The capital market sanctions folly: a lesson in diplomatic dopiness.

• Author: Steil, Benn

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...