John M Kline. Publius. Volume 29, Issue 2, Spring 1999.
Recent state and local government sanctions on business with Burma and certain Swiss banks renews a debate over foreign policy powers in federal systems that operate in an integrated global economy. International business promotion has become an accepted function of state and local governments. More controversial is the imposition of foreign policy sanctions, where economic involvement becomes a lever to pursue political goals rather than an objective in itself When compared with past cases, including South Africa and the Arab boycott, recent state and local initiatives demonstrate both continuity and fresh departures in federalism’s evolving adjustment to the global economy. These developments can be used to examine theoretical concepts such as constituent and multilayered diplomacy. They also argue for improved practical cooperation among the multiple and diverse actors engaged in foreign policy issues.
Two high-profile affairs in 1998 focused renewed attention on state and local government sanctions related to foreign policy. A Massachusetts selective purchasing law, designed to penalize enterprises doing business with the repressive military regime in Burma (Myanmar), caused the European Union (EU) to file charges asserting U.S. violations of World Trade Organization (WTO) obligations, while a group of international companies challenged the state law in U.S. courts on constitutional grounds. Diplomatic strains also arose between the United States and Switzerland when a coalition of local and state finance officials, led by New York City’s comptroller, proposed sanctions against Swiss banks in an effort to aid asset claims by Jewish victims of the Holocaust. Viewed in the context of other state actions affecting foreign policy, important differences in the actors, tactics, and targets involved in these two cases may hold significant clues to the future evolution, and perhaps eventual consensus, on better management of intergovernmental relations in this contentious and perplexing area of U.S. federalism.
When Foreign and Domestic Policies Converge
Among many areas of shared or overlapping powers in U.S. federalism, the federal government’s constitutional and practical dominance in foreign affairs often stands out as a clearly defined exception. Since the 1970s, however, the impact of international economic interdependence has called into question the contemporary application of this widely accepted tenet. A growing body of literature now traces the principal causes, effects, and responses that shaped U.S. state and local government forays into the international arena. In particular, international trade and investment became increasingly significant to the health of local economies, leading most states and many major metropolitan areas to formulate programs aimed at promoting exports and attracting foreign investment. These programmatic initiatives led, quite naturally, to greater interest and an expanding role in national decisions regarding international economic policy.
The key to understanding the involvement of state and local governments in international economic policy rests with recognizing both the deep intrusion of foreign economic forces into the U.S. domestic economy and the counterpart bonds forged by U.S. business relationships overseas. Traditional and legitimate responsibilities of state and local governments for their citizens’ economic welfare now necessarily incorporate the enmeshed actions of invested foreign enterprises as well as the overseas interests of U.S. corporate affiliates. Most attention to federalist aspects of this topic focus on core international trade and investment issues where a pattern of increasing, if sometimes grudging, intergovernmental cooperation and collaboration is evolving, particularly on programmatic business-promotion efforts. Policy-related cooperation has been more problematic. As lines blur between domestic and foreign economic policy, federal officials seek to guard an exclusive jurisdiction in foreign affairs while state leaders worry that foreign policy actions may lead to substantial infringements on states’ rights.
A recent WTO agreement on multilateral trade regulations covering government procurement policies offers an important example of the challenges posed to U.S. federalism by international economic policymaking. Prior international trade agreements on government procurement did not cover U.S. state and local government practices. Foreign trading partners (particularly non-federal systems) considered the exemption of state and local government practices unfair and demanded their coverage in a new WTO accord. The U.S. government agreed to cover state and local practices, but only for those states that voluntarily consented to the restrictions. After strong encouragement by U.S. negotiators, 37 governors submitted letters outlining their concurrence. The extent of the governors’ powers over procurement practices (absent state legislative action) and the exclusion of other states from the accord leaves this issue partly unresolved. Equally important, the unsettled and sometimes confusing procedures employed in this case suggest that further improvements are needed in how the U.S. federal system will manage future intergovernmental coordination on similar international economic policy issues.
Government procurement policy is particularly relevant to this article, but from an instrumental rather than a policy-content perspective. The article focuses not on the many international policy issues where state and local governments seek to promote their jurisdictions’ economic welfare, but rather on an overlapping subset of issues where economic policy is used to serve more political foreign-policy objectives. The motives impelling local and state officials to involve themselves with negotiations between Jewish organizations and Swiss banks, or the intentions of Massachusetts’ legislators in enacting sanctions against companies doing business in Burma, are not found primarily in aspirations to enhance the economic welfare of their citizens, but in political concepts relating to justice and human rights. Linkages inherent in a modern, interdependent global economy provide state and local governments with instrumental leverage through which they can seek to influence the interests and activities of foreign governments and business interests. These cases, therefore, present a somewhat differentiated niche of actions, where state and local government policy activity may present a clearer infringement on the federal government’s foreign policy authority, than actions that are clearly designed to promote or protect traditional state and local economic welfare interests. Nevertheless, such foreign policy involvements are not without precedent. These two new incidents should be evaluated against the backdrop of relevant past cases in order to assess their potential significance in evolving federalism issues.
The Record of Recent Precedents
The historical record contains a surprising array of state and local government activities related to foreign policy issues. Examples include city declarations of nuclear-free zones, providing sanctuary for illegal immigrants, exchanging state trade-missions with Libya despite U.S. trade controls, refusing airport landing rights to a foreign minister of the former Soviet Union, promoting sister-city relationships that provided assistance to Nicaragua when U.S. foreign policy supported that government’s overthrow, and refusing to send National Guard units for training in Honduras (subsequently overturned by congressional and Supreme Court action). Most of these cases, however, emerged from isolated incidents or only exerted a marginal impact on U.S. foreign policy outcomes. Two major exceptions involve state and local government actions related to South Africa and the Arab boycott of Israel. These two examples provide the most relevant comparisons to the contemporary Burma and the Swiss-bank cases, in term s of both motives and methods.
Sanctions Against Firms Supporting the Arab Boycott of Israel
During the mid-1970s, state governments in some important international trade centers used state antitrust and civil or human rights laws to establish penalties for companies that participated in the Arab boycott of Israel. This issue emerged when the Arab League’s boycott gained new significance from the rapid accumulation of revenue in oil-producing Arab nations following the 1973 oil embargo. The difficulty was not the boycott’s primary ban on direct business between Arab nations and Israel. Instead, so-called secondary and tertiary boycott effects threatened to cause discrimination against and even among U.S. enterprises. Secondary boycott regulations involved the refusal of Arab customers to do business with non-Israeli enterprises that had important business links in Israel. Tertiary effects arose from Arab requirements that sales transactions with other firms also not involve component supplies from enterprises boycotted for their Israeli links (under the secondary boycott).
Enforcement of the Arab boycott often involved the use of blacklists, negative certificates of origin, bank letters of credit, and other contractual clauses that raised serious discrimination issues. One difficulty lay in separating political actions taken against the state of Israel from actions of religious discrimination against Jew. Questions also arose about consistency with U.S. foreign policy. The U.S. government maintained and enforced boycotts against other nations and urged (but did not require) U.S. companies to avoid compliance with or offer support to other boycotts, especially against friendly nations. Proposals seeking to prohibit U.S. corporate compliance with the Arab boycott failed in the Congress because of executive branch opposition to the proposals as both unnecessary and potentially disruptive to delicate, on-going Mideast peace negotiations.
Jewish-based coalitions promoted action in nearly a dozen U.S. states, arguing that the Arab boycott’s secondary and tertiary requirements led to economic and religious discrimination in violation of state antitrust and civil rights interests. New York, Illinois, California, Ohio, Massachusetts, and Maryland adopted or amended statutes to penalize firms for complying with discriminatory boycott requirements, including fines or imprisonment for residents and a ban on in-state transactions for non-residents. As important industrial and trade centers, these states’ actions affected numerous international enterprises, exposing them to multiple and divergent regulations among the states, as well as posing a possible conflict with national policy.
The state laws had little measurable enforcement impact because most were in effect for a year or less before being preempted by an amendment to the Export Administration Act, signed into law in June 1977. National preemption was the principal declared aim of many sponsors of state anti-boycott regulations. State laws gave anti-boycott supporters additional political leverage in policy debates because business interests previously opposed to congressional action now endorsed a federal statute to preempt the diverse state regulations. Diplomats facing an increasingly complicated negotiating environment also saw congressional legislation as a way out of the political thicket of domestic federalism. States had importantly and intentionally impinged on U.S. foreign policy, applying their antitrust and civil or human rights laws to international business interests in ways that altered critical Mideast foreign-policy positions and strategies.
Sanctions Against Firms Doing Business in South Africa
The most important precedent-setting case of state and local government involvement in foreign policy arose from protests against apartheid policies in South Africa. Many states and localities called upon companies to leave South Africa or, if they stayed, to conduct operations according to a set of anti-apartheid business principles (originally called the “Sullivan Principles”). These jurisdictions often established programs to divest themselves of shareholdings in enterprises that refused to take these actions, paralleling steps taken by certain religious organizations, educational institutions, and various social activist groups. Stocks held by public pension funds constituted the principal leverage behind these policies, but for most large corporations, the share-price impact proved negligible (although negative public relations effects could harm a company’s image and sales).
A more effective tool emerged with the progressive adoption of selective procurement policies, whereby state and local governments either established disadvantageous bidding procedures or simply refused to buy products or services from firms doing business in South Africa (or not abiding by accepted anti-apartheid principles). The impact of these procurement restrictions was more immediately visible to the corporate bottom-line. When the potential loss of lucrative contracts with large U.S. state or local agencies was weighed against the declining importance of business in a deteriorating South African economy, many firms opted to phase down their South African operations, although few companies publicly attributed their departure directly to public pressures.
State and local government actions preceded the approval of serious U.S. government commercial restrictions on South Africa. More than 150 U.S. states, counties, and municipalities adopted South African sanctions before the U.S. Congress passed restrictions on doing business with the apartheid-based regime. The state and local initiatives were not attempts to secure economic gains; in fact, the jurisdictions faced possible financial costs associated with their divestment or procurement restrictions. Instead, their objective was to create diplomatic pressures and impose economic costs on the South African government that would bring about the elimination of apartheid policies (and effectively overthrow the white South African government). These actions clearly ventured into the realm of U.S. foreign policy, involving critical geopolitical and security interests, including anti-communist Cold War calculations as well as access to strategic mineral resources.
Other State Government Foreign-Policy Initiatives
The South African sanctions proved a pivotal experience in shaping the outlines for how state and local governments might become involved in foreign policy issues for political purposes rather than economic gains. Numerous officials gained direct experience or witnessed the adoption of South African sanctions, setting the stage (indeed, providing a template) for subsequent efforts aimed at other foreign targets, including Burma. Various private individuals and organizations with public policy agendas also noted these developments. A broad and varied new set of governmental bodies were now “in play” as potential platforms for debate and action on foreign policy. In fact, given the great diversity among states and localities in terms of economic, political, ethnic, and regional factors, selected state and local governments can present easier targets for interest groups unable to muster sufficient political strength to secure federal policy action.
An early spin-off from the South African experience involved Northern Ireland. Drawing partly from the pattern of the “Sullivan Principles” used in South Africa, four Irish and American human-rights activists, including Nobel Peace Prize winner Sean MacBride, formulated business practices principles (the “MacBride Principles”) for companies to observe in Northern Ireland. These standards seek to eliminate discrimination against Roman Catholic workers, assuring that foreign enterprises provide fair and equal treatment for this minority. Seventeen states (including Massachusetts) and 40 municipalities have adopted provisions dealing with religious discrimination in Northern Ireland, and at least 38 companies have signed a fair-employment pledge in order to secure contracts with New York City.
More recently, states and localities have debated sanctions involving many other nations, generally focusing on charges of human rights violations, including religious discrimination or persecution. Among the targeted countries are Burma, China, Indonesia, Nigeria, Sudan, Saudi Arabia, Egypt, Pakistan, Turkey, Tibet, Cuba, North Korea, Iraq, Morocco, Laos, and Vietnam. Some cities have adopted sanctions measures, but by the end of 1998, with the exception of the Burma case examined below, these proposals had not yet passed state legislatures. The consideration of such sanctions by multiple state legislatures can complicate U.S. foreign policy, particularly at a time when the federal government’s increased use of international sanctions has come under fire. Examination of the links between past and present cases may shed some light on the potential direction and importance of future developments. The Massachusetts selective purchasing law regarding Burma offers a good point of departure for a comparative analysis.
Sanctions and Burma
Burma’s military government encountered growing world criticism during the 1990s for its suppression of democracy and widespread violations of human rights. The military regime ignored the results of a 1990 election when more than 80 percent of the Assembly’s seats were won by the National League for Democracy, headed by Aung San Suu Kyi (winner of the 1991 Nobel Peace Prize). Suu Kyi was already under house arrest at the time of the election and she, along with her supporters, have faced continual repression of their activities. A special United Nations report in 1998 detailed severe human rights violations in Burma, including arbitrary executions, torture, rape, and forced labor. Foreign investors face charges of complicity with the military regime, particularly on infrastructure projects, such as a major pipeline involving Unocal and Total. Some companies withdrew from Burma, including Atlantic Richfield, Apple, Compaq, IBM, PepsiCo, and Kodak. Other firms, both U.S. and foreign, remain, prompting social activist groups to move beyond shareholder resolutions to the promotion of economic sanctions, including proposals placed before U.S. state and local governments.
One state (Massachusetts) and more than 20 cities have adopted selective purchasing laws directed against companies that do business in Burma. The Massachusetts statute evoked particular controversy, inciting a legal challenge in U.S. courts while also prompting the EU to file a case in the WTO, charging U.S. violations of international trade rules. Both the law’s goals and the sanctions mechanism it employs are under fire as infringements on the federal government’s powers and as a serious irritant to international relations. The debate raises an array of important issues that link past and present in terms of defining and perhaps delimiting U.S. state and local involvement in foreign policy.
The legislative sponsor of the controversial law was Democratic state Representative Byron Rushing who, according to one press description, “almost single-handedly pushed a Myanmar sanctions bill through the Massachusetts legislature.” He was familiar with state foreign policy sanctions, having written rules against South Africa’s apartheid system that were imposed under the governor’s executive authority. At a 1993 press conference announcing the end of the South Africa sanctions, Rushing met with Simon Billenness, a constituent who worked for a firm specializing in socially responsible investments. Billenness reportedly used the South Africa sanctions bill, simply substituting Burma as the target country, when he urged Rushing to take action against human rights violations in Burma. Although Representative Rushing knew very little about Burma, he was soon drawn to the cause. Most state legislators also had little knowledge and received little political pressure on the Burma issue, so Rushing used his credibility from work on South Africa to gain enough support over the next two years to pass the bill into law.
The law’s official objective, as noted in a U.S. district court ruling on 4 November 1998, was “solely to sanction Myanmar for human rights violations and to change Myanmar’s domestic policies.” The court decision quotes Rushing in the bill’s legislative history as specifically identifying the policy objective as “free democratic elections in Burma.” Indeed, largely for this reason, the court held that the law was “an unconstitutional infringement on the foreign affairs power of the federal government.” The court rejected comparisons with a Baltimore statute, upheld earlier by Maryland’s high court, that withdrew investments from South Africa, arguing that the Baltimore law only modified the city’s conduct without seeking to influence other individual or private commercial activities.
The commercial effect of the Massachusetts law arose from a “restricted purchase list” covering nearly 200 companies, about three-fourths of them foreign-based, whose business dealings with Burma made them ineligible for state procurement contracts except under exceptional circumstances where there were no other comparable competitive bids. Companies such as Apple Computer, Eastman Kodak, and Hewlett-Packard reportedly cited the law’s passage in their decision to pull out of Burma.” Corresponding pressure came from cities that adopted similar selective purchasing sanctions, including New York City; Ann Arbor, Michigan; Madison, Wisconsin; and Berkeley, Oakland, and Santa Monica, California. A San Francisco restriction reportedly resulted in Motorola gaining a $40 million telecommunications contract over rival Ericcson, because the latter firm maintained a $3 million contract in Burma.
The National Foreign Trade Council, whose membership includes both U.S. and foreign-based enterprises, brought the legal suit against Massachusetts, claiming that its member firms were harmed by the state’s actions. The suit argued that the law unconstitutionally infringed on the federal government’s foreign affairs powers, burdened international trade in violation of the foreign commerce clause, and was preempted by a federal statute and executive order dealing with sanctions on Burma. The district court chose not to rule on the foreign commerce clause arguments because the plaintiff won on the infringement of foreign affairs powers claim. The decision did reject the preemption claim, however, finding insufficient grounds to infer such a congressional intent. The U.S. government had placed restrictions on Burma in 1988 for that country’s failure to cooperate with international anti-narcotics efforts. In 1997, Congress extended the grounds for sanctions to include Burma’s repression of a democratic opposition, leading to a prohibition on new U.S. investment in Burma as well as restrictions on government assistance, travel, and arms sales. There was no explicit preemption of state and local sanctions, however. On 22 June 1999, a federal appeals court upheld the district court ruling, going farther in its decision by finding the state’s law unconstitutional under the foreign commerce clause and reversing the district court’s finding on preemption, deciding that federal actions did preempt state actions on this issue.
The WTO case stems from EU claims that the Massachusetts law violates an international trade agreement on government procurement policies that was extended during the recent “Uruguay Round” of trade negotiations to cover certain U.S. states for the first time. During the negotiations, the U.S. trade representative (USTR) tried to secure voluntary adherence by states and major city governments, fearing that their exclusion would lead other (particularly non-federal) nations to resist the agreement as unfair. In the end, 37 states (including Massachusetts) and seven large municipalities agreed to be covered by the accord, which pledges nondiscriminatory treatment for foreign enterprises in bidding on state or local public procurement contracts. This negotiating process proved controversial domestically, and the general absence of state legislative approval for the governors’ adherence letters raises questions about the pact’s enforceable coverage. Nevertheless, the EU, with support from the Association of the South East Asian nations (ASEAN) and Japan, views the WTO accord as binding the United States for Massachusetts’ compliance, which the Burma sanctions law is alleged to violate.
This trade dispute led to an unusual meeting in a conference room near Representative Rushing’s office in the Massachusetts’ State House in Boston. According to news reports, a senior EU official was joined by British diplomats from both Washington, D.C., and Boston in an effort to convince Rushing to amend his bill. A U.S. State Department official was also present to “monitor” the meeting. Rushing reportedly offered to revise the law to bring it into WTO compliance if the EU would strengthen its own sanctions on Burma, but this type of negotiation proved unacceptable as well as unusual. The U.S. government is thus left with the politically uncomfortable choice of whether to defend the Massachusetts law, which it opposes, in the WTO proceedings. If the EU complaint is affirmed, the U.S. government must decide whether to seek repeal of the state law in U.S. courts or to see the EU levy authorized trade sanctions against U.S. exports.
Although two courts have now ruled against the Massachusetts law, the state may still appeal the case, and the broader issue is far from resolved. Attempting to foreclose state and local foreign policy actions through court challenges is a complicated and time-consuming process that yields unpredictable and often unsatisfying results. Avenues for lengthy legal appeals are open, and nearly a half dozen other states and more municipalities have been considering their own Burma sanctions. These regulations might be formulated to avoid using approaches that are most constitutionally dubious, causing enough ensuing conflict and confusion to affect foreign policy outcomes. Indeed, Massachusetts’ cited goal of changing Myanmar’s domestic policies may be advanced more effectively through altering the political dynamics of U.S. foreign policy, as was accomplished in the Arab boycott case, than through the law’s direct impact on commercial activities in Burma.
Several observers have noted that Rushing may be taking aim at Washington, D.C., as much as at Rangoon. In 1991, Congress ignored a resolution that he had sponsored, passed by the Massachusetts legislature, urging Congress to take action to help democracy in Haiti. Dissatisfied with this traditional method of expressing disapproval, Rushing opted for state legislative sanctions on Burma that could actually affect companies doing business there, thereby perhaps reaching Burma’s government. However, he also is quoted as saying: “We’re doing this to get Burma on the foreign-policy screen.” “That’s why we’re passing selective purchase bills, because that gets (State’s) attention.” There can be little doubt that the Massachusetts law generated attention and activity around human rights violations in Burma, as well as foreign policymaking and management in the U.S. federal system. Even as the federal appeals court ruled the law unconstitutional, the judges’ decision concluded: “The passage of the Massachusetts Burma law has resulted in significant attention being brought to the Burmese government’s human rights record. Indeed, it may be that the Massachusetts law was a catalyst for federal sanctions.” Whether further action may yet result is an open question.
Sanctions and Swiss Banks
Local and state finance officers played a central role in bringing about a $1.25 billion settlement of claims by Jewish victims of the Holocaust against several Swiss banks. Following World War II, Jewish survivors and the heirs of those who died in Nazi extermination camps often faced difficulty proving ownership to valuables that had been deposited in Swiss banks. The issue achieved notoriety several years ago following widespread publicity, including U.S. congressional hearings, about wartime dealings between Swiss banks and Nazi Germany. Renewed attention focused on the unresolved claims when Jewish groups backed an effort in the United States to bring a class action suit against Swiss banks. Settlement talks stalemated, however, until a coalition of local and state officials threatened to implement a phased-in schedule of sanctions, first on the banks and eventually against other Swiss enterprises.
The coalition was assembled by New York City’s comptroller, Alan Hevesi, who, during a two-year period, organized a network of nearly 900 members, drawn primarily from city and state treasurers and pension-fund controllers. These officials use private banks to help invest funds in capital markets, comprising a significant customer base for investment banks, including the U.S. affiliates of Swiss institutions. New York City alone paid $31 million in investment fees during 1997 to Swiss banks, while the city’s retirement systems held over $136 million in shares in two of the targeted banks. Under the coalition’s announced schedule of spiraling sanctions, members would stop placing overnight deposits in Swiss banks in September 1998; prohibit new pension fund money-management contracts with, and trading through, Swiss banks in mid-November; cancel existing fund-management contracts with Swiss banks and seek legislation to exclude Swiss companies from state procurement bids in January 1999; and sell all Swi ss company stocks held by public pension funds by mid-1999.
State officials also threatened during the negotiations to pull other regulatory levers. Union Bank of Switzerland (UBS) and Swiss Bank Corporation (SBC) were undertaking a merger to form Europe’s biggest bank. However, the New York state banking department informed the U.S. Federal Reserve that the banks’ conduct regarding the Holocaust victims’ claims “raised regulatory questions about the ‘character and fitness’ of the banks to conduct business in the U.S.” The Swiss banks required a license to operate in New York’s financial center, and a delay in the merger could cost the banks nearly SFr300 million a month. New York’s regulators relented and allowed the merger to proceed after receiving assurances through a U.S. government official that the banks were willing to increase their settlement offer.
The U.S. government’s unusual involvement in this private legal case was led by Deputy Secretary of State Stuart Eizenstat (who was also a principal negotiator on other sanctions issues, including the conflict with trading partners over the Helms-Burton restrictions on Cuba and penalties against companies investing in the development of Iran’s oil reserves). Federal concerns included both the treatment of Holocaust victims, many of whom are now U.S. citizens, and broader diplomatic relations with Switzerland, where both political and commercial interests were at stake. Switzerland’s president; Flavio Cotti, even wrote a personal letter to President Bill Clinton, asking him to intervene in the dispute against the sanctions.
Swiss representatives argued that state and local sanctions infringed on the U.S. government’s constitutional responsibility for foreign policy. The U.S. Department of State also opposed the threat of sanctions. In congressional testimony, Eizenstat claimed that local and state sanctions “…will complicate (the federal government’s) ability to develop a healing and reconciliation process, hurt U.S. as well as Swiss economic interests, and increase strains in U.S.-Swiss relations.” Eizenstat attempted to mediate between the two sides, achieving a delay in the sanctions and the withdrawal of state objections to the bank merger. He even shuttled between adjoining rooms during one negotiating session to propose a range for a compromise financial settlement, but talks broke down when the banks responded to pressure for a higher amount with a “final” offer of roughly $600 million that disappointed the Jewish groups and sparked a new deadline for implementing the sanctions.
A federal district-court judge served as a key facilitator in the final agreement. Judge Edward Korman reportedly did not believe that the dispute belonged in his court; instead, he wanted it settled among the parties themselves. Court involvement may also have made the settlement more politically palatable in Switzerland than an agreement perceived to respond only to the threat of state and local government sanctions. At the judge’s invitation, the two sides offered informal presentations of their arguments and evidence over dinner at a steak house, after which the judge suggested the basic outline for a final settlement. Along with the $1.25 billion figure, the parties also agreed that the out-of-court agreement would cover the Swiss government’s obligations, even though the monies came entirely from Credit Suisse and UBS (now merged with SBC).
Although this case involves many different actors and pressures, a clear consensus emerged that the threat of local and state government sanctions played the critical role in achieving a settlement. The Wall Street Journal reported: “In the end, it was the threat of sanctions by state and local governments across the U.S. that forced the major Swiss banks to make an acceptable offer in connection with Holocaust-related dormant accounts dating back 60 years or more.” The Washington Post concurred, stating that “sources familiar with the negotiations said, the threat of substantial revenue loss if sanctions were applied widely was a major factor in inducing the banks to settle.” The Financial Times concluded that: “The clearest lesson from the Swiss banks’ $1.25bn settlement with holocaust survivors is this: threatening to impose sanctions can work.”
Comparing the Cases
Continuity and Modifications of Burma Sanctions
Viewed against the backdrop of previous cases, recent state and local sanctions directed at Burma display a general pattern of continuity, modified by a few adaptations. The clearest thread links the rationale, methodology, and personnel involved in Burma sanctions with prior actions against apartheid policies in South Africa. This correlation is not surprising given the ground-breaking nature of the South Africa case, as well as the extent of state and local involvements and their perceived success. Massachusetts’ action on Burma originated at a press conference celebrating removal of the sanctions against South Africa, and was propelled by a state legislator imbued with credibility from that action who duplicated the same statutory approach. Although not quite as thoroughly linked, local government sanctions on Burma also generally build on the base of previous activism in the South Africa movement.
The objectives sought by Burma sanctions also parallel the South Africa case in at least two respects. One goal, acknowledged politically but not expressly pronounced in legal instruments, is to raise the issue’s profile and increase the pressure for further action by the federal government. A second objective seeks to bring about a change of government in the targeted foreign nation. Although the official aim is directed more at effecting a change in policy (apartheid, repression of democracy, and abuse of human rights), in both cases, the prevailing foreign government’s power is so inextricably tied to the offensive policy that changing the policy effectively means ousting that government. A distinction between the cases is that two methods were used to undermine apartheid policy. Some state and local actions pressed for the withdrawal of corporate investments from South Africa while others focused on promoting anti-apartheid operating standards for corporations that remained in that country. In the case o f Burma, the focus has been on the former rather than on the latter method of effecting change.
Another similarity emerges in the legal arguments used to challenge state and local actions. Opponents generally claimed an infringement on exclusive federal powers to conduct foreign relations; a violation of the foreign commerce clause; and/or a clash with preemptive national policy. The court challenge to Massachusetts’ Burma sanctions was mounted more quickly, and with greater early success, than the more numerous and varied South Africa actions. One possible explanation for this dissimilarity is that Burma sanctions have far fewer active, organized, and influential domestic supporters than did the anti-apartheid forces. Another difference was noted explicitly in the initial court decision on the Massachusetts law when the ruling compared it with a Baltimore divestment statute on South Africa that had been upheld by Maryland’s high court. The district-court judge concluded that the Baltimore statute sought only to alter the city’s investment conduct, whereas Massachusetts’ law “was enacted solely to sanc tion Myanmar for human rights violations and to change Myanmar’s domestic policies.”
Despite the rulings against the Massachusetts law and the swirling constitutional debate over state and local sanctions in general, courts are unlikely to render comprehensive, conclusive decisions that would bring this debate to an end. Courts have proven reluctant to establish new limits on state economic policy prerogatives, absent explicit congressional mandates, even where serious claims are made regarding detrimental foreign relations impacts. The long record of unsuccessful legal challenges to state unitary taxation powers reflects this reluctance. It is possible that courts will define some outer boundaries beyond which state and local governments may not step, as they did in ruling against an Oakland ordinance that would have prevented U.S. Navy nuclear ships from entering the city’s ports, or the attempted refusal of some governors to deploy their National Guard units for training exercises abroad. However, the increasing number of policy and regulatory levers available to state and local auth orities, and the nearly infinite potential variations in their specific legal formulation, argue against an expectation that court decisions will generate a point of finality to state sanctions as a whole, as opposed to evaluations of specific statutes.
For example, should the appeals court decision stand as the final ruling on Massachusetts’ Burma sanctions law, the legislature could pass a different variation, perhaps refocusing the law’s stated intent and/or shifting from selective procurement to disinvestment or other regulatory levers. Although legal scholars will surely continue to examine and argue the finer points of constitutional law on this issue for years to come, the real battlefield will lie in the political minefields of congressional legislation. The Congress could provide the courts with clear statements of preemption, but Congress is often slower to act than individual state legislatures or city councils-which is one of the factors that makes state and local bodies an attractive way to call attention to an issue and, indeed, to increase the pressure for federal action.
The core issue arises from the intermixing of domestic and foreign interests, leading to an overlapping of the federal government’s foreign relations authority with traditional and legitimate state powers. The latter will not easily give way to the former until such time as the American public, through its congressional representatives, is ready to conclude that foreign policy interests consistently outweigh domestic policy concerns. Particularly in the absence of a Cold War-type threat, this type of judgment does not appear visible in the near term.
An important variation in the Burma controversy comes from the recent approval of a WTO accord on government procurement that covers states and cities that voluntarily subscribed to it. Should a WTO panel find against the Massachusetts law, the U.S. government must decide whether to seek the law’s repeal, accept retaliatory trade actions against U.S. exports, or negotiate some other form of compensation. Developments in this case could have serious consequences for domestic support of future international trade agreements, including the approach used to secure voluntary state endorsement of the procurement code. Representative Rushing has already warned that “it will be far more difficult for states to buy into future negotiations on trade and investment treaties” if WTO action leads to an attempted repeal of the Massachusetts law. The Massachusetts congressional delegation sent letters to the EU and Japan, warning against pressing the WTO case, with Congressman Barney Frank suggesting that U.S. defense expenditures in those regions might even be cut to offset any trade compensation secured under an adverse WTO ruling. Congressman Bernard Sanders of Vermont reflected the broader political clash between domestic and foreign policy interests when he said: “The American people in their cities and their towns and their states have the right to make decisions which affect their own best interests and have the right not to be overridden by a secretive trade organization in Geneva.”
A more immediate consequence of the WTO accord was the visit made by foreign government officials to Rushing, with a State Department representative present. This type of direct contact (federal officials would resist calling it a negotiation) is quite unusual, although not unprecedented. The debate over state unitary-taxation laws led European government representatives, particularly British parliamentarians, to visit state capitals for discussions aimed at promoting a revision or repeal of state laws. The Massachusetts visit therefore offers renewed evidence that foreign governments, recognizing the U.S. government’s political difficulty in addressing foreign policy conflicts that involve significant federalism issues, may find it practically advisable (if not diplomatically desirable) to deal directly with state or local officials when their respective policies collide in areas of overlapping interests.
Some Novel Departures on Swiss Banks
The Swiss-bank case exhibits fewer similarities than Burma sanctions with past state and local government actions. Several novel aspects mark at least a distinct evolution, if not a fresh departure, down a new avenue of potential foreign policy influence. The principal differences stem from the actors who are driving the initiative, the targets of the action, the policy tools employed, and the nature of the successful outcome.
Similar to some past cases, private interest-group activity spurred the involvement of state and local government officials. Israel Singer, secretary-general of the World Jewish Congress, reportedly said that he initiated the involvement of Alan Hevesi, New York City’s comptroller, because “I don’t want to be shooting blanks” when negotiating with the Swiss banks. More novel was the fact that state and local leadership came from heads of financial departments or agencies rather than from a governor, mayor, or legislative representative. A group of treasurers and pension-fund controllers generally set policy in this case without explicit instruction from legislative directives or chief executive mandates. Hevesi put together a loose coalition of officials from around the country rather than using an established interstate organization to address the issue. The composite membership of both state and local government officials also represented a more cooperative effort than is reflected in many existing institutions and activities.
The primary objective in this case was to promote a faster and larger financial settlement for Jewish claimants than was likely to occur otherwise. The principal targets were private financial enterprises, although the Swiss national bank was both involved in the allegations and covered by the settlement. The U.S. government was not a principal target in terms of policy or action, although increased diplomatic pressure was viewed as helpful to the claimants, and congressional hearings served to raise the issue’s profile. The foreign government involved was unusual for a sanctions case in that it was a friendly, fully democratic nation (as opposed to the apartheid-era South Africa or the military regime in Burma). The closest parallel might be advocacy of the MacBride principles in Northern Ireland, which also principally targets corporate actions rather than government policy. Because the final objective involved a numerical, monetary settlement from the banks, the potential for compromise was also perhaps greater than in cases having goals that are less quantifiable or more political.
State and local authorities brandished an unusually wide assortment of policy tools to press their position in this case. Most immediately, the financial officers would have stopped placing deposits in Swiss banks and then terminated money-management contracts with those institutions. A merger between two of the banks faced potential delay and financial costs from obstacles raised during antitrust reviews and approvals of financial business licenses. Plans were laid to seek legislative approval for selective procurement sanctions against Swiss companies in general. A follow-on action envisioned divesting public pension funds of all their Swiss company stock. These actions combine lessons drawn from past experiences, particularly with financial sanctions on South Africa and regulatory levers used in the Arab boycott case. However, with the Swiss banks, all these steps were marshaled for maximum impact at the beginning of the case, including a concerted plan of action for staged implementation according to an announced timetable.
The nature of the outcome also exhibits some unusual features. Embodied in the plan for a graduated schedule of increasingly broad sanctions is a clear emphasis on threat rather than punishment to affect outcomes. Because negotiations between the opposing parties were underway, the situation was already more fluid than in cases where an intransigent foreign actor must be convinced first to admit that something is wrong before corrective action can be agreed upon. These circumstances led state and local officials to play a more active and dynamic role in negotiations with the banks, altering deadlines and alternatively threatening or foregoing the use of regulatory sanctions as progress in the talks ebbed and flowed. Such flexible intervention was aided by two factors: the behavior was more easily variable as threats rather than actions taken, and the officials possessed significant discretionary authority over certain sanctions (rather than being dependent solely on policies requiring cumbersome, time-consuming approval processes to institute or remove).
Finally, the Swiss-bank case is being judged retrospectively as a clear success story for state and local government action, perhaps even more so than with South Africa because the causal linkages point more clearly to those actions as decisive influences. In its article headlined “When sanctions work,” the Financial Times reported that: “Every important breakthrough in the negotiations came soon after threats from US local government officials to impose sanctions.” The article noted that the final settlement came two weeks before sanctions were to begin, and one week after a published report by Moody’s rating agency said that the imposition of sanctions might cost UBS its triple-A credit rating. This assessment contrasts with warnings against such interventions, issued by both the U.S. and Swiss federal governments. In the aftermath of the settlement, however, there has been little vocal criticism of the state and local actions.
The potential significance of this case was underscored early in 1999, when similar pressures mounted on Germany to compensate workers enslaved by the Nazi regime during World War II. The German government announced on 16 February 1999 that a dozen large enterprises would contribute to a fund reportedly expected to reach at least $2 billion. Participating firms included Siemens, Bayer, Hoechst, BASF, Allianz, BMW, Daimler-Chrysler, and Volkswagen. Deutsche Bank’s Chairman, Rolf Breuer, reportedly led a push for the fund after the bank’s proposed $10.1 billion purchase of Bankers Trust in the United States appeared threatened with state and local regulatory objections similar to those posed in the Swissbank case. New York City Comptroller Alan Hevesi again played a pivotal role by indicating that a final agreement was necessary before required regulatory approvals would be granted. When negotiations continued into July, Hevesi suggested that sanctions might be necessary and planned for a meeting in Septe mber with other state and city financial officials and pension-fund controllers. Hevesi wrote to both Rolf Breuer and German Chancellor Gerhard Schroeder, urging a speedier resolution to the talks. In fact, Hevesi expressed his disappointment that a German cabinet minister, who had led the negotiations, was being shifted to new responsibilities overseeing German policy in the Balkans.
Implications for Theory and Practice
Examined against the backdrop of past cases, the two recent instances of state and local foreign policy sanctions present an opportunity to explore some posited federalism concepts as well as suggestions for improving intergovernmental cooperation on these types of issues. In a broad context, recent events carry forward the evolution of state and local government involvement in foreign policy that traces its contemporary origins back to the early 1970s. The stimulus for this development clearly lies with the growth of international economic interdependence that increased state and local government interest in global events while bringing increasingly integrated domestic and foreign business activities within the reach of traditional state and local powers. Several works have recorded nationally nuanced but still similar developments in various federal systems. A good summary of this generalized phenomenon appears in Brian Hocking’s 1993 book Localizing Foreign Policy.
Two related changes in the way that foreign relations are viewed are involved here. First, that foreign policy is not a distinct issue area: it is about ‘something’ and that ‘something’ has come to embrace an increasingly large number of issues once assumed to be the preserve of domestic politics. Second, international politics is no longer (if it ever was) a discrete level of political activity but one which increasingly touches national and local political arenas, producing a complex web of interactions which has rendered the claims of central governments to exclusive control of foreign relations increasingly hollow.
The sweep of these activities in the United States is well portrayed in Earl Fry’s new book for the Council on Foreign Relations, The Expanding Role of State and Local Governments in U.S. Foreign Affairs.
As these changes were recognized, state and local governments drew increasing attention from domestic and foreign interest groups as well as from occasional contacts with foreign governments. The twin results engender debate about the appropriate role for state and local governments with relation to foreign policy issues, both as a representative of their constituencies and as direct, rather than indirect, players in the game of international diplomacy. These two notions are captured in the concepts of constituent diplomacy, particularly as applied by John Kincaid to state and local government involvement in foreign policy, and the notion of multilayered diplomacy suggested by Brian Hocking.
The specter of state and local governments engaging in constituent diplomacy on foreign policy issues evokes vigorous debate, with contrasting views seeing the development either as a positive, democratic opening-up of an elitist foreign policy establishment or as a dangerous slide into the chaos of a nation speaking with competing and contradictory voices in international forums. Defenders of the federal government’s exclusive foreign-affairs jurisdiction rely heavily on constitutional arguments, coupled with the imagery of 51 secretaries of state (or actually, many more if multiple state representatives and even more numerous local officials are included). By contrast, particularly in a post-Cold War world, Kincaid sees the idea that politics must stop at the water’s edge as potentially anti-democratic and particularly costly to public participation.
Further refinement of this argument might be advanced through a careful assessment of the cases involving state and local foreign policy sanctions. One important issue would be to identify who is participating more through constituent diplomacy, assessing the representativeness of the resulting state or local government action. Michael Clough suggests that ethnic concentrations in certain U.S. geographic regions might lead to a “balkanization” of foreign policy where particular communities and groups exert inordinate control over certain issues and policies. Of course, such interest-group influence can and does occur in federal government forums as well. The cases described above suggest that relatively small interest groups and even individuals can wield extraordinary influence in settings where few local or state officials are well informed on an issue and where there is little early evidence of counter-pressures. However, truly effective sanctions generally require coordinated or similar actions by multiple large state and/or local governments, lessening the risk that small interest groups can “capture” national policy through such mechanisms.
In discussing the concept of multilayered diplomacy, Hocking describes adding an international dimension to the characteristic internal diplomacy that takes place among government units in a federal polity. As domestic and foreign interests intermingle, resources can be mobilized to influence actions in local, national, and international arenas. When the resulting diplomatic actions span national and international arenas, there emerges “the continuing process of determining the appropriate role and responsibilities of governments in a political environment marked by boundary fluidity and issue complexity.” Under this conception, there is not a hierarchy of exclusive policy areas running from subnational up to international, but rather “a complex diplomatic milieu” that reflects a changing cast of players whose interaction varies depending on issues, interests, and capabilities to influence outcomes. Perhaps even more than their predecessor cases, the Burma and Swiss-bank sanctions appear to reflect the type of “multilayered lobbying” referred to by Hocking. Domestic and foreign, public and private actors employ a variety of approaches and techniques in attempts to influence relevant policymakers in various forums, but with state and local governments playing an integral role.
Some greater order might be brought to this process by imposing boundaries on permissible state and local actions, as suggested by Earl Fry. His recommendations support state and local governments using both hortatory resolutions to condemn U.S. policy or foreign government actions and more active lobbying efforts that seek to alter U.S. policy. However, he draws the line at using state and local authority that directly contradicts U.S. policy, calling it “far too dangerous.” His recommended solution is passage of preemptive congressional legislation that expressly prohibits actions such as the Burma and Swiss-bank sanctions.
A reliance on clear policy contradictions, however, faces practical constraints in implementation. An immediate impediment is determining just what is U.S. policy. For example, in the Swiss-bank case, differences existed not only on policy goals but also on the tactics employed by government officials. Does the pronouncement of a State Department official constitute U.S. policy that should prohibit even the threat of state and local sanctions? The standard of embodying U.S. policy in an express congressional prohibition of state and local action, signed by the president, would leave little doubt (nor much room for constitutional debate in the courts). However, the time-consuming challenge of successfully passing a preemption law each time a new incident occurs almost guarantees that such a policy standard will not be achieved until well into the unfolding of a new case, after significant political impacts and diplomatic effects have already occurred. Congress recently approved certain sanctions on Burma, but did not explicitly preempt state and local sanctions activity (as was observed in the district-court ruling). Past cases, including South Africa and the Arab boycott, offer additional evidence of how long it takes for Congress to act. In fact, it was the spread of state and local sanctions in these cases that helped impel congressional action.
Even if a timely preemption of state and local actions were possible in cases that involve a clear contradiction of federal policy, there would still exist a broad range of issues susceptible to possible state and local sanctions where U.S. policy is not yet well developed. Often it is the absence of a clearly elaborated national policy that leads to state and local activity, as was true with South Africa, the Arab boycott, and most recently an effort in Maryland to impose sanctions on business with Nigeria because, according to one legislator, “there is a lack of leadership at the federal level on this issue. Maryland is trying to fill the vacuum.”
Rather than seeking clear demarcations of exclusive authorities through the Congress or the courts, practical political realities point more toward efforts to improve cooperation and coordination in managing the growth of “constituent diplomacy” in a “multilayered milieu.” Although many federal foreign-policy officials and their supporters vigorously defend the principle of federal exclusivity in foreign affairs, some recent statements strike a different and more cooperative tone. Secretary of State Madeleine Aibright reportedly “said that she and President Clinton recognized state and local officials’ authority ‘to determine their own investment and procurement policies, and the right-indeed their responsibility-to take moral considerations into account as they do so.”‘ In testimony on the proposed Nigerian sanctions bill before a Maryland legislative committee, Deputy Assistant Secretary of State David Marchick opposed certain provisions of the bill, but said: “My main message today is one of partners hip–an offer to work closely with you to respond to egregious threats to our national security, our interest in enhancing human rights, or in promoting other of our national…. Our aim is not to try to halt state actions–rather, we would like to work with you to encourage the judicious and appropriate use of sanctions.”
The State Department testimony cited consultations with various interstate organizations, including the National Governors’ Association, the National Association of State Attorneys General, the National Conference of State Legislatures, and the National Association of State Procurement Officers. These groups can facilitate contacts, provide information, and sponsor discussion on relevant foreign policy issues. In practice, however, such topics do not constitute a central concern for these organizations which, in any event, cannot constrain the actions of their individual members. In the most recent cases, ad hoc networks among state and local officials have proven more instrumental in guiding their activity, while established organizations have generally gone no farther than discussing the Burma issue at meetings.
One suggestion to improve intergovernmental cooperation and consultation on foreign policy issues is to create a specific body that includes influential federal, state, and some local officials, backed by devoted support from state and national offices of intergovernmental and international affairs. Taking a somewhat different perspective, Kincaid has cautioned against trying to impose too “rational” a public administration approach to state and local involvement in foreign affairs when this activity is so new, diverse, and dynamic. Rather than creating a new organizational structure or seeking tightly demarcated policy regulations, he suggests using a variety of coordination mechanisms while developing “soft law” rules of the game. The objective is to avoid clashes over the application of “hard law” regulations that force federalism players into conflictual zero-sum solutions.
This concept accords with Hocking’s view that federal systems are “an amalgam of constitutional norms, judicial interpretation and pragmatic political considerations. Taken together, this can produce an uncertain context within which the whole issue of foreign policy localization is debated.” Given the fluidity of change in this area, he appears to favor the type of “informal norms of behavior” that other federal systems have developed to help them manage such issues. Perhaps U.S. federalism could gain some insights by studying these evolved adaptations in other countries.
Conclusion
Foreign policy sanctions are a specialized subset of broader state and local government involvement in the international arena. They are, however, among the most unusual and contentious instances where state and local authority confronts and intrudes upon the foreign relations domain long held sacrosanct by the federal government. By blurring historical policy lines between foreign and domestic, political and economic, the forces of global interdependence have enabled state and local governments to use domestic economic and fiscal levers to advance political goals in foreign affairs.
The complex political issues raised by this development will not be resolved quickly or easily. Students of federalism will find ample opportunity over the coming decade to test old precepts and devise new concepts that could enhance our understanding of these changes and perhaps aid policymakers who search for practical improvements to the management of foreign policy in federal political systems. Such study should be broad enough to learn from the experience of other federal systems while incorporating an equally broad array of domestic interests and activities. Improved foreign policy management in this milieu is more likely to arise from practiced patterns of cooperative involvement than from the assertion of constitutional constraints or the premature institutionalization of intergovernmental consultations. The unique benefits of a federal political system emerge most fully when each governmental unit can contribute its own special insights and input to a dynamically interactive process that is federalism at work.