Emergency Committee For American Trade - Publications

Sanctions Reform

Unilateral Economic Sanctions

The end of the Cold War and increasing global economic integration pose great challenges and opportunities for U.S. trade and foreign policy. Engagement continues to be America’s best tool to meet these challenges and to promote freedom, human rights, and security, as well as continued economic growth. The dramatic increase in the imposition of U.S. unilateral sanctions is undermining U.S. engagement in the global economy and poses a serious threat to U.S. commercial and foreign policy interests. According to a recent study, over the last five years, the United States has imposed 60 unilateral economic sanctions on 35 countries accounting for 40 percent of the world’s population.

As important as the various foreign policy and humanitarian goals that are being pursued through unilateral sanctions may be, without multilateral support the sanctions infrequently achieve their objectives. A study by the Institute for International Economics found that the effectiveness of unilateral sanctions has declined significantly over the last 20 years and that only one-fifth of the sanctions imposed in the 1970s and 1980s had any positive outcome. A recent report by the U.S. State Department’s Advisory Committee on International Economic Policy also concluded that unilateral sanctions usually fail to change the behavior of target countries. For example, in the case of the Soviet grain embargo, it is estimated that the embargo cost the United States $2.3 billion as the result of lost farm exports and the cost of compensation to U.S. farmers. It is estimated that the increased cost to the Soviet Union of buying embargoed commodities from alternative suppliers was only $225 million, and the embargo did not achieve its objective of compelling Russia to withdraw from Afghanistan.

The increasing ineffectiveness of unilateral sanctions is due largely to the declining economic leverage of the United States and the growing ability of targeted countries to secure critical imports, market access, and financing from countries other than the United States. Targeted countries can almost always find a European, Japanese, or other supplier or investor to provide the restricted goods, services, or investment. Unilateral sanctions are particularly likely to fail to change the behavior of countries with authoritarian regimes that are relatively more isolated from world opinion. Moreover, unilateral sanctions can have the counterproductive effect of strengthening the control of despotic regimes and ruling elites, while inflicting great pain on innocent citizens.

Unilateral sanctions are bad economic policy because they impose significant costs on U.S. firms and workers. The Institute for International Economics concluded that U.S. sanctions cost between $15 and $20 billion in lost exports in 1995, translating into a loss of approximately 200,000 American jobs. While this damage estimate is large, it does not reflect collateral costs arising from sanctions, including sales lost due to concerns about the United States as an unreliable supplier and the costs associated with re-entering a market after sanctions are lifted.

When the United States acts alone, it creates market opportunities for foreign suppliers to demonstrate their products and increase their market share. For example, when the United States banned exports of U.S. equipment for use in the construction of the Siberian pipeline, it opened up a previously U.S.-dominated market niche for Arctic drilling equipment to European and Japanese suppliers. Similarly, when the United States cut off sales of American wheat to protest the Soviet invasion of Afghanistan, it created the opportunity for France, Canada, Australia, and Argentina to increase their wheat sales to Russia. Russia and other foreign buyers continue to this day to restrict purchases of American wheat, based on their concerns that the United States may impose a new embargo.

Moreover, the frequent use of unilateral sanctions is having a cumulative adverse impact on U.S. suppliers in markets throughout the world. It has encouraged the "de-Americanization" of overseas production, particularly in the high technology sector, with foreign firms deliberately designing their products without U.S. parts and know-how in order to ensure that they would not be subject to U.S. unilateral sanctions. Reliability issues are also severely handicapping U.S. companies bidding for infrastructure projects in the developing world.

The negative impact of unilateral sanctions imposed at the U.S. federal level is being compounded by the proliferation of state and local unilateral sanctions laws. For example, many states and localities have enacted bans on procurement from firms engaged in trade with Burma or Indonesia. The state and local sanctions laws are subjecting the United States to WTO challenges and putting U.S. exports at the risk of retaliation. Local sanctions legislation is also risking the loss of employment and exports at the U.S. subsidiaries of foreign firms that are an important source of U.S. exports. The United States Supreme Court this year will review the Federal Circuit Court decision striking down the Massachusetts legislation barring procurement from businesses engaged in trade with Burma as unconstitutional. It is likely that the Supreme Court will uphold the Circuit Court decision.

Unilateral sanctions also jeopardize U.S. foreign policy interests. Unilateral sanctions undermine relations with major U.S. allies, as exemplified by the increased tensions with Canada and the EU over the Helms-Burton Cuba and the Iran-Libya sanctions. Sanctions are an irritant in U.S.-Japan relations as a result of the Massachusetts sanctions legislation against Burma. These measures have prompted WTO challenges and led to intensive consultations to resolve the disputes.

Unilateral sanctions undercut U.S. ability to promote national security and foreign policy interests through greater engagement. In the post-Cold War era, trade and investment have become the most effective means to promote economic reform and democracy throughout the world. As U.S. policy in China and elsewhere demonstrates, engagement is far more effective in promoting civic and market reforms than punitive economic measures. Similarly, economic disengagement can undermine the efforts of humanitarian and religious groups that are working to assist those living under repressive governments.

Concerns over the proliferation of unilateral sanctions have led to growing support for sanctions reform legislation sponsored by Senator Richard Lugar (R-IN) and Congressman Phil Crane (D-8 IL). It would establish a process for consideration of sanctions measures, including a cost-benefit analysis. Senator Lugar (R-IN) also sponsored S.566, the "Agricultural Trade Freedom Act," which would exempt agricultural commodities, livestock, and value-added agricultural products from unilateral economic sanctions.

Unilateral sanctions will remain a significant issue this year. The following paragraphs discuss the sanctions reform legislation, as well as key issue-specific and country-specific sanctions issues.

Sanctions Reform Legislation

This year there will be a renewed effort to seek enactment of the sanctions process reform proposals contained in S.776, the "Enhancement of Trade, Security, and Human Rights through Sanctions Reform Act," introduced last year by Senators Lugar (R-IN), Hagel (R-NE), and Kerrey (D-NE) in the Senate and Congressmen Crane (R-8IL) and Dooley (D-20 CA) in the House. The legislation seeks to establish a more deliberative and disciplined approach to U.S. sanctions policy by creating a common sense procedural framework for considering unilateral sanctions. It would:

Require before a unilateral sanction is imposed that the Congress and the President request information and report on the effectiveness of the proposed sanction; the economic costs to U.S. agriculture and industry; whether it would create a backlash against U.S. security, humanitarian, or foreign policy objectives, including undermining multilateral cooperation on the objectives; and whether other policy alternatives have been tried;
Set out guidelines for future sanctions initiatives, including providing adequate presidential waiver authority, contract sanctity, compensation for the agricultural sector when U.S. sanctions hit a major agricultural export market;
Authorize the Department of Agriculture to boost export promotion programs whenever the U.S. sanctions a major foreign agricultural market to offset losses by American farmers;
Establish the general principle that food exports, including financing of such exports, should be excluded from future U.S. sanctions and that humanitarian factors should be taken into account so that sanctions target only those engaged in improper behavior and not the innocent;
Specify that congressional and executive branch sanctions should sunset after two years, but may be reauthorized or intensified if appropriate; and
Not prevent the President or the Congress from imposing unilateral sanctions and instead simply require that the framework and guidelines set out in the bill be followed in considering such sanctions.

In response to comments from the Administration and the Congress, several modifications were made to the legislation, including:

A clarification that the requirement under the bill that 45-day advance notice be given before a sanction is imposed would not apply to freezes on assets;
Strengthened exemptions from sanctions for food and medicine;
Provision of general waiver authority from mandatory sanctions imposed under the Glenn amendment regarding nuclear proliferation; and
A requirement that sanctions legislation must include a report from the Congressional Budget Office on its costs and benefits or the legislation is subject to a point of order.

The sanctions process reform bill currently has 38 co-sponsors in the Senate and 111 co-sponsors in the House.

Along with the sanctions process reform bill, Senator Lugar and a number of other members are sponsoring S.566, the "Agricultural Trade Freedom Act," to exempt food and medicine exports from all unilateral sanctions legislation. Last year, the Senate Agriculture Committee passed S. 566. Senator Ashcroft (R-MO) introduced S.1771, the "Food and Medicine for the World Act" last October. The Ashcroft bill would require congressional approval of any unilateral agricultural or medical sanctions against any foreign country or entity and would require the President to terminate any existing unilateral agricultural or medical sanctions.

Meanwhile, the President announced last July that as part of the Administration’s overall sanctions reform effort that the United States would exempt exports of food, medicine, and medical equipment from U.S. unilateral sanctions. The President’s decision is strong evidence of the growing support for sanctions reform.

Senate Majority Leader Trent Lott is committed to bring a sanctions reform bill to the Senate floor this year. Senate Foreign Relations Committee Chairman Helms has said that sanctions reform would be on the committee’s agenda early this year and that he would like to develop compromise legislation based on the sanctions reform proposals that have been introduced. Committee staff is reported to be working on draft legislation to be included in a broader technical assistance, trade, and corruption bill. The Senate Agriculture Committee is likely to consider sanctions reform legislation as well. Senator Ashcroft is likely to continue to pursue his legislation to lift existing unilateral sanctions. Senator Lugar’s sanctions process reform bill continues to gather support in the Senate and House.

Issue-Specific Sanctions Legislation

Religious Persecution

The International Religious Freedom Act of 1998 creates a Special Representative of the Secretary of State for International Religious Freedom who is charged with the responsibility of opposing overseas violations of religious freedom and recommending policies to promote religious freedom abroad. The 1998 act also creates a bipartisan commission to make recommendations and issue a report to the President in May of each year on violations of religious freedom abroad. The bill requires the Administration to prepare an annual report by September 1 of each year on countries engaged in violations of religious freedom and the actions the United States is taking in each country to promote religious freedom. The Administration is required to impose sanctions against countries identified in the annual report as violators of international religious freedom. Sanctions under the act include limiting U.S. development assistance, restricting export licenses, prohibiting loans by U.S. financial institutions, and requiring U.S. votes against loans from international financial institutions to countries violating religious freedom. The act provides the President with authority to waive sanctions in the national interest and to use existing human rights sanctions against a country to satisfy the requirements of the act.

The State Department identified five countries that are of particular concern in issuing its report under the International Religious Freedom Act last fall. The five countries named are China, Iran, Iraq, Myanmar, and Sudan. The report also mentions Afghanistan and Serbia. With regard to China, the State Department indicated that the sanctions required under the act would consist of existing restrictions on the export of crime control and detection instruments. The Administration said that in the case of Iran and Iraq sanctions under the act would consist of existing restrictions on U.S. security assistance and in the care of Myanmar would consist of the existing prohibition on exports of defense articles and services. The United States will continue to oppose any loans to Sudan by international financial institutions.

Narcotics Enforcement

The Foreign Assistance Act of 1961 requires the President to certify by March 1 of each year whether countries that are major drug producers or drug transshipment areas are fully cooperating with U.S. narcotics enforcement activities. If a country is found not to be cooperating, it is subject to a range of sanctions, including the loss of foreign assistance. The President’s certification decisions may be overturned if Congress passes a joint disapproval resolution within 30 days of the President’s certification announcement. If a country does not meet the certification criteria, the President can waive the criteria if he determines it is in the national interest.

This year, the United States certified that Mexico and Colombia are cooperating fully with the U.S. battle against illicit drugs. The United States announced that Afghanistan and Burma would continue to be subject to U.S. sanctions for their continued failure to cooperate with U.S. anti-drug efforts. Cambodia, Haiti, Nigeria, and Paraguay were also found not to be cooperating with U.S. anti-drug efforts, but the United States has waived sanctions against these countries on national interest grounds.

Country-Specific Sanctions

Update on Helms-Burton Cuba Sanctions Legislation

The Cuban Liberty and Democratic Solidarity Act of 1996 reaffirms the existing embargo against Cuba and creates a private right of action for U.S. nationals to sue persons who traffic in property expropriated from them by the Castro regime. The act denies visas to foreign nationals who are corporate officers, principals, or controlling shareholders of companies that have been involved in the confiscation of, or trafficking in, expropriated property. The President has the authority to waive the private-right-of-action provisions under Title III of the act for six-month periods, if he determines it is in the national interest and would expedite a transition to democracy in Cuba. The President has no authority to waive the immigration restrictions imposed by the act.

On January 14 of this year, President Clinton announced his decision to extend the waiver of the private right of action provisions under Title III of the act, citing the increased efforts of the EU and other allies to encourage democracy in Cuba.

In May 1998, the United States and the EU reached an agreement to resolve the dispute over the Helms-Burton legislation under which, based on certain conditions, the EU agreed to acknowledge the U.S. claims of seized property in Cuba certified by the Foreign Claims Settlement Commission, to accept a set of Disciplines for Strengthening of Investment Protection, and not to challenge the Cuba or Iran-Libya sanctions laws in the WTO. The set of disciplines agreed to would prohibit governments from providing loans, subsidies, risk insurance, or other support to firms that invest in expropriated property in Cuba and elsewhere. It also would establish a new international registry where individuals or firms could list their expropriation claims, and have governments require companies to check the registry before making foreign investments.

Under the agreement reached with the EU, the United States must keep the Title III waiver in effect, seek permanent waiver authority for the immigration sanctions under Title IV, and take no action against EU companies or individuals under the Iran-Libya Sanctions Act. Congress must enact legislation giving the President the authority to waive Title IV of the Act. To date there has been insufficient congressional support to pass the necessary legislation.

Easing of Cuba Embargo

The Administration is continuing to take small steps to ease Cuba sanctions. In January of last year, the Administration announced a relaxation of Cuba restrictions, allowing the sale of food and agricultural products on a case-by-case basis to non-governmental organizations, re-establishing direct mail service, authorizing charter flights to Cuban cities other than Havana, and licensing U.S. citizens and non-governmental organization to send up to $300 per quarter to non-governmental entities. In May of last year, the Department of Commerce issued regulations allowing U.S. exports of food and agricultural commodities to non-governmental organizations in Cuba. The Treasury Department has begun to simplify its regulations regarding travel to Cuba, and the United States initiated a new effort with Cuban government officials to combat illegal narcotics trade.

There is growing support among farm-state members of Congress for easing restrictions on trade with Cuba. Last year, the Senate approved an amendment to the 2000 Agriculture Appropriations bill offered by Senator Ashcroft (R-NC), giving the President the authority to exempt food and medicine from unilateral sanctions. The amendment was intended to provide the President the authority to ease Cuban sanctions on agricultural exports. Although the Ashcroft amendment was deleted in conference, its passage in the Senate reflects the growing support for easing Cuba trade restrictions.

Iran-Libya Sanctions

In 1995, the United States imposed sanctions against Iran, prohibiting U.S. persons from engaging in trade and investment with Iran. The 1996 Iran-Libya Sanctions Act (ILSA) broadened the existing Iran sanctions by imposing mandatory sanctions against companies that invest in the Iranian or Libyan oil and gas sectors. The act requires the President to impose two or more of the following sanctions on companies which make investments over a certain dollar threshold in Iran or Libya that contribute to the development of their petroleum sectors: 1) denial of Ex-Im Bank credits, 2) denial of U.S. export licenses, 3) denial of certain loans from U.S. financial institutions, 4) restrictions on financial institutions, including denial of designation as a primary dealer and repository of government funds, 5) a government procurement ban, and 6) import restrictions. The sanctions must remain in effect for two years and can be waived by the President if he determines it is in the national interest.

The act also imposes sanctions on companies that engage in trade with Iran in goods, services, or technology listed in the applicable UN resolutions, if the trade significantly and materially contributes to Iran’s ability to develop its petroleum or aviation sectors or acquire chemical, biological, or nuclear weapons. The President is required to impose two or more of the sanctions previously listed on companies that engage in prohibited trade with Iran. The act is scheduled to expire in August 2001.

As part of the agreement reached between the United States and the EU in May of 1998 to resolve the dispute over the Iran-Libya and Helms-Burton sanctions provisions, the United States agreed to waive the imposition of sanctions against the European firms investing in the Persian Gulf South Pars gas field development. The United States also waived sanctions against Malaysian and Russian firms investing in South Pars. The Administration said that it would not grant automatic waivers to EU firms investing in pipelines that run through Iran to the Caspian Sea. It also declined to give any automatic future waivers to Russia, due to ongoing concerns about the weakness of its export controls. The waivers for the EU, Russian, and Malaysian firms put American companies at a disadvantage, since under a 1995 executive order U.S. firms are prohibited from investing in Iran.

As a result of the Administration’s decision to ease restrictions on commercial sales of food, medicine, and medical equipment under U.S. sanctions, the United States has begun to allow such sales to Iran, Libya and Sudan. Last August, the U.S. Department of Agriculture approved a sale of 50,000 metric tons of corn to Iran. The new policy will open the door to a combined agricultural market in Iran, Libya, and Sudan worth nearly $1.7 billion per year.

It is hoped that the Administration will continue to make efforts to improve relations with Iran and to find ways to deal with proliferation and other sensitive issues in ways other than ILSA or other unilateral sanctions legislation. The victory of Iran’s reform party in the recent Iranian elections may improve the climate somewhat for bilateral relations with the United States. Reform party leader Mohammed Reza Khatemi has said that the Iranian government will consider a new policy of détente with the United States and the West, but is waiting for an overture from the United States. While the United States has made some quiet overtures to Iran, it also has demanded that Iran disavow terrorism and cease its efforts to develop weapons of mass destruction. The U.S. Administration is constrained in its efforts by congressional concerns over Iran’s support of terrorism and efforts to develop missile technology, and chemical, biological, and nuclear weapons. For example, in February of this year, the Senate voted unanimously to require President Clinton to certify that Russia’s space agency has not aided Iran’s missile program before the United States can help pay for Russia’s contribution to the international space station.

Iran Nonproliferation Act

This year both the House and Senate have unanimously approved the Iran Nonproliferation Act, H.R. 1883, which authorizes the President to impose sanctions against any entities that help Iran develop missile and weapons technology. Sanctions include prohibition of 1) sales of defense items on the U.S. Munitions list and defense articles and defense services controlled under the Arms Export Control Act, 2) export of controlled goods and technology under the Export Administration Act, and 3) U.S. agency payments to the Russian Space Agency in connection with the International Space Station or any other Russian government organization without presidential authorization. The unanimous approval of the legislation by both houses of Congress makes it likely that the President will sign the legislation. The legislation is aimed primarily at Russian companies.

India-Pakistan Nuclear Proliferation Sanctions

In 1998, the Administration announced that it would impose sanctions under the Nuclear Proliferation Prevention Act of 1994 against India and Pakistan for conducting nuclear weapons tests. The 1994 act, the so-called Glenn amendment, contains no waiver authority and requires the imposition of sanctions against previously non-nuclear countries that test nuclear weapons. The sanctions imposed against India and Pakistan included termination of economic development assistance; prohibition of TDA assistance; termination of military sales; revocation of export licenses for any items on the munitions control list; suspension of any U.S. government credits or credit guarantees such as Ex-Im Bank and OPIC; prohibition of U.S. exports of dual-use items controlled for nuclear or missile reasons; and prohibition on U.S. banks extending loans or credits to the governments of India and Pakistan.

Concerns about the adverse impact of the India-Pakistan sanctions on U.S. agricultural exports prompted the enactment in 1998 of an amendment allowing the President to exempt agricultural products from the sanctions for one year. The President exercised this authority and exempted food and other agricultural commodities from the India-Pakistan sanctions until October of last year when the waiver authority expired.

The International Trade Commission released a study on the impact of the India-Pakistan sanctions last year that found that the sanctions had little effect on India and Pakistan, but had detrimental effects on U.S. agricultural exports. The ITC study found that the sanctions imposed a total cost of $161 million on the United States.

Last year, House and Senate conferees included a provision in the fiscal year 2000 Defense Appropriations bill which would have granted the President the authority to waive the sanctions against India and Pakistan. The waiver authority was never enacted because the President vetoed the Defense Appropriations bill.

The sanctions waiver provision in the vetoed Defense Appropriations bill is evidence of the growing support for easing the India-Pakistan sanctions. While the military coup in Pakistan last fall makes easing of sanctions against Pakistan less likely, removal of sanctions against India may be possible if the United States and India are successful in their efforts to improve bilateral relations. The United States has begun to discuss the possibility of supporting World Bank lending to India in order to encourage India to sign the nuclear test ban treaty.

Myanmar

In 1996, Congress enacted legislation authorizing the President to bar U.S. persons from making investments in Myanmar (formerly Burma) upon certification to Congress that its government engaged in large-scale repression of its democratic opposition. Pursuant to that law and the International Economic Emergency Powers Act (IEEPA), the President issued an Executive Order in 1997 certifying that the Government of Myanmar had committed large-scale repression against its democratic opposition. The order bars any U.S. person from making new investments in Myanmar. The President renewed the ban on investment last May, citing continued repression of the democratic opposition in Myanmar.

Legal Challenge to Massachusetts Procurement Ban

In November of 1998, the Federal District Court in Boston upheld a challenge to a Massachusetts state law prohibiting companies that do business in Myanmar from providing goods and services to Massachusetts state agencies. The district court ruled that the Massachusetts law was unconstitutional on the grounds that it violates the federal government’s power to regulate foreign affairs. In June of last year, the First Circuit Court affirmed the lower court decision, holding that the law (1) constituted the making of foreign policy, a sphere reserved exclusively to the national government, 2) impermissibly discriminated against foreign commerce and sought to regulate conduct among foreign nations, and 3) was preempted by federal legislation imposing more limited sanctions on Burma. The U.S. Supreme Court has agreed to review the decision and will hear arguments on the case early this year.

Other Possible Sanctions Legislation

In addition to the areas of sanctions legislation described above, there may also be activity on sanctions legislation targeting: 1) Russia, in response to its actions in Chechnya, 2) Sudan, in response to human rights abuses and 3) Nigeria and possibly other nations for engaging in illegal narcotics trade. There may also be further action on legislation introduced by Congressman Chris Smith (R-4 NJ) requiring the removal of non-humanitarian assistance to countries certified to be engaged in international sexual trafficking. The bill is intended to eliminate the forced prostitution of women and children.

ECAT POSITION: ECAT believes that almost all unilateral sanctions that do not have multilateral support are ineffective and counterproductive. ECAT supports the deliberative and disciplined framework for consideration of sanctions set out in the sanctions process reform legislation sponsored by Senator Lugar and Congressman Crane and urges the Congress to take action early this year to enact the legislation.