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). The IO Foundation and the Massachusetts Institute of Technology.

Type	journal article
Scope	Wider apartheid literature
Method	mixed
Period studied	1981–1990
Regions	United States, South Africa, Nicaragua, Libya
Themes	sanctions divestment, macro fiscal finance debt, business and state, comparative theory, resistance social movements, politics ideology elections
Citation key	rodman1995a

Argument

Rodman tests the 'hegemonic decline' model, which holds that the decline of U.S. hegemony and the global spread of American multinationals have put overseas corporate activity beyond the reach of U.S. economic sanctions. He tests it against three post-pipeline cases: Reagan's sanctions on Nicaragua and Libya and congressional sanctions on South Africa. The model is partly confirmed: Washington could not command foreign affiliates and did not try extraterritorial controls. But MNCs and banks complied more than the model predicts, because U.S. hostility raised their perceived external risk (long-term loans and investment) and internal risk (loss of government business, shareholder and municipal pressure). For South Africa, the 1985 credit cutoff, the 1985 debt standstill, congressional anti-IMF measures and the anti-apartheid movement's pressure on firms combined with market forces to produce disengagement. Firms still chose forms of disengagement, such as licensing deals and debt rescheduling, that minimised the costs to apartheid.

Evidence and method

Secondary literature on sanctions, hegemony and MNCs; congressional hearings; U.S. GAO and State Department reports; IRRC and Business International publications; press and trade reporting (NYT, Financial Times, Economist, Financial Mail); Freedom of Information Act documents; and the author's 1988 telephone and personal interviews with bank, oil-company, Treasury and State Department officials. South African material is drawn largely from secondary sources (Harris, Ovenden and Cole, Price, Becker, Bradlow, Hufbauer et al.).

Place in the debates

• Hegemonic decline and the governability of MNCs for economic sanctions (see Sanctions, disinvestment and the anti-apartheid movement). Partly confirms the decline thesis (no extraterritorial control, no persuasion) but argues it overstates corporate autonomy, since the state can shape corporate risk perceptions and so induce voluntary compliance.
• Sanctions effectiveness against South Africa (market pressure vs. political sanctions) (see Sanctions, disinvestment and the anti-apartheid movement). Market pressures (unrest, recession, credit risk) were primary, but congressional action and subnational anti-apartheid pressure amplified them by eroding business confidence, removing the IMF safety net and imposing direct costs.
• Divestment as a tool against apartheid (see Sanctions, disinvestment and the anti-apartheid movement). Sceptical of its direct impact: departing firms sold to local managers and kept licensing ties, imposing little cost on white South Africans and reducing social accountability.
• Constructive engagement vs. tactical linkage (see Sanctions, disinvestment and the anti-apartheid movement). Describes Congress's shift from constructive engagement to linkage conditioned on reforms as a real change that altered creditor and investor expectations.

Findings

• Major U.S. banks cut South Africa off from capital markets in mid-1985, triggering capital flight. (p. 24)

  First, 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.

• Pretoria responded on 1 September 1985 with exchange controls and a debt standstill covering about $14bn. (p. 24)

  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.

• The CAAA lacked extraterritorial reach, so U.S. firms could in principle route investment through foreign affiliates. (p. 23)

  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.

• In practice firms were already retrenching and over 200 U.S. firms disinvested after the 1984 violence. (p. 24)

  The most visible example of this was the disinvestment of over two hundred American firms after the eruption of political violence in 1984.

• Subnational anti-apartheid campaigns imposed real costs on firms through municipal contract conditions. (p. 25)

  During the 1980s, 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.

• Sanctions imposed a quantifiable direct cost on the South African economy. (p. 26)

  One study calculated that the sanctions imposed by the United States and others since 1985 cost the South African economy $550 million per year.

• Bank rescheduling (Leutwiler accords) eased pressure on Pretoria and worked against sanctions. (p. 26)

  roughly 70 percent of the $2.4 billion owed by American banks was converted through this device.

• Disinvestment typically preserved commercial ties through sales to local managers plus licensing, imposing little cost on white South Africans. (p. 27)

  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 small share of U.S. firms' and banks' business, so they could comply at little cost. (p. 31)

  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.

• Direct anti-apartheid pressure on corporations, not federal lobbying, made the difference in South Africa. (p. 32)

  What made the difference in South Africa was the role of the anti-apartheid movement.

• The overall conclusion is that the state can shift corporate interests but cannot dictate them. (p. 28)

  While political actors were able to alter corporate calculations of interest, MNCs remained independent actors.

Evidence ledger

Sources used

Source	Kind	Period	How used
U.S. General Accounting Office, Libyan Trade Sanctions, report NSIAD-87-132BR (May 1987)	commission or official report	1986-1987	Establishes that trade between overseas affiliates and Libya fell 73.6 percent in the first year of sanctions despite being legally unaffected.
U.S. General Accounting Office, South Africa: Status Report on Implementation of the Comprehensive Anti-apartheid Act, NSIAD-88-44 (October 1987)	commission or official report	1986-1987	Documents the executive branch's generous interpretation of CAAA loopholes and opposition to sanctions.
Comprehensive Anti-Apartheid Act (CAAA) of 1986 and 1983 IMF Replenishment Act amendment	legislation gazette	1983-1986	Provides the content of the congressional sanctions (import/export bans, loan and investment bans, IMF vote instruction) whose effects on MNCs are assessed.
U.S. Congress House Committee on Foreign Affairs hearings: Extension and Revision of the Export Administration Act (98th Cong., 1983); The Anti-Apartheid Act of 1985 (9 May 1985); Imposition of Economic Sanctions and a Trade Embargo Against Nicaragua (7 May 1985)	parliamentary debates	1983-1985	Supplies business association positions on extraterritoriality, Treasury testimony on capital fungibility, and State Department testimony that new credits to Nicaragua would be imprudent.
U.S. Senate Committee on Foreign Relations, Angola—Options for American Foreign Policy, hearings, 18 February 1986	parliamentary debates	1986	Testimony of Chester Crocker used to show Reagan administration ambivalence about U.S. oil companies withdrawing from Angola.
Freedom of Information Act documents: Shultz to Reagan memo 'Libyan Trade Sanctions' (3 Jan 1986); Quainton to Secretary of State telegram 4720 (20 Oct 1982)	state archives	1982-1986	Show the administration's decision not to apply Libyan sanctions extraterritorially and bank officials' rationale for rescheduling Nicaraguan debt.
Author's interviews with bank, oil company, IBM, Exxon, Treasury OFAC, State Department officials and advisers (June-August 1988)	interviews oral history	1988	Supports claims on why banks and firms complied or not with U.S. preferences in Nicaragua and Libya, and that officials accepted voluntary enforcement.
Business International publications (Investing, Licensing, and Trading Conditions Abroad; Critical Issues Monitor; South Africa Alert; A Fresh Look at South Africa; Business International 1 March 1985) and Business Latin America surveys	newspapers periodicals	1981-1986	Provides surveys of corporate managers' attitudes and investment intentions toward Nicaragua and South Africa.
Investor Responsibility Research Center (IRRC) reports: Summary of U.S. Sales to the South African Public Sector (May 1988); Divestment Roundup (Feb 1987); Withdrawal of U.S. Companies from South Africa (Dec 1988); Hauck (May 1987); Voorhes, State and Local Laws (June 1990)	secondary literature compilation	1986-1990	Evidence on U.S. firms' voluntary sourcing commitments, share of assets in South Africa, post-divestment arrangements, and 124 state and local ordinances.
Hufbauer, Schott, and Elliot, Economic Sanctions Reconsidered, vol. 1 (2d ed., 1990)	secondary literature compilation	1980s	Source for sanctions chronology and the estimate that sanctions cost South Africa $550 million per year.
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	Documents that EEC measures were weaker than U.S. sanctions, limiting multilateral support.
World Bank, World Debt Tables 1987-88, vol. 2; U.S. Department of Commerce, Foreign Economic Trends: Nicaragua (March 1986)	official statistical series	1980s	Supply figures on MDB loans authorized to Nicaragua and the $4.5 billion foreign liabilities by 1985.
U.S. Department of State Bulletin, 15 September 1975	legislation gazette	1975	Documents the Ford administration's exemption of foreign subsidiaries from the Cuba embargo.
Business press and trade periodicals (New York Times, Wall Street Journal, Financial Times, Petroleum Economist, Middle East Economic Digest, The Economist, Financial Mail, Fortune, etc.)	newspapers periodicals	1979-1994	Document specific corporate decisions (Exxon's Libya exit, Castle and Cooke, bank reschedulings, 70 percent conversion of U.S. bank debt).
Keith Ovenden and Tony Cole, Apartheid and International Finance; Harris, 'South Africa's External Debt Crisis'; Bradlow, 'Debt, Development, and Human Rights'	secondary literature compilation	1982-1989	Provide figures on the 1985 debt standstill (about $14 billion), debt doubling to $24 billion, and the Leutwiler accords.

Inference

Quantification: Illustrative figures.

Comparative case study of three post-pipeline sanctions episodes (Nicaragua, Libya, South Africa) tested against a hegemonic-decline hypothesis, using process tracing on corporate and bank behavior, with a closing comparison to the pipeline, Angola, China and Cuba cases.

Key claims

Claim	Basis	Strength
In all three cases the U.S. government could not or did not exercise extraterritorial control over foreign affiliates, so MNCs could in principle circumvent sanctions. (p. 128)	Statutory scope of the Nicaraguan, Libyan and CAAA sanctions, Shultz memo, State and IRRC documents.	Partial data
Despite the loopholes, U.S. firms and banks in practice often complied voluntarily, e.g. Libyan affiliate trade fell 73.6 percent and oil companies barred non-U.S. affiliates from Libyan crude. (p. 125)	GAO Libyan sanctions report and author's interviews with firm and Treasury officials.	Partial data
In South Africa, banks cut off credit and firms disengaged mainly through market pressures and nongovernmental activism, amplified by congressional actions that eroded business confidence. (p. 129)	Business International reports, Harris and Ovenden-Cole on debt, IRRC data on municipal ordinances, press accounts.	Partial data
Corporate disinvestment from South Africa and bank rescheduling worked at cross-purposes with sanctions because firms chose forms (licensing ties, converted loans) that minimized costs to apartheid. (p. 131)	Press reports, Financial Mail on 70 percent loan conversion, IRRC Hauck report on post-sale practices.	Partial data
In Nicaragua, U.S. hostility (MDB blocking, contra war, rhetoric) raised perceived risk and deterred lending and investment, though firms also used global networks to obtain spare parts. (p. 121)	Interviews, Business International surveys, World Bank data, FOIA telegram, press accounts.	Illustrative or anecdotal
Corporate susceptibility to political pressure depended on firm size/diversification, strength of home vs. host preferences, and domestic politics such as anti-apartheid activism targeting firms directly. (p. 135)	Cross-case comparison with Angola, China, Cuba and pipeline cases; IRRC asset-share figures; secondary sources.	Illustrative or anecdotal

The author's caveats

The author acknowledges that outcomes were at least partially attributable to market forces and target-state policies, that it is unclear whether State Department pressure killed the Bank of America loan, and that Exxon's motives are hard to disentangle.

Gaps in the evidence

The argument rests on press reports, a handful of interviews and secondary data rather than systematic firm-level or bank-level data on actual flows (affiliate sales, loan exposure, capital repatriation) before and after sanctions. A counterfactual separating market from political risk effects, such as panel data on lending and FDI across comparable debtors, would test the causal claim better; such data (BIS, IMF, US BEA) existed then. Company records and wider interview samples, including firms that did not comply, would address selection in the interviewed sample.

Replicability: Data poorly documented.