Prepared Statement by Arthur Downey Before the House International Relations Committee Hearing: U.S. Policy on Iran

November 9, 1995

I am Arthur T. Downey, Vice President of Baker Hughes Incorporated, a Fortune 200 company headquartered in Texas, but I appear today on behalf of the National Foreign Trade Council. The National Foreign Trade Council is an association of more than 500 US companies engaged in international trade and investment. The Petroleum Equipment Suppliers Association also endorses this statement.

We appreciate the invitation to comment on HR 2458, the Iran Foreign Oil Sanctions Act of 1995, introduced by the Chairman on October 12.

We applaud the fact that this bill exposes the fundamental problem with the current broad US unilateral sanctions against Iran: they, along with virtually all unilateral sanctions, are doomed to failure unless there is broad multilateral support; ultimately, the long-term burden will be carried by US employers whose international competitiveness will be harmed for no gain. The CIA, in testimony before the other body last month, concluded that "the strong and sustained support of other countries is essential for sanctions to succeed". The CIA could locate only Ivory. Coast, El Salvador and Israel, among the world's 182 countries, who support the current broad embargo against Iran. Thus, by anyone's arithmetic, the "strong support" of other countries for broad trade sanctions is clearly lacking.Our allies, however, seem to agree that Iran's behavior has been unacceptable, and they have been willing to cooperate with the US in denying to Iran sensitive goods and technologies. Aside from that level of cooperation, however, most of our friends and allies have argued steadfastly that dialog with Iran is the right approach-- judicious use of a carrot and less use of a broad indiscriminate stick as represented by the current US sanctions. This suggests that it might well be appropriate now for the US to try a more positive diplomatic approach in cooperation with our friends and allies. For example, why not develop with them a road map by which positive actions by Iran will bring positive support (perhaps financial) from the major industrial nations?

While we congratulate the Chair for identifying this essential problem, we must part company with the remedy chosen in HR 2458--to impose a secondary boycott on foreign companies supplying goods and technology to Iran's petroleum sector. We believe that this approach is wrong for several reasons:

1 ) A secondary boycott, as proposed by HR 2458, is a national admission of a bankrupt foreign policy with respect to Iran. Rather than persuade and lead, this approach reflects the model of the muscle man, the bully--I'll force you to do it my way because I have the [economic] power to coerce you. That is an unworthy course for a Great Power.

2) Such a unilateral trade-disrupting boycott would run exactly contrary to the long-term direction of the world's trading system, which, with very active US leadership over many years, has become vastly more open and welcoming to US interests. In addition to a serious policy about-face, this secondary boycott--however limited it may appear--would violate US obligations under GATT, WTO and NAFTA. Bluntly, it's illegal.

3) Even in the short run, there is a high likelihood that foreign governments would consider retaliatory actions against US subsidiaries abroad or against other US international commercial interests. Such retaliation need not be confined to the petroleum sectors at all and could well range into non-industrial sectors. In the longer run, the welcome mat for US companies operating abroad would be pulled in, and the international competitiveness of US companies would be seriously harmed. We believe that Under Secretary Tarnoff was correct in concluding last month that "such interference in the international marketplace would backfire, hurting American businesses and harming the American economy".

4) It is likely that many foreign governments would feel their sovereignty challenged, and would also feel a need to take active measures to protect their companies from US Government policies. (This is what happened during the 1982 Siberian pipeline debacle.) The resulting serious political friction between the US and its allies would at best substantially reduce their interest in cooperating with the US with respect to Iran. Counterproductive is exactly the correct word to describe the resulting situation where Iran would look with pleasure at the US becoming the target of "friendly fire" from our own allies and friends because of the US challenge.

5) Less than twenty years ago, Congress adopted two separate pieces of legislation based on the US abhorrence of the international secondary boycott. US companies-and only US companies--still bear the compliance burden of those anti-boycott laws and regulations. Intellectual honesty makes it "difficult to square"-as Under Secretary Tamoff noted--that historic and forcefully held position with HR 2458's imposition of a secondary boycott. Of course, consistency could also be achieved if supporters of the bill were to propose the repeal of those two US anti-boycott laws.

We believe that the Committee should give very serious consideration to goals, methods and consequences-which so far have not been fully articulated.

The Administration seems to have shifted its goal earlier this year from the defensive one of preventing Iran from receiving goods and technology that might assist terrorism and weapons of mass destruction acquisition to the new aggressive goal of putting pressure on Iran by denying it access to international finance and government aid. (The Administration has not pointed to an external event that caused this change in goal.) In contrast to the Administration's new goal, the goal of HR 2458 seems to be to deny petroleum equipment to Iran, which denial is supposed to cause less money to be available to support terrorism or weapons--although the Chair's introductory remarks clearly identified an additional and punitive goal: Congress should make foreign companies "pay a price" for participating in an investment conference this month in Iran. Thus, there is a need for more clarity on the exact goal.

Assuming that HR 2458 is totally successful in getting most of the world's suppliers of petroleum-related equipment to stop sales to Iran immediately--a totally improbable assumption--what would be the impact on Iranian oil and gas exports? Are you certain that Iran's own locally-produced equipment is inadequate to maintain oil and gas exports; or that Iran is so reliant on "Western"equipment that it could no longer maintain petroleum export levels sufficient to generate adequate hard currency? If the supporters of this measure have developed the answers to these kinds of basic questions, we encourage the Committee to share this information with the interested public.

In assessing how realistic is the prospect of success, it is necessary to include an assessment of how other governments will accept this US action.

One wonders whether the Committee has received information from foreign governments on their likely response to such legislation? Is it credible that those governments will stand idly by while their companies are given the Hobson's Choice of either being frozen out of the Iranian or the US markets? What would the US do if the tables were turned, and a "friendly" foreign government forced US companies into an analogous choice?

It is also essential to assess the costs of this boycott to US companies, employees, communities and the economy. Would it not make sense for the International Trade Commission, or the General Accounting Office, to prepare a serious calculation of these costs? Just as Congress is desirous of ensuring a proper cost/benefit analysis for domestic regulation, so also is it necessary to acquire an understanding of the costs of this international regulatory measure-before it is adopted. Is it appropriate for those US companies whose international competitiveness is harmed by this measure to be compensated by the US Government for their losses? If not, this measure becomes equivalent to an unfunded mandate imposed on US employers in the furtherance of a national interest.

In short, we encourage the Chair to explore the consequences of HR 2458 with great care and realism, to reduce the impact of the unintended consequences which will inevitably follow.

As noted in the beginning of these comments, we believe the Chair is quite correct to focus attention on the multilateral issue, without which sanctions are worse than useless. But, rather than deploy an economic blunderbuss against our friends and allies abroad, is it not better to consider why US "leadership" on the Iran issue has been followed only by Ivory Coast and El Salvador?. Why does the rest of the world disagree with the US policy of total economic embargo? Is it really likely that the Canadian or British Governments, for example, are so cravenly dominated by their industry's desperate need to maintain commercial relations with Iran that they have sublimated their principles and responsibilities, especially with respect to international security? We doubt that.

Is it not better to terminate the admittedly ineffective unilateral US embargo? Why not expand the multilateral protective measures in which the US successfully has been in the lead--in stopping the flow of arms and dual-use products, in the G-7 agreement to refuse nuclear cooperation, etc.--and then, step-by-step, advance multilaterally in discrete areas such as eliminating official credits for Iran. Other governments might well respond positively to multilaterally-agreed steps which are focused and which can have an impact on Iran without unnecessarily eliminating innocent international commerce. Iran's behavior might well change if Iran observed other nations in concerted international action, rather than the international friction between the US and other governments that would inevitably result from HR 2458-and which would play into Iran's hands.

In summary, we believe that the supporters of HR 2458 are to be congratulated for highlighting the essential element of multilateral concerted action, rather than the totally ineffective and costly unilateral US sanctions currently in place. However, we strongly believe that the proposed secondary boycott is exactly the wrong way to achieve international cooperation; it will be significantly more costly to US international competitiveness (and therefore to US jobs), while at the same time it will be counterproductive in terms of altering Iran's behavior.