Category: Press Releases and Statements

NFTC President Discusses Implications of States Using Public Pension Funds to Influence Behavior of Foreign Governments

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Reinsch Says State Sanctions and Divestment Legislative Efforts Are Ineffective


Washington, DC ­ National Foreign Trade Council (NFTC) President Bill Reinsch today delivered remarks about the costs and foreign policy concerns posed by states using public pension funds to influence the behavior of foreign governments. In a speech before the annual conference of the largest national nonprofit association for public pensions, the National Conference on Public Employee Retirement Systems, Reinsch noted that multilateral action and a unified U.S. foreign policy – not multiple state sanctions or divestment laws – are best suited to address the serious concerns raised by Sudan and Iran.

 

In discussing the NFTC’s advocacy efforts in support of a unified, federal foreign policy, Reinsch said, “We have opposed these sanctions not only on their merits but also because the Constitution reserves the right to conduct foreign policy to the federal government.” In this context, he cited the unanimous 2000 Supreme Court ruling in Crosby v. NFTC, in which the NFTC successfully challenged the constitutionality of a Massachusetts law prohibiting procurement contracts to companies doing business in Burma.

 

According to Reinsch, “The essence of their ruling was that the President makes foreign policy, not the legislature and the governor of Massachusetts. And, he does not need fifty states, or lots of cities and counties, coming along with sticks and carrots which conflict with his and which pose enormous compliance burdens on the primary victims of sanctions – U.S. companies, banks and asset managers.”

 

While the Massachusetts sanctions prohibited the state government from procurement from companies that did business with Burma, Reinsch noted that current efforts by states are altogether different as they seek to force public pension funds to divest from companies with direct or indirect business ties to Sudan or Iran. In August 2006, the NFTC filed a lawsuit to challenge an Illinois Sudan divestment law, and in February 2007 a federal judge declared the law unconstitutional. The state is currently appealing the decision.

 

In closing Reinsch said, “We are often asked what states can do. The answer is they can pass resolutions and lobby Congress and the Administration to take stronger action. However unsatisfactory this may seem to sanctions proponents, only the federal government has the diplomatic and economic resources to move other countries and multilateral organizations to join in effective action.”

“Quite apart from the constitutional issues raised by state divestment laws, the costs of pension fund divestment must be weighed very carefully against the prospect of the sacrifices they entail having any beneficial impact,” he concluded.

 

 

Advancing Global Commerce for Over 90 Years

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

USA*Engage (www.usaengage.org) is a coalition of small and large businesses, agriculture groups and trade associations working to seek alternatives to the proliferation of unilateral U.S. foreign policy sanctions and to promote the benefits of U.S. engagement abroad. Established in 1997 and organized under the National Foreign Trade Council (www.nftc.org), USA*Engage leads a campaign to inform policy-makers, opinion-leaders, and the public about the counterproductive nature of unilateral sanctions, the importance of exports and overseas investment for American competitiveness and jobs, and the role of American companies in promoting human rights and democracy world wide.

 

Remarks to NCPERS, William A. Reinsch, President, National Foreign Trade Council, Honolulu, Hawaii

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I am pleased to be with you today to discuss attempts to use public pension funds to influence the behavior of foreign governments.  Let me begin, though, with a word about the National Foreign Trade Council.  Our member companies include most sectors of the U.S. economy.  We represent them on issues of trade policy, international tax policy, human resource issues, and we work with them in opposing unilateral economic sanctions.

 

Our opposition is because the evidence persuades us that unilateral sanctions simply do not work and are usually counterproductive.  Ten years ago we established a subsidiary called USA*Engage to educate Congress and the public about the futility of unilateral sanctions and why it was better to exert positive influence through diplomacy and engagement.

 

We have had some success with this message, though we still find ourselves all too frequently playing defense.  But in the past two years we have also witnessed increased efforts by state and local governments to get into the foreign policy business by imposing sanctions against whichever country they were mad at at the time.  We have opposed these sanctions not only on their merits but also because the Constitution reserves the right to conduct foreign policy to the Federal government. 

 

To prove that point,  in 1998 we sued the state of Massachusetts, challenging the constitutionality of its sanctions on companies doing business with Burma.  We did not do that because we like Burma.  We do not.  It has a nasty regime which is a clear violator of human rights.  But the Congress had already passed tough sanctions on Burma, and the Massachusetts law conflicted with them.  We won that case at every level, including the Supreme Court, which in 2000 ruled unanimously that the Massachusetts law was unconstitutional.  The essence of their ruling was that the President makes foreign policy, not the legislature and governor of Massachusetts.  And, he does not need fifty states, or lots of cities and counties, coming along with sticks and carrots which conflict with his and which pose enormous compliance burdens on the primary victims of sanctions – US companies, banks, and asset managers. 

 

Let me give you a hypothetical example.  Suppose violence breaks out in Kashmir (not an entirely unlikely prospect).  Michigan, influenced by its Muslim population, sanctions India, while California, with its large Indian population, sanctions Pakistan.  Where does that leave U.S. foreign policy?   I’ll quote just one passage from the Supreme Court’s decision that makes this point:

 

It is impossible to think that the (first) Congress would have gone to such lengths  to empower the President (to conduct foreign policy) had it been willing to compromise his effectiveness by allowing state or local ordinances to blunt the consequences of his actions. The state (Massachusetts) Act undermines the President’s capacity in this instance for effective diplomacy.

 

For six years state and local governments heeded the Supreme Court’s ruling.  Then last year in response to the genocide in Sudan, seven state legislatures passed sanctions on companies doing business in Sudan. While the Massachusetts sanctions prohibited the state government from procurement from companies did business with Burma, the Sudan and Iran sanctions target public pension funds, requiring them to sell shares of companies that have direct or indirect commercial ties to Sudan or Iran.  And, of course, the laws differ from state to state, so not only is there conflict with Federal policy, but there is no consistency among the various state laws.  These actions have forced us to file a second lawsuit – against Illinois – which has also been successful thus far.  And my main point today is to tell you that Illinois is only the tip of the iceberg, and your funds are in serious risk of being the Titanic.

 

While the Sudan divestment movement may be slowing down, at least as far as new legislation is concerned, the same movement on Iran is speeding up.  These bills are often broadly drafted and contain the same constitutional flaws we argued in the Illinois case, but they are moving along in legislatures, impelled by a strong national movement, aided by speeches all over the country by former Israeli Prime Minister Netanyahu, to persuade states to enact strong anti-Iran sanctions, including divestment. 

 

And, of course, once we start down this path of instructing pension fund managers to base their investment decisions on moral rather than fiduciary principles, where will it end?.  The world is not short of countries that commit human rights violations or do not practice our version of democracy.  Zimbabwe.  China.  Russia.  Saudi Arabia.  I predict if we start down this road, we will soon make it very difficult for asset managers to invest profitably, which will not only do enormous damage to pension funds and retirees but also to American capital markets, as foreign companies flee the New York Stock Exchange and NASDAQ in an attempt to avoid the consequences of these laws, which will be seen by foreign companies as a continuation of increasingly complex regulation of the kind required by Sarbanes-Oxley.  Capital flight is a genuine concern, and this does nothing to stem the tide. 

 

There is no question that the Sudanese government is an outrageous violator of human rights, and the situation in Darfur is tragic.  Likewise, Iran gives material support to terrorist organizations and is preventing international inspection of its nuclear program while it attempts to develop a nuclear weapons capability.   The United States must address these serious problems in both countries.  But the question is, how?

 

Activist groups have lobbied state governments, private foundations, colleges and universities to divest from companies having business ties to those countries.  Private institutions are obviously free to divest as they please.   (Although I noticed that two weeks ago shareholders in Berkshire Hathaway, Warren Buffet’s firm, voted 98% to 2% not to do so.)  And now eleven states have so far enacted laws which require their public pension funds to divest from companies with some direct or indirect connection to Sudan.  Similar legislation is pending in 15 additional state legislatures. So far nine states have sanctions legislation pending on Iran , a number that is increasing each month.  

 

These laws are pain without gain.  First the pain.  We are talking about public employee pension funds, predominantly for retired teachers, firefighters and police officers.  In many cases these funds are prohibited from holding individual company equities.  To be in equity markets they must invest in mutual funds.  As you know better than I, international mutual funds currently have higher yields than domestic funds, and it is precisely those mutual funds that public pension funds have to divest to comply with these laws.  That will force them into bonds with far lower yields.   In many localities, public pension funds are already significantly under funded.  A requirement that they sell their most profitable investments puts their annuitants at risk and tells pension fund managers to breach their fiduciary duty.  The result is that citizens who have spent their careers in public service are asked to put their retirement income at risk in a doomed effort to persuade foreign governments to change their behavior. 

 

As many of you also know better than I, divestment is not cheap.  Many of the funds you may have to sell are closed funds that you may not be able to reenter later on.  Second, the cost of divesting may be substantial.  In Illinois, pension fund managers found that very few mutual funds were willing to provide the Sudan-free certifications required by the state’s law.  In fact one pension fund manager stated in an affidavit “it is conceivable that the Sudan Act could eliminate all mutual funds as eligible investments for Illinois pension funds. This contravenes the notion of prudence as it is commonly understood by public pension trustees and professional fiduciaries.”  The estimated cost of compliance in Illinois, including the opportunity cost of lost returns, runs into the tens of millions of dollars.  Florida’s law requiring divestment from Iran and Sudan-related companies is estimated to affect about $1 billion worth of investments.  A report prepared for the Florida Senate estimates the administrative cost of divestment from Sudan and Iran-related assets would be as much as $65 million and the asset value loss at over $12 billion.  It goes on to say,

 

“If this activity results in lost investment income, or administrative costs associated with divestment and replacement of divested funds, those costs will have to be absorbed by the Public Fund in the form of a revised investment policy statement or by higher payroll contribution rates.” 

 

The estimate of Wisconsin’s costs, from the Wisconsin Legislative Council, are “up to 0.5% of the total value of all assets under management before the investment would cease,” which would mean losses of over $440 million.  The report went on the say, “The administrative costs cited in the fiscal estimate are substantial and would be paid from the employee trust fund.”

 

That was the pain.  On the question of gain, advocates of these laws ignore the fact that federal law and regulations already prohibit American companies from doing business with Sudan and Iran.  As a result, the vast majority of targeted companies are European and Asian.  

 

That means state divestment laws necessarily target foreign companies.  In the case of Sudan, Chinese oil companies are primary targets.  Given the appetite of countries such as China and India for energy, it is highly unlikely that they would give up access to Sudanese or Iranian oil and gas reserves because of potential decreases in share prices of their oil companies on Western stock exchanges.  Moreover, the depth of Western capital markets is such that the impact of divestment on companies’ shares is not likely to be significant.  So the chance that these well-intentioned laws will achieve their objectives is slim indeed.  But the cost, as I’ve indicated, is not slim. 

 

Last summer the NFTC, along with eight public pension funds as co-plaintiffs, sued the state of Illinois to test the constitutionality of its Sudan divestment law. In February the Federal District Court for the Northern District of Illinois found the law unconstitutional.  The judge determined that the law’s requirement that municipal pension funds divest Sudan-related shares violated the Foreign Commerce Clause of the Constitution.  State governments can, of course, invest their funds and purchase goods freely when they are acting as a normal market participant. The problem arises when their intent is not to get the lowest price or the best deal, but to affect the behavior of a foreign government.  In that case the state is acting as a regulator and not as a market participant. The Illinois ruling turns in part on the judge’s view of precedents in this area and I will be happy to go into greater detail about that if you wish. The state has appealed this decision, and at the same time the legislature is considering new legislation that purports to fix the constitutional flaws in the old law.  That means in all likelihood the NFTC will either have to defend its victory on appeal or return to court on the new law, if it turns out to be as flawed as the old one.  Doing that will require more money, and I hope you r organization will decide to contribute to our efforts.

 

Finally, there are policy problems with state sanctions. In Sudan, U.S. government policy is to encourage commerce with southern Sudan to strengthen it vis-à-vis the government in Khartoum.  Indeed, the U.S. Treasury Department issues licenses to companies to do business there.  Some state laws make no such distinction and, therefore, target companies that are legally providing goods and services to a region where they are desperately needed. 

 

In Iran, the President is working very hard to develop a multilateral approach to sanctions, which is the most effective approach.  The state laws being proposed, however, would attack companies that are major actors – sometimes government-owned – in the very countries we are trying to persuade to cooperate with us.  It is ridiculous to expect the Chinese, for example, to cooperate with us at the same time we’re beating their state-owned oil companies over the head. 

 

 We are often asked what states can do.  The answer is they can pass resolutions and lobby Congress and Administration to take stronger action.  However unsatisfactory this may seem to sanctions proponents, only the Federal government has the diplomatic and economic resources to move other countries and multilateral organizations to join in effective action.  Quite apart from the constitutional issues raised by state divestment laws, the costs of pension fund divestment must be weighed very carefully against the prospect of the sacrifices they entail having any beneficial impact. 

 

Finally, this divestment movement is not limited to states.  It has also caught the attention of Congress.  In the House, Ileana Ros-Lehtinen, the Ranking Member of the House Foreign Affairs Committee, has introduced legislation that would require divestment by federal pension funds of companies doing business in Iran’s energy sector and would impose new reporting requirements on privately managed pension and mutual fund managers.  The House Financial Services Chair, Barney Frank, is likely to come out with a separate bill of his own.  Bills have also been introduced in the House and Senate that would recognize and support state divestment efforts.  We oppose these efforts but once again find ourselves on defense.

 

This is clearly an issue that has resonance at both the federal or state levels.  And we can’t forget that there are clear wrongs going on in Iran and Sudan that must be righted.  But it is clear that divestment will harm pensioners and pension systems more than it will fix either of those situations.  And the precedent that it sets now may come back to haunt the U.S. financial community, asset managers and retirees for years to come. 

 

 

 

NFTC Cites Importance of Trade to State Economies

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NFTC Cites Importance of Trade to State Economies

State Legislators Provided Detailed Guide to Benefits of International Trade

Washington, DC ­ In a special report issued today, the National Foreign Trade Council (NFTC) provided a detailed guide to state legislators on how international trade benefits every state economy. “The United States and Global Trade: A State Legislator’s Guide to Maximizing Economic Opportunity through Trade,” also provides an outline for legislators on the role states can play in developing U.S. trade policy and how state governments can maximize the benefits of trade for individual state economies.

 

 

“U.S. trade agreements pave the way for state economic growth,” said Bill Reinsch, NFTC President. “Developing international markets has been a necessary priority for the U.S. Government and requires painstaking negotiations. Without trade agreements, the millions of Americans whose jobs come directly from trade would have no job security and our economy would suffer.”

 

 

The NFTC guide was prepared to serve as a resource for state legislators who want to better understand the basis and substance of U.S. international trade policy, and in part, to dispel many of the negative myths about the impact of trade.

 

 

“Increasing the sales of a state’s manufacturers, farmers and service suppliers is a goal that every policymaker should embrace – and governors routinely lead trade missions abroad in the quest to open new markets for state exporters,” said Mary Irace, NFTC Vice President of Trade and Export Finance. “However, the far-reaching impact of international trade is not always fully recognized. We’re hoping this guide will help set the record straight and serve as a valuable resource for legislators.”

 

 

The guide offers a comprehensive look at the issues surrounding the current trade debate, including the importance of assisting American workers, protecting American investments, and expanding opportunities for trade in services – the most significant and fast growing sector of the U.S. economy.

 

 

The guide will be distributed widely to state legislative leaders and other interested parties and is available on the NFTC Web site at http://www.nftc.org/default/trade/US%20&%20Global%20Trade%20Report.pdf.

Advancing Global Commerce for Over 90 Years

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

 

NFTC Commends Congress and the Administration for Efforts to Achieve Bipartisan Trade Agenda

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Washington, DC -­ The National Foreign Trade Council (NFTC) today issued the following statement regarding the bipartisan agreement on the U.S. trade agenda:

 

 

“We commend the bipartisan effort to find a path forward on a positive trade agenda for the United States. We are reviewing the details of the agreement, particularly with respect to intellectual property rights, investment and labor,” said NFTC President Bill Reinsch. “The United States Congress has approved every free trade agreement negotiated by our nation because they have been in the clear U.S. national economic and foreign policy interest. This bipartisan agreement should pave the way for the approval of free trade agreements with Colombia, Korea, Panama and Peru.”

 

 

“We look to Congress to act swiftly to approve the pending FTAs with our close allies and trading partners in Latin America and in Asia,” said Mary Irace, NFTC Vice President of Trade and Export Finance. “Just as importantly, we look for positive action by Congress to approve new Trade Promotion Authority to enable the vitally important Doha Round of multilateral trade negotiations to conclude successful. We must continue to demonstrate the necessary leadership to lead the Doha Round to an ambitious and balanced outcome.”

 

 

“The United States cannot afford to sit on the sidelines when it comes to economic engagement with the rest of the world and negotiating trade agreements to open markets for U.S. firms, workers and farmers. Our growth and future prosperity depend on it,” concluded Reinsch.

 

 

Advancing Global Commerce for Over 90 Years

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

 

USA*Engage and NFTC Caution Against Bills Which Would Hinder Multilateral Effort with Iran

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U.S. Business Community Letter Says New Legislation Will Create Divide with U.S. Allies

 

Washington, DC – USA*Engage and the National Foreign Trade Council (NFTC) today joined eight other prominent trade associations in urging Senators to reconsider S. 970 and S. 1234 – two bills which would impose broad, unilateral U.S. sanctions resulting from foreign entities doing business with Iran, including many companies organized under the jurisdiction of key U.S. allies.

 

In a letter to Senators, the associations argued that preventing Iran from developing a nuclear weapons capability is a “critical objective,” but signaled that both bills would detract from that objective by “targeting our allies for penalties,” thereby “draw[ing] attention away from the core problem.”

 

As drafted, both bills contain extraterritorial provisions that would make U.S. parent companies liable for the actions of their foreign subsidiaries.

 

According to the letter, whose signatories also include Business Roundtable, the National Association of Manufacturers, the U.S. Chamber of Commerce and the U.S. Council for International Business, “The United States and its allies are making progress in assembling broad, multinational economic and diplomatic action against Iran. Enacting either S. 970 or S. 1234 and thereby imposing mandatory U.S. penalties on entities in the same countries that are assisting us would only undercut the progress that our diplomats are making.”

 

Citing the Reagan Administration’s response to the Soviet invasion of Afghanistan in the early 1980s when the U.S. sought to ban participation of foreign subsidiaries in the Siberian oil pipeline, the associations highlighted the diplomatic difficulties associated with imposing U.S. unilateral sanctions with extraterritorial extensions. In the case cited, foreign governments where subsidiaries of U.S. companies were located, including the U.K., France and the Netherlands, instituted blocking statutes to disregard U.S. sanctions.

 

“History should serve as a guide and policymakers should recognize that these kinds of unilateral sanctions with extraterritorial reach have been unsuccessful in changing the behavior of governments,” said NFTC President Bill Reinsch. “What we’ve learned instead is that these types of measures exacerbate tensions with our allies and distract from the real issue at hand.”

 

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USA*Engage (www.usaengage.org) is a coalition of small and large businesses, agriculture groups and trade associations working to seek alternatives to the proliferation of unilateral U.S. foreign policy sanctions and to promote the benefits of U.S. engagement abroad. Established in 1997 and organized under the National Foreign Trade Council (www.nftc.org), USA*Engage leads a campaign to inform policy-makers, opinion-leaders, and the public about the counterproductive nature of unilateral sanctions, the importance of exports and overseas investment for American competitiveness and jobs, and the role of American companies in promoting human rights and democracy world wide.

 

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

 

NFTC Urges Political Leadership on the Doha Negotiations

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Council LeadsU.S. Business Delegation Visit to India to Discuss Trade Talks

Washington, DC – On the eve of an NFTC-led, U.S. business community visit to India, the Council today released the following statement calling on WTO Members to bring the Doha Round of negotiations to a successful and ambitious conclusion. The NFTC will lead an eight-member delegation of business leaders to India from March 26-30, 2007, and will meet with key government and business officials to discuss the Doha Round.

 

 

 

“This is an important visit for the NFTC and its members,” stated Mary Irace, NFTC Vice President of Trade & Export Finance. “There is an increasingly narrow window of opportunity to achieve a needed breakthrough in the Doha Round. The United States and India have a vital stake in a timely and ambitious conclusion to these negotiations, and the NFTC delegation looks forward to a dialogue with senior government and business officials in India about the importance of achieving this objective as soon as possible,” continued Irace.

 

 

 

The NFTC today also released a policy statement, entitled “A Call to Leadership on the Doha Round,” which urges WTO Members to make a concerted effort to reaffirm their commitment to multilateral trade liberalization by concluding the negotiations successfully and in a timely manner.

 

 

 

“The stakes are high and failure is not an option. As the WTO enters its thirteenth year of existence and builds on the GATT established 60 years ago, the vision of an ambitious and successful outcome to the Doha Development Agenda is within reach if WTO Members exert the necessary political will and leadership,” noted the statement.

 

 

 

“It is a vision of enormous economic promise and development through a higher level of openness and multilateral commitment to expanding global economic engagement. The vision is there, now is the time to seize it,” the statement concluded.

 

 

 

For a copy of the statement, please click here.

 

 

 

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Advancing Global Commerce for Over 90 Years

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

 

NFTC and Other Members of Visa Policy Coalition Press Congress for National-Interest-Based Reform

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Reinsch Says Current Visa Policy Hurts U.S. Competitiveness

Washington, DC ­ National Foreign Trade Council (NFTC) President Bill Reinsch today participated in a joint policy briefing on Capitol Hill to urge Members of Congress to reform current U.S. visa policy to establish a national-interest-based system, which welcomes international business and academic visitors, and helps to bolster U.S. competitiveness. The briefing was hosted by a newly formed, broad-based coalition of trade associations concerned about the current state of U.S. visa policy, including NAFSA: Association of International Educators, the NFTC, the Coalition for Employment Through Exports, the Heritage Foundation and the Alliance for International Educational and Cultural Exchange.

“ America has become the world’s leader in significant part because for more than 200 years, we have taken in smart, hard-working people from all over the world,” said Reinsch. “They have stayed here, become inventors, artists, researchers, and the backbone of our industrial base, contributing immeasurably to our GDP and to our culture.”

However, citing numerous examples of how current U.S. visa policy is unwelcoming to international business and other visitors, Reinsch warned, “We are in the process now of throwing that away and telling a generation of foreigners they are not welcome here – as businessmen, as employees, as students, as tourists. And we are doing this at precisely the time when competition for talent is the most intense globally.”

In late January, the coalition of academic, exchange and trade groups released new visa policy recommendations, titled “Realizing the Rice-Chertoff Vision: A National-Interest-Based Visa Policy for the United States.” The recommendations call on Congress and the Administration to take a clear set of actions to reform U.S. visa policy.

“Realizing the Rice-Chertoff Vision” recommends that Congress:

  • Restore to the Secretary of State the authority to grant U.S. consulates discretion to waive the personal interview requirement based on risk assessment;
  • Strengthen and expand the Visa Waiver Program; and
  • Exercise vigorous oversight of Executive Branch implementation of the Rice-Chertoff vision, especially those that pertain to the coalition’s recommendations regarding the Executive Branch.

The coalition further recommends that the Executive Branch:

  • Articulate a clear, operational visa policy that fully realizes the Rice-Chertoff vision; and
  • Improve efficiency, transparency, and reliability in the visa process.

“We support national security but think the balance needs to be readjusted in light of the damage our policy is causing,” said Reinsch. “We are committed to working with Congress and the Administration to develop a visa policy that is truly a win-win for both the United States and our friends across the globe.”

Click here for a copy of the coalition’s recommendations.

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Advancing Global Commerce for Over 90 Years

The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.

U.S. Export Controls and Economic Sanctions for the Oil and Gas Industry

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 William A. Reinsch
President, National Foreign Trade Council
March 8, 2007 

The issue of export controls is becoming hot once more – unfortunately in the worst possible way under the worst possible circumstances – the conjunction of fear of terrorism and paranoia about China.   

The result is a wave of xenophobia, which has manifested itself not only on export controls, but also in episodes like the Dubai Ports World acquisition case and our continuing disastrous visa policies.  Perhaps we should consider ourselves lucky that we had four years of benign neglect, but that changed in 2005, and now we have to deal with the consequences.   

·        Two years ago the Commerce Department published a Federal Register notice soliciting comments on what would have been significant expansion of the deemed export rule.  That followed its proposal in 2004 to change the definition of “knowledge” in a way that many believed would have lowered the bar to prosecutions. 

·        Both of those were subsequently withdrawn, although deemed exports will surely return. 

·        Last July the Commerce Department published a proposed regulation expanding the scope of controls on exports to China.   

These proposals are a misguided approach to the right problem.  They continue the movement we began toward controlling items based on the end use and end user rather than the blanket approach of the Cold War and on controlling technology more than items.  The reality of globalization is that everything is made everywhere.  A system that only controls things across the board is ineffective because of alternative sources of supply that do not adhere to our restraints and because technology is no longer contained in a convenient black box that we can simply hold onto.  Focusing on specific end uses and end users forces us to learn more about the items we are controlling and more about our adversaries’ efforts to use those items, both of which improve the system’s efficiency. 

Trying to do that through deemed exports and through the proposed China regulation is the wrong approach.  The Commerce Department processes about 1000 deemed export license applications each year and currently rejects about 1% of them.  This is not a very efficient use of limited resources.  In fact, in this area, which is about spying and not about terrorism, the talent and knowledge we are losing by keeping people out far exceeds the losses we incur by letting them in. 

Last year the NFTC led a coalition of companies and associations that opposed the deemed export proposal, and we were pleased to see Commerce throw in the towel on it.  Instead it has turned the problem over to a committee of experts, and we will simply have to wait and see what they come up with.  The appointment of the committee’s chair, Bob Gates, as Secretary of Defense will probably slow down the committee process, but on the other hand it puts someone in DOD who clearly understands this issue. 

The entire proposal, of course, demonstrated the extent to which we have lost touch with what is actually happening in the marketplace. 

Bill Perry was the first to really understand that with respect to defense technology.  Because of rapid technological change, the military has been shifting to commercial products and away from specially designed items.  That puts them in the position of relying on civilian producers whose major markets are civilian and export.  Those producers win the competitiveness race by staying ahead of their competition, and they do that by plowing their profits back into R&D on next generation products.  America’s future lies in our ability to keep on winning that race. 

That only works if they have profits, which requires exports.  Thus, Perry concluded that exporting was a key element of our ability to make advanced defense technologies and the Pentagon’s ability to buy them. 

 This was a sea change in thinking that informed the Clinton Administration’s export control policies.  Recent thinking on the subject suggests that while this is still true in the electronics sector generally, there are some circumstances where the Pentagon’s needs are so specialized and sophisticated that a return to “milspec” is necessary.  In those cases, however, I suspect the policy result will be subsidies to military contractors, or even the creation of dedicated, secure, production facilities rather than expanded export controls. 

Unfortunately, this Administration has abandoned Perry’s approach and is going down a road that threatens to harm our security rather than enhance it. 

  • Expanding the deemed export program will drive smart people away – the same smart people that have been the key to our economic success for the past 200 years.
     
  • This is also true of our visa policy for students and others, which is doing exactly the same thing.
     
  • Companies will respond by putting their research labs and other facilities off shore, creating a brain drain away from the US and ultimately not only transferring more technology offshore but setting up conditions to create the next generation offshore.
     
  • This is magnified by episodes like DP World.  If we let xenophobia get the best of us, there will be a chilling effect on inward investment that will retard innovation here without affecting the outward investment that will facilitate it offshore.     

The threat is similar in the case of the proposed China regulation.  Ostensibly developed to fulfill a Wassenaar Arrangement requirement – even though our other major Wassenaar partners are not implementing it with respect to China – the regulation would require exporters to seek a license if they “know” their item was being exported to a “military end use” in China.  That creates several serious problems: 

  1. The definition of knowledge goes beyond actual knowledge and, in conjunction with the other provisions, creates a far-reaching liability chain.
     
  2. The definition of “military end use” is likewise extensive and ambiguous and requires companies to make a very sophisticated judgment about military use that they are not prepared to make and which should properly be the government’s, not theirs.  
     
  3. The proposed regulation’s application to reexports multiplies the compliance burden and effectively means that exporters of components will have to determine whether their customer’s product is going to a military end use.  The reexport provision will reinforce the perception of American firms as unreliable suppliers and further encourage foreign customers to design-out U.S. components.  If you have any doubts about that check out the EADS Space Transportation website.    
     
  4. Finally, of the 47 new items listed, none of which had been previously controlled for national security purposes, it appears that a good number of them are not only produced elsewhere in the world, but are produced in China itself. 

None of this is good news.  Despite having begun in 2001 with a set of promises to the high tech community and a constructive effort that same year on the EAA, 9/11 and the paranoia it has created dominate the political landscape – a wave the anti-China team is cheerfully riding. 

So, what should we do instead?  For 50 years no one has disagreed with the premise that we do not want critical technology to fall into the hands of our adversaries.  The argument has been over precisely what technology we care about.  Even today most of the key actors in this play give the same speech – we want higher fences around a smaller number of items; by trying to control everything, we end up controlling nothing.  I’m sure you’ve all heard this speech.  I gave it myself many times. 

It is still true, but there are several problems with it, the main one being that once you get past nuclear weapons components and stealth technology, there is no agreement on what else should be inside the fence.  

To attempt to deal with that, a group of associations, including the NFTC, have formed the Coalition for Security and Competitiveness and announced two days ago a program of administrative reforms that will bring some sense to both the dual use and weapons control programs.  Among the dual use proposals are: 

  • Create a license exception for the transfer of controlled items within companies
  • Certify foreign end-users with strong compliance programs for favorable treatment
  • Enhance procedural transparency in the licensing process to help companies comply
  • Enhance the Commerce Department’s role in the “commodity jurisdiction” process for determining whether dual-use products should be subject to State Department licensing
  • Ensure timely updates of the Commerce Control List to reflect market availability
  • Expand factors used to determine “foreign availability” of controlled items
  • Revise the “re-export” controls to level the playing field for U.S. companies.

The beauty of these proposals is that they don’t require legislation.  They are all things the government can do on its own, and we intend to spend the next several months persuading them to do it. 

Now let me say a few words about sanctions.  My organization believes unilateral sanctions have proven ineffective in virtually every instance in which they have been implemented.  Put simply, they do not work and often do more harm than good. 

  • US sanctions caused a reduction in US exports by nearly $20 billion annually in the mid-90s, contributing to the loss of over 200,000 American jobs in the export sector and nearly $1 billion in lost wages. (Hufbauer/Elliot, IIE – 1997 Paper)
  • According to IIE, unilateral sanctions in the 90s achieved the desired results in less than 1 in 10 cases when implemented. (2006 Elliot speech)

History shows us that sanctions rarely work to change behavior.  Instead they foster anti-American sentiment, prevent access to vital export markets, and strengthen backing for regimes hostile to the United States while harming ordinary people in the process. 

In the face of new threats, unilateral sanctions are reemerging as a way for legislator to signal that they are “doing something” to address important problems in our world.  We call this chicken soup diplomacy.  It makes you feel better but doesn’t really cure anything. 


Let me cite some examples. 


IRAN

Our most important and visible unilateral sanctions regime affects Iran.  In addition to the domestic sanctions, the Iran-Libya Sanctions Act was amended last year and will likely be the subject of further amendments this year.  All this just as we are involved in a sensitive negotiation with the Iranians on their nuclear program.   

  • Current law calls for sanctions on foreign firms investing in the oil and gas sectors of Iran or exporting certain items that could help them develop weapons of mass destruction.
     
    A bill that would have significantly toughened the sanctions passed the House last year, but thanks to the leadership of Senators Warner, Biden, Hagel and Levin, and to Secretary Rice and the Administration what was ultimately sent to the President only extended the sanctions for 5 years, codified the executive orders already in place and provided for new penalties related to entities contributing to wmd proliferation.  The Administration retained flexibility to conduct investigations and waive sanctions.  
  • This year, the more extreme sanctions, which would expand the law to cover banks and other institutions that finance or facilitate the investments or exports and which would broaden the degree corporate parents would be liable for their subsidiaries’ actions – fondly known in Washington as the Halliburton Amendment – will be back, as will proposals for divestment legislation against Iran as well as the provisions from last year’s bill that were dropped.  Congressman Lantos recently introduced this legislation as H.R. 1400.

USA*Engage has serious concerns about this kind of legislation.

  • The timing is poor; toughening sanctions would poison the ongoing delicate efforts by the United States and its allies to dissuade Iran from embarking on a nuclear program.
     
  • It would take attention away from the behavior of the Iranians and refocus it on the actions of European and Asian companies in Iran, thereby creating divisions between the United States and our allies at the time we need them the most. 
     
  • The bills would make the United States more vulnerable to international commercial complaints by expanding the entities subject to sanctions to include insurers, creditors and foreign subsidiaries.   The United States would undoubtedly face complaints and lawsuits from our trading partners questioning their legality.    
     
  •  The bills would limit the ability of the President to conduct foreign policy.  By putting a time limit on investigations, they would require sanctions to be imposed or waived.  If they’re imposed, we would find ourselves in a difficult situation with our trading partners.  If they’re waived, Congress would complain and toughen the law further.  This is a  sledgehammer approach when a scalpel is called for. 
     

SUDAN
 
Finally, let me say a few words about state sanctions, which are rearing their ugly head just a few years after we thought we had killed them off at the Supreme Court.  

  • Seven states have enacted laws regarding public pension fund divestment from companies doing business with Sudan.  
  • This type of legislation has created a compliance nightmare for pension fund managers and investment banks, while catching a broad swath of U.S. and foreign companies with very tenuous ties to Sudan.  
  • Indeed, some legislation has identified U.S. firms who are operating legally under U.S. federal licenses as forbidden entities.  For example, the Illinois statute would punish US business involvement in southern Sudan and in Darfur, areas where our government has welcomed US investment.
  • The situation in Darfur is tragic by any measure.  The Sudanese people deserve the attention and help of the people of the United States and our leaders.  But actions by individual states are highly unlikely to benefit the people of Sudan.  
  • Both Congress and the President have spoken on the issue of Sudan.  As a result, we believe that state legislative sanctions are unconstitutional.  The Supreme Court agreed with us, in NFTC vs. Crosby in 2000 regarding Burma, that where the federal government has acted on an issue of foreign policy, states are preempted.  Just two weeks ago federal district court in Illinois also agreed with us and struck down the Illinois statute, using many of the same arguments.
  • Simply put, having 50 different foreign policies would severely limit our country’s ability deal with global issues in a constructive and efficient manner.  
  • The things that will benefit the situation there – such as increased aid or a new peacekeeping force – are hard to achieve.  Ultimately, however, they are the only policies worth pursuing – and can only be pursued at the federal level.  States cannot let their desire to do good blind them against doing what is right.

Remarks to the National Foreign Trade Council International Human Resources Management Conference, Houston, Texas, March 7, 2007

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CHINA AND U.S. NATIONAL SECURITY

 

Remarks to the National Foreign Trade Council International Human Resources Management Conference, Houston, Texas, March 7, 2007

 

I’d like to begin with some short comments on China’s recent economic trajectory and then try to relate that to some current issues.

 

  • What is China doing?  It is growing – fast.  It is improving its agricultural capabilities, working on its infrastructure, and expanding its manufacturing, moving up the value-added chain as fast as it can.  
     
    • Average annual GDP growth of 14.8% since 1988.  Still hovering around 10% per year, despite efforts to contain it. 
    • Global trade has grown from $20.6B in 1978 to $474.3B in 2000 to $1.7T last year.
    • After a long period of fairly balanced trade, they are starting to post large surpluses — $177 billion in 2006.
    • Total trade makes them 3rd or 4th in the world.
    • Total foreign investment grows from essentially zero to over $½ trillion.
    • Foreign exchange reserves grow from $20.6B in 1992 to over $1 trillion, largest in the world..
    • We estimate $700B of that is in US paper.
       
  • In fact, China is doing what Japan did in the 50s and 60s, what Korea and Taiwan did subsequently, and what Malaysia, the Philippines, Indonesia, Thailand, and a host of others are trying to do right now. 
     
  • In many respects we are mirror images.  We buy their products; they depend on our market to grow.  They save 40% of their income while we save virtually nothing.  We are the world’s largest debtor ($3 trillion plus), while their reserves reach new records.  
     
  • So, why are we worried about China and not about the others?
     
  • The easy answer is size.  Nobody is too worried about Malaysia’s progress up the technology value-added curve because there is a limit to their productive capacity.  With 1.3 billion people, there are potentially far fewer limits on China’s capacity.  In contrast to all the others, they will become a true economic rival.  They are not the proverbial 800-pound gorilla but the 800,000-pound gorilla.  
     
  • The other answer, of course, is politics.  While we had many of the same economic worries about Japan 20 years ago, at the end of the day they were still an ally and friend.  China is not, and we worry not only about the economic implications of rapid growth but the strategic implications of a potential struggle for predominance in the Pacific.
     
  • This is not a new condition.  It has characterized debate in Washington for 30 years.  Blue team, John Rood story.
     
  • The business community likewise maintains some ambivalence toward China.  On the one hand, they find it an enormously attractive market.
     
    • Size
    • Low labor costs
    • Work ethic
    • Of course, lemming effect 

On the other hand, it is enormously frustrating for them:

 

·        Forced technology transfer – creating competitors

·        Rule of law issues – theft of company

·        IP theft

·        Access difficulties if your product is not one they’re particularly interested in.  (selective capitalism) 

·        Exchange rate imbalances

 

·        In short, the Chinese don’t make the relationship easy, and the business community often finds itself in the awkward position of opposing Congressional attempts to “fix” the problems – like last year’s Schumer-Graham amendment – knowing that the concern Congress is trying to address is a legitimate one. 

 

B.  Integrating the domestic and the foreign

 

We are also not very good at understanding what is going on inside China and, more importantly, how that affects its growth and its relations with us.  My own colleagues on the China Commission, for example, tend to assume an invariable upward growth trajectory which ignores the very real internal contradictions the regime faces. 

 

C.  China’s future

 

  • In that regard and to oversimplify, there are two general theories on China’s economic future – and a new third one – that their economic policies will succeed and lead to –political liberalization as well; or their internal strains will become so great that they will implode.  Those strains include: 

o       A government with little legitimacy or inherent credibility maintaining itself by repression and on the strength of its economic growth policies, which will not last forever, no matter how successful they are right now.

 

o       The obligations China has undertaken to integrate itself into the WTO and the Western economic system, which will impose tremendous social, regional, and economic pressures.

 

o       The absence of a rule-of-law tradition and corruption-free bureaucracy, which are fundamental requirements for operating successfully in a globally integrated world, and which will ultimately drive people and money away, particularly in the face of new competition from India.  If there is no consistent, effective means of seeking redress, investors ultimately go elsewhere, probably India,  no matter how attractive the market.

 

o       A related concern is the growing view that corruption is systemic and not a problem that can be solved through the usual Chinese approach of a national campaign and a few arrests.  Party members retain status in their communities through a network of favors and interventions.  Take that away and you ultimately take away the reason why people tolerate the Party.

 

Jim Mann has recently propounded a third theory – that China will be able to continue its economic liberalization indefinitely without experiencing political change.  This is currently a topic of analysis and debate in Washington.

 

  • We may not know for years how this is going to turn out.  And, in fact, the truth is usually somewhere in the middle.  Their internal problems are serious and getting worse, and the government has not been consistently skillful in dealing with them.  At the same time, many Chinese believe in stability more than they believe in democracy.  That may change somewhat as the older generation dies off, but we cannot realistically expect any scenario that will lead to Western-style democracy. 
     
  • Even so, the United States can influence the outcome in a number of ways, though perhaps not in the way the current Administration thinks.  Demands for democracy, for example, will fall on deaf ears, and requests for cooperation with our goals in Iraq, Iran, North Korea, or elsewhere will be firmly subordinated to Chinese views about what is in their interest, not ours, although it is also true that their interests do sometimes coincide with ours.
     
  • What we can do, however, is help build rule-of-law, insist on WTO compliance, help with IP protection, and work, in the process, for the development of a more accountable government.  That is called engagement, and we do it in significant part via a U.S. business presence in China maintaining Western business practices and standards.  
     
  • It is also this Administration’s policy – so far – just as it was the last one’s.  That is important to the business community because it is losing patience with China on the trade front for the reasons I cited..  American companies were initially willing to forgive a lot in the interest of accessing an incredibly large market, and they showed considerable patience following WTO accession in waiting for the Chinese to fulfill their commitments.  However, those days are going.  Too many companies have experienced too many problems.  

·        While companies have not joined labor and others in supporting protectionist legislation – and will not – they are impatient for meaningful change and annoyed at the new problems they are encountering.

 

  • On the slightly better news front, there is evidence that our call for China to become a “responsible stakeholder” — based on the idea that their exposure to the West would give them a stake in global stability, promote their own growth and prosperity, and through that help them become a responsible actor on the international scene — has caught Chinese attention and precipitated debate there over what it means, particularly among those who are, at their end, trying to figure out what “Peaceful Rise” means.

 

 

The U.S. Response

 

  • Just as China has several paths, so do we.  On the one hand, we can overreact to current problems in ways that will make the long term situation worse.  The primary danger comes from the Congress, which has only blunt tools to work with.  Most of them do not want something stupid enacted, but they are unwilling politically to be perceived as not doing anything.  The proposals most likely to pass this year include making nonmarket economies eligible for countervailing duty complaints and making currency manipulation or imbalance a countervailable subsidy.

 

  • The other danger of overreaction comes from an Administration which is showing growing signs of paranoia about China from a security perspective.  There are now pending 4 separate proposed regulatory changes – three from Commerce and one from Defense – which will have a serious adverse effect on high tech trade with China and on continuing use of Chinese employees in American companies, particularly defense contractors, and on Chinese students seeking to study in the Unite States.

 

  • That latter issue is particularly important.  We trade with China; we invest in China; we visit China.  And vice versa.  But the biggest “gift” we have given China is the education of thousands of its brightest students – over 60,000 are here right now — many of whom have returned to help their country grow, taking with them Western standards and values that may ultimately produce social and political change in China.  And, many of them stay here and contribute to our intellectual base.  I think this is win-win whether they stay or go, but that’s not a view shared by everyone. 

 

  • These regulations suggest a turning of the tide within the Administration in favor of those see security as our paramount consideration, many of whom regard military conflict with China inevitable.  It’s ironic, of course, that the Chinese have their own blue team.  Perhaps the goal of both our foreign policies should be to ensure that neither side’s blue team takes over.

 

  • The dilemma of the paranoid is that they can complain all they want about what’s happening, but they have precious few means of stopping it.  Are we going to stop trading with China?  Pull our investment out?  Evict their students from our universities and cause the schools a budget crisis in the process, not to mention the long term damage it would do to our ability to innovate?

 

  • These are unlikely steps.  China is, after all, the world’s largest market, and those who think the US can be the world’s greatest military power without simultaneously being the greatest economic power, need a refresher course in economics and globalization, so they understand why closing ourselves off cannot enhance our competitiveness and innovative capabilities.

 

  • Instead of paranoia, the real policy response should not be what to do to China but rather what to do in the United States.

 

  • Approaching the problem that way actually gives us some answers.  If you have an adversary, or a competitor – and we have defined China as one or the other – then the critical strategic issue is maximizing the military and technological gap between us – staying as far in front of them as we can.  You do that two ways –holding them back or running faster than they are.  Holding them back isn’t working too well and, in truth, cannot work very well.  It is far better to spend our time making sure we are running faster.  And that means looking more closely at our own declining competitiveness and developing policies to address it.   That means taking care of victims; incentives to stay here; running faster (high tech R&D support), but that’s another speech.