Studies of past U.S. unilateral sanctions demonstrate that they impose high costs on American companies, workers, and farmers. U.S. sanctions cost an estimated $15 to $20 billion of lost exports in 1995. By acting alone, the United States hands these exports, and the jobs they support, to foreign competitors. Even after sanctions are lifted, Americans find it difficult or impossible to regain their markets. Repeated use of sanctions undermines confidence in America as a reliable supplier. In the long term, unilateral sanctions jeopardize America's economic growth and competitiveness by restricting access to the world's growing markets and deterring investment in the United States as a manufacturing platform.

The costs of unilateral sanctions constitute an unfunded mandate to carry out the U.S. Government's foreign policy. In recent years, the United States has reduced international activities ranging from military to diplomatic efforts. As the United States has decreased its funding of alternative foreign policy tools, it increasingly has turned to unilateral sanctions. The result is a shift in the economic burden of U.S. foreign policy to American companies, workers and farmers, whose commercial relationships the U.S. Government uses as leverage with foreign countries. Asking the private sector to assume the costs of achieving national interests might be justified if unilateral sanctions had a high probability of success. But unilateral sanctions rarely achieve U.S. foreign policy goals and often work against vital U.S. interests.

Unilateral sanctions -- measures other than legitimate actions to open foreign markets to U.S. products and services -- impose both immediate and long-term costs for Americans. Section one of this paper demonstrates these costs by examining the Soviet grain embargo, which after seventeen years still has lasting effects for U.S. farmers. Section two analyzes the immediate, cumulative, and long-term harm of unilateral sanctions to American companies, workers, and farmers, particularly harm to the reputation of the United States as a reliable supplier. Section three demonstrates that unilateral sanctions threaten U.S. economic growth and economic competitiveness by cutting off access to fast-growing markets. Section four discusses how unilateral sanctions deter investment in the United States as a manufacturing platform.

I. Tracing the Costs of a Unilateral Sanctions Episode: The Soviet Grain Embargo

The high costs of U.S. unilateral sanctions over time are exemplified by the Soviet grain embargo, which was imposed in January 1980 to protest the Soviet Union's invasion of Afghanistan. President Carter told Congress that the grain embargo was intended to "make the Soviets pay a price for aggression" and to deter future expansions. The results, however, fell far short of that goal. The grain embargo did not significantly reduce Soviet grain supplies. U.S. efforts to make the embargo a multilateral effort failed, as other grain-producing countries supplanted almost all of the expected U.S. exports. The embargo did nothing to persuade the Soviet Union to withdraw from Afghanistan, instead it hardened popular opinion against the United States.

Farmers, who already were suffering from depressed farm prices, protested by staging a tractor rally in the snow on the Washington mall. The embargo was imposed shortly before the Presidential primaries, and both Democratic and Republican challengers came out against it. President Reagan made the embargo a successful campaign issue throughout the South and Midwest, promising not to use grain exports as a weapon against the Soviet Union.

The grain embargo had a devastating effect on American farmers, who expected to sell 25 million tons of wheat and corn to the Soviets in 1980. The embargo reduced grain exports to the Soviet Union to 8 million tons, the amount required under a pre-existing commitment. The Department of Agriculture estimated the value of the lost sales at $2.3 billion. To soften the blow, the U.S. Government purchased excess grain for storage, increased price supports for wheat and corn, and stepped up its promotion of agricultural exports. These measures cost U.S. taxpayers an estimated $2 to 3 billion in deficit spending. In comparison, experts estimate that the embargo cost the Soviet Union only $225 million in increased grain prices.

The embargo amounted to a U.S. subsidy to other grain producing countries. Canada and the European Community agreed to maintain grain exports to the Soviet Union at "traditional" levels, but in fact they nearly doubled their exports. Argentina cut sales to Peru, Chile, Italy, and Spain to increase sales to the U.S.S.R. As a direct result of the embargo, all three countries increased their export capacity and strengthened their competitive position vis-á-vis American farmers.

After the embargo was lifted, U.S. farmers could not reclaim their previous share of the vast Soviet market. The Soviet Union was understandably reluctant to become dependent on the United States for vital food supplies. In October 1982, the Soviet Union ignored U.S. Government offers to increase grain exports to 23 million tons. When an agreement eventually was reached one year later, it covered only 12 million tons. U.S. grain exports still have not rebounded to the pre-embargo level: in the 1990s annual grain exports to the former Soviet Union have been below 15 million tons, and were below 6 million tons in 1993-94.¹

The grain embargo shook worldwide confidence in the reliability of U.S. agricultural supplies. For years after the embargo Saudi Arabia insisted on a U.S. Government commitment not to impose export controls for foreign policy reasons as a condition of purchasing U.S. grain.

2. The Costs of Unilateral Sanctions Compound Over Time

The Soviet grain embargo illustrates both the short and long term costs imposed by unilateral sanctions. The immediate costs include lost export sales, export-related jobs, and American investments. These losses create opportunities for foreign competitors who supplant U.S. suppliers and develop experience for worldwide exports. Unilateral sanctions also tarnish America's reputation as a reliable supplier, making it more difficult for U.S. companies, workers, and farmers to re-enter a market after sanctions are lifted and to win business in other countries.

A. Initial Damage: Lost Exports, Jobs, and Investment. Numerous studies have attempted to calculate the costs of unilateral sanctions. While the estimates vary, they reveal that the cost of U.S. unilateral sanctions has reached tens of billions of dollars.

• The Institute for International Economics concluded that U.S. sanctions cost $15 to $20 billion in lost exports in 1995, which translates to a reduction of more than 200,000 jobs in the export sector.²
  
  
• According to the National Association of Manufacturers, U.S. sanctions measures adopted from 1993 to 1996 cut off export markets worth $790 billion.³
  
  
• A 1994 Council on Competitiveness report found that eight sanctions episodes cost the U.S. economy $6 billion in annual sales and 120,000 export-related jobs.⁴ This study examined specific export controls and targeted sanctions and did not reflect the full panoply of U.S. sanctions measures.

While these numbers are large, they do not convey the full extent of U.S. losses. Capital equipment exports are a good example. The initial export of capital equipment is not the end of a transaction ­­ it is the beginning, and in many cases is a "loss leader." Exports are followed by service contracts, upgrades, and replacement parts sales: long term relationships that employ American manufacturing facilities, workers, and independent suppliers. The true long-term costs extend far beyond the initial lost sale.

The numbers also do not reflect collateral losses: sales that are not directly subject to sanctions. Re-entering the market after sanctions are lifted can take years, or even decades. For example, the power generation industry estimates that it takes seven to ten years to re-establish market share after sanctions have been imposed and lifted. Companies must win back contracts to service and upgrade power generation equipment that they initially supplied. This takes an investment of time to redevelop customer relationships. If sanctions were unilateral, foreign competitors are likely to have a firm hold on the market. Customers are unlikely to abandon well-established and satisfactory relationships with Japanese, European, or other suppliers for a U.S. company that recently has pulled out of the market. Lingering distrust based on past sanctions makes the process of rebuilding more difficult. To restore customer confidence, a company may be forced to make technology transfers or other concessions that it otherwise would not make.

The collateral effects of sanctions can be particularly damaging for suppliers of aircraft, construction equipment, trucks and other equipment purchased and maintained in fleets. Purchasers prefer uniformity in a fleet, so that downstream servicing and replacement parts inventories do not become hopelessly complex. As a result, it can be difficult or impossible for an alternative supplier to win sales once a customer has chosen a fleet supplier. The Boeing Company experienced this problem after the U.S. embargo on trade with Vietnam. In 1993, Vietnam Airlines sought to lease six narrow body aircraft suitable for short and medium distance flights. The airline hoped to lease Boeing aircraft, but when the U.S. embargo was not lifted as expected, it instead leased Airbus A320 narrow body aircraft. The initial loss to Boeing was approximately $211 million. Vietnam Airlines then established training, ground support, and route determinations around the Airbus fleet. To build on this investment, it has continued to lease Airbus 320s, despite the expiration of its initial leases and the end of the U.S. embargo. By the year 2000, Vietnam Airlines intends to acquire a total of 30 narrow body aircraft, which could bring Boeing's losses to $1.6 billion.

The U.S. embargo did not prevent or even delay Vietnam's acquisition of aircraft. It instead sealed a long term relationship between Vietnam Airlines and a foreign competitor.

B. Damage Downstream: Loss of U.S. Market Share to Foreign Competitors. As demonstrated by the grain embargo, unilateral sanctions can strengthen or create foreign competitors and reduce U.S. market share. As the CEO of a company hurt by sanctions put it, "[o]ne nation's export ban is another nation's economic boon: An invitation to win trade opportunities while competitor companies are kept in the penalty box."⁵

The intent of sanctions often is to deprive the target country of products, technology, or services it needs. In reality, however, the United States alone cannot achieve that result even in sectors where it is the world's leading supplier. America faces intense international competition in virtually every industry. For example, the United States accounts for only 20% of world exports of agricultural equipment and 16% of world exports of telecommunications equipment. ⁶ There are plenty of foreign suppliers that are eager to take our place.

For this reason, when the U.S. acts alone in withdrawing from a market, it creates an opportunity for foreign competitors to demonstrate their products and to increase market share. Once established, foreign suppliers gain experience and international credentials, strengthening them for worldwide competition. In many cases, unilateral sanctions provide an incentive for foreign suppliers to enter a market for the first time.

• In 1993, the United States unilaterally banned exports of satellite equipment and technology to China in reaction to China's transfer of missile technology to Pakistan. Prior to the sanctions, Hughes Aircraft had committed to sell satellites to China, including a long-term joint venture to build ten satellites. The sanctions grounded two Hughes satellites set for launch for Hong Kong and Australia. China immediately canceled a $400 million order for two more Hughes satellites and transferred it to Deutsche Aerospace. Seizing the opportunity, Germany's Chancellor Helmut Kohl met with Chinese officials and stressed that his country would not disrupt trade to exert foreign policy leverage. Chinese officials were persuaded to terminate the joint venture with Hughes. They contracted with the Germans instead. Hughes estimated that the loss affected 20,000 to 25,000 U.S. jobs.⁷
  
  
• In the early 1980s, the United States banned exports of equipment for use in building the Siberian gas pipeline. The ban was intended to delay construction of the pipeline, which the United States feared would make Europe dependent on Soviet energy supplies. The sanctions opened a previously U.S.­dominated niche for arctic drilling equipment to European and Japanese suppliers. Up to that time, U.S. companies held an imposing edge in arctic drilling technology, based on experience developing the Alaskan North Slope. The pipeline sanctions allowed European and Japanese competitors to develop experience and demonstrate success in the field, a development that still works to their advantage today. In addition to the loss of market share and technological leadership, the pipeline sanctions caused a deep rift between the United States and its closest European allies, who objected to efforts to extend U.S. foreign policy beyond its borders.
  
  
• In 1973, President Nixon imposed a ban on soybean exports to Japan. At that time, the United States was virtually unchallenged as a soybean producer and accounted for about 90 percent of world soybean exports.⁸ The experience led Japan to seek diversified sources for soybeans and to invest heavily in Brazilian soybean production. Brazil today remains America's largest competitor, and the U.S. share of world soybean exports has dropped from 90% to 66%.⁹

The loss of exports and the creation of foreign competition might have been justifiable if U.S. sanctions had achieved important foreign policy goals. In each case, however, unilateral sanctions were a "lose-lose tool."¹⁰ The soybean sanctions were lifted after several months; the Siberian gas pipeline was completed; and China obtained the satellites it needed from Deutsche Aerospace. Thus, American companies, workers, and farmers incurred the costs of sanctions without serving any broader purpose of advancing U.S. objectives.

C. Cumulative Effect: Loss of Trust in American Suppliers. Perhaps the most significant cost of unilateral sanctions is the loss of trust in American suppliers and in America as a place to do business. Success in business, particularly international business, depends on trust between buyer and seller. Customers must have confidence in the quality and performance of products and services and in timely performance of contracts. Former Secretary of State George Schultz described the impact of unilateral sanctions on American companies' ability to establish long term business relationships:

It takes a long time to go abroad, get positioned, and learn about how to do things there. A considerable investment is made on both sides of the transaction, and there emerges a certain interdependence that necessitates confidence in the continuing good faith of both sides. In this process of investment, a company develops what the government may regard as a bargaining chip. But if our government then takes that bargaining chip and spends it, where does that leave the company? The company has lost out, and its commercial relationship deteriorates. Who wants to deal with an unreliable supplier, especially when the supplier is not the only game in town?¹¹

Unilateral sanctions often are imposed to "send a message" to the target and the world that the United States will not compromise its principles. In fact, unilateral sanctions send the message to U.S. trading partners that the United States cannot be depended upon to fulfill commercial commitments. Commenting on the Soviet pipeline sanctions, the Journal of Commerce observed:

While the measures may have slowed the pipeline progress somewhat, they did not stop the project. They did cost American companies hundreds of millions of dollars. They also showed the world that the United States does not fully respect contracts and is prone to the use of trade sanctions as foreign policy weapons. ¹²

Reliability issues severely handicap U.S. companies bidding for infrastructure and resource extraction projects in the developing world. Projects such as the construction and operation of power plants or the development of oil and gas resources take place over many years and require continual servicing, upgrades, and replacement commitments. Often U.S. companies must form strategic alliances to participate in such major endeavors, and the possibility of future sanctions can sink a U.S. bidder. For example, a U.S. oil company recently was excluded from a consortium bidding to develop oil deposits in Azerbaijan in part because the United States currently restricts international financing to Azerbaijan. The potential venture partners feared that expanded sanctions might force the U.S. company to withdraw and therefore proceeded without the prospective partner.

Fears of sanctions also are particularly damaging in the high technology sector. High-technology customers look for a single supplier to provide equipment, technical support, and upgrades over time, because switching to a different supplier is prohibitively costly. Suppliers whose long term reliability is suspect face a major disadvantage. For this reason, even among U.S. allies, there are reports that companies design-out U.S. parts and components to avoid the potential extraterritorial reach of sanctions.

• Twenty-five years ago, Airbus Industrie's first line of jet aircraft contained over 50% U.S. parts and components. To escape U.S. foreign policy export controls, Airbus reduced its sourcing to below 20% U.S.-controlled components by 1992.
  
  
• In 1980 Caterpillar dominated the Soviet market in heavy construction equipment, holding an 85% share. Then U.S. sanctions prevented the company from meeting its commitments on the Soviet gas pipeline construction project. As a result, Caterpillar was tainted as an unreliable supplier and forced to cede the Soviet market to its Japanese competitors.
  
  
• A U.S. supplier of oil exploration and drilling equipment and technology was excluded from a contract to build an offshore oil rig in the North Sea. Although there is no realistic threat of U.S. sanctions against Great Britain, there was concern that U.S. law might preclude a future decision to move the equipment to other more sensitive locations.

3. Long-Term Harm to America's Competitiveness in the Global Economy

The future of the United States economy depends on exports. From 1988 to 1995, export-related jobs grew four times faster than total employment. Exports accounted for one-third of total U.S. economic growth. More than twelve million U.S. jobs depend on exports of goods and services, and by 2000 the number will approach sixteen million.¹³ Export-related jobs pay twelve to eighteen percent more than the hourly wage in the rest of the economy.¹⁴

According to the Department of Commerce, the developing world will play a critical role in increasing U.S. exports:

Over the next two decades, the markets that hold the greatest potential for dramatic increases in U.S. exports are not our traditional trading partners in Europe and Japan, which now account for the overwhelming bulk of our trade. Rather, the greatest commercial opportunities are to be found in ten Big Emerging Markets (BEMs). ¹⁵

The BEMs, which comprise half the world's population, are expected to double their share of the world's market to 27 percent by 2010.¹⁶ By that same year, the United States Trade Representative projects that 700 million people in China, India, and Indonesia alone could reach an income level equivalent to Spain's.¹⁷ The result will be a consumer market roughly equivalent to the U.S., Japan, and Europe combined.

As late Secretary of Commerce Ron Brown stated:

Our success in these dynamic markets will largely determine the United States' position as the world's economic leader. Our ability to compete in these markets will assure that we have the economic strength and vitality essential to preserving our national security, and will further our ability to create high-wage, high quality jobs for Americans. The locus of world economic growth is shifting dramatically towards these markets of the future, and we as a nation must respond swiftly and aggressively if we hope to maintain our global competitiveness.

Nevertheless, in recent years, the U.S. has imposed or threatened sanctions on China, India, Indonesia, Turkey, and Mexico ­­ five of the world's ten BEMs. 

3. Sanctions Deter U.S. and Foreign Companies from Locating Production in the United States

Frequent unilateral sanctions deter investment in the United States as a manufacturing platform. International investment contributes significantly to U.S. economic and job growth. U.S. subsidiaries of foreign companies employ 4.9 million American workers, or 5% of the country's workforce.¹⁸ From 1988 to 1994, U.S. employment supported by international investment increased by more than 26%, while employment at U.S. businesses overall increased only 9%.¹⁹

The risk that unilateral sanctions might bar exports of products and technology to global markets discourages international investment. The United States itself is an important market, but frequently it does not make sense to locate a facility in the United States unless that facility can supply export markets as well. The perception that the United States is likely to impose unilateral sanctions is a disincentive to locating production facilities (and high-wage manufacturing jobs) here, particularly if other locations are available. The uncertainty created by U.S. sanctions policy strengthens the incentive to operate outside the United States.

In a global economy, long-term investment decisions turn on a number of factors, including access to foreign markets. As the world's economic growth shifts from the developed to the developing world, concerns about long-term ability to serve markets from the United States can tip the scale in favor of investment abroad. This is particularly true for sectors in which the U.S. is a slow- or no-growth market. The nuclear power industry is an example. The United States unilaterally bars exports of nuclear power generation equipment to China. China's rapid economic growth has triggered escalating power needs and a high demand for nuclear power equipment. Because of the U.S. export ban, China has turned to France, Canada, and the Russian Federation for a total of $15 billion in nuclear equipment since 1989. During the same period U.S. demand for major nuclear equipment has been essentially non-existent. As a result, Westinghouse, a world leader in the nuclear power industry, has cut 3,500 jobs or one-third of its U.S. workforce related to nuclear power equipment. Without access to growth markets, the company simply could not maintain its workforce. ²⁰

References

1. U.S. Department of Agriculture, Wheat Background for 1995 Farm Legislation, Agricultural Economic Report No. 712, p. 14 Table 10 (April 1995); Feed Grains, Background for 1995 Farm Legislation, Agricultural Economic Report No. 714, p. 27 Table 13 (April 1995).

2. Gary Clyde Hufbauer, Kimberly Ann Elliott, Tess Cyrus, Elizabeth Winston, U.S. Economic Sanctions: Their Impact on Trade, Jobs, and Wages, p. 3 (Institute for International Economics, April 16, 1997).

3. National Association of Manufacturers, A Catalog of New U.S. Unilateral Economic Sanctions for Foreign Policy Purposes 1993-1996 p. 1 (March 1997).

4. Council on Competitiveness, Economic Security: The Dollars and Sense of U.S. Foreign Policy (February 1994).

5. C. Michael Armstrong, Chairman and Chief Executive Officer of Hughes Electronics Corporation, "America's Destiny: Export Superpower or Economic Disarmament," speech delivered before the Council on Foreign Relations, May 9, 1995 (hereinafter "Armstrong Speech").

6. United Nations Conference on Trade and Development homepage.

7. Armstrong Speech.

8. U.S. Department of Agriculture, Oilseeds Background for 1995 Farm Legislation, Agricultural Economic Report No. 715, p .9 Table 7 (May 1995).

9. Id.

10. Donald L. Losman, Pain without Gain: The Sanctions Saga, Mediterranean Quarterly, p. 10 (Winter 1997).

11. George P. Schultz, "Light-Switch Diplomacy," Business Week (May 28, 1979).

12. Journal of Commerce, p.4A (9 May 1983) (quoted in Gary Clyde Hufbauer, Jeffrey J. Schott, Kimberly Ann Elliott, Economic Sanctions Reconsidered, p.218 (Institute for International Economics, 2d ed. 1990)).

13. U.S. Department of Commerce, Big Emerging Markets 1996 Outlook and Sourcebook, p. 12.

14. The Institute for International Economics and the Manufacturing Institute, Why Exports Matter More!, p. 9-10 (February 1996); Lester A. Davis, U.S. Jobs Supported by Goods and Services Exports, 1983-1994, Department of Commerce, Bureau of Economic Analysis: Research Series OIMA-1-96, p. 19 (November 1996).

15. Department of Commerce Big Emerging Markets (BEMs) Home Page, http://www.stat-usa.gov/bems/whybems.html

16. Id.

17. United States Trade Representative, 1995 Trade Policy Agenda and 1994 Annual Report of the President on the Trade Agreements Program, p. 9.

18. Organization for International Investment, Investing in American Jobs, A State by State Examination of the Employment Impact of International Investment, p. 1 (February 1997).

19. Id.

20. Testimony of Michael H. Jordan, Chairman and Chief Executive Officer, Westinghouse Electric Corporation, before the Subcommittee on Trade of the Committee on Ways and Means, March 18, 1997.

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