1998 Congressional Hearings
Special Weapons
Nuclear, Chemical, Biological and Missile

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)