Speeches and Papers

US Economic Sanctions: Good Intentions, Bad Execution

by Jeffrey J. Schott, Peterson Institute for International Economics

Statement before the Committee on International Relations
United States House of Representatives
Washington, DC
June 3, 1998

 


© Institute for International Economics

 

I appreciate the opportunity to come before the Committee again to discuss the use of economic sanctions in pursuit of important US foreign policy objectives. I commend the Committee for the timeliness of these hearings, and trust that its objective analysis of overall US sanctions policies will balance the political fervor surrounding events in South Asia and the recent US-European Union sanctions agreement.

US sanctions policy needs reform. Too often our laudable goals are ill-served by our unilateral attempts to coerce changes in policies or practices of foreign governments; too often the economic impact of our sanctions is offset by alternative suppliers of goods and capital whose governments agree with our goals but not the tactics to achieve them; and too often we do not plan for the reconstruction of sanctions-weakened economies in the infrequent cases when our sanctions succeed or when they are abandoned.

Congress and the Administration both share blame for legislation and executive action that often fail to advance US policy goals. Legislative mandates seek to provide global US leadership in foreign affairs but too often breed discord among our allies and thus inhibit the cooperation needed to effectively pressure targeted regimes. Sanctions are sometimes implemented in an arbitrary and/or haphazard manner, particularly when we have cross-cutting and sometimes conflicting goals in our relationship with the targeted regime.

Congressmen Hamilton and Crane have introduced useful legislation that would address some of these problems; but the Administration also needs to develop a more coherent approach to both the planning and implementation of sanctions policies. Right now, the Administration is not well organized to deal with these issues, despite the recent progress made by Under Secretary Eizenstat in the State Department.

In my statement today, I cannot do justice to all the complex issues before this committee regarding US sanctions policies. I will briefly discuss why we use sanctions, why we use them more frequently and less and less effectively, and why we need to better match the costs of sanctions to US economic interests with the foreign policy benefits we can reasonably expect to achieve. I will conclude with some suggestions for policy reform.

Like Under Secretary Eizenstat, I am well into my third decade of work on economic sanctions: I have worked on sanctions cases as a Treasury Department official in the Ford, Carter, and Reagan administrations, and I have written extensively about sanctions policies at the Institute for International Economics with colleagues Gary Hufbauer and Kimberly Elliott, with whom I have coauthored the comprehensive two-volume study, Economic Sanctions Reconsidered (3rd ed. forthcoming 1998). This statement draws on that extensive experience.

 

Why We Use Sanctions

Economic sanctions are an important tool of US foreign policy. Sanctions are deployed as part of the overall US policy response to objectionable actions of foreign governments and to advance laudable US policy goals: to stop military adventures, arms proliferation, support of terrorism and drug trafficking, and human rights abuses among others.

In conjunction with diplomacy and other measures, sanctions seek to demonstrate US resolve and express outrage, change the behavior of the target country, and deter other countries from resorting to similar actions in the future. Sanctions do not operate in isolation from other US actions, and they should be consistent with and well-integrated into the overall US policy response.

Accordingly, sanctions should be designed to fit the specific objectives of each case. "One size does not fit all": US interests vary widely from case to case, and sanctions need to be directed in a way that affords maximum influence on the target regime.

Sanctions provide a middle road response between diplomacy and military action. Note, however, that in recent years the use of economic sanctions has increasingly become a "way station" to the use of military force. Ineffective sanctions have led to US military intervention in Panama, Haiti, Somalia, and Iraq (and the use of US air power against Libya and in the Balkans)—either to reinforce the US response or to forceably compel foreign governments to change their policies. In Iraq, President Bush deemed the rapid deployment of troops necessary to counter Saddam Hussein's invasion of Kuwait; but in the other cases, the US armed forces have intervened after sanctions made a bad situation worse.

 

Increasing Use/Declining Success

As indicated in the attached charts, the number of ongoing sanctions cases has grown steadily over time. The United States has instituted new sanctions cases more often in the 1990s than in previous decades. By our count, the United States is currently engaged in more than 30 cases (both unilateral and with other allies) where US trade and/or finance is being restricted in pursuit of specific foreign policy objectives.

US sanctions are authorized under a variety of statutes and executive orders. Over the past decade, there has been a proliferation of sanctions laws, at both federal and state/local levels, with differing requirements and waiver provisions. These laws are not always applied consistently and thus often send muddled signals of US intent.

Successful cases have become increasingly rare as globalization has made it easier for target countries to tap international trade and capital markets and find alternative suppliers of goods and capital.1 The success rate for US sanctions cases (both unilateral and multilateral) has declined sharply from the early postwar period. In the 1990s, sanctions have contributed to the achievement of US foreign policy goals in less than 20 percent of the cases.

When sanctions have worked, the objectives have been relatively modest and narrowly focused. Most don't make the headlines on page one; few result in major policy changes in the targeted regime (the notable exception to this rule was the contribution of sanctions to the collapse of the apartheid regime in South Africa).

The current cases with India and Pakistan illustrate this point. The threat of US sanctions did not deter them from testing nuclear weapons, even though the potential cost to Pakistan could be significant. Why? Both countries stated that they had fundamental national security interests at stake which outweighed the possible adverse economic effect of sanctions. Moreover, judging from recent experience, these countries may have felt that the US measures would not be emulated by other countries, and even if some did follow suit, their actions would be short-lived for both political and humanitarian reasons.

So far, the economic repercussions have been modest. Several European countries have rejected sanctions in part because they dislike the heavy-handed way that the United States has sideswiped their own firms (e.g., Helms-Burton and Iran/Libya Sanctions). Japan has frozen aid, but usually restores the funds when relations normalize after a "decent interval". US sanctions will punish the proliferators (Pakistan more than India) but pose little deterent to other countries that might consider similar tests. In short, the sanctions likely will fail to fulfill US policy goals.

 

Costs to US Firms and Workers

One main function of economic sanctions is to inflict damage on the target country as a means of coercing compliance with our policy goals. However, firms and workers in the United States also pay an immediate price when trade and financial relations are disrupted. Even though the aggregate cost in relation to our GDP is usually very small, the costs may be significant for individual firms or industries.2 Furthermore, even if sanctions cost the US economy only one or two-tenths of a percent of GDP, that still adds up to a recurring cost of $10-15 billion per year. Some of that money is well spent, but much is lost in failed sanctions episodes. That is too much money to waste!

Recent research by my colleagues at the Institute for International Economics calculated the impact of US sanctions on trade, jobs, and wages in the United States.3 They found that US exports to the 26 countries subject to US sanctions in 1995 were $15 to $19 billion lower than they would have been in the absence of the sanctions; that if these lost sales were not offset by exports to other markets, employment among US export industries (though not necessarily in the economy as a whole) would be reduced by 200,000 or more jobs; and that the shift in US employment would result in a loss of about $800 million to $1 billion annually in export sector wage premiums for US workers (since workers in US export industries earn on average $4,000 per year more than the average wage in manufacturing). The longer these sanctions remain in force, the greater the cumulative cost for US workers.

Moreover, if the sanctions impose significant costs on US interests without the promise of practical results, domestic political support for the maintenance of the US sanctions policy will likely erode over time. American workers and firms willingly sacrifice for the good of the country; but our sanctions policy is often not worthy of that commitment.

Simply imposing costs on the target country may satisfy a thirst for retribution, but it does not necessarily achieve US foreign policy goals. Sanctions are blunt policy tools that are easily circumvented. Targeted regimes often adapt to sanctions, even if their people suffer. Meanwhile, ongoing sanctions become increasingly burdensome to US firms and workers.

 

Helms-Burton and Iran Libya Sanctions Acts: Illustrative Cases

Both the Helms-Burton and Iran Libya Sanctions Acts illustrate the problems with US sanctions policies cited above. The objectives of these laws are laudable: to restore freedom and democracy to Cuba, and to halt support for international terrorism, impair the development of weapons of mass destruction, and promote human rights in Iran. Both laws supplement extensive US sanctions in effect for many years. Neither law has elicited support from the international community; indeed, both have generated a backlash of opposition against the United States among friends who otherwise share our basic objectives.

The Helms-Burton sanctions are more significant for their political than their economic effects. They target Cuba but aim at firms and officials of our strongest allies. The sanctions add only a very small incremental impact on the Cuban economy beyond the heavy burden that already exists due to Castro's self-inflicted economic wounds, the withdrawal of aid from the former Soviet Union, and the decades-old US embargo.

Castro is not weakened when we fight with Europe over the so-called extraterritorial application of the US law; but our position is weakened when that dispute makes international cooperation on critical foreign policy and security issues more difficult to achieve. We have just seen a clear example of this problem: France and others refused to join with us in sanctions against India and Pakistan in part because of their opposition to threatened US sanctions against their firms. In addition, the Europeans have threatened to retaliate in kind against selective US firms under blocking statutes, and to counter our sanctions under the dispute mechanism of the World Trade Organization.4 In short, the costs of the Helms-Burton sanctions (in terms of constraints on US policy initiatives) far outweigh the additional economic pressure on the Castro regime.

Similarly, our comprehensive sanctions against Iran and Libya have not been matched by our European allies (although some weapons technologies and equipment have been blocked). Here again, the US sanctions have had a noticeable effect on the target economy, though that effect is far smaller than the self-inflicted wounds of erratic domestic economic policies.5 In Iran, however, our dispute with Europe is more strident because—unlike in Cuba—the Europeans have significant economic and strategic interests in the region. Thus while Helms-Burton provoked primarily a diplomatic dispute, sanctioning European investors in Iran could well have sparked a fractious transatlantic trade dispute—which again would have diverted attention away from our main objectives.

In short, the international backlash against these two sanctions laws has reduced the prospects for achieving the US policy goals in the target countries and has impeded efforts to build international sanctions coalitions in other cases. For that reason, I believe the recent US-EU agreement serves US policy interests. If one assumes that the investments subject to waiver would have been made in any event, as most experts do, the deal merely recognizes the status quo in return for greater cooperation in advancing shared policy objectives in Cuba, Iran, and Libya. In other words, it undoes the harm to US relations with our allies that resulted from the passage of these laws and opens the door for more effective multilateral responses to future crises.

 

Policy Reform: First Steps

Despite all the problems cited above, we can't simply say, "Sanctions don't work, so don't use them". We must have an available government response to foreign outrages between diplomacy and military force.

When we use sanctions, however, they should be designed to better match their costs with their anticipated results. We should work more closely with our allies to develop coordinated approaches to potential trouble spots before a crisis erupts and before we take unilateral actions. And we should also consider strengthening our arsenal of "carrots" as well as "sticks" to more effectively pursue our policy goals.

First, we should learn from our disputes with Europe regarding tactics for using sanctions and institute a permanent G-7 sanctions group. Such a group could meet regularly as part of the annual summit preparatory process and develop contingency plans for coordinated responses to potential foreign crises. The idea would be to consult first, so that joint action is possible. For example, the group could have formulated a joint plan, including possibly multilateral sanctions, in the event of nuclear proliferation in South Asia. Such action would have been a much stronger deterrent than the US measures alone.

Second, we need to guard against using sanctions to implement a "foreign policy on the cheap". Sanctions laws do not have a direct budgetary impact, and thus often receive less scrutiny than foreign assistance programs that require budget appropriations. For the most part, we have renounced such assistance "carrots" and relied instead on sanctions "sticks". As we are now discovering in South Asia, a better blend of policy instruments could have better served our policy interests.

In sum, we need to employ "smarter sanctioners" to assess when and where sanctions can be productively deployed. We need to better match US measures with anticipated results. We need to reintroduce positive incentives as part of our policy arsenal to encourage compliance with our goals. And we need to work more closely with our allies to anticipate problems and develop mutually-reinforcing policy responses.

 

Notes

1. In our comprehensive analysis of the use of economic sanctions in the 20th century, Economic Sanctions Reconsidered: History and Current Policy, (3rd ed. forthcoming 1998) we purposely set a low threshold for success; cases are scored as successful if the sanctions make a modest contribution to at least the partial achievement of the US policy goals. If anything, our results overstate the effectiveness of sanctions in that regard.

2. For a more detailed discussion of this issue, see Economic Sanctions Reconsidered, pp. 75-82.

3. See Gary C. Hufbauer et. al., "US Economic Sanctions: Their Impact on Trade, Jobs, and Wages", Washington: Institute for International Economics, processed, April 1997.

4. I believe the EU's WTO case is weak, but it would force us to invoke the GATT's national security exemption on a political issue that should not be the subject of WTO deliberations. Neither side would win, since it would be highly improbable that a dispute panel would overturn 50 years of GATT precedent and rule that a member could not judge by itself what constitutes its national security interests.

5. For a more detailed discussion of this point, see my testimony before this committee on July 23, 1997.



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