policy_sanctions1a



	Heritage Foundation Backgrounder No. 1126 25 June 1997 A User’s Guide to Economic Sanctions Robert P. O'Quinn, Policy Analyst Introduction The annual debate over renewal of normal trading status for the People's Republic of China (PRC) has raised an enormous debate in this country over the effectiveness of economic sanctions, a debate that comes on the heels of an explosive growth in the use of economic sanctions. During his first term, President Bill Clinton imposed new unilateral economic sanctions on 35 countries that make up 42 percent of the world's population and consume 19 percent of its exports. This trend raises important questions for U.S. policymakers: (1) Are economic sanctions an effective way to achieve U.S. foreign policy objectives? (2) What do economic sanctions cost the U.S. economy, and how do they harm American workers? (3) Do unilateral state and local economic sanctions undermine the coherence of U.S. foreign policy, reduce policy flexibility, and violate the U.S. Constitution? (4) What strategic doctrine should govern the use of economic sanctions to ensure that they actually advance U.S. interests? A Poor Track Record Historically, economic sanctions have a poor track record. Between 1914 and 1990, various countries imposed economic sanctions in 116 cases. They failed to achieve their stated objectives in 66 percent of those cases and were at best only partially successful in most of the rest.1 Since 1973, the success ratio for economic sanctions has fallen precipitously to 24 percent for all cases.2 Although proponents often cite South Africa as an example of the successful application of economic sanctions, unique factors existed in that case that are unlikely to be found in other countries. Most important was the fact that the sanctions were imposed multilaterally by the international community, not solely by the United States. Even so, Pretoria succumbed to the pressure only after private business executives—fearing the Free South Africa Movement's disinvestment campaign would cause the price of company stocks to fall—went beyond government-mandated sanctions on new loans to and investments in South Africa, calling in current loans and liquidating existing investments in that country. The Downside of Unilateral Economic Sanctions Although multilateral sanctions might succeed under the appropriate circumstances, unilateral sanctions will fail more often than not. By itself, a unilateral trade or investment embargo may not be enough to persuade a country's government to change its objectionable policies. In today's global economy, foreign rivals quickly and easily replace American companies to meet the needs of a target country's market. In addition, unilateral economic sanctions applied against friendly countries because of single-issue disputes (for example, drug trafficking) may reduce cooperation on other more important issues and damage broader U.S. interests. Unilateral economic sanctions cost the U.S. economy dearly. In 1995, economic sanctions reduced U.S. exports to 26 target countries by as much as $15 billion to $19 billion, eliminated more than 200,000 jobs in relatively high-wage export sectors, and caused American workers to lose nearly $1 billion in wages.3 Moreover, the effects—through lost follow-on sales and services, diminished foreign confidence in the reliability of American companies as suppliers, and reduced foreign direct investment in the United States—can reverberate through the U.S. economy long after sanctions have been removed. Finally, economic sanctions imposed by individual states or localities are disruptive and tread on tenuous constitutional ground. They can interfere with the making of foreign policy by preventing the United States from speaking with one voice on international affairs. They also can undermine the President's ability to adapt U.S. foreign policy to changing circumstances. Moreover, unilateral state and local economic sanctions appear to violate both the Commerce Clause and the Supremacy Clause of the U.S. Constitution. A New Strategic Doctrine on Economic Sanctions Economic sanctions are important strategic weapons in the policy arsenal. Like other strategic weapons, however, they must be used with extreme care lest American companies and their workers, suppliers, and shareholders become friendly-fire casualties. Because economic sanctions are only a step below a blockade or other military action, any decision to apply them should receive the same deliberate, sober consideration that is given to a decision that commits U.S. troops to battle. The widespread misapplication of unilateral economic sanctions by Congress and the President since the end of the Cold War suggests that such careful deliberation is not occurring. The United States needs a new strategic doctrine governing the use of economic sanctions to achieve U.S. foreign policy objectives. To fashion this new doctrine, Congress should: 1. Establish guidelines for implementing economic sanctions. Before Congress and the President consider imposing economic sanctions, the following remedies should have been exhausted in the order listed: * Private persuasion. * Public appeals. * Consultation with allies on multilateral sanctions. * Non-economic sanctions. Economic sanctions to achieve clearly defined national security objectives should be treated differently from sanctions that are intended to serve a moral or economic purpose. In national security cases, they may be justified even if their probability of success is low. For non-national security purposes, economic sanctions should be applied only if there is a high probability of success. To determine the likelihood that a proposed sanction aimed at other foreign policy objectives will be successful, Congress and the President should ask four questions: * Is the proposed sanction's objective limited enough to be achievable? * Does the United States have a monopoly advantage that it can exploit against the target and, if not, will other countries cooperate with the United States to impose the sanction? * Is the sanction's likely impact so large that it may persuade the target to change its policies? * Is the sanction's probable impact on the U.S. economy small enough not to cause significant harm to American companies and their workers, suppliers, and shareholders, as well as American consumers? Congress and the President should proceed with a proposed economic sanction only if all of the above questions can be answered affirmatively. If they cannot, the sanction—even though it may please domestic constituency groups—has no realistic hope of achieving its objective and should be rejected. 2. Limit the application of the International Emergency Economic Powers Act (IEEPA) to clear-cut national security issues. Enacted in 1977, the IEEPA grants the President broad powers to regulate or prohibit trade, investment, and financial transactions with foreigners for purposes of dealing with a national security, foreign policy, or international economic emergency. These sweeping powers should be used only to counter real threats to national security interests. Congress should tighten the IEEPA to exclude so-called foreign policy and economy emergencies. 3. Mandate that the President consult with Congress within a set period following the imposition of economic sanctions by executive order. Just as the War Powers Resolution requires the President to receive congressional approval for any extended military engagement, Congress should approve, directly and expressly, any extended use of economic sanctions. 4. Direct the Secretary of Commerce to identify all American companies (including suppliers, shareholders, and employees) that have suffered material economic loss because of U.S. economic sanctions. 5. Direct the Council of Economic Advisers, in the Economic Report of the President, to publish an annual study of how much sanctions cost the U.S. economy. 6. Forbid state and local governments to impose economic sanctions when they interfere with national policy and security interests. What Are Economic Sanctions? U.S. policymakers and officials utilize a variety of tools to influence the policies of other governments. These tools, in order of increasing severity, are diplomatic persuasion, public appeals, non-economic sanctions, economic sanctions, and military action. They may be applied either unilaterally or in conjunction with other countries through the United Nations (U.N.) or other international organizations. Economic Sanctions. An economic sanction is any restriction imposed by one country (the sender) on international commerce with another country (the target) in order to persuade the target country's government to change a policy. Economic sanctions include: * Limiting exports to the target country; * Limiting imports from the target country; * Restricting investment in the target country; * Prohibiting private financial transactions between a sender country's citizens and the target country's citizens or government; and * Restricting the ability of a sender country's government programs, such as the U.S. Export-Import Bank (Ex-Im Bank) and the Overseas Private Investment Corporation (OPIC), to assist trade and investment with the target country. Non-Economic Sanctions. A sender country also may apply non-economic sanctions against a target country to persuade its government to change policy. In contrast to economic sanctions, which are intended to penalize a target country financially, non-economic sanctions are aimed at denying legitimacy or prestige. Although the following list is not exhaustive, non-economic sanctions include: * Canceling ministerial and summit meetings with a target country; * Denying a target country's government officials visas to enter the sender country; * Withdrawing a sender country's ambassador or otherwise downgrading diplomatic and military contacts with a target country; * Blocking a target country from joining international organizations; * Opposing a target country's bid to host highly visible international events, such as the Olympics; * Withholding foreign aid; and * Instructing a sender country's directors to vote against new loans to a target country at the World Bank or other international financial institutions. Policy Objectives of Economic Sanctions Sender countries delineate three general categories of policy objectives for which economic sanctions may be applied: national security objectives, other foreign policy objectives, and international trade and investment dispute resolution. National Security Objectives. Economic sanctions may be employed to deter military aggression or to force an aggressor to withdraw its armed forces from a disputed territory. In such circumstances, the U.N. Security Council may encourage countries to apply economic sanctions. For example, the United States participated in multilateral sanctions against Iraq following its invasion of Kuwait, and against parts of the former Yugoslavia following the outbreak of war there. Economic sanctions may be used to curb weapons proliferation. The United States participates in a number of international regimes to control the export of militarily sensitive goods and technology, including the Wassenaar Arrangement,4 the Missile Technology Control Regime, and the Australia Group (chemical and biological weapons proliferation control).5 Sanctions against countries that seek to acquire weapons in violation of international regimes controlling the proliferation of nuclear, chemical, and biological weapons and missile technology are far more likely to be effective if applied multilaterally and targeted against the offending country's leaders and armed forces. Economic sanctions may be used to punish a country that condones or sponsors terrorism. Terrorism-related sanctions usually have been applied unilaterally. For example, the United States prohibits investment in Iran and Libya, forbids trade with Libya, and severely restricts trade with Iran because Iran and Libya fund international terrorist organizations.6 The United States may wish to restrict the export of armaments and militarily sensitive technology to countries that, although not immediate threats, are considered potentially hostile to U.S. interests. Such restrictions, however, are more likely to be effective if applied multilaterally, in concert with military allies. Other Foreign Policy Objectives. Economic sanctions may be employed to further other foreign policy objectives, such as the observance of human rights and democratization. For example, on May 20, 1997, President Clinton announced a ban on new investments in Myanmar (formerly Burma) because the ruling military junta had refused to recognize the victory of the opposition party in the May 1990 general election and had kept opposition leader and Nobel Peace Prize winner Aung San Suu Kyi under house arrest for six years.7 Three other reasons for employing economic sanctions are indicated by President Clinton's March 1, 1996, decision to cut off Ex-Im Bank and OPIC financing to Colombia because of Colombia's failure to control the traffic in illegal drugs;8 a July 1, 1996, decision by President Clinton suspending the duty-free designation for surgical instruments, leather gloves, certain sporting goods, and carpets imported from Pakistan under the Generalized System of Preferences (GSP) program because of Pakistan's failure to respect workers' rights;9 and a May 30, 1996, decision by directors of the Ex-Im Bank to deny financing to three U.S. exporters because of environmental concerns surrounding the construction of the Three Gorges Dam in China.10 International Trade and Investment Dispute Resolution. Economic sanctions may be effective in the resolution of international trade and investment disputes. Most such disputes, however, are resolved satisfactorily through the dispute settlement procedures of the World Trade Organization, regional customs unions like the European Union, regional free trade agreements like the North American Free Trade Agreement, or other bilateral agreements. Even when economic sanctions are employed, a sender country's sanctions are usually limited and in proportion to a target country's alleged infraction. Because of their limited application, economic sanctions arising from international trade and investment disputes do not warrant further consideration in this analysis. The Explosive Growth of Economic Sanctions During the Cold War (1945-1989), most economic sanctions imposed by the United States were directed against communist countries and were intended to counter actual or potential military aggression; to deny advanced, militarily sensitive technology to the Soviet Union or its allies; and to control weapons proliferation. Economic sanctions with national security objectives usually were applied multilaterally in cooperation with other industrial democracies or (rarely) through the U.N. Since 1990, however, the United States has been far more willing to employ unilateral economic sanctions to achieve other foreign policy objectives. During President Clinton's first term, U.S. laws and executive actions imposed new unilateral economic sanctions 61 times on a total of 35 countries.11 These countries are home to 2.3 billion people, or 42 percent of the world's population, and purchase exports of $790 billion, or 19 percent of the global export market. Congress and the President seem eager to impose additional unilateral economic sanctions this year. On May 20, for example, President Clinton issued an executive order determining that the "actions and policies of the Government of Burma constitute an unusual and extraordinary threat to the national security and foreign policy of the United States and declar[ing] a national emergency to deal with that threat." The order prohibited new investments in Myanmar. In addition, Senator Arlen Specter (R-PA) and Representative Frank Wolf (R-VA) have introduced the Freedom from Religious Persecution Act of 1997 (S. 772 and H.R. 1685) to sanction countries that engage in religious persecution. The bill's findings demonstrate that its sponsors intend to apply the sanctions to many other countries: It specifically cites Cuba, Laos, the PRC, North Korea, and Vietnam as persecutors of Christians. It also alleges that Sudan and many other Islamic countries use blasphemy and apostasy laws both to prevent Muslims from converting to Christianity and to persecute Baha'i, Christian, and other religious minorities. States and localities, emboldened by the apparent success of economic sanctions in fostering political change in South Africa, increasingly are imposing their own economic sanctions to satisfy the demands of vocal domestic constituencies. These sanctions typically are secondary boycotts mandating (1) procurement restrictions that prohibit the state or locality from buying goods and services from any firm doing business in a target country and (2) divestiture requirements to prevent the state or locality from investing public funds in any firm doing business in a target country. In the past two years, Massachusetts and a number of localities have enacted procurement restrictions targeting Myanmar. This trend is spreading rapidly. Bills to sanction Switzerland for its banks' failure to return the secret deposits of Holocaust victims and families after World War II are pending before the New Jersey legislature and the city councils of Chicago and New York. Massachusetts and Rhode Island are considering sanctions against Indonesia for its actions in East Timor. New York City is considering economic sanctions against Cuba, China, Egypt, Indonesia, Kuwait, Laos, Morocco, North Korea, Pakistan, Sudan, and several former Soviet Republics for their alleged religious persecution of Christians. All told, the explosive growth in the use of unilateral economic sanctions for other than national security purposes poses serious questions for Congress: Are unilateral U.S. economic sanctions worth the cost? Are there better ways to achieve the policy changes the U.S. government seeks in target countries? Unilateral Sanctions: A Poor Track Record Historically, unilateral economic sanctions have a poor track record in achieving national security and other foreign policy objectives. In a comprehensive study of all economic sanctions imposed worldwide between 1914 and 1990,12 researchers found that economic sanctions failed to achieve their stated objectives in 66 percent of the 116 cases studied. The remaining cases, in which sanctions were at least partially successful, exhibited the following characteristics: * The sender country was seeking a minor policy change in the target country, such as the release of a political prisoner, rather than a major policy reversal such as military withdrawal, a change in the head of government, or democratization. * The sender country had a historic relationship with the target country, such as mother country to colony. * The sender country's economy was strong and did not depend on trade and investment with the target country. In contrast, the target country's economy was very weak and depended heavily on trade and investment with the sender country. * The sender country could isolate the target country internationally without much cooperation from other countries. Yet even when all these conditions were present, the sender country seldom achieved an all-out victory; partial compliance was far more common.13 Moreover, the effectiveness of economic sanctions deteriorated over time; by 1990, the success ratio had fallen to 24 percent for all cases since 1973.14 Economic Sanctions in South Africa Proponents cite South Africa as the prime example of how economic sanctions can foster democracy and respect for human rights. Most observers agree that international economic sanctions contributed to Pretoria's decision to free Nelson Mandela in February 1991, to enter into three years of negotiations with the African National Congress to end apartheid, to establish a new democratic constitution, and to hold South Africa's first free and fair election for a new Federal Parliament and nine provincial assemblies in April 1994. But even though these sanctions ultimately helped to undermine apartheid, they also took a long time to work. In 1962, following the Sharpeville massacre, the U.N. adopted a voluntary multilateral arms embargo against South Africa. In 1977, the Security Council made the embargo mandatory. In 1978, Denmark, Norway, and Sweden established bilateral trade restrictions and prohibited new investment in South Africa. In 1986, the European Union and the United States imposed bilateral economic sanctions against South Africa. The members of the British Commonwealth of Nations imposed economic sanctions in 1988. In general, these sanctions restricted imports of certain agricultural and manufactured products, including gold Krugerrand coins (but not strategic minerals), from South Africa; banned exports of arms, nuclear material, and petroleum to South Africa; and prohibited new loans to or investments in South Africa. By themselves, however, international economic sanctions were not enough to bring about political change. Several unique factors combined to buttress the adverse impact of these sanctions and undermine Pretoria's response: * The racist character of apartheid isolated South Africa. Apartheid outraged blacks in the United States, the Caribbean, and sub-Saharan Africa. It also reminded many Europeans and Jews around the world of Nazism. Consequently, it generated widespread public opposition in Africa, Australia, Europe, and North America. * South Africa lacked a sympathetic overseas emigrant community that could lobby their new homeland's government to support Pretoria. Most South Africans who emigrated to the United Kingdom, the United States, or other countries left because they opposed apartheid. They had little sympathy for the white minority regime in Pretoria. * Non-governmental organizations played a crucial role. A coalition of civil rights, religious, and student organizations in Europe and North America known as the Free South Africa Movement mounted a disinvestment campaign. This campaign pressed large institutional investors, including university boards of trustees, state and local government pension fund managers, and charitable foundation directors, to liquidate all shares they held in corporations doing business with or investing in South Africa. The number of American corporations in South Africa fell from nearly 300 in 1980 to 104 in 1991. Government-imposed international economic sanctions prohibited new loans to or investments in South Africa, but they did not require that banks call in existing loans or that corporations liquidate existing investments. In the end, it was the private decisions of commercial banks to go beyond what those sanctions required and call in existing loans to South Africa, along with the private decisions of corporate executives to liquidate their investments and stop doing business in South Africa, that produced the economic crisis that forced Pretoria to its knees. The crucial event occurred on July 31, 1985, when Chase Manhattan Bank refused to renew $400 million in short-term loans. This decision provoked a financial crisis in South Africa. From 1985 to 1989, according to a U.S. General Accounting Office estimate, $10.8 billion flowed out of South Africa, including $3.7 in loan repayments and $7.1 billion in capital flight. Once private firms decided to stop doing business with South Africa, the economic pressure on Pretoria was irresistible.15 Why Unilateral Sanctions Can Be Counter-Productive As in the case of South Africa, multilateral economic sanctions may help to persuade a target country's government to change its objectionable policies under certain circumstances. Unilateral economic sanctions often fail to achieve their stated objective, however, and may sometimes be counterproductive. Insufficient Penalty Unilateral economic sanctions are not likely to place a sufficiently large financial burden on a target country's economy to persuade its government to change objectionable policies. There are very few industries in the United States that dominate the global market and are unchallenged by foreign rivals. Even for such sophisticated products as commercial satellites and supercomputers, the reality of foreign competition undermines the effectiveness of unilateral export restrictions. When the United States imposes a unilateral export embargo, foreign suppliers can replace the American companies with minimal damage to the target country's economy. Unilateral economic sanctions frequently target countries that are autarkic or otherwise have minimal trade and investment ties to the United States, such as Myanmar and Vietnam. If target countries discourage international trade and investment in general, unilateral sanctions are unlikely to impose a significant financial burden on their governments; and even if they do penalize the target country, the penalty is usually small compared with the overall size of the country's economy. From 1914 to 1990, "[v]ery seldom did the costs of sanctions (expressed on an annualized basis) reach even 1 percent of a target country's GNP [gross national product]."16 Thus, the financial burden of unilateral U.S. economic sanctions is so small that it is highly unlikely to bring about the desired policy changes in the target country. Consider the 1980-1982 U.S. embargo on grain sales to the Soviet Union. Responding to the Soviet Union's invasion of Afghanistan, President Jimmy Carter imposed the embargo in January 1980 to "make the Soviets pay a price for aggression." Although U.S. allies and other members of the North Atlantic Treaty Organization (NATO) roundly condemned the invasion, the embargo was unilateral, reducing U.S. exports to the Soviet Union from an expected 25 million metric tons to 8 million metric tons (the amount required under pre existing commitments) in 1980. Nevertheless, the Soviet Union was able to expand its total grain imports from 31 million metric tons in 1979 to 40 million metric tons in 1982 because Argentine, Canadian, and European exports to the Soviet Union grew from 9.4 million metric tons to 23 million metric tons over the same period.17 The Soviet Union paid only $225 million in higher grain prices due to the embargo, compared with an estimated loss of $2.3 billion in foregone grain exports to American farmers. In 1981, President Ronald Reagan lifted the grain embargo because "it was not having the intended effect of seriously penalizing the USSR for its brutal invasion and occupation of Afghanistan."18 Counterproductive Even worse, unilateral economic sanctions often prove counterproductive by undermining a target country's emerging middle class rather than its political leaders. In many countries, including Chile, South Korea, Taiwan, and Thailand, the development of a large, financially secure middle class was necessary before their authoritarian governments could give way to democracy. Unilateral U.S. economic sanctions strike hardest at Western-educated business managers and professionals who interact most often with the rest of the world and who are the most amenable to foreign influence. By hammering the international sector of a target country's economy, unilateral sanctions may retard the growth of a middle class and thereby slow the process of democratization. When the United States imposes unilateral economic sanctions not on rogue countries like Iran and Libya, but on friendly countries like Mexico, broader foreign policy interests can be damaged. The United States needs Mexican cooperation on a wide variety of bilateral problems including illegal immigration, drug trafficking, and cross-border pollution control. Disrupting relations with Mexico by imposing unilateral economic sanctions for any one issue, however serious, risks a populist backlash against the United States with consequent repercussions for the resolution of other equally important border problems. Leadership Fallacy Proponents argue that the United States must display moral leadership by being the first to impose unilateral economic sanctions, after which other countries, sensing U.S. leadership, will jump on board and support multilateral economic sanctions. Recent history, however, demonstrates otherwise. Instead of following U.S. leadership, other countries see unilateral U.S. economic sanctions as commercial opportunities to grab lucrative foreign markets from American companies. The United States still maintains the economic sanctions it imposed against China after the Tiananmen Square massacre in 1989. The European Union and Japan lifted theirs within a few months. Consequently, while the United States continues to enforce its unilateral embargo on nuclear technology exports, European and Japanese companies have sold $15 billion in nuclear power technology to China. Because of the U.S. embargo, Westinghouse, a world leader in the nuclear power industry, has been forced to lay off 3,500 American workers.19 To pressure the military junta in Myanmar to end its human rights abuses, the United States encouraged the members of the Association of Southeast Asian Nations (ASEAN) to delay granting membership to Myanmar and to support comprehensive multilateral economic sanctions against it. ASEAN's two most vigorous democracies, the Philippines and Thailand, initially were reluctant to approve Myanmar's application. Even Singapore Prime Minister Goh Chok Tong suggested that Myanmar should wait until its government was "more normal." On May 20, 1997, however, President Clinton acted unilaterally and imposed a prohibition on new investment in Myanmar. The ASEAN leaders reacted angrily. President Suharto of Indonesia especially feared that Clinton's action might set a precedent for unilateral economic sanctions against his own country because of its suppression of the independence movement on East Timor. Consequently, on May 31, President Suharto and the other ASEAN leaders defied the United States and invited Cambodia, Laos, and Myanmar to join ASEAN at an upcoming July 1997 summit in Malaysia.20 Wary of growing Chinese influence in Myanmar, ASEAN leaders fear that Myanmar might provide air and naval bases to the PRC. Through economic and political engagement, they are seeking to wean Myanmar away from the PRC. Thus, while unilateral U.S. economic sanctions prevent new U.S. investment, Japan, Singapore, and other Southeast Asian countries are pouring funds into Myanmar. The only country that is being isolated by unilateral U.S. economic sanctions against Myanmar is the United States itself. *Click here to read part 2 of this policy paper ...*