10 October 1997
The Journal of Commerce

Non-strategic goods suffer side effects

A U.S. exporter recently applied for permission to sell a sewage pump to Iraq, assuming that it would be allowed under the embargo as a humanitarian exception for goods such as food and medicine.

But the Treasury Department refused to grant a license, despite a growing incidence of typhoid in Iraq. The apparent problem? A sewage pump isn't food or medicine.

The account, related by Ellen Frost, senior fellow at the Institute for International Economics in Washington, illustrates the strict application of U.S. sanctions which, in Iraq's case, may go further than the United Nations' own embargo policy. It is also an example of the effect of sanctions on capital goods such as industrial and farm equipment, which arguably have little to do with strategic threats.

$15 BILLION, 200,000 JOBS

Last April, an institute study estimated that American exporters lost $15 billion to $19 billion in overseas sales two years ago due to U.S. sanctions against 26 target countries, costing U.S. workers over 200,000 jobs. Eleven nations in the study are the subject of broad or comprehensive U.S. trade curbs.

The report is part of a recent counter-offensive against the spread of unilateral and foreign policy sanctions that includes campaigns by the National Association of Manufacturers, the National Foreign Trade Council and a coalition formed in April that's called USA*Engage.

USA*Engage's 631 members include such companies as Caterpillar Inc., Deere & Co., as well as groups like the American Soybean Association.

SAFETY IN NUMBERS

One reason for the group approach is safety in numbers, say participants. Most corporations are camera-shy about calling for trade with sanctioned countries. But many are also looking for ways to join the fight because U.S. curbs have multiplied, often restricting the flow of civilian goods.

In the three years prior to President Clinton's May 1995 order banning all trade with Iran, for example, machinery accounted for 41 percent of U.S. exports to the Islamic state, according to U.S. Census figures. Sanctions may represent a considerable loss of potential markets for makers of farm equipment because all seven nations on the State Department's terrorism list are, coincidentally, agrarian societies.

Critics argue that country sanctions covering some items can also harm sales of others, even if no legal limits apply. That's because the United States gets a reputation as an unreliable supplier.

THE 'PENUMBRA EFFECT'

"There's a penumbra effect," said Gary Hufbauer, an author of the institute's report, who is now director of studies at the Council on Foreign Relations.

The conclusion seems to be borne out by testimony before a trade panel of the House International Relations Committee, submitted by Paul Freedenberg, a former Commerce Department official, now a trade consultant at Baker & Botts in Washington.

Mr. Freedenberg noted that U.S. machine tool manufacturers have exactly the same 10 percent market share in China for sophisticated equipment which is subject to export controls as for simpler, unrestricted machines.

"The reason for this is clear. The Chinese clearly want complete product lines, and they do not want to go to several vendors in several countries to procure those product lines," Mr. Freedenberg said.

U.S. sanctions have also blocked exports of capital equipment in unexpected areas that seem far removed from the original policy goals.

CATERPILLAR'S WOES

"We've lost sales of mining equipment in Colombia," said Bill Lane, director of governmental affairs for Peoria, Ill.-based Caterpillar. The sales were underwritten by the U.S. Export-Import Bank until the financing was barred when Colombia was decertified for assistance last year after failing to meet U.S. standards in the war against drugs, Mr. Lane said.

Sanctions costs are a particularly sore point for Caterpillar because the company forfeited its market lead for construction equipment in the Soviet Union in the 1980s to Komatsu of Japan after U.S. curbs were imposed to protest human rights violations and the invasion of Afghanistan. Caterpillar puts its lost sales at $400 million.

A report in June by the President's Export Council also cited examples of lost sales in industrial equipment and agribusiness. U.S. manufacturers have foregone sales in refrigerated transport equipment for produce in Iran and Libya, according to United Technologies Corp.'s Carrier Transicold Division.

United Technologies' Otis Elevator Division also said it has taken a hit from country sanctions that prevent it from servicing equipment that it previously installed in Cuba and Iran. The company says it has been forced to abandon the markets to competitors from Switzerland and Japan.

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