Jeffrey J. Schott
Institute for International Economics
Testimony before the Committee on International Relations
United States House of Representatives
Washington, DC
July 23, 1997
Two years ago, I testified before the subcommittee on international economic policy and trade of this committee on draft legislation that would impose economic sanctions against Iran. At that time I was skeptical (1) that unilateral US sanctions could achieve the laudable policy objectives set out in the legislation, and (2) that our allies would comply with our sanctions policy under threat of the proposed secondary sanctions against firms participating in new oilfield development projects in Iran. This statement revisits those arguments and assesses the results to date of the Iran and Libya Sanctions Act that was subsequently signed into law the following year.
My comments today draw on my 20 years of experience both in formulating sanctions policies in the US government and in analyzing the widespread use of economic sanctions in support of foreign policy objectives in the twentieth century. They reflect the lessons compiled from that historical experience contained in the two-volume study, Economic Sanctions Reconsidered: History and Current Policy, that I coauthored with Gary Hufbauer and Kimberly Elliott.(1) A summary of the key policy recommendations from that study are appended to this statement.
Economic Sanctions Against Iran
The Iran and Libya Sanctions Act of 1996 is the culmination of a long series of unilateral US sanctions against Iran and Libya imposed over the past two decades. For the purposes of this hearing, I will limit my comments to measures targeted at Iran. Restrictions on US exports to Iran have been implemented incrementally since 1984, and most US imports from Iran were banned in late 1987. The 1996 Act supplemented the ban on almost all bilateral trade with additional restrictions on foreign companies that undertake new oilfield investments in Iran worth more than $40 million. Other countries have implemented more narrowly targeted trade sanctions designed to limit Iran's access to products and technologies that could support the production and delivery of nuclear, chemical, and biological weapons, but have maintained extensive trade and investment relations.
The US measures were designed to achieve two complementary objectives: to impair the military potential of Iran, particularly regarding the development of chemical, biological, and nuclear weapons, and to reduce resources available to the Iranian government to fund terrorist activities. These goals are laudable and deserve strong international support. However, the US inclination to sanction first and consult later has complicated efforts to garner the international cooperation needed to effectively pursue US policy goals.
Sanctions Against Iran: What has Been Achieved?
US trade and investment relations with Iran have been essentially cut off for two years pursuant to the 1995 Executive Order and the 1996 Act. What impact have the sanctions had on the target and sender countries?
Overall, the US sanctions have been costly to both Iran and the United States, but have generated few concrete benefits. In a nutshell, the US sanctions have:
- Delayed some new investment in Iranian oil and gas fields and imposed modest costs on the Iranian economy;
- Imposed costs on US firms and workers that would normally compete for sales to and investments in Iran;
- Incited US-European tensions and hampered cooperative efforts in support of US policy objectives; and
- Induced no significant change in Iranian policy.
Costs to Iran
Contracts for the development of Iranian oil and gas properties have been delayed and some companies have deferred bidding on new investments. US sanctions deserve some of the credit but most of Iran's problems in attracting new investment derive from self-inflicted wounds created by its own domestic policies.
Will these delays significantly affect Iran's production capabilities over the long term? The short answer is "probably not". Foreign investments would have to be cut back for a decade or longer, plus oil revenues would need to be curtailed, if the US policy was to have a noticeable impact on Iranian production capabilities. Neither is likely to happen under current circumstances.
As long as Iran has access to world markets to sell its oil, it will be able to generate sizable export earnings in dollars that will allow it to maintain its current production and to service its foreign debt. In fact, Iranian oil production has increased in 1996-97 from levels of a few years earlier.(2)
The US sanctions in 1995-1996 imposed some costs on the Iranian economy as the National Iranian Oil Company had to provide incentives to negotiate term contracts for supplies formerly committed to US firms. However, these costs were more than offset by the higher prices Iran received for its oil exports due to a tightening in world supplies and transitory jitters in the market due to concerns about increased instability in the region due to both sanctions and terrorist activities. Indeed, if US sanctions were more successful in limiting Iranian production, it could well drive up world oil prices and hence cushion the revenue impact on the target country!
Iran currently exports about 2.6 million barrels of oil per day. Each $1 dollar increase in the price of oil yields almost $1 billion in additional oil export earnings per year.
Oil revenues continue to fuel the Iranian economy, which grew at a modest rate of 3.5 to 4 percent annually over the past two years despite the US sanctions. During this period, Iran has run a sizable trade surplus due to strong dollar-denominated oil export earnings (which reached about $18 billion in 1996) and a sharp cutback in imports. In addition, Iran rescheduled about half of its foreign debt, easing its near-term debt servicing requirements, and negotiated about $5 billion in medium-term credits from Germany and other countries for domestic industrial projects.
Simply imposing costs on the target country may satisfy a thirst for retribution, but it does not necessarily promote the achievement of US foreign policy goals. Moreover, if the sanctions also impose significant costs on US interests without the promise of practical results, domestic political support for the maintenance of the US sanctions policy will likely erode over time.
Costs to US Firms and Workers
One main function of economic sanctions is to inflict damage on the target country as a means of coercing compliance with the policy goals of the sender country or countries. Of course, firms and workers in the United States also pay an immediate price when trade and financial relations are disrupted, but the aggregate cost for the sender country in relation to its GDP is usually miniscule, even if the costs are significant for individual firms or industries.(3)
Recent research by my colleagues at the Institute for International Economics calculated the impact of US unilateral sanctions (including those against Iran) on trade, jobs, and wages in the United States.(4) They found that US exports to the 26 countries subject to US sanctions in 1995 were $15 to $19 billion lower than they would have been in the absence of the sanctions; that if these lost sales were not offset by exports to other markets, employment among US export industries (though not necessarily in the economy as a whole) would be reduced by 200,000 or more jobs; and that shift in US employment would result in a loss of about $800 million to $1 billion annually in export sector wage premiums for US workers (since workers in US export industries earn on average $4,000 per year more than the average wage in manufacturing). The longer these sanctions remain in force, the greater the cumulative cost for US workers.
Increased US-European Tensions
The threat of secondary sanctions against firms that participate in new Iranian oilfield development has not encouraged our European allies to cooperate more closely with US policy on Iran. If anything, the legislation has exacerbated transatlantic frictions regarding the extraterritorial reach of US law and has provoked allegations that the United States is violating its trade obligations in the World Trade Organization (WTO). The European Union already has filed a WTO case in a related dispute involving the Helms-Burton Act. The vehemence of the European reaction to the new US sanctions against countries dealing with Cuba reflects in large measure their interest in preempting secondary embargos that could be applied in the Iran and Libya contexts where, unlike Cuba, the Europeans have substantial economic and political interests.
Impact on Iranian Policy
Information on Iranian policy is sketchy and subject to widely divergent interpretations. Nonetheless, Iran seems to be continuing to pursue its terrorist adventures and its efforts to procure military hardware and materials for the development of nonconventional weapons. The recent election results seem to reflect dissatisfaction with domestic policies, but do not necessarily portend significant changes in foreign and defense policies. The conclusions of former Iranian finance minister Jahangir Amuzegar are worth citing in this regard:(5)
"Inadequate hard data make an objective assessment of the sanctions difficult... What is certain, however, is that the economic, psychological, and political impact of the American sanctions has not produced the anticipated results or transformed the regime."
Have Sanctions Been Successful?
"Success" is in the eyes of the beholder, and policymakers and analysts evaluate recent developments based on different criteria. Even if one puts the impact of the US sanctions policy in the best light, however, it would be hard to call the results to date "successful".
In our comprehensive study, Hufbauer, Elliott, and I established a very low threshold for judging the success of a sanctions episode: we classified episodes as "successful" when sanctions made a "modest" contribution to at least the partial achievement of the policy objectives. For example, sanctions contributed to the release of the US hostages in Iran in 1981, but had little impact on the eventual removal of Noreiga from Panama. The former case was deemed a success; the latter an unsuccessful sanctions episode.
Despite our low threshold for success, we found that successful cases have become increasingly rare as globalization has made it easier for target countries to tap international trade and capital markets and find alternative suppliers of goods and capital. The success rate for US sanctions cases (both unilateral and multilateral) has declined sharply from decade to decade (see attached chart). In the 1990s, sanctions have contributed to the achievement of US foreign policy goals in less than 20 percent of the cases.
In light of this experience, the United States should use sanctions with care. Sanctions are blunt policy tools that are easily circumvented. Contrary to popular belief, there is no such thing as "smart" sanctions that maximize benefits with minimal costs. The "smart sanctioner" will realize these limitations, and tailor measures to better match the costs of these policies with their anticipated results.
Notes
- Gary C. Hufbauer, Jeffrey J. Schott, and Kimberly A. Elliott, Economic Sanctions Reconsidered: History and Current Policy, Washington: Institute for International Economics, 2nd edition, 1990. The third edition of this two-volume study, including cases initiated in the 1990s and analysis of the use of sanctions in the post Cold War period, should be available in early 1998.
- See, Jahangir Amuzegar, "Adjusting to Sanctions", Foreign Affairs, May/June 1997, p. 32.
- For a more detailed discussion of this issue, see Economic Sanctions Reconsidered, pp. 75-82.
- See Gary C. Hufbauer et. al., "US Economic Sanctions: Their Impact on Trade, Jobs, and Wages", Washington: Institute for International Economics, processed, April 1997.
- Amuzegar, op. cit., p. 31.
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