Statement of Frank D. Kittredge--free trade, unilateral and economic trade sanctions

Statement Of Frank D. Kittredge
President, National Foreign Trade Council, and
Vice Chairman, USA*ENGAGE

before the
Subcommittee on East Asian and Pacific Affairs
Committee on Foreign Relations
U.S. Senate

February 26, 1998

Mr. Chairman and Members of the Subcommittee, I am Frank D. Kittredge, President of 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 670 companies and trade and agricultural organizations, which has come together to encourage policy-makers to find alternatives to unilateral sanctions as a foreign policy tool in light of their demonstrated ineffectiveness and cost to the U.S. economy.
USA*ENGAGE represents a new and important initiative in the longstanding debate over the use by the United States of unilateral sanctions to achieve foreign policy objectives. Let me begin by giving you some background on the formation of USA*ENGAGE. In the summer of 1996, the Board of Directors of the National Foreign Trade Council concluded that major markets around the world--in fact many of the ones that had been designated crucial "big emerging markets" by the U.S. Department of Commerce--were increasingly targeted by unilateral sanctions proposals that would limit or outright prohibit U.S. companies from doing business. They seemed to be at odds with the U.S. governmentís stated objective of promoting free market democracies, in large part through private business activity. In addition, secondary boycotts, which the United States had long opposed in the form of the Arab boycott of Israel, were now being adopted as a way of coercing our trading partners into cooperation. This was clearly disrupting U.S. relations with our allies and major trading partners and having a negative impact on the climate for the U.S. private sector. Finally, state and local governments were increasingly adopting their own sanctions measures against companies doing business in certain countries. The secondary boycott provisions and state and local sanctions seemed headed for a challenge in the new World Trade Organization, in whose success the United States has a very major stake.
The NFTC Board found this trend to be deeply alarming and decided to initiate a major effort to reach policy-makers and opinion-leaders about the cost in U.S. jobs, economic growth and influence abroad of unilateral foreign policy sanctions and to build support for alternative policies. These include the more effective use of diplomacy and restricting the use of sanctions to cases where multilateral sanctions are possible. In April of last year, USA*ENGAGE was formally inaugurated with the active involvement of major business and agricultural organizations and the endorsement of senior members of Congress from both parties. USA*ENGAGE now has 670 members, representing all sectors of the U.S. economy, small business as well as large and all sections of the country. These include many small and medium-sized businesses that are suppliers to larger exporting companies, service, transportation and communications companies who understand that sanctions negatively impact their business.
Why has the private sector undertaken this major, multiyear effort on the general issue of unilateral sanctions, independent of any individual sanctions proposal? The answer is that the companies and organizations that comprise USA*ENGAGE are convinced that by working with Members of Congress, officials of the Executive Branch, state and local legislators, and opinion leaders in non-governmental organizations and the media, we would arrive at better procedures for making decisions about unilateral sanctions, discover new ways for the public and private sectors to work together toward common goals, such as respect for the rule of law and human rights, and arrive at a better understanding of the true economic and political cost to the U.S. of a liberal use of unilateral sanctions for an ever-increasing number of reasons. The reasons for the formation of USA*ENGAGE are a part of the message I want to bring you this morning:
-- USA*ENGAGE companies and organizations do not disagree with the stated objectives of many of the unilateral sanctions proposals that have been imposed. The 61 sanctions measures imposed by the United States on 35 countries since 1993 were undoubtedly intended to serve a wide range of objectives with which few Americans would disagree. We do object to the fact that the means that has been selected to achieve these ends is deeply flawed and often is counterproductive. In many ways it is a "boomerang" approach to foreign policy;
-- unilateral sanctions have a dramatically unsuccessful track record in achieving their own objectives. This is in contrast to multilateral sanctions programs that can show greater impact in cases such as South Africa, and in some respects Serbia and Iraq. There are few, if any, countries today that are so economically dependent on the U.S. that acting alone we can coerce them into making changes that they would not otherwise make. This results from the obvious facts that in a globalized economy, there are abundant non-U.S. exporters, as well as investors, ready to replace excluded U.S. firms. Likewise, there are few countries that are crucially dependent on the U.S. export market;
-- often unilateral sanctions merely serve to create greater resistance to change in authoritarian regimes by stiffening their opposition to outside pressure and mobilizing their internal support for standing up to it;
-- unilateral sanctions also provide an easy excuse for the failures of authoritarian regimes that need a scapegoat and find one readily provided by the United States;
-- government officials and ruling elites in sanctioned countries can almost always find ways of circumventing the effects of sanctions on themselves. Ordinary citizens, however, are less lucky and it is they, whom we would most like to help, who often feel the greatest pain of deprivation without any offsetting benefits in changing the policies or character of the regime;
-- the cumulative impact of unilateral sanctions does constitute a significant cost to the U.S. economy. This cost was calculated last year by the Institute for International Economics to be $15 to $20 billion a year in lost exports at the cost of 200-250,000 well-paying export-related jobs. These are jobs that pay 12-25% more than the average manufacturing wage, so that about $1 billion in export wage earnings are being lost each year that sanctions are in place. These are hidden costs that do not show up in any budget projections. These are costs that may result from business lost because foreign companies do not believe that they can count on an American partner not to be removed from a project in midstream by a unilateral sanctions imposition. The costs of unilateral sanctions are no less real because they are indirect and long-term costs whose impact is not immediately known or felt;
--there is a longstanding American tradition of "people-to-people" contact based on the belief that individual Americans and private American organizations, be they educational, commercial, philanthropic, religious, or emergency relief institutions, present to the world the true face of our country and best reflect the core values that have always inspired the world. This is what "engagement" is all about. It is reflected in the good news from China that since the end of the Cultural Revolution at least 12,000 places of Protestant worship and 17 centers of theological training have been opened in China while 20 million Bibles in Chinese have been printed. Are we to discount the impact of such an expansion of religious interest or put it at risk by policies that could result in a crackdown by the authorities?
--unilateral sanctions, on the other hand, assume that we can have more influence abroad by isolating and coercing governments and inflicting pain on their populations than through reaching out to them and proving by example and direct involvement that free market democracy and tolerance are the firmest foundation for prosperous and peaceful development.
Iíd like to turn now to a few examples of the long-term impact of unilateral sanctions on U.S. companies affecting their employment and profitability--at the same time demonstrating the obvious ineffectiveness of these sanctions.
-- in July of this year the President of Indonesia overturned a business decision to give the $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 two billion barrels of oil, worth perhaps $50 billion at todayís 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.
-- one of the worldís largest construction undertakings is the Three Gorges Hydroelectric Project in China. Recognizing the U.S.'s current trade deficit with China, one would think the U.S. would do all it could to participate in this activity. Yet, for ostensibly environmental concerns (note that this hydro project will replace the equivalent of 20 coal fired plants), the White House directed the U.S. Ex-Im Bank not to support American companies selling to this project. Millions of dollars worth of capital equipment exports were lost by U.S. companies, and the project is proceeding with our foreign competitorsí equipment. The U.S. refusal to offer Ex-Im financing--a very definite unilateral sanction--had no impact on the Chinese and their project.
-- 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;
-- you will recall on November 4, 1997, President Clinton issued an Executive Order announcing that the Government of Sudan "constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States" and imposed a comprehensive unilateral trade and investment embargo against Sudan. Immediately after the Executive Order was issued, the Japanese company Komatsu, clearly seeing an opportunity to displace Caterpillar, the dominant supplier of construction, agriculture and power generation equipment, took out a newspaper advertisement in Sudan announcing its new sales and support locations. Beyond losing these on-going sales, other business worth several tens of millions of dollars destined to a Malaysian company doing business in Sudan has also been lost. No businessman would not agree that the Sudan governmentís behavior has been egregious, but what is needed are solutions that work. Perhaps whatís most disappointing is we have recently learned from both the USTR and the State Department that at a recent APEC conference in Vancouver, the U.S. didnít mention the Sudan "threat" nor did it attempt to win multilateral support for the sanctions. If Sudan truly represents a "national emergency"--which could result in some Americans sacrificing their jobs--shouldnít there be some highly visible effort to enlist help from our allies and trading partners?
-- 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. companyís 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;
-- the U.S. power generation industry was unable to bid on $15.8 billion in nuclear power generation business in China as a result of sanctions imposed following the 1989 Tiananmen Square crackdown. Canada, Germany and Japan got the business. Beyond losing this significant business and the substantial number of U.S. jobs associated with it, this has had the result of completely isolating the U.S. from the Chinese nuclear energy program.
In each of these examples, not only were U.S. business interests seriously affected, but the sanctions were completely ineffective. They did not change the country in questionís behavior, and the products or services required were obtained from non-U.S. suppliers with no particular imposition. But the U.S. interests were badly damaged by loss of the sale, by a shrinking future market share and by the increasingly applied label of "unreliable supplier."
Now, the most obvious question one would ask is, how can sanctions policy be reformed to avoid these sorts of costs and at the same 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.
Late last year, Senator Lugar and you, Mr. Chairman, as well as other members of this Subcommittee, took the lead in introducing legislation that would establish a more deliberative and disciplined approach to U.S. sanctions policy. As you know, 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 counterproductive 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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