U.S. Learns How to Anger Friends While Failing to Influence Enemies

When Vice President Al Gore visits Chinese Premier Li Peng in Beijing this week, his agenda is supposed to include the promotion of an ambitious partnership to tackle China’s daunting environmental problems.

But one big obstacle lies in his path: a passionate disagreement with China’s top leaders over their biggest--and most controversial--energy project, the Three Gorges Dam.

Gore’s dilemma highlights more than just the two countries’ very different views of sustainable development. It also illustrates the seeming futility of the increasingly common U.S. practice of trying to change foreign governments’ behavior by unilaterally imposing economic sanctions.

While the United States has led the international environmental opposition to Three Gorges by withholding low-cost government financing for the $30-billion project, the high-minded effort has had little discernible effect on the massive venture.

The project--which will submerge 418 square miles of land and force the relocation of 1.2 million people--is well underway.

While U.S. firms look on, the Japanese, Germans, French and Canadians have stepped forward to help their companies garner a piece of the world’s largest hydroelectric project. Some U.S. companies have managed to land contracts through their foreign subsidiaries--with the result that jobs go to other countries.

“You cannot stop it unless there is a war,” said C.H. Yeh, a Chicago engineer hired by several U.S. firms to evaluate the Three Gorges project last year.

The Three Gorges case is one of the most visible examples of such U.S. initiatives, but there are many: unilateral economic sanctions were levied 70 times by the U.S. government from 1993 through 1996, according to a study by the National Assn. of Manufacturers in conjunction with Georgetown University. Sanctions were employed 23 times last year alone, the study said.

The vast majority have failed to change the behavior of the more than 35 targeted governments, the study concluded.

Meanwhile, allies have taken offense at such U.S. policies as the Helms-Burton Act, which penalizes certain foreign companies that do business in Cuba--with sometimes absurd results. The law has been attacked by Canada, Mexico and European countries as arrogant and presumptuous.

“You don’t have to travel too far to find countries that think this is an affront,” said Gary Hufbauer, an economist with the Institute for International Economics. “They don’t want their foreign policy, or their evaluation of these issues, decided in Washington.”

The manufacturers’ study is part of a campaign being launched by U.S. companies unhappy over the increased use of economic weapons--particularly by Congress--for a variety of foreign policy objectives ranging from stopping terrorism to protecting sea turtles.

They include bans on investment in Iran and Libya for alleged terrorist activities, restrictions on missile sales to China for arms control violations and a ban on wild shrimp imports from countries that have not equipped their fishing fleets with devices to protect against the accidental capture of sea turtles.

One immediate concern is a campaign to impose tougher sanctions on the military leaders in Myanmar, formerly Burma, who are under mounting criticism for widespread human rights abuses and political repression.

Critics argue the ability of one nation, even a superpower, to cripple other governments by imposing economic penalties is increasingly ineffective in a global economy where foreign competitors will happily step into any void.

They claim the real victims of U.S. sanctions are the American companies forced out of potentially lucrative markets and labeled as unreliable trading partners.

In places such as Myanmar, where U.S. allies have opposed economic isolation, companies such as energy giant Unocal Corp. argue for “constructive engagement.” That involves maintaining economic ties while pushing for change through normal diplomatic channels and multilateral organizations.

They would reserve sanctions for instances involving threats to national or international security, for instance punishing Iraq in the wake of the 1991 Persian Gulf War, and only when there is multilateral support.

But backers of U.S. sanctions, including members of Congress and environmental and human rights activists, argue that the withholding of economic benefits is nonetheless the quickest, and sometimes only, way to get the attention of uncooperative foreign governments.

In addition, they argue that the United States has the moral obligation to stand up for democracy, civil liberties and the environment even in cases where the outcome appears futile.

Their proof that sanctions can bring about the downfall of oppressive regimes is South Africa, where an international boycott is credited with helping to topple the system of apartheid, or white minority rule.

“Often, it is the U.S. that does take a lead on these issues,” said Simon Billenness, a senior analyst at Franklin Research & Development Corp., a Boston-based company specializing in socially responsible investments. “By blocking the first step by the U.S., these companies are effectively putting a block on multilateral sanctions.”

But moral leadership comes at a price. And U.S. firms argue that the United States has paid too dearly for too little, while jeopardizing relationships with its key allies.

They point to the hue and cry in Canada, Mexico, Europe and Asia over the Helms-Burton Act. Angry allies have imposed counter-sanctions and have threatened to challenge the legislation in the World Trade Organization.

In the meantime, U.S. executives are caught between American laws, foreign laws and the bottom line. This situation made the comedy club circuit a few weeks ago when a sharp-eyed customer launched the great pajama war of 1997 after discovering a rack of night wear with a “Made in Cuba” label in a Wal-Mart store in Canada.

Wal-Mart executives hurriedly pulled the pajamas off the rack to satisfy the U.S. embargo, only to be threatened with counter-fines from the Canadian government. Wal-Mart eventually put the pajamas back into the store--and is now threatened with fines by the United States.

Marino Marcich, the manufacturer association’s director for international investment and finance, said Wal-Mart is not alone. To comply with the long-standing U.S. embargo of Cuba, a U.S. airplane leasing firm needed a written guarantee that an airplane being leased to a Canadian customer would not be flown to Cuba. The Canadian customer then demanded--and got--a $1.5-million reduction in the annual lease fee.

“The economic costs are often hidden and unquantifiable,” he said.

In the case of Three Gorges, U.S. firms are making their unhappiness known. Even if Gore is able to finesse this issue during his four-day trip to China, he can expect more fireworks when he gets home.

The Export-Import Bank is under pressure to reverse its decision not to provide trade financing for the dam. U.S. firms are eager to compete in the next round of bidding, expected later this year.

The Export-Import Bank provides low-cost backing to U.S. firms for deals that are difficult to finance in the private sector.

Bank officials argue that they are only following the mandate of Congress, which in 1992 amended the bank’s charter to include a requirement to consider environmental impacts in its lending. Environmentalists have threatened the bank with lawsuits if it reverses its position.

U.S. firms aren’t prohibited from doing work on Three Gorges as long as they can find financing. But even those firms that have successfully circumvented the Export-Import Bank restriction by winning contracts through their foreign subsidiaries aren’t happy.

Late last year, Rotec, a small Illinois company that has developed a unique technology for concrete dam construction, won a $30-million order for three cement-moving machines for the Three Gorges project. The Chinese government, eager for the technology, provided the financing.

But Rotec President Robert Oury said the U.S. still lost out. Under the contract he signed with the Chinese, he said he will have to send as much as 60% of the work overseas to make a profit. If the sale had been backed by the Export-Import Bank, all the work would have been done by U.S. firms.

Oury also blames the U.S. embargo for helping to create a future competitor. Chinese officials recently awarded a contract for two additional cement-moving machines to a French-Japanese-American consortium, telling Oury that “your government will not support our Three Gorges effort, and Japan and France did.”

Oury has filed a suit in federal court in Illinois claiming the consortium stole his patented technology with China’s help.

“Why are we continuing to push Ex-Im?” he asked rhetorically. “Because we’ve already lost one order and there will be another Three Gorges Dam down the road. It’s not right.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Economic Persuasion

The U.S. used economic sanctions 70 times against more than 35 countries from 1993 through 1996 for objectives ranging from fighting terrorism to protecting marine life. The number of sanctions, by rationale:

PURPOSE: NUMBER OF SANCTIONS

Human rights & democratization: 22

Anti-terrorism: 14

Nuclear nonproliferation: 9

Anti-narcotics: 8

Political stability: 8

Worker rights/Use of prison labor: 6

Environmental protection: 3

Source: National Assn. of Manufacturers