19 August 1997
Investor's Business Daily
Charles Oliver

What Do You Do When A City
Enacts Its Own Foreign Policy?

State and local governments pass economic sanctions -'boycotts on steroids'

Frances David faces an unusual dilemma. She's trying to figure out where Berkeley, Calif., is going to buy fuel for the city's vehicles.

The City Council has barred managers from buying fuel from firms with ties to Nigeria or Burma in protest of human rights abuses there. The bans rule out most of the major oil firms.

"We're looking at independent refiners and other alternative sources," said David, the city's acting finance director. Berkeley isn't alone.

If you do business in Burma, forget about doing business with the state of Massachusetts. Or with Madison, Wis. Or New York City. Or Alameda County, Calif. All have recently passed so-called selective purchasing laws.

The trend of state and local governments passing such laws is growing. Twelve cities, one county and one state have barred governments from doing business with firms with ties to Burma. Other cities and states are considering such laws.

But some fear that selective buying rules will wreak havoc on government budgets and drive taxes up while doing little to improve the social woes of targeted countries.

The laws may also clash with international trading rules. The European Union recently filed a complaint with the World Trade Organization challenging the Massachusetts law.

Moreover, there's serious doubt that economic sanctions help make positive social change. A study of more than 100 sanctions dating to World War I by the Institute for International Economics found that they don't work.

"The bottom line is that sanctions, especially unilateral ones, rarely have much of an impact on the behavior of the country they're aimed at," said Kimberly Elliott, a research fellow at a think tank in Washington.

"We believe that they just add to the overall problem and create confusion," said Frank Kittredge, president of the National Foreign Trade Council, a business trade group.

These laws also put the weight of government purchasing behind a boycott. They put millions of dollars in contracts at risk, and they affect firms that don't have a direct consumer link, such as construction firms.

Supporters say taxpayers have a right to decide how their money's spent. They claim such activism represents democracy at its best. "Selective purchasing laws are just boycotts on steroids," said Simon Billenness of Franklin Research and Development, a self- described socially responsible investment firm.

Burma, a Southeast Asian nation bordering Thailand and China, has been singled out because of its record of human rights abuses. But Burma isn't the only country in activists' crosshairs.

More than 30 cities and states will buy only from firms that have signed the MacBride principles. These require firms doing business in Northern Ireland not to discriminate on religious grounds.

Berkeley won't buy from firms with ties to Nigeria. Neighboring Oakland may join that ban. Human rights abuses have been cited as the reason.

New York City is looking at a ban on purchases from firms with ties to China. And New Jersey is reportedly mulling a move against Switzerland for laundering Nazi gold.

Such laws began popping up decades ago, says Todd Putnam, editor of the National Boycott News magazine. The effort came of age during the fight against apartheid in South Africa. In the 1980s, dozens of cities and states banned buying from firms with ties to South Africa. In the case of Burma, activists think the boycotts will propel that country's leaders to end repression and abuses of human rights. Will it work? They point to South Africa, where they believe an international boycott helped bring an end to apartheid.

Kittredge says the National Foreign Trade Council shares the concern for human rights. The problem, he says, is there are just too many ways around sanctions. If U.S. firms can't do business in Burma, other firms will.

"U.S. firms can have a positive influence on the policies of those nations," he said. "But sanctions isolate a nation, and the U.S. can lose all influence - economic, religious and cultural."

He points to South Korea and Taiwan as success stories. These nations changed from authoritarian rule to democracies. Trade with the U.S. helped, he says.

And sanctions bring a cost.

Berkeley is an extreme example. Along with sanctions on Burma and Nigeria, it also bars doing business with firms with ties to the defense industry, and it won't buy from firms involved with nuclear power.

Now, the city's finance department says it spends roughly a quarter of its time trying to comply with these various restrictions. "That involves determining which firms are off-limits, finding alternative sources for various items and answering questions from the media," said David, the acting finance director.

Whether the restrictions force the city to spend more is unknown. Berkeley, like most governments that pass such laws, leaves itself an out. The purchasing manager can waive the restrictions if there are no alternative suppliers, if observing the ban would affect public health or safety, or for other compelling reasons.

Critics also say that such laws might violate the Constitution, which gives the federal government sole authority to make foreign policy, and expressly bars states from interfering with foreign trade.

Still, the constitutional issue may not matter.

The European Union has challenged the Massachusetts law under the rules of the World Trade Organization. Under agreements signed by the U.S., states can't place "political" conditions on their procurement contracts.

If the U.S. loses that fight, which seems likely, it could have to go to court to force Massachusetts to change its law. And, if these laws aren't repealed, the WTO would let Europeans levy sanctions against the U.S. - not just the states and cities themselves.

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