The argument for sanctions as a neo-protectionist tool is supported by an increasing body of evidence, e.g. trade wars in banking, energy, telecommunications.The seemingly tit-for-tat escalation in misconduct penalties on European and US banks, imposed by governmental authorities from either side of the Atlantic, provides a case in point, writes Ksenia Kirkham, a researcher at King’s College London.
Inefficiency of sanctions
While the worldwide use of sanctions has increased steadily over the past 50 years, more recently their use by the United States has accelerated. The Office of Foreign Assets Control (OFAC) of the US Treasury, along with other sanctions enforcing institutions (e.g. the Bureau of Industry and Security, the US Department of Commerce, the US Department of Justice, etc.) exercises extraterritorial and coercive economic power based on the continuing international reserve currency status of the dollar, the size and centrality of US banks and multinational corporations, and the residual importance of the United States as the global ‘growth locomotive’. A great deal of existing research indicates that sanctions seldom achieve their stated goals: sanctioned states maintain their foreign policy course and became economically and financially more self-reliant (Jerin 2015). Sanctions serve as a catalyst for the target regimes’ transformation in the energy, defence and financial sectors (Connolly 2018), with the aid of socio-cultural constitutive, ethical and normative elements that reproduce the modalities of social behaviour (Kirkham 2019). This paradoxical situation invites analytical investigation: what has precipitated this ‘sanctions boom’ amid its dubious efficacy?
The mainstream theories of sanctions (e.g. realist, liberal, public choice, institutionalist, neo-Weberian) that focus on the effects rather than on mechanisms of sanctions fail to answer this question (Jones 2015). Moreover, the pluralistic understanding of the state as an impartial, autonomous actor is incomplete. To understand the state transformation we need to abandon the ‘free’ trade paradigm of mainstream economic textbooks that misleads us to ‘the end of history’ and revisit an alternative historical narrative – the history of global protectionism. Economic sanctions have increasingly become a tool of neo-protectionist policies and a major source of tensions not only between western nations and ‘contender’ states, like China, Russia, or Iran, but also within the Transatlantic block itself, as disputes arise over whether the burden of US sanctions is being shared fairly. Despite the fact that American corporations accounted for over 60% of OFAC designations over the period 2009-2019 (137 out of 205 cases), the share of penalties paid by US companies was only 3% ($177.7mn out of $5.63bn), compared to 82% (or $4.67bn.) paid by EU companies (Timofeev 2019).
The argument concerning sanctions as a form of neo-protectionism contains three main elements: contextual, instrumental and conceptual.
Sanctions as an instrument of neo-protectionism
First, the political economy of sanctions cannot be taken out of geopolitical context and should be analysed by looking at the history of protectionism. The last fifty years of world history have witnessed a shift from Keynesian welfarism to neoliberalism. The contradiction of that period is that behind the rhetoric of freedom of choice, individualism and laissez faire, lay domestic interests and protectionist economic policies – vividly expressed in Trump’s “America First’ agenda. In this respect, Friedrich List’s ‘kicking away the ladder’ metaphor explains the real reason for this shift– the main proponents of liberalisation, the US, Germany, Japan, and the UK – historically have used tariff protectionism most aggressively (Chang 2003). Once they gained their competitive advantage by industrialising, they launched the neoliberal project with the concept of globalisation as its ideological construct that in fact prevented other states from catching up (Ibid.).
Therefore, it would be historically just if global financial institutions, such as the IMF and the World Bank stopped trading financial assistance for policy-related conditionalities (i.e. liberalisation packages), and let developing states make informed choices, ‘in the full knowledge that historically the vast majority of successful countries used the opposite strategy in order to become rich’ (Ibid.). As such, multilateral trade agreements should be rewritten to eliminate the mechanism of sanctions over states and companies for using infant industry promotion tools when it benefits their national development and security strategies.
The second point is instrumental. When the traditional means of protectionism, such as tariffs and NTBs, are off limits they generate alternative counteractions: hence neo-protectionist and regulatory trade instruments, i.e. classified by UNCTAD as ‘non-core measures’, such as licencing, quotas, import prohibitions for sensitive products’ (Belloc 2014). Extraterritorial sanctions should be added to the list of these neo-protectionist trade instruments.
The third point relates to how we conceptualise the changing character of sanctions: sanctions are becoming increasingly commercialised and trade-oriented The motives for sanctions are no longer primarily normative and geostrategic, but also geoeconomic. This is especially true concerning extraterritorial sanctions. Through the use of sanctions the US Treasury not only punishes targeted states in the name of human rights, but also promotes the interests of American corporations in global markets, enhances US state power, and advances domestic political agendas. Washington’s growing enthusiasm for sanctions enjoys overwhelming bipartisan support. Sanctions originate not only in the Executive Branch but also in Congress, independently of – and at times in opposition to – the Trump administration (Cafruny and Kirkham 2020). Also, there has been an increasing focus of lobbyists on influencing decision-making on sanctions: numerous interested parties benefit from sanctions, such as LNG producers, arms manufacturers, agro-businesses, steel and aluminium corporations, etc. For instance, Ted Cruz the former lobbyist but now Senator (R-Texas) has co-authored (with Jeanne Shaheen) a bipartisan bill ‘Protecting Europe's Energy Security Act’ (PEES) and is ‘focused on making sure the existing sanctions continue to serve as a deterrent, and ensure Nord Stream-2 never comes on line’ (Prince 2020).
Moreover, trade wars and sanctions have become integral elements of the new US National Security Strategy (NSS), revised in 2017. Regarding sanctions, the most striking difference between Obama’s NSS and Trump’s NSS is that the latter defines sanctions as an economic, commercial and geostrategic tool: it no longer refers to sanctions as to a ‘multilateral’ legal mechanism, no longer refers to the UN whatsoever, nor suggests that sanctions should be ‘carefully designed and tailored to achieve clear aims while minimizing any unintended consequences for other economic actors’ (as it was the case in NSS-2015) (NSS Archive 2015); also, sadly, NSS-2017 denies the possibility of an equitable dialogue and cooperation with America’s adversaries (NSS Archive 2017)
The argument for sanctions as a neo-protectionist tool is supported by an increasing body of evidence, e.g. trade wars in banking, energy, telecommunications (this list is wider). The seemingly tit-for-tat escalation in misconduct penalties on European and US banks, imposed by governmental authorities from either side of the Atlantic, provides a case in point. The US Department of Justice imposed multi-billion dollar fines on Barclays, Credit Suisse, Deutsche Bank, HSBC, RBS and UBS for mis-selling of mortgage backed securities in the run-up to the financial crisis of 2008 (DB eventually settled claims for $7.1bn in 2017 and RBS for $4.9bn in 2018 (The US Department of Justice 2017). HSBC settled $1.9bn in fines for to US authorities in 2012 for offences related to laundering money from Mexican drug cartels. Amongst others, Citigroup and JP Morgan have been fined by the EU Commission for rigging currency markets, following on from fines for manipulation of interest rate products through price-fixing the Libor and Euribor benchmark rates (FT 2017). When the US Treasury fined BNP Paribas $8.9bn for violating US sanctions against Iran, Cuba, and Sudan, a new way to raid the capital of foreign banks had been found, by invoking the global reach of the jurisdiction of US law and penalising a foreign bank for transacting with a company in a sanctioned country.
In the energy sector, the US opposition to Nord Stream-2 reflects clear geopolitical concerns – a longstanding antagonism to European energy dependence on Russia – but commercial motives are paramount. Dramatic technological innovations in the form of hydraulic fracking and horizontal drilling enabled the United States to become the world’s largest producer of natural gas and a net energy exporter by the end of 2017. In 2015, the United States had no terminals for supply of LNG to EU, but in the period from 2016 to 2020, six terminals with total export capacity of 118 billion m3 per year have been commissioned, with many more under consideration.
In telecommunications, the technological and commercial challenges have obvious geopolitical implications. Washington’s inability to contain Huawei’s growth and penetration into Western markets reflects both the complexity of global high-technology value chains and the limitations on US economic power deriving from its deep interdependence on China (Cafruny 2019). Huawei has become the dominant provider of 5G equipment worldwide, and no American company is a close competitor. In 2018 Meng Wanzhou, Huawei’s chief financial officer and daughter of the company’s founder Ren Zhengfei, was detained in Canada on US charges that the company violated Iran sanctions. In 2019 the United States banned US exports to Huawei, lobbied allies to ban Huawei from their emergent fifth generation wireless networks, and outlawed sales of computer chips made anywhere in the world if the product has been manufactured or designed using US technologies (NYT 2020).
What to expect?
The rise of neo-protectionism will have the following consequences vis-à-vis sanctions. First, the number of target states will continue to rise. The US Congress is already considering the bill ‘The COVID-19 Accountability Act’ against China, introduced by Lindsey Graham in May 2020. Also, Trump threatens to sanction Turkey should it activate the Russian S-400 missile defence system. Second, there is a tendency to strengthen rather than ease existing sanctions regimes, despite the pandemic. For instance, despite an open letter to Trump by Elizabeth Warren and Bernie Sanders, begging for sanctions relief for Iran, the Administration has further tightened sanctions. Third, US legislation will continue penetrating deeper into different spheres of the world economy. Penalties on corporations, various types of transactions, and individual behaviours will increase and the number of third parties affected by secondary sanctions will surge. As US Secretary of State Mike Pompeo has proclaimed, the United States ‘will sanction any sanctionable behaviour’ (Reuters 2019). Fourth, the legal base for sanctions will become more complex, with vague and ambiguous definitions: they will be harder to understand, more expensive to comply with, but easier to apply to a larger number of entities. For instance, while sanctions targeted only 40 vessels of the Dalian unit of China’s COSCO Shipping Corp., the lack of their precise identification ‘caused confusion’ and de facto 1,100 vessels became subject to sanctions (GibsonDunn 2020). Fifth, not only the imposition but even the threat of sanctions is unsettling for businesses, as sanctions do not even need to come into effect to increase uncertainty in the markets and disrupt investment flows and production processes (as the case of Rusal clearly demonstrated, see Bershidsky 2018).
US leadership at times of pandemic
Finally, as the world confronts the COVID-19 pandemic, the greatest concern regarding new OFAC’s designations is that sanctions disturb the supplies of agricultural products, medicine, and medical equipment (categories previously exempt from restrictions) to some states severely affected by the virus. The response to the health crisis is as protectionist and ‘exclusionary nationalist’ as it has been in the case of the ongoing ‘crisis of globalisation’ – a joint crisis of the environment, of inequality, of deflation, consumer debt, and prolonged wage stagnation (Blyth 2019), but it need not be so.
These developments contrast starkly with the expectations of those of a broad spectrum of foreign policy officials and scholars concerning US obligations as the global leader under current circumstances. Indeed, even the Realpolitik avatar Henry Kissinger (2020) calls on the United States to undertake major efforts in three areas: first, in technical and technological control over global resilience to infectious disease; second, to ‘heal the wounds to the world economy’ by seeking solutions of how to protect the world’s most vulnerable populations, and third, to reassert Enlightenment values of the liberal world order, by working to sustain the fundamental rights and needs of the people – security, order, economic well-being, and justice (Kissinger 2020). Only by taking the lead in these three domains can the US resurrect its leadership in the new post-COVID era.