Organization for International Investment
1901 Pennsylvania Avenue, N.W.
Suite 807
Washington, D.C. 20006
(202) 659-1903
Fax (202) 659-2293

TESTIMONY
OF
TODD M. MALAN
EXECUTIVE DIRECTOR
ORGANIZATION FOR INTERNATIONAL INVESTMENT
BEFORE THE
CALIFORNIA ASSEMBLY COMMITTEE ON
INTERNATIONAL TRADE AND DEVELOPMENT
OCTOBER 28, 1997

Madame Chairwoman, my name is Todd Malan. I am Executive Director of the Organization for International Investment (OFII), a Washington-based association of more than 60 of the largest foreign-owned U.S. companies in America. OFII’s mission is to ensure that the legal environment for international investment remains fair and open, and that it continues to encourage the substantial investments my Member companies and others are making in new operations and jobs here. The recent proliferation of state and local sanctions laws threatens this environment. On OFII’s behalf and my own, I want thank the Committee for this opportunity to share our views.

A. U.S. Subsidiaries are Major Contributors to the U.S. Economy

Before turning to my substantive remarks, I would like to take a moment to identify my organization and our interest in the sanctions issue.

OFII is a trade association representing the interests of the U.S. subsidiaries of companies based abroad, including many of the largest companies in California. All of our members are U.S. companies with substantial operations in this country. We employ hundreds of thousands of workers in thousands of plants and locations across the country, in industries ranging from sophisticated computer and electronics products to the automotive, pharmaceutical, chemical, insurance, publishing and food products sectors.

OFII companies and other U.S. subsidiaries account for fully 5% of all U.S. employment. In California, we support 522,400 jobs – 5% of the State’s total workforce, up 140% since 1980. U.S. subsidiaries also are responsible for a disproportionately large share of U.S. exports, accounting for $101 billion in 1992 (the last year for which government data is available) or 22% of the U.S. total. These and other significant contributions to the U.S. economy and the local economies in which we operate are a direct consequence of the open investment environment in states like California and the United States as a whole.

Our contribution to the U.S. economy and ties to companies abroad provide us with a unique perspective on the state and local sanctions issue. On one hand, we are especially sensitive to the political and human rights concerns motivating many of these laws. Like other U.S.-based companies, we also are subject to the full force of federal trade and investment restrictions for those countries like Iran and Libya for which national embargoes have been established. On the other hand, because of our ties to companies abroad we often bear the brunt of more limited state and local sanctions aimed at our affiliates abroad. Without denying the sincerity or motives of sanctions proponents, we think it essential that legislators take a hard look at the consequences of sanctions – to companies and workers, to consumers, and to state and local governments and taxpayers.

B. Proliferation of State and Local Sanctions

Since 1995, one state (Massachusetts) and at least 22 municipalities have passed laws prohibiting public agencies from contracting with companies that do business in a growing number of countries around the world. These "selective purchasing" laws apply variously to companies with business ties of one kind or another to Burma, Indonesia, Tibet and Nigeria. An additional 17 selective purchasing proposals are currently pending in state and local legislatures across the country, for these three countries as well as Switzerland, China, Sudan, Saudi Arabia, Egypt, Pakistan, Turkey, Cuba, North Korea, Iraq, Morocco, Laos and Vietnam. Still other jurisdictions have adopted "foreign policy" statements and investment restrictions for Ireland. With your leave, Madame Chairwoman, I would like to distribute to Members and have entered in the record a list of pending or recently adopted state and local sanctions measures.

As concerned as we are about the selective purchasing sanctions on this list, we worry even more about what the future may hold. This patchwork of measures has been expanding exponentially, as domestic constituencies concerned about conflicts and human rights violations abroad have turned to local governments to express their outrage.

C. The Business Community Perspective

   1. The Real Issue Defined

Let’s be clear on what is and is not at issue in this debate. The question is not whether we are going to support or oppose obnoxious regimes around the world. Our companies, along with the business community at large, appreciate the importance and sensitivity of the concerns motivating these sanctions proposals. Terrible injustices have been and continue to be committed against innocent people around the world – actions that offend the sense of morality of all right-thinking Americans and the fundamental principles of freedom and justice on which our own government rests. It is both noble and right to speak up for advocates of freedom and democracy abroad and to condemn those whose actions violate our political principles.

Where we differ – and this is the real issue – is on how best to foster the growth of freedom and democracy abroad. We believe, along with many others in the business community and foreign policy establishment, that economic engagement is almost always a more effective way to advance economic and social justice. This lesson has been demonstrated time and again, in formerly totalitarian political systems around the world. Raising the standard of living in these countries, and the exposure of their peoples to American values and practices, has proven an especially effective catalyst for democracy. Conversely, it has not been uncommon for reactionary regimes – in Burma and elsewhere -- to try to shut out this "polluting" influence.

Sanctions, on the other hand, have had a very poor record of success. More often than not, they do more harm to those adopting sanctions than to the targeted foreign regime. We also need to recognize that in those rare cases where sanctions do have an impact, as in Iraq today, the pain is felt most severely by the common people, not the rogue regimes that govern them.

To summarize: the real choice posed by state and local sanctions is not between a "morally-correct" path of disengagement and "business as usual," as some critics have suggested, but how best to advance our shared goal of political and religious freedom and economic development. It is long past time for state and local governments to put aside the easy emotional appeal of sanctions and face the harder question of whether they really work and, if not, what better alternatives to pursue.

    2. Local Sanctions Don’t Work

No one who has seriously studied the record of state and local sanctions could honestly say that they work. Unilateral sanctions, no matter who brings them, are an ineffective means of achieving their intended goal and usually cause more harm at home than abroad. Economic sanctions generally fail at the federal level because the U.S. when it acts alone rarely has sufficient leverage to influence a foreign target. As we have seen time and again, foreign targets merely shift to other sources of supply. This is an even greater drawback for state and local governments that adopt their own sanctions laws. We may well choose to adopt sanctions because it makes us feel good, but no one should be misled into thinking that they work.

Nor should we lose sight of the harm economic disengagement can cause the very groups and interests sanctions are intended to support. Many humanitarian and religious groups, especially those that are actually operating in the countries in question, believe that economic engagement has opened the door to reform and made local people more receptive to their message. The Reverend Robert A. Sirico of the Action Institute for the Study of Religion and Liberty made precisely this point in a recent Wall Street Journal editorial, in which he cautioned that "[j]ust as religious freedom offers the best hope for Christian social influence, economic freedom is the best hope for spreading that influence around the world." Dictators around the world have likewise come to see sanctions as a major tool in their efforts to close the door on outside, modernizing influences.

   3. State and Local Sanctions Cause More Harm to U.S. Interests

On the other side of the cost-benefit equation is the very real harm selective purchasing sanctions cause American companies and their employees and the communities that adopt them. Contrary to a widely-held -- if often unstated -- assumption, state and local sanctions are not a low- or no-cost way to send a message to outlaw regimes.

Sanctions Raise Procurement Costs

By definition, sanctions limit the number of companies a state or local agency can do business with. This inevitably reduces state and local authorities’ procurement options – affecting quality and forcing up costs and, indirectly, taxes. Sanctions proponents hope that contractors will opt for doing business in the local jurisdiction rather than targeted country, but this rarely happens. Given the economic importance of many of the countries targeted for sanctions, suppliers with global interests often have no choice but to stop doing business with the state or local government. Few if any companies, for example, could be expected to cut all business ties with China and the 14 other countries targeted in a religious persecution bill in New York City.

Sanctions Create Investor Uncertainty

Companies that operate globally, especially U.S. companies with parents abroad, cannot operate in an environment in which the federal government, 50 states and thousands of municipalities each pursue independent foreign trade policies. Businesses need a stable and predictable environment in which to operate. Unilateral sanctions undermine this predictability, especially when they are piecemeal and uncoordinated with the federal government. They can also threaten a state or city’s reputation among international investors, undercutting the millions of dollars California and other states spend on economic development efforts to attract new companies from the U.S. and abroad.

Sanctions Unfairly Discriminate against U.S. Subsidiaries

Many selective purchasing laws threaten to sanction not only companies doing business in or with a targeted country, but also any company that is "affiliated" with them. These laws make contractors vicariously liable for the activities of any company in their business group, whether or not they control or have any ability to influence the affiliated company’s business activities. In practice, this has a disproportionate impact on U.S. subsidiaries of large multinational groups.

A Not-So-Hypothetical Example

To illustrate these costs, permit me to walk the Committee through a hypothetical example. Imagine that the State of Oregon passes a selective purchasing law that bars procurement from any companies that do business with Indonesia, because of its actions in East Timor. Let’s assume the law is modeled after the selective purchasing bill this Committee considered earlier this year for Burma.

Global Foods is a multinational company with operations around the world, headquartered in Denmark. The company has a 50-50 joint venture in Indonesia with an Indonesian company. The joint venture has $4 million in annual sales in Indonesia. Global Foods also has a wholly-owned Oregon company, Oregon Dairy Inc., which is the largest dairy operation in the State employing 850 workers to package and distribute milk. Oregon Dairy is regularly the low-cost bidder for the State school system’s milk procurement. This contract is the company’s largest single contract, worth $3 million a year.

After enactment of Oregon’s selective purchasing law, Oregon Dairy loses its contract with the school system because of Global Foods’ Indonesia joint venture. Oregon Dairy loses this contract even though it has no business of its own in Indonesia, and neither controls nor directs the Global Foods joint venture in Indonesia. The management of Oregon Dairy, and surely its line workers, may not even be aware that the joint venture exists. Yet, Oregon Dairy loses its largest contract and is forced to lay off a substantial portion of its workforce. At the same time, the school system loses its low-cost bidder and is forced to pay more for milk. For its part, Global Foods feels burned by the experience and reconsiders plans to expand its operations in Oregon and elsewhere in the United States. Other European investors likewise take note, reconsidering their own plans for investing in new U.S. manufacturing or other job-creating operations and whether to locate them in Oregon.

What is so troubling in this example – which is not just hypothetical, but has become a fact of life under the Burma sanctions laws in place in Massachusetts and a dozen of other municipal jurisdictions – is how far off base the result is. Oregon Dairy is the only company in the world that loses business. Oregon Dairy workers are the only workers to lose their jobs. And Oregon, having lost its low-cost supplier, is the only government to suffer economic cost. Such costs might be justified if they influenced behavior in Indonesia. But in this example, as in the real world, the sanction has absolutely no effect 6000 miles away. To the contrary, it probably makes the Europeans less willing to work with the U.S. in developing a common position on Indonesia.

   4. State and Local Sanctions Interfere with Federal Policy

To return to my earlier point, the real issue here is not how we feel about particular rogue regimes but what can be done about them. The most effective course, we believe, lies with leadership from Washington that is properly coordinated with our allies abroad. Only multilateral sanctions have any chance of real success, and only the federal government has the ability and constitutional authority to pursue this objective.

Beyond practical considerations is the fundamental question whether the foreign policy and international relations of the United States will continue to be formulated and implemented by the national government, or whether state and local authorities, through the considerable economic means at their disposal, will take that power for themselves. U.S. leadership in international affairs and foreign economic relations has brought about a sustained era of peace and unparalleled prosperity. However, these efforts to foster democratization, to integrate other nations more fully into the world community and to strengthen a rules-based international trading system, require that the United States "speak with one voice" in international affairs. The ability of the United States to work cooperatively with it’s allies and trading partners and to confront antagonists, depends vitally on the formulation and implementation of a single foreign policy. A policy for the entire country.

Economic sanctions, for better or worse, have traditionally been a tool of foreign policy. But when and how to use that tool – that is, how to calibrate the United States’ economic engagement – is an extraordinarily difficult task, requiring the balancing of numerous competing interests both at home and abroad. The federal government’s ability to make these judgments and pursue the foreign policy of the Nation as a whole is eroded if the numerous constituent parts simultaneously pursue their own policies.

The capacity for state and local sanctions to impair U.S. foreign policy goals was recently made clear by Undersecretary of State Stuart Eizenstat in testimony before the House Ways and Means Committee on U.S. sanctions policy. Ambassador Eizenstat warned that "[w]hile state and local governments should express the democratic will of their citizens, unless sanctions measures are well conceived and coordinated, so that the United States is speaking with one voice and consistent with our international obligations, such uncoordinated responses can put the U.S. on the political defensive and shift attention away from the problem to the issue of sanctions themselves." He further warned that "[a]d hoc and scattered actions at various levels of government, however, well-intentioned, can do more harm than good in achieving the desired objective and impede the President’s and Secretary of State’s conduct of foreign policy." With your leave, Madame Chairwoman, I would like to distribute Ambassador Eizenstat’s testimony and have it entered in the record.

D. Conclusion

In sum, we believe that a careful review of the relative costs and benefits of local sanctions actions clearly argues against their adoption. Such sanctions rarely, if ever, have their desired effect on target countries, while imposing significant costs on the U.S. economy, companies and workers. The energy devoted to localized sanctions actions would be far better spent working to develop and advance a consistent and coherent national foreign policy.

In closing, I want to congratulate the Committee for its decision to tackle this controversial but important issue and thank you again for this opportunity to express my organization’s views. We stand ready and willing to help the Committee in any way we can to fashion alternatives to sanctions that will more effectively further our shared goal of extending liberty and economic prosperity to all corners of the world.

  Return to Top

Home |  About Us |  Resources |  Press Releases |  Federal Activity & Legislation
State & Local Activity |  NFTC Lawsuit |  Contact Us |  Site Index