MAY 9, 2001

STATEMENT OF WILLIAM A. REINSCH
PRESIDENT, NATIONAL FOREIGN TRADE COUNCIL, INC., AND
VICE CHAIRMAN, USA*ENGAGE

BEFORE THE
SUBCOMMITEE ON THE MIDDLE EAST AND SOUTH ASIA
COMMITTEE ON INTERNATIONAL RELATIONS
U.S. HOUSE OF REPRESENTATIVES

            Mr. Chairman and Members of the Subcommittee, I am William Reinsch, president of the National Foreign Trade Council, an association of more than 500 U.S. companies engaged in international trade and investment.  I am also appearing today as Vice Chairman of USA*ENGAGE, a broad-based coalition of over 670 American companies and trade and agricultural organizations that support sanctions reform.  My comments today will focus primarily on ILSA but will also address the U.S. Executive Orders that impose unilateral sanctions against Iran and Libya.

            We support ILSA’s goals -- “preventing proliferation of weapons of mass destruction and the means to deliver them and acts of international terrorism” -- and we support full compliance by Libya with U.N. Security Council resolutions regarding the destruction of PanAm flight 103; however, we believe ILSA has not been effective in achieving those goals but has, in fact, been counterproductive.  Simply maintaining it in place for an additional period of time will not increase its prospects of success.  Instead, we urge Congress to work with the Administration as it develops its policy toward Iran and Libya and to await the outcome of the June 8 Iranian presidential election before taking any action.  We also urge Congress to continue its review of the utility of using unilateral sanctions as an instrument of foreign policy. 

            The theory of ILSA in 1996 was that the U.S., acting unilaterally, could deny Iran the capital it needed to develop its most lucrative exports, oil and gas.  That, in turn, was expected to reduce resources available for development of weapons of mass destruction and support for terrorism.  In the case of Libya, the objective was primarily to gain leverage for compliance with the U.N. resolutions on the terrorist attack on PanAm flight 103. 

            Now, five years later, any objective review of the record will conclude that ILSA has not achieved its own objectives.  We are strongly convinced that ILSA has been entirely ineffective and that it is counterproductive for U.S. interests.

            That latter point is crucial, because the Committee should view action on ILSA in light of our national interests.  If the law were achieving our policy goals, we would be here testifying in support of it.  However, it is not advancing its stated purposes; it is creating collateral diplomatic damage to U.S. interests for essentially symbolic purposes.  In short, it does not meet a national interest test.

Having ILSA on the books strains U.S. diplomatic relations with its allies because of their resentment of its secondary boycott.  Further, if ILSA waivers were not granted, the economic costs for U.S. firms would increase because of retaliatory legislation by other countries.  Finally, ILSA’s attempt to target the oil and gas production of two key energy-producing countries runs counter to U.S. long-term energy security requirements.  U.S. and worldwide demand for oil and gas is rising rapidly.  The world has entered a dangerous period of energy scarcity.  Under these circumstances, it is shortsighted to try to diminish Iranian and Libyan energy production capabilities

The reality is that it is the world price of oil and the ability to produce it that determines Iran and Libya’s income from oil and gas production, not U.S. sanctions, and it is that rising price level that is encouraging exactly the investment ILSA sought to block.  There is no evidence that ILSA can deter foreign investment in Iran or Libya’s energy sector.

Both of these countries are receiving significant capital investment in their oil and gas sectors.  Last March, the Congressional Research Service reported that $10.5 billion of foreign investment has taken place in Iran’s oil and gas sector since 1997.  Iran expects $1.5 billion to be invested in its petrochemical sector this year.  These investors are from France, Canada, Italy, the Netherlands, the UK, Japan and Norway -- companies from our closest allies and most important trading partners, which have not joined our sanctions nor been deterred by the threat of ILSA.

Exclusion of U.S. firms from Iran and ineffective sanctions against foreign firms will not determine how Iran uses its oil revenues.  The desire of either Iran or Libya to support terrorism or pursue development of weapons of mass destruction is a national interest calculation, not a function of their oil and gas revenues.  These issues are important, but they require a more sophisticated and targeted approach than ILSA, which is a very blunt instrument. 

Mr. Chairman, unilateral sanctions have not only failed to achieve their stated purposes, but we believe they cannot achieve them. To prolong their life may provide the illusion of taking action, but nothing more.  Equally important, if the benefits are ephemeral, the costs are real.  Unilateral sanctions are doing significant damage to U.S. commercial prospects at a time of economic downturn and energy shortage.  If ILSA were to make Iranian and Libyan oil production less efficient and thereby reduces their contribution to world oil supplies, oil prices would increase.  To the extent that U.S. exports to these countries are prohibited, the American workers and farmers are damaged and U.S. consumer product manufacturers are seriously compromised in their future competitiveness in those markets.  Foreign affiliates of U.S. companies, where they need parent company approval, are also excluded from these countries; yet U.S. foreign affiliate sales are three times as large as total U.S. exports ($2.4 trillion in 1998).

ILSA has not only failed to stop foreign investment in Iran’s energy development.  It has also been a major irritant in our relations with countries whose cooperation we need to conduct an effective policy toward Iran and Libya.  We know for a fact that foreign investment will continue to flow into Iran and Libya’s energy sectors, especially under current world energy supply conditions.  The question is whether we continue our futile effort to prevent them.

Some argue that ILSA has not worked because it has not been tried.  In fact, ILSA could not have worked.  ILSA forces the President either to implement sanctions that he knows will be ineffective and counterproductive or waive the law.  That is what happened the one time the President was called upon to use ILSA.  In 1998, after three non-U.S. oil companies had been awarded a multi-billion dollar contract to develop Iran’s South Pars oil field, the Clinton Administration waived ILSA sanctions on Russian, French, and Malaysian companies.  It took this action, among other reasons, to prevent retaliation against U.S. firms and to avoid provoking a trade war with the European Union, which regards secondary boycotts, such as ILSA, as illegal under the World Trade Organization.  It is also ironic that U.S. law prohibits American companies from cooperating with secondary boycotts; yet in the case of ILSA we are imposing one and insisting that are allies comply with it, which can only undercut our efforts to weaken the Arab boycott of Israel.

Implementation of ILSA today, just as the U.S. is preparing for a new round of global trade talks in which EU cooperation is crucial, would involve this country in another bitter trade dispute with the EU.  It is clear that implementation of ILSA, indeed the reauthorization of ILSA for any period of time, puts us at serious odds with our major allies and threatens cooperative action on a range of issues, including policy toward Iran and Libya.  Nor would the inclusion of presidential waiver authority mitigate the negative impact of a reauthorized ILSA.  If the Act is waived, it becomes meaningless.  If it is not waived, the negative effects cited in this testimony will be exacerbated.  

There is no evidence that ILSA can deter foreign investment in Iran or Libya’s energy sector. Furthermore the rising price of oil insures that Iran’s oil revenues will increase, U.S. sanctions notwithstanding.  The only “success” of our sanctions policy toward Iran and Libya has been ceding those markets to our foreign competitors.  Let me cite a few examples:              

·        World oil prices are a powerful incentive to foreign oil firms to invest in Libya and Iran, which are now ranked numbers one and two for new petroleum exploration projects by 85 international oil firms polled in March by a British research firm;

·        U.S. efforts to isolate Iran are creating distortions in the development of the considerable petroleum resources of the Caspian region and putting U.S. firms at a disadvantage there;

·        Iran Air and Libyan Arab Air have reportedly signed contracts worth several billion dollars with Airbus;

·        In 1999 Caterpillar lost a major turbine contract in Turkey to its European competitors because of U.S. government uncertainty over whether ILSA sanctions applied.

·        As a result of the ILSA and the 1995 Executive Orders, Caterpillar has been forced to cede its Iran market to Europe.  Hardest hit has been its subsidiary, Solar Turbines, Inc. in San Diego, which lost its market to Novo Pignone in Italy.

·        Royal-Dutch Shell announced last month that it will begin pumping oil in November from its $800 million investment in two Iranian oil fields that will yield 190,000 barrels a day in two years;

·        Iran is the largest automotive market in the Middle East with 172,000 new motor vehicles being sold in 1999 and with vehicle sales of 500,000 a year forecast by 2003.  Iran’s huge growth potential as a market for vehicles will be met by European, Japanese and Korean automakers;

·        Unilateral sanctions hurt American farmers, who are effectively excluded from Iran’s $2-3 billion agricultural market by strict U.S. licensing and the strong EU relationships built up before last year’s legislation exempting food and medicine from sanctions programs.

Mr. Chairman, the Bush Administration is currently conducting a review of all U.S. unilateral sanctions policies, including Iran and Libya.  That review will not be completed before Iran’s presidential election on June 8.  That election is an important event in the ongoing power struggle in Iran, which itself is taking place in a volatile social context.  A majority of the population has been born since the 1979 revolution.  The ultimate direction of the country’s policies is very much in doubt.  It would be unwise in the extreme for Congress to continue sanctions or impose new ones before the Iranian election and before the new U.S. Administration has developed its policy. 

In the case of Libya, the end of the Lockerbie trial offers an opportunity to bring an end to a long period of confrontation in our relations.  While Libya must still fully comply with U.N. resolutions requiring appropriate compensation to the victims’ families and acceptance of responsibility, the U.S. should encourage positive trends in Libyan behavior.  Passing a new version of ILSA will have no impact on European and Asian investment in Libya but would signal that the U.S. does not acknowledge the progress that has been made.

We conclude, therefore, that U.S. sanctions on Iran have not had their intended effect of changing Iranian behavior, that ILSA in particular has not been effective in isolating Iran or Libya, but that it has been very effective in isolating the United States from these two countries and imposing significant economic costs on us.  This is the opposite of the “smart sanctions” policy that the Secretary of State is trying to develop. The consequences in the case of Iran are especially far reaching given the geographic and strategic importance of the country.

We are convinced that expanded private contact with Iran, including business contact, will reinforce positive trends in that country in the long term.  But let me be very clear.  A decision by the Congress not to renew ILSA is not a concession to Iran or to Libya.  Renewing ILSA sends a decidedly negative message that ignores changes that have taken place since 1996 and sends a powerful message to our European allies that we are continuing a failed unilateral policy.  Allowing ILSA to expire would clear the way for a new policy based on current realities and better designed to U.S. interests and carefully considered policy objectives. We believe the choice is clear.