Mr. Chairman and Members of the Committee, I am William Reinsch, president of the National Foreign Trade Council, an association of more than 500 U.S. companies engaged in international trade and investment. I am also appearing today as Vice Chairman of USA*Engage, a broad-based coalition of over 670 American companies and trade and agricultural organizations that support sanctions reform. My comments today will focus primarily on the Iran-Libya Sanctions Act (ILSA), but will also address the U.S. Executive Orders that impose unilateral sanctions against Iran and Libya.
We support ILSA’s goals -- "preventing proliferation of weapons of mass destruction and the means to deliver them and acts of international terrorism" -- and we support full compliance by Libya with U.N. Security Council resolutions regarding the destruction of PanAm flight 103; however, we believe ILSA has not been effective in achieving those goals but has, in fact, been counterproductive. Simply maintaining it in place will not increase its prospects of success. Instead, we urge Congress to work with the Administration as it develops its policy toward Iran and Libya. We also urge Congress to continue its review of the utility of using unilateral sanctions as an instrument of foreign policy.
The bill that you have before you today, S. 994, would extend ILSA for five more years. We are opposed to renewing these sanctions because they have been ineffective, costly to American economic interests, and posed significant diplomatic complications for the United States. The Bush Administration has asked for a two-year extension of ILSA to provide time for them to conduct a thorough review of sanctions policy broadly and specific sanctions laws, such as ILSA. Although we certainly prefer that ILSA not be renewed for any length of time, we believe that the Administration’s request is preferable to a five-year extension.
The theory of ILSA in 1996 was that the U.S., acting unilaterally, could deny Iran the capital it needed to develop its most lucrative exports, oil and gas. That, in turn, was expected to reduce resources available for development of weapons of mass destruction and support for terrorism. In the case of Libya, the objective was primarily to gain leverage for compliance with the U.N. resolutions on the terrorist attack on PanAm flight 103. Significantly, ILSA was intended to block foreign companies from making investments that the Executive Orders of 1995 prevented U.S. companies from making – in other words to make sanctions against Iran and Libya equitable with respect to investment.
Now, five years later, advocates of renewal argue that ILSA should be extended because it has succeeded – that is, because it has successfully deterred new foreign investment in Iran’s energy sector. Any objective review of the record will conclude that ILSA has failed in its key objective of stopping major foreign investments in oil and gas development.
Ironically, advocates of renewal also argue that this secondary boycott must be renewed because, in effect, ILSA has failed -- Iran is still able to finance development of weapons of mass destruction and terrorism. Either way, ILSA has been entirely ineffective and counterproductive for U.S. interests.
That latter point is crucial, because we would hope the Committee would view ILSA in light of our national interests. If it were achieving our policy goals, we would be here testifying in support of it. However, it is not advancing its stated purposes; it is creating collateral diplomatic damage to U.S. interests for essentially symbolic purposes. It has created precisely the situation it sought to avoid – Iran and Libya are increasingly able to develop their oil and gas reserves through foreign investments from which American firms are excluded. In short, it does not meet a national interest test.
Having ILSA on the books strains U.S. diplomatic relations with its allies because of their resentment of its secondary boycott. Further, if ILSA waivers were not granted, the economic costs for U.S. firms would increase because of retaliation by other countries. Finally, ILSA’s attempt to target the oil and gas production of two key energy-producing countries runs counter to U.S. long-term energy security requirements. U.S. and worldwide demand for oil and gas is rising rapidly. The world has entered a dangerous period of energy scarcity.
Under these circumstances, it is shortsighted to try to diminish Iranian and Libyan energy production capabilities. In fact, a recent study shows that if we were actually successful in reducing Iran and Libya’s oil production, it would have the perverse consequence of raising world oil prices, increasing revenues to the sanctioned countries and costing U.S. consumers over $150 billion.
Of course, it is the world price of oil and these countries’ ability to produce it that determines Iran and Libya’s income from oil and gas production, not U.S. sanctions. It is that rising price level that is encouraging exactly the investment ILSA sought to block. There is no evidence that ILSA can deter foreign investment in Iran or Libya’s energy sector. On the contrary, both Iran and Libya are receiving significant capital investment in their oil and gas sectors.
Stark evidence of this is now coming to light. Last March, the Congressional Research Service reported that $10.5 billion of foreign investment has taken place in Iran’s oil and gas sector since 1997. Iran expects $1.5 billion to be invested in its petrochemical sector this year. These investors are from France, Canada, Italy, the Netherlands, the UK, Japan and Norway -- companies from our closest allies and most important trading partners, which have not joined our sanctions nor been deterred by the threat of ILSA.
On June 21 the Financial Times reported that the chairman of British Petroleum announced plans to start "some sizeable" business in Iran, after delaying in the past in order not to "unnecessarily upset our U.S. interests." That same day, the Wall Street Journal reported that four more large European oil companies were planning major investments in Iran: a $1 billion deal by Italy’s EniSpa, and $3 billion from various projects by Royal Dutch/Shell, France’s TotalFinaElf SA and Spain’s Cepsa.
Exclusion of U.S. firms from Iran and ineffective sanctions against foreign firms will not determine how Iran uses its oil revenues. The desire of either Iran or Libya to support terrorism or pursue development of weapons of mass destruction is a national interest calculation, not a function of their oil and gas revenues. These issues are important, but they require a more sophisticated and targeted approach than ILSA, which is a very blunt instrument.
Mr. Chairman, unilateral sanctions have not only failed to achieve their stated purposes, but we believe they cannot achieve them. To prolong their life may provide the illusion of taking action, but nothing more. Equally important, if the benefits are ephemeral, the costs are real. Unilateral sanctions are doing significant damage to U.S. commercial prospects at a time of economic downturn and energy shortage. If ILSA were to make Iranian and Libyan oil production less efficient and thereby reduce their contribution to world oil supplies, oil prices would increase. To the extent that U.S. exports to these countries are prohibited, the American workers and farmers are damaged, and U.S. consumer product manufacturers are seriously compromised in their future competitiveness in those markets. Foreign affiliates of U.S. companies, where they need parent company approval, are also excluded from these countries; yet U.S. foreign affiliate sales are three times as large as total U.S. exports ($2.4 trillion in 1998).
ILSA has not only failed to stop foreign investment in Iran’s energy development. It has also been a major irritant in our relations with countries whose cooperation we need to conduct an effective policy toward Iran and Libya. We know for a fact that foreign investment will continue to flow into Iran and Libya’s energy sectors, especially under current world energy supply conditions. The question is whether we continue our futile effort to prevent them.
Some argue that ILSA has not worked because it has not been tried. In fact, ILSA could not have worked. ILSA forces the President either to implement sanctions that he knows will be ineffective and counterproductive or waive the law. That is what happened the one time the President was called upon to use ILSA. In 1998, after three non-U.S. oil companies had been awarded a multi-billion dollar contract to develop Iran’s South Pars oil field, the Clinton Administration waived ILSA sanctions on Russian, French, and Malaysian companies. It took this action, among other reasons, to prevent retaliation against U.S. firms and to avoid provoking a trade war with the European Union, which regards secondary boycotts, such as ILSA, as illegal under the World Trade Organization. It is also ironic that U.S. law prohibits American companies from cooperating with secondary boycotts; yet in the case of ILSA we are imposing one and insisting that are allies comply with it, which can only undercut our efforts to weaken the Arab boycott of Israel.
Implementation of ILSA today, just as the U.S. is preparing for a new round of global trade talks in which EU cooperation is crucial, would involve this country in another bitter trade dispute with the EU. It is clear that implementation of ILSA, indeed the reauthorization of ILSA, puts us at serious odds with our major allies and threatens cooperative action on a range of issues, including policy toward Iran and Libya. Nor does the inclusion of presidential waiver authority mitigate the negative impact of a reauthorized ILSA. If the Act is waived, it becomes meaningless. If it is not waived, the negative effects cited in this testimony will be exacerbated.
There is no evidence that ILSA can deter foreign investment in Iran or Libya’s energy sector. Furthermore the rising price of oil insures that Iran’s oil revenues will increase, U.S. sanctions notwithstanding. The only "success" of our sanctions policy toward Iran and Libya has been ceding those markets to our foreign competitors. Let me cite a few examples:
Mr. Chairman, the Bush Administration is currently conducting a review of all U.S. unilateral sanctions policies, including Iran and Libya. Iran has just re-elected its reformist president by a landslide majority. Most of the population has been born since the 1979 revolution. The ultimate direction of the country’s policies is very much in doubt. It would be unwise in the extreme for Congress to continue sanctions or impose new ones on the heels of President Khatemi’s victory and before the new U.S. Administration has developed its policy.
In the case of Libya, the end of the Lockerbie trial offers an opportunity to bring an end to a long period of confrontation in our relations. While Libya must still fully comply with U.N. resolutions requiring appropriate compensation to the victims’ families and acceptance of responsibility, the U.S. should encourage positive trends in Libyan behavior. Passing a new version of ILSA will have no impact on European and Asian investment in Libya but would signal that the U.S. does not acknowledge the progress that has been made.
We conclude, therefore, that U.S. sanctions on Iran have not had their intended effect of changing Iranian behavior, that ILSA in particular has not been effective in isolating Iran or Libya, but that it has been very effective in isolating the United States from these two countries and imposing significant economic costs on us. This is the opposite of the "smart sanctions" policy that the Secretary of State is trying to develop. The consequences in the case of Iran are especially far reaching given the geographic and strategic importance of the country.
We are convinced that expanded private contact with Iran, including business contact, will reinforce positive trends in that country in the long term. But let me be very clear. A decision by the Congress not to renew ILSA is not a concession to Iran or to Libya. Renewing ILSA sends a decidedly negative message that ignores changes that have taken place since 1996 and sends a powerful message to our European allies that we are continuing a failed unilateral policy. Allowing ILSA to expire would clear the way for a new policy based on current realities and better designed to U.S. interests and carefully considered policy objectives. Acceding to the Administration’s request for a two-year extension will at least permit a sober reconsideration of policies that will serve the U.S. national interest. We believe the choice is clear.
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