Two Cheers for India Sanctions

May 27, 1998 • Commentary
This article originally appeared in the Journal of Commerce.

In the wake of recent nuclear tests, the United States has unilaterally imposed an array of economic sanctions against India. The decision — mandated by the 1994 Nuclear Proliferation Prevention Act — could cost India billions of dollars in direct aid, credits and loan guarantees.

Administration officials have claimed the measures will hobble India’s economy. Even so, Congress is looking to expand them.

Additional economic sanctions — especially unilateral ones — won’t be very effective. In the past 30 years, U.S.-backed economic sanction schemes have failed in the overwhelming majority of cases. They’re likely to fail against India, too; only modest economic punishment will be inflicted.

Moreover, the purpose of additional sanctions is unclear. Indian leaders have already signaled that they will end testing and stop stockpiling plutonium if sanctions are lifted and they are allowed to buy U.S. civilian nuclear technology. That’s a reasonable request, especially since India has never exported nuclear and missile technology to rogue regimes.

Fortunately, many of the measures directed against India so far can’t properly be called sanctions. Instead, they simply halt wasteful foreign aid and corporate welfare spending. Three types of sanctions are currently in place.

First, the United States has ended direct aid payments. That’s the kind of sanction taxpayers can live with: It stands to save them $142 million in fiscal 1998 alone. The Indian people will also benefit in the long run as their government’s unhealthy addiction to foreign aid is broken.

For decades, the U.S. Agency for International Development and the multilateral development agencies supported by Washington have helped expand the state sector at the expense of India’s private sector. Direct U.S. aid from 1946 to 1996 amounted to nearly $50 billion, the bulk of which went to the government.

Despite the flow of dollars, economic reform in India has been tediously slow, even backsliding in recent years. Research economist Peter Boone of the London School of Economics confirms the dismal record of foreign aid to the developing world. After reviewing aid flows to more than 95 countries, Mr. Boone found that “virtually all aid goes to consumption” and that “aid does not increase investment and growth, nor benefit the poor as measured by improvements in human development indicators, but it does increase the size of government.”

Firms that choose the federal government as a partner should not be surprised when business takes a back seat to politics.

Second, the sanctions block credits and loan guarantees from the Export‐​Import Bank and the Overseas Private Investment Corp. That will affect some U.S. businesses, but subsidizing private investment abroad has never been a good idea. Indeed, firms that choose the federal government as a partner should not be surprised when business takes a back seat to politics.

Ending those programs will actually help promote economic reform in India. The provision of loan guarantees and subsidized insurance to the private sector has reduced pressure on the Indian government to create an investment environment that would attract foreign capital on its own. To attract investment, India must establish secure property rights and clear economic policies, rather than rely on Washington‐​backed schemes that allow those reforms to be avoided.

Third, the sanctions prohibit U.S. banks from lending money to state‐​owned Indian enterprises and ban millions of dollars of technology exports. Those are the most troubling aspect of the sanctions now in place. In addition to depriving banks of the right to invest their depositors’ money as they see fit, the ban cuts off investment funds desperately needed for restructuring and privatization. That harms U.S. investors and Indian workers, not politicians in New Delhi.

But the worst sanctions proposals are just beginning to surface in Congress. Rep. Edward Markey, D‐​Mass., for example, has submitted an amendment to a defense bill that would impose tariffs of up to 90% on more than $1.8 billion in annual textile imports from India.

That proposal is both senseless and counterproductive. It would force consumers and importers to pay the cost of U.S. foreign policy and embitter relations with India. In addition, retaliation could threaten more than $3.5 billion in U.S. exports each year. Perhaps for these reasons, the Markey amendment was blocked this past week, but it could resurface later.

It’s time for Congress to realize that disrupting private business transactions is not an effective foreign policy tool. Sanctions damage domestic interests at least as much as the target country and have little chance of inducing policy changes. Acting unilaterally, Congress squanders U.S. diplomatic capital and punishes the wrong people.

The United States has already strongly signaled its displeasure with India by cutting off aid and export financing. Those measures should be made permanent; anything more would be a mistake.

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