The ever-expanding use of US sanctions to regulate the conduct of foreign companies trading in foreign markets has alienated US trading partners and could ultimately unleash a wave of counter-retaliation by foreign governments. Although US politicians and the US media see these sanctions as lawful regulatory instruments rather than weapons of war, they involve a modern form of gunboat diplomacy using coercion rather than legal process to obtain foreign cooperation. US trading partners thus far have found no effective response, but that may soon change, and in ways that will badly damage US interests and erode US power.
At some point, in the absence of US self-restraint, the tables will turn and foreign government adoption of their own coercive measures will create enormous challenges for US and global business. The risk is not only or even largely to the primacy of the US dollar in world trade but rather the ability of US-based and multinational companies to access major markets whose governments at some point will no longer tolerate US encroachment on their sovereignty.
US sanctions programs seek to achieve US foreign policy and political objectives, often without regard to whether other countries share those objectives. For example, when President Trump withdrew from the Iran nuclear deal in 2018, he said the deal was non-binding on him because it was signed by President Obama. The fact that the European powers, China and Russia also had signed it, the UN Security Council had endorsed it, and Iran had not violated it did not deter the Trump Administration from re-imposing and expanding all of the previously waived US sanctions. Under these coercive measures, the Administration has designated or threatened to designate foreign companies as US sanctions targets for engaging in entirely foreign business with Iran that has no connection to the United States.
The US sanctions rules have always applied differently to foreign companies than to US-based and US-owned companies. Since 1995, the so-called primary sanctions against Iran have prohibited the involvement of US persons in nearly all types of Iran-related business. In more recent years, the US government has required even non-US companies to obey the primary sanctions whenever their transactions involve US persons, the US financial system or US-origin goods. However, the US government has no law enforcement jurisdiction over transactions by non-US companies that do not involve any such US elements.
Critics of US sanctions policy often focus on the enormous fines imposed on foreign companies, particularly banks, for violating the primary sanctions, and the risk that such aggressive enforcement tactics will cause a foreign flight from US dollar-based trade and payments. Although that risk is real, the fines relate only to activity within US law enforcement jurisdiction and leave foreign companies free to choose whether to continue transacting with US sanctions targets without involving any US elements and therefore with violating US law.
To overcome this jurisdictional hurdle, when the US government decided, beginning in 2010, that it wanted to deter certain types of entirely non-US business with Iran, it did so by labeling such business as “sanctionable” under so-called secondary sanctions that authorized the designation of foreign companies engaged in such non-US business as US sanctions targets. During the Obama Administration, the secondary sanctions on Iran generally worked in parallel with European and UN sanctions against Iran’s nuclear proliferation drive, culminating in the multilateral negotiation of the Iran nuclear deal. To strike that deal, the Obama Administration waived the secondary sanctions on Iran, while leaving most of the primary sanctions in place.
As a result of the Trump Administration’s restoration and expansion of the secondary sanctions on Iran and use of similar extraterritorial sanctions measures against a wide range of other targets, US sanctions policy now conflicts with European and global norms to an unprecedented degree. Instead of respecting the sovereign right of our trading partners to decide how and with whom their companies cantransact from within their own territory and in their own currency, the US Treasury and State Departments dictate to foreign companies a complex series of sanctions red lines, entirely outside US jurisdiction.
It matters not whether the sanctionable activity involves the US dollar or any other US elements because the US Treasury and State Departments do not need a US jurisdictional hook to put a foreign company on a US sanctions blacklist. Instead, crossing a red line into sanctionable activity can trigger a US sanctions designation of the offending company, prohibiting their involvement in any business that involves US persons or other US elements. Foreign purchases of Venezuelan crude oil, foreign participation in Russian pipeline projects and foreign transactions with literally thousands of persons blacklisted by the US government under a range of sanctions programs, even if unrelated to Iran (or Syria or North Korea),could all trigger a boycott of a foreign company by the US Government, without any need to tie the sanctionable activity to the United States.
Unlike the primary sanctions, which operate within the same legal structure as other US administrative and criminal laws, the secondary sanctions provide Treasury and State nearly complete freedom to strike preemptively against their foreign targets. Although the target can attempt after-the-fact to demonstrate that they did not infringe any sanctions or negotiate a resolution, that process can take years, by which time the US blacklisting often has already put the target out of business.
The impact of a US sanctions designation is supremely powerful because it not only terminates the target’s access to the US economy and US financial system, but also imposes a secondary boycott designed to force foreign firms to choose between business with the target or business with the US. Following the designation, any foreign company that transacts with the blacklisted person, and thereby provides “material assistance” to them, could itself be blacklisted in turn, even if the alleged material assistance has no connection to the United States. Thus, banks and many other companies globally will refuse any new business with, and run in the other direction from, anyone that US Treasury, through its Office of Foreign Assets Control, has put on the so-called Specially Designated Nationals list. Once blacklisted, the US sanctions target finds itself persona non grata not only in the United States, but most of the world.
In fact, the pressure on foreign companies to respect US sanctions red lines and avoid any sanctionable activity is often greatest within their own financial services community. Before providing a large loan or underwriting securities, in any currency, for Asian or European companies, the participating banks typically will require an undertaking from the borrower or issuer not to engage in any sanctionable activity, as defined by the US government. Even Chinese companies that prefer to list their shares on the Hong Kong Stock Exchange, rather than in New York, still need to address their US secondary sanctions risks as part of the listing process.
The extraordinary deterrent effect of the US secondary sanctions contrasts with the historic failure of the Arab League’s long-running secondary boycott of Israel to deter companies in the United States and third countries from Israeli business. This difference is easily explained. First, companies that needed to choose between business with Israel or the countries that boycott Israel often have seen Israel as the greener pasture. Second, the US and many other leading countries prohibited their nationals from supporting the Arab League secondary boycott. As explained by the US Office of Antiboycott Compliance, the US antiboycott rules “have the effect of preventing US firms from being used to implement foreign policies of other nations which run counter to US policy.”
The hypocrisy of prohibiting US companies from complying with other countries’ secondary boycotts while threatening to boycott foreign companies for dealing, entirely outside US jurisdiction –with US embargoed countries and/or Specially Designated Nationals– is not the issue here. Hypocrisy in foreign policy is nothing new. Historic international law principles and constraints also have not deterred the expansion in US secondary sanctions. Instead, before either Congress or the Executive Branch will lose their voracious appetite for secondary sanctions, the cost-benefit analysis of these measures in economic and thus political terms will have to change in Washington.
In the current political environment, this change will occur only when foreign countries with sufficient market power impose sufficient counter-measures to make the US reconsider its approach. Thus far, US trading partners, particularly in the EU, have relied primarily on their own version of the US antiboycott rules to threaten their nationals with domestic legal action if they comply with US secondary sanctions. But these counter-measures have failed, for two principal reasons.
First, most multinational companies, particularly in Europe, have no interest in tempting fate by crossing a US sanctions red line. In contrast, they know the domestic antiboycott laws to which they are subject, even if enforced, which they rarely are, would not have anything like the nuclear impact of a US sanctions designation. The EU’s blocking regulation in particular is widely viewed as no more than a political statement. Second, many EU and other foreign companies to which these local antiboycott rules apply can typically justify their withdrawal from and avoidance of Iran, Cuba and other targets of unilateral US sanctions for business reasons, without expressly acknowledging they have done so in response to a US secondary boycott.
In the military realm, to deter a nuclear strike against them or their allies, the world’s major powers have developed their own nuclear deterrents. The strategy of mutually assured destruction has withstood the test of time. Because it has proven to work, the same logic will ultimately prevail in the world of sanctions, led by China.
Last year, China announced that it would create its own “Unreliable Entity List” to punish firms whose actions were harmful to China’s national interests. Although China has not yet put any companies on this list, it presumably would do so if OFAC puts a major Chinese company on the Specially Designated Nationals list and seeks to compel foreign as well as US companies to sever their ties with that Chinese company. Alternatively, China could find other ways to retaliate in kind, with the aim of restricting US access to China’s market sufficiently to match the harmful impact of US secondary sanctions on Chinese firms.
An eye for an eye and a tooth for a tooth. If the retaliatory threat is both credible and commensurate in scope with the sanctions threatened by the US government, the US will have as much to lose as to gain by imposing a secondary boycott. For this reason, the US has yet to impose a secondary boycott on any major Chinese company. Instead, even under President Trump, the actions taken against Chinese companies generally seek to restrict their access to US markets and US technology under US trade, investment and export control laws; i.e., various forms of primary boycott.
In such cases, the US requires foreign companies to exclude all or some US elements from their dealings with the Chinese target company, but does not threaten them with retaliation for their entirely non-US business with that Chinese company. With the exception of some smaller Chinese companies that the US has listed as Specially Designated Nationals, the US Treasury and State Departments have not threatened to blacklist foreign companies for entirely non-US business with any leading Chinese company. Moving in that direction against China would appear certain to trigger swift retaliation and thus mutually assured economic damage.
In contrast, the US Congress has enacted, and President Trump has implemented, a broad range of secondary sanctions against Russia intended to deter foreign companies from entirely non-US dealings with targeted Russian persons, companies and energy projects. Although not comparable in either scope or extent of actual use to the US secondary sanctions against Iran, the ones on Russia have succeeded in deterring a range of foreign investment in and foreign business with Russia that the previously-imposed US and EU primary sanctions had failed to accomplish.
Although Russia has threatened to retaliate in kind, its economy is far smaller than China’s. In 2015, when Russia put 60 US politicians on its version of a sanctions list in response to the initial wave of US sanctions against Russia, the late Senator John McCain quipped “I guess this means my spring break in Siberia is off, my Gazprom stock is lost and my secret bank account in Moscow is frozen.”A tooth for an eye has never provided an effective deterrent.
Apart from China’s credible defensive capability, it also has the ability to play offense. If the US can retaliate against foreign companies for their entirely non-US dealings with US sanctions targets, what is to stop China from doing the same to US and other non-Chinese companies in response to their dealings with Taiwan or other future targets of Chinese sanctions? What is to stop India from imposing a secondary boycott on Pakistan or Turkey on Cyprus? The US can use its antiboycott law to prohibit US companies from cooperating, but only at the cost of losing their business with the boycotting country.
In sum, relying on secondary boycotts to achieve US policy objectives is dangerous not only because it invites retaliation but also because it invites imitation. The US therefore should use them cautiously rather than capriciously, recognizing that at some point the balance will tip and the costs might quickly begin to outstrip the perceived benefits.
In particular, how much longer will the EU tolerate US insistence that EU companies abandon entirely non-US business with US sanctions targets before the EU adopts its own version of China’s Unreliable Entity List and directs EU companies to resist US pressure? Like China, EU counter-retaliation could be both credible and commensurate in terms of the costs imposed on US interests. EU self-restraint to date reflects its preference for rules-based diplomacy, but when that enables the US to encroach European sovereignty with impunity, even the EU at some point, if pushed too hard, will have to respond in kind.
If and when we reach the tipping point, what the world sees as US sanctions bullying will be met with a jab in America’s eye by a major US trading partner rather than foreign subservience. Various potential scenarios come to mind. Let’s assume a new and potentially more rational leadership takes the helm in North Korea, and South Korea as well as China quickly offer trade and investment even before any major and verifiable concessions by Pyongyang. Let’s further assume the US, backed by Japan, rejects any such premature concessions and threatens to use its existing secondary sanctions against North Korea to blacklist any South Korea or Chinese company that supports their own government’s strategy of economic engagement. When the foreign policy and domestic political stakes are that high, resistance to US secondary sanctions not only by China but also South Korea becomes inevitable, creating enormous risk of miscalculation, counter-retaliation and destabilizing after-shocks.
The effectiveness of US secondary boycotts to date appears to have created a misplaced confidence in Washington that ever-expanding use will not diminish their effectiveness or harm US interests. Rather than continue along the current path, inciting US trade partners to copy our own tactics to our detriment as well as theirs, the US should develop a more restrained and strategic approach to preserve the usefulness of sanctions. Coordinating US sanctions policies with America’s closest allies rather than trampling on their sovereignty would be a helpful starting point.
