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REP. GILMAN: We now proceed to panel number two.
Panel number two includes Dr. John Paul Acton, Dr. Patrick Clawson, Daniel Fisk, Ms. Thea Lee and Jeffrey Schott. The panelists will take their places. (Pause.) Welcome, panel number two. I want to thank you for being patient through the extensive testimony of Secretary Eizenstat.
Since we have to wind up by l:30, we must ask that the witnesses please limit their statements to about five minutes. You may put your full statement in the record. And we will appreciate your summarizing if you would.
The panelists consist of Dr. John Paul Acton. Dr. Acton is the assistant director of the Congressional Budget Office, where he heads up the natural resource and commerce division. This division provides most of CBO's private sector estimates under the Unfunded Mandates Reform Act. CBO has conducted, at the committee's request, research concerning the impact that sanctions have on our own economy. And prior to his work at the CBO, Dr. Acton spent 21 years as an economist with the Rand Corporation. He's an expert in the field of energy and natural resources, industrial organizations and regulated economies. We look forward to Dr. Acton's testimony regarding CBO's research and his expertise in these areas.
Dr. Patrick Clawson is the director for research at the Washington Institute for Near East Policy. He's testified on numerous occasions before Congress, and is an expert on US sanctions against Iran and Iraq. He speaks five languages, ranging from Farsi to French to Hebrew, and has published extensively on the topic of sanctions and energy security. He brings to our panel today his expertise in the use of US sanctions on Iran.
We look forward to Dr. Clawson's testimony.
We welcome back Dan Fisk, who joins us today from Tempe, Arizona, where he is currently teaching in the political science department at Arizona State University. He's also an adjunct fellow at the university, serves on the board of directors of the Institute for US- Cuba Relations, as well as his teaching associate duties at the Arizona State University department of political science. Dan Fisk has served on the professional staff of this committee, and subsequently until 1997 was a member of the Republican senior professional staff, associate counsel of the Committee on Foreign Relations of the United States Senate.
Dan, we thank you for agreeing to come back from Arizona to testify today. It's good having you with us. And I know I speak for the committee when I say we appreciate once again benefiting from your insights and counsel.
And we have with us Ms. Thea Lee. Ms. Lee joins us today as the assistant director for international economics in the public policy department of AFL-CIO. She is an international trade economist by training and has previously worked at the Economic Policy Institute in Washington. She's testified several times before Congress, and has researched the impact of NAFTA on workers with small businesses, in addition to the impact of international trade on the domestic steel and the textile industries. Welcome to our committee, Ms. Lee.
And last but not least is Mr. Jeffrey Schott, a senior fellow at the Institute for International Economics in Washington. He's written exclusively on trade, particularly on the WTO. Mr. Schott was a senior associate at the Carnegie Endowment for International Peace. He also was an official at the US Treasury Department.
We look forward to your testimony, Mr. Schott. And we will start with Dr. Acton.
DR. PAUL ACTON
Assistant Director,
Congressional Budget Office
MR. ACTON: Thank you, Mr. Chairman and members of the committee. I'm pleased to appear here today.
My testimony is based on research that the Congressional Budget Office has conducted at the committee's request. We are examining the impact of sanctions on foreign commerce and the effect they can have on the United States economy.
In line with the committee's request, my testimony will only deal with the economic effects of sanctions and not other tools of foreign policy such as military action. I will also confine my remarks to economic costs and not deal with other types of costs that might accompany sanctions.
I would accept your offer to have the full statement in the record, and I will briefly summarize.
REP. GILMAN: Without objection.
MR. ACTON: Three principal findings emerged from the CBO research. First, sanctions that restrict trade and foreign investment impose costs on the US economy. Ultimately, those costs show up in the form of higher costs to US consumers and businesses and lower national income. Although the immediate costs appear to be the total amount of trade sanctioned, the actual net loss for the economy is always much smaller and more diffuse than the initial impact.
Second, to date the costs of existing sanctions to the overall economy has been quite modest. CBO's review of research indicates that the net cost may be less than $1 billion annually. That compares with a $6.6 trillion total national income in 1997.
Third, although sanctions have not been very costly to date to the overall economy, they can result in sharp disruptions and dislocation to specific US firms and workers. Those effects would generally be limited to the short run. In the long run, those firms and workers can shift to other productive uses, but the transition costs can be substantial in some cases.
The main reason that sanctions have had such a small effect on the overall economy is that the principal targets of sanctions have been countries with which the United States conducts relatively little trade. Large industrialized countries are the dominant trading partners of the United States. They are nations that share many of the foreign policy and security concerns with the United States.
Besides the volume of trade, several other factors affect the costs of sanctions. Multilateral sanctions can result in greater loss to the national income than unilateral sanctions because they can cut off trade more effectively. Without the full participation of other countries, sanctioned goods can be rerouted through other countries, foiling the sanctions. Similarly, unilateral sanctions on investments can lead target contributors -- or target countries to seek investments from third party nations who then turn to the United States to finance other projects.
Furthermore, sanctions that target goods that are easily replaceable in world markets -- goods such as crude oil or certain raw materials -- have little cost to the United States.
Finally, if sanctions are imposed against countries that already face other restrictions, the incremental effect may be modest, further blunting the cost to the United States.
Although the effects of sanctions have been small so far, they may be large in the future or may be larger in the future. In general, analysts assume that the overall cost of sanctions imposed on the US economy will grow with the volume of trade. In the case of rapidly emerging economies, the leverage of today's sanctions may be even more costly in the future.
The recent events in India and Pakistan provide specific example of many of the important features of using sanctions to attempt to influence other countries' policies. Following their nuclear tests, President Clinton announced the immediate application of sanctions against each country under Section 102(b) of the Arms Export Control Act, as amended, without invoking the 30-day delay that the act permits. Although the full details of the sanctions are not yet know, CBO's initial analysis provides three useful insights.
First, direct costs to the US economy as a whole will be limited because trade with India and Pakistan is limited, and to date, other countries have not imposed widespread trade sanctions. Current US exports of goods to India and Pakistan are less than $5 billion. Even if the sanctions ended all US exports to these countries, and they will not, the maximum cost to the US would be less than $2 billion and probably much closer to $200 million per year.
Second, the sanctions, particularly on Pakistan, will have limited added effect because the country already faces other economic restrictions. Almost all US aid to Pakistan was eliminated after 1990 as a result of its nuclear program.
Finally, and a number of members of the committee raised this concern in the first panel, there is some slight risk that restrictions on international lending would affect the US economy through international financial markets. Although CBO's analysis has concentrated on the effects of sanctions on the US economy and not on the target countries' economy, some effects may rebound through target countries to the US.
In particular, Pakistan is struggling to meet its current obligations to international lenders. If sanctions contribute to a default in Pakistan's servicing of international debt, they could exacerbate economic troubles in a part of the world that is already experiencing volatility. If the sanctions fueled the Asia turmoil or prolonged the recovery in that region, they could have wider economic effects, including negative effects on the United States. It is not possible at present to judge either the likelihood of such development or its cost to the US economy.
This concludes my oral summary. I would be pleased to address any questions from the committee.
REP. MANZULLO: Thank you, Dr. Acton. Dr. Clawson.
MR. CLAWSON: Thank you very much for the opportunity to address the committee. And I'd like to ask if my full statement can be --
REP. MANZULLO: All of the statements of the witnesses will be made part of the record, without objection.
DR. PATRICK CLAWSON
Director for Research,
Washington Institute for Near East Policy
MR. CLAWSON: Thank you.
I'd like to address the question of what has been achieved by the US sanctions on Iran and at what cost. The evidence suggests that the US sanctions have -- excuse me, the US sanctions on Iran have imposed some costs on the US economy but those have been small compared to benefits the US has reaped.
When the sanctions on Iran were first adopted, the weight of expert opinion was that they would have little impact on Iran. In fact, they've had considerable effect. We have been helped in this regard by Iran's inappropriate economic policies, and more recently by low oil prices that have further reduced Iran's income.
The United States government has cleverly positioned itself to take credit for Iran's economic problems when those problems were mostly due to other factors.
This year, because of low oil prices, Iran is particularly vulnerable to US continued economic pressures.
The benefits of the sanctions on Iran with respect to the United States have been two-fold. First and most important have been the effect on Iran's domestic political scene. Iran's economic problems have been an important factor in the widespread popular dissatisfaction with the clerical rule. Living standards in Iran now are no more than half their pre-revolutionary level and the future looks bleak without US technology and without funding from international capital markets.
There are certainly those in Iran who realize that the country's economic prospects are poor unless it is able to raise large amounts of foreign capital and the only way to do so is to improve relations with the West. This realization was a factor in the support for President Khatami. We cannot know how important for Khatami's victory was the sanctions-induced economic pain, perhaps it was only a small factor, but still it had some positive impact.
A second positive effect of the sanctions on Iran was that the sanctions deprived Iran of resources it could otherwise have used for military buildup. Had the United States not gone down the route of sanctions to contain Iran, then the United States would have needed to implement other policies to respond to what would have been a larger Iranian military, larger because an un-sanctioned Iran would have had more extra access to international capital and therefore been able to afford more weaponry.
A greater Iranian threat would have required an increase in US military preparedness in the Persian Gulf. In my full remarks I explain why I think that without the sanctions the United States might have incurred a bill of as high as $5 billion a year in addition to military expenditures to respond to the higher Iranian threat had we not gone down the route of sanctions.
As for the cost of the sanctions, well, as with nearly every foreign policy objective, achieving our goals with regard to Iran has had a cost. The costs in this case have been two-fold: first, economic costs, and second, the complications for other US policy objectives.
The economic costs have been quite small, for some of the reasons that Dr. Acton explained. In particular, US goods continue to go to Iran by means of third countries such as the United Arab Emirates.
The most important complication of the sanctions, however, has been their effect on US policies -- US relations, excuse me, with Europe.
The most controversial issue in this regard has been the Iran- Libya Sanctions Act. Europeans complain that the Iran-Libya Sanctions Act, or ILSA, is unacceptable in principle because they regard it as extra-territorial legislation, whereas the US regards it as only marginally extra-territorial and this sort of extra-territoriality is quite common in both European and US law.
Washington had hoped that ILSA would provide a basis for negotiations with Europe about measures against Iran terrorism and WMD. Instead, Europeans have taken any approaches by the United States for negotiation of this matter, and signs of U.S. concessions and reasons not to make any changes in European policy.
In particular, the reaction of Europe to the U.S. efforts over the Total deal, the deal on the South Pars investment, has not been encouraging. I have to say that the Clinton administration has not handled this case well. As Undersecretary Eizenstat explained, the South Pars deal was a poor deal for the United States to apply pressure on. And ILSA was crafted to provide great flexibility for such cases. But the Clinton administration did not make use of the act's possibilities.
For instance, the U.S. government could have quickly applied to Total limited sanctions, that would not have been the basis for a trade dispute with Europe, and the United States could have darkly hinted that in other cases where the U.S. has more leverage, that the United States would react more severely against other firms, and thereby, that would have sustained the deterrent effect of ILSA.
If the United States had thought that a general waiver of ILSA was in U.S. interest, because of the strong U.S. -- excuse me, because of the strong European reaction, then the time to proclaim such a waiver, would have been just after President Khatami's inaugural on August 1997, before the Total deal was announced. Had that been done, the waiver could have been presented as a U.S. olive branch to the new government, which would have put the ball in Iran's court to respond.
By waiting instead, the Clinton administration has given the impression that it will not stand up to Iran. The risk is, that a rogue government may decide that it can ignore strong declarations from Washington, on the grounds that the similar statements about Iran led to no action.
Let me just conclude, if I may, by saying that sanctions are part of a policy to pressure Iran, not to isolate it. U.S. policy is to encourage dialogue with the Iranian government. For such a dialogue to start, that can be combined with continued sanctions. Detente and deterrence went hand-in-hand with the Soviet Union for decades, and it seems to me, that a similar combination of policies might well work with Tehran; that is, sustaining vigorous sanctions against Iran, to show why changes in its behavior is needed, and at the same time, engaging in dialogue.
Thank you very much.
REP. MANZULLO: Thank you, Dr. Clawson. Mr. Fisk, if you could put that microphone as close to your lips as possible, and -- we appreciate it. And I'm going to reset the five-minute clock.
DANIEL FISK
Board of Directors, Institute for US- Cuba Relations,
Adjunct Fellow, Arizona State University
MR. FISK: Very good. Thank you, Mr. Chairman.
First of all, I would like -- wish to convey to Chairman Gilman my thanks for his very kind introduction and to he and the committee for the opportunity to testify today. I will have to confess, though, that this hearing room looks a lot different from this vantage point than it did sitting up there in the staff seats. (Laughs.)
Before turning to the question of sanctions in Cuba specifically, I want to preface my remarks with an observation on the broader debate on U.S. sanctions policy. The debate to date has been framed as if this is -- as if there is only one valid inquiry, that is, whether sanctions are effective.
I think that there is another side to this debate, and it should have equal review, and that is the question of the effectiveness -- effectiveness and consequences of engagement. I would encourage this committee to ask the same set of questions about U.S. engagement policies, as you do about sanctions policies.
Engagement, at least as defined in the current debate, is largely unimpeded commercial and economic relations. It is equally suspect, in my opinion, in its promotion or achievement of U.S. national interests, and in terms of costs -- and of its costs to U.S. citizens, as critics allege sanctions to be.
I would submit that what has happened in India and Pakistan raise questions about engagement policies. Sanctions have come in the failure, or in the result of the failure of engagement policies. And, even in the case of Indonesia, where everyone is hopeful, engagement did not succeed, regime changed. In fact, it sought to keep the current -- the Suharto regime, excuse me -- in power.
Now, the question of engagement, is also relevant to any discussion of U.S. policy towards Cuba, as well as the Cuba policy of other nations. Clearly, we all agree that U.S. Cuba policy seeks democratic change in Cuba. I think we also all agree, that democratic change is not Castro's agenda. What is at the top of his agenda, is the lifting of the U.S. embargo. Castro wants both the legitimacy and the hard currency that a lifting of the embargo will provide. He thinks he wins out of that kind of bargain, and I believe that the evidence of engagement to date bears out his assessment.
Castro has structured economic engagement in a matter -- in a manner that maximizes his regime's ability to earn hard currency. European, Canadian, and Latin investors are Castro's business partners. They participate in a wage confiscation scheme that supports the current structure, including the repressive apparatus of the state. Lifting U.S. restrictions would allow for U.S. businesses to become a party to that structure, a structure whose purpose is the continuation of the current regime, not the end of that.
Mr. Chairman, I think in the case of Cuba we must be clear: sitting on a so-called tourist beach, mining nickel or other extractable resources, or exploiting Cubans forced into either government-controlled labor or illicit activity, such as prostitution, does not support political or economic change. It does not give a foreign investor or a foreign government leverage. What these activities do, is endorse the Castro regime.
Now, in my statement, which I understand will be submitted to the record, I outline a number of areas where U.S. sanctions against Cuba -- excuse me -- in my opinion have advanced U.S. policy interests and objectives. I will not recite them here, but I do want to turn to one issue, which is that of property right, which I would like to point out was -- a discussion that occurred today with Ambassador Eizenstat was barely imaginable three years ago. In that sense, I think there's significant progress.
But specifically, on the EU-U.S. disciplines on property. While the accord is a positive step forward in the evolution of an enforceable international property regime, it has several limitations which merit closer review and clarification.
First, the disciplines admit that U.S. policy, especially the premises of the Lugar-Todd Act, were right, and that -- about the inadequacy of property protections. However, the disciplines then go on to commit the United States to condone -- excuse me -- to condone and permit Castro's wrongful property takings, including his right to convey interests in those properties to other parties. It does this by grandfathering in investments now acknowledged to be in violation of international law. I find this contradiction odd in an agreement that seeks to protect property rights.
Second, the disciplines are voluntary. Thus, they are enforceable more in spirit than in reality. And while they are important symbolically -- and I do not dismiss symbols -- there should be substance to them.
Third, in dealing with what I call the repeat offenders, or those states which have an established record of repeated takings, the weakness of the disciplines is especially troublesome. It creates an "I'll take it under advisement" standard, which does little to deter the repeat offender, or protect the victims of the takings.
Fourth, the creation of a registry is another positive aspect, and it is long overdue. But the disciplines give each participant- state the right to determine the validity of what constitutes -- what constitutes a valid claim. This appears to be a step back, especially if existing certified claims are now considered reopened. Fifth and finally, what about the other American claims? What are the mechanisms in place to protect those claimants? As I read the disciplines, there are none.
In sum, Mr. Chairman, I would say U.S. sanctions policy towards Cuba has been more successful than not. It has complicated Castro's life, it has cost him hard currency, it has strengthened U.S. policy attention and resolve on Cuba, it has focused the attention of other nations on Castro's regime, and has resulted in his government hearing, for the first time in its history, a concerted message on the need for fundamental democratic change. It has resulted in unprecedented, albeit haltingly implemented, steps by other nations, to put actions with their call for change. It has positioned the U.S. to address Cuba's inevitable democratic evolution, and it has advanced international protection of property rights.
Overall, I submit U.S. interests in the cause of freedom -- of Cuban freedom -- are advanced by current U.S. policies. Thank you very much.
REP. MANZULLO: Thank you, Mr. Fisk. Ms. Lee.
THEA LEE
Assistant Director for International Economics,
Public Policy Department of the AFL-CIO
MS. THEA LEE: Thank you very much. Mr. Chairman, members of the committee, I appreciate the opportunity to present the views of the AFL-CIO on the effectiveness and the appropriate use of economic sanctions. This is a vast topic, and I will use my testimony today to touch on some important principles from the point of view of the U.S. labor movement.
First of all, let me briefly review the areas where there seems to be broad consensus. No one disputes that unilateral economic sanctions are an essential policy tool, but should be applied judiciously, consistently, and effectively. All would similarly agree that given a choice, multilateral sanctions are preferable to unilateral sanctions.
The differences arise when it is not possible to achieve cooperation from our partners to impose multilateral sanctions in an appropriate timeframe, in this case, the choices between various types of unilateral sanctions, diplomatic action and inaction. It is worth noting that the line between multilateral and unilateral sanctions is not clear. Many multilateral sanctions, like those against the apartheid government of South Africa, began as sub- national and even private shareholder sanctions, in response to grass-roots activism, and gradually garnered first national, then multilateral support.
Our challenge is twofold. How can we be more effective in gaining support for concerted multilateral action, and how can we design sanctions to achieve maximum impact at minimal cost? We should not allow this discussion to be sidetracked into an ultimately unproductive debate over whether or not to use unilateral sanctions.
There has been much discussion recently about the need to discipline economic sanctions, because, it is argued, they have simultaneously proliferated and become less effective, and more costly. The Institute for International Economics released a working paper last year, highlighting the economic costs of economic sanctions, measured in terms of lost exports, and has testified recently about their limited effectiveness. And several people have mentioned that report this morning.
Unfortunately, the IIE study makes simplifying assumptions that, in my view, lead to overstating the economic job and wage impact of sanctions. First, by assuming that no exports cut off due to sanctions will be replaced by exports to other countries, it -- it assumes that -- that none of those exports will be replaced by other exports. And while I don't believe that the exports will be replaced dollar for dollar by increased exports to other countries, some of the lost exports will certainly be redirected to other markets.
Second, the report assumes there are no employment effects due to sanctions imports. Some legislative solutions to the sanctions problem have been proposed. The Hamilton-Lugar bill, for example, imposes new reporting requirements and a waiting period before unilateral economic sanctions can be imposed. But before we take any steps to limit our ability to impose economic sanctions in a timely and effective way, we need to be much more precise in our definitions, and clear about our goals.
Unilateral economic sanctions include trade measures, restrictions of exports or imports, financial measures, such as blocking assets or withholding loans and development aid, and government procurement restrictions. Lumping these disparate measures together, confuses the discussion of economic sanctions, particularly with respect to their efficacy and their cost.
Certainly the domestic economic impact of restraining exports and limiting imports will differ, particularly with respect to the impact on jobs, wages, and prices. Yet recent studies do not distinguish between these two forms of sanction. Similarly, withholding aid or opposing loans from the international financial institutions may reduce overall trade indirectly, but will have a much smaller and less focused impact on one country's trade volume, than other forms of sanctions.
My point here is simply that future research should not try to draw broad conclusions about the effectiveness or cost of sanctions in general, but should rank policy options, so we can make more informed choices. The debate that has arisen in the last year or so, purports to be about the effectiveness of unilateral economic sanctions as a policy tool, not about the justness of the causes to which they are applied. Yet the criticism of sanctions has focused exclusively on the problems involved with sanctions imposed for foreign policy reasons, while excluding sanctions imposed to attain trade or commercial objectives. This distinction does not make sense.
Any criticism of unilateral economic sanctions as ineffective, must apply equally to sanctions applied for trade objectives as to those applied for foreign policy objectives. Yet we seldom hear an outcry from the business community, that the U.S. Trade Representative should refrain from imposing retaliatory tariffs, or withdrawing trade preferences, when one of our trading partners has engaged in illegal dumping, or has violated intellectual property rights agreements.
In the end, objections to unilateral economic sanctions are not to the efficacy of the policy tool, but rather to the unworthiness of the cause, when there is no direct economic interest of U.S. business at stake. The U.S. Congress, and this committee in particular, has recognized the importance of using the economic and political clout of the United States to stand for values other than short-term cash flow: to prevent the spread of weapons of mass destruction, to prevent the abrogation of democracy, to punish egregious abuse of human and worker rights, and to stop terrorist activities.
Let me conclude by saying that a successful grass-roots action on trade policy, can be a valuable and empowering force, as well as a legitimate expression of citizen concern. Our task should be to make these initiatives more successful and effective, not to choke them. I look forward to your questions and comments. Thank you for your time and attention.
REP. MANZULLO: Thank you, Ms. Lee. Mr. Schott?
JEFFREY J. SCHOTT
Senior Fellow,
Institute for International Economics
MR. JEFFREY SCHOTT: Thank you very much, Mr. Chairman. I appreciate the opportunity to come before the committee again, to discuss these important issues, and I commend the committee for the timeliness of these hearings, which have shed a lot of light on some very complex issues.
U.S. sanctions policy needs reform. Too often, our laudable goals are ill-served by our unilateral attempts to coerce changes in policies or practices of foreign governments. Too often, the economic impact of our sanctions is offset by alternative suppliers of goods and capital, whose governments agree with our goals, but not the tactics to achieve them. And too often, we do not plan for the reconstruction of sanctions-weakened economies, in the infrequent cases when our sanctions succeed, or when they are abandoned.
Congress and the administration both share blame for legislation and executive action that often failed to advance U.S. policy goals, as Mr. Bereuter stated so clearly and eloquently this morning. Fortunately, the legislation put forward by Congressmen Hamilton and Bereuter and Crane and others, provides some useful remedies to these problems. But the administration also needs to develop a more coherent approach to both the planning and implementation of sanctions policies.
Now, as has been stated throughout this hearing, we've had a problem with sanctions. We're using them more and enjoying them less. Successful cases have become increasingly rare as globalization has made it easier for target countries to tap international trade and capital markets and find alternative suppliers of goods and capital. Our success rate in sanctions now is below 20 percent.
When sanctions have worked, the objectives have been relatively modest and narrowly focused. Most don't make the headlines on page one. Few result in major policy changes in the targeted regime. And the current case with India and Pakistan illustrates that point. Most countries stated that they had fundamental national security interests at stake which outweighed the possible adverse economic effect of our sanctions.
Moreover, judging from the recent experience, these countries may have felt that U.S. measures would not be emulated by other countries. And even if some did follow suit, their actions would be short-lived for both political and humanitarian reasons.
Now to the cost of sanctions. There have been a lot of comments about it, and Mr. Bereuter and Mr. Hamilton drew on the research that we have done at the Institute for International Economics. Thea, I think, has not done her homework fully on the impact of our study.
The point is that the aggregate effect of the sanctions is small, as the CBO study says, but it is not unimportant and indeed can be very significant for individual firms and industries and workers. And therefore, when we talk about lost jobs or displaced exports, we are talking about an impact that can be significant for particular communities. And that should be of concern.
I won't go over the figures because our figures have been represented by a number of people throughout the hearings. But I would be happy to go into details on the criticism of them if you would like. Let me say a word or two about the Helms-Burton and Iran-Libya Sanctions Acts. Both these acts illustrate the problems with U.S. sanctions policies that I've noted above. The objectives of these laws are laudable, but both have generated a backlash of opposition against the United States among friends who otherwise share our basic objectives.
We have just seen a clear example of this problem. France and other European member states have refused to join with us in sanctions against India and Pakistan, in part because of their opposition to threatened U.S. sanctions against their firms. Recall that the European Union does not speak with one voice on all foreign policy matters, and here we have had a clear example of how some member states resent the sanctions directed at them and have applied that against our efforts for cooperation in other matters.
The international backlash against these two sanction laws has reduced the prospects for achieving U.S. policy goals in the target countries and has impeded efforts to build international sanctions coalitions in other cases. For that reason, I believe the recent U.S.-European agreement serves U.S. policy interests. I agree with Mr. Eizenstat; the deal merely recognizes the status quo in return for greater cooperation in advancing shared policy objectives in Cuba, Iran and Libya.
So what do we do about fixing the sanctions problems? This hearing has posed some interesting proposals that merit close analysis, both from Mr. Eizenstat and from members of the committee. Let me conclude with a few complementary thoughts.
When we use sanctions, they should be designed to better match their costs with their anticipated results. We should work more closely with our allies to develop coordinated approaches to potential trouble spots before a crisis erupts and before we take unilateral actions. And we should also consider strengthening our arsenal of carrots as well as sticks to more effectively pursue our policy goals.
For the most part, we have renounced our assistance, or the carrots that had been a part of our foreign policy arsenal, and have relied instead on sanction sticks. A more balanced blend of policy instruments could have better served our policy interests.
Thank you.
REP. MANZULLO: Thank you very much. I've got a couple of questions here, and I'm going to hold myself to the five-minute clock and ask the rest of the members to do that also, because they have to vacate by 1:30.
Dr. Acton, you mentioned in your opening statement about the impact of sanctions is not as great as some argue. But I've heard story after story about foreign buyers (designing out?) U.S. exports, or not buying U.S. products, preferring European or Japanese goods and services because of the sanction-minded United States.
The Three Gorges Dam is an example. Can you measure the cost of lost sales opportunities because foreign companies -- as a result of foreign companies not even thinking about buying American goods and products? Big question.
MR. ACTON: It is a big question. It's a good question. And I'll have to say no. We cannot give you a precise dollar value on that. It is much easier to talk about targeted goods when a specific sanction is applied and you can measure the goods that are named in the restrictions by the Bureau of Export Administration or whatever. It is much more difficult to measure the (contra-factual?) of trade that never took place because parties never considered it in the first place.
The study of Huffbar (sp) & Associates that Mr. Schott also referred to here did attempt to measure that econometrically, using a so-called gravity model. And they look at the total amount of trade going between pairs of countries. And with that, you can -- they used a variable for mild sanctions to medium sanctions. That in principle should capture an overall shift in trade patterns. And with that, they estimated a value of $15 (billion) to $19 billion gross; net, about $1 billion in lost income to the U.S. economy.
REP. MANZULLO: Do you agree with the IIE study on that?
MR. ACTON: The net amount, not the gross amount. In my prepared statement, I tried to make the point that you don't just want to look at the gross amount of trade that might be affected, because in many instances workers and businesses will shift their economic activity to a marginally less desirable but still profitable activity. And so it's the change in profit levels and it's the change in wage rates that properly captures the -- (inaudible).
REP. MANZULLO: I'd like to share that I am distressed over the (water seeks its own level?) theory. Ms. Lee, you opened up a cannon on your colleague to the right because you said that his study is flawed because, quote, "It assumes that no exports cut off due to sanctions will be replaced by exports to other countries, that therefore the maximum number of jobs will be lost."
Speaking on behalf of the labor unions, I would think that that statement, which quantifies exports and imports, would make you in favor of NAFTA and GATT, because the testimony that I've heard from you earlier on other occasions talks about the (produce and fruits?), which is a big problem in the southern part of our country. And yet net there's been an increase in agricultural exports to Mexico coming from the state of Illinois. I guess I have that largess.
But I would like you and Mr. Schott to discuss that together as to whether or not you think cutting off exports to Country A is going to keep the same amount of productivity going and increase exports to other countries; however the two of you want to handle that.
MS. LEE: Okay. Well, I would say certainly there is a cost certainly to losing an export market. But the point is the same. I think it's the one that Dr. Acton made, which is not that it's not 100 percent of the loss in exports, but it's somewhere between zero and 100 percent. And so, in that sense, my point was not that there is no cost to the loss of export markets due to sanctions but that the cost is overstated by the IIE model.
REP. MANZULLO: Mr. Schott?
MR. SCHOTT: My colleagues and I have been very careful not to exaggerate the cost of sanctions, nor to exaggerate their effectiveness. And in this study, we do specifically note that there is -- that the export displacement could reduce the total values. This is explicitly stated throughout the study. But we also note that the numbers are somewhat biased on the low side because they don't include services. And complementary services can also impact the economic impact of the United States.
And so, for that reason, one has to be very careful in making sort of rash statements about the veracity of numbers. Numbers depend on their assumptions. We have been very careful to document our assumptions and try to be objective in setting our assumptions so that they're most useful for policy analysis. Thank you.
REP. MANZULLO: Thank you. Mr. Hamilton.
REP. HAMILTON: Thank you. I want you to help me evaluate two things. We've had a whole string of chief executive officers up here on the Hill recently saying that for the first time they are encountering this concern on the part of their customers that they are unreliable or potentially unreliable suppliers because of the frequency with which we put in sanctions. I'd like you to evaluate that for me. Is that something they're cooking up? Is it a serious matter? Do you dismiss it as irrelevant? How do you evaluate that? That's number one.
And I'll just ask a second one as well. There are many people who are saying, "Okay, unilateral sanctions don't work. But what we really ought to have is an import ban, and that would really bring people down, other countries to their knees in a hurry." What's wrong or what's right with an import ban approach rather than a sanction, as we traditionally apply it?
MR. CLAWSON: If I may address those issues, sir. The cost of sanctions are --
REP. HAMILTON: It's addressed to the entire panel; any of you chip in here.
MR. CLAWSON: The cost of sanctions are, in fact, geometric. That is to say, the more sanctions that we apply, the increase in cost is not just simply a small little increment, but that starts to rise sharply for precisely the fact that you mentioned; namely, the reliability of the United States as a trading partner. So I would certainly agree with the company executives that the more the United States applies sanctions, the higher the cost becomes for each individual sanction that applies.
That said, I'm frankly skeptical of the claims that some of the companies are making about their losses in trade opportunities precisely because of some of the reasons that have been offered earlier about the ability of U.S. companies to continue to sell goods in spite of the sanctions. European diplomats resident in Tehran tell me that as far as they can tell, the sales of U.S. goods in Iran has risen since the imposition of the sanctions.
REP. HAMILTON: I want to be fair to the chief executives. I think most of them have talked to me more in terms of potential than actual here. MR. CLAWSON: And on the question of an import ban, I think that circumstances depend upon individual countries. But in many cases, we're interested in depriving countries of foreign exchange revenue that they could use for various nefarious purposes, in which cases the ban on imports might indeed be one of the most effective ways that we can proceed.
I certainly think that the ban on U.S. exports of consumer goods is much more problematic. And indeed, in my prepared statement I suggested that's something we might consider listing on Iran, for the more foreign exchange revenue that the Iranians spend on purchasing American-made consumer goods, then the happier I am, because it means that Iran's government has less revenue to use to spend on its weapons-of-mass-destruction and on its conventional armaments program.
MR. FISK: Mr. Hamilton, may I take a stab at your first question? I don't think those complaints are necessarily new. I think they are renewed in the sense that if you go back to the Soviet pipeline issue in '81 and '82, you heard much the same criticism and concerns being voiced then.
REP. HAMILTON: Farmers used it a lot, of course, in the Afghanistan --
MR. FISK: Correct. I think one of the -- what was interesting when I was working at the staff level on the Libertad Act was that that was not an issue that was raised by any of the corporate representatives that I dealt with. And we had an open-door policy to talk to anyone and everyone.
What I think is also interesting about your question, though, is the fact that I think the corporations' own coalition -- (inaudible) -- is feeding this concern, because lumped together in sanctions -- and when we have this discussion or debate are conditions on bilateral foreign assistance. Now, I don't consider U.S. taxpayers' dollars in the former of foreign assistance, economic funds, to be a sanction. But they lump everything together.
And so when you look at their statistics, if you look at the National Association of Manufacturers report, you go, "Oh, my gosh, look at all these sanctions." But when you start taking out the numbers that are simply conditionality language, it's dramatically reduced. In some cases, the CEOs and their representatives are maybe representing themselves too well and a little bit misleading, and it's coming back to haunt them.
MR. ACTON: May I make two quick comments about your second question on the effectiveness of an import ban relative to an export or total trade sanctioning? I think there are two considerations that are important. One is whether it's unilateral or whether it's multilateral, and the second is the availability of substitute sources of supply. With respect to unilateral, if it's unilateral by the United States, and we refuse to buy particular goods from particular countries, chances are we'll find those goods from another country; consider oil as an example. If, on the other hand, you have a multilateral refusal to buy --
REP. HAMILTON: Well, we're really talking unilateral, because we're not going to get a multilateral agreement on that.
MR. ACTON: Okay. And then with respect to substitutability, again, if it's something like oil, we have lots of places we can buy oil. If it's something like (gum Arabic?), we might have fewer places.
MS. LEE: Just briefly, in terms of unreliable suppliers, I actually think there are a lot of valuable things about the IIE report. And one of them was that they did test the lingering impact of sanctions and found very little effect. Maybe Jeff wants to elaborate on that.
And in terms of the import ban versus export bans versus other kinds of things, I would say, weighing the two, certainly when we're talking about an export ban of goods that are widely available -- we're not talking about specific technology and military goods and so on -- that the import ban would be more effective, more cost- effective, and certainly less costly to the United States in terms of job loss.
MR. SCHOTT: If I may, Mr. Hamilton, just to be clear, I do not represent business or labor interests, and my analysis is based on being a practitioner in the government and studying this for the past 20 years. I think, on the unreliable supplier issue, the concern is that the proliferation of laws is sending a political signal that increases uncertainty in the marketplace. And any time you have increased uncertainty, it complicates the ability to do business.
Now, if there's uncertainty, these firms are multinationals, for the most part. They're going to take that into account where they source their products. And so the firms themselves may not lose the sales, but they may source out of a different market than the United States. And that'll affect production and employment in the United States. I think that's an important point to keep in mind.
On the question of import bans, of course, a number of our sanctions include export and import bans, and so we do that on a number of occasions. What our research at the Institute for International Economics has found is that, more often than not, financial sanctions have proven to be more effective than trade sanctions just because of the greater availability of alternative suppliers.
REP. HAMILTON: Thank you, Mr. Chairman.
REP. MANZULLO: You're welcome. Mr. Burr.
REP. BURR: Mr. Schott, you said that the rate of success of sanctions was below 20 percent. How do you gauge that? What do you use to come up with a percentage on the rate of success on sanctions?
MR. SCHOTT: Well, our study, which is now in its third edition, has looked at 150 cases where sanctions have been used by the United States and other countries in the 20th century. And we recognize that sanctions don't work in isolation, that there are a lot of factors involved in determining whether a U.S. foreign policy objective will be met or not.
And so we set a standard for success as "Have sanctions made a modest contribution to at least a partial achievement of the U.S. policy goal?" We have looked at each case individually, established a case study for each of the cases, and then admittedly in some cases the analysis is more subjective than others, but we have relied on the analysis of Mr. Clawson, for example, in areas where he has expertise and others to try to determine whether sanctions have passed that threshold.
And what we have found is that the success rate has declined very markedly, and really it's only in very low-profile cases now that we can even say that there's been a marginal success on our very weak standard.
REP. BURR: Mr. Fisk, should decisions on sanctions be driven by economics or by foreign policy?
MR. FISK: In my assessment, politics trumps economics almost every time. I think the broader question is what's the U.S. national interest. I believe -- and I agree with Ms. Lee on this -- that we should not create the distinction between foreign policy, quote/unquote, sanctions, and economic sanctions. To me, our economic policy and our foreign policy should advance our national interests.
REP. BURR: Mr. Schott, how would you score our anti-nuclear proliferation laws, successful or unsuccessful, as it relates to this year's instance?
MR. SCHOTT: Well, I think I'd agree with Mr. Eizenstat where he said that, at the end of the day, we have failed to deter India and Pakistan, though you must recognize that India has had the capability for some time, and so there are a number of factors that have resulted in the delay in their actually taking the step to test.
Clearly if we had had prior multilateral cooperation --
REP. BURR: Are you saying there are exceptions to foreign policy objectives?
MR. SCHOTT: Excuse me, I --
REP. BURR: Are you saying there should be exceptions to our foreign policy objectives?
MR. SCHOTT: No. No, no. Just to the contrary. I think we could have strengthened the deterrent impact of our sanctions if ahead of time we had built a multilateral coalition; therefore multilateral sanctions would have had a much greater deterrent of force than the unilateral sanctions alone. And one can't say whether that would have made THE difference. But the deterrence would have been a lot greater if we had had agreement ahead of time with our allies that everyone would have imposed sanctions against countries deploying nuclear tests.
REP. BURR: Let me read you the president's quote in the NPR interview. And again, this is the G-8 summit. And the president certainly (left at ?) that summit. And his quote was relative to whether the inclusion of others would have made a difference. He said, "No. Do I think that the results would be different if everyone had as hard a line as we do? I can't really say that." And I guess I would ask you, how do you form a multilateral situation when you walk in and don't believe that one can be put together? And that's what I read into that statement. Do you read the same thing?
MR. SCHOTT: No, I don't read the same inference into the president's settlement that you have, Mr. Burr.
I think more could have done well prior to the summit deliberations to develop multilateral cooperation on sanctions, not just on proliferation issues but on a wide range of areas where we share foreign policy objectives but have(?) different on tactics.
And in my testimony I've suggested that there should be a permanent sanctions committee of the G-7 that would then meet on a regular basis to try to develop contingency plans for how the G-7 would act together to address potential trouble spots.
And you can pick out five or 10 trouble spots around the world that could evolve. There will always be surprises. But people could have told you there would be problems in India and Pakistan on the proliferation issue a long time ago, and with that type of mechanism you could have developed some stronger coordinated response.
REP. BURR: Clearly, I would agree with you, that that's when the multilateral work needed to be started.
Let me move to Dr. Clawson, with the chair's indulgence.
You started your testimony with what has been achieved with sanctions to Iran. I look forward to reading your testimony because I don't know that I necessarily heard them in your verbal and I'm sure that there are some that are there. Let me rephrase the question back to you.
What has changed now that we have given those European countries a waiver from participating -- or from fearing the retribution of this country as it relates to that ban for terrorism?
MR. CLAWSON: The widespread expectation among European oil and gas firms is that they can proceed with any investment that they wish to in Iran, including, I'm sorry to say, with pipelines across Iran.
And that has -- from the comments made by the Iranian leaders, has given Iran encouragement that they can continue with the behavior which the US government finds unacceptable, and that in the end of the day Iran will be able to get the political support and the economic resources that it needs from European sources, and that US actions to deter Iran from engaging in that unacceptable behavior therefore can be ignored safely by Iran's leaders.
REP. BURR: Economic or foreign policy decision on our part? MR. CLAWSON: Oh, it was overwhelmingly a foreign policy decision on our part driven by our relationships with Europe, not by Iran policy.
REP. BURR: Not by Iran.
MR. CLAWSON: And I thought that Undersecretary Eizenstat was remarkably candid in his chart, which showed the advantages of this decision. Those advantages did not relate so much to Iran as they did to many other policy objectives. And I was intrigued that we were prepared to trade off our concerns about Iran in order to achieve objectives in other areas.
Yet, I would wonder if we in fact had considered trading off some relatively minor points on other areas in order to achieve agreement with the Europeans about Iran policy. In other words, I suspect if we had approached the Europeans and said, Look, we're do what you want on the following areas we don't care so much, the Europeans might have been more prepared to agree with us on Iran policy. And I don't believe that we tried that.
REP. BURR: Mr. Fisk, did you have something you wanted to add to that?
MR. FISK: If I may, on -- because Cuba has wound up with ILSA in the regard to what happened with the European Union. And there's a quip that sometimes we have a tendency as a foreign policy to feed our adversaries -- or friends the stick and beat them with the carrot. We may have in a sense done that in this case. I agree with Chairman Gilman that we may have given away all the sticks before even getting to the carrots.
REP. BURR: I thank this panel. I thank the chair.
REP. MANZULLO: Well, thank you very much.
I want to thank the members of the panel. You are here as guests of the House of Representatives. I appreciate your taking the time to engage in this.
I have one last question and I'm not going go ask it because it -- we could be here all day. And maybe we can muse on it. And that question would be, does there have to be any consistency in the American foreign policy to be an effective foreign policy? Based upon that rhetorical question and knowing that could lead to themes and books and all types of discussions, again, I want to thank you very much for coming.
And this committee is adjourned. (Raps gavel.)