Economic Casualties

How U.S. Foreign Policy Undermines Trade, Growth, and Liberty

Solveig Singleton, Daniel T. Griswold

• Publisher: Cato Institute
• Year: 1999
• ISBN:
  9781935308096
• Topic: Politik & Internationale Beziehungen
• Subtopic: Handel & Tarife

In recent years economic sanctions have become one of the most frequently employed weapons in the U.S. foreign policy arsenal. They have been imposed in the name of advancing human rights, of fighting terrorism, and of preventing the transfer of weapons technology. Those are laudable goals, but the essays in this book lay out the evidence that sanctions are not effective instruments of foreign policy. Because they curb the freedom of Americans to trade and communicate with the rest of the world, sanctions have more disadvantages than benefits. Efforts to restrict the use of sanctions will soon be debated in Congress, and the results will affect every American consumer.

PART I

OVERVIEW: THE ECONOMIC COST OF U.S. FOREIGN POLICY

1. Eagle in the China Shop: The Economic Consequences of U.S. Global Meddling

Ted Galen Carpenter

Proponents of Washington’s global interventionist foreign policy are fond of citing a litany of alleged benefits. America’s leadership role, they contend, has not only reduced the danger of aggression by predatory states, it has created a stable arena for international trade and investment. Such an environment provided an economic bonanza for the free world during the cold war, and with the demise of the Soviet empire, similar blessings are now available to an even larger portion of the globe. Although all nations willing to participate in the global economy benefit from the pax Americana, goes the argument, American corporations and citizens ultimately benefit the most because of the unparalleled size and efficiency of the U.S. economy.

That thesis contains some truth. Although advocates of the status quo exaggerate mightily when they contend that the only alternative to continued U.S. hegemony would be global chaos, there is little doubt that Washington’s dominant role has helped produce a stable international system conducive to trade and investment. Nevertheless, analyses that focus on the benefits of pax Americana while evading any discussion of the costs are incomplete and misleading. The economic costs alone, paid by the American people, to maintain Washington’s hegemonic policy have been substantial and pervasive.¹

For example, the demands of that role require a large and expensive military establishment. Despite the end of the cold war, U.S. military spending (currently at $270 billion per year) dwarfs that of other industrialized countries. Japan spends just $42 billion and Germany a mere $27 billion. Each American must pay more than $1,000 a year to support the military; the burden for each German or Japanese is about $320. The opportunity cost to American taxpayers—and to the American economy—is considerable, and has been for many decades.² That huge disparity in military spending is just one tangible example of the financial price tag of sustaining a foreign policy based on maintaining U.S. global leadership and responsibility.

The economic impact goes far beyond the burden of excessive military spending—or the additional billions of dollars spent each year on foreign aid programs motivated in large part by a desire to buy influence. Early in the 20th century, social critic Randolph Bourne observed that “war is the health of the state,” by which he meant that governmental power inexorably expands at the expense of individual freedom during periods of armed conflict. Robert Higgs’s seminal book, Crisis and Leviathan, later documented that observation, showing how many of the tax and regulatory powers now routinely exercised by the federal government were not acquired during such spasms of domestic “reform” as the Progressive Era, the New Deal, and the Great Society. Instead, they emerged because of national mobilizations to fight the two world wars. Moreover, the New Deal and the Great Society were explicit attempts to replicate in peacetime the mobilization of human talent and natural resources that had previously occurred during wartime.³

Even when the nation terminated its war mobilizations, a sizable residue of enhanced governmental power always remained. Manifestations of that “wartime” authority would later surface during peacetime—often in unexpected, if not bizarre, ways. For example, President Richard Nixon based his 1971 executive order imposing wage and price controls on an obscure provision of the Trading with the Enemy Act of 1917, enacted during the early days of World War I but still in effect more than five decades later.

The residue of wartime powers has been an important factor in the long-term expansion of the size and scope of the political state. One “temporary” measure enacted during World War n was the withholding provision of the federal income tax. That device has the insidious effect of disguising the magnitude of the true burden on most American taxpayers by “painlessly” extracting the money from their paychecks before they get an opportunity to see (and use) those funds. For such taxpayers, the category of gross salary or wages is little more than a meaningless bookkeeping entry on their payroll check stubs. One suspects that citizens would be decidedly less passive about today’s bloated tax burden if they had to experience the pain of writing annual or quarterly checks to the Internal Revenue Service. A wartime innovation has thus become an important, permanent building block of oversized government.

Bourne’s observation about war being the health of the state is correct but incomplete. A full-blown war is not the only thing that leads to economic regimentation and other abuses. An atmosphere of perpetual crisis and preparation for possible conflict can produce a similar result. The creation of a national security state to wage the cold war resulted in many of the same domestic problems and distortions that had been associated with earlier periods of actual combat. America has been essentially on a war footing for more than half a century, and the result is a significant erosion of economic liberty. Moreover, the end of the cold war has not brought a retrenchment in either the nation’s global role or the national security state.

Even more troubling, Americans have come to passively accept governmental economic intrusions in the name of “national security” that they would have ferociously opposed in earlier eras. Politicians learned that the easiest way to overcome opposition to schemes to expand their power was to portray initiatives as necessary for the security of the nation. Sometimes such rationales have been exceedingly strained. The statute that first involved the federal government in elementary and secondary education, for example, was the National Defense Education Act. Similarly, the legislation funding the interstate highway system was the National Defense Highway Act. In retrospect, it is surprising that the sponsors of Medicare did not fashion their bill as the “National Defense Elderly Care Act.”

Government also guides (if not dominates) the American economy in the name of national security, much as it would during a wartime mobilization. The emergence of multibillion-dollar firms whose principal (and in some cases sole) customer is the Pentagon is testimony to that development. There are also widespread restraints on foreign commerce for the explicit purpose of advancing Washington’s foreign policy agenda. Trade embargoes are imposed routinely on countries that are out of favor with the United States. In addition to such sanctions, there exist a variety of restrictions on the export of technologies that the government decides (often arbitrarily) could have military applications or other national security implications.

Perhaps most disturbing, many of those intrusions have increased rather than decreased (contrary to initial expectations) since the end of the cold war. For example, President Clinton’s Export Council reports that the United States has various economic sanctions in effect against 70 countries.⁴ Yet even that total apparently does not satisfy hard-core advocates of “sending a message” to foreign countries through economic coercion. According to a report issued in early June 1998 by the National Association of Manufacturers, Congress is considering 26 separate new sanctions measures aimed at 10 countries. That list does not include 11 other proposals, so-called generic sanctions, which would target any country that engages in specific conduct deemed unacceptable by Congress. The proscribed offenses include such things as failing to combat corruption or showing a “hostile” attitude toward American business.⁵ The increasing fondness for imposing sanctions makes American overseas trade and investment hostage to the whims and parochial agendas of either Congress or the Executive branch.

Countries as diverse as Iran, Cuba, Serbia, Colombia, Burma, and India have already felt Washington’s economic lash for transgressions, real or imagined. Sometimes the initiatives have come from the Executive branch, but increasingly they are the result of congressional pressure or outright legislative mandates. Sanctions are being imposed for. A bewildering array of motives and policy goals, most of which have little, if anything, to do with protecting national security—the ostensible justification. Instead, they have become the default option for political and moral posturing. There are tangible victims of such posturing: principally American firms that lose market share in the targeted countries and innocent civilians (especially the poor) in those countries who often find themselves facing even leaner times than normal.

There are, of course, occasions when commerce may have to be restricted for legitimate national security reasons. Even Adam Smith recognized a national security exception to the general principle of free trade. The possibility that an American corporation may have helped upgrade the guidance systems of ballistic missiles for the People’s Republic of China would certainly fall into that category. But the national security exception has to be narrowly drawn lest it become a pretext to impose restrictions for far more mundane motives. Two key conditions ought to be present. First, the transaction in question must provide a direct and substantial boost to the military capabilities of a nation that could pose a credible security threat to the United States. Second, the American firm involved in the transaction must have a cutting-edge product or service that could not readily be supplied by firms in other countries. Admittedly, such standards are not self-implementing, and interpretation is both difficult and subjective in cases of dual-use technologies. Insistence on some reasonably specific security-based standards, however, would at least brake the enthusiasm for making trade relations subservient to an endless array of foreign policy pet causes.

It is painful enough for American businesses to accept the need to forgo commercial opportunities because of bona fide national security requirements. It is far worse to endure such interference when national security is not at stake. Unfortunately, that has been the frustrating experience in a growing number of cases.

There is little prospect that the hoary embargo against Cuba—or even the especially onerous provisions of the more recent Helms-Burton amendment—will be lifted anytime soon. Yet even the Pentagon concedes that the decrepit Castro regime no longer poses a security threat to the United States. Sanctions were placed on Serbia earlier this decade, not because that country is a menace to America’s security, but because Washington objected to Belgrade’s actions with regard to the civil war in Bosnia. More recently, restrictions were reimposed after a brief hiatus because Serbia has had the temerity to suppress a secessionist movement in one of its own provinces.⁶ Burma is a target of sanctions because the government in Rangoon is undemocratic and treats political opponents harshly—a standard that, if applied consistently by Washington, would sever America’s commerce with a majority of countries.⁷ China is likewise the target of religious conservatives and the human rights lobby because of Beijing’s repressive domestic policies. If the sponsors of congressional legislation have their way, any number of countries could be blacklisted for failing to practice sufficient religious tolerance—as determined by a new Office of Religious Persecution Monitoring in the U.S. State Department.⁸

Business leaders and others might justifiably wonder what issues of that nature have to do with the security of the American republic. Yet that is the official rationale for all such existing or proposed restraints on trade and investment.

Not only are economic sanctions and other restrictions imposed for reasons that have nothing to do with legitimate national security concerns, they are often imposed even when there is virtually no prospect that they will achieve their stated objective. Few developments can be more maddening to American businesses than to be blocked from lucrative markets while firms based in other countries take advantage of Washington’s myopia and rigidity. That was the case for two decades following the end of the Vietnam War as the United States vainly sought to isolate the Hanoi regime.⁹ It remains the case today with regard to such countries as Cuba and Iran.¹⁰

Foreign policy officials and members of Congress have been slow to learn from such experiences and to appreciate the futility of emotionally driven crusades. That was illustrated with depressing clarity by Washington’s initial response to the nuclear tests conducted by India and Pakistan in 1998. Instead of recognizing that the simplistic ”just say no” nonproliferation policy the United States has pursued since the 1960s is no longer sustainable (a point understood by some scholars years ago),¹¹ the Clinton administration reacted with the foreign policy equivalent of a temper tantrum.

Admittedly, the administration did not have a great deal of latitude in crafting a response. The misguided 1994 Nuclear Proliferation Prevention Act required the imposition of sanctions against any nation that pursues a nuclear weapons program—much less tests such weapons. Some of the sanctions (the mandates to oppose new World Bank loans and terminate bilateral aid flows) might inadvertently benefit India and Pakistan by weaning those countries from the narcotic of foreign aid. Other sanctions, though, especially the restrictions on private bank loans and technology exports, had the potential to inflict economic pain—at least in the short term. They were also likely to embitter relations between America and both countries and cost American firms market share (only Japan and Canada among the G-8 countries agreed to go along with Washington’s proposed sanctions strategy) without having any realistic chance of getting New Delhi and Islamabad to abandon their drive to acquire modest nuclear deterrents.

Despite the initial bipartisan enthusiasm for penalties against India and Pakistan, the episode shows signs of becoming a catalyst for a more realistic attitude about sanctions. Almost immediately, the administration began pressing Congress for more discretion in imposing sanctions, not only in response to the South Asia problem, but in other cases as well. The powerful agricultural lobby promptly and successfully sought a congressional exemption for food exports to India and Pakistan, and the Senate voted to give the president greater overall latitude. Even Sen. John Glenn (D-Ohio), principal author of the Nuclear Proliferation Prevention Act, conceded that the statute might be too inflexible, although he continued to oppose a broad waiver power for the executive. Sen. Richard Lugar (R-Ind.) and other sponsors attracted a surprisingly high level of support for general reform legislation on the sanctions question.

Such developments have sparked a wide-ranging debate on the efficacy of sanctions, with proponents (both in Congress and in the foreign policy community) clearly on the defensive.¹² It is too soon to tell whether the enthusiasm for sanctions has reached high tide and will now ebb, but these are the first encouraging signs of wisdom on the issue in many years.

Reinforcing the new domestic debate on sanctions is mounting international hostility to America’s fondness for the tactic.

The refusal of other major economic powers to go along with some of Washington’s more ill-advised campaigns of economic coercion is increasingly frequent and emphatic. Both the Executive branch and Congress have often responded petulantly. The most damaging reaction has been. The attempt to give U.S. sanctions laws extraterritorial jurisdiction—i.e., to penalize foreign firms that defy or otherwise undermine sanctions that Washington has imposed on a target country. That was the case with both the Helms-Burton legislation and the sanctions measure against Iran. Washington’s attempt to use the foreign policy equivalent of a secondary boycott has infuriated the governments of various European Union members as well as other countries and has led to threats of retaliation. Although cooler heads seem to be prevailing as the Clinton administration beats a tactical retreat, congressional militants are reluctant to abandon the strategy.¹³

Unless fundamental changes in U.S. foreign policy take place, the economic collateral damage—already considerable—is certain to grow. American businesses will run afoul of an ever-expanding array of restrictions on overseas trade and investment imposed in the name of national security but in reality serving the parochial agendas of various domestic political constituencies. In a broader sense, the American people will continue to be overtaxed and overregulated so that Washington can pursue the unrealistic goal of a permanent global pax Americana.

There is a better way. The United States is easily the single most powerful country, both militarily and economically, in the international system. But even that vast power does not translate into an ability to dictate outcomes everywhere and under every circumstance. The United States cannot thwart all aggressors, secure human rights for all people suffering oppression, or export democracy at the point of a bayonet to recalcitrant societies. Indeed, America’s most potent source of influence is the power of example based on a commitment to the values of individual rights and limited government. Playing the role of global hegemon, much less global bully, undermines those values and the influence that flows from them.

Washington needs to prune its grandiose ambitions and concentrate on the protection of vital American interests—a difficult enough task in a dangerous world. Above all, the notion that the economy should be the handmaiden of the national security state must be repudiated. As long as U.S. political leaders act as though overseas economic ties can be manipulated or casually sacrificed as pawns to advance foreign policy goals (and all too often, whims), the collateral damage of pax Americana will be far too high.

Notes

Ted Galen Carpenter is vice president for defense and foreign policy studies at the Cato Institute.

1. Economic costs are, of course, just one part of the tally. The more than 100,000 American lives lost in the Korean and Vietnam wars, the corrosive effects of Washington’s garrison state policy on civil liberties, and the rise of the imperial presidency are other important aspects of the price of global interventionism. For a discussion, see Ted Galen Carpenter, “Global Interventionism and Erosion of Domestic Liberty,” freeman, November 1997, pp. 660–65.

2. Robert Higgs, “The Cold War Economy: Opportunity Costs, Ideology, and the Politics of Crisis,” Explorations in Economic History 31 (1994): 283–312.

3. Robert Higgs, Crisis and Leviathan: Critica...

Table of contents

• Preface
• Introduction
• PART I
• PART II
• PART III
• PART IV
• PART V