Economic Sanctions

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Sept. 14 1996 3:30 AM

Economic Sanctions

Since the Cold War, sanctions have been the U.S. government's bludgeon of choice for responding to intransigent foreign foes. What are sanctions? Whom are they deployed against? Do they work?

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The United States has two sorts of sanctions in its arsenal: trade and economic. Trade sanctions remove what the government calls "preference programs"--basic privileges, like Most Favored Nation trade status or Import-Export Bank loans, given to all friendly countries. The United States has imposed trade sanctions on nations that, for example, close their markets to its goods (China), sell arms to hostile regimes (Pakistan), and violate human rights (Myanmar). Trade sanctions are reprimands, tailored to reform a sanctioned country's behavior without completely alienating it.
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If trade sanctions fail, the president can adopt the more draconian economic sanctions, which do aim to alienate. Economic sanctions can include trade embargoes, bans on cash transfers and loans from American financial institutions, and measures that prevent access to American assets. Because economic sanctions can strangle an economy, they are considered one step shy of war. Indeed, it has become almost a diplomatic necessity to level sanctions prior to military intervention, to show that all other options have been exhausted.

Currently, Cuba, North Korea, Iran, Iraq, and Libya are on the receiving end of U.S. economic sanctions. Over the last two years, the Clinton administration has imposed economic sanctions on 282 drug traffickers and 49 terrorists and their organizations (Cali Cartel, Hamas, etc.). Pending legislation in Congress would, if passed, escalate current trade sanctions against Myanmar and Nigeria to economic sanctions.

The only U.S. economic sanction that enjoys international backing is the one against Iraq, which means that the other similarly black-marked countries can easily circumvent U.S. embargoes by purchasing goods and finding investors elsewhere. The Helms-Burton Act, signed into law last March, attempts to close this loophole, at least as it pertains to Cuba. It authorizes the State Department to bar foreign executives of companies that do business with Cuba from entering the United States. It also allows U.S. citizens with claims to properties expropriated by the Cuban government after the 1959 revolution to sue foreign companies that traffic in such properties. So far, no individual has been denied entry into the United States under Helms-Burton, and Clinton has suspended its second provision until mid-October.
 
Legislation resembling Helms-Burton that was passed last month prevents Americans from trading with foreign companies that invest more than $40 million in the development of oil and natural gas projects in Iran or Libya. The European Union intends to challenge these new American sanctions in the World Trade Organization on the grounds that they infringe upon national sovereignty. The United States made the same argument against the Arab boycott of Israel in the '70s and '80s.

Do sanctions work? The most comprehensive study comes from Kim Elliott, Jeffrey Schott, and Gary Hufbauer, fellows at the Institute for International Economics, a think tank with a free-market bent. A sanction "works," in the authors' formula, if it accomplishes the goals identified by U.S. policy-makers at the outset of a sanctions program, like ending apartheid in South Africa or undermining Libya's support of terrorism. Examining 35 U.S. sanctions programs in place since 1973, the study estimates they have succeeded 23 percent of the time.

But there are other measures of success. Even if sanctions don't topple a regime or end terrorism or human-rights abuses, they still smart and may deter future misbehavior. They provoke significant economic hardship. According to the authors of the study, in the nations where economic sanctions worked, the average GNP dropped 2.4 percent--the equivalent of a depression. In the first year of U.S. sanctions against Haiti, the country lost 250,000 export-oriented jobs; U.N. sanctions against Serbia contributed to 1,181 percent annual inflation and, in their first year, contributed to a 20 percent increase in unemployment. Even in the cases where sanctions "failed," in the authors' estimation, they coincided with a 1 percent drop in GNP.

Establishing a cause-effect relation between policy and results is difficult. Did sanctions force Slobodan Milosevic to the peace table in Dayton? Did they bring down apartheid in South Africa? The evidence can really only be anecdotal. In these two cases touted as success stories, the answer seems to be "sort of." Because of sanctions, the standard of living in those countries deteriorated substantially, creating enough political pressure to force leaders to comply with U.S. demands. However, it is important to qualify that success. In Yugoslavia, sanctions exacerbated the already wretched economic situation caused by war and the transition from communism. And with South Africa, grass-roots pressure in the United States and Europe forced multinational companies to divest beyond the requirement of government embargoes.
 
As a rule, sanctions against allies and important trading partners (like South Africa) have more leverage than sanctions against self-isolated countries (like North Korea). Banning cultural exchanges or trade with a country like North Korea that professes to have no interest in interacting and trading with the United States cannot accomplish much. North Korea's economic woes may be less provoked by sanctions than self-inflicted.

Also, multilateral sanctions supported by the United Nations, European Union, or the Organization of American States, are more effective than unilateral U.S. sanctions. Multilateral sanctions increase economic pressure by removing easy access to credit and markets. For instance, Slobodan Milosevic, a banker by training, shifted his position because of provisions in U.N sanctions that forbade banks from extending Serbia the credit it needed to respond to its economic crisis. But countries like Cuba or Libya, while hurt by U.S. sanctions, have other reliable sources of investment and, thus, less immediate incentive to change their behavior.
 
But economic sanctions come at a cost to innocents and U.S. companies. The United Nations has warned that 3 million people in Iraq may starve because of the embargo--yet Saddam Hussein not only survives but continues to provoke the United States. And sanctions may actually help rogue regimes survive. A leader like Castro or Hussein can use sanctions to rally public opinion in support of his own hard-line positions. Finally, American companies complain that embargoes hurt them, disrupting important business relationships by shifting contracts and profits to foreign firms. The U.S. Chamber of Commerce has estimated that last year, trade and economic sanctions deprived the U.S. economy of one-tenth of 1 percent of its total annual national income.

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