SPEAKERS CONTENTS INSERTS
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[H.A.S.C. No. 10839]
DEPARTMENT OF DEFENSE TRADE OFFSETS
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
JUNE 17, 2004
HOUSE COMMITTEE ON ARMED SERVICES
One Hundred Eighth Congress
DUNCAN HUNTER, California, Chairman
Page 2 PREV PAGE TOP OF DOCCURT WELDON, Pennsylvania
JOEL HEFLEY, Colorado
JIM SAXTON, New Jersey
JOHN M. McHUGH, New York
TERRY EVERETT, Alabama
ROSCOE G. BARTLETT, Maryland
HOWARD P. ''BUCK'' McKEON, California
MAC THORNBERRY, Texas
JOHN N. HOSTETTLER, Indiana
WALTER B. JONES, North Carolina
JIM RYUN, Kansas
JIM GIBBONS, Nevada
ROBIN HAYES, North Carolina
HEATHER WILSON, New Mexico
KEN CALVERT, California
ROB SIMMONS, Connecticut
JO ANN DAVIS, Virginia
ED SCHROCK, Virginia
W. TODD AKIN, Missouri
J. RANDY FORBES, Virginia
JEFF MILLER, Florida
JOE WILSON, South Carolina
FRANK A. LoBIONDO, New Jersey
TOM COLE, Oklahoma
JEB BRADLEY, New Hampshire
Page 3 PREV PAGE TOP OF DOCROB BISHOP, Utah
MICHAEL TURNER, Ohio
JOHN KLINE, Minnesota
CANDICE S. MILLER, Michigan
PHIL GINGREY, Georgia
MIKE ROGERS, Alabama
TRENT FRANKS, Arizona
IKE SKELTON, Missouri
JOHN SPRATT, South Carolina
SOLOMON P. ORTIZ, Texas
LANE EVANS, Illinois
GENE TAYLOR, Mississippi
NEIL ABERCROMBIE, Hawaii
MARTY MEEHAN, Massachusetts
SILVESTRE REYES, Texas
VIC SNYDER, Arkansas
JIM TURNER, Texas
ADAM SMITH, Washington
LORETTA SANCHEZ, California
MIKE McINTYRE, North Carolina
CIRO D. RODRIGUEZ, Texas
ELLEN O. TAUSCHER, California
ROBERT A. BRADY, Pennsylvania
BARON P. HILL, Indiana
Page 4 PREV PAGE TOP OF DOCJOHN B. LARSON, Connecticut
SUSAN A. DAVIS, California
JAMES R. LANGEVIN, Rhode Island
STEVE ISRAEL, New York
RICK LARSEN, Washington
JIM COOPER, Tennessee
JIM MARSHALL, Georgia
KENDRICK B. MEEK, Florida
MADELEINE Z. BORDALLO, Guam
RODNEY ALEXANDER, Louisiana
TIM RYAN, Ohio
Robert S. Rangel, Staff Director
Robert L. Simmons, Professional Staff Member
Erin Conaton, Professional Staff Member
Bill Marck, Professional Staff Member
Bill Godwin, Professional Staff Member
Jesse Tolleson, Research Assistant
Justin Bernier, Research Assistant
C O N T E N T S
Thursday, June 17, 2004, The Impact of Defense Trade Offsets on the U.S. Defense Industrial Base
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Thursday, June 17, 2004
THURSDAY, JUNE 17, 2004
THE IMPACT OF DEFENSE TRADE OFFSETS ON THE U.S. DEFENSE INDUSTRIAL BASE
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Hunter, Hon. Duncan, a Representative from California, Chairman, Committee on Armed Services
Skelton, Hon. Ike, a Representative from Missouri, Ranking Member, Committee on Armed Services
Doktor, Roland, Manager for New Programs, Navy Programs, Warren Pumps, Inc.
Edger, Rick, President and CEO, Jered Industries, Inc.
Herrnstadt, Owen E., Director, Trade and Globalization, International Association of Machinists and Aerospace Workers
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[The prepared statements can be viewed in the hard copy.]
Brown, Cynthia L., President, American Shipbuilding Association
Herrnstadt, Owen E.
Hunter, Hon. Duncan
Skelton, Hon. Ike
DOCUMENTS SUBMITTED FOR THE RECORD:
[The Documents submitted can be viewed in the hard copy.]
Defense Trade Report and Recommendations of the Defense Offsets Commission Still Pending
Offset in Defense Trade, Seventh Study Conducted Under Section 309 of the Defense Production Act of 1950, as Amended, prepared by U.S. Department of Commerce Bureau of Industry and Security July 2003
Table 1. Offset Investments, Sale of F16 Aircraft Poland
QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD:
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THE IMPACT OF DEFENSE TRADE OFFSETS ON THE U.S. DEFENSE INDUSTRIAL BASE
House of Representatives,
Committee on Armed Services,
Washington, DC, Thursday, June 17, 2004.
The committee met, pursuant to call, at 2:46 p.m., in room 2118, Rayburn House Office Building, Hon. Duncan Hunter (chairman of the committee) presiding.
OPENING STATEMENT OF HON. DUNCAN HUNTER, A REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED SERVICES
The CHAIRMAN. The hearing will come to order. We want to apologize to our guests. We were just getting started and there came a string of votes and that is life around here. So thank you for indulging us, and hopefully we will be able to move fairly quickly from here on out. I think we have about a two-hour block of time here before the next set of votes.
This afternoon, we are meeting to receive testimony on the impacts of defense offsets on the U.S. industrial base. I welcome our panel of witnesses representing companies in the defense industrial base and the defense workforce, and, gentlemen, thanks for taking your time to appear before the committee on this important subject.
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This hearing is the first in a series of hearings during which the committee will explore how defense offsets work today and, more importantly, what the long-term economic implications for the entire defense industrial base are.
Offsets are the compensation required by countries as a condition of the purchase of defense products from the United States. Direct offsets are usually in the form of co-production, subcontracting, technology transfer, training, production or financing activities associated with the product being sold. Indirect offsets are where the compensation is not associated with the product being sold. Offsets are usually described as a percentage of how much you sold compared to how much you have to give away.
The Lockheed Martin sale of 48 F16 fighters to the Polish government illustrate both sides of offsets. The F16 contract is worth $3.5 billion. The estimated value of the corresponding offset deal is $9.7 billionalmost three times as much. Thus, this sale carries a 260 percent offset, or roughly 2.6 times the value of selling the F16s by themselves.
It is true that some of the transactions are either inflated or have credit multipliers that reduce the actual cash value of the offsets, but any way that you look at this sale, we gave away much more than the Polish government purchased.
Before the Members, you will find the Interfax Poland Weekly Business Report, which is a partial listing of the offsets given for the F16 sale. As an example of direct offsetsand we have that in front of every Member, I believe, at this time. As an example of direct offsets, Pratt & Whitney purchased a Polish factory, modernized and established a manufacturing line that manufactured lower complexity F100 engine components for the Polish F16s. These components and assemblies are then shipped back to the U.S. for assembly into the engine.
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Now let us briefly look at the indirect offsets on the list. These are offsets that are not associated with the F16 production. In the earlier days of offsets, it often resulted in buying high-tech weapons like F16s in return for soybeans or tennis shoe contracts. Now it has grown to an unacceptable level. Look at item number 22, the purchase of roll on-roll off ships from a Polish shipyard; lines 25 and 26, the purchase of tooling for Cessna and lycoming from Polish sources; lines 29 and 30, the purchase of components for land-moving equipment; the purchase of aircraft and helicopter parts, automotive parts, pressure cast aluminum parts, electronic parts, accelerator technology from the University of Texasall for a total of $9.7 billion.
The free trade mantra is for free and open competition. Does anyone really think that American shipyards, for example, had fair and open competition for the ships included in this deal? So why does the government stand idly by and watch this market-distorting behavior where unit price and quality are less important that the size of the economic bribe? They do because it is the law. The U.S. Government cannot enter into, encourage or finance offset agreements. The decision whether to engage in offsets and the responsibility for negotiating and implementing offset arrangements resides with the companies involved.
In fairness, it must be recognized that American defense contractors have used offsets in the past quite successfully to make export sales. In the past, the U.S. defense dominance in the defense sector meant that offsets were generally small. Sweeteners to close a deal at levels of 30 percent offsets were common.
These deals were good for American industry and the American worker. Even as offsets grew toward 100 percent, they were still creating jobs. But now the European defense industries compete head to head with the U.S. companies for an ever-shrinking foreign defense market. The result: A buyer's market that demands higher and higher offsets.
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Today, offset requirementsand remember, we don't have an offset requirement. The foreign countries have offset requirements. Today, offset requirements regularly reach levels of 200 and even 300 percent of the value of the sale. No one wants to blink for they may lose a sale to the Griffin or the Mirage, and so the cycle continues to spiral upward.
There is an irony on this story. On the commercial side of trade, the World Trade Organization (WTO) outlaws offsets, but because the WTO excludes national security transactions from these requirements, offsets tacitly approved for the defense trade.
The irony continues. Our close allies and trading partners cry foul when the Congress seeks to ensure the capability of our defense supply base with a 50 percent domestic source requirement in the Buy American Act and then disingenuously ignore the fact that they apply 200 percent offsets to their own purchases.
So we face a very complex problem that once was small but now has reached a level that demands that it be brought under control. We must find a balance in trade where the U.S. prime contractors are not at a competitive disadvantage and yet are not required to leverage away someone else's market in order to compete in the global defense trade.
Today, we begin to delve into this issue in earnest as we pursue possible changes in policy to halt this unfair practice that accelerates the erosion of the critical portions of the U.S. industrial base.
Our witnesses today will start us down this road by helping us understand the magnitude of this practice and hopefully identify what courses of action are worthy of further consideration. Before recognizing our witnesses who have waited for a long time to testify here while we have been voting, let me first turn to my colleague, my partner on the committee, the gentleman from Missouri, Mr. Skelton, for any remarks he might want to make.
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[The prepared statement of Mr. Hunter can be viewed in the hard copy.]
STATEMENT OF HON. IKE SKELTON, A REPRESENTATIVE FROM MISSOURI, RANKING MEMBER, COMMITTEE ON ARMED SERVICES
Mr. SKELTON. Mr. Chairman, I will be brief. As we all know, this is a complicated subject, which has implications both for defense as well as our industrial base, and particularly with our defense partners. So today, in our hearing, we will hear some important perspectives, as I understand, with the exception of the Department of Defense, which I also understand that we will hear from at a later time.
Now, I look forward to the testimony in light of the complex issues and particularly on the aerospace industry. The July 2003 report of the Commerce Department on defense tradeoffsets notes that because 90 percent of offset agreements are aerospace-related, concerns about the competitiveness of the U.S. aerospace prime contractors and the aerospace infrastructure have increased.
The American aerospace trade surplus fell from an all-time high of $20 billion in 1998 to approximately $27 billion in the year 2000. Imports of aerospace products have increased rapidly in the last decade for a number of reasons. Clearly, the aerospace industry is important to national security, and I hope that this hearing, which will be followed up by other hearings, as I understand, will help us understand that offsets play an effective role in the health of the industry.
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So, Mr. Chairman, thank you for calling this, and we look forward to the testimony.
[The prepared statement of Mr. Skelton can be viewed in the hard copy.]
The CHAIRMAN. I thank the gentleman. And with us to discuss this issue are Owen E. Herrnstadt, director of Trade and Globalization, International Association of Machinists and Aerospace Workers. Thank you, Mr. Herrnstadt, for being with us. We appreciate it. Roland Doktor, manager for New Programs, Navy Programs, Warren Pumps, Incorporated. And Rick Edger, president and CEO, Jared Industries, Incorporated.
Gentlemen, thank you for being with us, and, Mr. Herrnstadt, why don't we start with you. We will just move left to right from our perspective here, and the floor is yours, sir.
STATEMENT OF OWEN E. HERRNSTADT, DIRECTOR, TRADE AND GLOBALIZATION, INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS
Mr. HERRNSTADT. Thank you very much, Mr. Chairman, and thank you for the invitation to appear before this committee today.
The International Association of Machinists and Aerospace Workers (IAM) represents several hundred thousand active and retired workers in North America in a variety of industries, including aerospace, shipbuilding, ship repair, electronics, defense and transportation, just to name a few. Among other things, members work for prime and subtier contractors, producing, assembling and maintaining almost every imaginable product that is involved in the aerospace industry.
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Indeed, IAM members have helped build some of the most successful aerospace companies in the world. Given the vast number of workers we represent in the aerospace industry, we understand the importance of ensuring the competitiveness of the U.S. aerospace industry in creating, maintaining and preserving the jobs of our members in this highly competitive industry. We are also mindful that healthy and vibrant aerospace employment in the U.S. contributes to our Nation's economic security as well as our defense.
Despite our warnings, for years we have witnessed the decline of the U.S. aerospace industry as foreign competition rises. While there are many factors for this decline, one of them is due to the short, medium and long-term impact that offsets, as well as other types of outsourcing, have had on our Nation's aerospace workforce. Given our enormous interest in this issue, we are obviously grateful for the opportunity to appear before you today.
For many people, the use of the term ''offsets'' can be quite a mystery. In their simplest form, the concept is really quite easy. Basically, one country demands the transfer of production and/or technology in return for a sale. Traditionally, offsets have been divided into two categories, as you mentioned, Mr. Chairman: direct and indirect offsets.
Direct offsets involve technology and/or production directly related to the purchased product. For example, the production of part of the air frame of a fighter jet is transferred to a company in a foreign country in return for that country purchasing the product. Indirect offsets involve transfers of technology, production or other innovative schemes unrelated to the product being purchased. For example, in return for an agreement by one foreign government to purchase a jet fighter made in the U.S., the U.S. producer of the fighter agrees to find someone in the U.S. who will buy an unrelated product from a company in the foreign country.
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This area is becoming wilder and wilder and more innovative. Reports of indirect offsets involving agricultural goods, involving things like figs and tomato paste, passenger ferries, wine and hams have been obviously reported.
Although the basic concept of offsets is relatively simple, as transactions impact on different products, services and industries, they rapidly become incredibly complicated. Among many other things, the nature of the transaction can also make things quite complex. For example, in addition to the transfer of technology and production, offsets can involve various forms of outsourcing, licensing procurement, subcontracting, research and development, foreign investments, financing, other forms of counter-trade and co-production. Innovative methods for valuing some offset packages, multipliers, other issues, can also make them exceedingly complex.
While more information is needed regarding offsets themselves and how they are implemented, what we do know is highly disturbing and highly alarming. Indeed, the little information we have should raise concern for anyone who is interested in maintaining and expanding the success of the U.S. aerospace industry and creating and maintaining U.S. aerospace jobs here at home.
We know that other countries use offsets to gain production and technology in return for sales. In attempts to satisfy offset demands, approaches are becoming more and more creative, as I have just mentioned, and more and more jobs here at home are being sacrificed to offset demands by other countries.
Page 15 PREV PAGE TOP OF DOC In addition, offsets have contributed to the ability of other countries to establish their own industries which in turn compete with companies in the U.S., further driving more layoffs here at home. This trend, obviously, looks like it will become even more problematic in the future. As the Bureau of Industry and Security stated in its seventh report to Congress on offsets in the defense trade, quote, imports of aerospace products into the United States have increased rapidly in the last decade for a variety of reasons, one of which is the increase in aerospace-related offsets.
We also know that offsets in the aerospace industry are extensive. As the Bureau of Industry and Security also reports, a significant number of all U.S. offsets involve aerospace products, as was already pointed out in this hearing. While we know that offsets are extensive, particularly in the aerospace industry, inadequate reporting requirements concerning offsets and all of their variations, prevent us from knowing exactly how widespread they are.
Although some reporting requirements exist for the defense side of the industry, reporting requirements for the commercial side of the industry are extremely limited. Moreover, the reporting requirements that do exist basically exclude the direct and indirect effects that these offset agreements have on suppliers or subcontractors and on producers in industries that are unrelated and that are caught in the offset trap.
We also know that U.S. aerospace workers have suffered huge job losses over the past several years. We know that estimates predict that several thousand more jobs in the U.S. aerospace and related industries will be lost in the next few years with offsets accounting for a significant number of them.
Page 16 PREV PAGE TOP OF DOC It is also clear that some foreign competitors in the aerospace and related industries have emerged with assistance from sophisticated national offset policies that exist in their countries. These companies then compete directly with U.S. companies, including hard hit suppliers. Indeed, a study of U.S. aerospace suppliers found that there was a large decrease in the number of direct production suppliers between 1991 and 1995, a study that probably should be updated at this point.
In addition to the employment issues and the increase in foreign competition, offsets can also lead to the transfer of technology and production to other countries, which some have raised would also raise a serious national security issue.
If history shows us anything, it is that the negative effects of offsets on U.S. industry will only increase unless it is not immediately addressed and addressed in a comprehensive fashion. This is why the IAM has on numerous occasions urged policy makers to acknowledge that offsets are serious and establish a comprehensive national policy to address them. Sadly, neither the Commission on Offsets nor the Commission on the Future of the United States Aerospace Industry adequately addressed this very important issue.
The conclusion of some people that offsets are at best a way for the U.S. to enter foreign markets and at worst are, quote, unquote, necessary evil, must be rejected once and for all. While much more must be learned about the precise impact that offsets and all of their variations have on the U.S. workforce in the short and long-term, labeling offsets as an inconvenience or a necessary evil is an unacceptable response to the U.S. aerospace workers, their families and the communities that have made this industry so successful.
Page 17 PREV PAGE TOP OF DOC The government must take action now to develop a comprehensive policy to address offset issues. We welcome efforts to address this issue and, once again, we thank you for the opportunity to appear before you today.
[The prepared statement of Mr. Herrnstadt can be viewed in the hard copy.]
The CHAIRMAN. Mr. Herrnstadt, thank you very much.
And Mr. Doktor, you are manager for New Programs and Navy Programs for Warren Pumps, Incorporated. Thank you, sir, for being with us today. And the floor is yours, sir.
STATEMENT OF ROLAND DOKTOR, MANAGER FOR NEW PROGRAMS, NAVY PROGRAMS, WARREN PUMPS, INC.
Mr. DOKTOR. Thank you, Mr. Chairman. I appreciate the invitation today. Warren Pumps is a small manufacturer with 102 associates in Warren, Massachusetts. Warren Pumps is a member of the Colfax Pump Group based in Monroe, North Carolina. Our company's history dates back to the 1800s. We have bee a major supplier of pumps for the United States Navy since the early 1900s, and we are proud of our long role in protecting our country.
Our pumps can be found throughout the fleet. We provide pumps for services such as bilge and turbine generator condensate pumps on the command ships, TAO3 and 11, the ballast and cargo feedwater pumps on the fleet oilers, the TAO187 class, as well as critical services onboard our Nation's nuclear aircraft carriers and submarines. We also provide engineering services and parts support for our pumps currently in the fleet.
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Throughout our history we have been a leader in our industry. We hold a patent for manufacturing of low-noise propellers for submarines and designed and built the only low-noise self-priming pump for our current attack submarines. We were also the first to receive approval to supply composite pump components for the United States Navy.
We have been successful in our industry because of our innovation, our quality, our service and our skilled workforce. Like many in the industrial base, remaining skillful has become a challenge. Our workforce has been reduced by half in the last six years. Because the Navy is responsible for 65 percent of our current business, the static procurement rate of ships over the last decade has driven up our costs, and our production has declined. In the 80's, when we were on track for the 600-ship Navy, the Navy accounted for 90 percent of our business. It is difficult to retrain your skilled design engineers and machinists when you do not have work for them. These job losses mean the loss of valued associates who take with them the knowledge and training that is not easily replaced.
Offset policies used by foreign countries can make this matter worse. In a program with the Canadian government for the supply of various pumps onboard their frigates raw materials for our pumps had to be procured from Canadian companies to meet our offset requirements. These products included castings, which we would normally have procured from foundries within 50 miles of our facility. We would have used foundries in both Connecticut and Massachusetts.
As this was a 12-ship program, the loss of work to these local suppliers was significant. We also had to depend on these Canadian sources, and the loss of local control was a major problem, as they were not familiar with the naval requirements that were imposed. The qualification process as well as specification development for non-disruptive testing and welder qualification was necessary. Quality surveys and audits were also required.
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In addition to the casting, the electric motors were also procured in Canada. These amounted to 54 motors at an average cost of $5,000 each. These motors would normally have been procured through companies in New Jersey or Ohio.
The loss of control was reported in the normal quality materials being received, and periods of time wasted by a machinist while quality work was received from the foundries. Adding to this problem, the original supplier went out of business shortly after the first castings was received, leading to finding a second source and starting the learning curve requirements all over again.
The U.S. taxpayers have made an investment in industrial base. Instead of treating it as the national treasure that it is, our government procrastinates while men and women who work to supply our armed services with equipment, tools and technologies they need go up in smoke. Once lost, Mr. Chairman, these skills and knowledge we have today cannot be replaced.
So, Mr. Chairman and Members of the committee, I would ask you to take a long look at the impact of foreign offsets and the impact that they have on our industrial base. Thank you, sir.
[The prepared statement of Mr. Doktor can be viewed in the hard copy.]
The CHAIRMAN. Thank you very much, Mr. Doktor, appreciate your statement.
Page 20 PREV PAGE TOP OF DOC And Mr. Edger, you are president and the CEO of Jered Industries, Incorporated. Thank you also for being with us today, and the floor is yours.
STATEMENT OF RICK EDGER, PRESIDENT AND CEO, JERED INDUSTRIES, INC.
Mr. EDGER. Thank you, Mr. Chairman, pleased to be here. Jered Industries is a small U.S.-owned business that is been in business for about 60 years. We are located in Brunswick, Georgia, the site of what we call our Liberty Works, so named because it is on the site where they built liberty ships during World War II.
We employ currently 100 employees there. We have got a proud history with the U.S. Navy, going back over 40 years. Jered is a primary source of naval equipment, including aircraft elevators, cargo weapons elevators, ship steering systems, bow planes for submarines, steering anchor windlasses and a variety of other custom-designed special systems.
We are best know for the aircraft elevators which we have on the CVN, the LHA, the LHD and the LPH classes of ships. Our cargo weapons elevators and ship steering systems are on more than half of the U.S. Navy fleet, including the newest class, the LPD 17, San Antonio, under construction now for the Navy.
Jered has made major investments at our 12-year-old facility in Georgia, including a multimillion dollar 4-head robotic welding system that we acquired for a elevated causeway system on a contract that we had from the U.S. Navy Facilities Command. This welding station deposited over a mile of weld on each of over 300 elevated causeway system (ELCAS) pontoons that we produced.
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In addition to our workplace investment, we invest heavily in our workforce as well. We have a highly trained and skilled workforce, composed of design and manufacturing engineers, certified welders and highly skilled mechanical assemblers. Our welders must pass intensive training, and all of our welders hold certificates to the required military specifications in addition to American Welding Society, American Institute of Steel Contractors certificates and other appropriate codes. They are certified to both military and ISO 9000 Quality Assurance Systems.
We also have seen our workforce decrease by half in about nine years. We have lost 40 highly skilled, highly paid jobs in the last year and a half alone. Historically low rates of ship procurement by the Navy is the primary factor in that decrease. Also playing a part is the uncertainty and unpredictability of Navy procurement.
I mentioned a minute ago the investment that we made in the robotic welding system. That investment was made on the basis of the Navy's plan to acquire two elevated causeway systems. They have only purchased one system, which I might add just was recently returned from a successful deployment in Kuwait.
More recently, we invested heavily in a non-recurring cost for the LPD, San Antonio program based on the Navy plan for construction of 12 ships. It now appears that they will only build eight, and we will not recover our initial investment on that program either. To put in a plug, our best hope right now is that Congress supports the acceleration and advance funding of the LHA-R program.
Page 22 PREV PAGE TOP OF DOC Jered is committed to supporting our systems for the life of the ship, typically 30 to 50 years, but every day we are faced with the problem of finding substitute components for companies that are no longer in business or at least are no longer in the defense business. All too often these replacement parts must be purchased from foreign suppliers.
Foreign competition has also played a role in our decline, both as direct competition for U.S. Navy contracts here and with foreign offset or domestic industrial production requirements on their programs. In the direct competition case, foreign competitors typically cherry pick U.S. Navy programs with high production potential and especially those with commercial specifications, while they ignore the lower volume programs with more challenging specifications that we have to support.
Examples are the T-AKE supply ships and the maritime prepositioning ships, both of which have seen substantial foreign supply of systems that could be supplied by U.S. manufacturers.
A few years ago, we lost a major bid for the CROPS Program to a Korean company that set up a manufacturing facility in Mexico to take advantage of the North American Free Trade Agreement (NAFTA). One thing this experience has taught us is that to compete we also must subcontract work in low cost countries. This, of course, helps accelerates job loss in our industry.
I would like to share with the committee our company's recent experience with foreign offsets. We have done several contracts in Spain going back over 25 years. Most recently, we supplied the steering gear for their F100 frigates. They required 100 percent domestic production on that contract, although you can reduce that somewhat by credits for transfer of technology.
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Just last week, we submitted a proposal for aircraft elevators for their new LL Strategic Projection Ship, and the same requirements apply. We will do the design and program management from the U.S., but all of the manufacturing will be subcontracted to Spanish companies. They have an office in their department of defense called the ''Gerencia de Cooperacion Industrial'' that enforces these requirements. The shipyard is not allowed to place a contract with a foreign supplier until that supplier has an approved industrial cooperation plan.
Similarly, we are working in Japan to supply aircraft elevators for their new DDH program. Foreign suppliers will not be considered unless they have made arrangements for partial domestic production. Although there is apparently no fixed percentage required, more is better. In recent proposals for the United Kingdom, Italy and Korea, however, no offset or co-production requirements were imposed on us.
Because of the low level of Navy shipbuilding in the U.S., we are working to increase our exports of equipment and systems overseas to survive. The ultimate effect of offset requirements is to shift manufacturing jobs out of the U.S. The impact is to reduce manufacturing volume here, which raises our overhead rates, increases our cost of our products and makes our U.S. Navy ships more expensive.
Mr. Chairman, we at Jered are committed to doing our part to ensure our national security. The fact that we suffer at the hands of foreign companies who are sometimes subsidized for exports and also benefit from their country's offset policies puts us at a competitive disadvantage. To the large defense companies, offset requirements are simply a part of doing business, but to small second and third tier defense contractors like Jered, they have a major negative impact.
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For those of us who make up the defense industrial base, it is both a critical business issue and a critical national security issue. Given all that is happened in the first years of the 21st Century, I wonder if we should be putting our security at the mercy of other countries. Will they be there for us when we need them for a part to launch a weapon or operate to our shipsa part once made by a U.S. company that no longer exists?
Mr. Chairman, I would like to see a fully open market, but I know it is a very complex issue, and I don't know how to accomplish that. Hopefully this committee will figure that out. I would like to thank you for the opportunity to testify today, and I would be happy to answer any questions.
[The prepared statement of Mr. Edger can be viewed in the hard copy.]
The CHAIRMAN. Thank you very much, Mr. Edger, and for the record here, we have a statement by the American Shipbuilding Association, which is opposed to the continuation of offsets. Because I think Members are trying to understand fully what offsets mean, because as all three of you have described, they can mean a number of things, but they start out on the basis that if we sell something to a foreign government, a military system, because it is outlawed under civilian trade, that country demands that we buy from them at least as much as we sold them and in some cases a multiplier, 150 percent at times. So I want to walk through this, and please correct me, any of the panel members if I don't have this right.
But let's say we sellyou have an offset requirement of a foreign country and we want to sell them $100 million worth of aerospace parts. They may have a 100 or a 150 percent offset requirement, which in the old days might mean that you had to buy $100 million or $150 million worth of soybeans from a producer in that country. Is that the way offsetsmany of the offset deals originally entailed, fairly simple commodity purchases?
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Mr. EDGER. In our case, Mr. Chairman, the offsets that we have been involved with have always involved production of the equipment in country.
The CHAIRMAN. Yes. I was going to get to that. So that was, as I understand listening to Mr. Herrnstadt, that was an early type offset was you had to go and buy a commodity or a simple manufactured product, but offsets also mean today having to do a large part of the production in the country that is buying your particular system. And it may mean transferring production technology, your seed corn, if you will, the product of your research and development (R&D), to that country in return to make that sale. Is that what you have described?
Mr. EDGER. That is correct.
The CHAIRMAN. And, incidentally, I have got an example that is in here since we don't havewe have the statement from the American Shipbuilding Association, and I am going to offer this for the record, without objection. They have several examples of situations in which, and I give the first one in 1988, the Norwegian government made the purchase of U.S. airplanes contingent upon an offset of building icebreakers for the U.S. Coast Guard. So they helped American aerospace manufacturers, but they did it by, presuming that we went through with this deal, by basically giving away shipbuilding jobs.
In 1993, Sweden indicated that the companies vying to sell that country armored tanks could enhance their bids by making Swedish-manufactured ship propellers the offset. And the next bullet is a 1997 Department of Commerce report on offsets and defense trade reported that the U.S. shipbuilding industry suffered $347 million in offsets between 1993 and 1995.
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I guess what that indicates is actually offsets can cross industries; that is in return for a sale in the aerospace industry, for example, we may end up having to give away jobs in another industry, in this case the shipbuilding industry. Is that consistent with your experience?
[The prepared statement of Ms. Cynthia L. Brown on American Shipbuilding Association can be viewed in the hard copy.]
Mr. HERRNSTADT. Mr. Chairman, if I may, yes.
The CHAIRMAN. Yes, certainly.
Mr. HERRNSTADT. I think you are exactly right. And the issue is for workers lots of times even if it is a direct offset in terms of production and technology and workers are losing their jobs here at home, they may not know that. They may not know that reason. That information lots of time is not shared with them. That is one part of it.
The second part of it is, and you are quite right, as these deals become more and more convoluted, more and more complex, it is very difficult to track. It is difficult to track in the same industry let alone, as you mentioned, when it crosses over into other industry, whether they are defense related or whether they are commercial. So that the ripple effect of the offset, the impact in the short term is very tough to discover. It is even tougher to figure out in the long term, as it leads to greater and greater competition coming in from abroad in a variety of different industries, in a variety of different ways.
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The CHAIRMAN. Okay. Let me ask you, let's say you have a big contractor, big prime and the big prime is told by the foreign country that they have to give them production in certain parts of that aircraft that they are selling, so instead of an American company making the sells, for example, that is located in New Jersey or Ohio or Pennsylvania, that subcontractor gets a phone call from the prime and they say, ''You know, we are sorry, Joe, but to make the deal with this European country, we had to give them your piece of the work. We will call you later.'' And that becomes athat in the deal is penciled in to satisfy a certain percentage of that offset, whether it is a 100 percent offset requirement or a 150 percent offset requirement. Is that right? Am I tracking here?
Mr. HERRNSTADT. Yes. I mean I think the issue is how does this translate, I think that is exactly right, and it is calculating that.
The CHAIRMAN. But in some cases, production and production technology is the offset. It is not a sale of a product or something that is measurable with a market price, but it can be that production technology that makes that particular European country your competitor the next time around.
Mr. HERRNSTADT. Yes.
The CHAIRMAN. Is that accurate?
Page 28 PREV PAGE TOP OF DOC Mr. HERRNSTADT. It is my understanding in looking at the government reports that that is apparently what is going on.
The CHAIRMAN. Okay.
Mr. Edger, tell me, if you can tell me, an example, maybe you can leave out names, but tell me an example of how an offseta case where you think that offsets most badly damaged the prospects for folks in your company?
Mr. EDGER. Well, if we are providing an aircraft elevator, for example, to a foreign navy, we would like to be able to build the equipment where it makes the most sense. Structural steel work would probably be done in the local country, but we would normally provide the more complex equipment from herethe hydraulic power units, pumps, motors, electrical controls, electric motors and so forth. When they have 100 percent offset requirement, we have to find subcontractors in the other countries to do that, and they buy then domestic components. So not only do we lose production work from our facility but our suppliers and subcontractors in the U.S. also are affected directly.
The CHAIRMAN. Okay. Thank you.
Mr. Herrnstadt, in the final report of the Commission on the Future of the United States Aerospace Industry, the commission found what they called anecdotal evidence provided to the Offsets Commission suggested offset demands may have grown qualitatively as the receiving countries increasingly require specific results rather than best efforts from U.S. exporters and seek greater technology transfer. Further, the report recommends, therefore, the U.S. Government should pursue a multilateral solution to curtail offset demands, meaning we should try to work out with our trading partners a curtailment of offset demand which apparently have already been outlawed in civilian trade.
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But my question, Mr. Herrnstadt, is what motivation would the European Union have to engage the U.S. Government in trade discussions to curtail offsets when they have them, they have a mandate for offsets, and we have none?
Mr. HERRNSTADT. I think your question really speaks for itself. Obviously, we can't read the mind of Europeans, but I think we can ask a bunch of questions. One of them is are there any multilateral negotiations going on now with the objective of eliminating offsets? And if there are not, why not, and has the U.S. raised these issues before? I think that it is fair to ask what incentives do the Europeans have to come to the table to discuss this matter with an objective to finally come to an end, to resolve this.
One just needs look at the government reports to see all the offsets that are occurring with Europe which may provide some of the answers.
The CHAIRMAN. The Department of Commerce report states, ''Imports of aerospace products have increased rapidly in the last decade for a number of reasons, including offsets. Offset agreements lead to increased exports to the extent that they result in U.S. prime contractors importing subcontracted parts and systems rather than relying on domestic sources. Aerospace-related imports have increased regardless of the state of the market.''
That is very interesting. As the aerospace market has gone up and down, the increase in importation of aerospace components, which is supposed to be a prime American industry, a premier American industry, has gone up even in difficult times. Boeing has lost commercial aircraft market share, and the U.S. has lost global market share in fighter aircraft.
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Is there any case to be made where the U.S. primes participation in offsetsand I know the primes like offsets, they have told their associations to fight for offsets, they dominate the aerospace associationsbut is there any case to be made that they are a little shortsighted here and that in the quest for more short-term sales and a declining market, they potentially damage their own industrial base in the long term? What do you think?
Mr. HERRNSTADT. We have lost over 600,000 jobs in the aerospace industry and several hundred thousand more jobs in related industries in this country. We fear that the U.S. aerospace industry could suffer enormously, like the U.S. shipbuilding industry which was once one of the world's great leaders, in the future. We are literally hemorrhaging jobs in U.S. aerospace industry. We have to explore every reason. I know the global economy is down, there are issues of overcapacity which we have argued are related to offsets and outsourcing.
The question for us is really how are we going to attack this issue, and how are we going to carefully examine every single reason, including offsets, that have resulted in these job losses that are occurring and occurring in the past several months at an alarming rate?
There have been a couple of studies let me direct you to that have looked at the industry and the issue of offsets directly. One is Jobs on the Way, it was a study done some time ago by the Economic Policy Institute, I believe, and the other done by the National Research Council, Trends and Challenges on Offsets, which give quite further elaboration and detail on that specific topic.
Page 31 PREV PAGE TOP OF DOC The CHAIRMAN. Okay. Thank you. I want to thank my colleagues for indulging me for such a long chairman's question here.
The gentleman from Texas, Mr. Ortiz.
Mr. ORTIZ. You know, Mr. Chairman, and I know, I know that this is a very complicated matter, but I think that you mentioned something a few moments ago, who in the hell is the Offset Commission? Who are they? Do we know?
Mr. HERRNSTADT. There was a commission which was established some time ago, I believe it was the year 2000, that was to look at the issue of offsets not only in the defense industry but also in the commercial industry. And to my knowledge, the commission met once. It was populated by members of government. I believe there were members of academia on it, labor organizations and industry as well. Unfortunately, it really only met once, it issued a status report and that was about it.
Mr. ORTIZ. No wonder we are getting to the point that we might have to buy soybeans when we don't need soybeans.
We have a very serious problem here, Mr. Chairman, and I think that we need to do something to see if we can reign this problem or corral it. This is not really an open market. This is a market where, ''either we give you this or we won't buy from you.'' I don't think it has nothing to do with a fair or open market. I could be mistaken, because it is very complex matter, and I do not understand it to begin with. I didn't even know for 22 years that we had an Offset Commission until today.
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Now, when you sell aerospace equipment, I am assuming that, Mr. Chairman, we spend a lot of tax money on research and development or you gentlemen spend a lot of money on research and development. Now, what happens when you sell a new product or a new invention that is a part of an airplane? Do you have to go through somebody in the government to approve before you sell that?
Mr. EDGER. Yes, we do. We have to get an export license to sell a part overseas, whether it is for a ship or for an aircraft. And if you are going to license someone to produce it, you also have to get Department of Defense and Department of Commerce approval for the manufacturing license as well.
Mr. ORTIZ. Now, thank God that we have a new technology in this country, but are we obligated to sell to another country specifically, Mr. Chairman, when they want to get our technology?
The CHAIRMAN. Well, I will just say to the gentleman that I think the testimony is it is part of the deal, but the driver on the deal is that the government itself, as I understand the witnesses, hasthese foreign governments have offset requirements of 100most of them at least 100 percent but some of the multiples of 100 percent. And part of that, one way to pull 20 or 30 or 40 or 50 percent of that offset requirement down so you can make your sale is to give them your technology. In some cases, I think that technology is probably created with a combination of government money and private money. I would ask the witnesses to answer that, but that is my understanding.
Page 33 PREV PAGE TOP OF DOC Mr. DOKTOR. In cases for our company, it is a combination of both. A lot of the products were jointly developed or developed one way or the other, but when you look at the dollars that are spent if the original product was developed under a U.S. Government contract, the taxpayers paid for all that research and development or the majority of it. And now the other countries are looking to ride the coattails of what the U.S. taxpayers have already provided and all the approvals and all the engineering and all the development that went along with that program.
Mr. ORTIZ. And, again, we are giving technology away. They say, ''Okay, you must buy so much amount of soybeans now.'' Who buys the soybeans? Suppose we don't need soybeans but that is the deal. Now, if our government ends up having to buy the soybeansand I am soplease excuse my ignorance but this is a subject that I have never tackled before. Who buys something thatfor you to sell something, they say, ''Well, you must buy this.'' Now, who do you go to to sell whatever youfrom that other country?
Mr. EDGER. Well, we have never been involved in a direct offset like that. I think those are usually the major prime contractors and I guess they have to make arrangements with other companies that deal in those commodities to buy them and resell them. Fortunately, I have never had to buy any soybeans. My father-in-law grows them in Michigan, but I have never had to buy any overseas.
Mr. ORTIZ. My suggestion, Mr. Chairman, is that we need to encourage this Offset Commission to meet more frequently and to see how we can help industry. I mean I hate to lose over 600,000 jobs. Is that the number?
Page 34 PREV PAGE TOP OF DOC Mr. HERRNSTADT. That is just aerospace.
Mr. ORTIZ. We can't afford to be losing anymore jobs like this, and my suggestion would be maybe to have another hearing, Mr. Chairman, and suggest and meet with these commission members, I don't know who they are. I am assuming they are good people for them to have been appointed.
The CHAIRMAN. I thank the gentleman. We are going to have several hearings on this issue. Obviously, we are going to bring in the major contractors, many of whom feel that offsets are very necessary for them, and also the U.S. Government. We are going to let everybody have their pitch here.
But I thank the gentleman very much, and the gentleman from Pennsylvania, Mr. Weldon is recognized.
Mr. WELDON. Thank you, Mr. Chairman. Thank you for holding this hearing. It is extremely important, a topic that we have to come to grips with. I think it is a little shortsighted to say that we lost 600,000 aerospace jobs because of offsets. That is just notI mean I remember using a figure during the eight years, from 1992 to 2000, of 1 million jobs lost in defense and aerospace. That was largely caused by a significant decrease in the modernization accounts of our defense budget. In fact, this Congress has to plus-up spending $43 billion over the President's request just to try to keep up. And so to say that was all caused by offsets is really wrong, and you know that.
Mr. HERRNSTADT. And I neverI don't believe I said that. If I did, let me correct that right now.
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Mr. WELDON. Okay.
Mr. HERRNSTADT. When I said 600,000 lost jobs, I just meant that in terms of a variety of different reasons
Mr. WELDON. I agree. I agree
Mr. HERRNSTADT [continuing]. Which I stated. And I don't mean to even make that inference.
Mr. WELDON. And I am concerned that Airbus is in some cases beating the pants off of Boeing for commercial aviation products around the world. And I told their CEO Harry Stonecipher when I met with him a few months ago in my office that Boeing is just not competitive enough worldwide. They have got to get more aggressive in going after the international market the way Airbus is.
But let me say this: I am against offsets, and I have had direct impact in my district. We have a Boeing plant that manufacturers helicopters and they also had produced the leading edge of their wings for their commercial airplanes. And because of an offsets requirement with Great Britain, they took all of that work out of my district and transferred that leading-edge work to Great Britain. Those were good United Auto Workers (UAW) jobs, high-paying jobs and for no reason except that they had to fulfill an offset requirement, those jobs left Pennsylvania and my district. So it offends me.
Page 36 PREV PAGE TOP OF DOC But I also am offended by the fact, as I mentioned in a hearing yesterday on China, that we can't even get it straight on what is allowable to sell overseas when a foreigner wants to buy it. I think of the munitions list. We have Chinook helicopters. The Chinese would love to buy them, but Boeing can't sell those overseas, because our government is determined that that is a highly protected item. Now, we can sell them high-speed supercomputers, we can sell them stage separation technology, we can sell them manufacturing technology, but heaven forbid we sell them a heavy lift helicopter which has produced jobs here in America. So there are a number of factors that we have to look at.
But I think we also have to be realistic. It is easy to poke shots, but the fact is we are trying to reduce the cost of platforms. The fact is we wouldn't be building a joint strike fighter were it not for the involvement of our allies. If we didn't have the British, the Australians, the Italians and a group of other countries with us, we could not afford to build a joint strike fighter. So it is a little bit illogical for us to say we want you to come in and build the joint strike fighter with us, but we want all the jobs to be in America. You put the investment in, even up-front investment, and then we will get all the jobs. You can't do that.
Now, I asked one of our contractors, Lockheed, to give me a summary of the F16. Now, I want my colleagues to listen to this, very important. From 1997 to 2003, Lockheed Martin produced 526 F16s. Do you know how many were bought by the U.S. Air Force? Thirty-one. Thirty-one out of 526 F16s were bought by the U.S. That is 4 percent. Now, should we tell all those countries that are buying the F16s that everything has to be made here? We can't do that. So there is a downside to this issue that we just can't ignore.
I look at theand if we had lost the F16 sales, we would have lost the engine sales, which I think are produced in Ohio and a couple of other states. If you look at other programs, the C130, if you look at some of the other programs where we have had extensive foreign sales, those countries want a piece of the action. Now, I don't like them holding our companies hostage. I think it is wrong, I think it is outrageous and it is illogical, but I don't know that there is an easy fix to this.
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Now, someone said can't we do away with offsets? Well, they are going to come back to us and say, ''Then you had better do away with small business set-asides because you require in your contracting that you have small business set-asides. Are you going to get rid of the Jones Act, because the Jones Act protects American workers. Or are you going to get rid of the Buy America provisions, the Berry amendment? And I support all of those, but we can't have our cake and eat it too. So what we have got to find is a way to achieve fairness, and I don't have that answer, I wish I did.
I am not happy that our companies are held over a barrel. I am not happy that sometimes our companies in fact, in some cases, maybe even enjoy this offset process. And I am not happy that our government is doing anything about it. But we can't approach the subject in a vacuum, because anything we do we have got to understand what the impact will be on those programs that we feel are important for our military.
Because if we take dramatic actions, we may end upnow, we can always say, well, they are always going to buy American products because they are always the best.
And, again, I am on your side. I oppose offsets, I think they are wrong. I think they cost us jobs. In fact, I think staff provided us a study here, Duncan, that says there are 42,000 work years that were provided by the Bureau of Industry and Security (BIS) Office of Commerce in U.S. defense industry between 1993 and 2000 because of offsets, but they also said that we cost 9,600 jobs because of offsets. Well, that is a net plus of 20-some thousand jobs. Now, I would rather it be 40-some thousand jobs, but the fact and the challenge for us is to find that middle ground.
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And I would say this to you, Mr. Chairman: I think American corporate leaders owe us some solutions short of opposing anything that you put forth. I mean they went to the wall against you last time on Buy America, and that is not the solution. We don't need a war here, we are all on the same team. We need to have a constructive approach to solve this problem to have as many jobs as possible stay in America, and I agree with that. But I don't think there is an easy solution of an easy fix that we just wave a wand and all of a sudden offsets are going to go away.
And I know that might not sit well with some of the people in the room in a number of instances for strong support of the labor movement, as my friend knows, on most of the labor issues in the Congress, but on the other hand, I think those labor unions producing the F16s would have severely impacted if those 500 F16s had not been able to be sold to those European countries, all of whom, all of whom have offset provisions. Thank you.
The CHAIRMAN. I thank the gentleman.
Gentlemen, any response? Yes, sir.
Mr. HERRNSTADT. Yes. I couldn't agree more with the issue that this is a very complicated issue, and I think we have to start with trying to determine to our best ability what exactly is going on out there. What is the impact on the short term and on the long term? Then I think we all need to work togetherindustry, academia, labor, government, Congress, everyoneto try to devise a comprehensive policy, a comprehensive policy that looks at all of the different pieces of the offset puzzle to try to really address this issue. It is complicated, and we are very well aware of that.
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The CHAIRMAN. And on that point, to Mr. Doktor or Mr. Jered, we have looked at the numbers. The Department of Commerce collects data that is reported to Congress on an annual basis on offset agreements as well as activities that the U.S. companies engage in to fulfill those obligations. And it is essential to have accurate data on the activities concerning the offsets, and under the law notification requires reporting for offset arrangements exceeding 50 million bucks.
But Mr. Doktor and Mr. Jered, are your offset contracts reported to the Department of Defense or the Department of Commerce?
Mr. DOKTOR. No, sir. Our total sales are half of that amount.
The CHAIRMAN. So they are 25 million bucks or in that area.
Mr. DOKTOR. Total sales of the company, yes.
The CHAIRMAN. Yes. Mr. Jered.
Mr. EDGER. Yes. Same is true with us. We would love to approach the $50 million level so we could report it.
The CHAIRMAN. Okay. Good. And I would say to my friend from Pennsylvania and my colleaguesthis is an important area for us to look at, because we have seen the Department of Commerce and Department of Defense holding this tally sheet up that says we got a net plus, but, obviously, they are missing all the contracts below $50 million. Wouldn't you say that probably most of the subcontracts that are given out in these defense sales, these component contracts, are under $50 million?
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Mr. EDGER. I wouldn't know for sure, but I would suspect that most of them are.
The CHAIRMAN. The point that was made by our two gentlemen was in this reporting requirement where they give a net plus for offsets, they say we have lost so many jobs, but we have gained more because of the sales, the only report over $50 million. That means neither Mr. Doktor nor Mr. Jered's offset requirements were ever reported to Department of Defense or to the Department of Commerce. And I suspect that is true of hundreds if not many hundreds of companies that don't make billion dollar sales.
Mr. WELDON. Will the gentleman yield?
The CHAIRMAN. Sure.
Mr. WELDON. When I read the reportfirst of all, that is an excellent point that needed to be clarified, but it said here where I read this that the 9,600 work years that were displaced were in the lower tier companies that were suppliers or subcontractors. So that is specifically what Commerce is saying, that it was in fact the smaller companies that took the brunt of the hit as opposed to the large U.S. contractors.
The CHAIRMAN. Yes, but what our two guys are saying is they are in the $25 million category and they never reported their losses, because they are not required to be reported under Title 2532.
Page 41 PREV PAGE TOP OF DOC Mr. WELDON. We ought to amend it to at a minimum have that concluded. That is a good point.
The CHAIRMAN. The gentleman from Arkansas?
Dr. SNYDER. Thank you, Mr. Chairman. I appreciate the discussion that you and Mr. Weldon had, because I think that thatfrom the testimony we have had here and your opening statement, I think the one thing you all agreed in is that you didn't have the solutions, that it was complex. And I think Mr. Weldon captured that flavor too, that it is difficult and needs to be thoughtfully looked at so that if there is a way to help things, we can help things. What we would not want to do is to aggravate the problem.
One of the concerns I have is that Congress we have gone through this somewhat before, and I think it was in the 1999 appropriations bill we established the National Commission on the Use of Offsets in Defense Trade, and so we set up a commission to look at this. I think you all referred to President Clinton made I think the 11 appointments to it that includes 5 executive branch members. They were looking at these issues. Then came the end of the Administration, and the five executive branch members are no longer part of the Administration, they are replaced, but they are not reappointed by the President to this commission, and so the commission doesn't have these five key government employee members, and so it stops functioning.
They issued a preliminary report in February of 2001. Their final report was due, I think, in October, toward the end of 2001, and then the President was supposed to respond to that. Well, if the members never got appointed by President Bush, then the commission has stopped functioning, and so we are now back to several years later and we have circled around again asking questions about, well, why don't we have some thoughtful analysis of this?
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If I might, Mr. Chairman, Government Accountability Office (GAO) put out a report in May 2003 called, Defense Trade Report and Recommendations of the Defense Offsets Commission Still Pending. If I could ask unanimous consent to have that be part of the record.
[The information referred to can be viewed in the hard copy.]
The CHAIRMAN. Absolutely, without objection.
Dr. SNYDER. Because it does discuss some of these preliminary findings, but it does make the point that because President Bush did not make the appointments to the commission, the commission stopped functioning. And maybe they have got another group that is looking at this, but it may be that we ought to get some folks in the Administration to come up and say, ''Now, when are you all going to finish this work that the Congress mandated be done starting in 1999 and it carried through the Administration?''
I was struck by the fact that youI think in both your written and oral statements none of the three of you really specifically articulated a response. Do you have something in mind? I mean is there some specific piece of legislation that you areeven some minor thing that you would suggest to the Congress to do or is it more still an amorphous concerns that is difficult for you all to put your finger on and answer right now also?
Mr. HERRNSTADT. Well, I think one of the first things that can be done is trying to figure out precisely the nature of this beast. Trying to figure out how many jobs really are at stake and how many jobs are being lost. We have got a lot of anecdotal evidence of it, but there has been nothing done with precision. The numbers that were quoted by the BIS report looked at value-added numbers
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Dr. SNYDER. If I might interrupt, when you say trying to get a handle on it, that is what that commission was supposed to have done starting three years ago, and so we have come back around so I guess we can reinvent the wheel, Mr. Chairman, and declare a success and go home. If we need to get the Administration working on the commission and get the report back here and have the Administration respond, then maybe we can do something if there is something to be done.
Mr. HERRNSTADT. I think that is a great suggestion. The president of our union, Tom Buffenbarger, was the labor representative on that commission. To my knowledge, they did only meet that one time. They laid out a large task and the commission, if reinvigorated, has an awful lot of work to do.
Dr. SNYDER. Any of the two of you have comments?
Mr. DOKTOR. We would just like to be able to on a global basis be on the same footing with everybody else. If it is tradeoffsets or subsidies or whatever the combination thereof or combination there isn't, we just want to be able to compete with everybody else on the same footing. And, again, whether it is offsets or something else, if our competitors don't have to do it and we have to, that puts us on a disadvantage right from the start.
The CHAIRMAN. I might say to the gentleman too that our bill has an offset provision in it, and it is very simple. It is a reciprocity provision. Because we have a Buy American provision of 50 percent, as the gentleman knows. A number of these countries, if you will go down the list here, Netherlands, 100 percent; Norway, 100 percent, Portugal, 100 percent. What those basically amount to is a 100 percent buy foreign provision, meaning even if they buy our C130, we have to buy that same amount in some other commodity or give them some technology.
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What it really means is there is a net zero in terms of trade surplus achieved by the United States, sum zero. It is a 100 percent buy foreign requirement. So we have a requirement that says very simply that there shall be reciprocity, that Secretary of Defense doesn't buy from countries that have offset mandates that are greater than the reciprocal provision in our particular application. So if we don't have aand in many cases, we don't have a Buy American requirement because it is notbecause of factors that would waive it or not specify it in that case. So this makes us even steven, we are on an even playing field.
And the other point is that that doesn't say that a company can't say, ''I want to make an aircraft, and I want to buy my nacelles from Norway.'' The company can do that if they want to. A prime American company can do that, and they do it all the time, they buy foreign products. But the evil of the offsets is it is a mandate, meaning you buy $100 million worth of C130's, you have toby that country's law, you have to buy $100 million worth of their product of a subsystem thereof. And that is the extortion dimension which has been flayed in so-called free trade circles and has made offsets outlawed in domestic trade circles. But I appreciate it, and did the gentleman have other questions?
Dr. SNYDER. Mr. Edger, did you have any comments?
Mr. EDGER. Well, I think the objective, in my view, is clear, and that would be to eliminate offsets on all sides, as the chairman has pointed out, is the case for commercial trade, but I am afraid, as I said earlier, I don't know how we get there from here.
Dr. SNYDER. Also, Mr. Chairman, there is a report, it is called, Offsets in Defense Trade, the seventh study conducted under Section 309 of the Defense Production Act of 1950, as amended, prepared by U.S. Department of Commerce, Bureau of Industry and Security, July 2003, and I ask unanimous consent to make that part of the record also. And on page 53 of that report, there is a section, Other U.S. Government Offset Activities.
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It says, ''The Department of Commerce, through the Bureau of Industry and Security, has participated in a Department of Defense led interagency Offset Steering Committee, called the committee, which includes representatives from the Departments of Defense, State and Labor and the Office of the U.S. Trade Representative. Since the publication of the sixth report on offsets in defense trade in February 2003, the committee has been inactive.''
Now, maybe it has been active since then, but we may have aI see a staff member shaking his head implying it has not been active. So we have both the commission that was set up by Congress that has not met because the President has not made the appointments to it since coming into office, and then this group, for whatever reason, is not active.
Last thing I want to say, as a family physician, all my life I have been called since getting out of medical school, Mr. Doctor, and it is just a pleasure to meet the real Mr. Doktor. Thank you so much. [Laughter.]
[The information referred to can be viewed in the hard copy.]
The CHAIRMAN. I thank the gentleman.
The gentleman from Connecticut, Mr. Simmons.
Mr. SIMMONS. Thank you, Mr. Chairman, and thank you for holding this what I consider to be very important hearing. Discussion has been made of Pratt Whitney and some of the offsets that involved them in the sale of F16 aircraft to Poland. Pratt Whitney is not in my district but it is a Connecticut company, and a lot of my constituents work there.
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And in the last session, Pratt Whitney was involved in one of the largest aircraft procurement contracts in history involving the joint strike fighter, which was a big plus and we were very excited, and we thought this was going to mean a lot of jobs. And within a month or so there was an announcement of a layoff and Bill Shortel who was in the middle town plant of Pratt Whitney of course got on my home phone in very short order and said, ''What the heck is going on? You just announced and have been celebrating the largest aircraft contract in the history of the world, and a month later we are getting laid off.'' And the answer I got for the company, ''Well, it had something to do with offsets in Poland.'' Offsets in Poland.
So when you look at the sheet here, you see capital injection for the restructuring and modernizing of an entity in Poland. Capital injection, that means U.S. dollars going somewhere to improve their facility at the expense of ours. I mean that is what that means to me. And that is not a good thing, from my perspective. Creation of a materiel research center at the Air Institute in Poland. So we are creating a materiel research center in that country. Obviously, that competes with whatever we happen to be doing, and also that involves a transfer of technology. And the list goes on. I mean the details of the offset are described somewhere in greater detail than what we have here today.
But that is what is going on, and that to me is a very serious problem. And it does not just involve aerospace. It also involves helicopters and the issue involving the Presidential helicopter and whether it should be a Sikorsky from Connecticut, which is 100 percent American or whether it should be a U.S. prime, as we call them, with multinational representation; in other words, a foreign component so that the U.S. President no longer flies in a U.S. helicopter; he flies an amalgam of some sort or other with the loss of U.S. jobs.
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It goes to pumps and submarines. Yes, we produce submarines in eastern Connecticut. Electric Boat produces submarines, and pumps are a key component. And what you are describing here about the problems in getting components for pumps is replicated across the board, and the primes may be able to survive this because they are big and they are multinational, but in my district alone we have 426 subcontractors for Electric Boat just for that one prime, and they don't survive. And that is the problem, and that is a huge problem that we have to address.
And let me carry it one step further.
The CHAIRMAN. If the gentleman would yield on that. I think you just made a good point on the primes I think we need to note, and the subs. We have got wonderful big primes, and God bless them, I am glad we have got them, but if a prime aerospace contractor has to go to Italy to make their nacelles to get the job, that doesn't reduce their profit margin. The only profit margin that is reduced is the poor wretch that gets that phone call at four o'clock from the nacelle producer in the United States who's got 120 people that are looking forward to a paycheck.
And to some degree, I think we are going to have to learn to all pull together in this country. Primes are out there. When you have the spector of Airbus picking up the tanker program, then you have good old Boeing out there with a good Buy American contingent. And they have got another set of lobbyists that are out there at times with the buy foreign contingent when it comes to getting that less expensive component, and may those two sets of lobbyists never meet for lunch.
Page 48 PREV PAGE TOP OF DOC I think to some degree we are going to have to come to a resolution that we are all going to pull together and that Americans are going to help Americans. We are going to try to keep this base together. And you have made a very good point with respect to the industrial base in your state, I would say to the gentleman. So thank you for that comment.
Mr. SIMMONS. Let me take it one step further, Mr. Chairman. You have been a great leader on this committee on providing up-armored humvees and body-armor for our troops in Iraq. That's an issue that has been in the papers, it's an issue that affects the lives and safety of our brothers and sisters in uniform.
What I have here is a piece of three-eighths inch rolled homogenous armor, RHA. And this is the steel that's used for the doors and the sides of the humvees. This is the steel that we are shipping overseas as quickly as we can to lay on to our humvees so that our soldiers, our men and women in Iraq, are protected from the improvised explosive devices. And one thing that this committee did was to kick and scream about getting this stuff over there faster, faster. But if you go to Rock Island Arsenal and ask them how many suppliers there are of this RHA in the United States of America, the answer is oneCoatesville, Pennsylvaniaone.
Now, one of our witnesses has referred to the problem of foundries, foundries in Connecticut and Massachusetts that we no longer have. We have gone from 12,000 foundries to 2,500 in America today. We are losing 100 a year, which is one every three and a half daysfoundries. There is one foundry in America today that makes this armor plate that we are using to save the lives of our soldiers in uniform.
And so when I look at this issue of offsets and when I listen to the testimony, I don't think just about the vitality of the business community, I don't just think about the lost jobs of working families, I think of the lives of our men and women in uniform. And if we have this problem with this material today, what problems are we going to have five years from now with helicopters and jet engines and surface ships and submarines when we can no longer get the components that are of the quality we need to save their lives?
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And I would just say, Mr. Chairman, that it's absolutely essential that we have a follow-on hearing where more Members can be present and where some of the CEOs can come here and some of the government officials. And if there's any concern about whether we can get their attention on this issue, I suspect that we should introduce legislation outlawing offsets for a year, a moratorium on offsets for a year until we can study the problem and figure out a strategy for dealing with it effectively.
Would any of you gentlemen object to that approach? It might bring this issue to the forefront which is where I think it belongs. Do any of you gentlemen want to offer a comment? I know you probably don't want to offer a comment. You don't have to offer a comment on that, but let me just close by thanking them for their testimony. This is a huge issue, and it needs a lot more attention.
Thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentleman.
The gentle lady from California, from San Diego, Ms. Davis.
Ms. DAVIS OF CALIFORNIA. Thank you, Mr. Chairman. Thank you all for being here. Mr. Chairman, you know we have many, many businesses in our community of San Diego, and I am concerned about small businesses. There's a new definition here today that a small business is a company that does below $50 million. I don't think everybody would agree with that, but according to the ability to track and understand what is going on in the country today, that is basically the definition, is that not true?
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Mr. DOKTOR. According to what we saw, yes, that is correct.
Ms. DAVIS OF CALIFORNIA. One of my concerns is not only about small businesses and the way they are really hampered by much of this and what we are discussing today, but also, of course, is the impact on national security and technology transfer. Are you aware or know of instances where perhapsI think Mr. Chairman used the word, ''extortion,'' may not be the word that everybody would choose to usebut where that military technology transfer is desired and in fact plays a very important role in the offset?
Mr. EDGER. Well, certainly, in our case, the customer desires to get technology transferred into their country and they incentivize you to do that by allowing a lower overall percentage offset if you transfer technology. And, of course, as we mentioned earlier, we have to get that approved by the Commerce and Defense Departments here before we can do that.
And it's always a risk when you do that, that you are creating yourself a competitor for the future. So it's pay me now, pay me later type situation there. If you pass up the opportunity, you are probably giving another competitor from a different country increased market share immediately, but if you transfer the technology, then you may be creating a third competitor that comes along in the near future.
Ms. DAVIS OF CALIFORNIA. In most instances, and perhaps if you want to follow up, that would be fine, I am just wondering do you usually get those approvals?
Page 51 PREV PAGE TOP OF DOC Mr. EDGER. Yes. I think the Department of Defense in particular is more looking at the relationship with the particular country rather thanwe are not considered high tech, so we are certainly not on that threshold. And as long as we are dealing with allied countries, we have never had that problem on the export approvals.
Mr. HERRNSTADT. I was just going to comment, that was one particular issue that the Commission on Offsets was to address, and they do address it in a general fashion in their status report. And I also believe a workshop on offsets conducted by the National Research Council there was certainly, I think, at least one paper that addressed that issue and that raised the issue through your discussion.
Ms. DAVIS OF CALIFORNIA. The commission was mentioned and the fact that it hasn't met, essentially is, I guess, dormant. Do you think thatall of you, do you think that that is the proper venue for the discussions that we are talking about?
Mr. HERRNSTADT. I certainly do. I do if it's given enough stature, if it's taken seriously. If it's mandated clear enough and broad enough and if people that are represented on it clearly have some sort of authority and substantive knowledge on the issue so that they can work together and deliberate and discuss and get some of these very complicated issues out in the open and get some of the best minds on this together, whether it's in industry or labor or government or academia, to really talk about this very complex issue in terms of an overall policy, one that addresses all of the difficult issues that have been raised here today.
Ms. DAVIS OF CALIFORNIA. I am wondering, gentlemen, do you have any great hope that small business will be well represented on such a commission?
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Mr. DOKTOR. Well, we would hope, and, actually, $25 million in sales isn't really a small business when it comes to most of the other government agencies. So we would like to at least have some representation. We deal a lot with the primes and our major customers are the primes, so we would hope that they would represent us well too. But to have somebody from a smaller company would be very welcome.
Ms. DAVIS OF CALIFORNIA. And can we just for a second, supporters of offset would make reference to the fact that offsets keep production lines open and thereby reducing the ultimate cost of products to the taxpayer. Do you think that's true?
Mr. DOKTOR. Well, in a company likes ours, we have no production line. Everything is made on an order-by-order basis. So if we don't have an order, we don't have work for somebody, we have to send them home. So I think in a lot of companies that's probably the case, and especially those who deal with the government or military contracts today because the downturn there you don't have a lot of business, and so you have to look at how you juggle that type of work in your facility.
Mr. HERRNSTADT. If I may, that also assumes that the offset or that the sale would not have occurred had it not been for the offset. And it's difficult to really know what the answer to that is. It's been said by others that workers are always placed in theor often placed in a prisoner's dilemma, the word they use, in terms of these offset deals. We should be competing fairly on quality, on productivity, not on market-distorting mechanisms.
Page 53 PREV PAGE TOP OF DOC Ms. DAVIS OF CALIFORNIA. Thank you. I appreciate your comments.
I don't know, Mr. Chairman, whether or not we require offsets. We are in a position where we have to think about the benefits, I think, of foreign companies to negotiating this with us, but I don't know to the extent that we require them ourselves.
The CHAIRMAN. The answer is that there are no offset requirements in the U.S. There is a Buy American requirement across the spectrum of Federal procurements, which is 50 percent. But that does not apply in many, many cases with respect to if you have a trade agreement with a country, and we have got them with almost all of these, so the practical effect is in almost all cases, the U.S. has no requirement, no offset.
And for practical purposes, the 100 percent offset requirement that most of these countries have is it's basically a buy foreign requirement that's 100 percent. It says, ''Okay, we will buy your plane. You have to buy exactly as much or more from us.'' So it's something that's been outlawed in international trade and civilian trade. In military trade, it's still around.
And one reason it accrues to the benefit of other countries, and it's favored by them, is because the entire defense pool in the United States is about $80 billion. Everybody gets a shot at about $80 billion worth of procurement. The rest of the world combined is less than $39 billion. So we are twice the market of the entire rest of the world in defense. So we are the big target. And so many countries have the best of all worlds. They buy that C130 that's the result of billions of dollars of American R&D paid for by the taxpayer, but at the same time, they sell their billion dollar worth of goods, which in the old days were just commodities. But now they say, ''Tell us how to make that thing.''
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And it's been mentioned to me by CEOs that offsets often look very good in the short-term board room to make that sale, that imminent sale. But as you watch foreign competition take the technology you were forced to give them, your seed corn, and turn it around and then beat you with it in later years shows that maybe it is not the long-term answer.
Ms. DAVIS OF CALIFORNIA. Yes. Thank you, Mr. Chairman. It is not just beating us, perhaps, economically but it is militarily as well. Thank you.
The CHAIRMAN. I think that is very true. I think one thing Americans are very worried about, and I am very worried about, especially if you look at the Straits of Taiwan, the hearings we just had on Korea, on China, seeing American technology show up in the Chinese industrial base, especially in areas where it could be manifested against our naval forces is very disturbing.
I thank the gentle lady for her questions.
The distinguished gentleman from North Carolina, Mr. Hayes.
Mr. HAYES. Thank you, Mr. Chairman. I would like to take Congressman Simmons' idea and go much further with it, go a couple years out with that. As you so ably put it, why in the world is the United States of America granting offsets? We ought to be having offsets. I mean we are being played for a bunch of saps.
Any individuals in the audience representatives of the aerospace industry? OK. I have got two or three volunteers. You may want to come see me after I chat with you about my concerns. Last yearand, Ms. Davis, you are right on the moneywe had a very effective effort, not to create protectionist mentality for our defense industrial base, not to build a wall around America, not to restrict fair trade, but to make sure that America was strong, that our industrial defense base could produce the items we would need, whether it was the steel, the titanium, Mr. Ryan noted, whatever the components would be.
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We made some pretty good progress, because our chairman worked extremely hard, as did Mr. Simmons and Mr. Philips and many, many others. But when we got right down to the final analysis, the aerospace industry filled the air around Washington with half truth, untruth and all kinds of BS that undermined our efforts to make sure that America's fighting men and women had what they needed and our industrial defense base stayed strong. And I carry that resentment with me very strongly to this day and will until the perpetrators of that come and say, ''Well, we may need to relook at this. It's time for us to get together and use the purchasing power of America,'' which you have alluded to, Mr. Chairman, ''before we lose it.''
Our foreign competitors give us a shot now because they need that market. It's twice as big as theirs. But, boy, as that market erodes, as soon as they pass us economically, you can forget about competing. You can forget about keeping our men and women properly armed and equipped.
So to the panel, I would love your comments, and to anyone in the audience that is here or has friends at home that would like to talk about this, we have an opportunity moving forward to create a fair environment and tear down these artificial trade barriers of which offsets are some of the most onerous and some of the most dangerous for our future.
Giving you an example, yesterday, the Chinese government filed an unfair trade practice against Corning for fiber optic cable. They accused them of dumping. The fact that Corning's product is 20 percent more than their Chinese competitor didn't enter into the discussion. Folks, that is utter BS. We have got to move aggressively at all levels to make sure that we are treated fairly and that we are allowed to compete. As we are maintaining our financial strength, we are doing the right thing not only for our employees at home but for the rest of the world that depends on our strength, our research and development and our good heart to provide freedom and protection for others.
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So along those lines, any of you gentlemen, Mr. Edger or whoever, how would you suggest to us, given the context and backdrop of this meeting, that we proceed forward using the Berry amendment, because the Berry amendment of the Defense Department are not subject to WTO rules, to create other examples of how we work with our trading partners around the world to create an environment where they produce jobs, taxes and benefits for America as buy from them? If anybody would love to speculate on that, I would appreciate any comment.
Mr. EDGER. I am not sure I can add anything to what you just so eloquently said.
Mr. HAYES. That was supposed to be a question. I messed up. [Laughter.]
Mr. EDGER. It seems to me it has got to almost be done on bilateral negotiations. I don't know how other than retaliatory or quid pro quo offset legislation that we would imposeI mean we can'tI don't know of any way that the U.S. can legislate that another country doesn't impose offsets. It has to be negotiated at some point. We can certainly threaten other actions to get their attention, but, ultimately, it seems it's got to be a bilateral negotiation.
Mr. HAYES. Nine out of 10 Americans, and it's probably a higher number, never heard of offsets and don't know what it is. It's a hidden
Mr. DOKTOR. And I think when you
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Mr. HAYES. Do you have any ideas? I mean we are not out here to retaliate. We are out here to look for fairness. How about the one-year moratorium on offsets?
Mr. DOKTOR. It doesn't tie to offsets directly but if you talk to folks like Electric Boat, they say between 80 and 90 percent of all the commodities they buy for their submarines are sole source. And if you look at the commodities that we buy for our products that go into the U.S. Navy, we are probably at 90 percent or even higher. So the industrial base here is very depleted to start with, so we need to maintain that. And if there is barriers to maintaining that, we need to get rid of them. Offsets right now look like they are one of the candidates that could possibly be doing that.
Mr. HERRNSTADT. If I could just make a couple points, a couple comments on what you said. I think for workers, part of it is shedding some sunlight on what offsets are, because you are right, you are absolutely right, it is a mysterious term. Somebody loses their job, they don't know whether they have lost their job because of a downturn in the economy, because of competition, because of an offset, et cetera. So part of it is shedding some light, both in terms of defense-related industries and also in terms of commercial-related industries, which also do suffer from offsets.
The second aspect that you raised is the immediacy of the issue. The immediacy of the issue just for the human element, for the laid-off worker, for the community that they live in, in times of hemorrhaging jobs, this is one more aspect that needs to be addressed and quickly.
Page 58 PREV PAGE TOP OF DOC But the second part of that issue, in the immediacy issue, deals with what some of my colleagues on the panel and other members of the committee have said, and that these are jobs, these are jobs with technical skills, with a high amount of knowledge, and they are being lost. And they cannot be ramped, they cannot be learned quickly overnight. So if there is a time that comes when we have to rely on this work, I hope we are able to do it, but that is a significant concern I think that we certainly share.
Mr. HAYES. Well, thank you for your answer, and I am very serious about this. I mean I have aerospace industries in my district who came to me and told me what I was doing, from their perspective, they had highly paid people in Washington who were telling them what I was doing and what the chairman was doing, and they didn't have a clue what we were doing. They were paid big bucks to be misinformed, and I really resent that, because here when we came up with an agreement, Boeing just happened to beI don't have a submarine base in my district but I do have Imo pumps so I can identify with that, and titanium's in that club a lot for armor.
But back to the issue, we can work together if we don't have to deal with the kind of campaign that we dealt with last time, and you all can be a part of that, because our objective is to work with our friends to have fair trade, keep our country strong and to make sure that our folks are employed in these high-tech jobs which allows us at that point to create additional economies for other countries. And that's the way to do it fairly. You don't outsource, you don't offset, you just do the right thing, the right way. Thank you.
Thank you, Mr. Chairman.
Page 59 PREV PAGE TOP OF DOC The CHAIRMAN. I thank the gentleman, and, gentlemen, thanks. You guys have endured a lot here. First you endured 30 minutes of us not being here, and then you had to endure us when we were here. So thank you for being with us.
But as you can tell, we have had some very thoughtful Members who have weighed in here, and we need to work this problem through, and I think this idea of Americans pulling together is something we are going to have to embrace. It's interesting as you go through industries when a particular industry is being gored, they want that good old fidelity to America, they want to buy American, and yet when there's a chance to go out and get that free lunch with the cheap component or maybe in the case of offsets to trade a few jobs from some other industry away, it's somewhat compelling.
But you know what, I have good instincts, and I think that one great thing about this guy we celebrated last week, Ronald Reagan, was that he appealed to our best instincts and he brought them forward, and I think we have the potential of bringing forward the best instincts and the best intellect, not only of our mid-level producers but also our major contractors, all pulling together and stitching this industrial base back together so it can keep our country free.
So thank you very much for being with us. And, gentlemen, would you folks want to continue to work with us as we move along and try to get some work done in this area?
Mr. DOKTOR. If we could be of help, we would be happy to, sir.
Mr. HERRNSTADT. Be happy to.
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Mr. EDGER. Yes.
The CHAIRMAN. Really appreciate it. Thanks so much for being with us, and, once again, I know this was a long afternoon. We will try to make the next one a little shorter. Thank you.
The hearing is adjourned.
[Whereupon, at 4:28 p.m., the committee was adjourned.]