Originally published in The Boston Globe
Tuesday, October 16, 2001

Using Economic Weapons
By Martin and Kathleen Feldstein

President Bush has emphasized that the US response to the terrorist attacks of September 11 must include diplomatic and economic initiatives, as well as military actions. The focus thus far has been directed correctly at military and diplomatic efforts. The primary economic response has been to freeze US bank assets of suspected terrorists and organizations that support or front for terrorists, and to ask our allies to cooperate in this asset freeze.

What more could be done on the economic front? There are at least three areas worth pursuing or strengthening. Foremost is the need to reduce our dependence on imported oil. Second, the United States can tighten the link between our foreign aid and the strategic and military cooperation from aid recipients. And finally, we can impose or put more bite into trade and investment sanctions against countries that help our enemies.

Despite decades of energy conservation policies, the United States imports more than half of all the oil that we consume. Our dependence on oil from the OPEC countries, most of which are in the Middle East, makes us vulnerable to pressure from outside and less able to achieve the cooperation from OPEC countries that we might otherwise expect. We know that the US war against terrorism will not be won overnight. That makes it even more important to start now to reduce our oil imports, even if it is not possible ever to be completely self reliant for the energy needs of our economy.

We can reduce our oil consumption through policies that affect demand for oil as well as through policies that increase our supply of energy. The Administration has been a proponent of increasing energy supply by opening up the Arctic National Wildlife Refuge to oil drilling. There is additional scope for increasing energy production in federally owned land throughout the contiguous 48 states. The Administration must balance this approach with sensitivity to environmental considerations, even in a time of crisis.

We should also be looking for additional clean energy sources, including nuclear energy, and alternative energy efficient technologies. Only 20 percent of the US electric supply is currently produced through nuclear plants. We have a long way to go before we reach the level of nuclear powered plants in countries like France and Japan.

Americans have steadily resisted the energy taxes and high gas prices that have reduced consumption in European countries. While no one likes paying higher prices for gas, some increase in energy taxes would promote gasoline conservation in a variety of ways. These include smaller cars, more car pooling, more use of mass transit, all of which we see in Europe. And the extra revenue that the government receives could be returned to the public by reducing other taxes.

Partly in response to consumer resistance to higher energy taxes, the US has resorted to regulatory methods for conservation. A notable example has been the so called CAFÉ (Corporate Average Fuel Economy) standard that requires auto manufacturers to have car fleet average mileage standards of at least 27.5 miles per gallon. Because the CAFÉ rules treat sports utility vehicles (SUVs) more leniently than cars, there has been a surge in the popularity of SUVs over the last decade. If CAFÉ standards are to be used at all, there is no justification for excluding certain close substitutes from the industry standards. Experts estimate that applying the same standards to SUV's as are applied to cars, would save more than 900,000 barrels a day of gasoline.

Reducing energy dependence on imported oil is a multi-year process, and it is unlikely we could ever be totally self sufficient. But the current international crisis makes it abundantly clear that we should waste no more time in undertaking an aggressive national program that includes both supply and demand management.

The second economic front requires a close reevaluation of our economic relationships with potential friends abroad. As a major donor of foreign aid, the United States must now call in its chips. We must ensure that the US is not directly or indirectly supporting countries around the world that encourage terrorism or harbor terrorist criminals.

Moral suasion and active diplomacy have already encouraged many countries beyond our traditional allies to express their support of the US in our war against terrorism. Economic assistance can be leveraged to augment those diplomatic efforts. Most directly, the US can cut off direct foreign assistance from countries that will not cooperate with us. We can also remove facilities like the Commodity Credit Corporation and the Export-Import Bank that subsidize imports.

More positively, those countries that are helpful to us can become the beneficiary of greater US largesse. The US can also work with other countries through multilateral aid organizations like the World Bank and the IMF. Pakistan has already seen additional IMF funding almost as quickly as it showed its willingness to support US military action.

The most direct economic action against countries that harbor or support terrorists should be explicit sanctions that block trade and investment, The US can close our market to products of countries that support terrorism and we can prohibit US companies from investing or doing business with them . Such sanctions are controversial because they so frequently are ineffective. For sanctions to work, it is essential to have a united multinational front to isolate fully the countries that are the target of the sanctions. If the targeted country has the ability to find other markets and other supplies of investment capital and direct foreign investment, sanctions by the United States will not be effective.

US sanctions against Cuba have weakened that regime, but they have not been so effective as were the multi-national sanctions against South Africa under apartheid. Even in the case of Iraq, where, in principle, there is strong multilateral agreement and UN backing for the policy of limiting Iraqi oil exports, the sanctions have been far from fully effective.

Winning on the economic front calls for using multi-national approaches whenever possible and being explicit in the economic consequences of non-cooperation. Although military action, covert activities and traditional diplomacy will all be critical, economic policies can be part of a long-term winning strategy.