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[H.A.S.C. No. 108–39]





JULY 8, 2004



One Hundred Eighth Congress

DUNCAN HUNTER, California, Chairman
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CURT WELDON, Pennsylvania
JIM SAXTON, New Jersey
JOHN M. McHUGH, New York
HOWARD P. ''BUCK'' McKEON, California
WALTER B. JONES, North Carolina
JIM RYUN, Kansas
ROBIN HAYES, North Carolina
KEN CALVERT, California
ROB SIMMONS, Connecticut
JO ANN DAVIS, Virginia
ED SCHROCK, Virginia
W. TODD AKIN, Missouri
JOE WILSON, South Carolina
TOM COLE, Oklahoma
JEB BRADLEY, New Hampshire
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JOHN KLINE, Minnesota

JOHN SPRATT, South Carolina
LANE EVANS, Illinois
GENE TAYLOR, Mississippi
MARTY MEEHAN, Massachusetts
VIC SNYDER, Arkansas
ADAM SMITH, Washington
MIKE McINTYRE, North Carolina
ROBERT A. BRADY, Pennsylvania
BARON P. HILL, Indiana
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JOHN B. LARSON, Connecticut
SUSAN A. DAVIS, California
RICK LARSEN, Washington
JIM COOPER, Tennessee

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



    Thursday, July 8, 2004, The Economic, Technology, Vocational and Skills Implications of Defense Trade Offsets on the U.S. Defense Industrial Base
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    Thursday, July 8, 2004



    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


    Schinasi, Katherine V., Managing Director, Acquisition and Sourcing Management Team, General Accounting Office

    Sorscher, Stanley, Labor Representative, Society of Professional Engineering Employees in Aerospace, International Federation of Professional and Technical Engineers Local 2001
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    Wessner, Charles W., Ph.D., Director, Program on Technology & Innovation, National Research Council, National Academy of Sciences


[The prepared statements can be viewed in the hard copy.]
Hunter, Hon. Duncan
Schinasi, Katherine V.
Skelton, Hon. Ike
Sorscher, Stanley
Wessner, Charles W.

[There were no Documents submitted.]

[There were no Questions submitted.]


House of Representatives,
Committee on Armed Services,
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Washington, DC, Thursday, July 8, 2004.

    The committee met, pursuant to call, at 9:05 a.m., in room 2118, Rayburn House Office Building, Hon. Duncan Hunter (chairman of the committee) Presiding.


    The CHAIRMAN. The committee will come to order. This morning we meet to receive testimony on the economic, technological, engineering workforce implications of Defense tradeoffsets on the U.S. Defense Industrial Base.

    I would like to welcome our distinguished panel, Ms. Katherine Schinasi, Managing Director, Acquisition and Sourcing Management Team from the Government Accountability Office (GAO).

    Thank you for being with us.

    And Dr. Charles Wessner, Director, Program on Technology and Innovation at the National Academy of Sciences.

    And also, Mr. Stanley Sorscher of the Society of Professional Engineering Employees in Aerospace.

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    Thank you, Mr. Sorscher, for being with us.

    And we appreciate our guests in this very important area this morning. This hearing is the second in a series of hearings in which the committee will explore how defense offsets are used in defense trade, how that use has changed over time, the quality and extent of information concerning offsets, short- and long-term economic and technological consequences of offsets and the impacts of offsets on our engineering workforce.

    It is important that we begin to move the debate beyond the short-term question of whether or not offsets themselves are a necessary evil. Instead, we must focus on the longer-term question of secondary or unintended consequences that will result from the continuation of this policy. The revelations that are now coming to light that indicate troublesome transfer of U.S. prime and subcontractor defense industries are known to a number of members of the defense community.

    We know that the Department of Commerce has reported that aerospace trade surplus has declined from 40 billion in 1998 to 27 billion in 2000. Clearly, this market has further eroded after 9/11. We also know, since the end of the Cold War, global defense procurement has also declined, so it is not surprising that U.S. defense exports for goods and services declined by 27 percent from 1998 to 2003.

    However, during the same period, U.S. defense imports for goods and services increased an amazing 93.4 percent. This raises questions. What role offsets play in transferring the capability of the U.S. defense Industrial Base to foreign suppliers? Is this trend reducing the business opportunities for U.S. subcontractors and eroding our capabilities? What the U.S. Defense contractors find that, if they had contributed to the development of future foreign competitors, what is their position at that point? And further, with the decline in the aerospace market and domestic erosion in the defense industrial base, can we sustain a science and engineering workforce to maintain technological superiority?
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    We hope that the testimony today will contribute to our ability to answer these and other important questions. As I stated in our previous hearing, it is not the intent of this committee to put our defense contractors at a competitive disadvantage, quite the contrary. The committee seeks a defense industrial base policy that is responsible to the taxpayers, good for the Defense prime contractors, good for the Defense subcontractors and provides a National Defense Industrial Base capable of sustaining our military and our national security. So I would now—I want to thank our witnesses for being with us.

    Before we go to the witnesses, let me turn to my partner, the gentleman from Missouri, Mr. Skelton, for any remarks he might want to make.

    [The prepared statement of Mr. Hunter can be viewed in the hard copy.]


    Mr. SKELTON. Mr. Chairman, thank you for calling this hearing, and I would like to join you in welcoming our witnesses.

    As I noted at the hearing on a similar subject before, the defense tradeoffsets are complicated, but it is an important subject. I think this second hearing will be useful in understanding the impact of offset arrangements. And without belaboring it, Mr. Chairman, I ask that my entire statement be put in the record and be glad to proceed.
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    [The prepared statement of Mr. Skelton can be viewed in the hard copy.]

    The CHAIRMAN. I thank the gentleman. Without objection, your statement will be included in the record.

    And all witnesses' statements will be included in the record, so feel free to summarize your statement any way you care to. Thank you very much.

    Mr. CHAIRMAN. And Ms. Schinasi, the floor is yours.


    Ms. SCHINASI. Thank you, Mr. Chairman, Mr. Skelton and Members of the committee. We welcome the opportunity to be here this morning to talk about GAO's work on offsets. And as you have offered, I would like my full statement included in the record, and I will summarize.

    The CHAIRMAN. Without objection.

    Ms. SCHINASI. Over the close to 15-year period that we have studied the use of offsets in defense trade, countries buying U.S. Department of Defense items have become increasingly sophisticated in their offset demands. The complications that offset agreements introduced into the relatively straightforward relationship between buyers and sellers have become more complex and often result in a highly distorting set of agreements.
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    The list of countries requiring offsets is long, and many now set out their offset policy in law. Demands are more costly as they cover both a larger portion of the sale and are more closely related to enhancing a purchasing country's competitive advantage. U.S. companies set up entire business units to manage their offset requirements, and a secondary market has evolved in which offset credits can be bought and sold.

    I know this committee has heard testimony on the sheer magnitude and variety of offset transactions. So I will illustrate with one example of how we have seen offset agreements evolve. In one U.S. aircraft program, a purchasing country required that one of its domestic companies be granted a license to produce part of the aircraft for that country's purchase. Once the domestic supplier was qualified to produce the part, the next sale by that U.S. company to the——

    The CHAIRMAN. Ms. Schinasi, could you pull that microphone closer?

    Ms. SCHINASI. Once the domestic supplier—as I was saying—once the domestic supplier was qualified to produce the part, the next sale by the U.S. company to the foreign government was contingent on that foreign supplier producing the aircraft part for all of the company's sales, including those to the U.S. Department of Defense. U.S. defense companies have made satisfying offset requirements an integral part of their business relationships with their first tier U.S. suppliers, using the suppliers success in helping to meet offset requirements as part of their scoring of most-favored supplier status for that supplier.

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    At the same time, however, a lower tier U.S. company may lose a sale as a result of an offset agreement without ever being aware of the nature of the competition. Indirect offsets, which are those not directly related to the purchase of a weapon system, can have an impact on trade patterns and domestic employment in a variety of sectors. Direct offsets, which are those that are directly related to the weapons system being purchased, also raise issues relating to the transfers of technology and manufacturing processes with the national security implications that that brings.

    Countries have also begun encouraging or requiring companies to satisfy offset arrangements prior to a contract award to show a good faith effort when competing for a sale. U.S. companies have indicated that engaging in offset activity is required in the intensely competitive global marketplace. We have no reason to dispute that assessment.

    I would note, however, that defense procurement, which has long been within the purview of national governments, has only recently gone global and is not bound by the multilateral negotiated rules of fair treatment, reciprocity and government actions that cover commercial items in trade.

    All that said, however, current information available on offsets does not provide an adequate basis for evaluating offset practices. Offsets related to defense exports are small relative to the total economy, and as a result, one cannot use national aggregated data to determine impact. Systematic assessments of the impact on workers, companies or industrial sectors have been limited.

    In addition, successive administrations have taken a hands-off policy with respect to offsets. Although information on offset transactions is being collected at congressional direction, other congressional mandates have not been carried out. Our most recent report in May of 2003 dealt with one of these, the work of the congressionally mandated National Commission on the Use of Offsets in Defense Trade. At that time, we reported that the report and recommendations of the commission had not been issued in final form, and that continues to be the case today. What that means is the required reporting to Congress on the feasibility of pursuing a multilateral agreement, which was to follow the issuance of the final report, has not yet taken place.
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    The Department of Defense's current emphasis on partnering with allied countries in weapons development programs has opened a new avenue for offset type activity. In previous agreements, the purpose of an offset demand was to encourage the purchase of a foreign defense good by balancing the expenditure of public funds with a perceived economic benefit. In joint development programs, partner countries seek to obtain that balance through the promise of access to technology that individually the partnering countries could not have afforded to develop themselves and the opportunity to win part of the production worked and the jobs and capability that would result.

    This model is apparent in the Joint Strike Fighter (JSF) program. Much as it has in its offset policy, the U.S. Government is taking a hands-off approach to industrial participation in the JSF program, preferring to let the prime contractor negotiate not just with potential supplier companies but with their home country governments. Those governments are also potential customers for the JSF. And their approach to participation in the program mirrors their approach to offsets. That is, countries have high expectations of getting contracts and know-how through development and production of the aircraft in exchange for their monetary contributions to the program.

    In the report on the JSF program we issued in July 2003, we recommended that the program office collect, closely monitor and use for oversight purposes information on the prime contracted selection and management of suppliers. The Department of Defense concurred with those recommendations, but we have not yet seen any change in their management strategy.

    So the idea of understanding who it is that is supplying your prime contractors and being able to deal with foreign governments as they negotiate with companies is one that we see in both of those areas. So, Mr. Chairman, that concludes my summary. And I would be happy to take your questions.
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    [The prepared statement of Ms. Schinasi can be viewed in the hard copy.]

    The CHAIRMAN. Thank you Ms. Schinasi.

    Dr. Wessner.


    Dr. WESSNER. Thank you, sir, and it is a pleasure to be here today.

    I am representing the National Research Council, which is the operating arm of the National Academy of Sciences. My comments are based on the work I directed for the Board of Science Technology and Economic Policy. I must emphasize, however, that the views I will express are my own and not those of the National Academy of Sciences. I will draw, however, on two reports, and one of them is a volume we did on trends in aerospace offsets, which identified some of the challenges that our industry faces. And another, which I would also draw your attention to, is the, Securing the Future, which is a report on the semi-conductor industry.

    I mentioned both of these industries because, basically, the nature of the challenge is the same for both industries, although offsets do not play a roll with the U.S. semi-conductor industry. I think we have identified what offsets are, but I think we would take the view thus far, without contradicting my colleague, that it is important to keep in mind that offsets may not be desirable, but they are a fact of life. In many respects, they are simply—and I think you could understand this as representatives of our taxpayers' money, that they are a way of—for foreign governments to justify large purchases of foreign equipment with taxpayer money.
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    But they are also symptoms of a broader challenge that foreign governments are determined to support their aerospace industries, both their commercial and defense components, by whatever means possible. In a strategic sense, they are one tool from a tool kit of foreign industrial policies focused on aerospace technologies and high-tech manufacturing. Their goal is to take the industry from us, and in some respects, we are helping them do so. Although, again, I would say that offsets are not necessarily the prime problem.

    The previous speaker identified an important point, and that is that American companies are competing in an environment shaped by national governments' industrial policies. There is a basic asymmetry here between the goals and constraints of a private corporation and the goals and capacities of governments.

    I think it is important to remember that some jobs in the U.S. industry are maintained and retained through sales facilitated by offsets. And basically, the analysis of the academy found that there were more jobs retained than are lost through export—through offset facilitated exports.

    On the other hand, the workers who make the planes and the parts for the planes are understandably concerned about the impact of offsets on their current and future work. There are also concerns, as raised by my colleague, about the transfer of U.S. technology, the erosion of the U.S. supplier base, particularly at the second and third tiers, and increased dependence on foreign suppliers for key U.S. defense products.

    I think this dichotomy illustrates a key point about offsets: Offsets are neither good nor bad, but there are good and bad offsets. If done well, they can help keep U.S. production lines high and help retain U.S. jobs and U.S. technological leadership. If done badly, they can cost jobs, disrupt other sectors of the economy and transfer technologies that have been developed with taxpayer dollars. Better data would help us make better judgments about the impact of offsets on the U.S. economy, and I would associate myself with the previous speaker's comments.
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    There is often talk about initiatives to curve offsets. I worked for many years in international negotiations, and these are not things that are ever brought to conclusion quickly. In fact, negotiations are most likely to be effective when accompanied by coherent national measures to support the U.S. industry. Unilateral measures are unlikely to succeed and may indeed have adverse effects. Measures occurring in the immediate future of the use of offsets by U.S. Firms could harm the prospects for U.S. sales and equipment. The ability of the U.S. to lead by example is quite limited, particularly of industries viewed as strategic by many governments around the world.

    Basically, I think, for offsets, we have a number of simple choices. One has to do with what we have been doing, which is basically nothing, staying with the status quo. The other is to aggressively seek bilateral or multilateral arrangements. These are unlikely to succeed in the absence of other policy initiatives. And the third and most promising, in my view, is to concentrate on domestic measures to strengthen the issue to better monitor the nature and impact of both current and expected offsets and thus enhance the competitiveness of the U.S. industry while providing leverage to work on bilateral understandings.

    In a sense, we have to pay more attention above all. Immediate measures that you might consider would be things like extending research and development (R&D) tax credits, lowering regulatory burdens, renewed support in particular for aerospace R&D, where National Aeronautics and Space Administration (NASA) seems to have diminished its expenditures and infrastructure. I am not sure that we can complain about the competitiveness of others when we are not holding up our side. A common—one of the things we might think about is developing a common vision of where we want to go with the U.S. aerospace industry. A forum for bringing the industry, the aerospace workforce and aerospace university research community might well help determine what needs to be done to keep the U.S. competitive and might be a positive step toward the constructive national strategy.
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    If you will bear with me for one second, I would like to emphasize this point about national semi-conductor programs. The purview of your committee is the Armed Services of the United States, and I don't think I need to tell you what a critical component semi-conductors are. But there are massive programs around the world, in Japan, in Taiwan, in China, in France, in Germany and in Belgium, yes, Belgium, sir, all of which are focused on developing the next generation of semi-conductor chips. There are many programs around the world that are designed to attract and retain R&D facilities and manufacturing facilities.

    The U.S. is in danger of losing this industry. Global companies, globalists in their outlook have cautioned us, both Intel and IBM, that they cannot be islands in a world where the research, where the development activities, the design activities, the manufacturing activities are all moving to the Far East. And I would urge your committee, direct some attention to this matter.

    And I would be happy to answer your questions. Thank you, sir.

    [The prepared statement of Dr. Wessner can be viewed in the hard copy.]

    The CHAIRMAN. Thank you very much, Mr. Wessner.

    Mr. Sorscher.

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    Mr. SORSCHER. Thank you, Mr. Chairman and Members of the committee, for taking an active interest in the long-term health of America's aerospace industry. I appreciate the opportunity to speak to you on this important topic. I hope to share my perspective from inside the aerospace technical community.

    For 20 years, I worked as an engineer and scientist on various Boeing programs. Currently, I am on staff with SPEEA, a union representing 20,000 engineers, scientists, technical and professional employees at Boeing facilities in several States.

    The aerospace industry is a distinctive industry in several respects. Our products are complex and heavily engineered. Design and service lifecycles are measured in decades, longer than many individual careers. Unit costs of our products are huge. Success depends on very high levels of trust and confidence from our customers and the public. The aerospace industry relies on the competence and judgment of our technical and manufacturing communities, effective flow of information and networks of relationships.

    The Columbia crash investigation provides an apt lesson: critical decisions depend on efficient flow of information across organizational boundaries. Ideas must move among technical specialists, program managers and decision makers without distortion of technical content or filtering from program pressures.

    Against this background, the American aerospace industry has steadily contracted over the last two decades, according to employment data from the Bureau of Labor Statistics (BLS) and an analysis by the Aerospace Industry Association (AIA). Between January 1990 and March of this year, BLS figures show total aerospace employment fell by 50 percent or 564,000 jobs. Production employment fell by 58 percent or 321,000 jobs. The AIA reports, from 1986 to 2001, aerospace R&D scientists and engineers suffered a reduction of 83 percent, leaving just 21,000 jobs from a level of 145,000 jobs 15 years earlier.
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    The CHAIRMAN. Would you repeat that last set of statistics?

    Mr. SORSCHER. R&D aerospace scientists and engineers? The BLS figures show roughly 50 percent drop in employment overall and with production employees. But aerospace R&D scientists and engineers dropped by 83 percent, leaving 21,000 jobs, starting from a level of 145,000 jobs.

    The CHAIRMAN. From what period to what period?

    Mr. SORSCHER. 1986 to 2001. So it is 15 years.

    Commercial space and military labor markets interact strongly. People move from program to program so that different market segments combine in making a critical mass of knowledge and experience. BLS suggests that key military labor markets are small relative to the industry overall. Furthermore, when a skilled engineer leaves aerospace, he or she often finds a new job at Kodak, Hewlitt Packard, Ford or another employer in another industry. Attrition is typically high among new hires, raising the threshold needed to sustain an effective technical community.

    Better data are needed for a detailed analysis. However, I think it is fair to say that as aerospace undergoes long-term contractions, military, space and commercial segments will all suffer from erosion of human capital. This decline dismantles our technical and manufacturing communities from within, eroding the network of relationships, expertise and authority developed over decades. A significant insight into this decline is illustrated in employment records for the large Boeing population in the northwest United States. Our data show an alarming characteristic of steady aging of the workforce with nearly total elimination of the younger portion of the demographic profile. Lacking young people in the workplace, no one is present to capture and retain the body of knowledge accumulated from decades of experience. The next generation of supervisors, managers and system integrators cannot be cultivated if they are not present. Already a 15-year period of experience has been foregone and cannot be recovered. This demographic trend is not sustainable.
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    Furthermore, and I cannot overemphasize this point, it would be irresponsible and futile to educate a new generation of scientists and engineers if we don't also create employment opportunities for them in American facilities. Lack of education did not cause our demographic decline, and more education will not reverse it. Aerospace R&D and capital investment are low compared to other industries, particularly in the commercial airplane segment. We are taking capacity out of production as work packages shift to the global supplier network. Education is a fundamental resource for economic well-being, but it must be matched with investment in productive capacity.

    In defense transactions, customers typically introduce the requirement for offsets. On the commercial side, American manufacturers turn to offsets to defend regional market share. Our market share in commercial airplanes declines year after year. As we look at the results in commercial markets, offsets have held share in only one region, the Japanese market, but at the cost of the structural work package for almost the entire 767 and 777 fuselage. For the 7E7, the composite wing and fuselage involves state-of-the-art design and manufacturing at a scale we have never attempted domestically. When those work packages go offshore, we will be conceding production, technology and capacity that we have never held ourselves.

    A second factor helps drive offsets. Foreign partners share the risk of large financial investments required to develop new products. In exchange for capital investment, foreign firms acquire the knowledge, skill and experience embodied in the work packages sent to their domestic firms. Foreign manufacturers will inherent the competitive advantage of future learning-curve benefits, derivatives and follow-on work. They will learn important institutional lessons while our body of knowledge erodes. While we intend to climb up the value chain, we may be withdrawing into a corner where we can be cut off by suppliers who have positioned themselves to put in place the final piece of the manufacturing puzzle, the role of system integrator.
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    Market forces are inherently short sighted. Microeconomic decisions are only indirectly connected to the interests of communities and the general public. Globalization places high priority on shareholder value while discounting the social compact. American manufacturers publicly express their commitment to Canada, Russia, China and India. Boeing invested $1.3 billion in Russia. General Electric (GE) has invested billions of dollars in China, and Microsoft invests heavily in India, as a few examples among many. Use of offsets is defensive at best with an arguable record of success.

    The long-term negative consequences are becoming clear in the erosion of human capital and deferred investment in R&D process improvement and new facilities. The public interest can still be served to the extent that investors' interests coincide or could be made to coincide with the public interest. It is reasonable to ask policymakers to seek strategic long-term balance to market forces and restore the conditions necessary to promote long-term public interest along with investors' interests.

    An AIA fact sheet from February 2003 puts the situation this way: A highly skilled, stable, secure and renewable aerospace workforce is essential to our national security and economic prosperity. The Commission on the Future of the U.S. Aerospace Industry recommended that the Nation immediately reverse the decline in and promote the growth of scientifically and technologically trained U.S. aerospace workforce, adding that the breakdown of America's intellectual and industrial capacity is a threat to national security and our capability to continue as a world leader.

    Mr. Chairman, I agree wholeheartedly and recommend that any policy initiatives should discourage movement of technology investment offshore and instead encourage long-term investment in an effective and capable domestic aerospace industry.
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    Thank you, Mr. Chairman and Members of the committee.

    [The prepared statement of Mr. Sorscher can be viewed in the hard copy.]

    The CHAIRMAN. Mr. Sorscher, thank you very much and all of our guests. Thanks for very concise opening statements.

    Let me start with the, I think, the question which is the natural result of all of your testimony which is, what can we do? Obviously, you have laid out in different ways the premise that this is a somewhat complex problem and that offsets are not inherently bad in all cases, that they are deal expediters in some cases, but that they have a corrosive effect over the long term in some areas.

    I guess my first question—and I would like you to comment on it, although Mr. Sorscher brought it up. You brought up some extraordinary statistics of this 83 percent loss of R&D—aerospace R&D—jobs over the last 15 years or so. Is that as a result of a natural contraction of the market or a massive loss of our share of the market?

    Mr. SORSCHER. I think both of those factors are important. I have asked that question myself, and I have talked to the Aerospace Industry Association to get their sense. Again, this is an aggregate figure, and we are not sure exactly what the source of this decline is.

    Again, if you look at the last figure in my summary document, it shows that, at Boeing, where we have more specific information, because that is where the members of our union are and we get direct information on them, the level of investment in R&D has dropped considerably from 1998 to 1999 down. So the actual expenses, the amount of money spent in terms of R&D and capital expenditures is going down, and the workforce has gone with it. We represent a small fraction of the industry in general, so this is something we are seeing throughout the industry.
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    I guess I would share with you your curiosity in seeing details about where this goes. In fact, I think this comes back to a point that Katherine Schinasi made and Dr. Wessner made. We would like to see more detail in the data that are collected, employment trade data, economic data. This is a good case in point of a question we can answer more clearly with better data.

    The CHAIRMAN. Mr. Wessner.

    Dr. WESSNER. Thank you, sir.

    Just to cast some light on that, I think there are three things to keep in mind here that are important. The first is that offsets are not in themselves responsible for the really large employment losses in the industry. The post-Cold War downsizing, the downturn in the commercial aircraft industry, but perhaps most importantly the applications of new technology, such as CAD/CAM and the new IT based procedures, we have changed from people using slide rules to people assembling the 777 on a computerized basis. So there have been structural shifts in the economy.

    The CHAIRMAN. You are saying, even if we were extremely healthy at this point, you would expect a downturn from the 100,000 plus R&D resource or human capital pool?

    Dr. WESSNER. Yes, sir.

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    The CHAIRMAN. Would it be as extraordinary? An 83 percent drop is pretty sharp.

    Dr. WESSNER. There are two other points to keep in mind about that. One is that the R&D expenditures by the corporations involved are down. U.S. national R&D is down. I mean, you know, the jokes are about Willy Sutton who keeps robbing the banks because that is where the money is. You know, if we are not putting money in the industry and not putting money in R&D, the professors and the students and the engineers get the joke and they move.

    And the other thing we shouldn't leave out here is that there has been a successful industrial policy by the governments of France and Germany and the United Kingdom and Spain, and they have built airbuses and have built planes of great quality often with more advanced technology, as I understand it, although I am not a specialist in many of the current Boeing fleet. And they have taken market share.

    The CHAIRMAN. I am looking at some figures here that, in defense—in the defense and science workforce, we have had—in our graduates, in engineering and physics and math, a reduction of some 30 percent over the last 10 or so years among American citizens. But we have seen an increase of foreign students with those same degrees, achieving those same degrees has gone up 50 percent. Now that would seem to instruct us that there is a market, there is a job market out there in foreign venues for young people going into these aerospace-oriented disciplines that isn't there for American citizens. Is that instructive at all to you?

    Dr. WESSNER. There is a vice effect. On the one hand, from 1993 through 1999, the academy has documented that we cut chemistry—I have to get you the exact figures but they are quite alarming. Chemistry was cut by 8 percent. Physics was cut to 10 to 15 percent. Mechanical engineering was cut 40 percent. From 1993 to 1999, we backed out of these, and again, the students get the joke. When there is no money there, they move away.
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    There has been some lateral movement into things like computer sciences. These are never completely fixed, and there are also major national programs around the world where students—where the public authorities encourage competency in these areas and run national programs with public support to encourage jobs.

    The CHAIRMAN. But if you look at the—we do defense here. And if we look at the procurement market for defense systems in the world, we have twice as much as the rest of the world combined. We have $79 billion each year expended on defense systems, a huge amount of that R&D obviously. All the rest of the nations of the world combined have a little over $30 billion, less than half of what we have, in the entire world. So why—when you say we don't put money into these areas, in defense we do, ten times as much as the next country.

    So wouldn't that lead—shouldn't that logistically lead us to the conclusion that, if things were moving in the right direction, we would be, in fact, bringing a new crop, albeit a smaller crop because of the efficiencies you have talked about in design and R&D? Wouldn't we have a new generation of young people coming up in these disciplines? Somebody is doing this $79 billion worth of work, right, annually? And this is a conversation so let's go back and forth.

    Mr. Sorscher.

    Mr. SORSCHER. Actually, this is a fascinating subject, and I think if you look at—if you just follow your thought a little bit more and say, okay, well, what has happened? If you look in the workplace, when young people come into the aerospace industry, it is an industry that is contracting. And their jobs are immediately at risk. If you look at the employment data in my statement, you can see that there was a little hiring pulse in the mid 1990's, 1997, 1998. But almost immediately, they were laid off or left. There is attrition among young people.
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    If they look at what is going on in their area, and say well, this important work in composite materials, for instance, is a work package that is going to Japan or Italy or the supplier network globally is going to take this on, the kind of work you would assign to a new person, is this detailed level of work that is more vulnerable to off shoring to the supplier network.

    So again, from their point of view, I think I am reinforcing what Dr. Wessner was saying, from that point of view, they look at this work and say, well, I don't see prospects here for me as an individual. And again, the competing work for them is to go into semi-conductors or computers or telecommunications or biotechnology. Most of the people who come into the aerospace industry were not trained to be a physicist or chemist, and as soon as they diffuse out of the aerospace industry, they are basically gone forever. It is unlikely they will be coming back.

    So, again, when you look at the dynamics of this, especially in a contracting industry, we keep the older, more experienced people, and the new people come and go. To the extent they come at all, they are volatile in the workplace and likely to go.

    The CHAIRMAN. To some degree, we have maybe taken the first couple of wrings off the ladder, if you will?

    Mr. SORSCHER. Yes.

    The CHAIRMAN. Ms. Schinasi, we are trying to get our arms around this idea around offsets, what offsets are, and they can be a lot of things. But one point that you have touched on here is that if you are a prime and want to go out and get a deal, the country that you want to make this sale to may say, you know, we would like to make this part of the airplane. And that may be a company in Ohio that has been making that part of the plane in Florida, New York or Massachusetts with lots of people depending on that job. And without that subcontractor ever knowing what has happened, the dealmakers in the prime go ahead and make the deal with the foreign country to give them that piece of the action.
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    Now, you say that, sometimes, has evolved, and I think you used an example, and that evolved with that offshore company making that particular component permanently for all the systems manufactured by that prime. So in putting that deal together, not because they made a bad product, not because they had a bad price, but just because the prime needed to take their work away from them to make the deal, they lost. And I think that is part of the consternation that we have, because we all talk about a competition-based system, but there is no competition for that particular component. That was part of the deal. The fix was in. The meeting was held, and presumably, the poor old American component maker got a call at 4 o'clock in the afternoon that, Joe, you are not going to be on this deal, we will get back with you.

    And so it looks to me like there are a couple of problems: One, that messes up the system that is supposed to be based on competition and good product. And second, you have moved an important dimension or important component of the aerospace industry presumably offshore. And after you have moved a lot of those things offshore, you, to some degree have built your competition.

    The interesting thing about the big primes now is, if you are a Lockheed or Boeing, it probably doesn't bother you any to use a subcontractor in Italy or Poland or some other place. You might as well use them instead of some person in Georgia. From your point of view, you are going to make the same amount of money, maybe more.

    But now, you see, the primes, we have now built or aided—and I think offsets have aided in the development of things like airbus and the helicopter concern, that is, going to try to make the Presidential helicopter. And all of the sudden, the primes have got coming back at them what they have been delivering out to the subs for a long time, which is, guess what? You are going to get the call at 4 o'clock in the afternoon, but your product is not going to be used. We actually see some of the big primes which love the mantra of free trade when they are subbing this stuff out, now wrapping themselves in the flag. And they want ''Buy American,'' by golly.
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    I guess my point is, I think, at some point, we are going to have to pull together and that there is a role for those of us who oversee the defense function to ensure that we have a reliable base to defend our country and continue to be a development ground for that workforce, which has served us so well in this last century. I think our problem is—and maybe, you can all three instruct us on this. What do you think we should do? What is our role?

    You have these offsets, which appear at first to be simply dealmaking between private parties, and why shouldn't we just go along with that? On the other hand, you see this enormous impact that it can have on jobs and our country and ultimately on our security. What should we do? And why don't we start with you and go right across the border?

    Ms. SCHINASI. I think the thing to keep in mind, there are places where the interests of the government and the companies converge, and there are places where the interests of the government and the companies diverge. And when we are talking about national security industries, I think it is important to understand what those are.

    The example that you just gave is maybe one of those areas when a company has a short-term interest in making a sale and a government has a longer-term interest in maintaining the health of an industrial base. We have not looked at the numbers of employment, but I think your question about the expenditure we are making in R&D in this country needs to be followed by a question of, how long are we keeping the edge, with the product cycles now so short and things like offsets resulting in the transfer of the know-how that we get through that R&D investment?

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    It is also important, as a government, to stay on top of those areas that are perhaps at greatest risk of moving quickly. And so, when you say, what should we do, we would look at a two-fold approach. One would be to have a better understanding through better data of what is going on through the lower tiers. The information that is reported to the Commerce Department is only at the prime level and first-tier level.

    The CHAIRMAN. When the Commerce Department tells us we are big winners with offsets, the last panel we had who were subcontractors said our losses never get reported. So I suspect those numbers are pretty bad numbers that the Commerce Department trots out to show how good offsets are.

    Ms. SCHINASI. I would be reluctant to make too much out of the impact of offsets from the data that is now reported. There needs to be protection of the information. There is a lot of proprietary information out there, but I think that is a problem that can be worked around.

    The second point, though, is the use of that information. And I don't think the information is in a fashion that has been used, nor is there anyone who wants to use it. And when we look at offsets, we are looking at the underlying trends that I spoke of earlier and what sort of pressures are being put on U.S. companies in their trading relationships with foreign governments.

    We would like to see at least a recognition that offsets are an area where the government does have an interest in getting involved in understanding what is going on. As you know, there have been calls for multilateral discussions on offsets, and certainly, we have models in the commercial trading area where countries have come together to put a boundary around what is appropriate behavior for export financing. So there are some things that we have come together in a multilateral environment and settled.
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    I would also hope that we would see in our individual negotiations with countries on a bilateral basis that offsets become part of the discussion that we have on what our defense relationship is. And I think, right now, by saying that we have a hands-off policy, we lose opportunities to bring together all of the pieces of the relationship that we need to talk about.

    The CHAIRMAN. Mr. Wessner, what do you think? What should we do?

    Dr. WESSNER. I am not sure I am glad you asked that question, sir. I think one of the things we need to do is understand our limited ability to control the behavior of other nations. And one of the valuable lessons my son, who is a rather good soccer player, taught me: I was complaining about the refs. And you often hear this in trade, we want a level playing field. We are the ones who want a rules-based system. The rest of the world wants to win, and the guys who are out there trying to win do a lot better than those who are working on a rules-based system. So I think we need to be fairly aggressive in defending our own interest.

    Putting a backstop but a constructive backstop to our own corporations, the first thing we need to know, what is going on? It is also very important that that information be tightly held, otherwise, you are just providing the military attaches here in Washington with a scorecard so they can see how well they are doing. I think we have to be realistic about what happens.

    Second, and more broadly, we spend a great deal of money in military R&D. With deep respect, I am not sure it is always spent well, and I am not sure that it is spent——
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    The CHAIRMAN. We are shocked to hear that.

    Dr. WESSNER. That means——

    The CHAIRMAN. That is part of this deal, that we do spend a ton of money and do spend the $79 billion, and the rest of the world combined is like $30 billion, and yet, we are losing big pieces of market share in our premier industry.

    Dr. WESSNER. They are often doing a fast-follow strategy, and we often fail, not in the basic research and not in the applied research, and we even get to development, but when you look at who actually commercializes the work—I am something of a specialist on comparative technology policy—and if you look at the programs around the world that are designed to take existing technologies and convert them into products that can be used both in military and civil, like the program in Finland, like the current Chinese programs, like the Taiwanese programs in Hinshu Park, they are quite effective in doing that.

    And we have a program, the advance technology program out of Commerce, which has been very effective. We have the Small Business Innovation Research (SBIR) program, which has been effective in bringing new ideas into defense procurement, but we tend to underplay those programs. But it is that connection between the public investment and the private development that we need to work harder on. Markets are not perfect. And just setting it out there by the curbside saying, we have done this research and expecting the market to pick it up, which I know is not your intent, but sometimes that is the ideology we get here, and we need to fight through that.
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    Let me give you some concrete examples. Everyone agrees that semi-conductors are essential for the country's health and defense. But the Focus program has been consistently underfunded, and that is a research program designed to resolve pressing problems. We are talking about relatively trivial sums, $10, $20, $30 million. And yet that is essential for our future.

    And I must say as a citizen and an analyst, I am flabbergasted that these things are not done. I am flabbergasted that we have not been paying more attention to how we will retain this industry. We cannot, in aerospace or semi-conductors, we cannot freeze the global allocation of production.

    The good news is that the rest of the world is developing. But we do have to take measures, as they have, to retain an important part of that infrastructure here or your committee—remember, you said you do the armed services work. Well, the armed services sits on the civilian economy. And if that is not strong and if that is not robust, then nothing else is.

    The CHAIRMAN. Mr. Sorscher.

    Mr. SORSCHER. I agree with just about everything that we have said on this subject. Let me kind of go through my summary of this, that we need better collection of data, better data collection on the nature, scope and trends and offsets on trade issues and the kind of employment figures that you are talking about. Better data is part of the issue here.

    Another theme that I have heard and would like to reinforce is that the offsets issue itself is part of a larger picture. And if we are going to have an effective response, it should be a coherent response at sort of a larger level. I am not a policy maker, so I get to speak freely on this. From my point of view, perhaps as a citizen then, is to say that not only do we have a considerable opportunity with large amounts of money that we spend on defense programs—trade policy, tax incentives were mentioned, R&D support, NASA, the National Science Foundation—also, there are public subsidies at the local, regional, State level. There are lots of opportunities for us in terms of public policy, and again, how do we apply this?
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    I think it has gotten to the point, as Dr. Wessner said, other countries have gotten fairly sophisticated in this, as to how they use their offsets to focus commercial interests, you know, business interests on economic development. I think we need to find a way to focus our domestic commercial interests on economic development, and specifically, that could be a commitment on the part of anybody who accepts, you know, support for these various kinds, of clear goals toward economic development and then public disclosure of their progress as they go through this.

    I mean, part of the problem is, we are running open loop here, we spend money, but we don't tie that back to the economic policy or the economic development that we want to see. So let us explicitly do it. Here is a R&D incentive, let us measure progress toward a goal we have agreed on.

    And then here is the truly daring part. In some cases, for public policy, you could have a recapture where we have agreed on the goal, we have spent the money, but the follow-through wasn't there, so there is recapture. Sometimes you see that in economic development at a local level where somebody builds a factory and then closes the factory while you owe the money back. There is a connection between this huge amount of economic activity that we control in terms of public policy and the actual behavior of, you know, the businesses that accept this.

    So—and at a much simpler level, I am impressed that, when a foreign country gives an indirect offset, an American company said, yes, I acknowledge my commitment to China, I acknowledge my commitment to Canada or the country that gave me the subsidy, and therefore, I will invest in their economic well-being. I would like to see a similar sense to the way we spend our money. And we have the leverage here, and I think we have all agreed on that. And the missing piece is connecting it back to the behavior.
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    The CHAIRMAN. Thank you.

    Mr. Skelton.

    Mr. SKELTON. Mr. Chairman, I will not ask questions at this time, and I will yield my time to Mr. Spratt.

    Mr. SPRATT. Let me suggest, from experience going way back 30 years, Lockheed nailed L–1011. We started this. Remember L–1011. Who made the engines? Rolls Royce. Pratt Whitney and General Electric had made the engines for every commercial airplane for 20 years. Lockheed wanted to sell that airplane to the Europeans so they went to Rolls itself and solicited the business. Who made the doors? Japan Air, Kawasaki. They let Japan have major components of it. To the extent we have met the enemy, and it is us, originally. It is the old pogo factor.

    I am not saying that on a continuing basis, but we have taught our foreign competitors how to play this game, just like textile imports that we face today. The Chinese didn't figure out what the American market wanted. Wal-Mart went to China and showed them what the American market wanted and showed them how to market, produce the products that they would sell back in Wal-Mart. And they have learned to play the game, and they want major competition as a business.

    Another factor that I learned looking at Lockheed's books years ago, the prime contractors rode their trade credit mercilessly. The suppliers and subcontractors would have to put in big facility investments, put in big R&D investments and have to wait the full period of time and sometimes longer than the prime to recover their front-end investment. So they became, some of them, disenchanted, and they lost heavily on business when even the prime was making money, Ronco and other subcontractors. Some of them who aren't even in business today experienced this result from being part of the bigger picture in aerospace. So that was part of the problem.
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    Lockheed was being paid, but it was writing its trade credit 100 percent. Its accounts payable went up substantially during that period of time because it was squeezing everything it could out of its subs and suppliers. You have got to ask yourself, if this contenement of subs and suppliers is giving rise to the very problem that you are complaining about today—I don't even know if it goes on today. I knew something about that, and it was a phenomenon that struck me as possibly still a problem today.

    But the big question I want to ask you is this, when you are looking around for—we are spending $150 billion on procurement and R&D every year, vastly more than any other country or the rest of the world put together. That gives suppliers, subcontractors, vendors and primes alike a huge advantage, it would seem to me, in facilitization, which we are largely amortizing in R&D and skills of the workforce. Why is it that we can't convert that advantage to a market advantage to outshine, outcompete and displace suppliers and subcontractors overseas? That is kind of—I didn't make it as smoothly the point as I wanted.

    The CHAIRMAN. Why aren't we winning? We want to win.

    Dr. WESSNER. Oh, well, as much as I am an advocate of winning soccer matches or anything else, we, in today's world, we are not going to win all the time on everything. The good news is that the policies of this Congress has succeeded in the last 50 years. I mean, we have a much more developed world. We have a collapse of communism. We have healthy economies growing and entering into the world community. That is the good news.

    One of the reasons we don't win is that we spent a lot of money in the early stages, my colleague just said, we do the research, and we do some of the development, but when it comes to helping to commercialize, as I said before, we drop it on the streetside and say, well, the market will come pick it up. Well, the market does come pick it up, but it is often Japan Incorporated, or Germany Incorporated, and they do that because they are willing, in two cases here.
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    Mr. SPRATT. Well, do we need an America Incorporated, then? Can we——

    Dr. WESSNER. What we need to do is combine the virtues of this incredibly innovative economy and connect better, and it is not ideologically popular, except in wars, you know, when we actually create it—I mean this committee, what have you done, you have created a computer industry, you have created a semiconductor industry, you created an aerospace industry.

    Remember, something that always amuses me is at the end of World War II, after years of really hard effort, the only thing the Germans were ahead of us in were airplane engines, airframes and armaments, and what else is there in an airplane? They ran out of pilots, they ran out of fuel, but they were doing just fine. So, like, my point is even when we make a sustained effort, it is not automatically crowned by success.

    In the next 10 years, after World War II, we overtook the world in engine development and airframe development. Now, my argument—my argument is that we—let me return to our friends, the Finns. There are 5.1 million Finns. They have a program designed not to develop new basic technologies, but to develop commercially relevant technologies of 500 million euros. We have a similar program out at National Institute of Standards and Technology (NIST), for $200 million, at risk in this House, for a country of 280 million people. And you are doing the supply side of the equation, but we are not making that crucial bridge across what we call the valley of death from the idea into the commercial realization.

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    And what we are able to do in the 1950's and 1960's was through military procurement, we helped firms get across the valley. Now we need a more competitive-based system to do that, and I come back to the SBIR program. This Congress tasked the national academies, and I direct the program to assess it. Why do I mention this small program in this august committee? Because it is—the sonar systems for all of our submarines are not based on a Lockheed system, they are based on this tiny company that figured out how to make a better one. You may know that you sent three times more than you needed to the Gulf War because we couldn't track where the cartons were or the containers were, but now with the SAYY system, which hooks up a bar code and a GPS system, we have diminished our shipping requirements for the same force level by two-thirds. I don't need to tell this committee what an enormous gain that is.

    My point is that we have these technologies, we have the inventiveness that is there. And the question is, how do you help get it across this valley of death and compete?

    And having a coherent approach, sometimes it is simply the innovative side helping the entrepreneur; sometimes you have an established industry, like the semiconductor industry or aerospace. We have cut R&D for aerospace out of NASA. In some sense, I say again with great respect, what is the surprise?

    We are not doing what the rest of the world is doing to maintain the semiconductor industry, and people like Andy Grove from Intel are telling us publicly that they are alarmed, that there is no policy backstopping from the United States. In two years the hearings will be on the decline in the U.S. Manufacturing capability in semiconductors. And I am grateful for you, Mr. Chairman, to have the leadership to address these issues, but we really need to take a more innovative approach, as we have in the case of wars in the past, and recognize that we are in a fierce economic competition now, and that we need to do things a little differently.
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    Mr. SORSCHER. Let me continue in the spirit of conversation here. I think Congressman Spratt has actually expressed the question fairly well in the way I have been thinking about it, I hope. Again, let me use an example. Let us suppose that we had spent $50 billion to develop or $10 billion to develop the 727, you know, several years ago, in current dollars. The 727 was 98percent in domestic product, and, again, you know, Rolls Royce was part of the business then, but the expectation was that if we developed a major product in the 1960's or 1970's or 1950's or 1960's, that it was basically a domestic product.

    Now, when we spend the same kind of money on a new program, we just have to assume with a globalization of the supplier network and the industry in general that the domestic content of that is much less. So, our leverage in all of this money is immediately reduced by the difference in the domestic content.

    So, where in the past we would have assumed that money spent domestically would be invested domestically—I mean, that is the economic principle, right? That money is—you develop products, with the profits you invest them domestically so Andrew Carnegie could get rich, and Pennsylvania does as well. Now when a product does well, it is the global supplier network that does well, so the focus back on the domestic economy is much weaker.

    And that, again, in the past we just had developed this intuition that if we spend money on domestic companies, it will result in domestic economic well-being. I think we are going to have to be more careful about that.

    And, again, it comes back to the data collection issue. Now we have to really figure out where the leverage is, and what the relative proportions are, and what kind of benefit do we get for the money we spent, because we can no longer assume that it is all spent on domestic companies, therefore producing domestic economic well-being. We are going to have to be more careful in the way we collect data, and we are going to have to be more explicit on the way we expect the benefits of this to evolve. So, that places a heavier burden on us, and we have to be more careful as policymakers to make sure we get the outcomes we want. We can no longer just expect the economic, you know, mechanisms to work in the global economy to the way we are accustomed to them working historically.
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    Ms. SCHINASI. And I will put a specific example on the table. One of the things that we have recommended is that the Department of Defense take explicit notice of the way its decisions affect the industrial base, and that is something they have not done in the past.

    As I started my statement, I said we had been looking at this issue for five years. A lot has changed in 15 years about our competitiveness, the competitiveness of both our partner countries and our nonpartner countries.

    When we look at a program like the Joint Strike Fighter program, that program was set out to try and avoid offsets; actually that the theory behind that that the Department of Defense put out was that the prime would compete all of those subcontracts, and so you would only attract the companies who could produce quality at a reasonable cost and would bring something to the program that perhaps we did not have here.

    That was the theory, and the Department of Defense said, now, you go implement that theory, and we are in a very different place here today. And we are not—we are not competing fully and openly all of those subcontracts, because the company is working with the foreign governments who have a different set of goals, and those goals very much support their industry.

    And so what we have said is that the Department of Defense, in talking about the portfolio here this morning, needs to explicitly understand and recognize the consequences that its decisions make in spending that RDT&E money and procurement money on the U.S. Industrial base.
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    Mr. SPRATT. Over the years we have talked about this, for as long as I have known anything about it, and it comes down to our R&D, our policy for allowing facilities to be amortized against payments that the government makes to contractors, profit policy. Murray Weidenbaum years ago wrote an article; he comes from St. Louis, so rather naturally did suggest that profits on defense contracts should be related to the equity investment that the contractors make in the production, and that in time equity would expand, facilities would become more—less labor-intensive, more capital-intensive, and would become more productive and efficient.

    None of this—we don't really have a policy right now that says this is a problem, and this is what we can do about it. We will pick up more of the facilities' cost at the Federal Government level. We will be more tolerant of our R&D expenditures, and so that companies can really charge up the cost of keeping the engineers around until another project comes, and you won't have this nomadic existence among aerospace engineers. We have lots of things.

    But I commend the Chairman for calling this hearing, but, you know, it looks to me like we need some fundamental changes in policy to answer the question I put to you originally.

    If we spend $150 billion, more than any country in the world, or even the European Union or anybody else, why can't we extract from that a competitive advantage that makes it extremely difficult to outsource to the advantage the prime contractor or to, you know, simply say, if you can give us a price, if you can give us a product that is equal to the company, then we will consider you as an outsource possibility; but if you can't, we will have to go with the company that we have got.
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    I mean,I still don't think we are reaping the maximum advantage we should be from the fact that we are spending this much money on primarily aerospace and high-tech equipment.

    Thank you, Mr. Chairman.

    The CHAIRMAN. I thank the gentleman.

    The gentleman from Virginia Mr. Schrock.

    Mr. SCHROCK. Thank you, Mr. Chairman, and let me add my thanks, too, for holding this hearing, because it is a subject a lot of folks think about all the time and that some of us are consumed with, and I know the Chairman has been concerned about ''Buy America''. And I think we do that out of frustration, because it seems like this we are hemorrhaging, and we don't know how to stop it.

    And, Dr, you said that offsets are probably not good, but they are at a fact of life. That is probably true, but that doesn't mean it always has to be that way. And somehow we have to keep the semiconductor business from going to the Far East or other countries.There is a reason, and I don't know what it is—there is a reason why this is accepting——

    And Mr. Sorscher, Mr. Sorscher, you talked about the loss of R&D jobs, and I am concerned about that. But, you know, we are always trying to be more technologically advanced and be better than everybody else in the world, but if we replace our slide rules with computer-aided design, and advanced modeling and simulation, which I think design and advanced modeling simulation is the wave of the future, is it not reasonable to think we could produce similar results with fewer engineers and R&D dollars? And perhaps our industry does not feel the pressure to compete when we—and when I say ''we,'' I mean those of us on this side of the table. I hand them $150 billion every year in procurement and R&D dollars. What incentive is it for them to go out and do things differently?
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    Dr. Wessner, I think I heard you say that—you said we need to figure out how we can control the behavior of other countries. I am not sure we ever have, can now and ever should, and never, ever should. So I think if we go from that standpoint, we have lost the game, unless I misunderstood you.

    Dr. WESSNER. May I just quickly correct?

    Mr. SCHROCK. Yes.

    Dr. WESSNER. My point is precisely yours, sir, that we cannot control the behavior of other countries, and that we have to learn how to play the game just as toughly as they do.

    Mr. SCHROCK. And it is not like this happened yesterday or this year. I listened very carefully to what Mr. Spratt said, and he is right on the money. This has evolved over a long, long period of time, but we haven't been able to solve it. And I think the frustration I have, and I think the Chairman, how do we solve this thing? What is all of this causing all this to go overseas?

    There has been a couple of pat answers that may not be politically correct, but what do you see are the reasons, and be brutally frank with me, because I need to try to understand this. Please. Ladies first, if you wish.

    Ms. SCHINASI. I can't speak specifically to the semiconductor industry, but when you come back to——
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    Mr. SCHROCK. Any industry, for that matter, that we have researched, developed, paid for, and then it goes away.

    Ms. SCHINASI. One of the drivers for the defense companies is, of course, looking for a market that they used to have in this country. So, when the turndown in defense spending came here, they were sized, as we talked about before, the facilities and the production runs, and their profit calculations were all sized on a certain amount of production that fell off, and so in looking for markets, they went overseas. What that meant was they had another set of customers who had not only their own Parliaments to deal with in terms of spending the money, but their own industries that they needed to make sure were keeping up, and I think that was part of it. Then the companies, in trying to make the sale, were willing to take less than 100 percent of the sale price of the item by trying to turn that production over.

    Mr. SCHROCK. Ms. Schinasi, it seems by doing that they are keeping up, and we are not. And I just don't understand. It is something—you talk about the Joint Strike Fighter, and I am a huge advocate of the Joint Strike Fighter, but from the time it was first conceived in somebody's mind until the time it actually flies on and off the carrier, in the case of the Navy, the costs are just going to be astronomically high, because the longer you wait to get something in the water, or in the air, or under the water or on the land, everybody that comes along has a different change order, and they keep changing them, and, of course, the costs keep going up. And maybe that is part of the reason we are not succeeding very well and we are going overseas, because they know what the product is they have to produce, they are going to get it done, and they are not going to let all these other people get in the way and keep changing things. Is that right, or is that pie in the sky?
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    Ms. SCHINASI. No. I could talk at great length on Department of Defense's acquisition policies and practices. We have done quite a bit of work at looking at why individual programs do take so long to deliver.

    Mr. SCHROCK. The procurement policies are totally, completely, broken.

    Dr. WESSNER. Mr. Chairman, if I may address that question, I think there are a couple of answers here that are short. One is that we spent—for Congressman Spratt's question, we spent a great deal of money on defense, but we concentrated on the primes, and we concentrate more money on a smaller number of companies and a smaller number of engineers that are increasingly isolated from the vibrancy of the commercial economy. And if you look at the commercial value of a company like Intel, around 170 billion, it is larger than the top four defense manufacturers together.

    A second point to reiterate is that we spent a lot of money on early-phase research, but we don't put enough funding and policy effort into the transition to market.

    Third, what we are talking about here repeatedly is the impact of foreign government policies, you know, offsets, and, Mr. Chairman, you may find this amusing in a sense. Offsets are relatively benign compared to the trade and investment policies of most countries. We export 75percent of our production, roughly that, of the aerospace trade. When we make a better product here, and China wants to buy it, what do we do? Well, we send them the factory, and we send them the technology.
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    Mr. SCHROCK. In your estimation, why do we send them the factory?

    Dr. WESSNER. Because if they don't, they won't—first off, there is a VATT tax. There is a high tax, which is GATT illegal on semiconductors, that keeps out shipping, ships just across the border. You have to go to the country and produce it.

    But my point is quite different. GE has put light bulb factories around the world. We are obliged to put our semiconductor manufacturing facilities around the world. In the aerospace sector, we do, in a tough world, relatively well, and with the drain of offsets and the drain of technology and the loss of jobs that that involves, we are nonetheless exporting. This is a surplus industry in aerospace.

    But my broader point is that, to answer your question, we are paying the initial funds. We are putting $150 billion dollars in. Why aren't we getting the benefit? It is because the trade and investment policies of other countries are effective in thwarting that. We have very poor coordination in this country.

    Mr. SCHROCK. Are what? Reporting that, did you say?

    Dr. WESSNER. Blocking us.

    Mr. SCHROCK. Oh, blocking, I am other——

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    Dr. WESSNER. We have——

    Mr. SCHROCK. Blocking us? We are American. Why are we allowing that to happen? I just don't——

    Dr. WESSNER. Because, first off, there is not this counterbalance between the short-term market needs. If a company—and I can't speak for them, and I don't wish to—if a major semiconductor producer comes to the government to complain, there is always a fear that they will be kept out of the rapidly growing Chinese market, for example. But it is a fact in the trade policy realm that there are requirements that you come and establish. Now, the good reasons for that, it's complicated. Sometimes you want to adjust your product to a local market. That is why Opel and Ford have invested in Germany and France. But they were also encouraged to do that.

    The U.S. has a trade policy position which is, in essence, if you have a product, and it is a good product, ship it to us. Many countries around the world have a trade policy which is if you have got a good product, fine, send us the factory, you can collect profits on it, but you will produce it here, and you will transfer the technology.

    And that is the major difference. And there are government mechanisms for coordinating between our defense industrial base and our trade policy, but it is my understanding that they are largely moribund, and I would simply submit that this is an area you may want to look at further.

    Mr. SCHROCK. And, Mr. Chairman, I just don't see why when they say, send it to us and we will build it, I don't see why we do that. Maybe there is just something that is just not getting to me that I just don't understand that.
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     Mr. WESSNER. Because if an company doesn't, another American company will, or Siemens will or Nokia will. The ability not to respond to these countries in order to have access to that market, particularly the Chinese market, is limited there, and it is the same point with offsets. You have individual corporations with their pressures caught against the deep pockets and strategic view of government policy. Is that a fair——

    Mr. SORSCHER. If I could take a shot at this. I offered you——

    Mr. SCHROCK. Do you understand my frustration?

    Mr. SORSCHER. I certainly do. And, in fact, as you say, a lot of it—I spent a lot of time thinking about this. I am at a disadvantage here because I was trained as a physicist, so most of my, you know, background is not of much help here. But I have tried to think like an economist about this. I assume that the economists have the most insight into this.

    Again, like Dr. Wessner was saying, companies act under market forces. They are not interested in policy for the most part. Their behavior is determined by market forces. Market forces say, well, here is your investment opportunity. It can be—you can invest it in Kansas, or you can invest in Shanghai, and it is a fairly simple choice for them.

    So, let me turn the question around. You have asked why is the investment now in R&D—why is the investment now in R&D and process improvement going offshore? I could turn the question around to say, why has it taken so long? Why hasn't it always gone offshore? What have we been waiting for? And if you think of it that way, what has changed, really, is that all of these less-developed countries are finally able to absorb this capacity. With the development of political stability or economic infrastructure or knowledge base of their own people, they are now suddenly able to absorb all of this work.
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    So, in the past, again, you know, with Andrew Carnegie and steel, there was no—there wasn't that much of an option. It was the factors of production, you know, capital labor, and land and now technology, were all invested domestically, because this was the only choice. Now there is a choice. You can move your investment offshore, and individual firms acting under individual market pressures will do that.

    And so as policymakers, we, not me, but you, have to find ways to realign the interests of firms with the national interest. In the past it was easy. That alignment was natural. Now the alignment is pulling apart, and we have to find ways through policy to bring the interests of companies back in line with the national interest.

    Mr. SCHROCK. And I understand it is a business decision, and as I am reminded, certain car companies are bringing their plants here as well. They may have foreign names on them, but they are to be built by our people. But at the end of these hearings, Mr. Chairman, maybe at some point I will get all of this. Thank you very much.

    The CHAIRMAN. Okay. It is a little bit of a complex issue. That is the reason we are doing it.

    The gentleman from Texas Mr. Reyes.

    Mr. REYES. Thank you, Mr. Chairman.

    I was kind of intrigued by the statement that I think Ms. Schinasi made that or planting the issue that the Department of Defense has to understand that it has a potential for affecting the industrial base. Well, as you said that, I was thinking back to the last few years of the Clinton Administration, where we were talking about the transfer of technology and the many different issues in providing, in that case was the Chinese, the kind of technology that would allow them to do launches and global positioning systems (GPS) locations and all of those kinds of things. In this committee we basically were slamming the Department of Defense because they recognized that that had the potential of affecting the industrial base.
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    In fact, we had a whole series of lobbyists and people representing the many different technology companies telling us that we, in this committee, had to approve of that, of that decision, because if they didn't, if we didn't approve, their product would be replaced by the French or the British, or you pick a country, India or whoever.

    So, in taking those votes, if you remember, Mr. Chairman, we were basically put in a position that, man, if we voted to allow Intel and some of the other companies to give—to be able to export that technology, we were being unpatriotic. This morning, now, the whole situation is reversed in terms of having us understand the implications of not competing, I guess, for lack of a better way to describe it, in the globalization of our economy, competition and those kinds of things.

    The problem that I have with this, and I know I am not the only one, is that we can only control—and it gets back to the analogy of the referees that Dr. Wessner mentioned. The problem is that we have control over only so much, which is the American piece. Everybody else is perfectly willing to pirate and do all of these other kinds of things that puts us in a catch–22 situation. If you don't give them the technology in the factory, then they will somehow get it and pirate it. If you do give it to them, then we lose jobs, and we outsource.

    So, it is—to me it is a catch–22 dilemma that I don't know—at least I don't feel like I am smart enough to know—what the solution is.

    But I guess the question that I have deals with the ability to make policy, and is it possible to manage what this hearing is about, the offsets, manage them directly as a government policy without ending up with what would amount to a national industrial policy? And do we even have the background or success in being able to manage such a policy?
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    And, you know, I think back to the issues most recently of the Iraqi war, which was going to war with allies like Britain and others where our technology was so much superior, but yet we had issues of fratricide because of interoperability, interoperability in terms of communication, identification and those kinds of things.

    So that complicates that issue a little bit for me,which puts us in a situation of what do we do. Do we help our allies and give them this, with this ability to manage the policy? Or do we go at it knowing that we are going to be far superior in most cases than everybody else? So, do we have the experience? Do we have the background and maybe even the governmental capability to manage such a policy decision as this regarding offsets?

    Ms. SCHINASI. You raised the export control system, I think. If I could go back to that for a minute to say what we have said is that for certain critical national security technologies, the government does have a responsibility to get in and make decisions about what companies can and cannot sell, and we do that through a very messy, very inefficient, very contentious interagency process where the different departments of the government come together and make a decision on a case-by-case basis, and then come here in consultation with the Congress, give approval or disapproval for the export of a technology that is national security. It is not a very pretty system, and it doesn't work very well, and we have written lots of reports trying to look at ways to fix that.

    But I would contrast that with what we are talking about this morning, which are offsets. There is no explicit recognition in this arena that there is a government role to play. I am not sure that one policy or one decision, you allow offsets, you don't allow offsets, would be effective. But what we have asked for is the fact that the offsets have an impact on the industrial base and the technology position of our industry at large at least be taken into account when you make these decisions.
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    I think one of the other things that has happened in the defense industry here is that we have fewer, larger companies now, and so what happens is that those companies are able to absorb a lot more in terms of lost business or lower profit margins. And so there is there is more of an ability—I won't say a willingness, but there is more of an ability for companies to act in ways that have one effect on them and a different effect on the supplier base. And so I think that that also augurs for at least maybe looking, having the government come in and look, as messy as it is when it does that, look at what is going on in trying to figure out whether there is something or not that needs to be done.

    Dr. WESSNER. If I may address that question, sir, I think there are—I think our ability is to unilaterally stop the way the world economy is operating now, as you suggested, is quite limited, but what we can do is compete in it better, and the fact that we are spending 150 billion now simply argues, as I mentioned earlier, to spend it better. We are—we all want the semiconductor industry, I think we would agree, and yet if we ran through a checklist of what the industry has asked for and what the industry needs and what they are getting, we would find that there are a lot of empty boxes.

    We are not spending on the focus program. We should be increasing that program. The university-based program that works, you know, the industry is partnering with government, and we need to do more partnering in order to—why? Because you can measure those things. You can stop programs that aren't working, whereas wide grants of R&D tax credits, for example, are very hard to measure what is the impact. They cost you a lot of money; what do you get?

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    SEMATECH, for example, is a very successful program. I mean, this committee did this directly and indirectly in the 1980's. We nearly lost the semiconductor industry then, and it was a combination, and I stress that, the combination of you funding the SEMATECH program, of support for the semiconductor trade agreement which kept—which stopped some unfair trade practices, and the signals to the investment community that we wanted this industry, which helped them reinvest and work into different areas like microprocessors that helped us compete.

    But my point is, that is an encouraging point. We can do this, and we have done it in the past, which addresses it without getting into an essentially directed deregiste policy. We don't need a French-style industrial policy in order to compete, but we do need to recognize the current gaps in our policy. The nanotechnology initiatives, tax depreciation, recognizing just what the rest of the world is doing in aerospace and in semis is a first step, and I would encourage you, Mr. Chairman, to bring some industry representatives here and help answer the questions of some of your colleagues. I think it's incredibly important that they have actually signaled that they are concerned, and that they are looking for a policy response, and some of the states like New York and Texas have stepped up to the plate to try and retain those industries.

    But if I could leave just one thought here, there is not a lot of time, and these industries are moving very quickly. When we started this report, we were focused on Taiwan 2 years ago, and Taiwan is now being bled dry by mainland China in this area. We had to redraft the report at the end because it had shifted that quickly. So this is not a three year window of opportunity. It is much shorter than that.

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    But, again, I commend you for raising these questions, and I am sorry that we cannot give you formulaic-type answers. It is a tough area, but it is one that if we work together with industry in a cooperative program, we can make progress.

    The CHAIRMAN. We will take your advice, Dr. Wessner. We will have industry here—and I think this committee is prepared to strap this one on and try to do what we can for our country.

    Is the gentleman finished? I appreciate that.

    The gentleman from Ohio Mr. Turner.

    Mr. TURNER OF OHIO. Thank you, Mr. Chairman. Is the mike working? I will just move for a moment then. Thank you, Mr. Chairman.

    I appreciate your focus on the important issues of retaining our industrial capability and its impacts on our national security. I think we hear every day when we open the newspaper stories of the concerns throughout our industrial economy as to our ability to retain our both intellectual capacity and our industrial strength.

    On the issue of offsets, inevitably the discussion has turned to other areas where we need to support our industrial base and our aerospace industry. Technology transfer was one that has been discussed; our tax structure; research and development, and coordination of research dollars; offsets as an impact on trade; education, our educational structure, how we are producing by individuals who have science-related backgrounds.
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    But, Mr. Wessner, you said something that struck me and is actually an issue that I have been working on in conjunction with the Chairman, and with Chairman Saxton, and you said that, you know, we need a common vision in the industry. We need a forum to gather people together to have this discussion. And I also heard the comment that we need to talk about the public investment that we are making in private development.

    And one of the issues that has been important to me is the fact that in our aerospace industry, with our being a leader in the aerospace industry internationally, is that we have been unable to sustain an international aerospace trade show. I am not talking about an air show, like just planes flying around for entertainment purposes, which, of course, is usually a part of an overall international aerospace trade show, but, really, an aerospace trade show. In part that has been because we have not had coordination, as other countries have, with the Commerce Department, the Transportation Department and the Department of Defense, because really what it takes to pull one of these off is all three agencies working together in a focused effort with our aerospace industry.

    We also have a disincentive for a domestic aerospace trade show in that we do allow contractors to include in their chartable overhead participation in foreign international trade shows, but not in domestic trade shows.

    So we all, in effect, pay for our industry to participate in international shows. We don't allow them to include those costs. They have to bear them themselves if they are going to participate domestically.

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    Congressional Research Service (CRS) also undertook a look at this issue, and they said the fact that we did not have an international aerospace trade show had an impact on small businesses, and because our small businesses, some of which are being squeezed out in this offset impact, don't have an ability to participate on an international level because they don't go to travel outside of the borders, where if things were brought here or they were participating in an equal level on a large scale with the aerospace industry, they would have the ability to more showcase their wares.

    So, my question to you is that seeing as how many of the things you are talking about in that—where other aerospace industry, foreign economies are thriving, in Europe we have two international trade shows, in Asia we have a large one, could you speak just a little bit more about this issue of an industry forum, because we do not have a place where we all come here domestically with our aerospace industry from top to bottom to look at what is the next generation that people are working on? How are we coordinating our dollars? How can our businesses showcase what they are doing and working together with government, Commerce, Transportation, Department of Defense, on that coordinated effort?

    Dr. WESSNER. Well, yes, I think there are two things. One, if you will forgive my smile, as a representative of the National Academies, I am glad you asked that question. The National Academies is striving to provide a forum—there is work under way both on R&D, very modestly-funded work on R&D for the aerospace industry, and we are seeking to focus on the semiconductor industry.

    What we try to and do in those forums, which I think is critical, I think, to bring together, I think you are suggesting, public officials, labor representatives, multiple industry representatives, not simply one large company, but the smaller companies as well, and one of the things that we are proud of in one of our first offsets, folks, is that for the first time the academies have brought in senior union representatives to let them explain how they were impacted, and we have had researchers who had looked at the second- and third-tier supply base. So we knew how to do a forum like that. Ultimately the forum should be industry-led with public participation.
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    I think, again, the semiconductor industry is an interesting example. What I would like to propose for the committee's consideration is a roadmap exercise, I think you are familiar with that, where we would sit down and say, this is where we are. Now, where are we going to be in 5 and 10 and 15 years, how will this play out, and have participation from union representatives of different types, have participation from the government. What kind of aerospace industry do we want, and what are we doing to get there?

    And the semiconductor industry started this. I attended the first meeting in 1990, and it was quite impressive. And this roadmap model, which is not a plan—I stress it is a study on a series of challenges that need to be met technically, how are we going to deal with capacity, how are we going to deal with the security requirements? You know, successfully trusted planes are absolutely essential for the operation of the economy. And I think that is a point that was stressed here and I would like to reiterate.

    So a roadmap is a way of bringing together all the concerned parties and addressing it, and I would encourage the committee to explore—and, by the way, that could be very modestly funded. There is sometimes a disconnect between the stakes we have in the global economy and the funding that we put into efforts to help us compete better or, to address the concern I have heard here repeatedly, how do we capitalize on the existing R&D investments, on the R&D expenditure, and it often doesn't take much. That Tekes program in Finland I just mentioned, a footnote, helped fund a company called Nokia. You may have heard of Nokia. No one had before they funded that program, and it was a question of capitalizing on developing new standards and new ways of working on cell phones. They did a good job.

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    The CHAIRMAN. I thank the gentleman.

    Dr. Snyder.

    Dr. SNYDER. Thank you, Mr. Chairman.

    When we had this discussion a couple of weeks ago, one of the issues that came up in your report, Ms. Schinasi, the GAO report, you went into a little more detail than you do in this most recent report about what happened in the Commission that was established in 1999, and, in fact, you would state today because of circumstances the commission never achieved its purpose. What do you mean by ''circumstances''? The fact that the current administration never appointed members?

    Ms. SCHINASI. I can tell you what happened with that. As you know, the commission had five members from the executive branch to be represented, and there were people appointed to represent those positions, and that is what the first meeting of the commission was with that set of individuals. When the Administration changed, those individuals left the government, and there was no one subsequently appointed to the seats on the commission.

    Dr. SNYDER. So if I got this right, because of, I guess, Mr. Hunter, but because of this committee that we had the commission established in 1999, President Clinton makes the appointments, does it include like the Director of the officce of Management and Budget (OMB); was that one of the appointees?

    Ms. SCHINASI. The director of OMB was the Chair of the commission.
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    Dr. SNYDER. Was the Chair?

    Ms. SCHINASI. It was also the United States Trade Representative, Department of State, Department of Commerce and Department of Defense were the five.

    Dr. SNYDER. So those five, and then President Clinton formally made those appointments to this commission; administration changes, they had a preliminary report ready to go, but could not issue a final report until the Commission gets together and releases it.

    But even though the Commission had their five appointments to be made, the Director of OMB, the President never appointed this Commission, so they could never do their work.

    Now, I think the part that concerns me is that because there was a chain of events that had to occur, was there not, that the final report had to be issued by that Commission, and then the administration had 90 days or something to come to a conclusion about do we need to have a multistate or——

    Ms. SCHINASI. Multilateral, yes.

    Dr. SNYDER. I am sorry, multilateral agreement.

    It is discouraging. I think this is really a complicated issue, and I want to ask you about the language in the defense bill. I think it is really a complicated issue, but it is now six years later. We could have had perhaps some suggested solutions from the Administration, but because Mr. Bush never made the appointment, the commission, then Chairman Hunter and through his leadership is trying to come up with language that improves it. But as Mr. Weldon pointed out the other day, we may improve it or worsen it with bad legislative language.
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    Our reading of the law is that the President could today make the appointments to the commission, and it could get on with its work. Is that your all's reading from the GAO?

    Ms. SCHINASI. That is my understanding. When we asked OMB what had happened in writing the report that you referred to, they weren't able to explain.

    Dr. SNYDER. And even though it has been like the time the way that we have looked at the law, the President would have the power to still go ahead and make those appointments, and we could get on with this business and perhaps a more thoughtful process that would involve more folks in the government.

    I wanted to ask now on this research issue, and I think this is really important, I think we have a problem all across the budget, Dr. Wessner, with support for research. In the defense budget, and I am a little out of my league here in the specific details, but I am concerned about basic research, our funding of 6.1 accounts, 6.2 percent. And so we can talk about the large amount of money that goes into R&D, but if it is so, if it is applied research that is going in one specific area, we may not be doing the kind of research we need to be doing as far as looking at the jobs of the future. Do you have that concern not only in the defense budget, but also throughout the defense budget?

    Dr. WESSNER. Yes, absolutely. I very much share your concern.

    Dr. SNYDER. My understanding, particularly China and India are doing a much more robust, better job than they used to of funding research.
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    Dr. WESSNER. Certainly more robust, although keeping in mind they are starting from a low base.

    Dr. SNYDER. Right.

    Dr. WESSNER. But in terms of their production of engineers, which are essential to a whole series of industries, the U.S. is a laggard. If you look at the charts, we end on a position that I am not fond of seeing the United States in, which is down at the bottom of the line, and the French, the Germans, the Finns, the Chinese and Japanese are doing a much better job in generating the workforce that will be necessary to compete in the 21st century with respect to engineering.

    We have made very good investments in biomedicine, and we are a magnet for the world in that respect.

    Dr. SNYDER. Well, if I may interrupt you, I don't want to get the big political issue, but some of us have concerns that by the obstruction of our stem cell research, that that may be one impeding a lot of potential opportunities down the line by having the political obstruction.

    One final question: What do you all think of the language in the defense bill that deals with defense trade reciprocity? Have you all looked at that section, the bill that passed out of this House?

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    Dr. WESSNER. Yes.

    Dr. SNYDER. I am sorry.

    Dr. WESSNER. I have not carefully examined that language, but my initial read of it is one has to be careful when one asks for reciprocity.

    Dr. SNYDER. And I think that has been the concern that has been expressed. It is a complicated topic. It is an attempt to do something about a complicated topic, but we want it to be an improvement, not harmful. I think that goes back to the Commission. The point of the Commission was to deal with a very, very complex topic, and it is still not understandable why those appointments were not made in early 2001.

    Thank you, Mr. Chairman.

    The CHAIRMAN. I thank the gentleman.

    The gentleman from Georgia Dr. Gingrey.

    Dr. GINGREY. Thank you, Mr. Chairman.

    As I listen to all of your testimony, I can't help but think about maybe an analogy in the reverse is the situation of a community trying to attract a company to come in, maybe, you know, a big box company or somebody from another country coming in and building a plant, and offering tremendous tax advantages, tax breaks. And the company comes in, and the local community suffers in their early years, hoping to recoup in the outyears.
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    The analogy in the reverse, I guess, is a situation where we have defense or primary contractors who cut these deals with, in this instance, foreign countries, and they do well on the short term, and maybe in the outyears are not thinking sufficiently about what ultimately would be the adverse effect not only on our economy, but, of course, in our overall defense situation, because, as you pointed out, you are outsourcing a lot of R&D technology.

    Maybe another analogy really would be to look at our pharmaceutical industry, where we pay for all the R&D in higher retail drug prices, and yet some of these other countries negotiate pretty toughly and get a bigger cut, a better price. It is the same sort of thing.

    And you all have presented to us today, and I think I can really commend the Chairman for holding this hearing and testimony. It is excellent. But I still haven't heard anybody cut right to the chase on what we might do to solve this problem, because I think it is a huge problem. And I guess the question would be should the Federal Government regulate the amount that a United States corporation pays to a foreign corporation, our government, in offsets, and, if so, which agency should that be? Should the United States have an audit mechanism for engaging offset compliance?

    Really, if any one of the three or all of you would like to comment on all of that, I would like to know what you think we ought to do and just cut right to the chase for us.

    Ms. SCHINASI. Let me start, because my answer will be relatively brief. A lot of that is the policy goes beyond the work that we actually engaged in. I think putting the questions on the table and getting started is the first thing that started to happen. What comes out of the discussions I can't comment on, but to have a recognition that this is something that requires some policy attention, I think it is the first place to get started into. And we have talked this morning about the various players in the executive branch who have an interest here, or who should have an interest here, and I think bringing together those players with the Congress in starting that discussion is what needs to happen first.
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    Dr. WESSNER. I would just like to associate myself with that remark. I think putting the question on the table and actively convening the key participants, particularly in a constructive way—it is not—when we did our work on offsets, there is no one in the offset community who thinks that offsets are a great thing. It is an assignment they are tasked with, and it is a tough one, and they do try to do it constructively.

    One quick word, you said, would we regulate the amount of offsets? The draft commission report distinguished between the quantity of offsets and the qualitative nature of certain offsets. And I would bring to your attention that, when you are talking about the wing, the avionics and the wings of an aircraft, that is a great deal more important to the long-term health of our industry than if you are guaranteeing the exports of a certain number of olives from Greece or the arrival of a certain number of tourists. Those effects are relatively harmless. I agree with that.

    Mr. SORSCHER. There were a couple—you asked a fairly complicated question, and I will take a little piece of it. The idea of auditing offsets, one positive element of offsets that I have heard expressed is that when a foreign country imposes offsets on American manufacturers, they are reporting requirements that come with it, and they have to report—the American company has to report to the foreign company about how they are performing relative to the offset. That is an opportunity for us to collect data. And we could take advantage of that as well.

    So the point is that there are some positive elements that we can learn from how offsets are conducted generally and incorporate them into policy ourselves. And I think that is a theme that I have heard and would like to reinforce generally, that it is important for us not to focus too closely on the offsets, per se. It is really part of a larger picture about what we want out of an industry like aerospace, for instance, how strategic is it, how important is it and what level of effort are we going to put into sustaining it and cultivating it, and offsets would be a piece of that.
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    Again, it should be, ideally—and it is easy for me to say, I guess—part of a larger more coherent policy. I am not sure I would call it national industrial policy so much, but we need to think about this, perhaps to use the expression road map: Where do we want to go, and then what policy tools do we have? One of them certainly would be related to offsets.

    Dr. GINGREY. Mr. Chairman, I know my time has expired. But just in closing, I was struck by both the loss of jobs over a 15-year period in the aerospace industry and aeronautical engineering, as Mr. Sorscher talked about. I thank you for having the hearing. And we need to continue to look very closely at this, because we are not just talking about a shooting war here; we have an economic war as well. But I think they are pretty closely intertwined when you are talking about our Defense contracting and the huge amount of R&D we are exporting for free.

    The CHAIRMAN. I thank the gentleman. And another gentleman from Georgia, Mr. Marshall.

    Mr. MARSHALL. Thank you, Mr. Chairman.

    Dr. Wessner, I would be very interested in getting copies of the two books that you held up, if that is possible. Not right now, sir. I read a book recently. Actually, the title of the book is the best thing in the book. I wouldn't recommend the book itself. It was called, Beyond Human Scale. And it is out of print right now. I had the Library of Congress' copy, and I don't know if I violated some law here, but I copied it and then read it. And I was struck that the title really fits a lot of what you described today.
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    A few things stun me. One, I think Ms. Schinasi, your reference to us not recognizing that government has a role to play in this issue. If what we are talking about is the larger economic question of globalization which applies across the board to all of our industries it seems, then the government's role is going to be a little bit different than the role of the government if we are talking about national security.

    And what does our future look like where the militarily industrial state is concerned? Clearly, our advantage, militarily, worldwide right now is due to the fact that we have a huge capital advantage. If we don't have that capital advantage, then the question is whether or not we are going to put human bodies and lives at stake in order to secure military needs. And historically, in the last few decades, we haven't been interested in doing that.

    It stuns me to hear anybody say that we don't recognize or haven't recognized that there are national interests at stake here. And this committee talks about this particular issue all the time. The question is trying to divide the global issue of the market and globalization of the economy generally and how that impacts it.

    All three of you repeatedly called for data. We want more data. Data calls, and in my experience, that just assures further delay. It is, in my opinion, a recipe for disaster. And if I am right, then you can call for as much data as you wish, and you will never understand the full problem. There will always be a call for more data and for more information before making decisions.

    So I guess I would encourage all of you to think a little bit more about, ''Well, gosh, we are the experts here, and we know what is going on. We don't have to have every ''i'' dotted and ''t'' crossed before we make specific recommendations.''
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    I am afraid, when those recommendations are made, they are going to be very specific. It is going to be the semi-conductor industry, a particular deal, et cetera. And at this point, at least, I doubt anybody has a more global suggestion that might be made in order to better secure our future, at least where the military industrial state is concerned and the advantage we have enjoyed militarily over the decades. And I am hoping that you can come up with something like that.

    Again, it may be this problem is beyond human scale. Your reference, Dr. Wessner, to several references here—Chairman, and by the way, Chairman Hunter, this is an incredibly important topic, and I appreciate you convening it, and I have an awful lot to learn. That is one of the reasons I asked for your two books.

    But the Chairman made reference to our investment of $79 billion whereas the rest of the world combined is at $30 billion.

    The CHAIRMAN. And that is procurement and not R&D. It boosts up to $150 billion with R&D, too.

    Mr. MARSHALL. I am not sure that those numbers don't mislead us. It seems to me that the $150 plus the $79 may not produce—I am going to produce widgets—may not produce the number of widgets, whether it is research or actual product as the $30 billion and $75 billion that the rest of the world is spending. If you take a specific example, you made reference to Finland and Finland's expenditure of $200 million—$500 million Euros a year versus $200 million in the United States for a comparable inquiry. I suspect, given costs in Finland, that $500 million Euros a year may actually be the equivalent—I don't know, I am suspecting this—of $2 billion per year spent in the United States as far as the product is concerned, and that that is something that we face—our businesses face, day in, day out, with the global market. And that is why I suspect that, in part, this issue is beyond human scale.
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    We hear in our committee—Duncan, we hear regularly, our witnesses say, ''Well, that is not really in my lane.'' you have said it already today, Ms. Schinasi. And I am afraid, if we are going to be successful with regard to this issue, we have to conclude that we have to get outside this lane, this narrow focus on defense and our defense future and recognize that if we don't deal with the broader issue, we are not going to be able to solve the narrow issue.

    I have got more questions than I could possibly ask. My time is up. And I would love to maybe even spend time with each of you at some future date after I have read your books and thought more about this and tried to learn more about it. Thank you all for being here.

    The CHAIRMAN. I thank the gentleman and I encourage the gentleman to take some time after our hearing, if you folks are available for some follow-up discussions, I think that would be very helpful. And I thank the gentleman for his excellent line of questions.

    Gentleman from Maryland, Mr. Bartlett.

    Mr. BARTLETT. Thank you very much.

    And thank you, Mr. Chairman, for convening this different sort of hearing for our committee.

    So that I can understand this a little better, are these offsets closer to bribery or blackmail? Or is it depending on where you sit?
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    Dr. WESSNER. Since we are not on the record here, sir, if I may emphasize as a joke what you might say—and I emphasize a joke—that when you have the very best product and it has the best price and you can get it delivered on time, then it is then what you pay them to take it. And——

    Mr. BARTLETT. If we are selling, from our perspective, it is bribery. From theirs, it is blackmail. Or is it the reverse of that?

    Dr. WESSNER. When we talked about reciprocity a second ago, when we want to buy something, a military system of some sort, what do we do? We say, you make the very best one and you have been selected and this is where the factory will be here in the United States, send it over, and we will pay you a license fee. That is not offsets. That is 100 percent offsets.

    Mr. BARTLETT. Before I came here today and I thought of a rather dismal picture of trade balance, which last year was $487 billion, that aerospace was a bright spot. Now, I find out that the offsets are 116 percent. Doesn't that mean that the more we sell, the more we lose?

    Dr. WESSNER. There is nothing more misleading than offset percentages. It is extremely arcane, and it varies by deal. But essentially, the offset percentages are fixed by how much the purchasing entity, usually a government entity, values it.

    So it is my understanding, when the Lockheed deal for the F–16s, if I have this right, they got—part of the deal was getting a General Motors facility constructed in Poland, and that was given a very high value for political and economic reasons by the Polish government. But the actual cost was relatively low. But that is an indirect offset.
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    Both on these directs and indirect, it can be very disruptive in our supplier base. But if you rank these where the indirects are normally, although they can be disruptive to other parts of the economy, are normally less of a concern.

    If you are doing the interior design work for a 747 for Australia, that to me is not a strategic problem. If you are doing the avionics and the leading wing structure for the next generation aircraft, to my mind, analytically, that raises strategic questions.

    Mr. BARTLETT. I was thinking pretty much from the perspective of jobs. Our staff has prepared a little background. They said European nations received offsets equaling 116 percent of the total U.S. Defense exports and therefore received, in consideration of the U.S. export sales, more jobs and technology than paid for by the purchase of the defense products. So if we are concerned about jobs in this Country and if this is true, then the more we export to Europe, the more jobs we lose in this country is what this staff report is telling us.

    Dr. Wessner, I am very concerned about something that you mentioned, and that is the generating of the workforce. In another life, I worked for IBM, and I worked—I left there in 1975, so that tells you when I worked for them. And we were concerned that we at IBM and we in the United States were going to lose our superiority in computers to Japan for one very simple reason: Every year, Japan was turning out better scientists, mathematicians and engineers than we were. And we knew that that could not continue for very long until they were going to better us. And you were pointing, in the long list of nations, we were at the bottom. How do we turn this corner?

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    I mean, you get what we appreciate. And in our country, we do not appreciate academic achievers. And I believe our culture is changing when I see academic achievers invited to the White House and appreciated the way they appreciate athletic figures. And what do we have to do in our society to turn that around? Because I think, for the short run, our economic superiority is at risk, and for the longer run, our military superiority is at risk if we can't turn this around. What do we do?

    Dr. WESSNER. I think that is an extremely important point, sir. The first thing is to provide the funding. As one of your colleagues pointed out, you have to look carefully at the 6.1 and 6.2 accounts, and you have to see what percentage of that is going to the universities after providing support for disciplines that we need. And I mentioned, through inadvertence in the 1993–1999 period, we cut support for physics, chemistry and engineering, which is the basis of the information technology (IT) evolution that drove the productivity and the economic growth during that time. That was a random disinvestment that was not agreed on by anyone. It is an error.

    This Administration and the previous Administration started to correct it, but it is dropping again. So one answer is sustained attention and provide the funding.

    A second point—and I don't say this in any desire to be politically correct—is trying to develop, putting incentives for minorities and women engineers. Women have a disproportionately low representation in most areas of engineering, and this should stop. There is no—and again, rather than pass laws requiring it, I think the approach of the Congress is to provide serious financial incentives, both for the individual students and for the universities and the university faculty. Incentives work a lot better than regulation and oversight. Align our incentives with theirs, and things will get better.
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    Mr. BARTLETT. Do you think this failure to do this, an exact analogy of the farmer who eats his seed corn? I represent a lot of farmers. I don't think one of them is dumb enough to eat their seed corn. And here we are, as a country, doing exactly the equivalent of that. Are we not?

    Dr. WESSNER. The National Academy of Science is concerned about the funding for a number of disciplines and, notably, engineering. And I couldn't agree with you more that it is important that we maintain and develop the seed corn.

    But I think one of my colleagues also made an important point here, that we don't have a thriving student base in harness. And if we are going to have students interested in aerospace engineering and interested in semi-conductors, then that industry has to be here and to be seen to be here and to be seen to be vibrant. Otherwise, they will opt out in a market fashion.

    The CHAIRMAN. I say to my friend, the Japanese had an experience with this in which, at least I am instructed, came to understand that if they didn't have production near their engineering base, the engineering base would wither. And that is something we have seen in this country by moving production offshore.

    Mr. BARTLETT. Mr. Chairman, our committee oversees most of the government-sponsored basic research in R&D in the country simply because our budget is so big compared to other budgets. So we have a major responsibility to do what we can to turn this around in our country because, in the long-term, we are at serious risk if we cannot invest more.
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    As a major industrial power, we invest a smaller percentage of our gross domestic product (GDP) in basic research and R&D than any other major power. And that is a prescription for disaster, and we have to turn that around. And our committee has a large responsibility for doing that, because we oversee so much of the money.

    Ms. SCHINASI. If I could come back to the Defense budget, the work we have done is trying to get the Defense programs that we fund into production more quickly, in part to answer some of the concerns that you have raised. And the other part of it is to spend, due to technology, work in the tech base where we get a lot more for every dollar we spend, and you can go in and really do some technology work as opposed to how we are looking at it now, which is now mostly in the program itself, when you don't get as much payback for that technology dollar that you spend.

    The CHAIRMAN. The gentleman from Mississippi, Mr. Taylor.

    Mr. TAYLOR. Thank you, Mr. Chairman, and thank you for calling this hearing. I wish, I am sure as you do, it had been better attended.

    I want to thank our witnesses for being here. This is a book written by, I think, America's premier historian—at least in my lifetime—Stephen Ambrose, who wrote it before he was famous. It is called, The Rise to Globalism. He talked about America in 1939 and America in 1989. America in 1939 had virtually no standing Army, had a fairly small Navy, although it was on the uprise. It produced all of its own gasoline, produced all of its electronics and made its own steel. It actually exported fuel.
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    In 1989, it compares to a rather large standing Army, the world's greatest Navy, but a Nation that is dependent on more than half of its fuel coming from overseas, that many of the electronics that make the fighters work come from overseas, many of the components that are needed for every weapon system. He makes a very convincing point that America was more vulnerable in 1989 because of that than in 1939. I happen to agree with that, and I happen to think we are even more vulnerable now because of this same argument.

    Mr. Chairman, I think you are exactly right. I thought the line of questioning by Dr. Snyder was very much on target. A commission is appointed to study this. In administration changes, because of whatever reason, absolutely nothing happened. And I would hope that your job and my job—you obviously are in a better position to influence this as Chairman—that regardless of who the Administration is, no matter who the contributors are to the big political parties, because I do suspect, actually feel pretty strongly that we are being sold out by both the parties, that the big contributors are saying globalization and, no matter who is running the White House, that somehow we end up selling our own folks short.

    I have got to tell you, I went to the New Orleans boat show a couple of years ago, and I happen to be ex-Coast Guardsman and ran search and rescue boats. That is pretty close to my heart. I can't tell you the anger I felt at walking by a booth of a Japanese engine manufacturer where they said, ''We are so good, we are good enough for the United States Coast Guard,'' because we have diesel manufacturers in this country dying on the vine for lack of work.

    The disconnects go on everyday. And you are in a position, since you write the mark, and I am in a position to support that mark, to start saying something about it. And I hope this hearing will remind people, you know, we are at the world's market for defense goods. Why are we worried about the little bit over here or there? We ought to be worried about the market that is right here, to say that those things that this Nation is going to buy with this Nation's tax dollars ought to be bought and made here. That is a pretty simple philosophy.
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    And we don't need these tradeoffs. Certainly, we need allies, and I think the war we are in right now points that out very well. We honor our allies right to say they are going to make their own weapons. They ought to honor ours. I would hope this year's mark, as we proceed in conference, and future years' mark, we will understand that message. In the Coast Guard authorization bill, we have just one small line in there that says the engines for the replacements for the 40—what will be about a 47-foot cutter will be made in America. You just can't believe how people get riled up about that. And again, I would remind them that this is American tax dollars.

    If we can't say that American tax dollars that came from American working people are going to be spent on American working people, what can we say? And so I think you are right on target. I would encourage you to please stick to your guns because both the political parties are going to sell out what you are doing, and I disagree with that. We need to look at for this Nation's industrial base. And at the end of the line, as Stephen Ambrose out, a big Army means nothing if the weapons that that Army is counting on are dependent on foreign parts and for some reason those foreign parts don't show up because someone doesn't agree with our agenda or maybe it couldn't make its way across the seas in time of war.

    This is the most important thing our Nation does, is defend the Nation. And the most important thing we can do is to continue to see that we have the industrial base to defend this Nation, and these folks are exactly right when they say we are developing way too many things that don't get manufactured for the civilian population in this country. There would be no such thing as GPS if it wasn't for the United States Military. I don't think there is an American-made GPS. I don't think you could buy one if you wanted one.
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    Ms. SCHINASI. I don't know.

    Mr. TAYLOR. Go down the list of things. I would encourage every Member and certainly my Chairman to go visit the David Taylor Naval Research right outside of town. They do phenomenal stuff. One of the things they tried to develop was a way of building double-hulled tankers here in this country, realizing that we do have high labor costs, but we do also still produce steel and that there are ways of building a ship to minimize labor, to maximize what you can do with a machine. They came up with a brilliant design 10 years ago. To the best of my knowledge, that design has never built one ship in this country, so there is a disconnect. And I am sure there are dozens of them that the GAO folks can point out.

    And we should not wait and sit back for the lobbyists to ask us to do it because, quite frankly, they are not going to do that. They are looking out for the buck and where that buck comes, and in many instances, it comes from overseas.

    So I want to commend you for what you are doing and want to encourage you to stick to your guns, and I want you to know you can count on my vote to do that and hope we can get a few more people that feel the same way.

    The CHAIRMAN. I appreciate the gentleman's comments and this is, as the gentleman understands, this is a long arduous campaign because there are lots of folks who are compelled to move toward—to follow the money, and making that deal is very much an incentive to move stuff.

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    And I think the last gentleman who spoke, spoke to the inequity of offsets when they are really at their worst, which is, if the prime contractor has to make the deal, is extorted, as Mr. Bartlett says, to make the deal, he has to give away a subcontract. The subcontractor who is making that particular component in the United States may be the very finest in the world. He may have the very best price. He has everything it takes to win in a real competition. He never gets a chance. He gets the phone call at 4 o'clock in the afternoon that we had to go with somebody else. And that is the real pernicious aspect of offsets, the idea that you sell out, in some cases, your own subcontractor base to make that deal. Now, you say, and when you explain to Joe when you see him—four, five weeks later, is he selling some of his equipment? You explain to him, you had to make the deal because the foreign company has its own law in that country that says that if they buy $100 million worth of C–130's from the United States, they have to sell to the United States $150 million worth, maybe, 100 percent offset, maybe 150 percent offset worth of goods.

    That is another reason why the so-called balance of trade with aerospace is totally phony. If the U.S. sells $100 million bucks of C–130's to a foreign country and the foreign country requires $150 million in purchases from that country by the United States, you don't have a trade surplus. You have just entered—you have a trade deficit. And when the real figures come out on this stuff, not those that are trotted out by the Department of Commerce, they are going to be somewhat shocking, I think.

    But I think the gentlelady from California, my seat mate, Ms. Davis.

    Ms. DAVIS OF CALIFORNIA. Thank you, Mr. Chairman.

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    And I think all of us who have been here for this hearing really appreciate the thoughtfulness and the broader picture you have brought to us today. And there are many, many issues that we have raised. And part of it has to do with Department of Defense (DOD) contracting generally and how we track some of those issues.

    I wonder if I could just for a second before we go on, the one analogy that comes to me is Title IX for women's sports. We emphasized that, and we ended up with a wonderful result, but it didn't happen overnight. And that is really what we need to be doing.

    I sit on the Education Committee. We have talked about incentives for women in mathematics and engineering, and nobody buys it. So you know, SBIR grants, I know, as a Representative in California, we worked a lot with SBIR grants, and we really haven't enhanced those. We haven't done what we need to do with those grants.

    So I appreciate the fact that you brought some of these issues forward. Policy is important. Where we put our energies and where we put our emphasis, our revenue, makes a difference. And sometimes, I think we are just afraid. I know we are afraid if government gets involved, we are somehow picking winners and losers. Sometimes, we have to pick winners and losers. So I appreciate those comments.

    Did you want to comment.

    Mr. SORSCHER. Actually, Congressman Marshall and you and some of the others have kind of stimulated my thinking on this a little bit. One of the ways that I see this is that—as you just did—the market will pick winners and losers anyway. And so, for instance, in America, we don't have a home electronics industry. We don't make toasters. We don't do shipbuilding. We don't make textiles. The market could come to that conclusion about aerospace, right?
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    And if we, as a country, decide we have a strong national interest in this, then the only way we can get where we want to go on this road map is by having some kind of policy. The policy has to balance the market forces. Markets are efficient and powerful, but be careful what you ask for if you don't want to hear the answer. And if the answer is, well, no aerospace industry for you—that wasn't the answer we wanted to hear—then we should have had a policy well in advance before we got into the endgame on this.

    And again, I think Dr. Wessner made that point, that we are—and Congressman Marshall, too—that we are getting to the point where we are going to have to take active steps. And again, offsets are not exactly my area of expertise, but I think of it, in a way, national policy is a domestic offset. This is our opportunity to play by the rules that other nations do. And if there is some way we can tie this back, for all the money we spend at all different levels in lots of different industries, to direct investment in the United States, to our own domestic industrial capacity——

    The CHAIRMAN. Would the gentlelady yield for one second on that response? Because that is a real key response.

    You talked about the importance of the market, and the market sometimes tells industries to go away. The interesting thing about offsets is that they often distort the market, because the prime contractor, the Boeing, that has a great subcontractor, who is the very best in the world, may give that guy a call at four o'clock in the afternoon and tell him he is going to go with a third-rate contractor in another country because he has to get the deal. That is one of the keys here.
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    Mr. SORSCHER. I am saying, let us turn that to our advantage, instead of it being our disadvantage. That is what I see—a lot of the policy options that we are talking about here really are ways for us to distort the market to our advantage.

    Ms. DAVIS OF CALIFORNIA. Could you be a little more specific? What tool would you use to do that then? I think it is a layered policy in many ways, but is there something in particular that you are——

    Mr. SORSCHER. I hadn't prepared an answer to that, and so I will speak informally about this. The comparison I use is local economic development, where you are a metropolitan area and you want to attract a factory or in the state of Washington—the state of Washington gave a $3 billion tax incentive to Boeing to build this 77 in Seattle. Well, fine, except the actual performance, in that case, is simply to retain jobs that we already had. And if we had written explicit conditions in there, here is the commitment that the Boeing company will make to local economic development and will involve this level of research and development or this level of capital expenditure or these other activities, whatever the parties agreed to, let us say specifically what it is we have agreed to and then track that, track that progression as you go through it.

    And then, in the spirit of local economic development, if you fail to do that, recapture the investment. There is an explicit tie there. It isn't just, here is your money, go do something fine for America. What exactly is it that you are going to do? Progress that you measure as you go through it and then recapture if you fail. And the focus of all of this is on domestic economic well-being, and it is explicit through the whole thing.
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    Ms. DAVIS OF CALIFORNIA. Did you have a comment to that?

    Dr. WESSNER. You have raised some very profound points here, ma'am. And your point about the market choices, I think it is important to keep in mind that we are not talking about market choices here. We are talking about market results from other countries' industrial policies. If the market were working then the American supplier would have that contract.

    It is even more painful. Sometimes they call them and say, you don't have the contract, but we would like you to train the other company how to make it. It is unbelievably painful to ask workers to do that. You should not be constrained by the popular ideological myth that we don't pick winners and losers.

    What is good about this committee—and I mean this in all seriousness—is that you have been very good at picking winners. You started in 1798. From 1792 to 1798, we didn't do this very much. But since then we have been pretty heavily involved. We picked Eli Whitney to make interchangeable musket parts. Remember that? No one knew how to do that, but he came up, and he invented in 1850—the British were importing what they were calling the American system of manufacture.

    In 1842, a committee like this invested in a guy named Samuel Morse who had this really crazy idea that he could send blips on something called electricity, called the telegraph. You invested in 1903 in a couple of guys in a bicycle shop. I didn't know this until a few months ago, but Jacques Gansler, the former undersecretary of technology at Defense, told me that it was an Army contract for the Wright brothers. In 1919, you invested in a company called the RCA, The Radio Corporation of America.
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    My economics 101 course didn't tell me that. I didn't know there was equity by—and representation by the Navy. In the early 1940's, as you may recall, there was an altercation, and those radios were very helpful. You helped create the computer industry. Your cost-plus contracts for Minute Men and Apollo were instrumental in creating the semi-conductor industry.

    Now, your challenge is that the model has changed a bit, and you can't do it exactly the same way. And the Congresswoman's point about the use of programs like SBIR which align better the market forces, the inventiveness of this incredibly innovative economy and national needs are one of the ways to go, not just in that program but also in the advanced technology program and others.

    The fuel cell that we are so proud of, to the best of my knowledge, those fuel cells have been driven by very small advanced technology program investments, not by the massive funding coming out of the Department of Energy. And it is that ability to capitalize on existing knowledge and technology and create a competitive company. We have to step away from this picking winners and losers. My only response is no, no, we are not trying to pick winners and losers; we are trying to pick winners.

    Ms. DAVIS OF CALIFORNIA. Just quickly, if I may, Mr. Chairman, just following up and perhaps we can clarify later and Mr. Marshall raised the issue as well, the data collection. I think you all said we need to know what is out there.

    And it is important that we collect data, not just from the companies that are earning the largest amount, but also to know what is happening and how much of a turnover there is, how much we are captivating new companies as well. And the data doesn't seem to allow for that kind of collection. And, perhaps, you know, as Mr. Marshall would say, we have data galore, and we are not doing anything with it. It is not telling us anything that we are acting on.
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    And so, perhaps, if you could just clarify. Are there specific policies that either the threshold is too low in terms of collecting data, it should be higher or it should be different? And then, what is the follow-up to that? We may have offsets, but do we know whether or not either companies are acting on them, are people following through on these offsets?

    I think my other questions are just in terms of international forum. Should the North Atlantic Treaty Organization (NATO) be providing a forum in terms of this issue with aerospace? We obviously can't have free trade in this area. Perhaps that is not the right way to look at it. What is that forum?

    And also, Mr. Chairman, I think if there are ways we can push harder on the commission to get that rolling again from a committee standpoint, whether it is a mark or whatever it may be, I think we are all in favor of doing that. Thank you.

    Ms. SCHINASI. I will start on that, and I am mindful that we can delay activity by asking for more data. There is quite a bit of data out there and available. And I think it is the use of it that I would focus on, or the lack of use of it. Let us look at what we already have and use it. We would want to be a little bit targeted in exactly what is it we are trying to figure out and find ways.

    We have actually found the companies to be fairly interested in telling stories about what is happening because, as the Chairman pointed out, the distortion takes some toll on them as well. But I would like to see what we have put to good use already, and the Commerce Department collects it. We are talking about DOD programs, right? There might be some disconnect that we could look at it and see if that could be better used.
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    I think the forum question is open. NATO may be a good place to start. We have a number of other groups in which the defense community works together on a variety of issues. And our point is that we would like to see offsets taken as a part and parcel of those relationships that we have with countries. Everyone else is looking at the industrial implications of their defense spending, and I think there would be a natural base of discussion with some of the groups that are already in existence.

    The CHAIRMAN. I thank the gentlelady.

    Mr. Ryan.

    Mr. RYAN. Best for last, Mr. Chairman, I appreciate it. Just a couple.

    This has been a great hearing as far as I am concerned, and I think it is a shame that there aren't more Members here. As I listened, from the beginning, in some of the issues that we are dealing with not only in this committee this week but with the Manufacturing Extension Program, with the small business appropriations—and yesterday, we were able to pass an amendment that would increase by $79 billion the money for small business administration for loans. And today or tomorrow, before we leave, we are going to try to address the issue with the Manufacturing Extension Program, which I think ties right into this. And one of the amendments is to increase by 10 percent the authorization every year.

    So we are going, from my information, fiscal year 2004 budget for the Manufacturing Budget Extension Program, which was $39 million, and try to get up to $117 million with a 10 percent increase every year. And I think this ties into what we are talking about here. It is not just what we do here in this committee, but it is what we do in other sectors.
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    So I hope everyone today that is touting investment in these programs. I voted for that amendment, and I hope to continue to support the continued appropriations.

    And just as a commentary, I think we have gotten into the mindset—and you have articulated with specific examples with Eli Whitney, with Samuel Morse, the Wright brothers—that the government does good things, and we do pick winners. But I think, over the last few years, we have poisoned the well through the political system by saying the government does nothing right, the Government is the problem. And I think, when we turn around and try to explain to people why these programs are good, why they benefit society, why they benefit manufacturing in our country, we have an uphill battle because the government is involved. And I think the well has been poisoned over the last few years.

    Couple of questions. Earlier on in the hearing, I think it was Dr. Wessner, you mentioned China and the VAT tax, and that is illegal, as far as the WTO is concerned. And so our companies are forced to move into China because we can't export our goods. Is that what you are in essence saying?

    Dr. WESSNER. Yes.

    Mr. RYAN. One of the problems is that China is not playing by the rules, and we are not getting tough with China at all. How do you suggest—how do you approach this? I know you are not at the Department of State. How big a problem is it?

    Dr. WESSNER. My first answer is, for heaven's sake, don't ask the Department of State. Their job is to maintain good relations, and their job is not to focus on the industrial strengths of the United States. And I think that it is important to keep that in mind. There is a WTO action that the WTO has been a very uncertain forum for the United States. And the challenge is that you don't—the companies hesitated—very quickly—hesitated to bring this case to USTR because they didn't want to have the Chinese explaining, okay, fine we will take the equipment from a European or Japanese company and the same with the semi-conductor producers themselves. They were finally forced to do that.
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    But the problem is—and it is a systemic problem because it goes to the heart of some of these things particularly concerning international solutions—it is going to take a long time, and it is a little bit like calling 911 and saying, ''They are trying to murder us.'' well, fine, I think we can see you in four months, like getting a dentist appointment. You take my point that there is too much of a lag in the process.

    And the impact of these measures, to put it a little bluntly, it is like saying to someone they have to cease and desist in robbing banks, and one year, they must stop. I will take that deal. That is fine. That is what the Chinese are doing. They are forcing this massive investment. So we have a disconnect between our ability to respond. And our government has not been active in providing, how would I say this, in being out front and identifying these problems as we were, by the way, in the 1980's when there were—there was a—the Administration, despite rhetoric, took a vigorous approach to defending the U.S. steel industry, which was nice to have for 20 or 30 years, to defending textiles, which was nice to have for 20 and 30 years, to defending the semi-conductor industry, which is nice to have. They took activist measures to keep other countries' policies from distorting markets.

    Mr. RYAN. These goods that are made in China, a lot of them are obviously shipped back here. So what are we doing? I mean, the frustration is obvious here, but we are not getting tough with China. They are violating the World Trade Organization. Our communities are getting devastated. The property tax base to our schools, police and fire—we see the real end result in our communities, and then they turn around and ship these goods back to us. And we are buying them without putting on any taxes. And if you threaten to do anything like that, all of a sudden, you are a Neanderthal.
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    Dr. WESSNER. Exactly. First off, when we are talking about these things, it is very important not to—for anyone to shout free trade or protectionist. Those are ways of stopping conversation about the challenges we face. You have to talk about what is happening and how can we bring China into the world trading system, which is a major accomplishment and very important, because that growth is growth for our companies, and it makes for a better and safer and more stable world. So those are good things.

    At the same time, we have—because China is large, we have to be very active, as you suggest, in making sure that they obey the rules and doing that quickly, not belatedly. China is both a challenge to us and an opportunity. And I think it is very important for us to take it on a case-by-case basis with an activist approach. There is a need to integrate or have some dialogue between the requirements of the defense industrial base, people at the Defense Science Board, for example, and the Trade Policy Committee.

    It is a morbid system, and yet these decisions in trade can have major impacts on your purview. I have worked in the Government. I don't like to say we need to coordinate better. I find that painful, but there comes a point where you need to do that, and you need to understand where the interests are. And I wish I could tell you there is an easy solution, but I can't.

    Mr. RYAN. I appreciate your comment and Mr. Chairman, I really appreciate—Mr. Taylor's comments were great, too, and whatever, count me in.

    And I know you have been great with the Buy American provisions and machine tools and helping me out with titanium, and I appreciate that, but we have a long road to hoe. And this is not a partisan issue. And the Chairman has been great, in many instances, working with us. So count me in. I am here for the long haul. So this is—and I think our job, Mr. Chairman, is to start creating a sense of urgency. Just because C-SPAN isn't here doesn't mean it should be four of us sitting in here when this is probably one of the most pressing issue in the country, given the job situation we have and everything else. I am preaching to the choir, but count me in.
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    The CHAIRMAN. We have had pretty good attendance, but we kind of wore our people out here. We have run this thing since nine o'clock.

    I want to thank our Members who hung in here, too, to the bitter end, to get this thing done. We have a lot of work to do, obviously.

    And this is a complex issue, and it has lots of forces at work, and there is a lot of ready money involved here, and some of it is going the wrong way. It is going to be tough to get this done, but I think this is an important part of security. And if we don't get it done, we are going to see the need for a lot more direct military spending.

    So thank you so much to our panel members for being with us. Let us keep working this thing. And if you could be available to us to talk to our Members, talk to me and our staff and let us try to keep working it.

    Dr. Wessner, you recommended getting industry in here, and we are going to do that. And I think most of our leadership and our good folks who have the good of the country in mind, and I think sometimes they are torn between that and the necessity of making the deal. And maybe, we should—there are things we can do that will get us all on common ground and pulling in the same direction. So let us keep working it. Thank you very much.

    [Whereupon, at 11:50 a.m., the committee was adjourned.]