Frank D. Kittredge testifies before the Trade Subcommittee.

Mr. Chairman and Members of the Subcommittee, I am Frank D. Kittredge, President of the National Foreign Trade Council, an association of 550 U.S. companies engaged in international trade and investment. I am also appearing today as Vice Chairman of USA*ENGAGE, a broadly-based coalition of about 650 American companies and trade and agricultural organizations that has formed to encourage policy-makers to find alternatives to unilateral economic sanctions as a foreign policy tool.

It is a particular pleasure for me to be here this morning. These hearings mark the beginning of the congressional phase of an extended dialogue that has been taking place elsewhere for some time. That dialogue concerns the wisdom of frequent use by the United States of unilateral sanctions to affect the behavior of other governments. The National Foreign Trade Council is a business association that has long been deeply concerned about the increasing tendency to resort to unilateral sanctions as the preferred first option in reacting to an adverse policy or action by a foreign government. I will therefore focus my remarks today on the commercial consequences of frequent imposition of unilateral sanctions.

Let me emphasize that I am speaking about unilateral sanctions for foreign policy purposes. No one would deny that there are situations in which economic leverage is an appropriate tool of foreign policy. Those are situations in which we have enough cooperation of the target country's other trading partners to actually deny them something they need and link that denial to changes in their behavior. Economic sanctions that are multilateral in this sense have proved effective in some cases. Unilateral sanctions program, on the other hand, are almost always ineffectual and, worse, counterproductive.

The concern of NFTC member companies about the rapidly growing trend of proposed unilateral sanctions in 1995 and 1996 led our Board of Directors to initiate the USA*ENGAGE coalition. This coalition, which was formally launched in April of this year has conducted an exceedingly thorough examination of the sanctions issue. Two of the most important conclusions we have reached are: (1) the costs of unilateral sanctions to the U.S. economy are very real, but are indirect and long-term and therefore have tended to be underestimated in the national debate over sanctions; and (2) there are common-sense reforms that can be implemented to increase the of effective use of economic leverage by the U.S. These reforms, combined with active policies of engagement, promise a more successful coordination between U.S. foreign policy and foreign economic relations'

(1) The cost of unilateral sanctions to the U.S. economy as a whole was calculated in a study released in April by the Institute for International Economics showing that in 1995 unilateral sanctions in place cost the US economy 200-250,000 well-paying export-related jobs in 1995 and reduced US exports by $15 to $20 billion. In its study the Institute said "the price is paid through a highly discriminatory 'tax' imposed on workers that participate in export markets. Nevertheless, the United States continues to employ sanctions far more than any other country."

Let me give you a few examples of the long-term impact of sanctions on U.S. companies affecting their employment and profitability:

• In July of this year year President of Indonesia overturned a business decision 10 give $600 million Tan Jung Jati power plant contract to a U.S. partnership with the result that Mitsubishi won the bid. Proposed federal and state sanctions against Indonesia were cited by Indonesian government sources as the reason;
• Shak Deniz is a major offshore oil field in the Caspian Sea, claimed by Azerbaijan. The field contains about 2 billion barrels of oil, worth perhaps $50 billion at today's prices. In 1996 a U.S. company felt that it had to turn down an opportunity for a partnership interest in Shak Deniz because Iran was likely to be a 10% partner in the project. It is highly likely that a non-U.S. company will take on this American company's share;
• an American company was selected to do a major power plant in Colombia valued at about $165 million, representing a breakthrough into a new market for the U.S. company. Most of the design work for the contract would have been done in the U.S., involving more than 40 suppliers. When Colombia was decertified, eliminating the U.S. Ex-Im Bank from participation, the company was given 30 days to find alternative financing. As a result, a French consortium got the business;
• as the U.S. gradually negotiated normalized political relations with Vietnam, sanctions remained in place. A major American chemical company wanted to be involved in a reverse osmosis water sanitation plant by supplying a water filtering system. Because of U.S. sanctions, the Vietnamese awarded their business to Asahi Chemical. The U.S. company's system had been in the original design, but was subsequently designed out; Japanese equipment was designed in. This was significant because the plant was a prototype for others of its kind;
• a U.S. consumer products company produces cough drops in Mexico for sale throughout Mexico, the U.S. and Canada. One key ingredient is sugar, which is purchased from Mexican refiners. An early draft of the Helms-Burton law would have required companies to certify that there was no Cuban content if the final product was intended for U.S. distribution. Given the nature of the Mexican sugar refinery industry, which buys sugar from all over the Caribbean, it was impossible to identify Cuban sugar. Although the provision was not included in the final bill, it illustrates the problem of foreign subsidiaries that are unable to comply with U.S.sanctions law;
• the U.S. power generation industry lost $15.8 billion in nuclear power generation business in China as the result of sanctions imposed following the 1989 Tiananmen Square crackdown. Canada, Germany and Japan got the business. Beyond losing this significant business, this has had the result of completely isolating the U.S. from the Chinese nuclear energy program.

(2) How can sanctions policy be reformed to avoid these sorts of costs and at the time contribute to an effective and coherent U.S. foreign policy?

The most important point I would like to make to you today is that the U.S. private sector makes its greatest contribution to free market democracy through constructive involvement in economies and societies around the world. We are urging common sense reforms that will support this role and help the U.S. to pursue more effective policies with less self inflicted cost.

This morning Chairman Crane and Congressman Hamilton have taken the lead in introducing legislation that would establish a more deliberative and disciplined approach to U.S. sanctions policy. The key to this bill is that it requires due process in considering the costs to U.S. security and diplomatic relationships, as well as economic costs of proposed sanctions. It would require consideration of the likelihood that proposed sanctions will achieve their stated objectives. It would scrutinize efforts to pursue alternatives to unilateral sanctions, such as multilateral initiatives and diplomacy. Importantly, the "Enhancement of Trade, Security and Human Rights through Sanctions Reform Act," would require presidential waiver authority, ensure contract sanctity, authorize compensation for American farmers injured by unilateral sanctions, and require a two-year sunset on all such measures. Independent annual reports are also mandated to assess the cost and success of existing U.S. sanctions programs.

This legislation would not seek the repeal of any existing sanctions legislation, nor would it prevent the President or the Congress from imposing sanctions whenever the foreign policy or national security of the United States dictates. It seeks to ensure a sensible and deliberative process so that sanctions measures are driven by common sense instead of being taken to counter-productive ends by politics and emotion.

The business community has a major contribution to make in ensuring that the kind of world that will evolve following the Cold War respects the rule of law, the rights of individuals, and international norms. This is the kind of world in which most of the peoples of the world and certainly the American people aspire to live. It will not be achieved by the absence of private American institutions, but only by deeper commitment and engagement in the world by the United States.

I thank the Chairman and the Subcommittee for the privilege of testifying today.

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