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Financial and Macroeconomic Policy
Foreign Aid


In recent years, economic issues have risen in priority among U.S. foreign policy interests, reflecting two major developments: a relative decline in security concerns, resulting from the end of the East-West struggle; and the American public's dissatisfaction with U.S. economic performance. As concern over economic issues has risen, interest has grown in the use of economic instruments to promote U.S. economic and security interests alike.

Economic Interests as an Issue. During the Cold War, national security concerns took precedence over economics. Differences with Japan or Europe over market access were generally settled in the spirit of the greater common endeavor of advancing collective security. By contrast, the predominant attitude in the post-Cold War era, irrespective of administration, holds that U.S. security depends upon a strong economy in two senses: first, a strong foreign policy requires a strong economic base; and secondly, security in its broadest sense includes economic well-being sufficient to provide prosperity for most and assurance of a safety net for all.

Many Americans are more worried about the economic aspects of security than about the military aspects. Since the mid-1970s, the U.S. economy has not delivered the growth in incomes that Americans have come to expect. Many people believe the economy suffers because the United States has not faced a level playing field in international economic competition, and because Washington has not supported U.S. business interests as strongly as other governments have supported their firms.

Public dissatisfaction with the U.S. economy is fed by the fall in the U.S. relative standing since the early post-World War II years. The U.S. share of world economic output dropped from a peak of perhaps 45 percent in 1945 to 25 percent in 1980, creating a sense that the United States has lost its position as the world's unquestioned economic leader and now is but one of several economic power centers. Less well known, and thus less influential in public opinion, is the fact that the U.S. share of world output has remained stable at about 25 percent during the last fifteen years. Indeed, in the years since the end of the Cold War in 1989, the U.S. GNP has grown as fast as those of Japan and the European Union. Besides maintaining its share of world output, the United States has also increased its lead in the information industries, including the crucial software industry that gives it a commanding position in the technologies central to future economic growth and modern warfare.

Economics as an Instrument. At different times, the U.S. public endorses inconsistent principles for guiding the instruments of international economic policy. Support for the proposition that all benefit from free trade is contradicted by support for the view that economics is the principal field of competition among nations and the United States must therefore take all necessary steps to ensure it comes out on top. The view adopted tends to depend on circumstances. In the late 1980s, when Japan's economy looked to be on a path to surpass that of the United States, some Americans viewed Japan as a threat; after four years (1992-95) of recession there, the U.S. public has adopted a more relaxed attitude toward Japan.

Whatever principles Washington chooses to adopt, its ability to wield economic instruments, on behalf of either economic or security goals, has been subject to contradictory forces. The effectiveness of economic instruments has become more circumscribed than it was in the heyday of U.S. economic power during the early Cold War era, owing to the decline in the relative weight of the United States in the world economy. Also, the sophistication of many nations' economies has grown, so that they can produce a wide range of industrial goods, which undercuts U.S. unilateral restrictions.

On the other hand, the new world order enhances the effectiveness of economic instruments in two ways. First, during the Cold War, the Soviet Union stood ready to step in whenever the U.S. tried to isolate another nation economically. For example, when Washington applied economic pressure against Cuba, Moscow provided the massive subsidies that kept Havana afloat. No country now possesses the combination of hostile interests and economic might to provide that kind of alternative. Secondly, national economies have become more dependent on international trade and world financial markets. Trade in goods and services across national borders in 1970 amounted to about 15 percent of world output; by 1995, this figure had grown to about 25 percent.


Trade Policy

During the Cold War, Washington subordinated the use of trade as a policy instrument to military and diplomatic concerns. One example was the granting or withholding to the USSR and East European countries of normal trade terms, misleadingly known as most favored nation (MFN) status. More often than trade privileges, however, the issue was trade sanctions, especially for what were seen as unfair trade practices. Starting in the 1970s, Congress enacted tougher and tougher legislation mandating antidumping duties and countervailing duties for subsidies. Section 301 of the 1974 Trade Act, which authorizes retaliation for unfair trade practices, requires rapid action by the U.S. on claims filed by U.S. firms and facilitates the imposition of stiff penalties--to the dismay of many economists, who see little basis for the law's view of what constitutes unfair trade. Successive administrations did not place as high a priority on unfair trade, as defined by U.S. law, as on foreign policy issues. Time and again in the late 1970s and early 1980s, proposals by the U.S. Trade Representative (USTR) to impose sanctions on Japan over its mounting trade surplus with the United States were overridden by the State Department and the Pentagon out of fear that such measures would imperil Washington's security ties with Tokyo. Trade actions were more frequently imposed when they could advance national security interests.

In addition, the Washington foreign policy establishment downplayed trade policy as an instrument of national power. Despite aggressive trade promotion efforts in 1994-95, the U.S. still trails its economic rivals in export promotion expenditures. In 1994, the U.K. spent on export promotion about $.25 per $1,000 of GDP; France spent $.17; Japan, $.12; and the U.S., $.03. Also, a positionat the Commerce Department rarely commanded the same prestige as a comparable one at the State Department, and foreign service officers believed that promotion came more quickly to those who focused on traditional foreign policy concerns than to those who specialized
in economics.

Trade policy has gained prominence since the end of the Cold War, owing in part to the growing importance of the international sector for U.S. prosperity. In 1994, the growth in exports provided a third of the growth in GDP, and exports supported 11 million jobs. The Commerce Department estimates that by 2000, exports will support 16 million jobs. And those are good jobs: one study showed that employment in the export sector in 1988-1995 paid 13 percent more than the average wage.

Many members of the Bush administration recognized the importance of this phenomenon and attempted to reshape U.S. policy accordingly--beefing up the Commerce Department's Foreign and Commercial Service to promote U.S. exports, and encouraging the formation of the Asian Pacific Economic Cooperation (APEC) forum to link the U.S. economy more closely with the dynamic economies of Asia. But these attempts were often hamstrung by internal disputes over the proper role of government in such efforts.

The Clinton administration brought an unprecedented focus on international trade policy as an instrument to promote U.S. economic interests. The administration pushed through Congress both the North American Free Trade Agreement (NAFTA) and the Uruguay Round GATT accord, which established the World Trade Organization (WTO). These two agreements were the centerpiece of the administration's strategy for lowering the cost to U.S. consumers of imports while increasing U.S. jobs by expanding markets for U.S. goods.

At the same time, the administration made sweeping changes in the way government works with business to increase U.S. exports. The Trade Promotion Coordinating Committee, which is chaired by the Secretary of Commerce and includes all the U.S. government agencies involved in trade, formulated a National Export Strategy to help American business compete and win overseas. The Commerce Department created an Advocacy Center to track large foreign infrastructure projects and assist U.S. exporters facing logjams; for example, the center helped AT&T win a $4 billion contract to modernize Saudi Arabia's telecommunications system. The Commerce Department has also targeted more than a dozen large, emerging markets--China, Brazil, South Africa, and others--the better to focus government export promotion activities. U.S. government financial assistance to exports--including feasibility studies, export credits, and aid related to exports--has amounted to $19 billion per annum in the mid-1990s. Although in 1995 Congress, led by the Republican majority, considered abolishing the Department of Commerce, it supported continuing the government's trade promotion activities, though the exact organizational structure for doing so remains unclear.

To mesh its economic efforts with traditional policy concerns, the Clinton administration created the National Economic Council (NEC), a White House-based coordinating group equivalent to the National Security Council (NSC). With powerful leaders and many staff members holding joint NEC/NSC positions, the new council has helped broker economic and foreign policy interests. However, balancing trade priorities with other foreign policy concerns has proven difficult. One issue has been whether MFN status--that is, access to the U.S. market on normal terms--should be made conditional on progress in human rights, most especially for China. An example more closely related to security issues is to what extent U.S.-Japan trade differences can and should be isolated from the bilateral security relationship. In early 1995, as the USTR implemented a get-tough policy with Japan, the Defense Department released its annual report on U.S. security interests in Asia. While the report did little more than restate the U.S. commitment to Asia's defense, Tokyo interpreted the timing of its release and its formulation of the grounds for U.S. troop strength in Asia as signals that U.S. trade concerns remained separate from, if not necessarily subordinate to, military and diplomatic interests.

The use of regional trade agreements as a policy instrument has a side effect on security interests, because such agreements may implicitly link integration with the U.S. economy to security commitments by Washington. For example, Washington has always demonstrated a profound interest in the political and economic stability of Mexico. By further integrating the U.S. and Mexican economies, NAFTA deepened Washington's sense of responsibility for developments in Mexico, making the Clinton administration's move to bail out the crumbling peso practically inevitable. Similarly, in discussions with Asian nations regarding APEC, Washington has explicitly linked access to the rapidly growing Asian markets with a continued commitment to Asian security. Implicit in this is the suggestion that free trade in the Pacific rim will anchor U.S. interests in Asia and maintain the U.S. security umbrella over the region.

Trade policy will likely serve increasingly as an instrument of U.S. power. However, while at times trade policy can advance foreign-and security-policy interests, trade issues can also complicate those interests. The challenge ahead is to forge a workable balance between these various interests.

One aspect of trade policy has been controls on high-technology exports with potential for military use. Such controls are discussed in the chapter on Arms Control.

Financial and Macroeconomic Policy

Among the economic instruments for affecting foreign governments, by far the bluntest are financial and macroeconomic tools: intervention in exchange rate markets, controls over loans and investment (into or out of the U.S.), interest rate changes, and tax and government expenditure policy. During the Cold War, these instruments were used in part to deny resources to the communist world (e.g., strict limits on loans to the USSR) and in part to push allies (e.g., financial leverage over Great Britain and France to cut short their 1956 invasion of Egypt during the Suez Canal nationalization crisis). However, the main Cold War use of financial and macroeconomic instruments was to preserve the unity and promote the joint prosperity of the Western alliance, for instance by running large budget deficits during the 1974-75 oil-price recession to provide an engine for Western economic growth.

Changing Circumstances. In the increasingly interdependent world of the 1990s, any attempt to use financial and macroeconomic instruments to influence a foreign government is fraught with risk. Indeed, many economists are sceptical about the ability of macroeconomic and financial policies to achieve economic goals, much less foreign policy aims. Four reasons may be mentioned.

Purely national economies no longer exist, if they ever did. Policymakers are constrained by globalization, which has changed financial markets, at least, into truly international markets. Thus, raising short-term interest rates, imposing capital controls, and coordinating monetary policy with other countries prove less effective than they once did because of greater capital mobility and the ability of traders to circumvent national economic regulations.

* International capital flows have become vastly larger than government resources available to defend currencies. This has greatly weakened the ability to use what was once among the most powerful of international financial instruments, namely, the exchange rate. Whereas during the sterling crises of the 1960s the British government could mobilize reserves equal to several weeks (or, in some cases, several months) worth of trading on international currency markets, the volumes those markets now handle daily exceed the reserves of all countries combined. In 1994, the world's foreign exchange markets handled an estimated one trillion dollars each business day. In the face of such volume, coordinated actions by the G7 countries can be only symbolic, a signal of the intent to change monetary policy.

* Since the late 1970s, the trend has been toward the idea that governments should create a predictable environment within which economic decisions can be made, without getting involved in fine-tuning the economy, which had been popular during the heyday of Keynesian economics in the 1960s and early 1970s. Governments are less willing to use tax and expenditure policies, which were once seen as central instruments to affect both domestic and world economies. Declining confidence in the government's ability to manage productive assets has only reinforced this trend. In many countries, privatization has replaced nationalization as the trend of the day.

* The size of the U.S. budget and trade deficits places tight constraints on international economic policy. The Federal Reserve has to retain interest rates high enough to finance these deficits, which limits its ability to stimulate the economy with lower rates as some domestic critics would want. In its interest rate policy, the Federal Reserve also has to be concerned about the exchange rate of the dollar for foreign currencies (the lower the interest rates in the U.S., the more attractive to take money abroad, which reduces the value of the U.S. dollar). Besides its effects on capital flows, the exchange rate also affects trade: the lower the value of the dollar is relative to other currencies, the cheaper are U.S. exports and the more expensive to U.S. consumers are imports. When the value of the dollar drops, that can exacerbate tensions with Japan (which worries that its products will no longer be competitive) and with Europe (which worries that capital flows will disrupt the EU's Exchange-Rate Mechanism).

World leaders at the 1995 G7 Summit, Halifax, Canada

Consequences of Change. That macroeconomic policy coordination among the G7 nations is difficult, and speculators can circumvent exchange-rate agreements, does not mean that cooperation among the advanced industrial countries will be abandoned. Macroeconomic coordination, even if only as meetings to air concerns, offers a means to promote openness and reduce the potential that countries will retreat into economic blocs. Such economic blocs might be less inclined to pursue common interests and more inclined to practice beggar-thy-neighbor policies, such as competitive devaluations, that undermine global economic prosperity and drive interstate tension. The formation of closed economic blocs centered around great powers could pose a substantial threat not only to global prosperity but ultimately to world peace.

It is significant that macroeconomics, not national security, led the heads of the Western powers to start meeting annually. While the G7 meetings were initially limited to finance, they evolved into a general consultation on foreign policy issues, such as how to respond to developments in the former Eastern bloc and to challenges from rogue states. In effect, the G7 summits became a way to draw non-NATO Japan--and perhaps one day Russia--into a common security dialogue.

Foreign Aid

During the Cold War, foreign aid was often used to counter potential Soviet influence by supporting governments friendly to the United States, enticing nonaligned governments towards a pro-Western stance, and ameliorating social conditions that could feed radical anti-Western movements. Some funds went to countries in which the U.S. maintained bases (principally the Philippines, Portugal, Greece, and Turkey), and other funds assisted countries facing communist insurgencies (such as El Salvador). In the 1990s, as the Soviet system has lost its appeal to developing countries and the Soviet threat disappeared, foreign aid has become an instrument to influence governments on a host of issues from labor rights to environmental pollution.

Since the end of the Cold War, there has been strong public pressure to cut spending on foreign aid, even though the aid budget has been shrinking in real terms for twenty years. In inflation-adjusted dollars, aid peaked in the early 1960s, at about twice the 1995 level. As a share of GNP, aid in 1995 was less than one-fourth its level of thirty years earlier.

One of the principal limitations on the effectiveness of foreign aid as a policy instrument is that the goals set for it are overly ambitious, which dissipates what could be more powerful influence if it were more narrowly focused. The legislation that guides the disbursement of foreign aid, the Foreign Assistance Act, is burdened with thirty-three objectives and seventy-five priority areas, which impedes USAID from rewarding governments that shift policy in directions desired by the U.S. Furthermore, Congress earmarks much of the aid, that is, directs how much is to be spent in each country. While earmarking lets the elected representatives rather than career officials decide how to spend the taxpayers' money, it leaves little flexibility for USAID to direct aid to good development and foreign-policy partners and away from poor performers.

Foreign Policy Aid and Economic Development Aid. Foreign aid has many components, which can be grouped for analytical purposes into two categories. First is the foreign policy aid, consisting primarily of military aid and cash payments to foreign governments (more or less equal to the budget category called Economic Support Funds, ESF). Second is development aid, which consists of food aid (PL 480), disaster relief, projects like roads and schools built by USAID, U.S. contributions to international aid institutions, and a variety of smaller programs, such as the Peace Corps. While USAID is the principal foreign aid agency, it is responsible for administering only about one-third of the U.S. foreign assistance funds, and the allocation of its funds is decided in an inter-agency process in which general foreign policy interests weigh heavily.

Since the end of the Cold War, Israel and Egypt have gotten most of the foreign policy aid. Between them, they receive $5 billion a year (including $3.1 billion in military aid), a level set by the 1978 Camp David peace accord between the two countries. (Inflation has cut the value of this assistance by a third since then.) The governments of Egypt and Israel see the aid as part of a U.S. commitment to their respective security, an absolute precondition for the peace between Cairo and Jerusalem. The aid has also helped cement close cooperation on a wide range of issues, including facilities and logistical assistance for the U.S. military.

In 1995, for all countries other than Israel and Egypt, less than $100 million was allocated for military aid grants, while $365 million was allocated for ESF. Foreign policy aid has been particularly hard hit by the decline in aid since the mid-1980s. At FY 1996 prices, foreign policy aid averaged $4.5 billion in 1986-88, $3.5 billion the three years after that (1989-1991), and then fell steeply to an average of less than $.5 billion in 1993-95.

In contrast to the decline in foreign policy aid, economic development has not been as hard hit. Economic development aid--which includes contributions to multilateral organizations, food aid, and direct U.S. aid programs--was relatively stable from 1986 thru 1994, at constant 1996 prices. The annual average for those nine years was $7.3 billion (at 1996 prices), and most years saw a slight growth compared to the year earlier. However in 1996, economic development aid was substantially below the average for the previous decade..

In other words, the reduction in the total aid budget in the late 1980s and early 1990s came entirely out of the foreign policy aid, while economic development aid stayed relatively constant. In 1986, the foreign policy aid was twice the size of the economic development aid. To be sure, much of the foreign policy aid went to Israel and Egypt; setting that aside, the foreign policy aid was still three-fourths the size of the economic development aid. In 1995, the foreign policy aid was less than the economic development aid; indeed, without aid to Israel and Egypt, the foreign policy aid was 5 percent the size of the economic development aid.

Economic development aid, the traditional focus of interest among aid personnel, is said to serve U.S. interests through job creation programs that reduce the pool of alienated youth who could be attracted to radical anti-Western ideologies; family planning and environmental protection programs that ameliorate pressures on the world's resources; and economic development that diminishes the risk of ethnic strife and the collapse of states (which can create humanitarian disasters so massive that the United States intervenes). Two such interventions--Somalia and Rwanda--cost more than Washington spent on development assistance to all of sub-Saharan Africa between 1992 and 1995.

Development assistance has become a less potent instrument of U.S. influence as the proportion of aid dispensed by Washington has declined relative to that of other donors. In 1970-71, the United States provided 40 percent of the world's official development assistance as defined by international agencies (which exclude military aid from their data). In 1993, the U.S. supplied 16 percent. Not only had Japan become by 1993 the world's largest donor in absolute terms, but Japanese aid to Latin America--an area of traditional U.S. interest--exceeded U.S. aid in that region.

Overall, foreign aid's importance as a source of development financing is shrinking in a world with more open economies and better information about opportunities in developing nations. Countries with sound policies attract private foreign capital that dwarfs available foreign aid. In 1994, private capital flows to developing nations totaled $173 billion--about three times the level of official aid.

Organizational Issues. Debate arose in 1995 about the best organizational structure through which to deliver foreign aid. USAID has been actively cutting its costs. In 1995, USAID closed twenty-one overseas missions and reduced its staff by 1,200 personnel (about 30 percent), partly in response to the criticism that, per dollar of aid distributed, it maintained ten times as many employees abroad as did its British counterpart. Proposals have been made to consolidate USAID with the State Department, which might cut costs but could also reduce the visibility of aid and subordinate development to other foreign policy objectives. Other proposals suggest increasing the responsibility of private voluntary organizations, which already distribute about 30 percent of project funds. However, such plans would not resolve the problem of extensive congressional mandates that establish so many priorities that the impact of aid is diffused, weakening its effectiveness.

In light of the tight resource situation, U.S. policymakers are using innovative means to mobilize funds. Long-established institutions are being tapped for new purposes; witness the use of $20 billion from the Exchange Stabilization Fund to finance the U.S. part of the package to avert a Mexican financial crisis in 1995 (other industrial countries provided $10 billion; the IMF, $8 billion; and commercial banks, $3 billion). Another method of leveraging U.S. money that may be used more in the future is to form international consortia to finance foreign policy initiatives. In 1994-95, the U.S. negotiated an agreement in principle with North Korea for the construction of a nuclear power plant in that country in return for Pyongyang's taking a variety of non-proliferation steps. The cost of that nuclear power plant may be $4 billion to $5 billion, depending upon what associated facilities are also provided and on what restrictions the North Koreans put on the construction process. Little of that money will come from the U.S., which persuaded South Korea and Japan to bear 90 percent of the cost. An international organization, the Korean Peninsula Energy Development Organization (KEDO), was set up to carry out the project. While the U.S. role in resolving this issue and in KEDO might seem disproportionate based on the money the U.S. is contributing, Washington's voice on the matter reflects the U.S.'s nuclear umbrella over Japan and South Korea and its 37,000 troops in South Korea.

In addition to administering foreign aid directly, Washington provides about $2 billion a year for international aid agencies. Most of this money represents the U.S. share in international financial institutions (IFIs), such as the World Bank, the Inter- American Development Bank, and the Asian Development Bank. The United States is the largest shareholder, or among the largest, in every IFI.

While Washington alone cannot determine policy in any IFI, it has a strong voice in all of them, which it uses to advocate economic policies that advance U.S. policy interests. For instance, when the collapse of the Mexican peso in late 1994 led to worries about social unrest in that country and about a contagion effect (frightened foreign investors withdrawing funds from otherwise healthy economies) on many smaller developing and ex-communist countries, the IMF stepped in with $18 billion, allowing the U.S. to share the burden of rescuing the Mexican government. In the former Soviet Union, the World Bank and the IMF distributed about $10 billion in loans in 1991-95, dwarfing U.S. aid efforts. Worldwide, the IFIs lend about $60 billion a year, with the World Bank group lending about $40 billion a year, the regional development banks about $10 billion, and the IMF another $10 billion (although IMF lending fluctuates sharply, rising when recession threatens and falling when business booms). That makes these institutions the largest sources of official funds to the developing world. However, most of these funds are provided at market interest rates, while most bilateral aid, including nearly all USAID projects, are grants.

In many countries that borrow from them, the IMF and World Bank have encountered strong criticism for infringing on national sovereignty, for imposing harsh burdens on the poor, and for insisting on doctrinaire conservative free-market policies. The two institutions have acquired a negative reputation among nationalists, especially in Africa and the former Soviet Union. The IMF and World Bank response is that they are asked in when times have turned tough, so it is hardly surprising that they must prescribe bitter medicine, and that only such medicine will cure the patient. The U.S. government is of two minds about the strong measures that the IMF in particular prefers. On the one hand, necessary as it may be for the medium term, shock adjustment may cause social instability that undermines a friendly government. On the other hand, to the extent that the government concerned needs to be pressured into taking reform steps it resists, then it is in Washington's interests to have the bad news brought by the IMF rather than by U.S. representatives.

One indicator of the usefulness of the IFIs in the post-Cold War period is the pressure to set up additional such institutions. The European Bank for Reconstruction and Development (EBRD), established in 1990, has helped consolidate the transition from communism by financing privatization and private sector firms. The Middle East Bank, formation of which was announced in November 1995, will facilitate roads and other infrastructure (e.g., telephone systems) that might strengthen the Arab-Israeli peace process, for example, by improving conditions of the West Bank and Gaza.

While the IFIs have been important instruments for advancing U.S. economic development goals, such as the promotion of free markets, they have not been as useful for Washington in bringing pressure to bear on regimes unfriendly to the West. Other IFI shareholders have vigorously resisted U.S. efforts to have the IFIs consider non-economic foreign policy concerns when disbursing loans, exhibited in Washington's attempts to block loans to countries that abuse human rights or support terrorism. The United States has, however, often persuaded the IFIs not to lend to rogue states because of their poor economic records. For example, Syria is over $300 million in arrears to the World Bank, and the World Bank is not considering new loans to Iran.

In conclusion, the effectiveness of aid as a tool of U.S. national power has been undermined by a lack of focus, by goals that are too numerous for the resources provided. The political climate in the U.S. suggests that funding for aid will be cut and restrictions on its use will be increased. More use will be made of alternative techniques to mobilize funds for foreign policy initiatives, such as relying on international financial institutions or specially formed international consortia, as in the case of the power plant for North Korea.


The term "economic sanctions" can refer broadly to the curtailment of any customary trade or financial relation, or narrowly to measures against states that have violated obligations under international agreements. This chapter discusses broad bans on trade or finance. The chapter on arms control considers denial of military and dual-use technology, while the chapter on limited military intervention discusses the enforcement of sanctions with military measures, such as a naval blockade.

The modern interest in sanctions focuses on them as an alternative to war. While the U.N. Charter envisaged sanctions as a major instrument of the Security Council, the Cold War prevented agreement among the council's five permanent members in the face of most threats to peace. A trade ban was imposed on Rhodesia in 1965 (after the white residents declared independence from Britain), and more limited bans (particularly on arms) were used in a few other cases. In addition to these international sanctions, the United States imposed its own trade bans on several communist countries, including North Korea, China, Cuba, and Vietnam. In 1986, the U.S. Comprehensive Anti-Apartheid Act banned new investments and trade with South Africa in a number of goods; in 1988, the U.S. forbade financial transactions with the Panamanian regime of Manuel Noriega.

In the post-Cold War era, internationally mandated sanctions have become a more common instrument, in part because the permanent Security Council members can agree more readily on their use. In 1990-95, the United Nations imposed sanctions on Iraq, Libya, the successors to the former Yugoslavia, and Haiti, all but the latter two of which were still in place in late 1995. The sanctions on the former Yugoslavia were suspended by Security Council Resolution 1022 in November 1995. They would be reimposed, without action by the U.N. Security Council, if either the Commander of IFOR (the NATO-led force) or the civilian High Representative (chosen by the OSCE) informed the Council that Serb authorities are significantly failing to meet their obligations under the peace accord. Beyond the U.N.-mandated sanctions, the United States in late 1995 had comprehensive sanctions on Cuba and Iran, as well as partial trade bans on the areas of Angola held by UNITA rebels and, despite the early 1995 easing in relations, on North Korea.

Sanctions' record of success depends upon what they are expected to accomplish. They have been least successful at promoting the fall of regimes or the overthrow of dictators, in part because the elites who could engineer a coup are well insulated from the hardship that sanctions create. Sanctions have also had little success in changing governments' fundamental policies--with some obvious exceptions, such as the end of South African apartheid. More likely, sanctions can persuade governments to change policies to which they are not firmly committed, or which are peripheral to their basic interests. For example, the mid-1980s sanctions of certain Japanese firms for selling militarily useful technology to the USSR encouraged the Japanese government to tighten its controls over dual-use exports. Sanctions can also tip the balance when a government is only considering changing its policies, as occurred in 1995 when the hope of securing an easing of sanctions certainly contributed to the reduction in the Serbian government's support for the Bosnian Serbs and its strong pressure on them to agree to the peace accord negotiated in Dayton, Ohio in late 1995.

In addition, sanctions have often weakened a target government's ability to carry out aggressive plans, by depriving it of resources.

According to a widely cited 1990 Institute for International Economics study by Gary Hufbauer, Jeffrey Schott, and Kimberly Elliott--Economic Sanctions Reconsidered--sanctions achieve greater success in modifying the target country's behavior when their goals are relatively modest, the target is much weaker than the countries imposing sanctions, the target and the nations imposing sanctions conduct significant trade, sanctions are imposed quickly without time for adjustment, and the sanctioning countries avoid high costs to themselves. To this list can be added: that the effectiveness of sanctions increases when the nations imposing them can sustain them for as long as necessary and are willing to use military force to enforce them.

While they may influence governments, sanctions inflict collateral damage on vulnerable civilians. This problem is exacerbated when the target government cares little about the well-being of its people, or will even use their suffering to pry concessions from countries imposing the sanctions. Another shortcoming of sanctions is the cost to the U.S. economy. Unilateral U.S. trade bans may shift business to other countries, though the target country will still probably sustain some losses. The issue is whether the economic loss for the United States is a reasonable price to pay for the damage inflicted on the target. For example, the 1995 ban on dealing with Iran forced the U.S. firm Conoco to cancel an oil investment. Iran renegotiated the deal with the French firm Total on less attractive terms, meaning less revenue for Tehran, which may therefore have to postpone arms purchases during lack of cash.

As noted, in the immediate post-Cold War period, cooperation among the permanent members of the U.N. Security Council facilitated passage of sanctions resolutions. In 1994 and 1995, however, disagreements grew among the permanent five over several of the sanctions it had imposed. For example, the U.S. Congress voted to unilaterally lift the restrictions on arms to Bosnia, the Russian Duma voted to lift trade restrictions on Serbia, and the French and Russian governments expressed unease over the conditions they thought Washington tied to lifting export restrictions on Iraq. In light of the growing differences over existing sanctions, it may become more difficult for the Security Council to approve new ones.

Despite their mixed record, sanctions will remain a popular policy instrument. Their benefit-to-cost ratio usually compares favorably to those of other policies, and they are often seen as more appropriate than the alternatives: military action or diplomatic protest. Sanctions can also signal U.S. displeasure, cautioning that Washington may take additional steps. Furthermore, they warn other nations of the price they will pay for future misbehavior.

However, sanctions can also provide an excuse for inaction. They may placate public demands for action when Washington wants to evade responsibility, and thus they may fail to convey a firm message to the target country, which may see the imposition of sanctions as an indication that stronger measures are unlikely. If that is the case, sanctions can weaken U.S. influence.


Economic policy will continue to grow in importance as the world becomes more economically integrated. The greater the growth in international trade and financial flows, the greater the role the U.S. economy will play in international economic developments. Unlike the Cold War world of ideological conflict, in which traditional security concerns dominated policymakers' thinking, governments now emphasize the pursuit of material prosperity.

Nevertheless, the increasing prominence of economic issues does not necessarily translate into a greater ability to use economic instruments of U.S. power. Economic instruments are often blunt in two senses. First, like a blunt instrument, they work only if swung hard, in which case they can inflict so much damage that they can be destructive. For instance, sanctions are most effective when they are universal, applied by all countries and affecting all trade--but in that case, the sanctions inflict considerable suffering on the innocent civilian population. Another example is the use of economic pressure on an ally with which the U.S. maintains a close security relationship, such as Japan. The difficult task is how to achieve the U.S. economic goals without damaging the security relationship.

Economic instruments are blunt also in the sense that they are not sharp, that is, they are not especially effective. Foreign aid has a mixed record at achieving general foreign policy goals; for instance, the assistance to Russia has done little if anything to improve U.S.-Russian political and security relationships. And foreign aid is becoming a less powerful instrument as budget pressures reduce the funds available. As for economic sanctions, despite specific successes, such as South Africa, and Serbia, the general rule remains that governments are unlikely to change their policies in response to sanctions; the best sanctions can usually do is reduce the target government's income, which may hinder its ability to carry out plans that would damage U.S. interests.

The most powerful economic instruments that the U.S. government wields are those that shape the behavior of the private sector. Rather than spending taxpayer resources, Washington can often affect the economies of other nations more efficiently by offering guidance to the private sector about overseas political risks, and by establishing the framework and incentives to promote private trade and investment overseas. The recognition that the private sector is crucial to international economic relations may in part underlie the declining importance of budget-based instruments such as foreign aid and the growing emphasis on trade policy.

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