The capital market sanctions folly: a lesson in diplomatic dopiness

International Economy, The, Wntr, 2005 by Benn Steil

The granting or withholding of trade "privileges" has taken on great metaphorical meaning since the end of the Cold War. America, the global power of international commerce and finance, bestows free trade agreements on nations that aid her in the war on terrorism. (Pakistan was so blessed by the Bush Administration in 2001, even though Congress declined to convert the metaphor into actual commerce.) America also punishes with economic sanctions those who oppose her. For those large enough to be particularly irksome in their opposition, such as China, the ultimate surrogate for traditional warfare has become capital markets sanctions. Here is the story of how capital markets assumed center stage in the emerging drama of economic statecraft.

CONGRESS TARGETS HOMELAND SECURITIES

In 1999, two congressionally mandated bodies (the Cox Commission and the Deutch Commission) released reports related to activities of the Chinese military and their links to Chinese commercial and financial activities either in the United States or involving U.S. firms. The conclusions of the reports were headline-grabbing in their focus on the purported role of the U.S. capital markets in providing finance, however indirectly, for Chinese weapons development and proliferation.

The report of the Deutch Commission concluded that:

   Because there is currently no national security-based review of
   entities seeking to gain access to our capital markets, investors
   are unlikely to know that they may be assisting in the
   proliferation of weapons of mass destruction by providing funds to
   known proliferators. Aside from the moral implications, there
   are potential financial consequences of proliferation
   activity--such as the imposition of trade and financial
   sanctions--which could negatively impact investors.

This last sentence has proven a rallying cry not only for anti-China and national security hawks, but for activists of all stripes. A new logic had been proffered in a major congressionally mandated report which could be used to compel the U.S. government to harness the power of the capital markets, despised by groups on the right and left of the political spectrum, in the service of any manner of Great Cause. The logic was that since foreign companies doing wrong might be hit by American government punishment in consequence, American investors in such companies must receive government warnings of such companies' behavior, presumably in a manner such that they would be deterred from investing.

The Deutch Commission went well beyond calling for increased information flows, however. "... [I]t is essential," the report states, "that we begin to treat this 'economic warfare' with the same level of sophistication and planning we devote to military options." While noting that the Commission "was prohibited ... from evaluating the adequacy or usefulness of sanctions laws," it nonetheless concluded that "the United States is not making optimal use of its economic leverage" and should "assess options for denying proliferators access to U.S. capital markets." This call has since escalated through several congressional bills.

"NOT ON MY MARKET!": THE CASE OF PETROCHINA

In September 1999, the first reports emerged that the China National Petroleum Company (CNPC) planned to list on the New York Stock Exchange. The proposed offering provoked strong objections from members of Congress, notably Representative Frank Wolf (R-VA), based largely on CNPC's business in Sudan. CNPC had invested about $1.5 billion in the Sudanese energy sector, and had reportedly committed multiples of that to future exploration and development in the country. Opponents of CNPC's New York listing claimed that it would assist the government in Khartoum in prolonging an eighteen-year-old civil war which they alleged had caused two million deaths and displaced twice as many.

CNPC, reacting to the political tempest in the United States, restructured itself such that only a subsidiary entity--PetroChina, from which Sudanese and other non-Chinese assets were excluded--would list on the NYSE. The move, referred to on Wall Street as a "Chinese Wall," infuriated CNPC's American detractors, who saw it as a meaningless bit of legal maneuvering to safeguard the U.S. listing while allowing the Sudanese operations to develop unhindered.

The public campaign against PetroChina's U.S. initial public offering was waged by members of Congress at the conservative and liberal ends of the spectrum, former Republican government officials, organizations associated with the Christian Right, the AFL-CIO, a protectionist small-business lobby group called the U.S. Business and Industrial Council, and the William J. Casey Institute, named for the late CIA director. Whereas most of PetroChina's detractors expressed concern for human and religious rights in Sudan, they were united only in their loathing of China.

The Casey Institute, chaired by Roger W. Robinson, Jr., was commissioned by a third Congressionally mandated body, the U.S.-China Economic and Security Review Commission, of which Robinson was a member, to prepare a report on the use of capital markets sanctions against China. The report's fantastical accounts of the "successful" capital markets sanctions campaigns against PetroChina and the Russian oil giant Gazprom would make an account of the CIA's "successful" venture in the Bay of Pigs seem almost plausible.