TESTIMONY OF AMBASSADOR DAVID L. AARON
UNDERSECRETARY OF COMMERCE FOR INTERNATIONAL TRADE
JUNE 18,1998
HOUSE COMMITTEE ON INTERNATIONAL RELATIONS
SUBCOMMITTEE ON ASIA AND THE PACIFIC
HEARING ON INDIA-PAKISTAN NUCLEAR PROLIFERATION
Mr. Chairman, Members of the Subcommittee on Asia and the Pacific,
thank you for inviting me to comment on the implementation of
sanctions announced in response to the nuclear tests of India and
Pakistan and the implications for U.S. business. I know that the
specific details of implementation are of great interest to you and to
the business community. My remarks are necessarily preliminary, given
that we are only now completing preparations to announce how the
sanctions will be implemented.
THE SANCTIONS
The President announced sanctions on India on May 13 in response to
India's nuclear tests on May 11 and 13. He subsequently announced
sanctions on Pakistan on May 30 in response to Pakistan's nuclear
tests of May 28 and 30. The President was required to impose sanctions
under the Section 102 of the Arms Export Control Act, which is also
known as the Glenn Amendment. Under the law, sanctions will remain in
effect until the Congress passes legislation removing them.
The sanctions include:
-- Termination of assistance under the Foreign Assistance Act of 1961,
except for humanitarian assistance or food or other agricultural
commodities.
-- Termination of sales of defense articles, defense services, or
design and construction services under the Arms Export Control Act,
and revocation of licenses for the commercial sale of any items on the
U.S. Munitions List.
-- Termination, of all foreign military financing under the Arms
Export Control Act.
-- Denial of any credit, credit guarantees or other financial
assistance by any department agency, or instrumentality of the United
States Government.
-- Opposition to the extension of any loan for financial or technical
assistance by any international financial institution.
-- Prohibiting U.S. banks from making any loan or providing any credit
to the government of India and Pakistan, except for the purpose of
purchasing food or other agricultural commodities.
-- Prohibiting export of specific goods and technology subject to
export licensing by the Commerce Department.
-- Pursuant to the Secretary of States determination under section
2(b)(4) of the Export-Import Act of 1945, the Board of Directors of
the Export Import Bank may not give approval to guarantee, insure, or
extend credit, or participate in the extension of credit in support of
U.S. exports to India and Pakistan.
IMPLEMENTATION OF THE SANCTIONS
This is the first time that the sanctions of the Glenn Amendment have
been imposed. Agencies have been working quickly to interpret the law
and develop implementation policies. Our approach has been to
implement sanctions in a way that is most likely to influence the
affected governments, while minimizing to the extent possible the
impact on U.S. business and labor, and the populations of these
countries.
The sanctions do not preclude all U.S. trade and commerce with India
and Pakistan. However, they will preclude the export of selected items
and the provision by the U.S. Government of financial assistance to
U.S. companies for exports and projects in India and Pakistan. This
financial assistance has been important to U.S. companies. For
example, it is important in the major infrastructure projects, which
have been very visible products of the new commercial relationships
that we have been building in recent years. Until implementation of
the sanctions is well underway, it will be difficult to determine the
precise impact on U.S. business.
To give you an idea of the impact of sanctions on our trade and
commerce with India and Pakistan, I will outline briefly what the
Commerce Department's Bureau of Export Administration is doing to
implement the sanction prohibiting the export of dual use goods and
technology subject to export licensing. I will then discuss our
present trade and commerce with India and Pakistan and highlight the
activities and programs of USG agencies that will be affected by the
sanctions.
EXPORT LICENSING OF DUAL USE EQUIPMENT AND TECHNOLOGY
The Department's Bureau of Export Administration (BXA) will deny
exports of dual-use items controlled for nuclear or missile
nonproliferation reasons under the Export Administration Act to all
end users in India and Pakistan -- with an exception for commercial
aircraft safety and maintenance equipment, and for computers above
2,000 MTOPS which will be controlled under the Export Administration
Act for national security purposes. These measures are in response to
the requirements of the Glenn Amendment.
On a discretionary basis under the Export Administration Act, the
United States will control all exports with a presumption of denial,
including those not presently requiring a license, to a published list
of Indian and Pakistani government entities involved in nuclear and
missile programs. The United states will also publish a list of Indian
and Pakistani government entities involved in military activities and
will require a license, with a presumption of denial, for all items
controlled by the Export Administration Regulations with the exception
of common use item (those under category EAR99).
The United States government will also identify private entities
supporting India's and Pakistan's nuclear or missile programs under
the Enhanced Proliferation Control Initiative (EPCI). This will result
in a broader licensing requirement for those entities with a
case-by-case review of such licenses and a presumption of denial for
transactions that would support prohibited activities.
Favorable consideration will continue to be given on a case-by-case
basis to other dual use exports, U.S. business relationships, and
other arrangements providing benefit to the U.S. with private and
public Indian and Pakistani entities. License Exceptions will remain
intact.
U.S.-INDIA TRADE AND COMMERCE
Prior to imposition of sanctions, bilateral trade and investment ties
had been increasing as a result of Indian liberalization. In fact, the
United States is India's largest trade and investment partner. In
1997, U.S. exports to India were valued at $3.6 billion, while U.S.
imports from India totaled $7.3 billion. Our principal exports to
India included aircraft and aircraft parts, computers and components,
and chemicals. Our principal imports from India included textiles and
apparel, diamonds, and jewelry. U.S. exports to India in 1997
increased nine percent over 1996, and increased 81 percent between 199
1, when India began its economic liberalization program, and last
year. As of 1996, total actual U.S. investment in India was $1.1
billion. As of 1996, the United States accounted for 17 percent of
actual foreign direct investment in India, and 27 percent of FDI
approvals ($7.2 billion of $28.9 billion).
The ability of U.S. companies to respond to new opportunities in India
has been helped by the Commerce Department's trade promotion and
advocacy activities. It remains to be seen how effective the
International Trade Administration will be in the climate of
sanctions. U.S. companies' activities in India and Pakistan also have
benefited from financial support of the Export-Import Bank, the
Overseas Private Investment Corporation (OPIC), the Trade and
Development Agency (TDA). Let me give you an idea of what this amounts
to:
-- $10 billion in projects on the Commerce Department's advocacy
agenda for India that were conceived with assistance from Eximbank,
OPIC, or TDA in mind.
-- Eximbank believes sanctions will immediately affect approximately
$500 million in U.S. exports to India in pending commitments and $3.5
billion in projected U.S. exports based on indications of interest.
Total Eximbank exposure on India is $1.5 billion.
-- When sanctions were imposed on May 13, OPIC's outstanding financing
and political risk insurance commitments in India exceeded $1 billion.
-- The Trade and Development Agency (TDA) had provided about $1
million in support of feasibility studies for projects in India when
sanctions were imposed on May 13, precluding new assistance.
U.S. companies' ability to pursue projects in India will be diminished
without USG financial support. Certainly, suppliers and investors in
other countries whose governments have not imposed comparable
sanctions will benefit. The relative insularity of the Indian economy,
combined with the United States being the only country to impose such
extensive sanctions, make it doubtful that the sanctions will cripple
India's economy and economic development. Nevertheless, these
sanctions will have an effect, especially if we are able to sustain a
coalition opposing new financing by the international financial
institutions.
Already, foreign institutional investors are reducing their exposures
in the Indian market because of economic uncertainty following the
imposition of sanctions and the June I announcement of India's new
budget, which provided little encouragement.
U.S.-PAKISTAN TRADE AND COMMERCE
The sanctions on Pakistan are the same as those imposed on India.
However, the impact on Pakistan has the potential to be much more
severe because of Pakistan's daunting economic problems.
Last year our exports to Pakistan were $1.23 billion, and our imports
$1.44 billion. We are the second largest supplier to Pakistan's market
(after Japan), and the largest destination for that country's exports.
About a third of our exports are cereals, but machinery, aircraft and
fertilizers also are top items. On our import side, the trade
overwhelmingly is in textiles and apparel items.
Our commercial relations with Pakistan were already constrained by
earlier proliferation-related sanctions in the early 1990s, which shut
down OPIC and TDA activities. Eximbank also was largely absent for a
recent period, although for commercial reasons.
-- Eximbank currently has a total exposure in Pakistan of $429
million. Eximbank only re-entered the market effective February 19,
1998, after an absence dating from the fall of 1996. Since reentering
the market, Exim had issued only one letter of interest, valued at
$1.1 million.
-- TDA had just re-entered the market last fall after a long,
sanction-related absence. It was beginning to evaluate new projects,
but had nothing ongoing at the time of the President's recent
determination.
-- OPIC reentered Pakistan earlier this year. Before sanctions, it had
been in recent discussion with American companies for projects with an
aggregate value of $2 billion, representing nearly $500 million of
potential OPIC support. OPIC currently supports existing American
investment in Pakistan with $65 million in political risk insurance.
The new sanctions imposed on Pakistan will add to other daunting
challenges U.S. companies face in this market. We cannot make the
assumption that the Pakistani economy is strong enough to withstand a
period of additional economic shocks. Pakistan has relied heavily on
assistance from the international financial institutions and bilateral
loans and assistance. Since its nuclear tests and the announcement of
sanctions, Pakistan's government has declared an emergency, under
which it has controlled foreign exchange transactions.
(end text)
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