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Chapter11

Economic Instruments

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Dateline: New NAFTA

During his 2016 presidential campaign, Donald Trump repeatedly referred to the 1994 North American Free Trade Agreement (NAFTA) as “the worst trade deal maybe ever signed anywhere.” (See the Historical Lesson at the end of this section for details about this agreement.) He promised that on his first day in office he would announce plans to renegotiate it.

Day one came and went with no NAFTA announcement. Instead, Trump’s rhetoric suggested otherwise; he threatened to abandon NAFTA much as he had already done with the Trans-Pacific Partnership (TPP). However, in late March 2017, the administration circulated an eight-page draft that did not contain a threat of withdrawal. Instead, it put forward 272negotiating points consistent with the views of many free trade pro-NAFTA Republicans in Congress.

Just under thirty days later, the pendulum swung in the opposite direction and then back toward negotiation. First, stories emerged that Trump was going to announce a new executive order putting the withdrawal process in motion. This set off a wave of activity, including phone calls from the president of Mexico, the prime minister of Canada, and congressional Republican’s warning against doing so. By that evening, Trump announced that he would not withdraw. The White House asserted that the confusion following word of his upcoming announcement had energized Mexico and Canada into coming to the negotiating table. Critics noted that Canada and Mexico were already at the table, as they had already made trade concessions and were waiting for the United States. Some two weeks later, on May 18, Trump sent a short notice to Congress indicating that he planned to renegotiate NAFTA, a legal necessity (Congress had to be given ninety days’ notice of such a decision). Unlike the earlier draft sent to Congress, this announcement was vague regarding the changes that would be sought.

Negotiations began in August, with the Trump administration defining NAFTA as having “fundamentally failed.” Each country brought its own set of concerns to the table. The United States was concerned with reducing the trade deficit, forcing carmakers to use more parts made in the United States, and increasing U.S. influence in NAFTA’s dispute resolution process. Canada’s main concerns were with low wages in Mexico and right-to-work laws that weakened labor unions. Among Mexico’s primary concerns was revitalization of its energy industry. All three countries agreed that NAFTA had to be modernized to take telecommunications and digital trade into account. This was not seen as difficult, since such provisions had already been incorporated into the TPP and could now be placed into the new NAFTA agreement. More contentious were calls by the United States for a sunset clause that would allow the treaty to end after five years unless all three countries agreed to renew it.

Negotiations dragged on into the spring of 2018. President Trump became increasingly impatient. In March he announced that he was considering new tariffs on steel and aluminum but told Mexico and Canada that they might be exempted if they completed renegotiations. On May 31, Trump announced that he was imposing these tariffs on Mexico, Canada, and the European Union. Administration officials also indicated that Trump now wished to proceed with bilateral negotiations rather than multilateral ones.

On August 27, 2018, Trump announced that a breakthrough in bilateral negotiations with Mexico had produced an agreement in principle to replace NAFTA. Talks between the United States and Canada moved forward quickly. On September 30, with time running out on a self-imposed deadline set by negotiators for the two countries, Canada agreed to join the new NAFTA.

The United States was last to act on approving USMCA. The House only signaled its willingness to ratify USMCA in December 2019. In doing so, a new problem arose. Mexico objected to new language that would send U.S. diplomats to Mexico to verify it was upholding labor standard. This issue was resolved by reassuring Mexico that no violation of sovereignty was involved.

This chapter begins with an overview of the concept of economic statecraft and then presents an inventory of economic options and strategic outlooks available to policy makers. This is followed by a discussion of different forms of trade agreements, economic sanctions, foreign aid, and the trade with China. It concludes by raising the question of how trade wars end.

Economic Statecraft

Defined as a deliberate manipulation of economic policy to promote the goals of the state, economic statecraft is an age-old instrument of foreign policy. Past examples include the Louisiana Purchase, economic intimidation directed at Great Britain to end its support of the South during the American Civil War, dollar diplomacy in the late 1800s, the Lend-Lease Act during World War II, and the Marshall Plan for rebuilding Europe after World War II. More recently, it has been described as a “lost art” of U.S. foreign policy.1 This may no longer be the case; as shown in the Dateline feature opening this chapter, economic statecraft has been rediscovered in the Trump administration.

Supporters see the use of economic statecraft as part of the legitimate pursuit of American national interest, but critics often see the exercise of American economic power as a part of a foreign policy of imperialism and domination. No matter its purpose or context, American economic power exerts its influence by its ability to lure other countries to the U.S. economic system and then trap them in it. For that reason, many refer to it as America’s “sticky power.”2 Less recognized is that this American sticky power can also entrap the United States, limiting its ability to pursue foreign policy initiatives. China, for example, has jumped to the forefront as a trading partner and holder of U.S. debt, thus complicating efforts to deal with it in strictly adversarial terms.

A major complicating factor in the use of economic statecraft is uncertainty over judging its successes and failures.3 Its supporters argue that economic statecraft is dismissed as ineffective all too frequently. Advocates of economic statecraft as an instrument of foreign policy make four arguments in its defense:4

1. Day-to-day economic exchanges under the heading of free trade are generally—and incorrectly—defined to be outside the scope of economic power.

2. 274Economic power is often said to fail when it does not produce a change in policy in the target state. Underappreciated is the added cost that economic sanctions place on the target state, even without a policy change.

3. Economic power has often been judged a failure because it is examined out of context. Policy makers often turn to it when no other instruments are available or to accomplish the almost impossible, such as removing Fidel Castro from power.

4. Economic statecraft suffers because writers on world politics underestimate the importance of symbolic actions to policy makers and domestic pressure groups.

Inventory of Options

Should American policy makers decide to employ U.S. economic power against another state, they have several options at their disposal, including tariffs, nontariff barriers, embargoes, boycotts, and quotas.

A tariff is a tax on foreign-made goods entering the country. Typically, tariffs are applied either to protect domestic industry against foreign competition or to raise revenue, but they can also be manipulated to serve foreign policy goals. More than once in the post–World War II era, the United States made notable efforts to manipulate its tariff structure to accomplish foreign policy goals. First, the United States used its tariff system as a lever in dealing with communist states, excluding them from equal access to the U.S. market. During détente, the United States sought to use access to the U.S. market and most favored nation status as an inducement for Soviet cooperation in noneconomic areas, such as the Strategic Arms Limitation Talks (SALT) negotiations.

The primary danger inherent in the excessive use of tariffs is retaliation. The most serious instance took place in the early 1930s, after the United States passed the Smoot-Hawley Tariff intended to help solve the Great Depression. The highest tariff in U.S. history, it taxed imports at an average rate of 41.5 percent of their value. Retaliation by foreign governments led to a sudden and dramatic drop in U.S. exports, which only worsened the ongoing depression. The Trade Agreements Act of 1934 broke the spiral of raising tariffs by authorizing the president to lower existing tariffs by as much as 50 percent to those countries making reciprocal concessions.

Manipulating nontariff barriers (NTBs) to trade is a second policy option. NTBs are a modern variation on traditional tariffs and can range from labeling requirements, health and safety standards, and license controls to taxation policy; they have become powerful tools to protect firms from foreign competition or remedy a balance-of-payments problem. U.S. use of NTBs dates from the 1930s, when the Buy American Act required the government to purchase goods and services from U.S. suppliers if their prices were not unreasonably higher than those of foreign competitors.

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The third economic instrument of foreign policy is an embargo, refusal to sell a commodity to another state. Embargoes (and the more subtle concept of export controls) played an important role in U.S. Cold War foreign policy. Building on the Trading with the Enemy Act of 1917, the United States embargoed financial and commercial transactions with North Korea, the People’s Republic of China, Cuba, and North Vietnam. Trade with communist states was also controlled by the Export Control Act of 1949. During the Korean War, the list of restricted items reached one thousand. Many of these controls are still in place. In 2016 Obama lifted an arms embargo against Vietnam that had been in place since 1975.

A boycott, a refusal to buy a product or products from another state, represents the fourth economic instrument available to policy makers. One celebrated case involved U.S. participation in UN-sponsored sanctions against Rhodesia (Zimbabwe).5 Off and on, these sanctions lasted for over a decade. They were first imposed by President Lyndon Johnson in a 1968 executive order to force the white minority Rhodesian government into accepting the principle of majority rule. The U.S. commitment to the boycott was never firm, however. Congress amended the boycott in 1971 to allow the export of raw chromium and other critical materials to Rhodesia.

The fifth policy tool is the quota, a quantitative restriction on goods coming from another state. Because of GATT, quotas have not played a large role in foreign economic policy making for most of the post–World War II era. This changed as concerns grew over the international competitiveness of U.S.-made products. Canada has often been the target of U.S. quotas. In 1994, Clinton threatened to limit the amount of Canadian grain entering the United States. In 2004, attempting to end a trade dispute, the United States offered to replace tariffs with a quota system for imports of Canadian lumber.

Strategic Outlooks

There is no single strategic outlook that forms the basis for economic statecraft. This section provides overviews of two outlooks: free trade and strategic trade. It also briefly examines monetary strategies and then introduces Donald Trump’s strategic outlook.

Free Trade

Free trade is both an instrument of foreign policy and a strategic orientation for organizing economic power.6 There is nothing inevitable or natural about free trade. International free trade systems exist because they serve the interests of the dominant power. This was true of Great Britain in the nineteenth century and of the United States in the post–World War II era. From about 1944 to 1962, access to U.S. markets was used as an inducement to get other states to adopt policies favored by the United States. Included 276among those Cold War goals were strengthening military alliances, promoting the economic recovery of Western Europe, ensuring access to strategic raw materials, and stimulating economic growth and political stability in the Third World. American policy makers were also sensitive to the limits of free trade. On a selective basis, they permitted or encouraged discrimination against U.S. goods if it would further these broader U.S. foreign policy goals. At the strategic level, the United States used free trade to create an international system that allowed the U.S. economy to prosper and placed it at the center of international economic trade and monetary transactions.

Strategic Trade

Strategic trade competes with free trade as the foundation for American international economic policy.7 Its advocates maintain that the comparative advantages enjoyed by states in international trade is due not to a country’s resource base or historical factors but to imperfections in markets that have been deliberately created by government policy. Only by actively intervening in the international marketplace to create comparative advantages for selected industries can the United States hope to remain a world leader. A prime example is “buy American clauses” such as those requiring the use of U.S.-made iron and steel in certain infrastructure projects. Critics of strategic trade policy assert that, despite positive statement such as this, strategic trade policy often crosses the line into protectionism.8

The driving force behind post–World War II strategic trade was the inability to put a dent in the U.S.–Japan trade imbalance. In 1988, concern with the trade imbalance gave rise to the Omnibus Trade and Competitiveness Act. Section 301, commonly referred to as “Super 301,” provides for retaliatory sanctions against states that engage in unfair trading practices against the United States. Presidents identify “priority countries” and set a timetable for resolving the dispute, after which time the sanctions will take effect. While its use has declined, concern remains. The 2019 annual report of the Office of the U.S. Trade Representative placed eleven countries on its priority watch list, including China, Russia, Venezuela, and India, and included twenty-five countries on its watch list.

Strategic trade policy requires two things of the U.S. government. First, it must identify which high-growth industries are crucial to the overall global competitiveness of the American economy. Second, it must ensure that these firms are not shut out of foreign markets. Neither task is easy. Identifying industries for special treatment is a politically charged decision. Just as members of Congress fight to prevent military base closures in their districts, they also fight to ensure that their districts get a fair share of research and development money. A related problem is how to address the problems faced by industries, such as steel, that are no longer competitive internationally but retain enormous political clout. An overly aggressive strategic trade policy runs the risk of spawning a trade war in which U.S. goods are singled out for retaliation.

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Monetary Strategies

Financial transactions can also be used to further foreign policy goals. This may occur at the strategic level, such as when the United States allowed the value of the dollar to float or provided debt relief funding after the 2008 global financial crisis. It may also occur at the tactical level, such as in blocking the ability of an individual, corporation, or government to access its funds held in the United States or in other countries.

The United States helped create two important international financial institutions as part of the Bretton Woods system: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD or, more commonly, the World Bank). The IMF was intended to regulate international currencies to ensure that they did not suddenly and violently change in value. The World Bank was to provide additional funds that were believed necessary for European economic recovery. Virtually from the outset, the financial aspects of the Bretton Woods system did not function as anticipated. American dollars became the international currency of choice, and American foreign economic and military aid provided the necessary funds for economic recovery.

By 1960 the situation began to change, and the outflow of dollars reached the point where U.S. officials began to worry about the trade deficit. The Bretton Woods system ended in 1971 when President Nixon announced that the U.S. dollar would no longer be convertible to gold. Since then, international monetary management has taken the form of periodic exercises in crisis management rather than systemic reform.

The most recent exercise of crisis management came in 2008, with the largest financial and economic crash in over seventy-five years. It set in motion concerns within the United States about two aspects of China’s international monetary policy for U.S. economic and national security.

1. China’s manipulation of the renminbi. At one time the value of China’s official currency was pegged, or fixed, against the U.S. dollar, but as China embarked on a development strategy in which exports played a central role, it devalued the renminbi, making its goods cheaper to buy than those made elsewhere. U.S. officials see the undervalued renminbi as costing American workers jobs and slowing the American economic recovery.

2. China’s massive holding of U.S. debt. In 2019, China held $1.12 trillion of U.S. debt, making it the United States’ largest debt holder. One fear is that this large debt holding will give China foreign policy leverage over the United States; for example, it could engage in a massive sell-off of its U.S. debt to drive down the value of the dollar in retaliation for a U.S. foreign policy decision it opposes. Referred to as the “nuclear option,” it reportedly was included as a Chinese strategy in a 2009 Pentagon war game.

Trump’s Trade Strategy

3. At its core, Donald Trump’s strategic international economic outlook is economic nationalism, which fits into the strategic trade category. Its highest priorities are state autonomy and maximizing state power. It views economic transactions from a conflictual and zero-sum, win-lose perspective. In place of free trade, economic nationalism advocates state intervention and protectionism couched in the rhetoric of fair and reciprocal trade. To this end, Trump has embraced bilateral trade agreements over regional and global ones, asserting that “what we will no longer do is enter into large scale agreements that tie our hands, surrender our sovereignty, and make meaningful enforcement impossible.” The size of this challenge is significant. In 2017 the U.S. lacked bilateral trade agreements with seven of its top ten trading partners.

4. Trump’s preferred economic instrument is the tariff; he has gone so far as to identify himself as “Mr. Tariff.” Trump advocates the use of tariffs in large part because he defines them as a tax paid by the exporting firm/country. Economists note that this is not the case. The cost of the tariff is paid by the importer and either absorbed—resulting in a lower profit—or passed on to consumers as higher prices. With globalization of supply chains, virtually every product sold on the U.S. market has parts made abroad, making them subject to tariffs.

5. As noted earlier in the chapter, Trump’s embrace of tariffs and economic nationalism is not a radical break from the past.9 The United States has long pursued an America First trade strategy but just went about it differently, abusing its power through global trade agreements that forced other states to make one-sided concessions and enter into voluntary export restraints. The concern is that Trump’s heavy reliance on punitive tariffs and bilateral trade agreements rather than global agreements reduces the influence of the United States in driving international economic policy.

6. Varieties of Trade Agreements

7. There are a number of varieties of trade agreements. The United States engages in three different types: bilateral, regional, and global.

8. Bilateral Trade Agreements

9. Bilateral trade agreements govern the terms of trade between two countries. For much of the post–World War II era, bilateral trade agreements were viewed as a second-best method for strengthening the U.S. economy and promoting U.S. interests abroad. Regional and global multilateral agreements were preferred, since they promised to open more markets to American goods more quickly. This began to change in the post-9/11 era as dissatisfaction with regional and global trade agreements grew.

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11. Virtually all of the bilateral agreements negotiated by President George W. Bush ran into domestic political problems. One problem Bush faced was that his fast-track presidential authority to sign trade agreements, which would limit Congress to a yes/no vote, expired. Many of these agreements were opposed by domestic interest groups that felt they would harm their constituents’ interests. With fast-track authority expired, they were now in a position to demand modifications. Key bilateral free trade agreements with Singapore, Chile, and Australia were approved by Congress, but. when Bush left office, agreements with South Korea, Colombia, Panama, and Vietnam had not yet been approved.

12. During his presidential campaign, Barack Obama voiced concern about these treaties, but his administration was largely silent on trade issues during his first year in office. This changed in 2010, when Obama announced a major initiative to double U.S. exports as a way of spurring job growth in the United States. Bilateral export agreements were central to the success of this initiative. Difficult negotiations were entered into with South Korea (over trade in autos and beef imports), Colombia (over treatment of union officials), and Panama (over taxation policy). Congress approved the agreements in successive separate votes in 2011, and they took force in 2012.

13. In response to what he argues is foreign exploitation of the United States, Donald Trump typically initiates his bilateral trade negotiations with announcements of significant and punitive tariff rate increases on high profile items such as steel and aluminum, which will be implemented unless a new trade agreement is reached by his deadline. That strategy has produced agreements with smaller states such as Brazil, South Korea, and Argentina. It has not been as successful in coming to terms with larger trading partners, but it has compelled them to begin negotiations and offer up concessions. Trump had to delay or suspend the implementation of tariffs on cars and auto parts in 2019 with Japan and Europe when negotiations stalled. He also had to extend the license allowing the Chinese telecommunications firm Huawei to do business with U.S. firms after having announced a ban on such transactions for national security reasons.

14. Trump’s high-profile imposition of tariffs followed by low-profile reversals also highlights a potentially high political cost of the unpredictability of his tariff policy: the challenges that allies have in responding to his demands. In short order, South Korea found itself attacked by Trump for an unfair bilateral trade agreement that he threatened to cancel and congratulated on the signing of a new agreement (only to have Trump threaten not to sign it depending on progress in nuclear negotiations with North Korea).

Regional Trade Agreements

Regional trade agreements have held an uneven place in U.S. thinking about their merits in conducting international economic policy. The Historical 280Lesson and the Dateline section earlier in this chapter examined the original NAFTA agreement and the New NAFTA agreement, respectively. This section looks at two other recent attempts at creating regional trade agreements: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

On February 4, 2016, the United States and eleven other states signed the Trans-Pacific Partnership (TPP), creating what would be the world’s largest free trade agreement. The initial impulse for an Asia-Pacific free trade agreement came from Singapore, New Zealand, and Chile in 2003. China was noticeably absent from these negotiations. In 2008, George W. Bush announced that the United States would join with these states to negotiate free trade issues relating to investment and financial services. Obama announced that his administration would continue these free trade talks, and a negotiating framework was announced in November 2011.

Not surprisingly, TPP negotiations proceeded at an uneven pace. Agreements in some areas were reached with relatively little controversy, while talks in others stalemated and threatened to block consensus on a treaty. Five issues were particularly difficult, because they raised serious domestic political and economic consequences for some states:10

1. The length of patents for drugs held by pharmaceutical companies.

2. Protection of the environment, wildlife, and worker rights.

3. Reduction of tariff protections by the United States, Canada, and Japan for dairy, beef, and poultry producers.

4. Opening up of TPP member automotive industries to foreign competition (with Japan being the primary target market).

5. Restrictions on trade of tobacco products (agreed to by the United States in return for an investor-state dispute mechanism that would allow foreign companies to sue host governments).

The Obama administration hailed the TPP as a model twenty-first- century trade agreement. Critics argued that its economic benefits were being oversold and that—at best—they would be distributed unevenly, with low-income workers and industries benefitting the least. An often-voiced counterpoint was that critics underestimated the political and strategic importance of the TPP in overall U.S. foreign policy. Noting that China was not a member of the TPP, supporters argued that the TPP was an important vehicle for ensuring a highly visible and effective U.S. presence in the Pacific. On his third day as president, Trump announced the United States withdrawal from the TPP, which never entered into force.

The Transatlantic Trade and Investment Partnership (TTIP) is another agreement that has not yet come into existence. Some refer to the concept of a transatlantic free trade area, which had been raised off and on since the 1990s, as an “economic NATO.” President Obama advocated such a plan in his 2013 State of the Union address. Talks for creating a 281TTIP began shortly thereafter in July 2013 with November 2014 set as the target date for an agreement. The talks began in an atmosphere of optimism, but all realized that it would not be an easy task because tariffs in U.S.-European trade were already low. Negotiations would have to address such domestically sensitive issues as regulations on genetically modified crops, safety standards, and financial services. An additional roadblock to a TTIP agreement was fear in Europe that it would lead to American cultural domination.

Regional trade relations have moved in different directions in the Pacific and Atlantic. In the Pacific, eleven countries (including Canada, Japan, and Australia) have signed an agreement to replace the TTP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In the Atlantic, new trade talks began between the European Union and the United States in 2019. However, they are not expected to succeed because of a key demand by the United States to include agricultural goods; the EU refuses to include them because of a need to protect its farmers and food standards.

Global Trade Agreements

At the global level, free trade in the form of global trade agreements became a major U.S. foreign policy priority for the post–World War II international system. It played a central role in establishing the Bretton Woods system. Through a series of negotiations, one of its core institutions was the General Agreement on Tariffs and Trade (GATT), which succeeded in lowering national tariffs and other barriers to free trade. Out of the last series of GATT talks, the Uruguay Round (held from 1986 to 1994), came an agreement to set up the World Trade Organization (WTO).

WTO talks encountered problems from the outset. A 1999 meeting in Seattle to launch a new Millennium Round of trade talks ended in failure. Not only were the countries attending the meeting divided, but the event drew large numbers of anti-globalization protestors. U.S. interest in WTO talks only returned after the 9/11 attacks, when the Bush administration saw advancing global economic growth as a key part of its strategy to defeat terrorism.

Launched in Doha, Qatar in November 2001, the first round of WTO talks stalled, with rich and poor countries in deep disagreement over free trade in agricultural products. In December 2013, what many saw as a last-ditch effort to save the Doha Round was held in Bali, Indonesia. An agreement was reached when negotiators gave up on achieving a comprehensive agreement in favor of a more limited one, which agreed to cut the red tape and corruption existing in the customs procedures by which goods enter countries.

One of the WTO’s few major successes was the creation of a dispute settlement procedure. Under the GATT, a dispute settlement panel was 282set up only if requested, and its report was adopted only if there was a consensus in favor of it. Under the WTO, the report of a standing dispute settlement panel is adopted unless there is a consensus against it. This change transformed the WTO dispute settlement process into a compulsory and automatic instrument for resolving trade disputes. The United States has both won and lost rulings made by the WTO dispute resolution system. In 2015, the WTO ruled in favor of Mexico and Canada—and against the United States—in a case regarding meat labeling. The year before, the WTO had sided with the United States in a case against India for placing unfair restrictions on imported U.S. meat and eggs in the name of preventing the spread of avian flu. The very existence of the dispute resolution system also produced fears about the potential loss of sovereignty and the nondemocratic nature of the decision-making procedures; it was one of Trump’s primary objections to the WTO.

Economic Sanctions

Even before the Trump administration, economic sanctions were a popular way of exercising American economic power. In 2016, the Department of the Treasury was implementing twenty-eight different sanctions programs. Some were directed at specific countries, such as Cuba, Iran, and Syria. Others were problem-oriented, such as those in place against terrorism, diamond trading, narcotics trafficking, and proliferation.11 This section examines how sanctions are used in general, and then how they have been applied in three specific cases.

Using Sanctions

What exactly constitutes an economic sanction is highly contested. This text adopts a middle-of-the road definition of economic sanctions: “the deliberate withdrawal of normal trade or financial relations for foreign policy purposes.”12 It is important to recognize that sanctions are “not forever.” They are intended to bring about change in targeted countries, and when that is accomplished, they are to be removed. Determining when sufficient changes have been made is no easy matter and not without controversy.13 Economic sanctions against Cambodia were in place for seventeen years (1975–1992), while those against Japan ran for just twenty-four days in 1985. Evidence suggests that a major factor in determining how long sanctions will stay in place is whether they were imposed by Congress or by the president. Presidential sanctions are twice as likely to be lifted after one year. After five years, about 70 percent of congressional sanctions remain in place, compared to 30 percent of presidential sanctions.14

The effectiveness of sanctions can be undermined by a variety of factors. One problem is the pursuit of incompatible goals. For example, 283George W. Bush imposed broad sanctions against Syria for its support of terrorism in 2004. All exports to Syria were barred except for food and medicine. Yet Bush delayed implementing the measure and indicated that he would continue to permit the sale of telecommunications equipment and aircraft spare parts. The telecommunications exemption was justified because of the need to promote the free flow of information. Critics argued that Bush really did this to protect the economic interests of the telecommunications industry.

A second problem is that economic sanctions are often imposed because policy makers find themselves needing to demonstrate resolve when they are unwilling or unable to use military force. In such cases, critics argue that sanctions amount to nothing more than “chicken soup diplomacy.” They give the appearance of taking action and make people feel good without having to pay a cost.15 One example was the Iran-Libya Sanctions Extension Act of 2001. It kept in effect sanctions approved by Congress in 1996 that were about to expire, even though no firms had been sanctioned under its terms.

A third problem is the response by other countries. Often described as black knights, some states provide economic support to the sanctioned country for political reasons, which lessens sanction effectiveness. During the Cold War, the Soviet Union was a black knight for Cuba in the face of U.S. sanctions. In the post–Cold War period, Venezuela has been Cuba’s black knight, while Russia has played that role for Syria and Iran. What holds true for getting around sanctions against governments also holds true for sanctions against rebel groups. In Syria, Sudan sold Chinese-made weapons to Qatar, which arranged for their delivery to Syrian rebels through Turkey. Recent studies suggest that help from black knights is of limited valued unless it is accompanied by sanction-busting actions of corporations interested in profit.16 Cuba, for example, has benefited from investments by Canadian and European firms.

A very different criticism of sanctions is that, in reality, the primary targets of sanctions are ordinary people. The rich escape the pain. This gave rise to the concept of smart sanctions,

so-called because they target the ability of government, businesses, and terrorist leaders to access personal funds and are intended to protect vulnerable social groups from economic harm. Initial evaluations of smart sanctions are not encouraging.17 They do not appear to be significantly more successful than conventional ones. The fundamental problem is the same—a lack of political will to enforce them.

Sanctions in Action: Iran, Cuba, Russia

The discussion of economic sanctions concludes by examining three different types of situations and the policies employed by the United States to address them.

Iranian Sanctions The United States has a long history of imposing economic sanctions against Iran. Carter ordered a freeze on all Iranian assets under the jurisdiction of the United States after the American embassy was seized and hostages were taken in 1979. Reagan imposed sanctions against Iran for its ties to the bombing of the marine barracks in Beirut in 1984. Clinton instituted a boycott against Iran in response to evidence that it was seeking to acquire nuclear technology and issued an executive order banning U.S. oil companies and their subsidiaries from trading with Iran. In 1996, Congress passed the Iran-Libya Sanctions Act (now the Iran Sanctions Act), which permitted the United States to issue penalties against foreign firms dealing with Iran. Originally set to terminate in 2001, the Iran Sanctions Act has been extended several times. After 9/11, George W. Bush issued an executive order freezing the assets of individuals, organizations, and financial institutions supporting terrorism. Many of those now on the list are Iranian, including corporations, banks, and the Revolutionary Guard.

Obama continued sanctions against Iran but coupled them with a willingness to engage in talks. With little progress being made in July 2010, he signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act. It extended the Iran Sanctions Act to include trade in refined petroleum products and expand the types of sanctions that presidents could apply. Under pressure from Congress in 2011, Obama accepted new sanctions against Iran, preventing foreign banks from opening an account in the United States or limiting the funds in an existing account if that bank processed payments through Iran’s central bank. This reduced Iran’s ability to sell oil abroad. When Congress passes sanction legislation, presidents generally are permitted to waive the sanctions under specified circumstances. By mid-2012, twenty countries, including China and all of Iran’s major purchasers, had received exemptions.

In 2013 the Obama administration further tightened its sanctions against Iran by enforcing a provision of the Iran Threat Reduction Act requiring any funds owed to Iran as a result of exempted oil purchases to be placed in a local bank and not transferred back to Iran. The election of Hassan Rouhani as president that year led Obama to remove sanctions affecting humanitarian aid. When the first round of nuclear talks produced promising results, Obama agreed to lift sanctions freezing Iran’s overseas assets in limited amounts and in stages to encourage Iran to continue negotiations.

The Joint Comprehensive Plan of Action (JCPOA), signed in July 2015, placed limits on Iran’s stockpiles of enriched uranium, and called for a reduction in UN nuclear related sanctions and U.S. sanctions against other countries for doing business with Iran. Unaffected were U.S. sanctions against firms conducting business with Iran and sanctions against support for terrorism, human rights abuses, and missile production. Under the terms of the 2015 Iran Nuclear Agreement Review Act, presidents must certify that Iran 285is acting in accord with the JCPOA every ninety days. Trump repeatedly denounced the JCPOA during his presidential campaign, but certified Iran’s compliance in April and July 2017. In September 2017, Trump extended waivers on Iran’s sanctions but in October he declined to do so. In May 2018, the U.S. officially withdrew from the JCPOA. In August of that year the administration began reinstating U.S. economic sanctions. More than seven hundred individuals, organizations, aircraft, and vessels were sanctioned.

Trump further tightened sanctions in 2019. In April, he announced the end of exemptions that had been given to countries the previous November, allowing them to import oil from Iran without sanctions. Those now subject to U.S. sanctions included China, India, Japan, South Korea, and Turkey. This was followed by an announcement in early May of sanctions on Iran’s steel and mining industries that would effectively end Iran’s ability to export those goods. As noted in the Dateline section in  chapter 9 , the cumulative effect of these sanctions on Iran’s economy were significant, and contributed greatly to the rising tensions that led to the ongoing crisis in the Persian Gulf and domestic riots in Iran.

 

Cuban Sanctions When Fidel Castro came to power in 1959, Cuba was heavily dependent on the United States; 67 percent of its exports went to the United States, and 70 percent of its imports came from the United States. Under the terms of legislation passed in 1934, the United States purchased the bulk of Cuban sugar at prices substantially above world market rates. Relations between the United States and Castro deteriorated quickly. In February 1960, Castro concluded a barter deal with the Soviet Union in which Cuban sugar was exchanged for Soviet crude oil. After U.S.-owned oil refineries refused to process the Soviet oil, Castro took them over. The United States responded by terminating all remaining foreign aid programs and canceling all purchases of Cuban sugar for the remainder of the year. Castro retaliated with additional nationalizations of U.S. property. Next, the United States imposed an embargo on all exports to Castro except for food and medicine. Cuba then entered into more economic agreements with the Soviet Union; in response, the United States broke off diplomatic relations.

Throughout the Cold War, economic sanctions were tightened periodically, often as a result of electoral considerations. In 1992, Congress passed the Cuban Democracy Act, which placed heavy penalties on U.S. firms that engaged in trade with Cuba through foreign subsidiaries. In 1996, the Helms-Burton Act threatened sanctions against countries that provided Cuba with foreign aid and allowed U.S. nationals to sue foreign firms that now controlled properties seized during the Cuban revolution. Opposition from American allies to this last provision has been intense, and presidents routinely waived it.

President Obama moved to restore normal diplomatic and economic relations with Cuba. While he was unable to convince Congress to end 286economic sanctions, Obama did issue a series of executive orders easing regulations covering travel, trade, financial transactions, and commerce. President Trump entered office determined to reverse Obama’s policy change, Tweeting “if Cuba is unwilling to make a better deal for Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate the deal.” His determination to do so intensified with Cuba’s support for Venezuela’s socialist government, which was involved in a civil war against U.S.-backed insurgents. Among the economic sanctions his administration put in place were limitations on the amount of money that could be remitted back to Cuba, and on tourist access to Cuba. The most controversial decision was to remove the ban on American citizens suing to obtain property nationalized by Castro. Lifting of the ban was vigorously opposed by European governments, as European firms had purchased property in Cuba and could be subject to thousands of lawsuits.

Russian Sanctions Cold War sanctions against the Soviet Union were commonplace. The first significant post–Cold War sanctions were placed in response to Russia’s annexation of Crimea and its role in the Ukrainian crisis. In 1954, the Soviet Union had transferred control over the Crimea to Ukraine. The action was described as largely symbolic, because Ukraine was then part of the Soviet Union. This transfer of control took on a great deal of significance in 1991 with the fall of the Soviet Union. As an independent country on its borders, the foreign policy of Ukraine was of great importance to Russian leaders. Matters came to a head in February 2014, when public protests forced Ukraine’s pro-Russian president out of office. Russian ground forces and pro-Russian Ukrainian militia soon seized control of the Crimea. On March 21, the Crimea became part of Russia.

With no credible military options at his disposal, President Obama turned to economic instruments of foreign policy. First, Russia lost its membership in the G8, and Obama announced economic sanctions targeting the financial holdings of Putin’s key political and economic allies along with Russian banks. In late April, additional business leaders and companies linked to Putin’s supporters were targeted by financial and travel sanctions. In July, sanctions were placed on Russia’s largest financial, energy, and defense industries, restricting their access to foreign capital. Later in 2014, U.S. companies were prohibited from doing business in the Crimea. Judgments about the effectiveness of these sanctions are mixed. Defenders argue that they imposed significant financial, societal, and political costs on Russia.18 Critics argue that any success was due to a general downturn in the global economy and the price of oil, that the sanctions brought unintended consequences, and that they were counterproductive.19

Sanctions against Russia became highly controversial under Trump, who repeatedly praised Russian President Vladimir Putin during the presidential campaign and continued to express warm feelings for and trust in Putin upon taking office. After his election, Trump offered to end 287the Crimea sanctions (which were extended in 2019) if Russia agreed to nuclear arms control talks. Even more pointedly, Trumps stated that he and Putin did not discuss sanctions at their Helsinki summit. Trump’s reluctance to place sanctions on Russia over interference in the 2016 presidential election and cyberattacks on U.S. energy grids put him at odds with both Republicans and Democrats in Congress. Disagreement over sanctions against Russia also existed within his administration, as he and UN ambassador Nikki Haley publicly disagreed in 2018 about imposition of new sanctions on Russia over its support for Syria’s use of chemical weapons.

Ultimately, after Congress passed the Countering America’s Adversaries Through Sanctions Act in July 2017 with a veto proof majority, Trump found that he had little political choice but to impose sanctions. That bill required him to produce a list of individuals and government organizations by January 2019 that could be subjected to sanctions, and a list of businesses that dealt with Russian defense and intelligence programs by October 2018. The administration missed both deadlines, which Congress took as a sign of Trump’s continued desire to avoid Russian sanctions. When the lists were finally announced, many viewed them as largely symbolic since many had already been sanctioned by Obama, and Trump lifted sanctions against a firm whose owner was linked to Russian meddling the 2016 presidential campaign.

The China Trade War

During his presidential campaign and early in his presidency, Donald Trump often claimed that tariff wars were easy to win. At least with respect to trade with China, this has not proven to be the case. It is now commonplace to refer to trade with China as a trade war. This section reviews its evolution and raises the following question: how do trade wars end?

Early in his candidacy for president, Trump identified China as stealing American technology, taking American jobs, and “ripping” the U.S. economy. Following his election, Trump moved away from this rhetoric. He did not label China as a currency manipulator and held out the promise of improved trade relations in return for help in dealing with North Korea. Movement toward a trade war began to build midway through Trump’s first year in office with the announcement that his administration was opening an investigation into China’s trade practices. In January 2018, he imposed a new 30 percent tax on solar panels. In March, new import taxes on steel and aluminum were announced. China responded that it would take “proper measures to safeguard its legitimate rights and interests.” One month later, it announced $2.4 billion in tariffs on U.S. exports. Trump retaliated by identifying 1,300 Chinese goods that could face 25 percent tariff hikes totaling $50 billion. China countered by producing a list of 106 American goods that could face the same tariff increase. 288

There followed a rapidly changing series of actions with regard to ZTE, a Chinese telecommunications firm that the United States identified as having illegally exported U.S. goods to Iran and North Korea. In April 2018, the Commerce Department placed a seven-year ban on U.S. exports to ZTE and imposed a $1 billion fine for its actions. In early May 2018, ZTE announced a plan to end major activities due to the economic impact of this decision. On May 13, Trump announced that he was working with Chinese President Xi Jinping to revive ZTE because of the high number of jobs in China being lost. His statement followed in the wake of an agreement reached between the U.S. and China on easing market access for a wide variety of goods. That agreement proved to be somewhat illusory; the United States claimed that China had agreed to buy $200 billion worth of U.S. products by 2020, and Chinese officials claimed that no such firm agreement had been reached. By the end of the month Trump shifted his position again, announcing 25 percent tariffs on 1,100 Chinese goods totaling $50 billion. Three days later, he threatened to impose another $200 billion worth of tariffs. China labeled the threatened actions as blackmail. In early June, the United States and China concluded their trade talks without an agreement. China refused to buy more American goods unless the United States agreed not to impose additional tariffs.

Tensions eased in late June when Trump and Xi met at the 2019 G-20 summit in Tokyo and agreed to restart trade talks. Those talks took place in late July and did not go well, with Trump arguing that China kept changing its position and reneged on its commitment to buy agricultural goods. In short order this was followed by announcements that the U.S. was putting tariffs on $300 billion worth of Chinese imports and declaring China to be a currency manipulator. China responded by announcing $75 billion in retaliatory tariffs, stating that they were forced to do so by the “unilateralism and trade protectionism of the United States.” A few days earlier Trump had defended the trade war by indicating that “this is not my trade war . . . this is a trade war that should have taken place a long time ago by other presidents.” He added, somewhat enigmatically, “I am the chosen one.”

Foreign Aid

A perennial debate exists regarding the purpose of U.S. foreign aid. Are its primary goals found in the areas of humanitarian assistance, development, and democratization, or is the purpose of foreign aid to advance core American national security interests? The existence of multiple goals means that foreign aid policy often runs the risk of working at cross-purposes: foreign aid given to support governments fighting terrorism or promoting regional stability may negate efforts to promote democracy.

Several underlying conditions need to be kept in mind in thinking about foreign aid as an instrument of foreign policy: First, the size of the 289U.S. foreign aid program has varied greatly. Calculated in 2015 dollars, the high point for foreign aid came in 1949 ($65.9 billion) and the low point came in 1997 ($19.5 billion). In 2015, it was estimated at $48.6 billion. Compared to other areas of government spending, the foreign aid budget is small, amounting to some 1.3 percent of the total federal budget. Second, U.S. foreign aid is not distributed evenly around the world but concentrated in a few states.  Table 11.1  provides a comparative listing of the top ten recipients of U.S. foreign aid in 2010, 2017, and 2019.

TABLE 11.1 Top 10 Recent Recipients of U.S. Foreign Assistance for Selected Years (millions of dollars)
Country	FY 2019 (Requested)	FY 2017	FY 2010
Israel	3,300	3,100	3,075
Egypt	1,381	1,419	1,597
Jordan	1,275	1,280	776
Afghanistan	633	848	2,286
Kenya	624	706	*
Tanzania	553	547	*
Uganda	461	*	*
Zambia	440	*	*
Nigeria	352	515	647
Pakistan	336	525	1,821
Ethiopia	*	495	707
South Africa	*	471	542
South Sudan	*	*	620
Iraq	*	*	1,270
* Not in the top 10 that year.
Source: Susan Epstein, et.al., 2014 State and Foreign Operations Budget Request, Congressional Research Service, April 18, 2013, p. 7; Susan Epstein, et. al.., Department of State, Foreign Operations, and Related Programs: FY2018 Budget and Appropriations, Congressional Research Service, April 13, 2018, p. 14; and Department of State Foreign Operations and Related Programs: FY2019 Budget and Appropriations, Updated, Congressional Research Service, March 12, 2019, p. 16.

Third, U.S. foreign aid is often given with restrictions; however, these restrictions may be overridden by national security concerns. In October 2009, Obama approved a $7.5 billion, five-year aid program to Pakistan, which officials there quickly characterized as “insulting and unacceptable.” Among the conditions attached by the United States were the establishment of monitoring mechanisms to see how the money was spent and the enactment of procedures for promoting military officers. In 2012, Obama announced that the United States would resume military aid to the new government in Egypt and waive restrictions that made such aid conditional on 290progress toward democracy. Fourth, a very high percentage of U.S. foreign aid funds are spent on U.S. products. The Congressional Research Service estimates that 90 percent of food aid is spent on U.S. goods and services.

Types of Foreign Aid

There is no standard method for categorizing the different types of U.S. foreign aid programs. One approach used by the researchers of the Congressional Research Service identifies six basic categories, which will be followed here. However, before examining the breakdown of official U.S. foreign aid, it is important to note three major trends in the organization and disbursement of foreign aid.

First, remittances, private foreign aid from individuals living abroad, are now among the most important sources of funds for Third World states. In 2018, $4.8 billion in remittances was sent to Honduras and $9.5 billion was sent to Guatemala. For countries such as these, the value of the remittances far exceeds the value of U.S. foreign aid (which totaled $2.6 billion for the region) and has a more direct impact on their lives; for example, Guatemala spent $241 per person on health care in 2016. One consequence is that threats to cut off foreign aid (such as Trump’s threats against Guatemala in 2019 in an attempt to reduce the flow of migrants to the United States) may have a limited effect in ending the exit of individuals seeking jobs and income.

Second, it is becoming increasingly common to speak of a distinction between traditional and nontraditional official foreign aid. Traditional foreign aid is distributed by the State Department and affiliated agencies such as the U.S. Agency for International Development (USAID). Nontraditional foreign aid flows from other agencies, such as the Environmental Protection Agency, the National Institutes of Health, the Department of Energy, and most importantly, the Department of Defense.

The third trend is the increased importance of public-private collaboration and philanthropic foreign aid. The bottom line is that USAID, the primary source of foreign aid in the U.S. government, is now a minority shareholder in foreign aid.20 One example of public-private collaboration is USAID’s Global Development Alliance, which includes corporations such as Coca-Cola and Wal-Mart. The overall goal is to share expertise and information and carry out projects more efficiently.

The first of the six categories of official U.S. foreign aid is economic aid given for the purpose of advancing U.S. political and security objectives. This is the biggest category. Monies given in this category have supported such diverse programs as the Camp David Accords, the building of democracy, antinarcotics efforts, anti-terrorism plans, and attempts to counter weapons proliferation.

A particularly challenging problem confronting economic aid in the 1980s and 1990s was debt relief. The sums were staggering. In 1988, 291Mexico’s debt stood at $107.4 billion. At first, the U.S. approached the problem as solvable through a combination of government austerity measures and prudent lending policies by banks and international organizations. When this proved inadequate, the United States sought to increase the level of funding available (the Baker Plan). This was followed a program of limited and voluntary debt forgiveness with international guarantees of the remaining loan amounts (the Brady Plan). It, too, failed to solve the debt problem completely.

The second largest category of foreign aid is military assistance. These monies go to help allies maintain and train their armed forces, as well as fund purchases of U.S. military equipment. Included in this category are economic support funds, loans to countries that are not eligible for development assistance but are considered strategically important. Of growing concern here is the inability to account for the weapons that were provided. In 2014, the Pentagon discovered that 156,000 pieces of military equipment valued at almost $500 million could not be found in Afghanistan. Some of it was likely broken and discarded, and other pieces were probably stolen and sold to hostile forces.

The third category is bilateral development assistance. These aid programs are generally administered by USAID and have a long-term development focus on strengthening the economy, environment, health care delivery systems, and political institutions of recipient states. Funding for the Peace Corps and debt relief falls into this category. One of the major complaints about development assistance aid is that, rather than being transitional, it has become permanent, creating dependent societies and stifling rather than promoting development.21

The fourth category of foreign aid is humanitarian economic assistance. This aid tends to be short-term and emergency focused. Refugee assistance, emergency food aid, and disaster relief account for the bulk of this spending. The amount of money involved has fluctuated greatly from year to year, largely because of the unpredictability of the natural disasters that set such aid in motion. In fiscal year 2010, approximately $5 billion was spent on humanitarian programs. This figure was double that spent in 2006, but it still represented only 13 percent of the overall foreign aid budget. Providing humanitarian aid is often complicated by other policy goals. In 2011, the Obama administration had to relax restrictions on prohibiting aid to terrorist groups or their supporters in order to get relief to famine victims in Somalia.

The fifth category is multilateral development assistance. The smallest segment of the foreign aid budget, it consists of funds contributed to such international development organizations as UNICEF, the World Bank, and the African Development Bank. U.S. aid to multilateral organizations is affected by a number of concerns, such as organizations’ international planning policies, conflicting goals, and the pace and nature of reform efforts at the United Nations.

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The final category of foreign aid is nonemergency food aid. The Food for Peace program, also known as PL 480, is the primary instrument for distributing nonemergency food aid. It makes surplus U.S. agricultural goods available to Third World states in local currency and at concessionary prices. Critics of the Food for Peace program have noted that tension has always existed between the humanitarian and political purposes of this aid and that politics tends to triumph. Often, those countries receiving PL 480 funds are not the neediest by objective measures but are valuable U.S. allies. Egypt, for example, has always ranked among the leading recipients of PL 480 funds. A relatively new program has been created that provides those in need with cash to obtain food locally at less cost and more quickly. In 2014, Obama proposed that 25 percent of Food for Peace’s emergency and development aid budget be dedicated to this new program.

Cold War Foreign Aid

The relative importance of military and economic aid varied considerably during the Cold War. The Truman administration’s foreign aid program was dominated by economic development initiatives such as the Marshall Plan and the Point Four Program. Ninety-six percent of Truman’s foreign aid budgets consisted of development funds. With the outbreak of the Korean War, policy makers increasingly viewed foreign aid as an instrument for furthering American national security; more than 60 percent of foreign aid was being given for military purposes. The geographic focus of American foreign aid also changed. At one time Europe received 86 percent of U.S. foreign aid, but it received only 6 percent between 1958 and 1961. The share of American aid to the Third World increased to 68 percent during this same period.

During the presidency of John Kennedy, the proportion of economic aid to military aid changed again, so that by the mid-1970s, economic aid accounted for 75 percent of all U.S. foreign aid. However, within the economic aid category, greater emphasis was given to loans (which had to be repaid) than to grants (which did not). With the deepening American involvement in Vietnam, the pendulum swung back in favor of military aid, which constituted 70 percent of U.S. foreign aid by the mid-1970s. After the American withdrawal from Vietnam, economic aid grew to 80 percent of the total, then faded again under the Reagan administration. From 1980 to 1985, economic aid rose from about $7.5 billion to almost $10 billion, while military aid virtually tripled, from $2 billion to almost $6 billion.

Post–Cold War Foreign Aid

During the first decade of the post–Cold War era, three issues dominated the foreign aid agenda. The first centered on foreign aid to Russia, with the major goal of helping Russia denuclearize by providing it with funds to 293destroy chemical and nuclear weapons, establish safeguards against proliferation, and assess the environmental damage done by nuclear waste. The 1991 Nunn-Lugar Threat Reduction Program was designed with this goal in mind. Formally terminated in 2013, the Nunn-Lugar program remains operational in a modified form that includes a worldwide focus on chemical and biological weapons. As of March 2013, it had helped deactivate 7,616 strategic warheads (82 percent of its goal) and destroy 914 intercontinental ballistic missiles (88 percent of its goal).

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Historical Lesson

NAFTA

The North American Free Trade Agreement (NAFTA) among Mexico, Canada, and the United States came into effect in 1994. NAFTA talks began in 1991. On October 7, 1992, a two-thousand-page agreement was signed. Congress gave its approval in November 1993 by votes of 234–200 in the House and 61–38 in the Senate. President Bill Clinton signed the agreement into law on December 8, 1993. At the core of the NAFTA agreement were provisions to eliminate most tariffs on goods traded between the three countries. Some were to be eliminated immediately, others were to be phased out over fifteen years. Particularly affected by the NAFTA agreement were agriculture, automobiles, and textiles. Other portions of NAFTA established intellectual property rights protections, labor and environmental safeguards, and a dispute resolution system. George H. W. Bush, whose administration negotiated NAFTA, promised to negotiate labor and environmental protections in order to secure getting fast-track authority from Congress. These safeguards were included in the agreement, but many considered them to be insufficient.

The negotiating path that led to its signing began with President Ronald Reagan’s advocacy of a North American Common Market during his 1980 presidential campaign. Armed with fast-track authority that Congress gave him in 1984, the United States and Canada entered into trade negotiations that led to the 1989 Canada-U.S. Free Trade Agreement. The agreement was widely regarded as the most extensive bilateral trade agreement ever negotiated and contained several groundbreaking elements that would appear in later free trade agreements.

By this time Mexico had also become interested in a continent-wide free trade agreement. In the 1960s, Mexico pegged its development hopes on an import-substitution strategy that would protect domestic industries from foreign competition. It was now clear that this strategy had failed. From an economic perspective the most attractive alternative was integration into the U.S. market. Politically, however, this was an unattractive option due to fears that doing so would lead to Mexican dependence on the American economy. Instead Mexico proposed a North American free trade zone.

George H. W. Bush embraced the concept in his 1988 campaign, but once in office his administration was divided over the wisdom of entering into talks with Mexico. The National Security Council, the Commerce Department, and the State Department supported the idea. The Department of Agriculture and the Office of the U.S. Trade Representative were less enthusiastic.

Bush looked on the NAFTA agreement as a vehicle for generating Republican votes in Texas and California in the upcoming 1992 presidential election. Instead, NAFTA became a controversial campaign issue. Leading the early charge against it was onetime supporter Ross Perot, who said NAFTA was the product of a conspiracy among Washington insiders, foreign lobbyists, and huge corporations that would cost the United States some five million jobs. He warned, “You’re going to hear a giant sucking sound of jobs being pulled out of this country.”22 Bill Clinton straddled the fence on NAFTA during the presidential campaign. When he finally announced his support for NAFTA, it was conditioned on adding supplemental agreements to cover “serious” omissions dealing with the potential for sudden inflow of large amounts of foreign goods into the U.S. market, the environment, and labor.

Bill Clinton did not immediately push for congressional approval of the NAFTA agreement. Many of those who supported his candidacy for president opposed NAFTA as did a large number of Democrats in Congress. When it did act, it first negotiated a series of executive agreements with Mexico that were not officially part of the treaty and side deals with members of Congress. In one he promised that textile quotas would be phased out over fifteen years instead of ten. In another he pledged to protect peanut, wheat, tomato, and citrus growers by restricting imports to prevent lowering prices. Other side deals had nothing to do with NAFTA such as Bill Clinton’s promise to a New York congressman to support a Small Business Administration pilot urban project in his district.

NAFTA continued to be at the center of political controversy after it came into effect in 1994 largely out of concern for its real or perceived impact on American workers, crime, illegal immigration, and drug trafficking. During the 2008 presidential campaign John McCain supported the agreement but the other major candidates attacked it. Barack Obama blamed it for the loss of American jobs. Both he and Hillary Clinton promised to amend the treaty or withdraw from it. Ron Paul called for abolishing NAFTA.

Applying the Lessons

1. Is Fast Trade Authority (trade promotion authority) a good idea? Is it necessary?

2. Are regional trade agreements in the U.S. national interest?

3. Should trade agreements come with expiration dates?

4. A second area of controversy surrounded funding for health and social programs. In particular, conflicts arose over combating human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) and aid for family planning programs. In 1984, in what is known as the “Mexico City policy,” Reagan prohibited USAID from providing funds to foreign governments, international organizations, and nonprofit organizations that engaged in family planning programs. This ban was suspended by Clinton, put back into place by George W. Bush, suspended again by Obama, and put back in place (and expanded) by Trump.

5. The third area of controversy involved efforts to stop international drug trafficking. The most ambitious undertaking was Plan Colombia, a $7.5 billion aid package intended to advance the peace process in Colombia, strengthen its national economy, stop the production of drugs, promote justice and human rights, and foster democracy and social development. Critics were fearful that Plan Colombia was all too reminiscent of the 1980–1981 period when the United States became embroiled in El Salvador’s civil war because of its overly close identification with the Salvadoran military.

6. Both defenders and critics of Plan Colombia acknowledge that drug production has not so much been curtailed as moved elsewhere, most notably to Mexico.

7. Post–9/11 Foreign Aid

8. After 9/11, foreign aid came to be viewed in a more positive light by those who had long criticized it under the assumption that it can make a major contribution to fighting terrorism. Almost immediately after 9/11, the George W. Bush administration sought authority from Congress to waive all existing restrictions on U.S. military assistance and weapons exports for five years to any country determined to be helping in the War on Terrorism. A similar pattern existed in the area of trade; the administration proposed dropping trade restrictions on eight Central Asian countries that emerged out of the Soviet Union after its fall, even though all had questionable records in the areas of human rights and democratization. In addition to being used as a carrot, trade restrictions were also used as a stick. In 2003, the Bush administration announced that it was suspending military aid to some thirty-five countries because they failed to meet a Congressionally imposed deadline exempting Americans from prosecution in the new International Criminal Court. Congress exempted twenty-seven states, including NATO members Israel and Egypt, from the loss of aid.

9. One new foreign aid plan put forward was the Millennium Challenge Corporation (MCC). The MCC targets low-income countries to support economic growth and reduce poverty.23 Money is given only to countries that meet a demanding set of criteria, and programs are implemented by the recipient country’s government. The eighteen indicators used to 296judge eligibility are presented in  table 11.2 . They fall into three categories: (1) good government (“ruling justly”), (2) economic freedom, and (3) investing in people. In 2018, there were eleven active compacts and five active threshold programs. As an independent government aid agency, a concern raised with the MCC’s efforts is its potential impact on the coherence of U.S. foreign aid initiatives. Colin Powell described the relationship as one of the MCC “pulling” countries forward and USAID “pushing” them.24

TABLE 11.2 Millennium Challenge Corporation Selection Indicators
Indicator		Description		Category		Source
Access to credit		Depth of available credit information and effectiveness of laws in facilitating lending		Economic freedom		International Finance Corporation
Business start-up		Time and costs associated with business start-up and operation		Economic freedom		International Finance Corporation
Child health		Commitment to child health, including child mortality rates and control of water, sanitation, and sewage disposal		Investing in people		Columbia/Yale
Civil liberties		Country performance on elements such as freedom of expression and belief, human rights, and independence of judiciary		Ruling justly		Freedom House
Control of corruption		Extent to which public power is exercised for private gain and effectiveness of policy and framework to prevent and combat corruption		Ruling justly		World Bank/Brookings Institution
Fiscal policy		Commitment to prudent fiscal management and private sector growth		Economic freedom		International Monetary Fund
Freedom of information		Commitment to enable or allow information to move freely in society, including press freedom, freedom of information laws, and Internet filtering		Ruling justly		Freedom House Centre for Law and Democracy Freedom House
297Gender in the economy		Commitment to promoting gender equality by providing equivalent access to legal and public institutions, property ownership, legal system, and employment		Economic freedom		World Bank
Girls’ primary education completion rate		Commitment to basic education for girls in terms of access, enrollment, and retention		Investing in people		UNESCO
Girls’ Secondary Education Enrollment Ratio		Commitment to secondary education for girls in terms of access, enrollment, and retention		Investing in people		UNESCO
Government effectiveness		Quality of public services, civil service, and policy formulation and implementation		Ruling justly		World Bank/Brookings Institution
Health expenditures		Commitment to investing in people’s health and well-being		Investing in people		World Health Organization
Immunization rates		Commitment to providing essential public health services and reducing child mortality		Investing in people		WHO/UNICEF
Inflation		Commitment to sound monetary policy		Economic freedom		International Monetary Fund
Land rights and access		Whether and to what extent governments are investing in secure land tenure		Economic freedom		International Fund for Agricultural Development International Finance Corporation
Natural resource protection		Commitment to habitat preservation and biodiversity protection		Investing in people		Columbia/Yale
Political rights		Quality of the electoral process, political pluralism and participation, government corruption and transparency, and fair political treatment of ethnic groups		Ruling justly		Freedom House
298Primary education expenditures		Commitment to investing in primary education		Investing in people		UNESCO
Regulatory quality		Ability to formulate and implement sound policies and regulations that permit and promote private sector development		Economic freedom		World Bank/Brookings Institution
Rule of law		Degree of confidence in and adherence to the rules of society by individuals and firms		Ruling justly		World Bank/Brookings Institution
Trade policy		Openness to international trade based on average tariff rates and non-tariff barriers to trade		Economic freedom		The Heritage Foundation
Source: mcc.gov

Contemporary Foreign Aid

Donald Trump left little doubt about how he viewed foreign aid upon becoming president. In a speech to the United Nations (UN) he declared, “we are only going to give foreign aid to those who respect us, and, frankly, are our friends.” UN ambassador Nikki Haley followed up this statement by noting that the United States was taking note of those states that voted against the U.S. recognition of Jerusalem as Israel’s capital. While this comment stunned many, it was not without precedent. The United States has collected statistics on UN votes since the Reagan administration. In 1990, the United States warned Yemen of the consequences of voting against the UN Security Council resolution calling upon Iraq to leave Kuwait and cancelled virtually all of the $70 million in foreign aid it was giving to Yemen after the vote.

Trump frequently asks what the United States is getting in return for its aid. He has termed past foreign aid expenditures, such as those in the Middle East, “a mistake.” His preference is to provide loans rather than grants. Following this logic, he has been reluctant to provide foreign aid for rebuilding war-torn states in the region. In 2018, Iraq requested $88 billion for this purpose. The United States offered only $4 billion and asked its allies to cover the rest. A funding conference in Kuwait resulted in the failure to secure any funding. In 2019, Trump threatened to cut off $450 million foreign aid to Guatemala, Honduras, and El Salvador for their failure to stop the flow of migrants to the United States Overall, Trump has sought to reduce the level of foreign aid spending drastically. 299His proposed 2020 budget called for reducing funding for humanitarian aid, refugee assistance, and global health by more than $9 billion.

In one important case Trump has continued Obama’s foreign aid policy rather than seeking to terminate it. This involves an effort to counter China’s attempt to achieve political, economic, and technological dominance in the developing world through the Belt and Road Initiative. China’s primary focus is to construct rail and roads connecting it with Africa, the Middle East, and the Balkans. To accomplish this, it intends to distribute $1 trillion in construction and investment funds to over a hundred countries. In response, Obama authorized the Overseas Private Investment Corporation (OPIC) to spur investment in developing countries by U.S. business interests through loans and risk insurance. Although OPIC was a major target of Trump’s foreign aid cuts, in its place he created a $60 billion foreign aid program within the Federal Aviation Administration to counter China’s Belt and Road Initiative.

Over the Horizon: How Trade Wars End

The U.S.–China trade war has taken its toll on both economies. Imports of American-made goods fell by 22 percent in August 2019, and as of September 2019, the growth rate in China had slowed to its lowest level in thirty years. The U.S. economy has also shown signs of slowed growth and a loss of business confidence, leading the Federal Reserve to cut interest rates in an effort to stimulate growth.

No single ending exists for trade wars. Rather, a number of possibilities must be considered. Five deserve particular attention:

· One side wins. One side is able to exert sufficient pressure and costs on the other to obtain an agreement largely consistent with its goals.

· A draw. Neither side is able to achieve its goals. Exhaustion plus high domestic costs dictate ending the war and moving on; this outcome may require a change in leadership to one that is not committed to winning the war.

· A cease-fire. Neither side can achieve victory but, rather than walk away, each prepares for a future trade war that they see as inevitable and needed to restore national honor.

· Return to a global free trade system. Both sides lose. Neither is in a position to impose its will; rather than a cease-fire, the remaining global economic powers reassert the logic of a global free trade system through a modified WTO.

· The emergence of trading blocs. The trade war ends in the establishment of competing trading blocs, each with its own economic and political rules. Nationalist economic competition rather than cooperation now guide global economic interactions.

It remains to be seen which of these will be the ultimate outcome of the U.S.–China trade war.

Critical Thinking Questions

1. Which type of free trade agreement—bilateral, regional, or global—is of most value to the United States today, and why?

2. Should economic sanctions be used against friends or just foes? Explain your answer.

3. How do you think the U.S.–China trade war will end?

Key Terms

· boycott, 275

· Bretton Woods system, 281

· economic sanctions, 282

· economic statecraft, 273

· embargo, 275

· fast-track, 279

· free trade, 273

· imperialism, 273

· nontariff barriers (NTBs), 274

· quota, 275

· smart sanctions, 283

· tariff, 274

300

Further Reading

David Baldwin, Economic Statecraft (Princeton, NJ: Princeton University Press, 1985).

In this classic overview of economic statecraft as an instrument of foreign policy, the author clarifies the concept of economic statecraft and provides examples of its potential and use.

Robert Blackwell and Jennifer Harris, War by Other Means: Geoeconomics and Statecraft (Cambridge, MA: Harvard University Press, 2016).

The authors assert that, once a mainstay issue in conducting foreign policy, economics has become a neglected and misunderstood foreign policy tool. They call for a new vision of U.S. statecraft to reintegrate economics into U.S. foreign policy.

Bryan Early, Busted Sanctions (Stanford: Stanford University Press, 2015).

This book examines the role of third-party spoilers, “Black Knights,” in undermining economic sanctions. The author examines over sixty years of U.S. sanctions, finding that often U.S. allies are a major impediment to their success.

Douglas Irwin, “The Truth about Trade,” Foreign Affairs 95 (July 2016), 84–95.

The author notes that free trade is often blamed for America’s economic problems, arguing that, on the whole, trade still benefits the United States. This article examines the validity of complaints leveled against free trade and examines future options.

Walter Russell Mead, “America’s Sticky Power,” Foreign Policy 141 (2004), 46–53.

This article argues that, for too long, the United States has overlooked the full potential of its economic power, which has the ability to entrap other countries in positive relationships, thereby making global relations more stable and manageable.

301

Nicoli Nattrass, “U.S. Foreign Aid and the African AIDS Epidemic,” Yale Journal of International Affairs 8 (2013), 52–61.

In this overview of the content and evolution of U.S. AIDS funding and programs in Africa, the author discusses the merits of critiques of the program and puts forward suggestions for improving it.

Richard Nephew, “The Hard Part: The Art of Sanctions Relief,” Washington Quarterly 41 (2018), 63–77.

This article discusses three common problems with policies of sanctions relief: unclear, confused or misaligned objectives; entrenched politics; and the complexity of pushing business interests.