Testimony of Bill Lane--free trade, unilateral and economic trade sanctions

Testimony for Bill Lane
Chairman of USA*ENGAGE and Washington Director of Caterpillar Inc.

Before the Senate Task Force on Economic Sanctions

September 9, 1998
Mr. Chairman ... members of the Task Force, on behalf of Caterpillar and 676-member USA*Engage Coalition I would like to thank you for this opportunity to share our concerns about the proliferation of U.S. unilateral foreign policy sanctions and the importance of engagement. Caterpillar is proud to be a leader of the USA*ENGAGE effort.
At Caterpillar, we believe we have special standing to discuss the issue of unilateral sanctions. As you may know, Caterpillar's business strategy is somewhat unique in that we compete globally from what is primarily a U.S. manufacturing base. As a result, we rank as one of America's largest exporters. But relying on a U.S. manufacturing base also means that when the U.S. imposes unilateral sanctions, the impact is greater on us than on many other companies.
Caterpillar also has a keen appreciation of how unilateral sanctions undermined our competitiveness in the early 1980s as a result of the Soviet pipeline sanctions. You may recall that at that time Caterpillar was forced to cede the Soviet market to our Japanese competitors. As a result of that policy:
-- 12,000 man-years of work was transferred from Illinois to Japan.
-- Caterpillar and other U.S. exporters were tainted as unreliable suppliers.
-- Komatsu of Japan grew in strength which allowed them to more effectively compete against Caterpillar on a global basis -- a legacy that's still with us today.
-- And the Soviets completed their pipeline ahead of schedule.
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I might add that even though Russia is a democracy, our customers still ask if we can be counted on as a reliable supplier. Farmers from Illinois can recount similar experiences about how the Soviet grain embargo hurt their businesses. Of course today their focus is on how recent sanctions against India and Pakistan might affect international grain markets.
From our viewpoint unilateral economic sanctions generally fall into three categories:
1. Sanctions that cut off U.S. trade and investment. The most notable example is the U.S. policy toward Cuba. The most recent example is U.S. policy toward Sudan.
2. Sanctions that make it hard to export American products. Examples include recent sanctions against India and Pakistan that cut off EXIM financing, OPIC,PL-480, and Commodity Credit Corporation programs.
3. Sanctions intended to discourage economic development. While there is no "right" to U.S. economic assistance, cutting off assistance is never-the-less a form of punishment that falls within the common-sense definition of a sanction.
We note that last year the President's Export Council reported that U.S. unilateral sanctions threaten 75 countries or 52 percent of the world's population. With the addition of recent sanctions against India and Pakistan, U.S. sanctions now target two-thirds of the world's population.
Are these sanctions working? At USA*Engage we are not aware of any systematic accountability checks that are currently taking place within the U.S. Government to assess the effectiveness of existing sanctions.
But we do know that America's sanctions-based foreign policy is proving costly to other U.S. objectives. Based on Caterpillar's experience the cost of sanctions can be evaluated from several perspectives.
(1) Lost Exports and Jobs. Clearly, the most obvious impact of U.S. unilateral sanctions is the impact they have on U.S. exports, and American jobs. At Caterpillar, we can document exports lost as a result of numerous sanctions regimes. A few recent examples include:
-- Colombia. As a result of sanctions imposed in 1996/97, Caterpillar lost several important contracts to sell mining equipment to Colombia's coal industry. The reason: European competitors had access to competitive export financing which was forbidden to American companies by the U.S. government.
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-- China. White House efforts to discourage the export of American- made products to China's Three Gorges Dam have reduced Cat sales in Central China. Even though the world's largest construction project is progressing as scheduled, U.S. companies still don't have access to competitive export financing. Consequently, American companies are at a disadvantage vis-a-vis their foreign competitors.
-- Iran. As a result of U.S. export restrictions imposed against Iran in 1995, the entire Iranian market for construction equipment and engines was completely ceded to European manufacturers.
-- Canada. Fear of being entangled in U.S. extra-territorial sanctions prompted a Canadian Cat customer to buy diesel engines from Europe. Last year, the potential customer told a Caterpillar sales representative that "since the engines were being incorporated into products that might be sold in the Mideast, the best way to avoid problems is to buy German."
-- Sudan. Immediately after President Clinton's November 4, 1997 imposition of a trade and investment embargo, Komatsu of Japan took out newspaper ads in Khartoum announcing its new Sudan sales and support locations. Since then, Caterpillar has lost several important export contracts. The most recent lost sale occurred last week.
(2) Tainted as an Unreliable Supplier. To determine the cost of unilateral sanctions, one must recognize that lost exports can also occur as a result of being labeled as an unreliable supplier. This is of particular concern for producers of capital equipment. After all, when you buy a Caterpillar bulldozer or an off-highway truck, you are making a decision that will last decades. Any uncertainty about our ability to provide long-term product support from the United States gives our European and Japanese competitors a significant competitive advantage. Earlier this year the issue of being a reliable supplier was a major hurdle in our efforts to sell in Russia, Malaysia, and several Republics of the former Soviet Union.
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(3) Enhanced Competitiveness of Foreign Rivals. Even though it is hard to quantify, it is important to recognize that U.S. unilateral sanctions can enhance the competitiveness of our foreign competitors. When the U.S. cedes an export market to its foreign competitors, it has in effect provided them with a protected "home market." As a result, they not only benefit from increased economies of scale, but have the opportunity to cross subsidize sales in other markets.
Put another way, when the U.S. government gave the Soviet market to Komatsu, Cat also ended up with a more formidable competitor in Europe, Asia, and the Western Hemisphere.
(4) Undermine other U.S. Objectives. Perhaps the biggest cost of sanctions is how they impact other U.S. foreign policy goals.
We note with concern that, at a time when we are still trying to maintain multilateral support for a united policy toward Iraq, we find that the United States has imposed or threatened sanctions against all Arab members of the Gulf War alliance -- except Kuwait -- and 3 of 4 other permanent members of the UN Security Council. You don't have to be a foreign policy expert to realize that these sanctions may be one of the reasons why it has been so hard to win an agreement on a multilateral sanctions policy toward Iraq.
Even more disturbing, at a time when the U.S. is mounting an intensified fight against international terrorism, the United States is seriously considering sanctions against moderate Arab countries over the issue of religious rights.
There is also a cost incurred when U.S. sanctions violate our trade and treaty obligations. When this occurs, we undermine the very multilateral institutions that can play an important role not only enhancing the world economy ... but promoting positive change. For example, if extra-territorial sanctions violate U.S. commitments made to the World Trade Organization, the United States has less leverage to force other countries to honor their GATT obligations. As a result, the WTO loses credibility and Americans don't fully benefit from a more open trading system.
-5- Allow me to conclude by emphasizing that the business community fully recognizes that much of the world remains a dangerous place. We strongly believe the U.S. should continue to use sanctions as "a" tool of foreign policy. But we also believe that in recent years unilateral sanctions have been grossly over-used.
Recognizing that the track record of sanctions demonstrate that they rarely work, are often counterproductive and almost always costly to other objectives we believe it is appropriate to consider some common-sense reforms when considering new unilateral sanctions.
For starters, before considering unilateral sanctions the Congress and Executive Branch should ensure that potential alternatives -- such as diplomatic initiatives and multilateral pressure -- have been exhausted. If unilateral sanctions are to be considered, they should be judged by:
(1) whether they actually can achieve their intended results;
(2) the harm they will cause to other national interests;
(3) and the costs imposed on Americans.
Finally, we believe future unilateral sanctions should be subject to a meaningful accountability review every two years.
While sanctions -- even unilateral ones -- may be appropriate at times, we should all recognize that engagement can be a powerful force for positive change when pursued at all levels -- political, diplomatic, economic, charitable, religious, educational, and cultural. In contrast, a unilateral sanction can isolate America, taking away the influence and credibility we gain by being involved. The Lugar Sanctions Reform Act (S.1413) provides reasonable reforms that would provide a more disciplined, deliberative process for considering unilateral sanctions. With greater focus on prevention, process and accountability we believe the U.S. will have a more effective foreign policy. We ask that you make passage of S.1413 a top priority for the reminder of this Congress.
Thank you. At this time, I'd be pleased to answer your questions.

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