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Research Article

Economic Warfare and Private Property Rights
Recent Episodes and their Constitutionality


     
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Economic warfare—prohibitions of international transactions imposed selectively in order to alter the behavior of other governments—is a long-established practice in the conduct of U.S. foreign policy. Early in American history the government used the Embargo Act (1807) and the Nonintercourse Act (1809) as instruments of foreign policy. The failure of these measures did not diminish the government’s zeal for similar measures in later times. The frequency of their imposition has increased markedly in the twentieth century. During both world wars, economic warfare was waged along with the projection of raw force. Since World War II no country has employed economic sanctions more frequently than the United States.1

Throughout American history economic sanctions have usually failed to attain their ostensible objectives in altering the conduct of other governments, but they have had significant domestic consequences. U.S. citizens have suffered economic losses, both short-term and long-term. In effect, sanctions against trade, financial dealings, and travel have imposed the costs of U.S. foreign policy selectively on Americans according to their interest in certain international commercial and financial dealings or their desire to travel to certain countries. More importantly, all Americans have suffered a diminution of their rights because of the sanctions. When citizens have challenged the government’s actions the Supreme Court has upheld the government and given broad construction to presidential discretion in using the “economic weapon.” Use of this weapon not only wounds American citizens; it also hurts innocent people in the target countries. Economic warfare is best understood as a costly form of political theater. Only governmental officials, especially the President, normally benefit from it; and even that benefit is fleeting.

Recent Acts of Economic Warfare

In the wake of the Iranian Revolution and the taking of American hostages at the embassy in Tehran, the U.S. government imposed economic sanctions restricting transactions related to Iran. On November 14, 1979, President Carter issued an executive order (12170) declaring a national emergency and blocking all property interests of the government of Iran in the United States. In subsequent regulations the Treasury Department’s Office of Foreign Assets Control (OFAC) announced that all transactions involving an Iranian property interest were prohibited “in the absence of a license.” No such property was to be “transferred, paid, exported, withdrawn or otherwise dealt in except as authorized” (44 Fed. Reg. 65956). So the regulations did not impose a blanket prohibition; they allowed for exceptions.

In making exceptions the government enjoyed complete discretion. OFAC announced that after December 18, 1979, it would consider authorizing payment of certain checks and drafts “on a case-by-case basis” (44 Fed. Reg. 75352). The arbitrariness was underscored by a standard proviso stating that, because the rules involved foreign affairs, OFAC was not bound by the Administrative Procedure Act with regard to notice of proposed rule making, opportunity for public participation, or delay in effective date. However, OFAC “may consult with interested groups or persons in connection with the issuance of rules or the establishment of licensing policies.” Specific licenses might be granted, for example, to allow payments from blocked accounts in “hardship cases” (44 Fed. Reg. 75353).

On April 7, 1980, President Carter issued an executive order (12205) imposing extensive controls on transactions with Iran. “[N]otwithstanding any contracts entered into or licensees granted” previously, the order prohibited most exports to Iran, transport services, new service contracts, loans, or credits. Again the government retained complete discretion in administering the sanctions: the designated transactions were prohibited “except as authorized by means of regulations, rulings, instructions, licenses or otherwise.” Specific licenses for service contracts, for example, would be considered on a case-by-case basis (45 Fed. Reg. 24433-24434). On April 17, the President issued another executive order (12211) extending the controls. Now prohibited were imports from Iran, transfers of funds to any person in Iran, and payments or transactions in support of U.S. citizens or permanent resident aliens traveling to or within Iran (45 Fed Reg. 26940). At that point U.S. citizens had been forbidden to do almost everything involving Iran or Iranian property interests.

In January 1981, however, the government abruptly changed the rules with respect to Iran. As part of its deal with the Iranians to secure the release of American hostages, the government ordered that Iranian property in the United States be released and returned to Iran notwithstanding legal claims on the property by U.S. citizens. Stated Executive Order 12277 (January 19, 1981), “All rights, powers, and privileges relating to the properties . . . and which derive from any attachment, injunction, other like proceedings or process, or other action in any litigation after November 14, 1979 . . . whether acquired by court order or otherwise, are nullified, and all persons claiming any such right, power, or privilege are hereafter barred from exercising the same.” Further, “[a]ll persons subject to the jurisdiction of the United States are prohibited from acquiring or exercising any right, power, or privilege, whether by court order or otherwise, with respect to the properties. . . .”2 In Executive Order 12282 the President set aside the previously established prohibitions of economic transactions involving Iran.

Finally, in an executive order (12283) that, on its face, appeared to tear the separation-of-powers doctrine to shreds, President Carter ordered the Secretary of the Treasury to promulgate the following extraordinary regulations: “(a) prohibiting any person subject to U.S. jurisdiction from prosecuting in any court within the United States or elsewhere any claim against the Government of Iran arising out of events occurring before the date of this Order relating to [the taking and holding of the American hostages at Tehran or other American injuries and losses associated with the Iranian Revolution] . . . ; (b) prohibiting any person not a U.S. national from prosecuting any such claim in any court within the United States; (c) ordering the termination of any previously instituted judicial proceedings based upon such claims; and (d) prohibiting the enforcement of any judicial order issued in the course of such proceedings.”

To implement its deal with the Iranians, the government established the Iran-United States Claims Tribunal and provided (Executive Order 12294, February 24, 1981) that “all claims for equitable or other judicial relief in connection with such claims, are hereby suspended, except as they may be presented to the Tribunal.” Meanwhile the claims would “have no legal effect in any action now pending in any court of the United States . . . or in any action commenced in any such court” after February 24, 1981. The Tribunal’s decision would be final. Thus were U.S. citizens denied by presidential fiat the protections of the U.S. judicial system with respect to claims against Iran.

While the Iranian episode was extraordinary, especially as it brought about the displacement of the U.S. legal system, it was by no means the only recent episode of extensive restrictions of the rights of American citizens. On January 7, 1986, ostensibly in response to the threat of terrorism sponsored by the Libyan government, President Reagan issued an executive order (12543) to declare a national emergency and forbid U.S. citizens to export, lend, or provide services to Libya, import from Libya, or engage in transactions related to travel to Libya. Also, Libyan property interests in the United States were blocked (Executive Order 12544, January 8, 1986).

As usual, loopholes were created: specifically, the prohibitions did not apply to “the importation into locations outside the United States of goods and services of Libyan origin”; nor did they apply to “the export of goods to or destined for Libya from locations outside the United States” (51 Fed. Reg. 1356). These exceptions permitted wholly-owned subsidiaries of U.S. corporations to continue business as usual with Libya. Evidently, they have so continued,3 despite some later tightening of the restrictions (51 Fed. Reg. 22802).

On May 1, 1985, the President declared a national emergency with respect to Nicaragua and prohibited all imports from or exports to that country by U.S. citizens as well as entry into U.S. waters or territory by Nicaraguan vessels or aircraft (Executive Order 12513). The regulations lodged the usual arbitrary administrative discretion in the Secretary of the Treasury, who, for example, “reserves the right to exclude any person from the operation of any license or from the privileges therein conferred or to restrict the applicability thereof with respect to particular persons, transactions or property classes thereof” (50 Fed. Reg. 19892).

On September 9, 1985, the President declared a national emergency with respect to South Africa—an action that seems to defy reason unless one recalls that such a declaration is required before the President may lawfully exercise the powers provided in the International Emergency Economic Powers Act. His executive order (12532) prohibited several types of transactions by U.S. citizens: loans to the South African government or its entities; export of computers and related goods for use by designated South African government agencies; export of goods or technology related to the production of nuclear power; import of South African military goods. On October 1, 1985, Executive Order 12535 banned import of Krugerrands. Loopholes were created, of course (50 Fed. Reg. 46727), this time for financial institutions to reschedule loans or deal in letters of credit or trade acceptances related to South African exports.

Not content with the President’s actions, Congress passed the Comprehensive Anti-Apartheid Act of 1986—a statute that must be read to be believed. The act makes numerous policy declarations (most of them with regard to matters outside the jurisdiction of the United States), repeatedly expresses “the sense of Congress,” declares that the South African situation constitutes “an emergency in international relations” imperiling the United States, and puts into official print several expressions of undiluted wishful thinking. The act gives statutory force to the sanctions previously ordered by the President and provides for additional controls. Now prohibited: imports of products of certain “parastatal organizations” as well as South African uranium, coal, agricultural commodities, iron and steel, petroleum and derivative products, and sugar; air transportation with South Africa; the holding of bank accounts of the government of South Africa; and new investments in South Africa (100 Stat. 1099-1106).

In November 1986 the government imposed sanctions against Syria.4 Mainly changes in governmental practices, the sanctions also include a prohibition of sales of all aircraft and parts of Syria. Previously, sales of computers, helicopters, certain communications equipment, and certain chemicals had been banned (51 Fed. Reg. 20467-20468).

The Question of Constitutionality

With regard to the constitutionality of suppressing the rights of U.S. citizens in order to promote the government’s foreign policy, the leading recent case is Dames & Moore v. Regan, 453 U.S. 654 (1981). The case was prompted by the government’s setting aside court attachments of Iranian property and suspending claims against Iran in U.S. courts as part of the deal to gain release of American hostages in Tehran. Dames & Moore, an American company that had secured an attachment of Iranian property to insure payment of its claim against an Iranian government agency, alleged that the actions were unconstitutional because, inter alia, they took private property for public use without just compensation and they improperly circumscribed the jurisdiction of the courts. The Supreme Court agreed.

While recognizing that the case raised questions that “touch fundamentally upon the manner in which our Republic is to be governed“ (659), Justice Rehnquist, speaking for the Court, declared that the decision rested on “the narrowest possible ground capable of deciding the case” (660) and laid down no general guidelines—an empty caveat, as all Supreme Court decisions have precedential weight. The Court based its decision largely on an apparent technicality, namely the date on which petitioner had filed its suit: “by the time petitioner instituted this action, the President had already entered the freeze order. Petitioner proceeded against the blocked assets only after the Treasury Department had issued revocable licenses authorizing such proceedings and attachments.” Hence “the attachments . . . were specifically made subordinate to further actions which the president might take under the IEEPA [International Emergency Economic Powers Act]. Petitioner was on notice of the contingent nature of its interest in the frozen assets” (673, emphasis added). But the fundamental issue was: What empowered the executive branch to make petitioner’s claims contingent in the first place? In a footnote (fn. 6), the Court suggested that complete administrative discretion to license or revoke attachments of Iranian property interests arose from the broad language of the IEEPA.

As for the President’s constitutional power to suspend petitioner’s claims in U.S. courts, leaving only the slender recourse to the Iran-United States Claims Tribunal, the decision found implicit authorization springing from “a history of congressional acquiescence” in similar instances (678). The Court saw no violation of the separation of powers: “The President has exercised the power, acquiesced in by Congress, to settle claims and, as such, has simply affected a change in the substantive law governing the lawsuit” (685). Reading the mind of Congress, the Court declared that “Congress may be considered to have consented to the President’s action in suspending claims” (686). Evidently, whatever executive action Congress has never overtly disapproved, it has implicitly approved—a doctrine that would have astonished the Founding Fathers.

In a partial dissent, Justice Powell recognized a serious flaw in the ruling. There was, he asserted, a substantial question whether the President’s orders “themselves may have effected a taking by making conditional the attachments that claimants against Iran otherwise could have obtained without condition” (690). Powell noticed that the government’s actions amounted to “forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” He thought that the government “must pay just compensation when it furthers the Nation’s foreign policy goals by using as ‘bargaining chips’ claims lawfully held by a relatively few persons and subject to the jurisdiction of our courts” (691). But no other justice joined Powell in his dissent.

Upshot

A President pursues economic warfare because it enhances his popularity, if only momentarily. It diverts attention from intractable domestic problems and creates an image that he is strong, that he is “doing something” to defend or promote American interests beyond our borders. The image has little substance. Although some innocent, oppressed citizens of the target countries may have suffered, the governments of Iran, Libya, Nicaragua, South Africa, and Syria have not been visibly moved by U.S. sanctions—the burden of proof rests on anyone who thinks otherwise.

But American citizens have been hurt. Important business has been lost along with reputations for reliable service in the world market. More importantly, economic warfare has shifted rights from private hands into the hands of governmental officials who are free to exercise their newly acquired powers with virtually unchecked discretion. As Justice Powell recognized, sanctions have effectively imposed the costs of U.S. foreign policy selectively and arbitrarily on certain Americans. Because compensation has not been paid for the de facto takings, the costs remain hidden or uncertain, making it easier for the government to persist in such policies.

While misguided economic warfare may be preferable to violent warfare, a third option—the alternative of peaceful dealings between American citizens and the rest of the world—should not be forgotten. For ordinary people, as opposed to their rulers, war is seldom the best course of action. Economic warfare has generally failed to serve the national interest. Nothing of genuine public importance has been gained; bad legal and political precedents have become established; a little more liberty has been lost.


Footnotes:

1. For details, see Gary Clyde Hufbauer and Jeffrey J. Schott, Economic Sanctions in Support of Foreign Policy Goals (Washington: Institute for International Economics, 1983) and Richard J. Ellings, Embargoes and World Power: Lessons from American Foreign Policy (Boulder: Westview, 1985).

2. The same language appears, applied to various forms of Iranian property interests, in Executive Orders 12278, 12279, 12280, and 12281.

3. “Libya: ‘Business as Usual,’” Newsweek (December 15, 1986): 7.

4. George Gedda, “U.S. imposes sanctions against Syria,” Allentown Morning Call, November 15, 1986: 22 Weekly Compilation of Presidential Documents 1563-1564 (November 17, 1986); 51 Fed. Reg. 43796-43797 (December 4, 1986).


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

Full Biography and Recent Publications

Charlotte Twight is Research Fellow at The Independent Institute, Professor of Economics at Boise State University, and contributing author to the books, American Health Care and Arms, Politics and the Economy.

Reprinted with permission from the Fall 1987 issue of the Journal of Private Enterprise. © Copyright 1987, Association of Private Enterprise Education.






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