Select Committee on Economic Affairs Written Evidence


Memorandum by Professor Michael P Malloy, University of the Pacific McGeorge School of Law

  1.  I thank the Select Committee on Economic Affairs for the opportunity to share my views on the impact of international economic sanctions. This is a subject that has been a central concern throughout my professional life, both as a practitioner and an academic. Much of what I have to submit to the Committee is derived from major studies of economic sanctions that I undertook in 1990,[140] 2001,[141] and 2006.[142]

2.  THE PURPOSES OF ECONOMIC SANCTIONS

  2.1  The Committee has raised a series of questions about the purposes of economic sanctions. What are these purposes—to effect regime change, to effect policy changes by an existing regime, or to neutralise the threat posed by an existing regime, group or individual? Whatever the purposes, have they been clearly stated in the past?

  2.2  It has been said that economic sanctions "are an instrument of economic policy designed to serve several, not necessarily mutually exclusive, foreign policy, military or strategic objectives."[143] However, the historical objective of most of the economic sanctions imposed by Western countries has been directive, "to induce change in another country's behaviour by inflicting economic damage."[144] Professor Barry Carter of Georgetown University has identified several specific objectives that one could place under the rubric of this directive policy objective: influencing target country policies in relatively limited ways,[145] destabilizing target country government,[146] seeking other major changes in target state policies,[147] and disrupting military adventures.[148]

  2.3  Another generic policy objective may be termed defensive: in the trade embargo context, for example, this might be expressed as an objective "to reduce or slow development of an adversary's military or strategic capabilities by raising the economic cost of acquiring imports or import substitutes."[149]

  2.4  These policy goals are susceptible to objective measurement—economic damage does or does not alter target state behavior; economic costs do or do not impede the target's capabilities. Other objectives may be more impressionistic and hence less susceptible to measurement. One such generic category may be termed communicative. Sanctions may be imposed "to send a symbolic message of displeasure with another country's behaviour (which may also be for internal political purposes or directed at allies)."[150] This is a particularly problematic category for several reasons.

  2.5  First, virtually any sanction, even one appropriately categorized as directive or defensive, is to some extent communicative as well, at least implicitly. Attempting to direct the target to make a modest or major change in policy will naturally communicate displeasure with the behavior of the target state arising from that objectionable policy. In this sense, the communicative policy objective has no life of its own; analytically, it is indistinguishable from the directive or defensive objective that it accompanies.

  2.6  Second, to the extent that a communicative objective is pursued independently and in isolation from any other generic category—that is, to the extent that sending a "symbolic message" of displeasure is in fact the only significant policy motivation behind the imposition of a sanction—the sanction program is likely to be trivial or disproportionate in its effects. Pounding the table or speaking rudely to the target state's representatives would serve this isolated communicative objective just as well, and with considerably less cost to third parties who may be caught between the sanctioning state and the target.

  2.7  One further problem follows from these two. Where a communicative objective is explicitly stated as the raison d'etre of an economic sanctions program, one might suspect that imposition of the sanction is in fact motivated by domestic political considerations, rather than the needs of foreign policy. Hufbauer, Schott and Elliott capture something of this suspicion—that sanctions may occasionally arise for the purpose of domestic consumption—when they observed:

    The desire to be seen acting forcefully, but not to precipitate bloodshed, can easily overshadow specific foreign policy goals. Indeed, one suspects that in some cases domestic political goals were the motivating force behind the imposition of sanctions.[151]

  2.8  Such suspicions are unlikely to receive explicit confirmation from the public record. However, to the extent that actions still speak louder than words, one may expect that a program of economic sanctions that seems so poorly constructed or administered as to accomplish little more than public display is a likely candidate for suspicion. Hence, the "communicative" objective is of questionable appropriateness as a policy justification for economic sanctions.

  2.9  Articulation of policy objectives is rarely clear-cut; in fact, policy objectives often shift over time while the interaction between sanctioning state and target evolves. For example, Vietnam was the target of US sanctions from 1964 to 1995, with the former South Vietnam added to the sanctions in 1975. Clearly, imposition of these broad trade and financial sanctions began as an incident to the involvement of US armed forces in the Vietnam conflict, but were later counterpoised against continuing foreign policy differences between the United States and Vietnam, which were eventually eased in the normalization of relations between the two nations in 1994-95.  Sanctions did not in and of themselves resolve the wide range of foreign policy difficulties that existed between the two states. Yet we do know that Vietnam experienced severe economic difficulties that could not have been eased by continuing US sanctions.[152] Furthermore, sanctions did provide necessary "bargaining chips" for normalization of relations[153] and for settlement of outstanding claims of US nationals against Vietnam.[154] The fact remains that the movement of events is not embargoed by sanctions,[155] and critics as well as policymakers must be sensitive to the fact that sanctions may become more—or less—effective over time.[156]

3.  IMPACT OF PREVIOUS SANCTIONS

  3.1  The Committee has also raised questions about the impact of previously applied trade sanctions. How did they affect the sanctioned economy? Did they mainly impact on the poorer or the richer groups? How did they affect the country or countries imposing the sanctions?

  3.2.  The case of US limited trade sanctions against Nicaragua, imposed in May 1985,[157] presents a useful illustration. These specialized economic sanctions were imposed on direct US-Nicaraguan trade only. My 2001 study therefore looked primarily at export and import data, with 1985 as the base year. For whatever credible data is readily available, there is a gradual downward trend in the export performance, but they do not offer any strong indication of an impact of sanctions centered around the base year. A similar pattern can be seen in the import data. Performance of gross domestic product is erratic, with a relative increase in the post-base-year data. Examining this data on an indexed basis, relative to the 1985 base year, and comparing it to aggregate indexed data for the Western Hemisphere region, the performance of the Nicaraguan data seems, if anything, even less suggestive of a significant effect of limited economic sanctions.

  3.3  The observable effects of the 1979-81 Iran hostage sanctions, applied relatively swiftly against a former ally and then quickly lifted, appears to be considerably less ambiguous than any effects that could be observed in the case of the Peoples Republic of China, at the end of 20 or 30 years of broad trade and financial sanctions. Yet despite the magnitude of the Iran blocking program (affecting $12 billion worth of Iranian Government assets) and the impact of the trade embargo, the broader foreign policy crisis between the United States and Iran continued, with Iran steadfastly refusing to release the hostages.

  3.4  The Iran hostage crisis created a set of circumstances that brought into play a diverse range of international dispute settlement devices.[158] Even in hindsight, it is impractical to separate out the significance of any one of these devices for the eventual resolution of the crisis. Nevertheless, the actions taken by the United States during the crisis, particularly such unilateral responses as the sanctions, would appear to have been at least necessary if not sufficient conditions to resolution of the crisis. Any assessment of these actions unavoidably involves a large degree of speculation. Yet to the extent that the crisis is properly characterized as concerning not only the hostages but also the claims of US nationals, the unilateral actions, and especially the blocking of Iranian assets, were a necessary and effective step towards eventual resolution of the crisis. Without the pool of blocked assets as a "bargaining chip," one can only wonder what leverage the United States would have had in the face of continuing Iranian Government intransigence. Certainly other traditional dispute resolution devices (such as resort to the Security Council, mediation and conciliation by the Secretary-General, and consideration by the International Court of Justice) do not appear to have had any appreciable effect on the behavior of Iran at the time.

4.  GENERAL V TARGETED SANCTIONS

  4.1  The Committee has asked whether there is any role for general economic sanctions in today's environment, or should sanctions normally be imposed in a targeted manner, against specific individuals or groups?

  4.2  Compared to the increased use of US unilateral sanctions in the period from 1979 to 1996, there has been a decline in the imposition of new unilateral sanctions against target countries in recent years. The decline in new sanctions probably results at least in part from the continuing public debate about the appropriate role of unilateral US economic sanctions[159] and about the cost effectiveness of such sanctions.[160]

  4.3  On the other hand, the period from 2001 to 2006 has seen a growing use of sanctions against individuals and non-governmental organizations, often as a response to heightened concerns about the threat of international terrorism in the aftermath of the attacks on US territory on September 11, 2001. A great number of new sanctions have been and will likely continue to be imposed against individuals and groups.

  4.4  Nevertheless, "smart sanctions," ie, narrowly targeted economic sanctions designed to have minimal impact on collateral states, institutions, and persons,[161] have still not demonstrated their effectiveness or their comparative efficacy as contrasted with broad-based sanctions. This issue is particularly underscored by the oil-for-food scandal that emerged from the 1990 unilateral and multilateral Iraq sanctions.[162]

  4.5  One suggestive case study is offered by sanctions against Zimbabwe/Southern Rhodesia during the 1960s and 1970s. This situation essentially involved multilateral, rather than unilateral action—the UN economic sanctions against Southern Rhodesia, in which the United States participated. US sanctions were lifted in 1979. Performance of the economic data over an 11-year assessment period (1974-84) is erratic. In particular, foreign exchange holdings are relatively poor both in the pre-1979 period of the Southern Rhodesian regime and in the post-1979 period of the emerging state of Zimbabwe. Export data evince a characteristic upward turn following the lifting of sanctions in 1979, but performance flattens out relatively quickly. The upward turn in import data is somewhat more pronounced, but it also begins to fall off relatively soon after the 1979 base year. It may be noteworthy that, unlike other cases that I have examined in my studies, for Zimbabwe the broader indicator of gross domestic product does roughly echo the trending found in the export and import data.

  4.6  Does this suggest that targeted trade and financial sanctions are less of a distinct factor in the behavior of the trade data? Examining the data indexed relative to the 1979 base year, and comparing the data with the corresponding indexed aggregate data for the developing African region, it would appear that the performance of the Zimbabwe data is not significantly out of line with regional performance over the 11-year assessment period. At the very least, the comparison suggests that the pre-1979 sanctions did not exert any unique or significant pressures on Southern Rhodesian performance (pre-base-year) or of the removal of such pressures on Zimbabwe performance (post-base-year).

  4.7  The Iran hostage crisis offers another example of targeted sanctions. The President's unilateral actions in the hostage crisis exhibited a consciously selective approach, with a gradual intensification of the restrictions imposed by the President. The selectivity of the restrictions, most pronounced in the early stages of the crisis,[163] seems reminiscent of the 1956 Egyptian Assets Control Regulations,[164] insofar as the restrictions were intended to affect directly only the Government of Iran and its owned and controlled entities, and not Iranian nationals or wholly private transactions.[165]

  4.8  The Iran hostage sanctions experienced a graduated intensification over a very short span of time, with the upward spiral of the restrictions exhibiting a relatively deliberate process. In any event, direct ad hoc negotiations on Iran's terms were necessary before the crisis precipitated by the taking of the hostages could be resolved. The unilateral responses of the President to the hostage crisis were no more sufficient for a resolution of that crisis than was resort by the United States to the dispute resolution mechanisms afforded by the UN Security Council and the International Court of Justice.[166]

  4.9  The regulatory technique, however, was quite clear and traditional: to impose a prohibition on any transaction involving any property in which the Government of Iran, its agencies, instrumentalities, or controlled entities might have any conceivable interest of any nature whatsoever. It may be argued that the broad and sweeping nature of this prohibition, which is the essence of a "blocking" of assets, is central to an effective use of blocking as a weapon of economic warfare. In its initial stages, when the blocking most disrupts the normal expectations of international commercial and financial transactions, it is at its most patently effective, and in some significant sense the Iranian sanctions played a role in effectuated the resolution of the hostage crisis.[167]

5.  OPTIMAL CIRCUMSTANCES FOR EFFECTIVE SANCTIONS

  5.1  The Committee also asks whether the available evidence points to circumstances in which sanctions are most likely to be effective. What does the evidence suggest about the impact of unilateral sanctions?

  5.2  Based on available empirical data, the relatively most successful sanctions programs appear to be those that apply a wide range of sanctions, rigorously and in coordination with a range of other seriously initiated foreign policy measures. The case of the Iran hostage sanctions may be examples of such sanctions. The relatively least effective sanctions programs may be those that apply a constricted range of sanctions diffidently or with little serious coordination. The cases of the Southern Rhodesian multilateral sanctions and unilateral US trade sanctions against Nicaragua may be examples.

  5.3  Curiously, a multilateral dimension to the application of sanctions does not appear to have had any significantly positive impact on the effectiveness of sanctions programs. The Southern Rhodesian sanctions are a clear example of this, while the available economic data with respect to South African sanctions remain at best ambiguous in this regard.

6.  LIKELIHOOD OF SUCCESS OF SANCTIONS

  6.1  The Committee has asked whether there is any evidence to suggest that economic or financial sanctions have been successful in achieving their stated objective. If they don't achieve their objective, what should be the next step? Is this something which is normally considered when sanctions are formulated?

  6.2  Economic sanctions themselves are purely instrumental, but they are not themselves the embodiment of policy. Sanctions will have whatever instrumental "effect" the circumstances of their use will allow, but it is overarching policy—foreign and/or domestic—that should be judged in terms of its effectiveness, not sanctions. Selecting a particular sanction or group of sanctions is a matter of selecting a means to an end. The critical policy question involves determining the objective (against which the effectiveness of the instrument will then be measured). Certain commentators have explained the issue as follows:

    A reasoned approach to policy making requires consideration of three important questions. (i) Under what circumstances, if any, is it possible to use sanctions to impose significant economic costs on the targeted country or countries? (ii) What are the economic costs borne by the country or countries imposing sanctions? (iii) Even if it is possible to impose significant costs on targeted countries, are sanctions effective in achieving their ultimate foreign policy, military or strategic objectives?[168]

  6.3  Whatever policy one adopts with respect to a particular state or a specific international crisis, economic sanctions remain one available instrument to further the policy, along with diplomatic efforts, resort to formal and informal dispute resolution devices, treaty remedies, and—where appropriate and legal—the threat or use of armed force. Sanctions may be relatively more or less appropriate as an instrument depending upon practical circumstances, and depending upon how important realization of a particular policy goal may be (as compared with the cost of attaining it).

  6.4  A review of past sanctions episodes does offer two important caveats. First, in the most successful episodes, sanctions are not applied sequentially, with other responses to be triggered only after sanctions have failed to achieve the policy objective. Rather, sanctions are best applied en suite, along with all other appropriate available responses. Second, it is a fundamental mistake, both in terms of cost and effectiveness, to initiate sanctions as a rhetorical response to a crisis, in an effort to appear to be proactive. Sanctions undertaken for domestic political effect subverts the appropriate role of sanctions as instruments of foreign policy.[169]

1 Winston S. Churchill, The Second World War: The Gathering Storm 175 (1948).



140   Michael P Malloy, Economic Sanctions and US Trade (Little, Brown and Company: 1990). Back

141   Michael P Malloy, United States Economic Sanctions: Theory and Practice (Kluwer Law International: 2001). Back

142   Michael P Malloy, Study of New US Unilateral Sanctions, 1997-2006 (National Foreign Trade Council: forthcoming). Back

143   Bayard, Pelzman & Perez-Lopez, Stakes and Risks in Economic Sanctions, 6 The World Economy 73, 74 (1983). My sanctions studies have focused on the foreign policy objectives, as opposed to those related "military or strategic objectives." Back

144   Bayard, Pelzman & Perez-Lopez, Stakes and Risks, at 74. Recent studies have further articulated the species of objectives that might be grouped under this generic policy objective. In this regard, Hufbauer, Schott and Elliott identify such policy goals as "modest changes in the policies of target countries" (Hufbauer, Schott & Elliott, supra at 41), destabilization of a target country government (id at 43-44), and a variety of major changes in the policies of target countries, such as opposition to apartheid and South African control of Namibia. Id at 46-47. The authors also identify a category that, in the view of the present study, is a mixed category, namely, "disrupting military adventures." Id at 44-45. Some of the examples given in that category have a directive function (eg, encouraging an end to the Suez crisis (id at 45, 275-279)). Other examples, such as sanctions against the People's Republic of China (id at 45, 221-230), exhibit a mix of objectives, including a directive policy objective, but also including a national security dimension that would generally be excluded from the scope of the present study. Back

145   Barry Carter, International Economic Sanctions: Improving the Haphazard US Legal System 14-18 (Cambridge Univ Press: 1988). Back

146   Id at 18-19. Back

147   Id at 22-23. Back

148   Id at 19. Back

149   Bayard, Pelzman & Perez-Lopez, Stakes and Risks, supra at 74. Recent studies have also articulated the specific types of objectives that might be grouped under the generic category of the defensive policy objective. Hufbauer, Schott and Elliott identify such policy goals as "impairing military potential." G C Hufbauer, J J Schott & K A Elliott, Economic Sanctions Reconsidered 45-46 (1985). The goals of destabilization of a target country government (id at 43-44), and of "disrupting military adventures" (id at 44-45) may also share this defensive policy objective. Likewise, Carter's objectives of "[i]mpairing the military potential of the target country" (Carter, supra at 19-22), among others, could be included under the rubric of the defensive policy objective. Back

150   Bayard, Pelzman & Perez-Lopez, Stakes and Risks, supra at 74. Back

151   Hufbauer, Schott & Elliott, supra at 3 See also id at 9 (discussing "demonstration of resolve" as sanctioning state's motive). Back

152   See Weinraub, Hanoi, in Economic Straits, Seeks to Move Toward Ties With US, NY Times, Dec 28, 1981, at A1, col 4. This situation persisted. See Greenberger, Isolated Hanoi, Its Economy in Shambles, Trying to Win US Hearts, Minds, Bucks, Wall St J, Feb 8, 1988, at 20, col 5; Crossette, Currency Crisis Is Ravaging Vietnam's Fragile Economy, NY Times, Apr 10, 1988, § 1, at 1, col 4. Yet we were often told by those fresh from trips to the area that US policy had lead to isolation of the United States, not Vietnam. See Pressler, We Can't Isolate Vietnam Forever, NY Times, May 23, 1988, A19, at col 3. Back

153   See Malloy, US Economic Sanctions at 86-89 (discussing easing of trade sanctions in normalization of international relations). Back

154   See id at 89 (discussing role of blocked assets in settlement of international claims). Back

155   See, eg, Wain, Vietnam Luring Hardy Foreign Investors, Wall St J, July 12, 1989, at A14, col 1. Back

156   In the case of Vietnam, for example, the economic effects of the continuing embargo apparently moved the Vietnamese Government to consider liberalization of the climate for direct foreign investment. See id at col 2. In contrast, North Korea-subject to identical US sanctions-went into default in August 1987. See Kristof, North Korea Is Told of Loan Default, NY Times, Aug 23, 1987, at 3, col 1. Back

157   50 Fed Reg 19,890 (1985). Back

158   For a discussion of some of these devices, see Michael P Malloy, The Iran Crisis: Law Under Pressure, 1984 Wisconsin Int'L LJ 15, 59-68, 84-92 (1984). Back

159   See, eg, Sanctions Revisited: Hearing Before Subcomm on Int'l Econ Policy and Trade of the Comm on Int'l Relations, House of Representatives, 105th Cong 44 (1998) (testimony of Frank Kittredge, Vice Chairman, USA*Engage) (questioning cost and effectiveness of economic sanctions). Back

160   For an interesting review and critical analysis of this public debate, see Richard W Parker, The Cost Effectiveness of Economic Sanctions, 32 Law & Pol'y Int'l Bus 21 (2000). Back

161   See, eg, David T Duncan, Note, "Of Course This Will Hurt Business": Foreign Standing under the Foreign Narcotics Kingpin Designation Act of 1999 and America's War on Drugs, 37 Geo Wash Int'l L Rev 969 (2005) ("What makes these economic sanctions `smart' is their precision. Smart sanctions 'narrowly target' individuals and entities by identifying (ie, `blacklisting') and blocking (ie, `freezing') access). . . .") Back

162   Cf US Government Accountability Office, Lessons Learned from Oil for Food Program Indicate the Need to Strengthen UN Internal Controls and Oversight Activities (GAO-06-330, April 25, 2006), available at 2006 WL 1126318 (appearing to suggest that Iraq sanctions policy allowing sales of oil primarily for humanitarian purposes was out-smarted); US General Accounting Office, Observations on the Oil for Food Program and Areas for Further Investigation (GAO 04-953T, July 08, 2004), available at 2004 WL 1570976 (earlier report by since-renamed office). See generally Intelligence Authorization Act for Fiscal Year 2005, Pub L 108-487, § 306 118 Stat 3939 (2004) (expressing sense of Congress on availability of information on UN oil-for-food program). Back

163   See Malloy, The Iran Crisis: Law Under Pressure, 1984 Wisc Int'l LJ 15, 28-30, 34-35 (discussing graduated intensification of sanctions). Back

164   21 Fed Reg 5777 (1956). Back

165   But see Malloy, Embargo Programs of the United States Treasury Department, 20 Colum J Transnat'l L 485, 512-513 (1981) (suggesting that Iran sanctions were not so narrow in practical effect). Back

166   See Malloy, The Iran Crisis, supra at 59-68, 96-97 (discussing resort to UN). Back

167   Cf Andreas Lowenfeld, Trade Control for Political Ends § 3.41, at 591 (1983) (suggesting that Iranian sanctions "may have played a part" in resolving hostage crisis). Back

168   Bayard, Pelzman & Perez-Lopez, Stakes and Risks in Economic Sanctions, 6 The World Economy 73, 75 (1983). For a quantitative model for evaluating costs, see Bayard, Pelzman & Perez-Lopez, An Economic Model of US and Western Sanctions against the Soviet Union and Eastern Europe, reprinted in, The Soviet Economy in the 1980's: Problems and Prospects, pt 2, J Comm Print, 97th Cong, 2d Sess 507 (1983). Back

169   This fact is well illustrated by Churchill's remarks concerning the 1935 League of Nations sanctions against Italy:
[The British Government's] policy had for a long time been designed to give satisfaction to powerful elements of opinion at home rather than to seek the realities of the European situation. By estranging Italy they had upset the whole balance of Europe and gained nothing for Abyssinia. They had led the League of Nations into an utter fiasco, most damaging if not fatally injurious to its effective life as an institution. 
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