Extra-Terrestrial Sanctions in an Interdependent World

Gregory Husisian*

U.S. Unilateral Sanctions in the Post-World War Era

It is almost a law of nature: strong states have used their economic dominance as instruments of foreign policy for as long as international trade has existed. Before ancient Rome destroyed the farmlands of Carthage by sowing them with salt, it first destroyed Carthage's economy by strangling its foreign trade; before Waterloo, Napoleon waged war on England by preventing its merchants from trading with Continental Europe; and before Pearl Harbor, the United States countered Japanese aggression in China with debilitating trade sanctions. The temptation to use economic sanctions as a weapon of foreign policy has always held the lure of a smart bomb : targeted, debilitating destruction, executable at minimal cost. It promises warfare, without the messiness of war.

The real-life effectiveness of economic sanctions, however, like all smart weapons, may not be so great upon deeper examination. This is especially true for unilateral economic sanctions sanctions implemented by a single, usually powerful, nation. If not carefully implemented, unilateral sanctions exhibit the worst characteristics of a prisoner's dilemma, with the sanctioning nation being cast in the role of the duped prisoner who serves the maximum sentence at the hands of his deceptive partner in crime. Rather than punishing the offending foreign country, unilateral economic sanctions that are not honored by other nations tend to shift trade from the sanctioning country to competing economic powers, who are sometimes responsive to different domestic pressures, often indifferent to the reason for the sanctions, and always happy to benefit from the self-inflicted wound of an economic rival. Unilateral sanctions, in other words, work best when other nations support them at which time, by definition, they no longer are unilateral.

Unilateral sanctions have been a bipartisan weapon of choice for the majority of the post-World War I period. Since President Roosevelt responded to Japanese aggression in Asia by imposing unilateral sanctions on oil and scrap metal shipments to Japan, the United States has enacted more than seventy unilateral sanctions, with targets ranging from the Soviet Union to North Vietnam to Serbia, for reasons ranging from the prosecution of the cold war to the sponsorship of terrorism. In the immediate post-War period, many of these sanctions were quite effective. During the Suez Canal crisis of 1956, for example, it was U.S. diplomatic pressure backed by the threat of unilateral sanctions that convinced England and France to withdraw their troops, and U.S. sanctions against Iran in the early 1950s almost singlehandedly brought the nationalist Mossadegh Government to an end. With the United States then accounting for nearly seventy percent of international trade, U.S. unilateral sanctions were effective because few nations could survive on a diet of non-U.S. trade.

While the United States remains the world's leading trading nation, it no longer dominates the world's economic activity as it did when its main competitors were still struggling to rebuild their war-torn economies. When President Carter attempted to embargo grain sales to the Soviet Union in 1980, U.S. allies broke ranks and sold the Soviets grain, removing any pressure on the Soviets to withdraw from Afghanistan and leading President Reagan to repeal the obviously ineffective embargo not long thereafter. While the U.S. embargo on the sales of high-tech goods to the Communist world that was also in place at that time largely succeeded, its success occurred mainly because U.S. control over most leading-edge technologies, although eroding, still was formidable.

Such circumstances now occur only in the rarest of cases. Today, not even a unified United States and Europe combined can enact trade sanctions that account for the seventy percent of the world trade that the United States used to command single-handedly. Most products offered by U.S. companies also are available abroad. Despite the declining leverage of the United States, however, U.S. enthusiasm for unilateral economic sanctions only has grown. In recent years, the United States has enacted or tightened economic sanctions against numerous countries, including Cuba, Libya, China, Serbia, North Korea, Nigeria, Rwanda, Colombia, Iran, and Iraq, and Congress currently is considering whether to impose sanctions on Myanmar (formerly Burma) because of its military dictatorship. Only in the case of Iraq, which is the subject of a United Nations-sponsored trade embargo, did many foreign countries support the U.S. sanctions.

Recently, the United States has added a new twist to its sanctions. Despite long-standing opposition by the United States to secondary boycotts (i.e., boycotts against foreign firms that trade with a sanctioned country), the United States just this year has enacted secondary sanctions against firms that trade with Cuba, Libya, and Iran. These sanctions have aroused widespread foreign indignation, protestations of U.S. overreaching, and foreign counterlegislation expressly designed to neutralize the effects of these laws.

The Cuban and Libyan/Iranian Sanctions

The first Cuban economic sanctions were issued by President Kennedy in response to a series of expropriations of American properties in Cuba. Those sanctions, which are enforced by the U.S. Department of Treasury's Office of Foreign Assets Control (OFAC), long have forbidden U.S. interests from investing in, trading with, or even traveling to, Cuba.

These sanctions were tightened most recently in February of 1996, after Cuban fighters shot down two U.S. civilian aircraft carrying four anti-Castro activists, who died during the attack. President Clinton, who previously had resisted pressure to tighten the Cuban embargo, promptly endorsed new legislation containing tough additional sanctions. The new law, formally known as the "Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996," but more popularly known as the "Helms-Burton Act" after its Republican Congressional sponsors, significantly tightened the existing sanctions. The most significant provisions of the bill are:

Liability for "Trafficking" in Cuban Property. The law provides that any person who "traffics" in property confiscated by the Castro government shall be liable in civil actions for treble damages equal to the value of the property, plus court costs and reasonable attorney's fees. "Trafficking" is defined very broadly, and includes buying, selling, distributing, brokering, leasing, or managing any confiscated property or property interest; or engaging in commercial activity benefiting from confiscated property; or causing or profiting from trafficking through another person. President Clinton, pursuant to the waiver provision contained in the law, has delayed the implementation of this provision.

Visa Restrictions. The Helms-Burton Act requires the Secretary of State to deny a visa to any person who has trafficked in Cuban property claimed by a U.S. interest. The restriction extends to corporate officers, principals, and shareholders with a controlling interest of any entity involved in the confiscation or trafficking, and their spouses, minor children, or agents. This provision has been implemented, and several Canadian and Mexican citizens (as well as some of their children, who were receiving their education in the United States) have been banned from entering the country.

Codification of Former Regulatory Provisions. The Helms-Burton Act also codifies many of the pre-existing Cuban regulations, including: (1) bans on U.S. nationals, permanent resident aliens, or U.S. agencies extending financing to any person for transactions involving any confiscated property to which a United States national has a claim; (2) total freezes on Cuban assets, including bank accounts, letters of credit, and wire transfers, as well as goods, no matter where in the world the transactions occur; and (3) regulations preventing vessels carrying goods or passengers to or from Cuba from entering U.S. ports, and preventing vessels that have entered a Cuban port for the purpose of trading in goods or services from loading or unloading any freight in the United States for 180 days. Although these provisions were found in prior OFAC regulations, their statutory codification diminishes the flexibility of the U.S. government to modify the provisions in the future.

The new law has precipitated much international protest, especially with regard to the new provisions allowing the prosecution of private lawsuits and restricting entry to the United States. On May 3, the European Union made a formal request for consultations (the first step toward the establishment of a dispute resolution panel) within the World Trade Organization (WTO). According to the E.U., the visa provisions of the Act may violate the provisions of the General Agreement on Trade in Services by hindering the free movement of business people, while its trade provisions might constrain European trade with Cuba in violation of WTO rules. The E.U. also has threatened to retaliate with visa requirements for American business people, and with national laws to negate the effects of the bill, unless the Act is rewritten or withdrawn. Significantly, some sources within the E.U. have indicated that these actions will not be implemented until after the U.S. election in November, when the E.U. expects enforcement of the law to fall by the wayside.

The Canadian and Mexican governments have announced that they too may challenge the Act (although not immediately) before a North American Free Trade Agreement (NAFTA), rather than a WTO, panel. According to these governments, Helms-Burton's visa provisions violate Chapter 16 of the NAFTA, which provides for generally free access for Canadians and Mexicans to enter the United States for business purposes, while the civil liability provisions may violate NAFTA's investment provisions. The Federal Government of Canada also has introduced a new law authorizing the issuance of "blocking orders" to prevent the collection of litigation awards by U.S. courts, and containing so-called "clawback clauses," which provide that Canadians will be reimbursed for any judgments paid due to prosecutions under the Helms-Burton Act. The proposed law also would fine Canadian companies up to $1.5 million for complying with the Helms-Burton Act. Mexico is studying the proposed statute to determine whether it, too, should add similar provisions to its own laws.

Congress encored the Helms-Burton Act just this last August with sanctions against Iran and Libya, two nations often linked with the sponsorship of terrorism. The measure punishes foreign companies that make more than $40 million in new petroleum-related investments in Libya and Iran, and imposes sanctions on foreign companies that violate existing U.N. prohibitions against trade with Libya in certain goods and services. Under the law, the President is authorized to sanction violators by imposing a minimum of two of the following five broad sanctions: (1) denial of loans and loan guarantees from the U.S. Export-Import Bank; (2) denial of required export licenses and a flat ban on imports of goods; (3) barring American companies from lending more than $10 million in any twelve-month period to sanctioned companies; (4) barring sanctioned financial institutions from serving as a primary dealer in U.S. government instruments, as repositories of U.S government funds, or an agent of the U.S. government; or (5) prohibiting U.S. government procurement from the sanctioned company. The President is authorized to waive the requirements of the Act if either country meets specified goals.

Once again, the world community strongly opposes the U.S. sanctions. The European Union, which derives nearly twenty percent of its energy needs from Libya, and which has significant investments in both Iran and Libya, has indicated that it is considering taking strong measures to oppose the U.S. Act, including granting compensation to European companies that are prosecuted under the U.S. law, establishing a blacklist of U.S. companies that attempt to take advantage of the law, and filing a case with the WTO. Not long after the passage of the bill, Turkey signed a $20 billion, 22-year deal to buy Iranian natural gas. Several European companies also announced that they were likely to continue their investments in the two countries, including Elf-Aquitaine, France's largest oil company, which is continuing its discussions to develop a large Iranian offshore oil field, and AGIP, an Italian energy giant that is continuing discussions concerning a proposed $1.2 billion natural gas pipeline between Libya and Sicily.

The Sanctions Paradox

The secondary sanctions contained in Helms-Burton and the Iranian/Libyan sanctions bill have aroused widespread foreign opposition, while apparently having little effect on the completion of several major projects in the sanctioned countries. These developments nicely illustrate the twin paradoxes of unilateral sanctions. First, the renewed enthusiasm for unilateral sanctions occurs against a backdrop of bipartisan U.S. support for multilateral economic and political solutions, including the NAFTA, which encourages the resolution of many bilateral disputes before binational dispute resolution panels, and the WTO, which for the first time includes a meaningful multilateral dispute resolution mechanism for many international trade disputes. Thus has the United States sought to expand the power and jurisdiction of independent multilateral institutions at the same time that it has implemented unilateral sanctions. Second, the effectiveness of unilateral U.S. sanctions has only decreased since the end of the Cold War, when many U.S. allies could be counted on to provide at least tacit support for U.S. sanctions because of the perceived need for unity in the face of Soviet expansionism. Nonetheless, support for U.S. sanctions whether under Presidents Reagan, Bush, or Clinton only has increased.

Some cynics believe that unilateral sanctions are little more than a political sop useful exhibits to be shown to an electorate that is as eager to believe that something is being done about recalcitrant foreign countries as it is reluctant to commit U.S. military force abroad. Supporters of unilateral sanctions, however, believe that even leaky sanctions can be useful. For example, while some trade does occur with Cuba, when it comes to choosing between trading with Cuba and the United States, most companies choose the U.S. market, hands-down.

Thus, despite the mixed success of recent unilateral sanctions, and no prospects for greater success in the future, there is no reason for the United States to forsake unilateral sanctions as an appropriate response to inappropriate foreign behavior. Although sometimes fairly ineffective (especially when other countries can easily fill in for U.S. suppliers), the sanctions nearly always have some effect, and nicely bridge the gap between the expression of diplomatic outrage and sending in a battalion of Marines. Although sanctions should not be imposed lightly leading, as they do, to the short-term loss of U.S. business opportunities and the long-term loss of confidence in the United States as a reliable business partner they are a weapon that has its place in the United States's foreign policy arsenal.

Unilateral secondary sanctions, however, as the recent U.S. experience with the Cuban and Iranian/Libyan sanctions indicate, are much more problematic from a number of perspectives. The problems raised by these kinds of secondary sanctions include the following:

Potential impact on U.S. firms. The foreign firms the U.S. targets also are the suppliers, customers, and investors in U.S. firms, making it difficult to sanction foreign firms without indirectly hurting U.S. firms.

Potential impact on U.S. foreign policy. Once the United States imposes secondary economic sanctions other governments are less likely to sever their ties to the foreign country, for fear that doing so will set the precedent of willing capitulation to U.S. pressure.

Potential establishment of a dangerous precedent. Since the United States is the world's largest investor, exporter, and importer, the United States has the most to lose if secondary sanctions become a world-wide norm. Moreover, the recent embrace of secondary sanctions undermines U.S. arguments that secondary boycotts, like those maintained by Arab countries against Israel, violate international law.

Potential damage to U.S. leadership on economic issues. Throughout the post-war period, the United States has pursued many initiatives that, while promising long-term gains to global net wealth, also promised short-term economic dislocation and pain. In many cases, it was U.S. leadership which was based not only on the strength of the U.S. economy but also on the purity of its intellectual arguments that won the day. Because our ability to drive the agenda in international trade talks has been very beneficial to U.S. interests, we should think twice before taking positions that undermine the U.S. claims to moral leadership on economic matters.

The problems spurring the recent sanctions bills are, indeed, serious, and no one can fault the United States for attempting to punish outlaw states that willfully nationalize U.S. property without compensation, or which sponsor international terrorism. Targeting third-party trade, however, without the consent of the relevant foreign governments, may only arouse the animosity of our allies while not necessarily inflicting significant damage on our enemies. The United States accordingly should treat the Cuban and Iranian/Libyan secondary sanctions as case studies and, over the next year or so, carefully evaluate whether these two controversial acts have accomplished their objectives before enacting similar extraterritorial sanctions involving other countries. Although the long-term efficacy of these provisions is still unknown, one thing is clear: in a world where secondary sanctions are a normal tool of international diplomacy, the world's largest trading nation potentially has the most to lose.

*Gregory Husisian, the Vice-Chairman of Publications for the Federalist Society's International and National Security Law Practice Group, is an attorney at Weil, Gotshal & Mange's Washington, D.C. office. The views expressed in this article are his own, and do not represent the views of Weil, Gotshal & Manges.


2001 The Federalist Society