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| Section II. | IMPACT OF FOREIGN POLICY-BASED UNILATERAL ECONOMIC SANCTIONS ON U.S. ECONOMIC INTERESTS |
The PEC's assessment of economic impacts necessarily is qualitative. We are unable to provide an econometric analysis of the cost of economic sanctions in terms of foregone U.S. wages and income, investment, and competitiveness. Such a study requires the resources and information gathering capabilities of an entity such as the International Trade Commission. Instead, this report attempts to provide a useful description of the nature of impacts based on our business experience in the international marketplace and our understanding of the factors that have influenced foreign customers' selection among international sources of supply.
Our presentation of this information on business impacts is not intended to reflect our evaluation of whether the related sanctions should have been imposed. We have not undertaken that type of assessment and have reached no conclusion on such a question.
Impacts may be characterized in two primary categories. The first and most obvious are direct impacts: foregone sales and business relationships related to the country or entity targeted by sanctions. The second category, indirect impacts, relates to effects on U.S. competitiveness in friendly third-country markets. Indirect impacts are cumulative and, we believe, may be significantly more important to the nation's economic interests.
Estimates of the economic costs of unilateral sanctions typically are limited to the interrupted sales to the target of goods specifically affected by the sanction. These are costs that would be borne even if the sanction were multilaterally imposed. The PEC paper of June 1996 provides a rough estimate of the shortfall of U.S. market shares in ten unilaterally sanctioned countries compared to Japan and the European Community:
Source: IMF, 1993
Sanctions against all but Libya, Cuba, the DPRK, and Vietnam were limited in scope.
A more detailed and comprehensive analysis of such direct effects was released by the Institute for International Economics on April 16, 1997. IIE estimated the U.S. shortfall for 26 sanctioned countries as $15 billion to $19 billion for 1995 with 200,000 to 250,000 jobs affected.
Indirect impacts include:
- Special advantages created for foreign competitors in both U.S. and
third-country markets;
- Uncertainty about availability and the effects of utilizing U.S.-origin
goods, services, and technology;
- Unreliability of U.S. firms and their affiliates as suppliers and as
business partners;
- Retaliation by friendly third-country governments and trading partners against U.S. interference in their international trade policy decisions.
While the first of these impacts serves to strengthen our key competitors globally, the latter three impacts are of great importance because they weaken U.S. competitiveness also in third-country markets, including our most important trading partners. All of these impacts are functions of failure to gain cooperative action among our allies to deal with foreign policy problems. The latter three largely are the result of extraterritorial application of sanctions.
Appendix II provides anecdotal cases of both direct and indirect economic impacts of unilateral sanctions. The following discussion provides a description of the principal impacts of U.S. unilateral sanctions seen in the international market place with illustrative examples drawn from Appendix II.
Special Advantages to Foreign Competitors from Market Substitution
Economic sanctions typically restrict transactions of U.S. firms and their foreign subsidiaries as well as the sale by all persons of U.S.-origin goods and technology involving targeted countries, end uses, and end users. When the restrictions are unilateral, leading competitors in third countries move to substitute for the U.S. presence under "sanctuary market" conditions.
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Foreign Competitors are Strengthened
Foreign suppliers are able to gain overall economies of scale and experience and to extract more favorable pricing and terms and conditions for their sales than would be available under open competition. Such advantages result in competitive strength against U.S. goods and services in global markets, including in the United States. - Effects are Cumulative Ð Extending Beyond Removal of Sanctions
Infrastructure plant and equipment provided by foreign competitors during sanctions may have lifetimes of 10-to-50 years; e.g., aircraft, trucks, locomotives, power plants. Associated sales of replacement parts and service over the lifetime of such products often are equal to the value of the initial sale contract. Moreover, initial investment in training, support equipment, and spares inventories would have to be repeated in order to switch to U.S. suppliers. - Illustrative Examples
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The Soviet-Western Europe Gas Pipeline Embargo of 1982 shifted global
turbine market leadership from the U.S. to Europe with a permanent cost of
thousands of U.S. jobs. When the U.S. government attempted to stop the
use of U.S. goods and technology in construction of the pipeline to bring
gas from the Soviet Union to Western Europe, GE Power Systems (GEPS) was
forced to break contracts with European manufacturers for the use of GEPS
designs and parts and components in European-made turbines. European
governments retaliated by making compliance with the U.S. law illegal for
European companies. Where they had been dependent on GEPS for the
high-tech half of the turbine components, the European firms were able to
gain essential independence.
A large part of GEPS' market share, which fell from 18% in 1981 to 6% in 1982, was given over to three major European competitors. That share loss had to be recovered by extraordinarily costly restructuring, cost and quality improvements. Meanwhile, the now independent European firms have been given an unearned competitive boost and thousands of good U.S. jobs have disappeared. (See Appendix II, Section G.2.)
- Continued unilateral exclusion of U.S. nuclear energy cooperation with
China --
- threatens survival of U.S. industry's ability to support the existing
100 U.S. nuclear power plants and the nuclear Navy,
- denies state-of-the-art safety features in equipment for the world's
largest and fastest growing nuclear energy industry, and
- costs the opportunity to compete for $15 billion in projects over the next 14 years, with 225,000 job years in 28 states at stake. Nuclear energy cooperation with China has been withheld in an attempt to force China's compliance with U.S. nuclear non-proliferation standards since 1985. Notwithstanding China's desire to include U.S. bidders in its nuclear power procurements, since 1991 China has been able to complete its own nuclear power reactor, purchase four reactors from France (two completed and two under contract) at a price of $4 billion, sign a $3 billion contract for two Canadian reactors, and reach advanced negotiations for two Russian reactors. (See Appendix II, Section H.1.)
- threatens survival of U.S. industry's ability to support the existing
100 U.S. nuclear power plants and the nuclear Navy,
- U.S. special restrictions on commercial aircraft and related equipment
exports drive sanctioned countries to establish long-term commitments to
non-U.S. suppliers. For example, Vietnam standardized on Airbus aircraft
when the embargo was extended in 1993. The initial lost sale by Boeing to
Airbus of Europe was $211 million. Even though the embargo was soon
lifted, that loss is likely to grow to $1.6 billion over the next three
years. Similar commitments presently are being made by Syria and
Lebanon.
(See Appendix II, Section A.5.)
- By including equipment for commercial satellite launch in the 1993 U.S.
unilateral missile sanctions against China and Pakistan, $1.5 billion in
exports to China were blocked and a market opportunity was created for
European suppliers. Stricter interpretation of the "Helms Amendment"
could have blocked most of the $9 billion annual U.S. exports to China.
(See Appendix II, Section A.6.)
- Sanctions against Angola, Libya, Iran, and Vietnam prohibited CONOCO from competing successfully on projects needed to create unique technological know-how for development of certain oil-bearing formations in other countries including Dubai, Russia, Canada, Colombia and the United States. Competitors from Canada, the Netherlands, and the United Kingdom are reaping the benefits of the expertise gained in those U.S.-sanctioned countries in other locations, including the U.S. Gulf of Mexico. (See Appendix II, Section G.2.)
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The Soviet-Western Europe Gas Pipeline Embargo of 1982 shifted global
turbine market leadership from the U.S. to Europe with a permanent cost of
thousands of U.S. jobs. When the U.S. government attempted to stop the
use of U.S. goods and technology in construction of the pipeline to bring
gas from the Soviet Union to Western Europe, GE Power Systems (GEPS) was
forced to break contracts with European manufacturers for the use of GEPS
designs and parts and components in European-made turbines. European
governments retaliated by making compliance with the U.S. law illegal for
European companies. Where they had been dependent on GEPS for the
high-tech half of the turbine components, the European firms were able to
gain essential independence.
Uncertainty, Unreliability, and Retaliation Stem from Unilateralism and Extraterritorial Application of U.S. Sanctions
U.S. companies believe their international competitiveness is burdened by perceived U.S. disregard for its international trade policy commitments, and for the reliability of its companies and their products and services in global markets.
- Perceived uncertainty and unreliability of supply is a major factor in
the choice among alternative suppliers. Just as the typical consumer
avoids automobiles or appliances from sources that have a poor record of
continuity and parts and service availability, so do public and private
institutions when considering investments.
U.S. foreign policy has disrupted the commitments of U.S. suppliers and the international distribution of U.S. goods and services to a much greater extent than that of the governments of any of our foreign competitors. Even though the Congress established a presumption in favor of contract sanctity in the Export Administration Act of 1979, U.S. unilateral economic sanctions seldom have been imposed with such a provision. As a result, there is abundant evidence that U.S. economic interests are impacted by the burden of perceived unreliability of the United States as a source of products and services.
- Illustrative Examples of the Impact of Perceived U.S. Unreliability
China, Pakistan, and India have been subject to or threatened by a wide variety of U.S. economic sanctions for many years.
- China began procurement of an anticipated fleet of 250-300 Sikorsky
commercial helicopters in 1984 with a purchase of 24 Black Hawks. The
second tranche was under negotiation when the Tiananmen sanctions were
enacted. Because this aircraft configuration had some military variants
of commercial components, the State Department denied permission even to
service the existing fleet. China turned to Russia, France, and the
EC-120 European helicopter consortium to acquire its commercial helicopter
fleet. The immediate impact is in sales already lost by Sikorsky of more
than $1 billion and the potential of $3.1 to $3.7 billion, with tens of
thousands of related jobs for the firm and its suppliers. Moreover, the
implementation of U.S. policy demonstrated that U.S. helicopter suppliers
are unreliable.
(See Appendix II, Section A.4.)
Such experiences as the aborted commercial helicopter fleet, the previously described commercial satellite case, denial of support for U.S. equipment for the Three Gorges Dam Project, the prohibition on nuclear energy cooperation, and the continuing threat of essentially complete denial of commercial trade from withdrawal of MFN or under the Helms Amendment have demonstrated the unreliability of U.S. suppliers for the burgeoning Chinese infrastructure market. China clearly has considered this in other procurements, including airliners for its commercial fleet.
- Pakistan has been subject to sanctions and threatened sanctions similar
to those for China. The most well-known case was the U.S. abrogation of
Pakistan's contract for F-16 aircraft due to the inflexible Pressler
amendment that leaves no room for Presidential discretion. Pakistan
already had paid $658 million toward the $1.4 billion purchase, and the
United States was unable to return the money. Recently, the Pakistani
national airline issued a procurement notice for ten wide-body airliners.
It required bidders to forego the normal contract clause protecting the
supplier from obligations for failing to fulfill contractual requirements
if the failure is caused by their own government's action. European
bidders will be able to comply with the requirement. U.S. bidders will
not. Pakistan's fleet already contains a much smaller number of U.S.
aircraft than would be expected based on the U.S. share in other markets.
Thus, unreliability of U.S. supply continues to undermine important
opportunities to regain a presence in a market almost lost to U.S.
suppliers.
(See Appendix II, Section A.3.)
- India also has been the subject of U.S. unilateral sanctions and
sanctions threats for many years. One of the most disruptive and
frustrating to India occurred in the early 1990's when missile sanctions
were imposed on the Indian Space Research Organization (ISRO). No U.S.
export licenses, even for non-controlled items, to fulfill supplier
commitments could be approved to ISRO or its suppliers for many months
because of interagency disagreement over the scope of the sanctions.
- These countries represent an important and rapidly growing share of the global market for commercial aircraft for the next 20 years. Continuation of the present trends could mean a shortfall of tens of billions in U.S. export sales and scores of thousands of U.S. jobs. To compete at all, U.S. suppliers must respond to the unreliability burden with price or other concessions that are not required of our international competitors.
- China began procurement of an anticipated fleet of 250-300 Sikorsky
commercial helicopters in 1984 with a purchase of 24 Black Hawks. The
second tranche was under negotiation when the Tiananmen sanctions were
enacted. Because this aircraft configuration had some military variants
of commercial components, the State Department denied permission even to
service the existing fleet. China turned to Russia, France, and the
EC-120 European helicopter consortium to acquire its commercial helicopter
fleet. The immediate impact is in sales already lost by Sikorsky of more
than $1 billion and the potential of $3.1 to $3.7 billion, with tens of
thousands of related jobs for the firm and its suppliers. Moreover, the
implementation of U.S. policy demonstrated that U.S. helicopter suppliers
are unreliable.
(See Appendix II, Section A.4.)
Trading partners in third countries continue to be reminded of reasons to avoid dependence on U.S. goods. A European turbine manufacturer held a $70 million Iranian order for turbines when the unilateral embargo on U.S. trade with Iran was announced in 1995. The manufacturer was dependent on a U.S. source for the specially designed control unit. The component would comprise 3% of the finished turbine's value and, if taken from a foreign inventory, would be eligible for reexport to Iran without U.S. permission. However, the Treasury Department advised at the outset that such an export from the United States was prohibited by the Executive Order. The foreign manufacturer proceeded to design its own control unit, jeopardizing the future of the U.S. controls business. Later in 1995, Treasury stated that it was uncertain what would be the legal authority for the earlier interpretation and that it had submitted the matter for an interagency determination. As of May 1997, no decision had been reached, but the de facto policy remains negative.
- Extraterritorial measures, or otherwise attempting to force compliance
by third-country trading partners with U.S. unilateral sanctions are
especially damaging to the reputation of U.S. firms as reliable business
partners and sources of supply. Such measures are applied by
- restricting the use, resale, or retransfer of U.S. origin goods and
technology by foreign purchasers,
- restricting foreign exports of foreign-made goods containing U.S.-origin
parts and components or technology,
- extending the jurisdiction of U.S. law over foreign business
transactions of foreign subsidiaries of U.S firms, or
- penalizing foreign firms if they have engaged in U.S. targeted transactions.
Compliance requires foreign firms to avoid, without U.S. permission, transactions involving ever-changing lists of thousands of U.S.-targeted persons, entities, destinations, and countries as well as types of end uses and end users specified by various U.S. regulations.
The regulations are implemented, pursuant to laws described in Appendix I, by the Departments of Commerce, Energy, Treasury, and State. There is no single point of contact in the U.S. government for persons who are or may be affected by one or more of the regulations, and integration of regulatory policy and practice is minimal.
Compliance failure may subject the foreign person to criminal penalties in the United States or denial of further transactions involving U.S. goods or domestic markets.
- restricting the use, resale, or retransfer of U.S. origin goods and
technology by foreign purchasers,
- Illustrative Examples of Impacts of Extraterritorial Measures
- The Soviet-Western Europe Pipeline Embargo, which attempted to cause
foreign manufacturers using U.S. goods or technology to break their
contracts, highlighted the extensive extraterritorial practices used by
the United States to carry out its foreign policy. Directly affected
firms immediately took steps to reduce their exposure to American "light
switch diplomacy" by designing out U.S.-origin components (see Appendix
II, Section G.2.), but the broader effect was to sully the reputation of
U.S. suppliers generally. In a 1986 speech, the Chairman of the European
Business Roundtable stated that his company, Philips, NV, would avoid U.S.
parts and components because of U.S. unilateral controls. The United
Kingdom and other major trading partners passed laws forbidding compliance
by their citizens with laws of other nations that interfere with their
national trade policies. British Aerospace sent letters notifying its
U.S. suppliers that it reluctantly had established a practice of designing
out U.S.-origin components in its products because of the associated
extension of U.S. unilateral control over its freedom to market its
products under the laws of its own country. The company also required
U.S. respondents to its purchase requests to identify unilateral reexport
controls associated with any of their bids. The National
Academies/National Research Council panel preparing the 1991 report on
U.S. export controls was told by European manufacturing firms that, where
possible, they were avoiding U.S. parts and components in their products
because of U.S. unilateral export controls.
- In the highly concentrated commercial aircraft industry, no
internationally successful large airliners were available in the early
1980's without a major share of their value being comprised of U.S.-origin
parts and components. Airbus now has reached the point where new
aircraft can be configured to exclude U.S. engines and other components in
order to reach the 10% U.S content de minimis required to escape U.S.
extraterritorial controls on the sale of its aircraft.
- International partnerships are essential to the development of some
types of high technology, capital intensive equipment. Prospective
foreign investment partners frequently request special terms and
conditions to overcome the possibility that U.S. extraterritoriality will
capture control over their contributed technology or otherwise interfere
with the success of a prospective business relationship. Reminders occur
frequently. One effect has been to cause foreign partners to withhold
leading edge technologies from such exposure.
- Extraterritorial controls reduce the value of U.S. foreign investments in many ways. For example, in 1995, a European subsidiary of a U.S. firm was forced to accept a $1.5 million reduction in the annual fee for leasing an airliner when it responded negatively to the potential lessee's question about including Havana in its international route structure. This response was required by the U.S. Cuban Assets Control Regulations (CACR).
- The Soviet-Western Europe Pipeline Embargo, which attempted to cause
foreign manufacturers using U.S. goods or technology to break their
contracts, highlighted the extensive extraterritorial practices used by
the United States to carry out its foreign policy. Directly affected
firms immediately took steps to reduce their exposure to American "light
switch diplomacy" by designing out U.S.-origin components (see Appendix
II, Section G.2.), but the broader effect was to sully the reputation of
U.S. suppliers generally. In a 1986 speech, the Chairman of the European
Business Roundtable stated that his company, Philips, NV, would avoid U.S.
parts and components because of U.S. unilateral controls. The United
Kingdom and other major trading partners passed laws forbidding compliance
by their citizens with laws of other nations that interfere with their
national trade policies. British Aerospace sent letters notifying its
U.S. suppliers that it reluctantly had established a practice of designing
out U.S.-origin components in its products because of the associated
extension of U.S. unilateral control over its freedom to market its
products under the laws of its own country. The company also required
U.S. respondents to its purchase requests to identify unilateral reexport
controls associated with any of their bids. The National
Academies/National Research Council panel preparing the 1991 report on
U.S. export controls was told by European manufacturing firms that, where
possible, they were avoiding U.S. parts and components in their products
because of U.S. unilateral export controls.
- Retaliation against U.S. attempts to force compliance with its
unilateral sanctions creates controversy, confusion, and costs for U.S.
interests.
While some argue that the Iran and Libya Sanctions Act of 1996 (ILSA) and the Cuban Liberty and Democratic Solidarity Act of 1996 (LIBERTAD) are not properly labeled as extraterritorial measures, they clearly are perceived by our allies and trading partners as attempts to force compliance with U.S. unilateral foreign policy.
The European Union, Canada, and Mexico have retaliated by making illegal the compliance with either U.S. law. To the extent that companies in those countries are "controlled" by U.S. persons (e.g., U.S. subsidiaries), they are unable to comply with the Cuban Assets Control Regulations (codified by LIBERTAD) without violating their own national law. The recent conflict over Cuban pajamas sold by Canadian Walmart stores is illustrative. Criminal penalties are provided by the U.K. and Canada as well as by the United States.
Under current law, the airliner leasing case described above would pose criminal liabilities for the lessor under UK law if the Cuban service were denied and under U.S. law if it were accepted. While the U.S. has yet to impose significant penalties under either ILSA or LIBERTAD, substantial trade retaliation is expected if and when that occurs. Meanwhile, progress in other important initiatives, such as the Multilateral Agreement on Investment and the Transatlantic Business Dialog, has been damaged by the hostility and diversion created by this controversy.
We were not asked and we have not undertaken to address the effectiveness of economic sanctions in achieving foreign policy objectives of the United States. However, we have included as Appendix III a summary of the 1990 report of the Institute for International Economics, the most extensive analysis published to date. IIE plans to publish an update of its report in the near future.
While much of the economic impact information presented here necessarily is qualitative and anecdotal, we trust that it will add to the base of understanding needed to guide improved policies and processes governing the use of unilateral economic sanctions in the future. Economic sanctions inevitably will have economic costs for the United States. However, this information suggests that a large portion of negative impacts on U.S. economic interests could be reduced by more thoughtful consideration of policy options, and more rational design and implementation of sanctions when they are deemed to be required. The use of measures that interfere with third-country trading partner relationships and create undue uncertainty about the reliability of U.S. firms and the long-run availability of U.S. goods and services is seen as most damaging. We also have seen that the threat of sanctions creates economic impacts on U.S. interests in substantially the same manner as the actual implementation of sanctions.
Sanctions purposes cover a broad spectrum from attempts to influence cultural practices or send "signals" of our disapproval of certain policies or practices, to attempts to deter or penalize serious violations of international security agreements. This suggests that negative consequences for U.S. interests might be reduced by selecting equally effective alternatives, or at least minimal sanctions, where the potential for actually changing the target behavior is small.
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