COVER STORY

Sanctions: the bark and the bite

An assessment of the degree of effectiveness and otherwise of the sanctions regime put in place by the United States against India in the wake of Pokhran-II.

R. RAMACHANDRAN

A MAJOR fallout of Pokhran-II is seen in the trade, economic and military sanctions that were imposed on India under Section 102(b)(2) of the United States' Arms Export Control Act (AECA) of 1976, or the Glenn Amendment. The Glenn Amendment provides for prohibition of foreign assistance, munition sales and licences, government credits, credit guarantees and financial assistance (such as those from the Exim Bank), U.S. support for multilateral financial assistance (from international financial institutions such as the World Bank), private bank lending to entities of the government and exports of specific controlled goods and technology (broadly termed "dual-use" items).

This provision of the U.S. legislation was invoked for the first time after the enactment of the Nuclear Proliferation Prevention Act (NPPA) in 1994. The first round came soon after the tests. While the overall implementation scheme was formalised in the form of interim guidelines on June 18, the full implementation has not been gone through yet because there were no pre-existing regulations governing the matter. For instance, concern over the lack of any exemption in Section 102(b)(2)(D), which governs government credit and credit guarantees, for export of agricultural commodities led to the passing of an amendment on June 11 (as part of Agricultural Appropriations Bill) that allows agricultural exports through the Commodity Credit Corporation and the Department of Agriculture. The impact of agricultural sanctions would in any case have been minimal because of the relatively small value (about $20 million annually) of such credits to India.

T.A.HAFEEZ
The Light Combat Aircraft, with its full complement of weaponry, on display at an air show. Under the effect of the sanctions imposed by the U.S., critical parts and components required for the LCA, for instance, for which the U.S. has been the chief source, may be unavailable.

But, more significantly, Section 102(b) of the AECA does not provide for lifting of the sanctions. Therefore, any such move would call for congressional action. Because of the coincidentally concurrent larger ongoing process of reforms in the U.S. Government with regard to unilateral sanctions, a sanction waiver authority was given to the President in October 1998 through the India-Pakistan Relief Act of 1998 (also known as the Brownback Amendment). President Clinton exercised the waiver authority on December 1, 1998, and lifted the sanctions in, as the White House release said, "a limited, targeted way". In fact, the Relief Act is part of the 1999 Appropriations Bill of Agriculture, Rural Development, Food and Drug Administration and Related Agencies.

What is behind the "limited and targeted" scope of the waiver is the fact that the President does not have the authority to waive sanctions arising from Sections 102(b)(2)(B), (C) and (G). What the amendment allows the President to do (which he otherwise could not have done) is to lift sanctions imposed under Section 102(b)(2)(A), namely termination of assistance under the Foreign Assistance Act. Assistance under this includes U.S. developmental assistance (including for child survival and AIDS management programmes), International Military Education and Training (IMET) Programme and PL-480 food assistance. Child survival and AIDS - which accounted for a major chunk of the $51.35-million assistance in 1998 - and PL-480 programmes ($91.88 million in 1998) were, in any case, exempt from sanctions. The IMET assistance is of the order of $450,000. However, so far no programme under the IMET seems to have been revived.

Section 102(b)(2)(D) requires denial of credit, credit guarantee, or other financial assistance by a U.S. government agency or instrumentality (such as the Exim Bank). This included credits and credit guarantees for agricultural exports under the Commodity Credit Corporation and the Department of Agriculture. However, the June 11 amendment had already imposed sanctions on agricultural exports. The effect of prohibition on Exim Bank and Overseas Private Investment Corporation (OPIC) guarantees was in any case marginal because it did not affect already sanctioned cases such as the Dabhol power project and the rest of the exposure was small. Also, these sanctions affected U.S. business interests more than they affected India.

Under Section 102(b)(2)(E), the U.S. is only required to oppose loans by IFIs and cannot by itself block them. If the President so desired, he could, even without the waiver, allow these loans to go through. As regards Section 102(b)(2)(F), which requires prohibition of any U.S. bank loan or credit to the Indian Government, excluding loans and credits to purchase food or other agricultural commodities, the necessary executive order was not issued after the tests because it was not clear whether the term "government" included Indian public sector banks and other public sector entities, which were the major borrowers from U.S. banks. This was, therefore, not imposed in the first place; it would otherwise have greatly eroded U.S. banks' operations in India.

But, most important, the waiver is valid only for one year from the date of enactment of the Act, which is October 21, 1999. And at least 30 days prior to this date the U.S. President is required to report to the appropriate congressional committees about the "progress" achieved on the intended goals of sanctions, namely, prevent weaponisation and the development of delivery systems, signing of the Comprehensive Test Ban Treaty (CTBT), supporting the Fissile Material Cut-off Treaty (FMCT), strengthening of Indian export controls on dual-use goods and improvement in Indo-Pakistan relations (read Kashmir). The signing of the CTBT and support to the FMCT seemed imminent and the bus diplomacy was being projected as a sign of improvement in Indo-Pakistan relations - the fall of the Vajpayee Government changed it all. India already has a fairly good export control law for dual-use goods. But the first of the goals has clearly not been achieved and, in fact, the launch of Agni-II is only likely to result in the withdrawal of the waiver, rather than an extension of it, even if India goes ahead and signs the CTBT before the September 1999 deadline.

Of the sanctions that are in place, the first - under Section 102(b)(2)(A) - includes the sale of defence articles and items on the U.S. Munitions List (USML). India hardly imports defence or USML items from the U.S. (In the last three years, only during 1995-96 was $125,000 worth items from the USML imported). So this sanction will not have any impact. The next concerns termination of military financing to India. This also will not have any effect since the U.S. does not finance any Indian military operations. What is likely to have a serious impact is the prohibition on the export of dual-use goods and technologies arising from Section 102(b)(2)(G).

The June 18 interim guidelines were formalised in a new licensing policy of the U.S. Department of Commerce (DoC) issued as an 'Interim Rule' on November 19 through appropriate revisions of the Export Administration Regulations (EAR). The centrepiece of this legislation (which, for some reason remains 'Interim') is the Entity List (E.L.) covering over 200 government, parastatal and private entities "determined to be involved in nuclear and missile activities". Export of all EAR-controlled goods to these entities requires a licence "but with a presumption of denial". The E.L. includes military establishments such as ordnance factories, and for these units the legislation says that licence is required for "all items subject to the EAR except EAR99".

A corollary to the export restrictions were the restrictions placed on the issue of visas to Indian scientists and the suspension of collaborative research programmes, exchange of information, data and so on. This was effected through the initiation of the Mantis Programme (a remnant of the Cold War) and the associated sweeping Technology Alert List (TAL), which identified programmes and disciplines where such restrictions would be applied. The Department of Energy, being involved in the U.S. nuclear programme, took specific actions in this regard through what is known as the Pena Memorandum. This identified facilities and institutions (mainly of the Indian Space Research Organisation (ISRO), the Defence Research and Development Organisation (DRDO) and the Department of Atomic Energy (DAE) with which all interactions of the department would be terminated. One major programme which came to a halt because of the Pena Memorandum was the 'D-Zero' project at the Fermi National Accelerator Laboratory (Fermilab) in which the Tata Institute of Fundamental Research (TIFR) was participating in a big way. The dozen-odd TIFR scientists were sent back. The visa issue continues to be an annoyance, particularly to non-university scientists. However, thanks to the intervention of the U.S. scientific community, some amount of relaxation is evident. They are now able to obtain visas at least to attend conferences, if not to participate in collaborative research programmes. However, the impact of this U.S. measure, while significant, is not serious.

IT is the restrictions on the export of specific, particularly dual-use, goods that is likely to have the most serious impact. But as was observed in an earlier analysis (Frontline, February 12, 1999), a quantitative estimate of this impact is still lacking. Even agencies which have been under one form of embargo or the other for long (the DAE, the DRDO and ISRO) are yet to complete this exercise, let alone the host of other individual institutions and companies that have been named in the E.L. This is mainly because of the absence of a centralised database on high-tech imports from the U.S. despite the Indo-U.S. memorandum of understanding on high-tech transfer of 1984. The U.S. Government, which maintains a database of licences issued for exports to India, has a better idea of India's vulnerability and how severely the export controls are likely to hurt.

Indeed, in its Annual Report on Foreign Policy Export Controls issued on March 30, 1999, the Bureau of Export Administration (BXA) of the DoC has given a comprehensive analysis of its perspective on the impact of sanctions. The report observes that multilateral sanctions are more effective than unilateral U.S. sanctions and, even in a unilateral move, financial sanctions are more effective than trade sanctions like export controls because of the increasing availability of alternative sources of supply of high-tech goods. Nevertheless, according to the report, from the U.S. perspective the sanctions have added weight to U.S. efforts to bring India and Pakistan towards achieving the stated goals of the sanctions.

The report observes that although other countries have expressed some support for U.S. sanctions against India and Pakistan, no other country has imposed new dual-use export controls but the Commerce Secretary feels that this will not render the controls counterproductive to U.S. policy. As the report points out, the precise economic impact on India of export sanctions on dual-use goods and technologies is difficult to determine. According to the DoC database, in the last three years, the total values of licences for controlled goods (see Table 1) sanctioned items to India were $43 million, $149 million and $150 million. The impact of new sanctions would have been reflected in the 1997-98 figures and will be seen in the 1998-99 figures. However, since the sanctions will affect trade in items that were till now exportable without a licence (particularly EAR goods) as well as those requiring licences, the actual impact of the sanctions will be much higher than the $150 million region.

Goods subject to the EAR are classified in the Commerce or Commodity Control List (CCL) by an Export Commodity Classification Number (ECCN). EAR99 refers to the basket of all items subject to the EAR but which do not occur in the CCL and do not, therefore, have a specific ECCN. These are low-tech and non-dual-use items (that normally do not require a licence) such as capacitors, resistors, RF tubes and amplifiers, pumps, pipings valves for chemical industry, and so on, that are generally available all over the world. Even though these items themselves are not directly linked to nuclear or missile proliferation, they are subject to EAR as a result of the Enhanced Proliferation Control Initiative (EPCI) of 1990 whose "catch-all" provision seeks to target all entities with some links to entities of proliferation concern.

The EAR99 items account for a high share of imports in controlled goods. (The sudden spurt can be explained by the gradual implementation of EPCI controls.) According to the BXA report, in 1997-98 a total of 1,008 licence applications, with a combined value of $566 million, were received. Of these, 427 applications valued at $60 million were for items classified as EAR99. The DoC approved 461 licences valued at $138 million, denied 211 licences valued at $9 million, and returned 677 licences (many of these were for EAR99 products submitted for EPCI requirements). Table 2 shows the profile of "processed" cases as against Table 1 which shows "approved" cases in a year. The latter would include pending applications from previous years as well.

Apparently, a single Indian end-user accounted for at least 230 licence applications and approximately 100 applications of these were for U.S. high technology companies in India. In assessing the impact of sanctions on Indian entities, this latter aspect will have to be factored in. These multinational corporations would be able to import goods for their operations. The majority of the remaining licences were for entities now targeted by sanctions.

Clearly, as a result of the sanctions, the number of instances of denial/no-action on applications for EAR99 items is set to grow. For U.S. exporters this has become a major concern, and this happens to be the main thrust of various representations received by the DoC as part of public comments to the Interim Rule on export sanctions. Their key argument is that since nothing prevents the export of these goods to a third country from where re-export to India is not prohibited, the prohibition does not make sense. More significantly, they have pointed out that since other foreign suppliers can easily step in for these goods, this amounts to loss of a big market for them. They have therefore asked for the removal of EAR99 goods from export prohibition. From the Indian end-users' perspective, this is only an irritant because nearly all EAR99 items can be sourced from elsewhere but could call for reconfiguration and recalibration of systems and a consequent delay. Interestingly, no Indian entity or individual seems to have made a representation to the DoC before the deadline of January 19, 1999.

The major licensed items imported in the last two years pertain to information security or data encryption (both software and hardware) and, interestingly, precursors to chemical weapons. The plausible reason for the former is the liberalised U.S. export policy since 1996 which allows licensed export of "key recoverable" encryption products that have up to 56-bit length Digital Encryption Standard (DES). While this is important for e-commerce, particularly banking operations (most foreign banks are likely to have imported these products), it is also useful for intelligence operations. The single end-user referred to above could be the Ministry of Home Affairs or the Research and Analysis Wing (RAW) which are not affected by the sanctions. The import of chemical weapon precursors could be by chemical industries, which is permitted as India is a signatory to the Chemical Weapons Convention.

Import of numerically controlled machines, a significant import item in the past couple of years and used notably by many of the industries in the E.L., could be affected. But this is an area where it should be easy to identify European or Japanese sources. While digital computers is a major area of imports, the value shown in the tables is not high because of the liberalised licence-free import of computers up to 2000 MTOPS for nuclear and defence end-users and up to 7000 MTOPS for others till 1997. The increase in 1997-98 is perhaps because of the reimposition of the licence requirement for computers above a rating of 2000 MTOPS for all end-users. As a result of sanctions, one can assume that a fairly high share of licence applications will now be denied. So the impact of sanctions on digital computers can be taken to be around $10 million annually.

The single importer of aero-engines, worth $2.4 million, is likely to be the DRDO for the Light Combat Aircraft (LCA). This means that the GE-404 engine will not be the cause for the delay in the LCA project. What is likely to affect major programmes like the LCA is the non-availability of critical parts and components, which are required in small volumes, for which the U.S. has been the chief source. An exercise is on within the DAE, the DRDO and ISRO to identify items that are becoming difficult to procure from the U.S. and locate alternative sources. About 200 items, worth $1 million, have been identified and for about 10 per cent of these the U.S. seems to be the exclusive or most reliable source. Most of these 200 items are electronic items such as microwave and RF components, integrated circuits, high-performance electronic devices, oscilloscopes and some critical materials.

From the perspective of research and R&D (research and development) institutions which figure in the E.L., it is the small volume or one-off imports of specific high-tech instruments or high-performance goods and equipment that is posing difficulties. For example, alternative sources have to be identified for speciality chemicals and biologicals for which the U.S. has been the traditional supplier. Similarly, the U.S. has been the traditional supplier also for electronic devices for which the reliability of European sources could come into question.

Similarly, the effect of sanctions on specific high-value equipment (such as the neutron generator and the lithography equipment in Table 1) is what could hurt or delay a programme. But for such items, like a SQUID magnetometer or a liquid helium plant, European sources exist but the entire import process over the last year has gone into a tailspin because of the sudden cancellation of orders. While individual institutes have yet to identify their needs and corresponding alternative sources, including the possibility of indigenous development, the Department of Science and Technology (DST) has initiated a scheme specifically to fund the indigenous development of such items after a feasibility study. Overall, while it seems that in value terms the impact may not be all that significant, in terms of criticality of some items for a given programme and other intangibles, which cannot be estimated, the impact of sanctions may be significant.

Even in the unlikely event of these export sanctions being lifted or relaxed, the government needs to evolve a comprehensive policy, and consider steps such as the setting up of a microelectronics fabrication unit, a centre for speciality chemicals and biochemicals, a high-precision instrumentation unit and a centralised database of high-tech imports, in order to be able to combat any such embargo situations.