6 February 1999. Thanks to John Gilmore and Stewart Baker.
The Honorable William J. Clinton
President of the United States
The White House
1600 Pennsylvania Avenue, N.W.
Washington, DC 20500
Dear Mr. President:
Your Export Council is submitting herewith the report on unilateral economic sanctions requested by the White House late last year. Prepared by Mike Jordan's Subcommittee on Export Administration with help from John Barry's and George Becker's staffs, the report includes a survey of foreign policy-basedeconomic sanctions currently in effect, a description of the nature of business impacts withillustrative cases from U.S. companies, and recommendations for improvements in relatedpolicies and processes.
Impacts on U.S. business and jobs from unilateral economic sanctions are both direct andindirect. Loss of sales directly to target countries are seen as substantially less important to U.S.economic interests than the indirect impact from damage to sales and business relationships infriendly countries. These indirect effects are magnified when sanctions are applied extra-territorially because they motivate retaliation against U.S. interests, create uncertainty about useof U.S. goods and services, and cause U.S. companies and their affiliates to be seen as unreliable.
In sum, existing unilateral sanctions comprise a complex and growing web of restrictions forU.S. international competitors that is much greater then their individual intent. Policies andprocesses that result in unilateral sanctions appear inconsistent and without discipline, and thegrowing number of sanctions at the state and local level adds extreme complication to thepicture.
We conclude that the negative economic impacts of unilateral sanctions could be substantiallyreduced with no significant impact on foreign policy interests of the nation. Such improvementcould be gained by more thoughtful consideration of optional approaches and better design andimplementation of sanctions when they are deemed to be required. To that end, we haverecommended policies and processes to address the foreign policy targets that typically aresubjects of sanctions:
We urge you to establish formally an interagency committee under the White House to overseethe implementation of such policies and processes within a structured framework of contingencyplanning and decision making.
We hope that our report adds to the base of understanding about how costs are imposed on U.S.economic interests so that foreign policy objectives can be met with greater efficiency. Ourreport does not address the question of whether unilateral economic sanctions are effective inachieving foreign policy objectives. Indeed we believe they can be an appropriate tool of U.S.foreign policy when used in conjunction with the effective implementation of the policies andprocesses which we have recommended.
C. Michael Armstrong
TABLE OF CONTENTS
I. SCOPE AND EXTENT OF CURRENT U.S. FOREIGN POLICY-BASED UNILATERAL ECONOMIC SANCTIONS
II. IMPACT OF FOREIGN POLICY-BASED UNILATERAL ECONOMIC SANCTIONS ON U.S. ECONOMIC INTERESTS
III. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS FOR IMPROVED POLICIES AND PROCESSES
[Appendices linked to BXA site]
APPENDIX I SURVEY OF U.S. UNILATERAL ECONOMIC SANCTIONS
APPENDIX II ANECDOTES ILLUSTRATING ECONOMIC IMPACT OF UNILATERAL ECONOMIC SANCTONS APPENDIX III SUMMARY OF "ECONOMIC SANCTIONS RECONSIDERED" APPENDIX IV MEMBERS OF THE PRESIDENT'S EXPORT COUNCIL AND THE SUBCOMMITTEE ON EXPORT ADMINISTRATION
In 1996, the President's Export Council (PEC) submitted to the President a White Paper suggesting the need for better understanding of the costs and benefits of foreign policy-based unilateral economic sanctions. Subsequently, the White House requested the PEC to provide a more extensive report incorporating three elements:
- A survey of existing unilateral economic sanctions;
- An assessment of the impacts of sanctions on U.S. economic interests; and
- Recommendations for improved policies and processes. This report responds to that request.
The United States has used unilateral sanctions more than other nations, but there have been important changes in the U.S. approach to their use.
Pre-1980 statutes reflect a cooperative relationship, generally allowing the President substantial discretion and flexibility in the use of authorized sanctions. The great cost and political embarrassment of the Soviet grain embargo and the extraterritorial Soviet-European gas pipeline embargo resulted in the virtual exclusion of agriculture from future sanctions, and extraterritorial measures were avoided until the mid-1990' s.
Recently, Congress has assumed a more directive role by adopting highly specific legislation often without reference to previous laws and sanctions already in place. Two major extraterritorial laws were enacted in 1996, including the mandatory application of secondary boycotts against our trading partners and allies who fail to abide by U.S. foreign policy.
Moreover, we see increasing impositions of sub-federal secondary boycotts against those who trade with foreign countries targeted by state or local governing bodies.
We do not question the objectives of existing U.S. unilateral sanctions. However, taken together, the sanctions comprise a complex and growing web of restrictions and legal impediments in the international trading system that extends well beyond the intent of the individual measures.
More importantly, the survey reflects the absence of transparent policies and disciplined processes for dealing systematically and effectively with the targets against which unilateral economic sanctions are being imposed.
The current federal sanctions laws and regulations are described in detail by Appendix I which is bound separately. Trade-based sanctions and standard national security-based export controls are not included.
Impact on U.S. Economic Interests
This report describes economic impacts based on the international marketplace experience of U.S. firms.
The direct impacts of sanctions include foregone sales and business relationships related to the targeted country. A recent econometric analysis estimates the value of lost exports in 1995 at $15 billion to $19 billion, affecting 200,000 to 250,000 export-related jobs .
The most important economic impact of unilateral economic sanctions is the cumulative weakening of U.S. competitiveness in friendly third-country markets, including those of our largest trading partners. Such indirect effects include:
- Special advantages created for foreign competitors in both U.S. and third-country markets;
- Uncertainty about availability of U.S.-origin goods, services and technology;
- Unreliability of U.S. firms and their affiliates as suppliers and as business partners;
- Retaliation by third country governments and trading partners against U.S. interference in their international market decisions.
These impacts occur when cooperation among our allies is not achieved. The latter three largely are the result of extraterritorial application of sanctions.
Our aim is to provide a better understanding of the nature of impacts on U.S. economic interests. We do not mean to imply a judgment about the appropriateness of unilateral sanctions. Rather, we hope that the report will aid in the design and implementation of improved policies for dealing with the targets at which unilateral economic sanctions typically are directed.
Appendix II provides anecdotal cases of both direct and indirect economic impacts of unilateral sanctions. Appendix III summarizes a report of the Institute for International Economics that assesses whether economic sanctions achieve their desired objectives.
Conclusions and Recommendations
Proliferation, terrorism, human rights (including worker rights) abuse, and drug trafficking by third world emerging nations are high priority issues for both domestic and foreign policy.
We conclude that the negative economic impacts of unilateral sanctions could be substantially reduced with no significant negative impact on the domestic and foreign policy interests of the United States. Such improvement could be gained by more thoughtful consideration of optional approaches and better design and implementation of sanctions when they are deemed to be required.
We recommend that the President establish guidelines for selection and implementation of unilateral sanctions and consult with Congress to ensure adherence to such guidelines.
Unilateral economic sanctions can be an appropriate tool of U.S. foreign policy when used in conjunction with the effective implementation of the other policies and processes recommended herein.
- Justify unilateral economic sanctions in context of
- other national interests and international obligations,
- other measures appropriate for accomplishing the stated objective; and
- the exhaustion of diplomatic efforts to obtain multilateral cooperation.
- Avoid inequitable impacts on citizens and unintended damage to competitiveness.
- Avoid extraterritorial measures and secondary boycotts.
- Consult with affected private parties and the Congress prior to implementation.
- Stop sanctions when stated objectives are not being achieved after a reasonable time.
- Create a Policy Review and Oversight Interagency Committee under NSC/NEC to review all sanctions policy and implementation issues and prepare decision options.
- Assure inclusion of appropriate considerations for each optional approach, e.g., policy objective; comparison of likely impacts on the target, the United States and its allies. date certain for review and reauthorization; success/failure criteria; exit strategies.
- Implement a contingency planning process to develop approaches and decisions options for dealing with potential target countries.
- Request the International Trade Commission to conduct and update annually an analysis of the near and long-term economic impacts of existing sanctions, including direct and indirect effects; and estimate impacts of proposed or optional sanctions.
- Mitigate inequitable impacts on U.S. citizens and unintended damage to U.S. economic interests by
- Preserving contract sanctity under clear guidelines and subject to Presidential national security waiver, or, if contract sanctity must be waived, providing for recovery of committed costs;
- Avoiding unilateral extraterritorial controls on U.S.-origin goods and technology when comparable, substitutable goods are available otherwise to the target;
- Allowing adjustment assistance for displaced workers;
- Requiring that implementing agencies establish advisory committees comprised of parties affected by their regulations;
- Publishing implementing regulations with opportunity for public comment;
- Assessing whether a federal initiative is appropriate in respect to state and local government actions that impinge federal foreign and trade policy responsibilities.
In June of 1996, your Export Council reported to you its concern that unilateral economic sanctions for foreign policy purposes are being employed without sufficient examination of the full range of impacts on our own national interests. We submitted a brief paper suggesting that the costs of such sanctions for the nation's international competitiveness are substantial, and we cited assessments by others evaluating their foreign policy benefits.
Concluding that neither costs nor benefits are well enough understood to form a basis for prudent decision making, we recommended the creation of a bipartisan panel of government and private sector experts to direct a comprehensive and independent assessment of sanctions laws, practices, costs and benefits, and to recommend policies that would guide the future use of such measures. Subsequently, you asked that we undertake to extend our report in three ways:
- To catalog and describe existing unilateral economic sanctions,
- To assess the impact of such sanctions on U.S. economic interests, and
- To recommend specific actions.
This report comprises our response to your request. It was prepared by Mike Jordan's Subcommittee on Export Administration with help from staff members of Mike Armstrong, John Barry and George Becker and under the lead of Boyd McKelvain.
Observations from our previous report are summarized below:
- National security, economic, and foreign policy interests are interdependent.
- Defense relies on commercial technology leadership for battlefield advantage.
- Competitiveness of U.S. high-tech industry requires free access to world markets.
- Growth in living standards depends heavily on trade.
- International trade was 13 percent of GDP in 1970 versus 30 percent in 1995.
- Exports are projected to grow by 9.5 percent per year through the year 2000.
- Expanding trade is critical to creating good, high-wage jobs.
- Our 11 million export-related jobs pay 13 to 17 percent more than non-trade jobs.
- Established trading partners' economies and populations are relatively mature.
- The big emerging markets (BEMs), by 2000, will take more U.S. exports than all of the European Union and Japan.
- BEMs pose the greatest challenges to our foreign policy interests.
- Proliferation threat is created by desire of some BEMs for independent defense.
- Some BEMs do not yet have the democratic processes and respect for human rights required to meet international norms.
- Policy makers face a dilemma.
- Proliferation, terrorism, human rights (including worker rights) abuse, and drug trafficking by third world emerging nations are high priority issues for both domestic and foreign policy.
- Threats to the security and well-being of Americans or their affinity groups in foreign countries create a political imperative for effective national reaction.
- While the stated objective of foreign policy actions ordinarily is to improve the offending behavior, there are times when it is sufficient domestically to demonstrate resolve and distance ourselves from the behavior.
- Even though unilateral economic sanctions may be ineffective in achieving change in the target country's policies, such sanctions are seen by many as the weapon of choice when multilateral cooperation is not achieved because:
- They show national resolve to deal tangibly with unacceptable behavior,
- Perceived direct costs to economic interests are unlikely to be of political significance relative to the immediate priority of dealing with the target,
- Economic sanctions have no visible effect on the budget deficit, and
- Cost-bearing parties and their political representatives are reluctant to be portrayed as "soft" on the target behavior.
- Success in changing the most dangerous target behaviors has come from multilateral actions achieved through U.S. leadership. For example, the North Korea Framework Agreement, gained through high-risk diplomacy and constructive engagement, has succeeded in freezing that rogue country's nuclear weapons program.
- But the threat threshold required to use trade sanctions to deal with such behaviors has been substantially higher for our allies than for the United States.
- When a target country's economy or national security is not linked significantly with the United States, the potential for nonmilitary unilateral action against the target to accomplish more than distancing has been very limited.
- Economic impacts of unilateral sanctions may be substantially larger than perceived.
- Access to the $50 billion nuclear energy market of China is critical to the survival of the U.S. nuclear power supply industry. Continued denial of access will result in the loss of tens of thousands of jobs across 28 states, and the gradual elimination of the trained personnel base now supporting more than 100 U.S. nuclear power plants and the nuclear Navy.
- Repeated denials of the use of U.S. civil aircraft in the fleets of, or in service to, countries targeted for various foreign policy purposes have given a permanent competitive advantage to the European aircraft and engine industry and weakened our most important exporting industry.
- Retaliation by our allies and trading partners against U.S. extra-territorial sanctions in the early 1980's created overwhelming losses of global market shares for some of our most competitive heavy equipment exporters and permanent loss of thousands of well-paying jobs. While that embarrassment led to avoidance of such measures for more than a decade, we began to see a reversion to extra-territoriality in 1995 and the proposal of an unprecedented secondary boycott against our allies in an attempt to force their compliance with our approach to dealing with rogue countries
Section I. SCOPE AND EXTENT OF CURRENT U.S. FOREIGN POLICY-BASED UNILATERAL ECONOMIC SANCTIONS
The basic laws authorizing economic sanctions for foreign policy purposes were enacted prior to 1980. These statutes are the International Emergency Economic Powers Act (IEEPA); the Trading With the Enemy Act (TWEA); the Foreign Assistance Act of 1961; the Export Administration Act of 1979 (although the EAA lapsed in 1994, its provisions have remained in effect through an executive order issued under IEEPA); the Arms Export Control Act (AECA); the Atomic Energy Act as amended by the Nuclear Non-Proliferation Act; and Section 247c of the United Nations Participation Act.
These statutes reflect a cooperative relationship between the Congress and the Executive Branch with respect to foreign policy generally and the use of unilateral economic sanctions in particular. Most pre-1980 legislation articulates the reasons for and circumstances in which sanctions may be imposed and establishes procedures to ensure timely communication between the Congress and the Executive Branch concerning their use. These statutes generally reserve for the Executive Branch some substantial discretion and flexibility concerning imposition or removal of sanctions measures in specific circumstances. Typically, they do not target individual countries for the imposition of specific sanctions.
In the early 1980's, the cost to the U.S. economy of unilateral sanctions became a matter of greater concern, as exemplified by the reaction to the U.S. grain embargo and extraterritorial restrictions on allies and trading partners' use of U.S. origin goods and technology in the Soviet-European gas pipeline. Agricultural products were virtually eliminated from eligibility for use in unilateral sanctions, and such extreme extraterritorial measures were avoided until the mid-1990's.
Legislation enacted since 1990 reflects a new propensity for the Congress to take a direct hand in the direction and conduct of foreign policy vis-a-vis unacceptable behaviors of Third-World countries by utilizing unilateral economic sanctions in a much more prescriptive manner:
- Mandating, rather than simply authorizing, their use;
- Specifying a wider variety of target behaviors to trigger imposition of the sanctions;
- Identifying the precise conditions for their removal;
- Defining many different types of sanctions to be imposed; and
- Naming specific target countries.
More than 75 countries now are named as subject to, or under threat of one or more of some 21 specific sanctions based on 27 target behaviors. And in 1996, two major new extraterritorial laws were enacted, including the mandatory application of secondary boycotts against the citizens of our trading partners and allies who undertake certain energy investments in countries sanctioned by the United States.
While the use of foreign policy-based unilateral economic sanctions at the state and local government level was not included in the review at Appendix I, we observe that both Japan and the European Union have filed challenges in the World Trade Organization against U.S. sub-federal trade actions that are not consistent with obligations under the WTO Government Procurement Agreement.
Specific types of sanctions in current federal legislation include the following:
- Deny benefits, such as OPIC insurance, allowed under the Foreign Assistance Act
- Withdraw eligibility for Export-Import Bank programs
- Deny U.S. participation in nuclear power projects
- Deny U.S. participation in defense trade
- Deny U.S. participation in communication satellite launch programs
- Vote against approval of assistance by international financial institutions
- Withhold payments to international institutions that override U.S. opposition
- Deny U.S. participation in financial transactions with the target
- Prohibit eligibility for loans from U.S. financial institutions
- Prohibit serving as a primary dealer of U.S. bonds or as a U.S. funds repository
- Curtail air transportation
- Withdraw sugar import quota
- Deny transfer of spoils of war
- Prohibit all imports into the United States
- Prohibit exports and re-exports of U.S. goods, services and technology
- Deny participation in procurement programs of the United States
- Prohibit imports of fish, fish products and fishing equipment
- Deny dealing in U.S. government debt instruments
- Deny benefits under tariff programs (GSP)
- Permit U.S. claimants to confiscated property to bring suit in U.S. courts against "traffickers" in confiscated property
- Deny entry of officials and their families to the United States
Survey of Existing U.S. Unilateral Economic Sanctions
Appendix I presents the requested Survey of U.S. Unilateral Economic Sanctions. This document contains a comprehensive summary of current U.S. laws and regulations that authorize or mandate U.S. unilateral economic sanctions to achieve foreign policy purposes. The survey does not encompass trade-based sanctions (e.g., Section 301 of the Trade Act of 1974), and it does not cover unilateral export controls for defense articles and services nor for other goods and services based on their specific qualities or specified end uses (i.e., based on national security, anti-proliferation, etc.).
The survey reflects a significant body of law authorizing or mandating unilateral economic sanctions. Of particular concern are the apparent ad hoc processes followed in enacting and implementing the laws, the absence of any visible coherent rationale or guiding principles for their existence, and the lack of any methodology to assess whether any substantive objective is being achieved and at what cost to other national interests.
The survey identifies all unilateral sanctions programs that target individual countries and that target a particular activity. More than 75 individual countries, from Angola to Zaire, are specifically identified in the survey as subject to or threatened by one or more unilateral foreign policy sanctions. (See survey index pp.50-55.) Many sanctions target particular activities on the basis of a determination that a country or entity has engaged in a particular target activity.
The survey places unilateral measures within twelve categories based on the reason for imposition of the sanctions. These categories are:
- Communist Government
- Environmental Activity
- Expropriation of U.S. Property
- Harboring War Criminals
- Human Rights Violations
- Military Aggression
- Narcotics Activity
- Proliferation of Weapons of Mass Destruction
- Support of International Terrorism
- Restrictive Trade Practices
- Undemocratic Government
- Worker Rights Violations
The survey covers more than 40 separate legislative acts in which unilateral foreign policy sanctions have been mandated, including several annual departmental appropriations or authorization laws. The survey and its index (pp.56-58) catalogue the specific sanctions measures according to the reason for enactment. Some statutes are identified with more than one reason; e.g., IEEPA, Foreign Assistance Act.
Sanctions Targeted at Individual Countries
The body of the survey is organized into five sections that reflect the variety of U.S. unilateral foreign policy sanctions. The first section covers sanctions targeted at individual countries. Iran, Iraq, Cuba, North Korea, and Libya are obviously prominent in this section. However, this is also where one finds programs authorizing or requiring imposition of sanctions against persons in third countries; e.g., Title III and Title IV of the Cuban Liberty and Democratic Solidarity Act of 1996, and Section 106 and 111 of that Act (p.11), and the Iran and Libya Sanctions Act of 1996 (pp.12-13).
The sanctions against the People's Republic of China in 1990, contained in the Foreign Relations Authorization Act for 1990-91, as amended, which continue in effect, also are found in the first section of the survey, at p.16. Likewise, the most recent legislation in the survey, the 1997 Omnibus Appropriations Act (September 30, 1996), is found in this section of the survey. This Act includes provisions targeted against Burma; countries not in compliance with United Nations Security Council sanctions against Iraq or Serbia and Montenegro; the Palestine Liberation Organization; Cuba; Iran; Iraq; Libya; North Korea; Serbia; Sudan; Syria; China; Guatemala; Haiti; countries not taking steps to implement educational programs to prevent the practice of female genital mutilation; and any country whose duly-elected head of government is deposed by military coup or decree, until a democratically-elected government takes office. Not every one of the various provisions of the 1997 Omnibus Appropriations Act requires imposition of sanctions at the date of enactment. Most provisions specify certain circumstances or conditions that will trigger a requirement for sanctions.
Legislation Targeted At Particular Activity
Unilateral sanctions legislation targeted at particular activities covers a range of problems including terrorism (nine separate statutes), proliferation of weapons of mass destruction (five separate enactments, not including IEEPA and the EAA), and environmental concerns (four separate statutes), including the High Seas Driftnet Fisheries Enforcement Act (p.29), pursuant to which the United States has identified Italy for possible sanctions. In the environmental area, limited import embargoes are now in effect against Mexico, Venezuela, Columbia, Panama, Vanuatu, Belize, Costa Rica, Italy, and Japan, pursuant to the Marine Mammal Protection Act of 1972, as amended, and against shrimp imports from countries not certified as having a regulatory program against incidental take of sea turtles pursuant to Section 609 of the Departments of Commerce, Justice and State, the Judiciary and Related Agencies Appropriations Act of 1990.
Four separate statutes authorize sanctions against countries that are not cooperative with respect to prevention of narcotics trade and related money laundering and public corruption (pp.24-25). Sanctions measures are imposed against countries that are not "certified" by the President as either cooperating or where "vital national interests" of the United States favor certification.
Other unilateral sanctions provisions address the harboring of war criminals (two statutes) and forced labor (one statute). Certain imports from Mexico and China are now subject to restrictions under the forced labor provisions of the Smoot-Hawley Tariff Act of 1930 (p.38).
Sanctions Pursuant to Authority to Restrict Imports or Exports of Particular Goods
The Arms Export Control Act and the EAA authorize or require unilateral sanctions against specific countries relating to activities with respect to munitions or dual-use goods. More than a dozen countries are under some form of restriction under these authorities (pp.39-40).
Restrictions Under the Foreign Assistance Act
The Foreign Assistance Act contains provisions covering a multitude of circumstances and pursuant to this legislation, unilateral sanctions are in effect or required based on subsequent findings against Pakistan, Burma, Syria, Saudi Arabia, Qatar, the United Arab Emirates, and the New Independent States of the Former Soviet Union, in addition to measures against Cuba, North Korea, Iraq, Iran, and the Palestine Liberation Organization (pp.41-42).
Restrictions on Favorable Trade Status
Four separate statutes include provisions that allow for, or require restriction of, favorable trade status for foreign policy reasons. In addition to the well-known annual review process for most-favored nation tariff treatment for Communist countries under the "Jackson-Vanik" provision of the Trade Act of 1974, as amended, the Generalized System of Preferences Renewal Act, as amended, the Caribbean Basin Economic Recovery Act, as amended, and the Andean Trade Preference Act, as amended, all restrict benefits based on certain foreign policy findings with respect to a beneficiary country (pp.41-45).
Restrictions on Activity of Financial Institutions
Five separate statutes contain unilateral sanctions provisions that call for U.S. actions or opposition within multilateral financial institutions or the Export-Import Bank (pp.46-49). China in particular has been a target of these provisions.
The Survey of U.S. Unilateral Economic Sanctions is a resource for understanding and appreciating the current scope and extent of unilateral economic measures enacted to achieve foreign policy objectives.
The objectives reflected by these measures are ones that all of us strongly agree are appropriate goals. However, the survey demonstrates that the sum of all of these unilateral measures for achieving the goals constitutes a complex web of restrictions and legal impediments in the international trading system that extends well beyond the legislative intent of the individual statutes. This at least in part is due to a growing propensity for Congress to assume a direct role in the conduct of foreign policy by adopting highly specific legislation often without reference to previous laws and sanctions already in place.
The compilation also suggests the absence of a disciplined, consistent process for creating, imposing, and maintaining rational foreign policy-based economic sanctions. More importantly, it reveals the absence of any prudent provision for attempting to understand whether the sanctions serve to achieve or to damage the interests of our nation.
Section II. IMPACT OF FOREIGN POLICY-BASED UNILATERAL ECONOMIC SANCTIONS ON U.S. ECONOMIC INTERESTS
The PEC's assessment of economic impacts necessarily is qualitative. We are unable to provide an econometric analysis of the cost of economic sanctions in terms of foregone U.S. wages and income, investment, and competitiveness. Such a study requires the resources and information gathering capabilities of an entity such as the International Trade Commission. Instead, this report attempts to provide a useful description of the nature of impacts based on our business experience in the international marketplace and our understanding of the factors that have influenced foreign customers' selection among international sources of supply.
Our presentation of this information on business impacts is not intended to reflect our evaluation of whether the related sanctions should have been imposed. We have not undertaken that type of assessment and have reached no conclusion on such a question.
Impacts may be characterized in two primary categories. The first and most obvious are direct impacts: foregone sales and business relationships related to the country or entity targeted by sanctions. The second category, indirect impacts, relates to effects on U.S. competitiveness in friendly third-country markets. Indirect impacts are cumulative and, we believe, may be significantly more important to the nation's economic interests.
Estimates of the economic costs of unilateral sanctions typically are limited to the interrupted sales to the target of goods specifically affected by the sanction. These are costs that would be borne even if the sanction were multilaterally imposed. The PEC paper of June 1996 provides a rough estimate of the shortfall of U.S. market shares in ten unilaterally sanctioned countries compared to Japan and the European Community:
Source: IMF, 1993
Sanctions against all but Libya, Cuba, the DPRK, and Vietnam were limited in scope.
A more detailed and comprehensive analysis of such direct effects was released by the Institute for International Economics on April 16, 1997. IIE estimated the U.S. shortfall for 26 sanctioned countries as $15 billion to $19 billion for 1995 with 200,000 to 250,000 jobs affected.
Indirect, Cumulative Impacts
Indirect impacts include:
- Special advantages created for foreign competitors in both U.S. and third-country markets;
- Uncertainty about availability and the effects of utilizing U.S.-origin goods, services, and technology;
- Unreliability of U.S. firms and their affiliates as suppliers and as business partners;
- Retaliation by friendly third-country governments and trading partners against U.S. interference in their international trade policy decisions.
While the first of these impacts serves to strengthen our key competitors globally, the latter three impacts are of great importance because they weaken U.S. competitiveness also in third-country markets, including our most important trading partners. All of these impacts are functions of failure to gain cooperative action among our allies to deal with foreign policy problems. The latter three largely are the result of extraterritorial application of sanctions.
Appendix II provides anecdotal cases of both direct and indirect economic impacts of unilateral sanctions. The following discussion provides a description of the principal impacts of U.S. unilateral sanctions seen in the international market place with illustrative examples drawn from Appendix II.
Special Advantages to Foreign Competitors from Market Substitution
Economic sanctions typically restrict transactions of U.S. firms and their foreign subsidiaries as well as the sale by all persons of U.S.-origin goods and technology involving targeted countries, end uses, and end users. When the restrictions are unilateral, leading competitors in third countries move to substitute for the U.S. presence under "sanctuary market" conditions.
- Foreign Competitors are Strengthened
Foreign suppliers are able to gain overall economies of scale and experience and to extract more favorable pricing and terms and conditions for their sales than would be available under open competition. Such advantages result in competitive strength against U.S. goods and services in global markets, including in the United States.
- Effects are Cumulative Ð Extending Beyond Removal of Sanctions
Infrastructure plant and equipment provided by foreign competitors during sanctions may have lifetimes of 10-to-50 years; e.g., aircraft, trucks, locomotives, power plants. Associated sales of replacement parts and service over the lifetime of such products often are equal to the value of the initial sale contract. Moreover, initial investment in training, support equipment, and spares inventories would have to be repeated in order to switch to U.S. suppliers.
- Illustrative Examples
- The Soviet-Western Europe Gas Pipeline Embargo of 1982 shifted global turbine market leadership from the U.S. to Europe with a permanent cost of thousands of U.S. jobs. When the U.S. government attempted to stop the use of U.S. goods and technology in construction of the pipeline to bring gas from the Soviet Union to Western Europe, GE Power Systems (GEPS) was forced to break contracts with European manufacturers for the use of GEPS designs and parts and components in European-made turbines. European governments retaliated by making compliance with the U.S. law illegal for European companies. Where they had been dependent on GEPS for the high-tech half of the turbine components, the European firms were able to gain essential independence.
A large part of GEPS' market share, which fell from 18% in 1981 to 6% in 1982, was given over to three major European competitors. That share loss had to be recovered by extraordinarily costly restructuring, cost and quality improvements. Meanwhile, the now independent European firms have been given an unearned competitive boost and thousands of good U.S. jobs have disappeared. (See Appendix II, Section G.2.)
- Continued unilateral exclusion of U.S. nuclear energy cooperation with China --
- threatens survival of U.S. industry's ability to support the existing 100 U.S. nuclear power plants and the nuclear Navy,
- denies state-of-the-art safety features in equipment for the world's largest and fastest growing nuclear energy industry, and
- costs the opportunity to compete for $15 billion in projects over the next 14 years, with 225,000 job years in 28 states at stake. Nuclear energy cooperation with China has been withheld in an attempt to force China's compliance with U.S. nuclear non-proliferation standards since 1985. Notwithstanding China's desire to include U.S. bidders in its nuclear power procurements, since 1991 China has been able to complete its own nuclear power reactor, purchase four reactors from France (two completed and two under contract) at a price of $4 billion, sign a $3 billion contract for two Canadian reactors, and reach advanced negotiations for two Russian reactors. (See Appendix II, Section H.1.)
- U.S. special restrictions on commercial aircraft and related equipment exports drive sanctioned countries to establish long-term commitments to non-U.S. suppliers. For example, Vietnam standardized on Airbus aircraft when the embargo was extended in 1993. The initial lost sale by Boeing to Airbus of Europe was $211 million. Even though the embargo was soon lifted, that loss is likely to grow to $1.6 billion over the next three years. Similar commitments presently are being made by Syria and Lebanon. (See Appendix II, Section A.5.)
- By including equipment for commercial satellite launch in the 1993 U.S. unilateral missile sanctions against China and Pakistan, $1.5 billion in exports to China were blocked and a market opportunity was created for European suppliers. Stricter interpretation of the "Helms Amendment" could have blocked most of the $9 billion annual U.S. exports to China. (See Appendix II, Section A.6.)
- Sanctions against Angola, Libya, Iran, and Vietnam prohibited CONOCO from competing successfully on projects needed to create unique technological know-how for development of certain oil-bearing formations in other countries including Dubai, Russia, Canada, Colombia and the United States. Competitors from Canada, the Netherlands, and the United Kingdom are reaping the benefits of the expertise gained in those U.S.-sanctioned countries in other locations, including the U.S. Gulf of Mexico. (See Appendix II, Section G.2.)
Uncertainty, Unreliability, and Retaliation Stem from Unilateralism and Extraterritorial Application of U.S. Sanctions
U.S. companies believe their international competitiveness is burdened by perceived U.S. disregard for its international trade policy commitments, and for the reliability of its companies and their products and services in global markets.
- Perceived uncertainty and unreliability of supply is a major factor in the choice among alternative suppliers. Just as the typical consumer avoids automobiles or appliances from sources that have a poor record of continuity and parts and service availability, so do public and private institutions when considering investments.
U.S. foreign policy has disrupted the commitments of U.S. suppliers and the international distribution of U.S. goods and services to a much greater extent than that of the governments of any of our foreign competitors. Even though the Congress established a presumption in favor of contract sanctity in the Export Administration Act of 1979, U.S. unilateral economic sanctions seldom have been imposed with such a provision. As a result, there is abundant evidence that U.S. economic interests are impacted by the burden of perceived unreliability of the United States as a source of products and services.
- Illustrative Examples of the Impact of Perceived U.S. Unreliability
China, Pakistan, and India have been subject to or threatened by a wide variety of U.S. economic sanctions for many years.
- China began procurement of an anticipated fleet of 250-300 Sikorsky commercial helicopters in 1984 with a purchase of 24 Black Hawks. The second tranche was under negotiation when the Tiananmen sanctions were enacted. Because this aircraft configuration had some military variants of commercial components, the State Department denied permission even to service the existing fleet. China turned to Russia, France, and the EC-120 European helicopter consortium to acquire its commercial helicopter fleet. The immediate impact is in sales already lost by Sikorsky of more than $1 billion and the potential of $3.1 to $3.7 billion, with tens of thousands of related jobs for the firm and its suppliers. Moreover, the implementation of U.S. policy demonstrated that U.S. helicopter suppliers are unreliable. (See Appendix II, Section A.4.)
Such experiences as the aborted commercial helicopter fleet, the previously described commercial satellite case, denial of support for U.S. equipment for the Three Gorges Dam Project, the prohibition on nuclear energy cooperation, and the continuing threat of essentially complete denial of commercial trade from withdrawal of MFN or under the Helms Amendment have demonstrated the unreliability of U.S. suppliers for the burgeoning Chinese infrastructure market. China clearly has considered this in other procurements, including airliners for its commercial fleet.
- Pakistan has been subject to sanctions and threatened sanctions similar to those for China. The most well-known case was the U.S. abrogation of Pakistan's contract for F-16 aircraft due to the inflexible Pressler amendment that leaves no room for Presidential discretion. Pakistan already had paid $658 million toward the $1.4 billion purchase, and the United States was unable to return the money. Recently, the Pakistani national airline issued a procurement notice for ten wide-body airliners. It required bidders to forego the normal contract clause protecting the supplier from obligations for failing to fulfill contractual requirements if the failure is caused by their own government's action. European bidders will be able to comply with the requirement. U.S. bidders will not. Pakistan's fleet already contains a much smaller number of U.S. aircraft than would be expected based on the U.S. share in other markets. Thus, unreliability of U.S. supply continues to undermine important opportunities to regain a presence in a market almost lost to U.S. suppliers. (See Appendix II, Section A.3.)
- India also has been the subject of U.S. unilateral sanctions and sanctions threats for many years. One of the most disruptive and frustrating to India occurred in the early 1990's when missile sanctions were imposed on the Indian Space Research Organization (ISRO). No U.S. export licenses, even for non-controlled items, to fulfill supplier commitments could be approved to ISRO or its suppliers for many months because of interagency disagreement over the scope of the sanctions.
- These countries represent an important and rapidly growing share of the global market for commercial aircraft for the next 20 years. Continuation of the present trends could mean a shortfall of tens of billions in U.S. export sales and scores of thousands of U.S. jobs. To compete at all, U.S. suppliers must respond to the unreliability burden with price or other concessions that are not required of our international competitors.
Trading partners in third countries continue to be reminded of reasons to avoid dependence on U.S. goods. A European turbine manufacturer held a $70 million Iranian order for turbines when the unilateral embargo on U.S. trade with Iran was announced in 1995. The manufacturer was dependent on a U.S. source for the specially designed control unit. The component would comprise 3% of the finished turbine's value and, if taken from a foreign inventory, would be eligible for reexport to Iran without U.S. permission. However, the Treasury Department advised at the outset that such an export from the United States was prohibited by the Executive Order. The foreign manufacturer proceeded to design its own control unit, jeopardizing the future of the U.S. controls business. Later in 1995, Treasury stated that it was uncertain what would be the legal authority for the earlier interpretation and that it had submitted the matter for an interagency determination. As of May 1997, no decision had been reached, but the de facto policy remains negative.
- Extraterritorial measures, or otherwise attempting to force compliance by third-country trading partners with U.S. unilateral sanctions are especially damaging to the reputation of U.S. firms as reliable business partners and sources of supply. Such measures are applied by
- restricting the use, resale, or retransfer of U.S. origin goods and technology by foreign purchasers,
- restricting foreign exports of foreign-made goods containing U.S.-origin parts and components or technology,
- extending the jurisdiction of U.S. law over foreign business transactions of foreign subsidiaries of U.S firms, or
- penalizing foreign firms if they have engaged in U.S. targeted transactions.
Compliance requires foreign firms to avoid, without U.S. permission, transactions involving ever-changing lists of thousands of U.S.-targeted persons, entities, destinations, and countries as well as types of end uses and end users specified by various U.S. regulations.
The regulations are implemented, pursuant to laws described in Appendix I, by the Departments of Commerce, Energy, Treasury, and State. There is no single point of contact in the U.S. government for persons who are or may be affected by one or more of the regulations, and integration of regulatory policy and practice is minimal.
Compliance failure may subject the foreign person to criminal penalties in the United States or denial of further transactions involving U.S. goods or domestic markets.
- Illustrative Examples of Impacts of Extraterritorial Measures
- The Soviet-Western Europe Pipeline Embargo, which attempted to cause foreign manufacturers using U.S. goods or technology to break their contracts, highlighted the extensive extraterritorial practices used by the United States to carry out its foreign policy. Directly affected firms immediately took steps to reduce their exposure to American "light switch diplomacy" by designing out U.S.-origin components (see Appendix II, Section G.2.), but the broader effect was to sully the reputation of U.S. suppliers generally. In a 1986 speech, the Chairman of the European Business Roundtable stated that his company, Philips, NV, would avoid U.S. parts and components because of U.S. unilateral controls. The United Kingdom and other major trading partners passed laws forbidding compliance by their citizens with laws of other nations that interfere with their national trade policies. British Aerospace sent letters notifying its U.S. suppliers that it reluctantly had established a practice of designing out U.S.-origin components in its products because of the associated extension of U.S. unilateral control over its freedom to market its products under the laws of its own country. The company also required U.S. respondents to its purchase requests to identify unilateral reexport controls associated with any of their bids. The National Academies/National Research Council panel preparing the 1991 report on U.S. export controls was told by European manufacturing firms that, where possible, they were avoiding U.S. parts and components in their products because of U.S. unilateral export controls.
- In the highly concentrated commercial aircraft industry, no internationally successful large airliners were available in the early 1980's without a major share of their value being comprised of U.S.-origin parts and components. Airbus now has reached the point where new aircraft can be configured to exclude U.S. engines and other components in order to reach the 10% U.S content de minimis required to escape U.S. extraterritorial controls on the sale of its aircraft.
- International partnerships are essential to the development of some types of high technology, capital intensive equipment. Prospective foreign investment partners frequently request special terms and conditions to overcome the possibility that U.S. extraterritoriality will capture control over their contributed technology or otherwise interfere with the success of a prospective business relationship. Reminders occur frequently. One effect has been to cause foreign partners to withhold leading edge technologies from such exposure.
- Extraterritorial controls reduce the value of U.S. foreign investments in many ways. For example, in 1995, a European subsidiary of a U.S. firm was forced to accept a $1.5 million reduction in the annual fee for leasing an airliner when it responded negatively to the potential lessee's question about including Havana in its international route structure. This response was required by the U.S. Cuban Assets Control Regulations (CACR).
- Retaliation against U.S. attempts to force compliance with its unilateral sanctions creates controversy, confusion, and costs for U.S. interests.
While some argue that the Iran and Libya Sanctions Act of 1996 (ILSA) and the Cuban Liberty and Democratic Solidarity Act of 1996 (LIBERTAD) are not properly labeled as extraterritorial measures, they clearly are perceived by our allies and trading partners as attempts to force compliance with U.S. unilateral foreign policy.
The European Union, Canada, and Mexico have retaliated by making illegal the compliance with either U.S. law. To the extent that companies in those countries are "controlled" by U.S. persons (e.g., U.S. subsidiaries), they are unable to comply with the Cuban Assets Control Regulations (codified by LIBERTAD) without violating their own national law. The recent conflict over Cuban pajamas sold by Canadian Walmart stores is illustrative. Criminal penalties are provided by the U.K. and Canada as well as by the United States.
Under current law, the airliner leasing case described above would pose criminal liabilities for the lessor under UK law if the Cuban service were denied and under U.S. law if it were accepted. While the U.S. has yet to impose significant penalties under either ILSA or LIBERTAD, substantial trade retaliation is expected if and when that occurs. Meanwhile, progress in other important initiatives, such as the Multilateral Agreement on Investment and the Transatlantic Business Dialog, has been damaged by the hostility and diversion created by this controversy.
We were not asked and we have not undertaken to address the effectiveness of economic sanctions in achieving foreign policy objectives of the United States. However, we have included as Appendix III a summary of the 1990 report of the Institute for International Economics, the most extensive analysis published to date. IIE plans to publish an update of its report in the near future.
While much of the economic impact information presented here necessarily is qualitative and anecdotal, we trust that it will add to the base of understanding needed to guide improved policies and processes governing the use of unilateral economic sanctions in the future. Economic sanctions inevitably will have economic costs for the United States. However, this information suggests that a large portion of negative impacts on U.S. economic interests could be reduced by more thoughtful consideration of policy options, and more rational design and implementation of sanctions when they are deemed to be required. The use of measures that interfere with third-country trading partner relationships and create undue uncertainty about the reliability of U.S. firms and the long-run availability of U.S. goods and services is seen as most damaging. We also have seen that the threat of sanctions creates economic impacts on U.S. interests in substantially the same manner as the actual implementation of sanctions.
Sanctions purposes cover a broad spectrum from attempts to influence cultural practices or send "signals" of our disapproval of certain policies or practices, to attempts to deter or penalize serious violations of international security agreements. This suggests that negative consequences for U.S. interests might be reduced by selecting equally effective alternatives, or at least minimal sanctions, where the potential for actually changing the target behavior is small.
Section III. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS FOR IMPROVED POLICIES AND PROCESSES
Summary of Conclusions
This report demonstrates that the sum of unilateral economic sanctions measures for achieving appropriate U.S. foreign policy goals now constitutes a complex and growing web of restrictions and legal impediments in the international trading system that extends well beyond the legislative intent of the individual statutes, executive orders, and regulations. This is at least in part due to a growing propensity for Congress to assume a direct role in the conduct of foreign policy by adopting highly specific legislation often without reference to previous laws and sanctions already in place.
There is no disciplined use of policy guidelines in a consistent process for creating, imposing, and maintaining rational foreign policy-based economic sanctions. Also importantly, there is no ongoing, systematic analysis directed at understanding whether sanctions are serving or damaging the interests of our nation, either individually or in the aggregate.
Concerns were expressed about the infringement of federal foreign policy and trade policy prerogatives by state and local government economic sanctions.
The information about economic impact that we have been able to add to that provided by others necessarily is qualitative and anecdotal. Nevertheless, we believe there is reason to conclude that a large portion of the negative impacts on U.S. economic interests could be reduced with no significant impact on foreign policy interests. In particular, we conclude that much improvement could be gained by more thoughtful consideration of optional approaches, and better design and implementation of sanctions when they are deemed to be required. Of greatest concern are measures that create undue uncertainty about the use of U.S. goods and services, that cause U.S. firms and their affiliates to be seen as unreliable, and that interfere with third-country trading partner relationships.
Policy Guidelines Recommended
The President should establish guidelines for the selection and implementation of unilateral economic sanctions and consult with Congress to ensure adherence to such guidelines. The following are recommended:
- Unilateral economic sanctions can be an appropriate tool of U.S. foreign policy and should be available to policy makers when used in conjunction with the effective implementation of the other policies and processes recommended herein.
- Unilateral economic sanctions must be justified in context of
- other foreign policy and national interests, including security, economic, and international norms and policy obligations;
- other appropriate foreign policy measures and their potential effectiveness for accomplishing the stated objective; and
- failure of reasonable diplomatic efforts to obtain cooperation in multilateral sanctions.
- Compliance costs will be mitigated through a rational organizational structure for sanctions implementation with integrated regulations and licensing/outreach process.
- Inequitable impact on workers and economic sectors will be avoided.
- Extraterritorial measures and secondary boycotts will be avoided.
- Decisions will be preceded, except in emergencies, by consultations with affected private parties and the Congress.
- Unilateral economic sanctions will not be continued when the stated objectives are not being achieved after a reasonable period of time.
Process Improvements Recommended
The President should establish processes to assure disciplined adherence to the policy guidelines.
Organizational Structure and Methodology
First, we believe that it is important to establish an organizational structure and methodology to improve the effectiveness of measures employed to deal with target behaviors. We recommend the following steps:
- Create a Policy Review and Administrative Oversight Committee --
- Under the joint leadership of NSC and NEC;
- With standing membership of CIA, Commerce, Defense, Energy, State, Treasury, and USTR plus ad hoc membership of others, such as Agriculture, Labor, NRC;
- Responsible to review all sanctions policy and implementation issues and, as necessary, provide Presidential decision review memoranda.
- Require that relevant decision reviews include the following considerations for each of the optional approaches:
- Statement of foreign policy objective and assessment of likelihood of achievement;
- Relationship to overall U.S. strategy vis--vis the target;
- Relationship to measures imposed multilaterally or by U.S. allies;
- Comparison of likely impacts on the interests, as appropriate, of the target, the United States, allies, and other affected friendly countries, including political, security, military, economic, energy, humanitarian, and worker rights interests;
- Description of milestones toward achievement of the stated objective;
- Date for review and re-authorization requirement;
- Criteria for success/failure measurement; and
- Possible exit strategies if extension is not warranted.
- Direct the Oversight Committee to
- Establish and direct a contingency planning process to develop approaches and decisions options for dealing with potential target countries and entities under alternative future scenarios.
- Request the International Trade Commission to
- conduct and update annually an analysis of the near and long-term economic impacts of existing sanctions, including direct and indirect effects; and
- estimate economic impacts of proposed sanctions, including optional approaches associated with the contingency planning process.
Mitigation of Impacts on U.S. Economic Interests
Second, we believe it is possible and appropriate to mitigate inequitable impacts on U.S. citizens and unintended consequences for U.S. competitiveness without undercutting the foreign policy effectiveness of the sanctions. We recommend consideration of the following measures:
- Reduce uncertainty and unreliability of using U.S. goods and services.
- Permit a limited form of contract sanctity by allowing performance of pre-existing contracts that are legally enforceable and which would be abrogated by compliance with the sanction Ð
- until completion of the contract obligation if the date for construction or delivery and specification of quantity and price were agreed upon under the pre-existing contract, or
- for open-ended contracts, only to the extent such performance does not extend beyond the date of the sanction by more than one year Ð unless the President determines that such permission would cause a significant threat to the national security of the United States. (Note: New or similar future business would not be permitted by such contact sanctity.)
- Avoid unilateral controls on U.S.-origin goods and technology in transactions abroad by foreign persons when comparable, substitutable goods otherwise are available to the target.
- Reduce unintended negative consequences and inequitable impacts for U.S. persons.
- If the permission of contract sanctity (as recommended above) is determined by the President in any specific circumstance to cause a significant threat to the national security of the United States,
- permit a grace period for completion only of contractual obligations necessary to recover committed costs, or
- reimburse, from general funds of the United States, the committed costs of the contracting parties.
- Allow adjustment assistance for displaced workers;
- Issue compensation plan at time of sanction implementation or, in emergency, within 30 days of sanction implementation;
- Require that implementing agencies establish advisory committees comprised of parties typically affected by their regulations to permit ongoing assessment and removal of the unintended negative impacts of the regulations;
- Publish implementing regulations in proposed or interim final form with opportunity for public comment.
State and Local Government Sanctions
We urge the Administration to make an early assessment of whether federal initiatives might be appropriate in respect to state and local government actions that may impinge upon federal responsibilities in the areas of foreign and trade policy.