broader 
public which basically, unfortunately, sets new thresholds. 
When the Commerce Department comes out and says that the 
average European demand for offsets is 100 percent, it is hard 
for a country in Latin America or Southeast Asia to ask for 
less because the United States Government is saying that is 
what the new minimum is.
    I don't know how you get around that. Part of the job of an 
offset manager is to make an offset look as attractive as 
possible to the foreign customer with as little effort as 
possible, but the percentages are going to look high, and they 
are going to tell everybody else that is the percentage that 
you should be shooting for. In terms of practices of the 
industry, probably very little. In terms of raising offset 
demands, it probably has had some impact.
    Mr. Mica. Dr. Scott, you kind of linked offsets to job 
losses in your testimony, and you have a significant number of 
charts and data that you submitted, but isn't it true that we 
have had job losses in the aerospace and defense industry 
primarily from downsizing; if you looked at where we are losing 
jobs, downsizing in the defense industry, that is one. And 
then, two, you could probably trace most of the other job loss 
to Airbus, which has now become a big player and taken Boeing 
and some of the other aerospace business away from us.
    Can you give us any hard numbers as to what offsets in both 
defense and commercial we could tie to lost jobs?
    Mr. Scott. It is difficult to develop hard numbers because 
we don't have any hard statistics on the exact volume of offset 
transactions, particularly in the commercial sector. This is 
one reason why in my various reports I have supported proposals 
to begin to collect data on offsets in the commercial sectors. 
So, in the absence of that kind of data, it is very hard. Thus 
I have developed estimates based primarily on this information 
in figure 4 that I discussed in my testimony which show the 
increase in the share of imports of parts and components 
relative to U.S. production of military and commercial 
aircraft. And in the absence of hard data, I think that is the 
best proxy for measuring the effect of offsets and other forms 
of outsourcing on employment in the United States.
    Mr. Mica. I am not sure if it was Mr. Johnson or Dr. Scott 
who said that they favored no statutory or other limits imposed 
by Congress. Who had the list? Was that you?
    Mr. Johnson. I would--certainly we would oppose, but I 
think what my colleagues----
    Mr. Mica. Who wants to own up to that statement?
    Mr. Johnson. We argued that there should be no unilateral 
effort by the U.S. Government in terms of imposing restraints 
on U.S. industry which would not be imposed on our competitors, 
but I think my colleagues probably agree with that to some 
degree.
    Mr. Mica. I see some disagreement. It is very difficult 
sometimes when they have purchase agreements or manufacturing 
agreements because you want to manufacture some of those goods 
in their country, and in most cases it is their money. When it 
is our money, it is a different story. When you get into the 
question--and some of you raise the point about the technology 
transfer, sometimes they want technology transferred as part of 
the deal. Don't you think we have a responsibility, given, say, 
the China incident--again, someone raised that--to impose some 
limits and to put some restrictions on technology transfers? We 
will start with Mr. Johnson.
    Mr. Johnson. It should be pointed out, in the first place, 
that any technology transfer that is of military significance 
must have a license from the State Department. Companies cannot 
transfer technology as part of an offset or as a straight 
commercial deal without going through the Department, which is 
referred almost invariably to the DOD. Any technology transfer 
from a security perspective has been approved by the U.S. 
Government.
    Mr. Mica. And there are adequate protections in place, you 
feel?
    Mr. Johnson. We believe so.
    Mr. Mica. Dr. Scott.
    Mr. Scott. I would make two comments. First, I want to 
carefully distinguish restrictions on--unilateral restrictions 
on offset agreements and multilateral restrictions. I would 
tend to agree with Mr. Johnson. I think unilateral restrictions 
could be counterproductive, but I think multilateral 
restrictions where we both agree not to engage in destructive 
behavior, say, the United States and Europe, would be in our 
interest. That is the first point.
    And I think that with respect to the question of 
technology, even in the commercial sector, our European 
counterparts argue that there are indirect benefits to 
commercial R&D that flow out of defense spending.
    I think there certainly are some overlaps there. So I think 
even in the commercial sector, where the commercial industry 
might argue that it is their technology to give away, we have a 
national interest in control of that technology, and I think we 
should be looking carefully at that question.
    Mr. Herrnstadt. I think you have raised a very good point. 
I think there are two questions when it comes to unilateral 
restrictions on offsets. One is, we don't even know what we are 
talking about yet in terms of the exact information and data, 
so we need to start with that, before we can come to those 
hard-core conclusions.
    Two, we need to know exactly what we are talking about in 
terms of unilateral activities regarding this issue. Offsets 
have a very broad definition. Some have included things like 
outsourcing, subcontracting, licensing procurement, which has 
already been mentioned, research and development, export sales 
and financing, and many, many other topics. So each of those 
needs to be looked at to find out what is best for the U.S. 
worker, at least from our viewpoint, when it comes to those 
issues.
    If I could be so bold just to make one response to the 
first question you asked about the job losses, one of the areas 
that is very undercounted, is the effect that job losses have 
had from the subtier producers. The Bureau of Export 
Administration has some very fine anecdotal evidence regarding 
subcontractors who have been very hard hit by offsets. 
Presumably when they are hard hit, their work force is also 
hard hit. So when we are talking about job losses, we need to 
look at the entire labor market and the labor economy.
    Mr. Mica. Mr. Herrnstadt, if you would permit me just a 
quick followup, you wrote an article recently, the Role of the 
U.S. Government in Setting Offset Policy, and you pointed out 
that there is a serious lack of current and accessible 
information on offsets; and then you go on to explain that 
information about offsets is also very difficult to obtain.
    How do we obtain the information? How do we get a basis to 
make judgments on? Again, this goes back to--you just answered 
the first question, but you left sort of a blank here about 
what we do as far as laws and regulation in this area. And Mr. 
Tierney wanted an answer to that, too.
    I could go into more depth and, in fact, I will let him 
finish the rest of the question, but we are here trying to see 
what we need to do as far as Federal policy, and that is where 
we need your recommendations. So if you could elaborate, and 
then I will just recognize Mr. Tierney.
    Mr. Herrnstadt. OK. Would you like me to go ahead?
    Mr. Mica. Yes. On his time.
    Mr. Herrnstadt. In my written statement, I point out that 
one of the things a commission would do, one of the things 
Congress could do is look at more detailed reporting 
requirements in terms of Federal procurement. There could be 
more detailed reporting requirements for export sales and 
financing issues. Those are the types of things that need to be 
looked at to compel prime contractors to report more specific 
data, not only in terms of offsets in their broadest 
definition, but also in terms of how they affect the subtier 
producers on that.
    Mr. Mica. Mr. Tierney.
    Mr. Tierney. Thank you. Tell me, what now is required to be 
reported to the Commerce Department with regard to these 
offsets?
    Mr. Herrnstadt. Well, Congressman, I think there is someone 
from the Commerce Department that is testifying next, and they 
will probably have more specific information about that. I am 
aware of the information that the Bureau of Export 
Administration has now put out, I believe for 3 years, which is 
a very good, but obviously, it is very difficult to find out 
where the specific offset is, how it has specifically affected 
workers and, also, how it specifically affected the entire 
network of not only subtier producers, but also those that are 
in industries that normally one would think would be unrelated 
to the actual aerospace activity.
    Mr. Tierney. I would just make the comment that we have had 
a number of subcontractors contact our office and tell us that 
they are just horrified by the situation of losing contracts, 
but they are also afraid to come forward, frankly, because they 
have to maintain a relationship with people in the industry and 
they do not want to lose what remaining work they have. So we 
are stuck, in a number of cases, with anecdotal evidence of 
what is going on, and in fact, in some instances where 
contracts have been stopped dead in their tracks--a 3-year 
contract ended after 1 because a situation arose--if they are 
going to keep any work at all, they can't really complain and 
come forward and testify here.
    Mr. Johnson, right now, as I understand it, U.S. companies 
are not required to provide copies of their transaction papers 
to the Commerce Department. Is that accurate?
    Mr. Johnson. What we provide to the Commerce Department on 
an annual basis is a record of every transaction over $100,000 
to help implement an offset agreement.
    Mr. Tierney. But you needn't provide copies of those 
transaction papers; it is just whatever you say it is in the 
form that you want? So that none of the sales contracts, none 
of the written offset agreements or the related paperwork ever 
goes to Commerce?
    Mr. Johnson. That is correct.
    Mr. Tierney. But they do go to the other government that 
you are dealing with?
    Mr. Johnson. The guy that has bought the product in the 
first place, correct.
    Mr. Tierney. They get all of that reporting. And the U.S. 
companies are not required to give the Commerce Department 
copies of the reports that you prepare for the foreign 
purchaser either? You have a particular form that you prepare 
for them in addition to the documentation?
    Mr. Johnson. Every offset agreement will require different 
reporting--some annual; some will run into the hundreds of 
pages of print-out pages per quarter, and that is why we agreed 
with Commerce on a threshold so that we will be looking only at 
those transactions which at least had some dollar value of 
importance. I would argue even a $100,000 transaction, if it 
were at all critical, we should probably put the Marines at 
that installation because it is the jugular of the United 
States. This is an industry of $140 billion, so when we start 
getting down to the $100,000 transaction----
    Mr. Tierney. But whatever limit you set to start reporting, 
it seems to me that it would be worthwhile to have copies of 
the sales contracts, the offset agreements and other related 
paperwork go to the Commerce Department.
    Mr. Johnson. Well, you could do that, but it won't give you 
a context to put those in.
    Mr. Tierney. Well, then the report that you give to the 
other country or the other customer, that would be helpful too.
    Mr. Johnson. But what it doesn't tell you, Congressman, is 
that the F-16 line would be shut down altogether today if it 
weren't for exports, that the F-18CD line will shut down.
    How do you put that in the context of what you are 
providing for offsets? There would be no assembly line, no work 
for subcontractors whatsoever. That is not in those reports 
that we give to the foreign businesses, so that you have to 
have some----
    Mr. Tierney. Could I interrupt you for a second? It is your 
contention that there would be no work left for us if we didn't 
do offsets?
    Mr. Johnson. There are a number of lines that are open only 
because of exports. The U.S. Air Force only bought something 
like 12 airplanes last year, fighter aircraft.
    Mr. Tierney. We have enough in the budget to buy a zillion.
    Mr. Johnson. The point is, we would not exist without 
exports; it is as simple as that.
    Mr. Tierney. Exports that come with offsets?
    Mr. Johnson. They almost all come with offsets, sir.
    Mr. Tierney. So this thing has grown to the point where you 
don't make a foreign sale without having offsets involved?
    Mr. Johnson. Generally, that is correct.
    Mr. Tierney. And we can't really tell what effect it is 
having on our economy unless we get more information, and you 
object to more information being given?
    Mr. Johnson. What we object to is publicizing it. We also 
argue that it doesn't make sense to have one kernel of 
information if you don't have a context to put it in.
    Mr. Tierney. Why can't Commerce put it in context? They are 
capable people.
    Mr. Johnson. We have spent 20 years. You can ask the DOD 
guys when they come up----
    Mr. Tierney. You mean the Commerce people?
    Mr. Johnson. No, the Defense guys for years have tried to 
track that, and indeed this shop in Commerce, you try to look 
at subsectors of the industrial base to see what is domestic 
content, what is foreign, and it is almost impossible in 
today's economy. It is just too complicated.
    Again, one's guess, and I think my--is that offsets occur 
within the $8 billion to $9 billion worth of military exports 
in the aerospace industry. They have held reasonably constant 
over the last 10 to 15 years, they are actually going up a bit 
this next couple of years, I suspect, in a $140 billion 
industry.
    It is very hard to wash out the $2 billion or so in offset 
obligations activity which Commerce reports each year. 
Basically, they are reporting about $2 billion in offset 
obligations in a $140 billion industry. Now, how you 
disaggregate what each subcontractor deal might have in the 
overall nature of our industry, it would be very hard without 
having some information other than just what is going on with 
this $2 billion.
    Mr. Tierney. Mr. Scott, what would you need?
    Mr. Scott. Well, I think we need more case studies, 
actually. I think that it is a complicated issue. I could 
recommend one to you by Professor Watkins from Lehigh 
University that was included in this NRC volume, that we all 
participated in, that was published earlier this year.
    Mr. Tierney. You are going to tell me now what you 
specifically think ought to be reported to Commerce so that we 
can determine----
    Mr. Scott. Yes. Let me get right to the point. In addition 
to the defense offset information, we ought to be collecting 
information about commercial offices.
    Mr. Tierney. What information should we collect and how 
should we collect it?
    Mr. Scott. I think, as Mr. Herrnstadt suggested, that any 
time there is government financing involved, we ought to 
require that any offset transactions ought to be at least 
reported, if not, as perhaps you suggest, have the actual 
documentation submitted as well. So I think that would 
certainly advance our knowledge of the issue.
    Mr. Tierney. Mr. Herrnstadt, would that be enough for you?
    Mr. Herrnstadt. Well, I think that would be a good start. I 
think ultimately what we would want to know is anything where 
taxpayer money is used to fund any offset in any form, whether 
it is defense-oriented or commercial-oriented, we would want to 
know the effect that has on the actual U.S. work force that is 
involved in any way in that offset.
    Now, in terms of putting that together, that package 
together, that is something I think we need to think about in 
more comprehensive terms, and we need to get many more people 
together to figure out exactly how we can do that. But that way 
we can get a clear picture about exactly what is going on in 
this system that is becoming wildly out of control, and we 
don't know comprehensively where everything is going, what the 
impacts are on all different aspects.
    Mr. Tierney. It seems that everybody agrees that most of 
the defense reduction job losses occurred between 1989 and 
1995, and the statement was also made that the foreign content 
now in many of these aerospace products has doubled in the last 
decade or so. Is that a fair indication that these offsets in 
outsourcing and work like that are in some combination having a 
tremendous adverse effect on jobs?
    Mr. Scott. I would certainly agree that, yes, the offsets 
in outsourcing are having a tremendous impact and will have 
more so in the future.
    Mr. Tierney. And Mr. Herrnstadt, is that your impression? 
How do you separate out the two, the outsourcing versus the 
offsets?
    Mr. Herrnstadt. I think they are very difficult to 
distinguish, very difficult.
    Mr. Tierney. Now, is there any concern--Mr. Johnson, I 
suspect that you are not overly concerned about this from your 
testimony, but is there any concern about the fact that the 
aerospace industrial base that we have around here may be sort 
of being dissipated through this process, and that we have a 
national security interest in trying to find out the adequate 
amount of information on that angle, too?
    Mr. Johnson. All I can do is point to the statistics that 
even with the reduction of over--of 60 percent in defense 
procurement, we are producing today in real dollars what we 
were producing 10 years ago, and exports have doubled as a 
percentage of what we are producing. That is not a litmus of a 
sick industry or a litmus of one that can't hold its own 
competitively.
    Yes, foreign content, we quibble over the percentages, I 
think because a lot of it has to do with Rolls Royce engines 
coming in and going back out on Boeing airplanes, but the fact 
is that exports have also doubled as a percentage of what we 
produce and, therefore, it is not entirely surprising that you 
would have an increase in foreign content.
    Mr. Tierney. So when I see folks at General Electric in 
Lynn, who are some of the best workers in the world in this 
area, and they are in fear of losing their jobs and they see 
things like that Korean contract that I talked about, it is not 
to worry?
    Mr. Johnson. I can sympathize with the chaps at Lynn, but I 
would also note that were it not for those exports, a lot more 
of them would be on the streets. They primarily make military 
engines up there.
    Mr. Tierney. Unless, of course, we did something about this 
offset business, we might get back to where we want to be.
    Mr. Johnson. If you could wave a magic wand and make other 
parliaments not concerned about spending their taxpayers' money 
on imports, there wouldn't be a problem.
    Mr. Tierney. We have a situation where--you take the 
European people, this is a jobs thing for them. They need a 
product that we make and they don't make in a lot of instances, 
so the deal is, they want to buy it from us. But they want to 
be able to tell the folks back home the reason they had to buy 
a superior product from the United States was so that they 
could have jobs; and they spin it that way.
    You mean to tell me that we can't deal with that issue? I 
mean, it seems to me we are making a superior product and we 
ought not to have to bargain where we give them jobs, and 
technology to boot on top of that. It should be quality, price, 
and drive the bargain.
    Mr. Johnson. That would be wonderful in an ideal world, if 
they were private consumers, but just as I don't think you can 
identify a single major DOD purchase from offshore that has not 
had a U.S. prime and been produced in the United States----
    Mr. Tierney. The difference being that we have a product 
that they need, and they don't have anything comparable in many 
of these instances. They would like to have that kind of 
leverage.
    Mr. Herrnstadt, I see you are nodding over there. We have 
that kind of leverage where we make the superior product that 
they need, so why are we also giving them jobs in technology in 
this thing?
    Mr. Herrnstadt. I think you have asked a very poignant 
question. I think--there are two comments that come to mind. 
One is, we do not know that if it weren't for the offset, we 
would not make the sale. After all, the things that we make in 
the aerospace industry here in the United States are quality. 
They are the best in the world. That is why the U.S. aerospace 
and related industries have become the success, the world 
leaders that they are.
    The second is, the whole issue of engaging in both 
bilateral and multilateral negotiations regarding offsets. 
There are a limited number of engine makers and airframe makers 
throughout the world. There are world trade organizations in 
the world that do put restrictions on different types of trade 
requirements. Those also need to be focused on, so that we can 
take care of what some people call a nuisance, others call a 
real threat.
    Mr. Tierney. Now, the comment was made, too, that if we are 
going to do that, if we are going to start addressing this, we 
might be in a bad position because we have requirements like 
Buy American and things of that nature. What is your impression 
of that? Are we going to have to put something on the table and 
walk away from some other policies in order to try to have 
these multilateral and bilateral agreements that address 
offsets and hopefully eliminate or reduce the impact?
    Mr. Herrnstadt. I think the first thing we need to do 
before we even get to that question is to look seriously at the 
offset issue in terms of a multilateral negotiating stance. I 
mean, I have here a copy of the country reports on economic 
policy and trade practices from March 1997, talking about the 
Netherlands, and there is an actual subsection for offsets for 
defense contracts where there are well-defined policies in 
other countries which specifically, specifically look at 
offsets. That is where we need to start. That is what we need 
to start looking at first.
    Mr. Tierney. Thank you. I am going to defer to Mr. Gilman, 
who is very patient.
    Thank you for your patience.
    Mr. Mica. Thank you. We will get back to you, Mr. Tierney.
    The gentleman from New York, Mr. Gilman, you are 
recognized.
    Mr. Gilman. Thank you, Mr. Chairman.
    I ask all the panelists, what would you say if we outlawed 
offsets?
    Mr. Johnson. I take it if you outlawed offsets--and this 
perhaps gets back to one of the points Mr. Tierney made. The 
Europeans, who are the largest demanders of offsets, 
particularly in terms of military; this is a region with 12 
percent unemployment, which has also had a shrinking defense 
industry.
    They have two other choices than buying American with 
offsets: One, they produce it themselves even if the quality 
might not be as good; and second, they have the alternative of 
not buying anything.
    As we noted in Kosovo, one of the reasons we had to take 80 
percent of the burden is because the Europeans don't buy very 
much. They cut their defense budgets more rapidly than we did. 
They don't have to buy American. They have two other 
alternatives. In the case of the Apache helicopter to the U.K. 
or to the Netherlands, the alternatives were buying the German-
French attack helicopter or not buying an attack helicopter. 
And I think what you would find, Congressman, if we were to 
outlaw offsets, you would see our defense exports drop by 40, 
50 percent, and you would see our European allies even less 
prepared to work with us in the next combat.
    Mr. Gilman. So you are willing to live with the offset 
problem?
    Mr. Johnson. Absolutely, as a better alternative than any 
other alternative we can come up with.
    Mr. Gilman. Mr. Scott.
    Mr. Scott. I am not willing to again unilaterally outlaw 
offsets. I think that could have negative consequences for U.S. 
trade, U.S. exports. But I think a multilateral restriction on 
offsets would certainly help producers in both the United 
States and Europe, both in terms of employment and technology.
    Mr. Gilman. Dr. Herrnstadt.
    Mr. Herrnstadt. We need to do much more work on offsets to 
find out exactly what they are before we think about the topic 
you are talking about. Exactly what are the offsets? We need to 
know the impact on them, and then we need to know what it is we 
need to do as a Nation. We need to develop a comprehensive 
national policy on this issue.
    Mr. Gilman. What sort of a policy do you recommend?
    Mr. Herrnstadt. Well, I think we need to look at whether or 
not offsets in all of their many forms--commercial, defense-
oriented, direct, indirect, voluntary marketing schemes--how 
they actually affect the U.S. work force; and we need to figure 
out what works and what doesn't, what will maintain the U.S. 
work force and expand the U.S. work force and expand the 
success of an industry like the U.S. aerospace and related 
industries.
    Mr. Gilman. Well, assume that you find it affects the work 
force. What kind of a recommendation would you make?
    Mr. Herrnstadt. Oh, I think then we need to figure out 
exactly what it is we need to do to resolve the issue, and I 
think----
    Mr. Gilman. That is what we are asking. How do we resolve 
the issue?
    Mr. Herrnstadt. That's right. And that is why we have urged 
this high-level commission where we can get everyone together, 
to get all of the information that is possible, to look at all 
of the nuances, all of the different aspects of offsets on 
this. When offsets end up sacrificing U.S. jobs and technology 
overseas, then we need to do something about that, to curtail 
that.
    Mr. Gilman. Assume we do apply some restrictions on 
offsets, if you find it affects jobs, and we get the EU and 
other nations to agree, how do we enforce that kind of a 
restriction?
    Mr. Herrnstadt. Well, I am no expert on the World Trade 
Organization, but one suggestion would be to look at the 
remedies or enforcement provisions of the WTO and other 
international trade bodies.
    Mr. Gilman. Dr. Scott, do you have any suggestions, 
assuming there is an agreement on restricting offsets? How 
would you enforce----
    Mr. Scott. In addition to working through the WTO, I think 
we could also rely on--to some extent on self-enforcement. The 
Foreign Corrupt Practices Act has been in place for a number of 
years. It has, I believe, successfully reduced bribery in 
international transactions.
    I think in the same way, if the United States and Europe 
agreed to outlaw offset agreements, or to restrict them in some 
very specific way, that each country or region could be relied 
on to enforce its own agreements in its own region.
    Mr. Gilman. Mr. Johnson, why are you objecting to 
publishing an offset agreement?
    Mr. Johnson. Simply because you are providing a cookbook to 
every other guy that is out there wanting offsets. As I have 
said, we don't have a problem working with the government and 
sharing with our own government that information. What we 
dislike is sharing that information with 80 other governments 
who demand offsets.
    Mr. Gilman. Essentially, you don't like offsets; is that 
correct?
    Mr. Johnson. We don't like having the U.S. Government help 
escalate the demands of offsets around the world by providing 
every demander the best practices of demanders for offsets, 
which is essentially what publishing this kind of information 
does. It provides every other finance ministry, economics 
ministry and defense ministry a look at what is the most people 
have extracted out of the United States, and that is our new 
bottom line where we start from. That is the problem. Just as 
we don't want to publish our proprietary manufacturing data for 
every competitor to look at, we don't have much interest in 
publishing our offset data for every consumer to look at.
    Mr. Gilman. Well, Mr. Johnson, would the industry prefer to 
restrict offsets rather than keep escalating the offset 
problem?
    Mr. Johnson. No. We just don't want the U.S. Government to 
help in that escalation process. This is one of those cases 
where industry will take care of itself, I think, for lack of 
any other alternative.
    Mr. Gilman. But the industry hasn't taken care of itself 
apparently, and with all of the projections of job losses, it 
would seem to me, the industry would be more interested in 
finding a solution rather than just keeping from publishing.
    Mr. Johnson. All I can say is, we are still the single 
largest net exporter in the United States of any industry. That 
is not the sign of an industry that has self-destructed. Any 
other industry in this country would envy our record.
    Mr. Gilman. Just one concluding statement from each of you. 
What should the U.S. Government do about offsets?
    Mr. Johnson, what should we do? Apparently you are saying, 
nothing.
    Mr. Johnson. Certainly, we can continue private discussions 
with our government. You are only talking about 40, 45 
companies that are involved in the bulk of international trade 
in defense products, which is where most of the offsets are. We 
do some of that now. We could do more of that, sitting down 
with our government and talking about what our practices are. 
They could tell us a bit about what sectors they are 
particularly worried about. We have asked for 10 years for that 
kind of information from the U.S. Government and never received 
it.
    Tell us where you think the problems are and we will try to 
avoid doing offsets in those sub sectors. No one has ever given 
us any of that kind of information. Start at the bottom up 
rather than the offset down. Certainly, you can jaw-bone our 
allies and try to put some kind of lid on offset demands. But 
as long as we, by and large, demand that everything we buy from 
offshore in the military arena be produced in the United 
States, it is going to be very hard to convince the Europeans 
that offsets are a bad thing.
    Mr. Gilman. Dr. Scott.
    Mr. Scott. I believe that we need to create a national 
aerospace commission, or executive council within the National 
Economic Council, that is responsible for monitoring this 
problem and also for monitoring the broader competitiveness of 
the U.S. aerospace industry.
    I think we have to recognize that there is a difference 
between a national interest in jobs and technology and the 
interests of many of the producers of these aircraft systems. I 
think we have to be aware of that when we develop policy. It 
may be in the interests of the aerospace industry to export 
jobs and to engage in outsourcing, in part because it increases 
their leverage with some of the labor unions or some of their 
suppliers. But this may not be in the national interest, so I 
think we have to be aware of that when we develop policy.
    Mr. Gilman. Mr. Herrnstadt, what is your recommendation?
    Mr. Herrnstadt. We can no longer relegate to private 
parties the issue of offset policy. This is a job for 
government. Government has the resources, government has the 
responsibility and the obligation to closely scrutinize this 
matter and come up, finally, with a comprehensive national 
policy for an issue that affects so many workers now and will 
affect so many more workers in the future.
    Mr. Gilman. I thank our panelists.
    Thank you, Mr. Chairman.
    Mr. Mica. Thank you. I recognize Mr. Ose, the gentleman 
from California.
    Mr. Ose. Thank you, Mr. Chairman.
    I am curious about something with respect to the offsets. 
The information that is going to be compiled and reconciled and 
analyzed and digitized and all that sort of stuff, who is going 
to collect that?
    Mr. Scott. I believe that information is currently being 
collected by Commerce and by the Department of Defense. I think 
that it needs to be channeled up to an organization like the 
National Economic Council in the White House. I believe that we 
need to have that information coordinated at a much higher 
level in the government so that it can be used for policy 
purposes.
    Mr. Herrnstadt. I agree. I think it is being collected 
currently in the Department of Commerce and elsewhere 
throughout government, but there needs to be more coordination 
through all of the Federal agencies, whether it is the Labor 
Department, Commerce, Defense Department, a clearinghouse, if 
you will, that can collect all of the information and sift it 
out and coordinate it.
    Mr. Ose. Did I understand, Mr. Herrnstadt, from your 
comment that you think we need to expand it beyond the current 
arena to include all transactions, both of a government-private 
and a private-private nature?
    Mr. Herrnstadt. I believe Dr. Scott had mentioned that.
    Mr. Ose. How big of an agency do you think we are going to 
create to compile and reconcile and analyze this data?
    Mr. Scott. Well, it is relatively simple. We have 
essentially one aerospace prime in a commercial site and we 
could ask that one company simply to supply to the appropriate 
government office the reports and agreements that it is already 
making with foreign firms and foreign governments.
    So basically this requires a copy machine in the 
appropriate departments at Boeing and a few of the other major 
suppliers.
    Mr. Ose. What about the subtier companies, for instance? Do 
they not also have to--I think my point is that if you expand 
it beyond, say, Boeing to private-to-private transactions, I 
mean, you are going to open a huge area for data collection, if 
nothing else, which probably dwarfs even the--I can't even 
conceive of the agency, the Labor Department, perhaps.
    Mr. Johnson, I would appreciate any comments you have on 
this. You referenced 45 companies being involved in these kinds 
of transactions where there is government involvement of one 
nature or another in the defense business, but what if we go 
outside, say, defense and do lumber or automobiles or oil or 
computers?
    Mr. Johnson. You would have a matrix that would make MIT 
blanch. I mean, suppose you get credit for moving X number of 
wicker chairs from Thailand to Pier One. Then, are we going to 
examine the entire worldwide wicker chair industry to find out 
what impact you had on the wicker chair people? That is the 
problem.
    When you get into direct offsets in general, what you find, 
even when Commerce looked at three areas that they thought 
might be heavily impacted offset transactions, is that offset 
activity amounted to less than 1 percent of the total activity 
of any of those three subsector industries in the United 
States.
    Even with the narrow confines of the defense industry, 
suppose you get credit for buying X number of fasteners from 
Germany for aircraft. There are hundreds of distributors in the 
United States. They, in turn, draw from fastener manufacturers 
around the world, including the United States. How do you 
figure out what impact that had on all of the fastener activity 
in the world? You would have a matrix that MIT can't handle 
with supercomputers.
    Mr. Ose. The question that comes into my mind, when I was 
building houses and I had partners in the deal, some of those 
partners also provided subcontracting services, and while I was 
sensitive to their needs, I didn't let them jab me for an extra 
3 percent just because they were my partners. If it was a 
lumber guy and his bid was the equivalent, well, then, I gave 
him the benefit of the doubt. But if he was 3 or 5 or 2 or 1 or 
anything over what the market was, I mean, it was a ``tough'' 
kind of thing.
    Now, the question I have is, I am the guy writing the check 
on these things. If I am buying it, don't I have the right to 
buy it from the person that I want to buy it from? I mean, if I 
am France buying X, Y or Z, don't I have the right to say, 
well, a component of X is going to be this?
    Mr. Scott. I think there are two answers to that. One, part 
of what they are buying was, in part, paid for by the U.S. 
Government, and that is the party who doesn't sit at the table 
in many of these transactions. We are talking about technology 
developed with government funding.
    And I think, No. 2, often parties from different countries 
play by different rules. I think we have the European 
governments intervening informally behind the scenes in the 
purchases made by private companies.
    For example, we saw a huge share in Airbus shipments to 
European producers, and the United States share there 
plummeted, I think, much more rapidly than those exchanges 
happened in the United States. I think that does reflect a 
national interest as well as the search for the best deal. So, 
I think that we have to recognize that when we get into 
international trade, the rules are different, and we need 
different policies to respond.
    Mr. Ose. Mr. Chairman, I see the red light is on and I am 
crushed. I yield back.
    Mr. Mica. Thank you.
    Mr. Tierney, did you have any additional questions?
    Mr. Tierney. I do, and I thank you for that.
    First of all, Mr. Johnson, I need to go at this one more 
time with you, because I am still puzzled.
    You are fearful, I guess, or the industry is fearful that 
if we provide Commerce with the information that might be 
necessary to sort of monitor or police what is going on, that 
offsets will escalate. How can that possibly happen? I mean, 
already exports, you have indicated, in this area has an offset 
agreement attached to it. I have been to conferences where the 
room is packed with people whose sole responsibility for the 
corporation is to devise seemingly new ways to surreptitiously, 
and I think unseemingly to go around and find ways to do 
offsets, the most creative things that many people have ever 
seen. So what are you afraid of?
    Mr. Johnson. Let me say one more time, we do not object to 
sharing some information with Commerce. Our concern is, when 
you publish it, you create a best practices for every other 
offset demander in the world.
    Mr. Tierney. They are already----
    Mr. Johnson. The other issue, I would say, as discussed 
with the gentleman from California, is that if you provided 
Commerce with wheelbarrows full of offset data, it doesn't give 
them a context to look at it in.
    Mr. Tierney. You want to say that the only people that can 
give the context is the industry?
    Mr. Johnson. No. I am just saying you have to come at it 
from the other direction. I sympathize. If you look at the 
trend across the board in industry, for example, one trend in 
automotive and aerospace, et cetera, is to slash the number of 
subcontractors as an efficiency means. How do you differentiate 
that overwhelming trend from some guys who think they were 
affected by offsets unless you know what the general trend is?
    All I am saying is that you are taking information which is 
a teeny part of our industry without having a context in which 
to put it. I don't see how Commerce can do that if--that is why 
I think it is much more sensible to start at the bottom up.
    Mr. Tierney. We are acting like we haven't already had a 
great deal of agreement on this, that offsets are not good. The 
agreement on government procurement already makes, I think, a 
pretty clear statement that offsets are not something that we 
think are great, it is market distorting, it is not favored. In 
fact, article 16.1: Entities shall not--shall not consider, 
seek or consider offsets.
    Basically, the problem with that is, we then go ahead and 
exclude it on defense. Basically we say, well, you can do it in 
defense if you say it is for your national security. But you 
and I both know, Mr. Johnson, this has nothing to do with 
national security; it is to explain it to the people somewhere 
in the European Union that they spent dollars on American goods 
and the dollars didn't go to them.
    We are fussing around with this a little bit and if we can 
prohibit offsets for virtually every other industry and just 
leave this loophole for defense, it seems to me that you could 
take another step. And if we have the information, we find out 
what we need to know about the statistics, and we go ahead and 
do it.
    We have 45 companies; presumably they have some patriotism 
in their blood. Why don't they get together and come up with 
some standards in a joint effort about what they are going to 
do with this issue, which they say is a prisoners' dilemma--it 
seems to me like a lot of unwillingness on their part--and then 
maybe work on the national government to set a policy and start 
applying it to some of these multilateral and bilateral 
agreements in coming down on that to prohibit it, as we have 
for virtually every other industry, and I don't see them 
falling by the wayside or going out of business.
    Mr. Herrnstadt, what do you say to that?
    Mr. Herrnstadt. I think you make a lot of sense.
    Mr. Tierney. That is why I asked you.
    Mr. Herrnstadt. I will even turn on my microphone.
    Mr. Tierney. I was going to ask Mr. Scott to turn his off.
    Mr. Herrnstadt. No, I think what you stated makes an awful 
lot of sense. Other countries have, as I mentioned before, 
well-developed offset policies. It is time we develop our own. 
It is also time that we stop considering this as a mere 
inconvenience or as a nuisance and look at it as the real 
threat it is. We need to be able to start with the data issues 
that you have talked about and formulate the comprehensive 
policy I have referred to before.
    Mr. Tierney. Mr. Chairman, I will stop with that. It just 
seems to me when something is an inconvenience, seldom do you 
see people hire entire staffs and fill ballrooms full of people 
that deal with this inconvenience in more creative ways rather 
than just find out how to work the system, as opposed to doing 
something constructive about it.
    Thank you.
    Mr. Mica. I thank the gentleman. I want to thank this panel 
for their contribution and also for their willingness to 
participate with us and answer questions in helping us seek 
some solutions to the problem of offsets.
    There are no further questions of the panel at this time, 
so you will be excused, and thank you again for your 
participation.
    Our third panel I would like to welcome, consists of the 
Honorable Roger Majak, Assistant Secretary for Export 
Administration in the Department of Commerce; and the Honorable 
Alfred Volkman, Acting Deputy Under Secretary of Defense for 
Commercial and International Programs with the Department of 
Defense.
    Gentlemen, as I mentioned to our first panel, I don't think 
you have been here before either. This is an Investigations and 
Oversight Subcommittee of Congress. If you would stand and be 
sworn, please.
    [Witnesses sworn.]
    Mr. Mica. Let the record reflect that the panelists 
answered in the affirmative.
    Welcome, gentlemen, representatives of the administration, 
to help us address the questions and problems surrounding 
defense offsets. As I mentioned to our previous panelists, we 
try to limit the oral presentations to about 5 minutes; as the 
red light goes on, you get about a minute to conclude. We do 
welcome any lengthy documentation or statements within reason, 
they will be made a part of the record by unanimous consent.
    So, with that, you are recognized, first the Honorable 
Roger Majak, Assistant Secretary for Export Administration with 
the Department of Commerce.
    Welcome, sir. You are recognized.

   STATEMENTS OF ROGER MAJAK, ASSISTANT SECRETARY FOR EXPORT 
    ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE; AND ALFRED 
 VOLKMAN, DEPUTY UNDER SECRETARY OF DEFENSE FOR COMMERCIAL AND 
       INTERNATIONAL PROGRAMS, U.S. DEPARTMENT OF DEFENSE

    Mr. Majak. Thank you, Mr. Chairman. I appreciate the 
opportunity to inform the subcommittee regarding the Commerce 
Department's involvement in the issues surrounding offsets in 
defense trade.
    As you know, the Defense Production Act directs the 
administration to prepare annual reports to Congress on defense 
tradeoffsets and also codifies the current policy, which was 
initiated by President Bush, of nonintervention in offset 
transactions by the Federal Government. Within Commerce, the 
responsibility for monitoring offsets has been delegated to the 
Bureau of Export Administration, with which I am associated.
    We are presently working on our fourth report to the 
Congress, which will be submitted later this summer. We 
coordinate the collection of this data and the issuance of 
these reports with the Departments of Defense, Labor, State and 
Treasury, and the Office of the U.S. Trade Representative.
    To help you better understand the scope of the offset 
issue, let me review just a few of the findings from our 1998 
report to Congress.
    New offset agreements from 1993 to 1996 total about $15 
billion. That is about 52 percent of the value of the defense 
exports involved, which were about $29 billion. So in order to 
secure $29 billion in exports, we had to give back, in a sense, 
$15 billion in offsets.
    Preliminary figures for 1997--you should keep in mind that 
our data are a couple of years behind in this area--our 
figures, preliminarily, for 1997 indicate that the average 
offset as a percentage of export value will be approaching 80 
percent, and discussions with U.S. prime contractors indicate 
that number is continuing to go up, gradually approaching 100 
percent. So we could be looking in the future at a situation 
where we are asked for $1 in offsets for every $1 in defense 
exports.
    We also measure actual transactions under these offset 
agreements. Transactions reached $9.2 billion between 1993 and 
1996; 38 percent were direct offsets, 58 percent were indirect 
offsets, and the rest were unspecified. About three-quarters of 
those transactions appeared to displace U.S. subcontracting 
work, and certainly it has been a consistent finding of our 
studies that the subcontractor base is most seriously and 
directly affected by offset requirements.
    Three-fourths of all of the offset transactions we have 
tracked involve three industry sectors: Transportation, which 
includes aircraft and aircraft parts, that is about 48 percent 
of these transactions; electronic and electrical equipment, 
which is about 16 percent; and industrial machinery account for 
about 9 percent.
    Between 1993 and 1996, over 90 percent of new offset 
agreements and transactions were triggered by U.S. aerospace 
deals, although nearly half of those offset requirements were 
actually fulfilled with nonaerospace products. Ship-building is 
an industry which appears to have been particularly hard hit by 
offsets. The machine tool industry has also been heavily 
affected, according to our figures, in the period 1993 to 1996. 
In total, more than 40 major U.S. industries, from food and 
food products to apparel, printing, stone-cutting even, have 
been hit by offsets, despite the fact that those industries 
have little or nothing to do with defense trade.
    While virtually all governments engage in offsets to one 
extent or another, five countries account for about 72 percent 
of new offset requirements, by value--the United Kingdom, the 
Netherlands, Switzerland, Saudi Arabia, and Taiwan. In the 
period that I have mentioned, 1993 to 1996, European countries 
demanded 94 new offset agreements worth about $10 billion in 
return for $11.3 billion in defense purchases. That is about a 
90 percent offset rate.
    The United Kingdom, I would note, has one of the most 
aggressive offset programs. Not only does Britain demand nearly 
100 percent offsets against their United States military 
purchases, but the British Government also has established a 
program to assist their companies meet offset requirements 
demanded by other countries.
    Canada's offset program is also quite aggressive, and is 
designed to enhance its general economic development, rather 
than its national security or defense industries in particular. 
Again, Canada tends to require 100 percent offsets, most of 
them indirect. It does so despite the fact that we offer 
special access to Canadian firms in our markets.
    Is there a better way of sharing the benefits of defense 
trade than resorting to these offsets? Probably. The 
development and production of extensive weapons systems through 
international partnerships would be a better approach, in our 
view, for example.
    Our allies have been reluctant to discuss and negotiate 
limits on offsets for a variety of reasons. I think some of 
them regard offsets as an economic win; others are responding 
to political factors; overcapacity and excess employment in the 
European defense industries have increased pressure for offsets 
in order to keep European defense facilities operating.
    So where do we go from here, Mr. Chairman and members of 
the subcommittee? Official U.S. Government policy, as has been 
noted, is to avoid government involvement in offsets and to 
actively consult with friends and allies to limit the adverse 
affects of offsets in defense procurement. We have had 
discussions over the last few years with officials of the Dutch 
Government and the Canadian Government. It is particularly 
important, I think, to make progress with the Canadians, 
because they are a part of our North American industrial base, 
and they are our closest neighbor, of course, and largest 
trading partner.
    Our objective remains to reduce and restrict offsets where 
possible. It will be difficult to stifle the demand for 
offsets, at least in the short term. It is a buyer's market for 
defense systems. We are unlikely to restrain or eliminate 
offsets by just complaining about them. We certainly will not 
eliminate them by unilaterally restricting our own defense 
contractors.
    If we are serious about further constraining offsets, I 
think we need to consider ways to increase our leverage, 
including the following.
    We need to continue our efforts at international 
negotiations on offset rules, both on transatlantic trade with 
our European allies and on Third Country markets where we 
compete with European manufacturers. As I have mentioned, 
recent discussions have indicated some receptivity to our ideas 
in this area. We need to collect accurate information on all 
foreign sourcing of parts and components and weapons systems 
down to the subcontractor level.
    Finally, Mr. Chairman, we may need to take a closer look at 
the British program. I mentioned, in passing, that the British 
Government actually assists its companies in responding to 
offset requirements in order to make them more competitive and 
to bring the demanders of offsets to the negotiating table. 
That's fighting fire with fire, which we may need to consider 
under these circumstances.
    That summarizes my statement, and I thank you for your 
patience on the time.
    [The prepared statement of Mr. Majak follows:]
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    Mr. Mica. Thank you for your testimony. We will withhold 
questions until we have heard from the Honorable Alfred 
Volkman, who is the Acting Deputy Under Secretary of Defense 
for Commercial and International Programs with the Department 
of Defense.
    Welcome, sir. You are recognized.
    Mr. Volkman. Good morning, Mr. Chairman, members of the 
subcommittee. I appreciate this opportunity to participate in 
these discussions on the subject of offsets in international 
trade.
    As almost all of our panelists have noted this morning, 
there is no consensus on the subject of offsets. Government 
agencies have a range of views on the topic, and industry 
opinion on the matter is also divided. There is no definitive 
evidence of the effect of offsets on the U.S. economy. Views on 
their effect are generally divided between those who accept 
offsets as an unavoidable cost of doing business overseas and 
those who believe that offsets negatively affect the defense 
industrial base and other U.S. interests.
    It is difficult to accurately measure the impact of offsets 
on the overall U.S. economy and on specific industry sectors 
that are critical to defense. The GAO reports that U.S. defense 
companies advised them that without offsets, most export sales 
would not be made and the positive effects on the U.S. economy 
and defense industrial base would be lost. In addition, company 
officials indicated that export sales provided employment for 
the defense industry and orders for larger production runs, 
thus reducing unit costs to the U.S. military. They also noted 
that many offset deals created new profitable business 
opportunities for themselves and other U.S. companies.
    Critics, however, charge that offsets have effects that 
limit or negate the economic and defense industrial base 
benefits that claim to be associated with defense export sales.
    In response to concerns raised by the impact of offsets, 
the President issued a policy statement in 1990 that reaffirmed 
DOD's long-standing policy of not encouraging or participating 
directly in offset arrangements. This policy statement also 
recognizes that certain offsets are economically inefficient, 
and directed that an interagency team led my DOD, in 
coordination with the Department of State, consult with foreign 
nations on limiting adverse effects of offsets in defense 
procurement.
    The Department of Defense fully supports the policies 
articulated by the Congress and the administration concerning 
the need to negotiate with friendly and allied governments to 
eliminate the harmful effects of offsets in defense trade. My 
office has been actively engaged in discussing offsets with key 
allies during our regular meetings on reciprocal defense 
procurement activities. In addition, we have cosponsored 
seminars, organized by independent organizations such as the 
National Research Council, to better understand and deal with 
the complex and growing world of offset demands in 
international trade.
    More recently, we initiated action to lead an interagency 
team, including representatives from the Department of State, 
Department of Commerce, Department of Labor, and the Office of 
the U.S. Trade Representative that has met bilaterally with 
officials from Canada and the Netherlands on the subject of the 
harmful effects of offset demands in defense trade.
    Our allies consistently tell us that they need offsets 
because they perceive that the U.S. defense market is not open 
to them due, at least in part, to protectionist legislation. In 
particular, they cite congressional reluctance to change Buy 
America and small business preference legislation. We believe 
that offsets should be considered as one, among many, practices 
that distort defense trade, and consequently, negotiating the 
offset issue by itself does not give the United States a strong 
bargaining position.
    Furthermore, officials from the defense industry have 
expressed concern about any unilateral action by the U.S. 
Government that would limit the use of offsets, stating that 
such action, as Mr. Johnson said earlier, would place U.S. 
exporters at a competitive disadvantage in winning overseas 
defense contracts.
    The Department of Defense is prepared to continue to work 
with other Federal agencies, our allies, and the defense 
industry to monitor the employment and effect of offsets in 
international trade, to ensure that U.S. Government policies of 
action or inaction do not compromise broader U.S. national 
interests. The DOD will continue to support U.S. industry 
interests when they are forced to comply with foreign 
government-mandated offsets, while working to discourage our 
foreign friends and allies from requiring offsets. However, the 
Department would be very concerned over any U.S. Government 
actions that would diminish the competitiveness of the U.S. 
defense industry or harm the Department's efforts to achieve 
military interoperability with our allies.
    Mr. Chairman, thank you very much for this opportunity. I 
am prepared to answer any questions you may have. Thank you.
    [The prepared statement of Mr. Volkman follows:]
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    Mr. Mica. Thank you. We do have a couple of questions.
    It appears from the testimony that we had from Secretary 
Majak that you have a pretty good handle on what is happening, 
of course, with defense offsets; and it appears that that is 
going to jump from 80 to 100 percent. Is that your prediction?
    Mr. Majak. It seems the trend is in that direction, Mr. 
Chairman.
    Mr. Mica. Is there anything in that area that we should 
explore as far as legislative limits, in your opinion, or is 
this something that is just bound to happen?
    Mr. Majak. Well, we share the skepticism of industry in 
setting limits by legislation in this area. I think our 
preference is to use negotiation and have flexibility to both 
respond to offset requirements and to attempt, at the same 
time, to negotiate them away, both on a government-to-
government level and on an industry-to-industry level. So I 
don't see a legislative mandate as a direction we would want to 
go, although, of course, that is the prerogative of this body, 
and it would depend a lot on what the provisions of such 
legislation might be.
    Mr. Mica. Well, you have pretty good data, and of course 
there have been some requirements on reporting. I am wondering 
if sometimes the collection of aggregate information regarding 
offsets hasn't actually provided information to countries--it 
is openly available to other manufacturers to require this. I 
mean, everybody else is getting a piece of the action. Why 
shouldn't they? Are these reporting requirements now fostering 
this increased offset requirement?
    Mr. Majak. I seriously doubt that they are, Mr. Chairman. 
As you say, they are only aggregate data.
    I have no doubt that other governments may from time to 
time, hold up a copy of the Commerce Department report and 
refer to the numbers there, but my own experience with the 
aerospace community is that they are tough and very capable 
negotiators. I suspect that they have good answers to those 
tactics on the part of the governments or customers they are 
negotiating with. I think the report and the data that we 
provide may provide some rhetorical ammunition for these other 
governments, but I hardly think that it would be a decisive 
factor.
    Mr. Mica. Another question is that if you get into the 
commercial arena, we heard the gentleman, Mr. Herrnstadt, say 
we need more information, I guess Senator Feingold said we need 
more information, data collection. But then I think we also 
heard testimony that said how difficult it is or at least a 
paper Mr. Herrnstadt published said how difficult it is to 
collect that information.
    From a Department of Commerce standpoint who is responsible 
for collecting commercial data? Is that possible and would it 
be helpful and how would you go about that?
    Mr. Majak. Well, I would say, first of all, Mr. Chairman, 
we of course would prefer strongly not to impose major new 
burdens on industry, whether the defense industry or industry 
generally, for data reporting to the Commerce Department. That 
is a principle that we try to adhere to, and it is a principle 
set forth in a number of pieces of legislation set forth by the 
Congress. So we tread carefully into new areas of data 
collection.
    Is it feasible? I would have to say, yes, it probably is 
feasible.
    We have one other example in my own bureau of collecting 
that kind of data. As you know, there is legislation 
prohibiting and restricting the compliance of companies with 
foreign boycotts, and we collect data from all companies who 
may be approached by any foreign party to participate in such a 
foreign boycott, and they are required to report to us. It is a 
major undertaking. We have to have computers and people and 
facilities to handle that kind of data.
    Could it be done? It could. It certainly is feasible. I 
think, however, at the same time, we have a good and adequate 
base of information right now based upon what the 30 or 40 
prime defense contractors provide us. I think we have a pretty 
good picture, at least of what is going on in the defense 
sector. If you need or want to expand that to all commercial 
transactions, it would be a rather large data base, and so we 
would have to weigh the benefits of doing that.
    Mr. Mica. How many people do you currently have at the 
Department of Commerce that work on the offset issue?
    Mr. Majak. Three or four.
    Mr. Mica. Would it require a substantial increase in 
personnel to expand----
    Mr. Majak. I think almost certainly it would, although we 
would hope to take advantage of economies of scale with other 
data collection facilities that we have. I think we would try 
to use some of the existing resources that we have for other 
kinds of data collection as best we could. But certainly it 
would require more than the three or four people we presently 
have working on this issue.
    Mr. Mica. In addition to manufacturing offsets, it is very 
popular, particularly in the defense area, were technology 
transfers to be made part of the deal. Currently, the 
Department of Commerce, the Department of State, the Department 
of Defense are all involved in some way, or get involved, in 
the question of export controls and technology transfers.
    Is the current system adequate in this offset transfer 
process? Are there gaps or things that we should be looking at? 
Is there something that we should be doing that is different? 
Are we going to have another embarrassment in this area, or are 
we adequately covered? And we will go to Mr. Volkman first, and 
Mr. Majak, you can be the clean-up hitter.
    Mr. Volkman. I think that the export license control 
process is very well established. I think it is generally 
effective in protecting the transfer of U.S. technology outside 
of the United States. Obviously, any----
    Mr. Mica. As it works with offsets and again some of these 
requirements that are being imposed; and it looks like we are 
going to even higher percentage. Do you think that everything 
is in place and working well?
    Mr. Volkman. In order to export the technology, an export 
license is required. If it is a military item, a request would 
be submitted to the Department of State, who then consults with 
the Department of Defense before an export license is granted. 
It is my understanding that it is a very thorough process. If 
there is a deficiency in the process, it is that it takes too 
long.
    Mr. Mica. One of the problems that you saw even in the 
China missile technology transfer is that tremendous amount of 
pressure from the private sector--we have to do the deal, we 
have to provide this technology transfer. And with an offset, 
you run into the same situation--pressure from the vendor to do 
the deal, get the technology transferred--and you see the 
little lobbying efforts that go on to move this technology.
    Do you feel pretty comfortable that we have enough 
protections in place, even though there is going to be even 
more pressure on vendors to transfer this technology, to do the 
deal?
    Mr. Volkman. Well, I think there is always pressure when a 
firm wants to make a sale, whether it is a foreign military or 
commercial sale, that the export license be granted. I think 
there is an integrity in the process that permits the U.S. 
Government to withstand those pressures.
    Certainly, that is true of the munitions license process, 
which involves the Department of State and the Department of 
Defense. I would defer to my colleague as to whether the 
Department of Commerce can withstand the pressures.
    Mr. Mica. No further disclosure information should be 
revealed in the process to shed any light on this--on what is 
taking place?
    Mr. Volkman. I don't believe that we are making any 
improper disclosures of information because of offsets.
    Mr. Mica. I am talking about disclosure where you have an 
offset involved, any further disclosure; do you think that is 
adequate?
    Mr. Volkman. Not that I am aware of. I don't know of any 
pressures for further disclosure as a result of an offset 
agreement.
    Mr. Mica. No? That we should impose any further?
    Mr. Volkman. No, sir, I don't believe so.
    Mr. Mica. OK.
    Mr. Majak. I would agree with Mr. Volkman. The Commerce 
Department administers the export licensing process for so-
called dual-use items, those that have both commercial and 
military applications; and we have a very thorough process. 
Whether the transfer is based upon an offset arrangement or not 
would be more or less immaterial to us. If the transfer of a 
technology is to be made and that technology requires a 
license, then we require and review those licenses. So it 
really wouldn't matter what the source of the transfer was, 
whether it was an offset arrangement or otherwise.
    We do see license applications in our process which involve 
transfers of technology under offset agreements. But as I said, 
we analyze those with the same scrutiny for national security 
as we do any other transfer. And I think that process is 
generally working well and reliably.
    Mr. Mica. Thank you.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Volkman, your department within the Department of 
Defense is not the primary department dealing with offset 
policy for the Department, is it?
    Mr. Volkman. Well, there is probably not a primary office. 
Within the Department of Defense, the responsibility for 
discussions with foreign nations over limiting the adverse 
effects of offsets is shared between my office and the Office 
of the Director for Defense Procurement that has a director of 
foreign contracting.
    Mr. Tierney. They wrote to us and told us that they were 
the ones within the Department of Defense, the procurement 
people, with the primary responsibility for offset policy 
within the Department. Is that accurate?
    Mr. Volkman. I would say that we share that responsibility. 
We both work for the same under secretary.
    Mr. Tierney. You have to share that with them then; they 
don't know that, just reading this, ``My office has the lead 
for Department of Defense in these matters.'' That is by Dave 
Oliver, the principal deputy of procurement.
    Mr. Volkman. That is my boss. That is correct.
    Mr. Tierney. Other industries survive quite well with 
offsets being restricted under international multilateral 
agreements. Is it your opinion that the defense industry could 
not survive in similar atmospheres?
    Mr. Volkman. I don't know the answer to that. I would echo 
the comments made previously, that it would be a dangerous 
thing to try to impose that kind of restriction unilaterally. 
Obviously, if it is going to be effective, it has to be agreed 
to by all of the participants, all of the nations that 
participate.
    Mr. Tierney. It has been agreed to in other industries 
through multilateral agreements that it would be restricted and 
eliminated. Do you see any reason that we couldn't do that in 
Defense if we came to a multilateral/bilateral agreement to 
restrict or eliminate the use of offsets?
    Mr. Volkman. I would welcome that. I would just hasten to 
say that I expect that it would be a very difficult 
multilateral agreement to achieve.
    Mr. Tierney. It wasn't difficult, apparently, in other 
industries. Why do you think that it would be difficult to 
achieve it in the defense industry?
    Mr. Volkman. My impression is that parliaments, like our 
Congress, want to see the large expenditures that are made on 
national defense spent within the borders of their country.
    Mr. Tierney. You would agree with me that there are harmful 
effects to offsets?
    Mr. Volkman. Yes, sir.
    Mr. Tierney. Mr. Majak, you also have come to that 
conclusion?
    Mr. Majak. Very much so.
    Mr. Tierney. Tell us about the economic inefficiencies that 
result from offsets.
    Mr. Majak. Well, there are a number of them. I think 
probably--duplication of facilities, manufacturing facilities, 
is probably one of the more blatant ones.
    Obviously, in defense industries, like any other industry, 
you want plenty of competition for both finished systems and 
for components, but you don't want overcapacity. That creates 
inefficiency. And I think foreign governments, in their 
eagerness to have some of these dollars spent within their own 
borders, probably do not take a very good look at what the 
global market for whatever item they are wishing to produce 
within their country might be.
    Furthermore, many of them do not have the resources to 
sustain a broad military base. So to pick one item or another 
item to manufacture, even with assistance from the outside, is 
not always an economically efficient way to proceed. That is 
why we feel that international cooperation agreements are a 
more rational process by which to determine who should produce 
what, who should invest in what facilities. That would not 
eliminate offsets completely, but it would make them more 
economically rational.
    Mr. Tierney. Do you have enough information in your 
department to give us an opinion whether or not offsets have an 
adverse effect on the labor market?
    Mr. Majak. We do not specifically analyze labor impact. 
Perhaps we should work more closely with the Labor Department 
on that. We do share our data with the Labor Department, and I 
would look to them to make those kinds of projections.
    Really, our data are confined to aggregate figures on both 
the number and the dollar value of offset agreements and the 
dollar value of implementing transactions. I mean, we can use 
some crude measures of what that might translate into in jobs. 
Personally I think those crude formulas are not very accurate, 
so I would look to the Labor Department to make those kinds of 
projections.
    Mr. Tierney. Tell me for what reason you do collect the 
data that you do collect.
    Mr. Majak. Well, I think, under the congressional mandate, 
we collect this data to develop a gross measure of the 
magnitude of the offset requirements in defense trade. That 
kind of data is not designed and doesn't give us the capacity 
to make very fine analysis of the details of these offset 
requirements except as we might find them out on an anecdotal 
basis. We are confined to dollar value of the country to which 
the offset is provided and that kind of basic information.
    Mr. Tierney. Toward what end?
    Mr. Majak. Toward the end of understanding the impact on 
trade and the impact on defense and moving toward restraining 
these activities which we have concluded are not economically 
efficient.
    Mr. Tierney. What was the foundation of your conclusion 
that these are not economically efficient, that you want to 
somehow limit them or terminate them? What information did you 
get? Was it the aggregate figures, these numbers; it is a bad 
thing?
    Mr. Majak. Well, I think both aggregate data and the 
anecdotal data that we do obtain enables us to evaluate the 
impact on particular industries. We are able to break these 
numbers down by industry and to distinguish the impact on 
subcontractors versus prime contractors. So we do some economic 
analysis of the data, and we have reached those conclusions 
from that economic analysis.
    Mr. Tierney. Nevertheless, you don't feel that any other 
collection of data in any form at all would be helpful?
    Mr. Majak. I wouldn't go so far as to say that. Certainly 
we would like to have more accurate and complete information, 
perhaps at the subcontractor level, more complete information 
with respect to the inclusion of foreign components in major 
defense systems. Some of that data is collected already by the 
Department of Defense and we have access to it. I would like to 
have more thorough information, but without imposing major 
burdens on industry to provide that data.
    Mr. Tierney. What would you need to get the information 
that you say that you need?
    Mr. Majak. Well, initially perhaps, more data from the 
subcontractor level on their experience with offsets, the 
impact that it has upon them. At the present time, we do that 
only on a spot basis; we could do that on a more thorough 
basis.
    Mr. Tierney. Would you get written information from them?
    Mr. Majak. Yes. Our authority is based in terms of our 
ability to conduct surveys of industry, so we would do it 
through a survey, presumably. I am not talking here about the 
documents.
    Mr. Tierney. Is there anything prohibiting you from doing 
that now?
    Mr. Majak. Only time and resources. I think we have the 
authority to do that now.
    Mr. Tierney. What kind of resources are you saying would be 
needed to do that?
    Mr. Majak. This is primarily people resources, personnel.
    Mr. Tierney. Significant--I know that Mr. Ose is going to 
be very concerned if it means hiring more people.
    Mr. Majak. We collect a lot of data and do a lot of 
analysis now with three or four people. I couldn't put a number 
on how many more people. It would not be a large number unless 
we expanded the data collection beyond the defense export 
sector into all commercial activities. That would be a major 
expansion.
    Mr. Tierney. Do you see any benefit of your department 
getting copies of the sales contracts and related documents and 
reports from the industries to foreign countries?
    Mr. Majak. Well, that would obviously provide us with more 
detailed information with which to work. So, yes, there would 
be advantages to having that kind of information in terms of 
our detailed understanding of these transactions.
    Mr. Tierney. Do either of you gentlemen have an opinion as 
to the wisdom in requiring, as a condition of entry into the 
WTO, that China agree to no offsets in defense procurement 
agreements?
    Mr. Majak. Well, I think that question is more 
appropriately directed at the Department of State. Certainly, 
it is our view in the Commerce Department that the WTO 
requirements represent an important discipline on trade 
barriers and distorting trade practices of this kind, and we 
would expect China to conform to those requirements along with 
all of the other WTO members.
    Mr. Tierney. Mr. Volkman, when you negotiate or discuss 
this with other allies in Europe or elsewhere, what is your 
opinion that results from those discussions as to what we would 
have to use for leverage? What do we have for leverage to get 
them to agree not to have offsets factor into contracts?
    Mr. Volkman. As I said, when we discuss the adverse effects 
of offsets in our defense relationship with other countries, 
their reaction invariably is that the U.S. defense market is 
essentially closed to foreign competition and that the way in 
which they compensate for that is to demand offset, or like the 
United Kingdom, industrial participation requirements.
    Mr. Tierney. We know that is smoke, because fairly often we 
read in these reports that their real motivation for doing 
these things is, they are just trying to kick their economy up, 
right?
    Mr. Volkman. But if they were to agree to eliminate demands 
for offset, they would expect to have a clear entry for their 
defense industry into the U.S. defense market, which they view 
as closed, and I think perhaps with some justice because of 
protectionist legislation, small business set-asides. In fact, 
in the past when the U.S.--on the rare occasions that we do buy 
an item of major defense equipment outside of the United 
States, we have required that the item be produced in the 
United States. So we don't call it an offset, but in fact one 
of the conditions of the purchase was that there be assembly to 
a large extent, manufacture of equipment like the AV-8B Harrier 
aircraft, Beretta pistols purchased from Italy, that had to be 
assembled in the United States, trainer aircraft that was of 
foreign origin that has to be manufactured in the United 
States. So they see the United States as imposing requirements 
that limit their ability to manufacture in their country, or 
they would view them as tantamount to offsets.
    Mr. Tierney. Mr. Volkman, do you or your colleagues have 
any concerns at all about the defense industrial base being 
dissipated in this country as a result of offsets?
    Mr. Volkman. We are concerned about maintaining a viable 
defense industrial base. So, to the extent that offsets would 
diminish that viable defense industrial base, obviously we 
would be concerned.
    Mr. Tierney. I have no further questions right now.
    Thank you.
    Thank you, gentlemen.
    Mr. Mica. Mr. Ose, you are recognized.
    Mr. Ose. Thank you, Mr. Chairman.
    Do end-user inspections fall within the offset dialog?
    Mr. Majak. They do not as such. As I indicated in response 
to an earlier question, whenever a militarily sensitive 
technology is exported, we license that. We require a license 
for it. We review it.
    One of the mechanisms we use to evaluate those licenses is 
both a pre-license check to see where the product is going and 
how it is going to be used and sometimes a post-license check 
to make sure that it got where it is going and is being used as 
indicated. We control those technologies, however, based on the 
technology, not on the basis of whether it is an offset or any 
other kind of arrangement.
    Mr. Ose. Your trading partners, when we require an end-user 
inspection, do they take that as negotiating something subject 
to negotiation and ask for a countervailing concession?
    Mr. Majak. Not usually. They may complain about the burden 
of having to provide us with access in order to conduct those 
inspections, but it normally does not become a subject of 
commercial dispute.
    Mr. Ose. What happens when the trading partner--that is not 
within the jurisdiction of the discussion. Never mind.
    Mr. Volkman, you have a comment in your testimony on page 7 
about various studies and evidence showing no clear or 
significant impact on some sectors or subsectors of the U.S. 
economy. Referring to these studies, they have produced no 
clear evidence that offsets have a significant impact on 
specific sectors or subsectors of the U.S. economy, including 
sectors important for defense production. Congressional 
hearings on the subject have also presented inconclusive 
testimony on the negative economic effects of offsets. That is 
your position in your testimony.
    I just want to--this is the Department's position?
    Mr. Volkman. I think we were recounting the results. In 
this case, we were recounting the results of the studies which 
show the ambiguity of this issue, that we are unclear as to the 
effect offsets have on various sectors of the defense 
industrial base.
    Mr. Ose. When there is a defense product that is sold, 
presumably the buyer is buying American because of the quality 
or the price or the quantity or lack of availability elsewhere. 
In the case where it is a very specialized piece of equipment, 
such as an airplane, and it is not available elsewhere--say, 
the country of France wants to buy 117--what happens if we 
refuse their offsets?
    Mr. Volkman. Well, if it is not available elsewhere, as Mr. 
Johnson said earlier, their alternative is not to buy at all.
    Mr. Ose. Does that occur?
    Mr. Volkman. I suppose it could occur that there would be a 
decision that absent the economic benefits to, let's say, the 
French economy in your example, that would result from offsets, 
that they would choose not to make the investment in the piece 
of defense equipment. If that were the case and if it were a 
necessary piece of defense equipment, then I think that the 
alliance or those who are likely to fight together in the 
future--and certainly in the recent past France has been a 
loyal participant with us in most of the conflicts that we have 
engaged in--that we would all be at a disadvantage as a result 
of the French making that decision.
    Mr. Ose. What is the consequence when there is an 
alternative elsewhere in the world, in other words, a cargo 
plane?
    Mr. Volkman. My observation, and I would hasten to add that 
I am hardly an expert in this, my observation is that offsets 
are demanded and offsets are granted and that, in effect, one 
of the major items in the decision is the adequacy of the 
offset package.
    So U.S. industry is competing with foreign industry to come 
up with the best offset package.
    Mr. Ose. Going back to our hypothetical with France being 
the buyer, they have the opportunity to buy from us or any 
number of other suppliers; and if we don't grant the offsets, 
they will not make the deal because they will get the offset 
package elsewhere?
    Mr. Volkman. If there is a competing European supplier for 
a piece of defense equipment, one of the issues that will be 
considered in making the selection, whether to buy from the 
U.S. manufacturer or the foreign manufacturer, is the adequacy 
of the offset package. If we decided not to offer an offset 
package, that would obviously be a factor in the source 
selection.
    Mr. Ose. These products that are transacted, whether they 
be cargo planes or what have you, in these instances where 
there is a transaction, how often or in what percentage of such 
transactions is there a choice being made by the buyer? In 
other words, in what percentage of the transactions are we not 
the only supplier of a product--in other words, you have a 
choice of buying this one or that one?
    Mr. Volkman. I don't really know the answer to that. There 
is adequate foreign competition in most defense sales.
    My staff tells me that it is about 70 percent. Apparently 
there is anecdotal evidence that suggests in about 70 percent 
of the cases there is a foreign competitor.
    Mr. Ose. So in 70 percent of the transactions, if we were 
to adopt a policy mandating no offsets, we would, in effect, be 
chasing the transaction to some other country?
    Mr. Volkman. Yes, sir.
    Mr. Ose. And losing the jobs that would otherwise be here 
for assembly?
    Mr. Volkman. We would be taking the risk that that would be 
the case.
    Mr. Ose. You are a far better wordsmith than I am, but I 
will learn.
    Thank you, Mr. Chairman.
    Mr. Mica. I thank the gentleman.
    In this GAO report, that was done last December, I believe, 
one of the statements on page 2 says,

    in the past, contractors had to absorb the cost of offset 
implementation against their negotiated profit margins.
    In 1992, DOD recognized that contractors incurred such 
costs by allowing their recovery under FMS contracts. Today 
U.S. Defense contractors may recover administrative costs 
incurred to implement their offset agreements under certain 
circumstances by charging such cost of purchasing of foreign 
governments through FMS sales contracts.

    It seems that is also--well, there are not too many ways to 
get a handle on offsets, particularly in this defense arena.
    Should we go back and revisit this, Mr. Volkman? Would it 
make any difference?
    Mr. Volkman. I am sorry, would you repeat that, sir.
    Mr. Mica. The contractors have had to absorb the cost of 
offset implementation against their negotiated profits in the 
past. We changed that policy in 1992. I am wondering, if we 
didn't provide an incentive to these folks not to do anything, 
would we need to go back and change this policy, would it help 
any, or is it a legitimate cost?
    Mr. Volkman. Change the policy so that they would have to 
bear the costs?
    Mr. Mica. Right. Again, we are trying to find some ways to 
discourage offsets, and if you have a vendor getting to write 
off--we changed the policy in 1992, letting them absorb the 
cost of offset implementation against their negotiated profit 
margins. Maybe we should go back and change this to the way it 
was.
    Mr. Volkman. My reaction to that would be----
    Mr. Mica. We have several contractors squirming in the 
audience.
    Mr. Volkman. You would be placing defense contractors in a 
tough situation where they would have--in order to be 
competitive, they would have to meet offset demands, but 
couldn't pass on the costs of fulfilling those offset demands 
to the foreign customer who is, in effect, imposing the 
demands.
    Essentially what we do is, we recognize that when a foreign 
customer requires that there be an offset commitment, that 
there are costs associated with demands for that offset 
commitment and that it is fair for U.S. contractors to pass 
those costs on to the foreign customer, the foreign government.
    So I think it would be a bad idea to do what you have 
suggested.
    Mr. Mica. So we, through our policy, help promote offsets?
    Mr. Volkman. No, I wouldn't say that. What the policy does 
is, when a contractor agrees to an offset commitment, we are 
treating U.S. contractors fairly by letting them recover the 
necessary costs associated with that. I think the reason that 
they enter into offset commitments, it is the price of making 
the sale.
    Mr. Mica. And we help them write off the costs of 
implementing the offset.
    Mr. Volkman. At the expense of the foreign government; not 
at the expense of the U.S. Government, but at the expense of 
the foreign government.
    Mr. Mica. Mr. Majak, did you want to respond?
    Mr. Majak. I have nothing further to add to that difficult 
question.
    Mr. Mica. Well, I just like to stir things up every once in 
awhile.
    Mr. Tierney, do you have any final questions?
    Mr. Tierney. I do. Thank you.
    Are you aware of an administration attempt to put together 
an advisory group or panel to look into this issue and help us 
revisit national policy on offsets?
    Mr. Majak. I am aware only of the interagency group headed 
by the Defense Department, which is mandated by the Defense 
Production Act.
    Mr. Volkman. I would say that we have the basis of a good 
interagency group that has been formed as a result of this 
cooperative relationship that we have developed.
    Mr. Tierney. How active are we in terms of pursuing some 
remedy of this offset situation through bilateral or 
multilateral negotiations?
    Mr. Majak. Well, in my full statement, I articulate and 
list the recent discussions that we had with the Dutch, the 
Canadians. In addition to that, we participate in many 
multilateral official and unofficial conferences, and attempt 
to convey our concerns about offsets at every opportunity 
within the limits of our time and personnel.
    Mr. Tierney. Are you getting any response?
    Mr. Majak. Yes. I think there is a receptivity in many of 
these discussions, which I think we need to take advantage of 
by intensifying these discussions. We are continuing with 
Defense to schedule additional ones.
    There is receptivity to restraints on offsets if we can 
mutually find a way out of the current practices; and that is 
the difficult part. But, yes, I think generally, we find there 
is more interest in restraints than one would suppose from 
looking at the volume of demands.
    Mr. Tierney. Mr. Volkman, do you know roughly what the 
percentage of people in the Department of Defense procurement 
division is that formerly worked within the defense private 
industry?
    Mr. Volkman. No, I don't know the answer to that. I would 
suspect that it is not very large.
    Mr. Tierney. Why do you suspect that?
    Mr. Volkman. Mainly because I know people who are in 
civilian procurement for the Department of Defense, and it is 
not noticeable that many of them come from the defense industry 
to government, at least at the working level. It may happen on 
occasion that someone will come from an industry position to a 
government position, perhaps at the executive level, but the 
bulk of the work force does not have industry experience.
    Mr. Tierney. Thank you, Mr. Chairman. I thank the witnesses 
also.
    Mr. Mica. Mr. Ose.
    Mr. Ose. No further questions.
    Mr. Mica. There being no further questions of this panel, I 
would like to thank Mr. Majak and Mr. Volkman for their 
participation in representing the Department of Commerce and 
the Department of Defense at the hearing today. We will keep 
the record open for 1 week, without objection, so we can 
receive additional testimony or statements from members.
    There being no further business to come before the 
subcommittee this afternoon, this meeting is adjourned.
    [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]

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