The Subcommittee met, pursuant to call, at 2:06 p.m., in Room 311, Cannon House Office Building, the Honorable Donald A. Manzullo [chairman of the subcommittee] presiding.

Chairman MANZULLO. The Subcommittee will come to order.

Imposing unilateral economic sanctions is foreign policy on the cheap. For the past six years, both the legislative and executive branches have been all too quick to impose unilateral economic sanctions. The National Association of Manufacturers estimated that in just a four-year period between 1993 and 1996, 61 U.S. laws and executive actions enacted unilateral economic trade sanctions against 35 countries. The Institute for International Economics and the Congressional Budget Office agree that the cost of sanctions to our country is as high as $20 billion, resulting in the loss of up to a quarter of a million jobs.

American workers and sound U.S. foreign policy are the losers in this vain exercise. Small businesses are particularly hurt either directly as exporters or indirectly as supply orders to large firms dry up because of these sanctions.

Most of our economic sanctions focus on denying our agriculture, manufacturing, or service exports to the offending country to send a message that we do not like their behavior. Yet many countries of the world grow or make similar products. The real-life practical effect of our sanctions is simply to shift production away from the U.S. to another country. Plus the offending country does not change its ways.

Last year Congress received a stark lesson on sanctions. Because Congress was in session -- that was one of the few times in history that we were grateful Congress was in session -- we intervened just in the nick of time to preserve the sale of $37 million worth of winter wheat from the northwest part of our country to Pakistan. Yet few know that since last November the U.S. did not export over $65 million worth of manufactured products to India and Pakistan because of the remaining sanctions on those two countries. The ripple effect on other U.S. exports not subject to direct sanctions to India and Pakistan remains to be seen. Thus, the sanctions process reform bill is needed now more than ever.

We have a record trade deficit. We should seek to maximize every export opportunity within the boundaries of the national security concerns. That is why we need to know the costs and ramifications of potential unilateral economic sanctions. The U.S. seems to keep forgetting the lessons of previous sanctions. It is time we finally learned from our mistakes and passed this legislation.

This is a big issue, especially in light of the figure I just heard yesterday, that the U.S. consumption of locally manufactured machine tools has decreased by 45 percent within the past several months. So we have a very difficult situation on our hands.

Our first witness is one of my mentors in this great body -- the Honorable Phil Crane from an adjoining district. He used to represent McHenry County. He is the chairman of the Subcommittee of Trade on the Ways and Means Committee.

Mr. Chairman.

[Mr. Manzullo’s statement may be found in the appendix.]

Mr. CRANE. Thank you, Mr. Chairman, for this opportunity to testify regarding H.R. 1244, the "Enhancement of Trade, Security, and Human Rights through Sanctions Reform Act," legislation that you, Congressman Cal Dooley, and I along with nearly 90 of our colleagues now on a bipartisan basis have sponsored to reform the process by which Congress and the administration consider future unilateral sanctions. Reform is necessary because the proliferation of unilateral sanctions is causing lasting damage to America's reputation as a reliable supplier in the global marketplace. U.S. unilateral sanctions cost $15 to $19 billion annually in lost U.S. exports, and over 200,000 high-wage U.S. jobs.

Let us put this into perspective. The U.S. has applied sanctions for foreign policy purposes more than 115 times since World War I. More than 100 of those times have occurred since World War II, and more than 60 of those since 1993. More than half of the sanctions imposed in the last 80 years have been imposed since the mid-1990's.

In 1997 the President's Export Council reviewed the number of sanction countries and found that 75 countries around the world are covered or threatened by U.S. unilateral economic sanctions.

Small businesses are particularly vulnerable to sanctions because the consequences to them of losing even a small contract can be so severe. Sanctions act as a disincentive for small businesses to enter the global marketplace due to the complexities involved in navigating the sea of laws and regulations governing the ability of U.S. firms to engage in business with sanctioned countries.

On May 27 the Ways and Means Trade Subcommittee held a hearing on unilateral economic sanctions. Among our witnesses was Peter Bowe, president of Ellicott Machine Corporation International, a small business employing 125 individuals in Baltimore, Maryland. Ellicott produces dredges, and more than half of its sales are in export markets. Mr. Bowe told us that the cost of U.S. unilateral sanctions against the former Soviet Union, Vietnam, India, Iran, and China in some years has exceeded $10 million in lost sales for Ellicott. This cost in turn directly impacts job creation at Ellicott and benefits its foreign competitors whose home governments fully support their activity in these countries.

Instead of acting alone, the better policy is to pursue our goals through multilateral fora with our allies and trading partners. By developing a consensus approach, we increase the likelihood of success and ensure that the full brunt of the sanctions is felt by the targeted government.

If we are to maintain credibility and effectiveness in the foreign policy arena, we must examine our use of sanctions as an all-purpose foreign policy tool and the notion that the cost of unilateral sanctions is borne by those responsible for behavior we are seeking to change. That is why I have introduced legislation, H.R. 1244, which seeks responsible reform of the decision making process associated with U.S. unilateral sanctions. The bill's primary goal is to ensure that Congress and the administration have better information for more informed decision making on sanctions bills and initiatives.

Before imposing a unilateral sanction, H.R. 1244 requires Congress and the President to address certain common-sense questions. One, is the proposed unilateral sanction likely to be effective? Secondly, is the goal clearly defined and is it a realistic objective? And, third, will the sanctions undermine other U.S. objectives, including our relationships with our key allies? In addition, H.R. 1244 requires cost-benefit analysis and requires the consideration of other alternatives before unilateral sanctions are imposed. If unilateral sanctions are used, the bill would establish regular reporting and sunset requirements to ensure that action taken remains the most appropriate tool to address the problem at hand. Finally, H.R. 1244 would provide permanent waiver authority to the President under the Glenn Amendment with respect to the mandatory sanctions required by current law against non-nuclear countries that are conducting nuclear tests.

Under Secretary of State Stu Eizenstat testified at our hearing in May and stated that the administration believes that sanctions reform legislation would be constructive. I hope to work with the administration on refinements to H.R. 1244 so that we can work jointly toward the passage of this legislation. Without the information that H.R. 1244 would provide us about future sanctions, we risk taking action that is not in our interest, may be counterproductive, and has a very small chance of success. This bill is about establishing effective procedures that will lead to effective results in the way we respond to behavior by nations with which we have concerns.

Thank you for allowing me this opportunity to testify on this important subject, and I would be happy in the brief time we have to try and respond to any questions you may have.

[Mr. Crane’s statement may be found in the appendix.]

Chairman MANZULLO. I appreciate that, Mr. Chairman. We are joined by Carol McCarthy, who is our ranking minority member. If you have an opening statement, could we save that till the beginning of the second panel?

Mrs. MCCARTHY. I will even save that for you and just submit it.

[Mrs. McCarthy’s statement may be found in the appendix.]

Chairman MANZULLO. Okay. That would be fine, without objection.Carol, did you want to go first on questions of Congressman Crane?

Okay. Chairman, you have been a Member of Congress for some time, longer than my four terms, and you have seen a lot of sanctions come and go. Based on your experience, for example, with the Siberian pipeline or with the Russian wheat, could you relate to us how those sanctions came to pass and the results from them?

Mr. CRANE. Well, they are responses to international outrage, and there are ways in which you can bring a sanction bill to the floor and get everybody foaming at the mouth because we are going to pop in the chops that rogue or whoever is responsible for this behavior. And so everyone can vent, and then you introduce the bill for a vote, and everybody gets on board and boy, we smash them.

But the fact is -- and this is especially true more recently when we have had the majority of our sanctions in this global economy -- all you do is inflict injury on your own domestic exporters. I mean, they can turn anywhere else around the world in most cases and get supplied. And I think another thing that is so unfortunate about it, once you get the sanction in place, going back at a later time and trying to undo it is an infinitely more difficult task than getting it in place in the first instance. And so these sanctions go on and on forever without a sunset or shelf life. And so I think that while it may seem like good politics to put forth a proposal like that in response to some outrage, and you have punched them, and wow, back home everybody loves it until they start feeling the economic impact. And a lot of them are not even sure of what caused the economic impact.

You know, I hesitate to bring this up because it is still a hot, controversial issue, but on that subject of the sanctions against Cuba, at the very least what we should have done was to permit the export of food. And that has frankly taken a toll with our agricultural States. The estimated cost I think is about $700 million so far. And what has it accomplished? I mean, the people who pay for that in those countries almost invariably are the innocents, the poor, innocent people. Fidel has no problem getting whatever he wants at the expense of those people. And medical supplies of course is another one that should not come under any sanctions consideration. But at any rate, it is seemingly good politics, but what this bill does is slow that process down and force us to weigh and evaluate what may be consequences unanticipated when you are releasing your rage on the floor through a sanctions bill.

Chairman MANZULLO. That is how they come to pass.

Mr. CRANE. Um-hum.

Chairman MANZULLO. Mrs. McCarthy.

We are also joined by Congress Chabot.

Mrs. MCCARTHY. Thank you. Actually I was going to talk to you about Cuba, because right now there are a number of bills that are going to be coming up. One has to do with food and medicine, and those that are against it are saying they are taking that and selling it and making money. Cuba -- oh, gosh, it has to be 40 years now, isn't it?

Mr. CRANE. I think '60. Yes, it has been --

Mrs. MCCARTHY. I'm not old enough for that. I remember when they put sanctions on Cuba. But with that being said, there are many things that I agree with you on, and sometimes it does come down to the politics. And I think we are going to be seeing that when we deal with China on what we are going to do with China. And yet we are seeing all of our allies go around and certainly do what is best for their economy.

What would you suggest -- how, if we are outraged with a country, what would you suggest that we do, if we could get around these sanctions?

Mr. CRANE. In dealing with a rogue country?

Mrs. MCCARTHY. Yes.

Mr. CRANE. As I indicated, and I mentioned this with regard to Kosovo, rather than bombing, try and reach an agreement with all of the major trading partners in the world that we are going to impose multilateral sanctions against Belgrade. And I think that could have accomplished one of the paramount objectives theoretically behind the bombing, and that was to get people just totally turned off with Milosevic. And instead, even his political foes in Serbia rallied behind him because of the attack on their country. And if you had done the economic sanctions, it would have produced over time economic dislocations that the people would have risen up, I think, and overthrown him for putting his country in that kind of an isolated state. But, as I say, that's multilateral sanctions. They can have an impact. But when you do it unilaterally in this climate today you are not accomplishing anything except injury to your own domestic exporters.

Mrs. MCCARTHY. Which brings us to the case of China and how are we going to deal with them. There are many of us that happen to believe if we have continue trading with them, democracy will be promoted. It might be long-term, and having people see what goes on in the rest of the world. There are many who, because of the inhumane treatment of many people there, say we shouldn't do anything. How do we get around trying to teach some of our colleagues that we are actually helping the people of China?

Mr. CRANE. Well, I think it is an educational problem, and it is a big one. And I have mentioned that historically the Republicans were the protectionists. We were the ones that wanted the Great Wall of China around the United States. And the Democrats were the free-traders. And those two positions prevailed until World War II.

After World War II the Republicans started to lift the blinders up and check the realities and realized that protectionism is just plain stupid. But unfortunately because of the privileged position of some in the industrial world here in the United States that came out of us being the only industrial nation left, they figured put the walls up and you are protecting special dispensations. And that had some influence on the Democratic side of the aisle. Not totally, because our sides are still about -- well, I mean, we are divided, but I remember not that far back when at least 50 percent of the Democrats were still free-traders.

And you hearken back to in 1890 when the McKinley tariff went in place, it produced a very severe economic dislocation that really did not hit until '93. It was called the Panic of '93. And Grover Cleveland, who had been out for a term, got reelected in '92, sworn in, and the depression hit. And he got blamed for it. And he immediately started dismantling that stupid McKinley Act and getting the economy back on track. And he said at the time when you impose those kinds of barriers, economic barriers on your country, you impose the greatest pain and suffering on that man who earns his daily bread with the sweat of his brown. To which I say amen.

Republicans -- it took them a long time because it was not until the next century, we got the Smoot-Hawley, as you know, and that guaranteed that our Depression went worldwide for a decade. But this is something that really does not belong in partisan debates. It is not a partisan issue. It is an issue that we can debate the merits of, but it has to do with what is in the best interest for the United States and our trading partners. And your point is well taken about what the advancement of an economic foundation in a country can do in advancing also democratic institutions.

The Caribbean Basin Initiative, which Reagan pushed through in '83, was designed expressly for that purpose. It was to guarantee that our Caribbean neighbors did not succumb to what happened in Cuba, and to do that we would help them build up their economies and in the process that would advance democratic institutions, and it worked for all of the Caribbean countries except Cuba. I mean, of course it was after Castro was in power. But if you go over and visit -- and that is something we should encourage more of our colleagues to do. I know we catch flak from the media for taking committee trips. But taking committee trips to places like China to witness firsthand what that economy has managed to do by moving down the line of free markets -- and Zhu Rongji, for example, unilaterally has been privatizing over there with a vengeance. Now that is not the most popular political thing for him to do, but he did that. And what it has the practical effect of doing is providing those expanded opportunities to have contacts, personal contacts. And what is the best way to advance our values but to be able to have the personal contacts and to talk and visit with people.

I talked to the head of a Motorola plant in Shanghai – Motorola’s corporate headquarters in my district -- and he was explaining to me that in their plant they have clean working conditions. If you work more than a 40-hour week, they pay overtime. They provide health care benefits to their employees. And they went a step further and built a huge apartment complex so that if you are with them five years, you move in; ten years, you own your own apartment. And I said gee, did you bring all of our standards over here and impose them on yourself that way? And they told me no, those were the standards imposed on a foreign company doing business in China.

Now, it applies to foreign companies over there, but not to the domestics. But I said if you and I are neighbors and you are working in some grungy Chinese factory that is filthy, you do not get overtime pay, you do not get any health care benefits, and I am working for Motorola, then at the end of the work day we are having a Tsing Tao together, and I hear you going on about that place where you work, I am going to tell you well, come on, work for Motorola. Why are you working there? And Ben Franklin made the observation a good example is the best sermon. And having those good examples over there provides that, and it provides the incentives for them also domestically to start getting up to speed.

Mrs. MCCARTHY. I happen to agree with you as far as going over and traveling. I have taken three trips so far. And if the press thinks they are fun, they should travel with us.

Mr. CRANE. Yes, indeed. I agree.

Mrs. MCCARTHY. It takes us about 48 hours. When we come home --

Mr. CRANE. Um-hum.

Mrs. MCCARTHY. Just to try and get back to a normal routine. So I challenge any press person to go on any of our trips, and I think that they would see that we are not there to have fun.

Chairman MANZULLO. Thank you.

Mr. Chabot.

Mr. CHABOT. Thank you.

Phil, you have already mentioned a few, but are there any other historical examples of ineffective sanctions that you would like to mention or perhaps any sanctions that might have worked?

Mr. CRANE. Well, there is one that Don mentioned there, and that was when Congress acted when the sanctions were about to go into effect to hurt our farmers last year, and we gave the waiver to the administration. But, I mean, these are going on repeatedly. It would be hard to properly calculate and tabulate the impact worldwide of the sanctions that are in place when there are small businesses that have finally made decisions not to go exploring worldwide. And we have no calculation of how many, but I will tell you something interesting that happened to me.

A fellow came into my office doing business in the Persian Gulf and he said Congressman, do you know how many businesses from your district are doing business in the Persian Gulf. And I said no, I haven't the vaguest idea. And he handed me a little notebook and said here, over 150 of them. And I looked at the list.

Now, I have the corporate headquarters of Motorola, Sears, Ameritech, United Air Lines, Kemper, I have Baxter and Abbott right on my border, and Allstate. And so, you know, I knew that we have big giants in the world of trade. These 150 I looked at the list and not a single name did I recognize. And he told me afterwards, he said those are little companies. You know, 100 to 200 employees. And this is a fact that is not properly being disseminated and explained to colleagues here when you talk about taking these kinds of actions it has a ripple effect that is hard to define.

We had a Trade Subcommittee hearing in my district about, well, it was two years ago, I guess, but we had representatives from some of the big corporations there to testify, and we are the fifth largest export State in the Union, and I think my district exports more than yours, Don. I am not positive about that.

Chairman MANZULLO. I don't think so --

Mr. CRANE. Well, yours exports a lot, I know, too. But the fact is, we discovered that better than 90 percent of Illinois exporters are companies employing 500 or fewer. And, you know, it is these little guys that are aggressively involved in this, but it is the little guys that get timid because of not anticipating the political ramifications of having made that adventure abroad and then having somebody in Congress impose a sanction and put you out of business there. And these are things that are unanticipated consequences, but there are things that we should not take lightly. If we study in advance and get the input, appropriate input, we will think of some more effective way of dealing with rogues.

Chairman MANZULLO. Mr. Chairman, I want to thank you for sharing part of you day with us.

Mr. CRANE. Well, no, thank you.

Chairman MANZULLO. I look forward to working with you on the Crane-Dooley-Manzullo legislation.

Mr. CRANE. You betcha. And Cal, I hope, is going to get here before your hearing is over.

Chairman MANZULLO. Did Cal call? I think he is tied up in another subcommittee. He is going to try to make it.

Mr. CRANE. Oh. Well, the reason I say is to make sure that, you know, we get our bipartisan presentation here.

Chairman MANZULLO. Right.

Mr. CRANE. Because the good thing about the bill is we have good, down the line, I mean almost 90 sponsors, and it is about 45-45. And that is the kind of thing that is encouraging. And I thank you for this opportunity.

Chairman MANZULLO. Thank you, Mr. Crane. I appreciate it very much.

If we could have the staff prepare the table for the second panel, please.

Chairman MANZULLO. Is Mr. Ledge or Mr. George here? Do you want to come up and have a seat, please, at the table?

Our first witness on this panel will be Gary Hufbauer, who is formerly a Professor of International Finance Diplomacy at the Georgetown University, Deputy Director of the International Institute at Georgetown University, Deputy Assistant Secretary for International Trade and Investment Policy at the U.S. Treasury, plus a host of other positions. He has written several articles involving NAFTA, "Economic Sanctions Reconsidered," and "Trade Policy for Troubled Industries."

It is with great pleasure that we welcome you to appear on our panel, Mr. Hufbauer.

Mr. HUFBAUER. Thank you very much, Mr. Chairman, for inviting me to speak, and apologies for my hoarse throat and voice.

Chairman MANZULLO. Mr. Hufbauer, if you could put the microphone close to you --

Mr. HUFBAUER. Is that a little bit better? Thanks very much.First of all, I very much agree with all the remarks made by Congressman Crane. I am delighted the bill which he has authored and you have co-authored is coming along. I would note that we did have a really good legal victory just the other day when the appeals court in the First Circuit upheld the District Court in the case brought by the National Foreign Trade Council involving the Massachusetts law over Burma. This appeals court decision, if it stands -- if it is tested in the Supreme Court and if it stands in the Supreme Court -- will do a great deal to ensure that this country speaks with one Federal voice in terms of foreign affairs, and that we cut out much of the thicket of state and local sanctions. But that still leaves plenty of room for Congressional and Administration reform and that is what your business is about today.

You have my statement, so let me summarize a few key points. We find in our research at the Institute for International Economics that there has been a declining effectiveness of sanctions over the postwar period, as Congressman Crane noted. There are certainly some successes but there are far more failures in foreign policy terms. The costs of sanctions are pretty high, even for very light sanctions that involved, let's say, cutting off of some bilateral military aid. Our statistical analysis indicates that overall trade between the U.S. and the target country would fall about 27 percent in those cases. When you consider very heavy sanctions in some of the cases that have been mentioned, trade practically disappears – it drops by about 90 percent -- so that translates into the kind of numbers that Congressman Crane emphasized.

The small gloss I would put on these numbers is that our exporting sector pays better on average, and export jobs are more stable on average than in the economy as a whole. The "on average" translates into about $4,000 more wages per year per person in manufacturing employment in exports by comparison with the economy as a whole. This is the area of our competitive advantage, so jobs are going to be better paid. When we cut off our export jobs we are not doing ourselves a great national favor.

Small business firms are of course particularly hard hit. If you take a large business firm such as General Electric -- and my fellowship at the Institute is named after the former president of General Electric, Reginald Jones -- well General Electric does business all over the world in thousands of products. Of course they are subject to a lot of sanctions and they lose money, but they can shift.

A small business firm, which is only doing business in one or two products in a few countries, when it is hit either in terms of its supplies or in terms of its exports, it truly suffers and oftentimes that may be the straw that breaks the back. Let me just conclude by urging this bill forward. I think it really is in the national interest. Thank you.

[Mr. Hufbauer’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you. Our next witness is Steve Ledger. Steve is from Addison, Illinois, which I believe is in Mr. Hyde's district --

Mr. LEDGER. That's right.

Chairman MANZULLO. And he is the president of ROTEC Industries from Elmhurst, a manufacturer of belt conveyer systems, tower cranes and mobile construction equipment that is marketed worldwide.

He received his degree from Northern Illinois University Business School and Purdue University School of Aeronautical Engineering. His company is no stranger to Capitol Hill, having testified several times and our Committee having used ROTEC Industries as the example of a company that has been singled out essentially in terms of sanctions hurting a company, so it is with great pleasure that we welcome you to appear before our panel, Mr. Ledger.

Mr. LEDGER. Thank you, Mr. Chairman.

I am a little bit of a stranger here but my predecessor has laid some pretty definite tracks I think.As you mentioned, ROTECH is a small company. We are out of Elmhurst. We make a unique line of equipment and we operate as a classic American entrepreneurial company. We have really no, up until recently, we had no direct competition for our specific products anywhere in the world and our success was keyed on several things -- our product line, our hard work, lots and lots of travel and frequent flyer miles, and most of our business, especially in the last 10 years, has been export and sometimes as much as 90 percent per year.

So a big job for us, usually in a foreign country, is often the key to what is a good year or is a not so good year not only for our company but for our subcontractors and suppliers who live off of the fruits of our labor as well.

Our equipment is usually used on large civil projects, typically dams, hydropower plants, and these are the types of projects that tend to benefit the people of a region, the economy of a region. It is the type of projects that the Third World countries, the developing countries do need to bring the standard of living of the people that live there to a higher level.

Those of you who have been to China, if you have gotten away from Shanghai and Beijing into the central part of the country, even the people who aren't being mistreated by the government don't have a very nice life. I am not trying to be the world's savior, but I think my equipment can help bring in electricity, flood control, and water to many people around the world.

The sanctions, particularly the unilateral sanctions that we are discussing, have hurt us in the past. Three Gorges in China is one example. We were faced with lack of support from Ex-Im to provide financing for this project. We went in there, spent several years cultivating that order and eventually were successful in receiving three major orders for a total of about $85 million worth of equipment -- sorry, $65 million. The total U.S. exports for that project are $85 million and the total international acquisition for that project is $1.5 billion, so the U.S. companies got a very small slice of that pie and the result is the job is going on, on schedule.We didn't stop them. We didn't even slow them down. We only cost jobs for U.S. businesses and U.S. workers.

We have faced similar problems in Iran last year. There was a major project there where we had I think a great chance of success, but because of the embargo we weren't allowed to touch that, and I understand there is future business for our type of equipment in Iran that we are still stepping back from and waiting for the green light.

A small company like ours, we invest a lot in one of these orders, even after we receive the order. Beforehand of course, but after we receive the order we may take six to 12 to 15 months before we can ship and get paid for the equipment. If an embargo was put in place during that time, we would stand the risk of not only losing the order but losing all the money we had invested in the order, so I want to emphasize that the effects on U.S. businesses are very real from these embargoes.

We are out there working hard. We are out there taking risks and trying to do something that is a little bit different, yet brings profit, jobs and hopefully a little enjoyment to us, ourselves, at the same time.

I think I better quit because I have got a red light.

[Mr. Ledger’s statement may be found in the appendix.]

Chairman MANZULLO. Usually I go on a crusade every six months over Ex-Im's failure to grant the ability to guarantee loans in China and the repercussions of that still are being felt here in the United States.

Our next speaker is Mr. Varghese George.

Mr. GEORGE. Yes.

Chairman MANZULLO. Mr. Varghese George. I bet people turn that around, don't they?

Mr. GEORGE. They do.

Chairman MANZULLO. Mr. Varghese George is president of Westex International, Incorporated, and is a Director of the Small Business Exporters Association, with which we have worked quite frequently here in Washington. We are very much interested in some compelling testimony as to which you have some very intimate knowledge and look forward to your testimony, Mr. George. Go ahead -- if you could put the mike as close to your mouth as possible, thank you.

Mr. GEORGE. Thank you, Mr. Chairman, and members of the Subcommittee for the opportunity for me to testify here. My name is Varghese George -- and you were very close. I am the president of Westex Group. I am an export company operating out of Washington since 1983, and I am a supplier of American equipment, machinery and materials to clients all over the world.

I am also an active member of the Small Business Exporters Association and I have been privileged to serve on the board of the organization for many years.

During the last 16-plus years of our operation Westex has been responsible for over $80 million worth of exports either as a direct exporter or a facilitator. Westex lost approximately $25 million in sales due to unilateral sanctions over the past few years. Likewise, members of our association may have lost billions of dollars in lost sales.

Recently we were forced to abandon our targeted marketing and sales operations in a country under sanction, primarily due to the uncertainty it poses because of the sanctions. The market potential is enormous for American products in this country right now and for the future. Speaking as the owner and operator of a small business, an exporting business, and as a member of the Small Business Exporters Association, I am against unilateral sanctions.

I would like to make the following remarks about sanctions common to the members of the Small Business Exporters Association. Unilateral sanctions adversely affect small business in terms of lost opportunities and wasted efforts and resources. All things considered, it is our experience U.S. brands have the highest market recognition and will be purchased if the price is competitive. We are only hurting ourselves by not allowing the free market to prevail in international commercial transactions.

What is perhaps more disruptive to American business interests is the stop-and-go nature of the sanctions policy. We have been involved in transactions in which we have to disengage midstream in order to comply with our government policy at a considerable loss of time and money. European and Far East competitors were only too happy to step in and fill the vacuum caused by our departure. We are always at a disadvantage to re-enter these markets once the sanctions are lifted.

Our credibility as a dependable source of supply is threatened by the sanctions. I encounter prospective clients in countries where sanctions have been lifted who are wary of working with American firms. Sanctions, to be fair and effective, require the participation of all developed countries, especially our historical allies. Competition from European and Far East companies has eroded the market share of U.S. exports in many markets. Adding the sanctions policy to the scenario only weakens U.S. business interests. In order to remain competitive in the global marketplace, we must refrain from declaring unilateral sanctions.

We also believe America's economic well-being and prosperity will very much depend on our ability to sustain and increase our exports. Any dilution of our efforts through unilateral sanctions will indeed pose a threat to our economic security now and in the future.

We, as small business exporters, must be given more opportunities, not less, by our government to develop new markets without the threat of future disruptions by sanctions. We believe the unilateral sanctions prior to implementation should be subject to comprehensive impact studies, especially on small companies like Westex.

The impact of sanctions on jobs and families must be considered prior to any decision by the U.S. Government to invoke sanctions. Thank you, Mr. Chairman, for this opportunity.[Mr. George’s statement may be found in the appendix.]

Chairman MANZULLO. We appreciate your testimony.

I have a question to Mr. Hufbauer. The Congressional Budget Office has stated that sanctions on foreign commerce have had a negligible effect on the overall U.S. economy. I am sure you have seen that report. It claimed that $19 billion in lost exports does not mean that much in a $6.6 trillion economy. Only an agency of Congress can say $19 billion means nothing. It's just amazing.

You are smiling and I would like your reaction to that CBO study.

Mr. HUFBAUER. Well, the Congressional Budget Office and the Institute have a disagreement on this point. Sure, if you measure anything relative to the U.S. economy, it is small. This is not an exaggeration. If Mexico were to disappear from the face of the earth, relative to the U.S. economy it is small, because it is about 5 percent or 8 percent of our economy, but you can't size up everything relative to the U.S. economy. That is ridiculous. Twenty billion dollars worth of lost exports -- about 70 percent of that in small and medium size companies and a third of that in truly small companies as measured by the Small Business Administration -- that is a lot of money. It represents a very concentrated impact on those firms and on those communities. In any event, all economic progress is accomplished step by step, and you are taking away some of those steps when you put on economic sanctions.

I will size it up another way. The total budget of the State Department is less than the cost of these sanctions. Well, Congress goes over that budget line item by line item. But sanctions are as big a budget as on top of that. I could make a few other comparisons along those lines. The amounts are not at all trivial. I was a little bit surprised by the CBO rhetoric on that point.

Chairman MANZULLO. I imagine Mr. Ledger would agree with you, because 90 percent of your manufacturing is exports, is that correct, Steve? Is that what you said?

Mr. LEDGER. Yes -- well, the last few years especially, a great majority of our business has been export business.

Chairman MANZULLO. Do you agree with this $19 billion figure, or do you think it is a lot greater than that?

Mr. LEDGER. Me, personally? I think our company, we are a $30-40 million a year company, and I think it has probably cost us $19 million or more in the last two to three years --

Chairman MANZULLO. In sanctions.

Mr. LEDGER. And I don't -- right, exactly -- between China and Iran. I don't see how I'm only one out of a thousand. I think more I am one out of 10,000 or one out of 100,000.

Chairman MANZULLO. I have problems with these figures because there is no way that you can qualitatively state the loss of sales due to a reputation for being a poor supplier. I mean how do you state in quantitative economic terms how much we have lost because other countries simply will pass us by and go somewhere else where there is a more reliable supply on it?

Mr. George, did you have any specific examples of how sanctions have hurt your company in particular?

Mr. GEORGE. Yes. In the last three or four years, during Ron Brown's tenure as the Commerce Secretary, there was this big presentation of 10 emerging markets as the "in" thing for exporters, and I jumped on the bandwagon and I looked at the markets, you know. This map is very illustrative of the size of the markets that we are losing because of sanctions, if you really look at it.

We are leaving out probably a couple billion people and I looked at India, the country of my birth, as a very good prospect for export, and there is almost a billion people and I go there quite often because my parents still live there, and I got very, very excited about the prospect of Americans and the Indians integrating their economy in some way, and I spent a lot of money and time, which I can least afford, while building up businesses, into that project. I think somehow things have waned because of the relationship, and now with the nuclear proliferation issues involved, it is not a good bet for me, so everything I have done so far -- if you want me to quantify in real terms what I lost, close to about half a million dollars -- and that is a lot of money for a small guy, and that's why it hurts.

I was involved in nothing other than consumer products. You know, I want a stable place where I can slowly build up brand awareness and the American way of doing things into the markets that I am so familiar with, in which I have a lot of contacts, but there is politics and I don't control the government of India policy. They have their own reasons why they do things. But it hurts me in the pocketbook and it hurts my chances to make it as a small business.

I employ about 14 people, and that is a lot of burden -- continuing to feed them, enough work, and if you cut out a couple billion people from the face of the planet that is less that I have to work with. So it is real -- only in these forums we can come in and express our disappointment in these things.

Chairman MANZULLO. Well, you know, the issue here is, first of all, whether or not the sanctions work, and, Gary, you attached a chart to your testimony that talked about whether or not a sanction was, quote, "successful" -- could you explain a little bit more what criteria you used to determine the success of the sanction?

Mr. HUFBAUER. Yes, indeed, Chairman, and I think you are eligible to buy the first copy of the third edition of our book.

Chairman MANZULLO. Well, let us know when it comes out.

Mr. HUFBAUER. Yes, it will be out --

Chairman MANZULLO. I will get one from the Library of Congress -- no, I will buy one, autographed, from you.

Mr. HUFBAUER. We go into a lot of detail but briefly, for each case we try to look at two things. One, whether the foreign policy objectives which were stated by responsible officials were realized in part, and I emphasize "in part" because you very seldom get a slam-dunk in foreign policy, especially where sanctions are involved. Then secondly, whether the sanctions, according to on-the-spot observers, close observers of the episode at the time, succeeded or were partially successful in the outcome. So the measure has two components and we scale those and we multiply them to judge success.

Let me just take a very obscure case which nobody follows, Angola. We have sanctions against one of the factions in Angola, Mr. Savimbi's faction -- in I think it is the MPLA. We have had them for some time. Savimbi at a time was willing to negotiate with the government, the elected government of Angola, and that was one of our objectives. When we looked at the situation more closely, we concluded that the negotiations, such as they were, did not resolve the civil war that is going on there. The negotiations were a very temporary sort of thing and just provided an opportunity for Savimbi to move some troops to a more advantageous position. We didn't score those sanctions as successful.

That is illustrative of the kind of detail we get into. We tried to use a consistent scoring method across these cases that span a long period of time. When I look at other academics who have commented on our work we get more criticisms from people who think we are too generous in our scoring than people who think we are not generous enough. I think it is fair to say these are liberal estimates of the success ratio, that is, the percentage of cases where there is some success, taking those two components, and it is rather low in recent years, as you can see.

Chairman MANZULLO. Did you have any more questions, Carolyn?

Mrs. MCCARTHY. Thank you, Mr. Chairman. We have had this battle here in Congress before, but frequently American economical interests are threatened by actions of foreign countries. The example that we were fighting here in Congress was when one country did not respect our intellectual property rights, copyrights, patents, trademarks and the like. American interests were definitely suffering from these actions, and they felt victimized, and they wanted to seek retribution.

How do all of you feel about the U.S. utilizing sanctions to retaliate against other nations whose policies really do victimize our own businesspeople?

Mr. HUFBAUER. Briefly, Congressman, on that point, our research at the Institute indicates that retaliation or sanctions, if you will, where there is a straight-out commercial dispute, have been far more successful than in these political disputes, and I think the rationale is pretty straightforward.

When you are talking of commercial disputes you are talking basically money, and you don't embroil the whole power structure in the country, or spark nationalistic reactions.

When you talk nuclear explosions in Pakistan, events are just a totally different order of magnitude and so sanctions have initially far less chance of success in foreign policy episodes than they do in commercial episodes.

Mr. GEORGE. In the case of India, I think once a country passes a certain threshold, it is irretrievable, and I think it is futile, just like closing the gate after the chicken has escaped -- I don't know whether I said it right or not -- but it is too late. You know, it should have happened much before for the diplomacy to work.

I think it is very difficult to employ sanctions and ask them to retrieve their course. Some other methods have to be used, and I concur greatly on this issue. I mean quid pro quo or commodity by commodity or product by product, I think it has got a better chance of success than unilateral declarations of sanctions, total sanctions.

In my experience as a small businessman, it hasn't worked. I think we should think seriously about it before we do it, because we are at the short end of it. We always lose.

Mrs. MCCARTHY. And just a follow-up question. When we implement sanctions, do you get involved personally by calling your Congressperson and explaining what it was going to do to you personally as far as your business?

Did they know how you felt, your Congressman from your area?

Mr. GEORGE. Yes. My Congressperson that I deal with is Connie Morella.

Mrs. MCCARTHY. Okay.

Mr. GEORGE. I live in her district and I send e-mails and express that, but it is a much bigger issue, and she is sympathetic. I happen to support her policies and her method of approach, but it in this case it is too big for somebody to help. I mean I am looking for immediate remedy for a situation I am in and I think I am very hesitant to go into these countries which have got big problems on the State Department level.

It is beyond me. And, I mean, the process takes time. Once sanctions are applied, it is very difficult to move the machinery, bureaucratic machinery and all the procedures back in place to enjoy the benefit of no sanctions. It is very difficult as a small business. And I do try, I do go through the channels which are available in the democratic process that we have. But I do not think it is very effective.

Chairman MANZULLO. If I could interject -- would you yield for a second?

Mrs. MCCARTHY. Oh, certainly.

Chairman MANZULLO. If I could interject for a second, the Crane-Dooley-Manzullo legislation would give notice to the various groups that the President is about to impose a sanction. Now you have absolutely no idea that a sanction is about to be imposed and really have little opportunity to get involved because the sanction normally is imposed by way of regulation as opposed to a vote of Congress where there is even an opportunity to contact your Member of Congress.

Thank you.

Mrs. MCCARTHY. Thank you, Mr. Chairman. I also believe in that particular amendment that anyone that is already in contract or going through business there can continue, if I read that correctly. So it seems like a pretty fair thing to go for.

Thank you, Mr. Chairman. Thank you.

Chairman MANZULLO. Well, we want to thank you for coming here this afternoon. You know, we continue to try to get more and more Members of Congress involved on this particular piece of legislation. Sometimes bad things happen. They get reversed. That brings people's attention to what is going on. But obviously the imposition of the Glenn amendment that temporarily stopped wheat exports to Pakistan, which required a special vote of Congress to repeal, really brought to the attention of many Members of Congress the need for sanctions reform. Our proposed piece of legislation simply gives the President opportunities to choose from a cafeteria list of exactly what sanction is appropriate and what is not appropriate, and it gives Congress the opportunity to become involved in that choice.

So again we want to thank you. Thank you, Mrs. McCarthy. Your statement will be made part of the record. And all of your statements will also be made part of the record. And thank you for sharing this afternoon with us.

This Subcommittee is adjourned.

[Whereupon, at 3:06 p.m., the Subcommittee adjourned subject to the call of the Chair.]