Sanctions at Bay? Hegemonic Decline, Multinational Corporations, and U.S. Economic Sanctions since the Pipeline Case¶

Literature › Works

Kenneth A. Rodman (1995). Sanctions at Bay? Hegemonic Decline, Multinational Corporations, and U.S. Economic Sanctions since the Pipeline Case. International Organization 49(1). MIT Press / IO Foundation (Cambridge University Press).


Type	journal article
Scope	Wider apartheid literature
Method	mixed
Period studied	1982–1990
Regions	United States, South Africa, Nicaragua, Libya
Themes	sanctions divestment, macro fiscal finance debt, business and state, comparative theory, politics ideology elections
Citation key	`rodman1995`

Argument¶

Rodman tests the 'hegemonic decline' thesis that the spread of US multinationals and the erosion of US hegemony have left the government unable to enlist firms in economic sanctions. Using three post-pipeline cases (Nicaragua, Libya and congressional sanctions on South Africa), he finds that the state could not command overseas affiliates, because extraterritorial controls were not applied. Yet firms complied far more than the model predicts, because US hostility, the anti-apartheid movement and shareholder and municipal pressure raised their perceived external and internal risk. For South Africa, he argues that the 1985 bank credit cutoff, capital flight and divestment resulted from market pressure amplified by Congress, state and local governments and activists, not from direct legal compulsion. He also shows the limits of inducement strategies: banks rescheduled debt, and divesting firms kept licensing and trade ties.

Evidence and method¶

Secondary literature on sanctions and MNCs, US congressional hearings, GAO and State Department reports, IRRC and Business International publications, press and trade journals, Freedom of Information Act documents, and telephone and personal interviews (1988) with bank, oil company, Treasury and State officials.

Place in the debates¶

Hegemonic decline and the governability of MNCs (can the US state enlist multinationals in sanctions?) (see Sanctions, disinvestment and the anti-apartheid movement). Partially confirms the hegemonic decline model: the state cannot command affiliates. Argues the model overstates corporate autonomy, since the state can shape firms' perceptions of risk and induce compliance.
Sanctions effectiveness against South Africa / constructive engagement vs. sanctions (see Sanctions, disinvestment and the anti-apartheid movement). Treats the CAAA as leaky in law, but argues that the credit cutoff, disinvestment and the cost of sanctions (market pressures amplified by Congress and activists) did weaken South African creditworthiness. Constructive engagement and the 1982 IMF loan had earlier encouraged lending.
Effects of corporate disinvestment on apartheid (see Sanctions, disinvestment and the anti-apartheid movement). Argues disinvestment often imposed little cost on white South Africans, because firms sold to local management and kept licensing ties, and it reduced social accountability.

Findings¶

The 1986 CAAA lacked extraterritorial reach, so loopholes allowed US firms to route investment through foreign affiliates. (p. 24)

Since the CAAA lacked an extraterritorial reach, the United States could not prevent the overseas operations of its corporations and banks from channeling new investments into South Africa through affiliates in nonboycotting countries.
US banks' mid-1985 withdrawal of short-term credit cut South Africa off from world capital markets. (p. 25)

after mid-1985, South Africa virtually was cut off from world capital markets after a decision by a number of prominent U.S. banks to call in their short-term loans as they came due and freeze unused lines of credit.
The September 1985 exchange controls and debt moratorium placed about $14 billion in a standstill net. (p. 25)

South Africa imposed exchange controls and declared a unilateral moratorium on the repayment of its short-term debts to private creditors, placing roughly $14 billion in a standstill net.
Over two hundred American firms disinvested after the 1984 violence, even before the sanctions. (p. 25)

The most visible example of this was the disinvestment of over two hundred American firms after the eruption of political violence in 1984.
Banks' initial enthusiasm built an unstable debt structure: South African debt doubled in 1982-85. (p. 26)

$24 billion from 1982 to 1985, with $14 billion due in the next twelve months.
Anti-apartheid groups pressed firms through 124 state and local ordinances tying municipal contracts to withdrawal. (p. 26)

they persuaded 124 state and local governments in the United States to pass ordinances that conditioned municipal contracts on various forms of corporate withdrawal from South Africa.
US and other sanctions since 1985 imposed a quantified annual cost on the South African economy. (p. 27)

One study calculated that the sanctions imposed by the United States and others since 1985 cost the South African economy $550 million per year.
Banks' self-interest led them to reschedule: most American bank debt was converted into longer-term loans outside the standstill net. (p. 27)

roughly 70 percent of the $2.4 billion owed by American banks was converted through this device.
Divestment often imposed few costs on South Africa because departing firms sold to local managers and retained licensing ties. (p. 28)

Almost all the departing U.S. firms sold their local operations to their South African management or to third parties, maintaining an ongoing licensing relationship to provide services, technology, and trademark rights to the former affiliates.
South Africa was a minor share of most US firms' and banks' exposure, making them more responsive to political pressure. (p. 32)

South Africa represented between 1 and 2 percent of the assets and sales of most American investors and 0.5 percent of the exposure of the major U.S. banks.
The decisive factor in the South African case was the anti-apartheid movement's direct pressure on corporations. (p. 33)

What made the difference in South Africa was the role of the anti-apartheid movement.
Central conclusion: the state cannot command MNCs but can shape their risk calculations. (p. 30)

The United States may lack the hegemonic clout to make others comply with its preferences. It can, however, influence the calculations of U.S. investors and lenders by imposing costs through sanctions or other means and by creating an environment of uncertainty.

Evidence ledger¶

Sources used¶

Source	Kind	Period	How used
Author's telephone and personal interviews with bank officials, Richard Weinert, IBM, Conoco, W.R. Grace, Treasury OFAC and State Department officials (1988)	interviews oral history	June-August 1988	Establishes bank and corporate motives in the Nicaragua debt restructurings and voluntary corporate enforcement of the Libya sanctions.
Interview with Robert Bonczak, general counsel, Conoco (6 July 1988) and interviews with Treasury OFAC officials	interviews oral history	1988	Supports the claim that diversified firms voluntarily complied with the Libya sanctions to preserve good relations with Treasury and State.
Freedom of Information Act documents: Quainton telegram 4720 (20 Oct 1982) and Shultz memorandum 'Libyan Trade Sanctions' (3 Jan 1986)	state archives	1982-1986	Shows bank officials' reasons for rescheduling Nicaraguan debt and the administration's decision not to apply Libya sanctions extraterritorially.
U.S. Congress, House Committee on Foreign Affairs hearings (Export Administration Act 1983; Nicaragua sanctions 1985; Anti-Apartheid Act of 1985; Senate Angola hearings 1986)	parliamentary debates	1983-1986	Provides business association positions against extraterritoriality and sanctions, plus official testimony (Motley, Cornell, Crocker).
U.S. General Accounting Office, Libyan Trade Sanctions, NSIAD-87-132BR (May 1987)	commission or official report	1986-1987	Source for the 73.6 percent decline in affiliate trade with Libya in the first year of sanctions.
U.S. General Accounting Office, South Africa: Status Report on Implementation of the Comprehensive Anti-apartheid Act, NSIAD-88-44 (Oct 1987)	commission or official report	1987	Documents the executive branch's generous interpretation of CAAA loopholes.
U.S. Department of State, Report to Congress on Industrialized Democracies' Relations with and Measures Against South Africa (12 May 1987)	commission or official report	1987	Used to describe the weaker European/EEC sanctions compared with the U.S. CAAA.
Comprehensive Anti-Apartheid Act (1986) and 1983 IMF Replenishment Act amendment; Cuban Democracy Act 1992; Export Administration Act amendments	legislation gazette	1983-1992	Defines the content and extraterritorial limits of the South Africa sanctions at issue.
Investor Responsibility Research Center (IRRC) reports (U.S. sales to South African public sector; Divestment Roundup; Withdrawal of U.S. Companies; Hauck 1987; Voorhes 1990 state and local laws)	company records or reports	1987-1990	Documents corporate sourcing, disinvestment forms, share of South Africa in firm assets, and the 124 local ordinances.
Business International publications (Critical Issues Monitor 1986; South Africa Alert 1986; A Fresh Look at South Africa 1982; Investing, Licensing and Trading Conditions Abroad 1982; MNC survey 1985)	newspapers periodicals	1981-1986	Evidence on corporate attitudes, risk perceptions, and investment behaviour in Nicaragua and South Africa.
Business Latin America and Business International surveys of MNC managers in Nicaragua	newspapers periodicals	1981-1985	Shows managers' views of Sandinista treatment and that the main problem was foreign exchange, not sanctions.
Austin and Ickis survey/case research on managers in revolutionary Nicaragua	secondary literature compilation	1980s	Evidence that managers rated the government favourably on labor disputes and that investors stayed apolitical.
Hufbauer, Schott and Elliott, Economic Sanctions Reconsidered, 2d ed. 1990	secondary literature compilation	1990	Source for the $550 million per year cost of sanctions to South Africa and for case overviews.
World Bank, World Debt Tables 1987-88, vol. 2	international trade or finance data	1987-88	Source for the size of World Bank and IDB projects authorized over U.S. objections.
U.S. Department of Commerce, Foreign Economic Trends: Nicaragua (March 1986)	official statistical series	1986	Cited for Nicaragua's payment failure and arrears figures.
Press and trade periodicals (New York Times, Wall Street Journal, Financial Times, Petroleum Economist, Middle East Economic Digest, Financial Mail, The Economist, etc.)	newspapers periodicals	1979-1994	Documents specific corporate decisions (Castle and Cooke, Exxon, Occidental, Bank of America loan, bank debt conversion, disinvestment).
Kobrin conference paper on extraterritorial enforcement of export sanctions (APSA 1988)	secondary literature compilation	1988	Supports claims on host-country resistance to extraterritoriality and Dresser's position.
U.S. Department of State Bulletin, 15 Sept 1975	commission or official report	1975	Documents the 1975 decision to exempt foreign subsidiaries from the Cuba embargo.

Inference¶

Quantification: Illustrative figures.

Qualitative comparative case study of three post-pipeline sanctions episodes (Nicaragua, Libya, South Africa) tested against a hypothesis derived from the hegemonic-decline and MNC literature, with process tracing of corporate decisions and a closing contrast with cases (pipeline, Angola, China, Cuba) where pressure failed.

Key claims¶

Claim	Basis	Strength
U.S. sanctions in all three cases lacked extraterritorial reach, so affiliates could legally route trade and investment around them. (p. 118)	Legislation and regulations, Shultz memorandum, press reports of affiliate sourcing (IBM, Xerox, Texaco, Halliburton, Dresser) and interviews.	Partial data
Despite the loopholes, U.S. oil companies voluntarily kept non-U.S. affiliates from dealing with Libya, and affiliate trade fell 73.6 percent. (p. 125)	GAO report NSIAD-87-132BR, interviews with Conoco, W.R. Grace and Treasury officials.	Partial data
Reagan administration hostility magnified corporate risk perceptions in Nicaragua, deterring lending and investment alongside structural economic causes. (p. 121)	Press reports, Business International studies, Conoco/bank interviews, Bank of America loan episode, MDB loan data.	Illustrative or anecdotal
Congressional action against South Africa contributed to the 1985 capital cutoff mainly by amplifying market and anti-apartheid pressures, notably through the IMF vote mandate and prospective sanctions. (p. 129)	Press and Business International accounts, Harris on debt, Hufbauer et al. cost estimate, IRRC and local ordinance counts.	Partial data
Banks negotiated debt rescheduling with South Africa despite sanctions, with about 70 percent of the $2.4 billion owed to American banks converted to long-term loans. (p. 130)	Financial Mail (South Africa) 13 Oct 1989, Bradlow, Leutwiler accords.	Partial data
U.S. firm disinvestment from South Africa mostly took forms (sale to local management with licensing ties) that imposed little cost on apartheid. (p. 131)	Cowell NYT article and Hauck IRRC study.	Partial data
Corporate susceptibility to political pressure depends on firm size and diversification, the strength of home versus host preferences, and domestic politics; South Africa was only 1-2 percent of most investors' assets and sales. (p. 135)	IRRC Divestment Roundup, Jentleson, comparative cases (Angola, Cuba, China, Poland).	Asserted

The author's caveats¶

The author notes that the causal role of U.S. pressure is hard to disentangle from market forces: Exxon's motives are ambiguous, whether State Department pressure killed the Bank of America loan is 'unclear', and market forces were the primary cause of Libya's problems.

Gaps in the evidence¶

The argument lacks systematic firm-level data on investment, lending and affiliate trade flows before and after sanctions that could separate political risk from market forces. Bank and corporate internal records on decision-making (loan committee files, board minutes) would test the risk-amplification mechanism better; some became accessible only later. The South Africa case rests mostly on press and advocacy-group (IRRC) material rather than Reserve Bank or BIS capital flow data, which existed then.

Replicability: Data described but not public.