free trade, unilateral and economic trade sanctions

Fall 1996
Houston Business Review
Ken R. LeSeur, CEO, Halliburton Energy Group

Sanctions: An Ineffective Tool of Diplomacy

Economic sanctions have emerged as the greatest barrier to foreign investment and trade for many U.S. companies. As opportunities in markets outside the U.S. have increased, so have the number of real and threatened U.S. sanctions. There are no less then 30 countries where the U.S. is seeking to limit commercial activity. Most of these are U.S. unilateral sanctions, which means the U.S. is imposing economic sanctions on the offending country without the support of other countries. When this occurs, business continues in these countries -- with, or without us -- and as the international city of the South, Houston should be concerned.

As the number of sanctioned countries has increased, so have the number of reasons economic sanctions are being sought. They are not used just for promoting democratic values, human rights and freedom anymore. Sanctions are being considered as a means to influence drug trafficking, weapons proliferation, labor rights, moral and cultural values, territorial assertiveness and remnants of cold war policies. Sanctions to protect certain animal species threaten our relationship with Mexico and other nations that some claim are not complying with concern about the incidental catch of dolphins in tuna fishing. Similar sanctions are being considered against nations that do not maintain the same pollution control requirements as the U.S.

Sanctions are a favorite threat in international disputes because they are often considered relatively painless for the U.S. - no appropriation of government funds is needed to contend with the offending regime, and we sit back comfortably thinking that we are allowing market forces to drive political and social change. It reminds us of the advice our parents gave us "If you don't like him, then don't play with him."

Seems simple enough. But in the schoolyard of international diplomacy, this just doesn't work. In fact, it is self-defeating. Economic sanctions alone, especially unilateral ones, do not drive change because the offending regime rarely suffers economic deprivation. There are just too many others to play with. Cuba, for instance, has continued to maintain trade relations with many countries around the world, including our NAFTA counterparts -- Canada and Mexico. After decades of U.S. sanctions, Castro remains in power. The primary impact has been on the U.S. jobs that would have otherwise been created to sell products and services to Cuba.

Economic isolation is proven to be an ineffective political tactic, even sometimes when broadly multilateral. For example, despite widespread international support to sanction Saddam Hussein's regime. In Iraq, there is equally widespread concern that it hasn't been effective. Moreover, if sanctions don't work with full international community support, the results are obvious for those situations where the U.S. stands alone: Iran, for instance, has virtually not suffered from U.S. unilateral actions, and simply enjoys strong relationships with non-U.S. businesses instead.

Market forces do drive change, but only if you are in the market. Countries that are supposed to be penalized by sanctions can and do find plenty of other companies to do business with and these other companies don't necessarily seek change in the country, leaving the U.S. at a loss on two fronts, diplomatic as well as economic. Foreign competitors whose governments do not restrict their ability to do business around the world aggressively exploit the U.S. policy by supplanting U.S. firms, eroding U.S. market share and technology leads in those countries.

For instance, in countries where sanctions prevent U.S. companies from servicing oil and gas exploration and production, foreign-based competitors are able to charge inflated prices and generate higher profits. These profits are used to reduce prices and gain market share in countries where U.S. companies are permitted to do business. The result -- the U.S. economy and jobs suffer.

Energy companies are particularly vulnerable to restrictions caused by sanctions. Unfortunately, much of the world's oil and gas reserves are in countries that are considered offensive for an increasing number of reasons by the U.S. government. Much of the opportunity to offer job growth and stability to our employees will come from serving these markets outside the United States. Sanctions could severely limit our ability to participate in this growth and cost U.S. jobs. It is almost as if we should tell our new employees that their job is subject to government conscription in economic sanctions.

Beyond putting us at a competitive disadvantage, sanctions are now casting U.S. companies as unreliable partners. Countries that are considering long-term partnerships are increasingly concerned that U.S. contracts can be nullified by diplomatic action. For them, it may seem easier to work with a foreign company not hostage to what may seem like haphazard political maneuvering. In addition to the stiff competition of progressive foreign-based companies supported by their local governments, we must overcome the threat of U.S. economic sanctions against a host of countries around the world.

Congress and the president recently enacted new legislation that seeks to piece economic restrictions on other countries who trade with those countries that we find offensive. These secondary countries receive some restrictions on the sale of producers and services in the U.S. This type of legislation represents an attempt to force multilateral action by restricting shore that don't participate in U.S. trade tactics. In doing so, our government has effectively admitted to the failure of unilateral economic sanctions as a diplomatic tool.

Meanwhile, some of these secondary countries, long since recognizing the ineffectiveness of unilateral sanctions, have threatened to retaliate the U.S. for this policy. If carried out, this retaliation could have a devastating impact on U.S. global competitiveness. The European Union has had to retaliate against the U.S. for elements of the law that could punish European companies doing business in Cuba.

The Iran/Libya boycott law puts at risk, in the U.S. petroleum equipment sector alone, over $600 million in export sales and over 12,000 export-related jobs. Also at risk is the technology lead gained over decades of investment, invention and engineering because of the possibility that U.S. products will be designed out of procurement plans.

But it is not just energy companies that suffer. Texas is the nation's second exporter, sending more than $50 trillion worth of products to foreign markets each year. The Texas Department of Commerce reports that nearly 1 million Texas jobs are directly or indirectly related to international trade. The Greater Houston Partnership reports that more than half of Houston-based companies have international operations - more than any other Texas city and among the top U.S. cities in this regard. Moreover, the Department of Commerce ranks Houston 7th in the country for export sales and, again, the for the state of Texas. We simply cannot isolate ourselves from the global economy.

The U.S. position on sanctions would lead us to believe that these unilateral actions are a necessary response to "terrorist nations." The implication is that many of the people in these countries support violent aggression against innocent people to accomplish political and religious objectives. This is not so. In fact, terrorists represent a small minority of fanatics who use fear and violence to intimidate the rest of the country's inhabitants. With sanctions, only the innocent suffer -- U.S. employees and the sometimes desperate inhabitants of the offending countries. Terrorists who live by fear and violence are not deterred by the threat of economic isolation from the U.S. In fact, sanctions may indicate to them that the U.S. will not deliver serious retribution.

U.S. business leaders, and our employees share the concerns expressed by many members of Congress and the Administration about security implications of the actions of rogue governments. We should not compromise our commitment to democratic principles, human rights and free governments. But we bring more leverage when we are a significant participant in a country's economy than we ever bring by not being at the table. Providing jobs and being a leading employer is more influential than any sanction or embargo. History has taught us that much: one need only look at China.

By being engaged and working with China, both countries have benefited. China has doubled its Gross National Product (GNP) since 1980. Texas alone exported over $1.5 billion in goods and services to China in 1995, according to the Texas Department of Commerce. The National Retail Federation estimates that this helped support over 17,000 jobs in Texas.

Our nation's economy and ability to maintain employment strength is strongly rooted in our global competitiveness. If we are to continue to grow and support jobs and profits, we must be allowed to compete and expand unfettered by the whims of legislators eager to appear strong on the international stage. We are not strong diplomatically if we are not strong economically if we are haphazardly restricted from the international marketplace. The U.S. Business community is very aware of the need to have foreign policy tools that help keep rouge governments from threatening security. Unilateral economic sanctions would better leveraged as a foreign policy tool if they were considered only after options in the diplomatic and national security arena have been tried.

Sanctions are among the most insidious unfunded mandates because politicians do not disclose their ineffectiveness, nor their adverse effect, to their constituents. Economic sanctions legislation that has the potential to adversely effect the U.S. Economy and jobs should be carefully deliberated in Congress.

The potential consequences to all affected elements of the U.S. Economy should be accounted for and publicly disclosed. If the legislation is enacted, the effects on the targeted economy and on the U.S. Economy should be monitored, measured, evaluated and reported annually. The impact should be carefully assessed and ineffective or counterproductive economic sanctions should be immediately discontinued.

Finally, we must make our elected and appointed government officials aware that sanctions have real costs in their districts and states, in near-term viability of U.S. Companies who must compete in an increasingly global market place. They must know that the greatest opportunity to promote democracy and human rights in other countries is for the U.S. to be engaged.

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