Security Related Trade Controls

 

Images of Foreign Policy and Economic SanctionsWhat are Security Related Trade Controls

Security related trade controls are governmental measures which aim to achieve political goals.

Governments, individually or collectively, impose these types of controls in the pursuit of national security and foreign policy interests, e.g. 

Read More - examples of EU & U.S. Policy Controls
Both the EU and the U.S. have published their policy reasons to impose security related trade controls. Note that these policy reasons can apply to both export controls and economic sanctions. These policies are some of the underlying factors to impose trade restrictions, e.g. a reason to authorization a particular export, i.e. trans-shipment or a transaction.

Examples of these policies are:

For the EU – see article 2 CFSP Common Position 2008/944 (although it refers to the sale of conventional arms, it can also apply to the export of dual-use goods and for economic sanctions – embargoes).

For the U.S. – see sections 5 (National Security Controls) and Section 6 (Foreign Policy Controls) under the Export Administration Act 1979

This blog covers two types of security related trade controls, namely export controls and economic sanctions. The reason for this is that both these types of trade controls are not only subject of my PhD research, but also because they are frequently lumped together into the same basket. 

They are both non-military instruments which governments apply to achieve similar national security and foreign policy goals.


However, it is important to note that export controls and economic sanctions are different. 

1) The presumptions and focus are different.

Although the conditions and prohibitions of both export controls and economic sanctions can be overcome, the presumption of export controls is to regulate or even promote trade under certain conditions. In contrast, the presumption of economic sanctions is to prohibit or disrupt trade. Although export controls can and are used to implement economic sanctions regimes, their focus is more limited than economic sanctions. 

  • Export controls focus on goods, items subject to a regulation, e.g. strategic goods – military or dual-use goods, technologies or software.
  • Economic sanctions focus is broader, whereby they also focus on the parties and countries subject to a sanction regime.
  • Economic sanctions can also cover transfers of anything of value that can benefit the Targets of sanction regimes – e.g. financial assets, transfers of property (interests hereof), and non-trade related issues (e.g. travel bans and the denial of foreign assistance).

2) The duration of the restrictive measures are different.

  • Export controls are a permanent feature, i.e. condition, to export strategic goods regardless of the political relations between countries. Strategic goods are always subject to some form of governmental oversight or a licensing system.
  • Economic sanctions are imposed as a political reaction, i.e. disapproval of conduct of individuals or policies of governments/regimes. They are case-specific – imposed to address a specific issue(s) or a situation.
  • Economic sanctions are also designed to be uplifted once the reasons for imposing the restrictive measures no longer apply.  For instance, the current United Nations, U.S. and EU nuclear related sanctions against Iran sanctions, international sanctions against Apartheid South Africa (1985–1991) or the UN sanctions against Iraq (1990–2003). 

The Difficulty in defining Security Related Trade Controls

From a conceptual perspective, an amazing aspect of security related trade controls, is that there is no commonly agreed upon global compliance mechanism which governs or regulates them. 

There are a couple of reasons for this.

Andreas Gursky Chicago Board of Trade TwoFirstly, the political environment in which security trade controls are applied are characterized by significant unilateralism

Countries are sovereign states which have the freedom to choose with whom they wish to engage in trade, unless a positive legal obligation restricts this freedom. As a result, countries have the freedom to restrict persons subject to their jurisdiction (e.g. citizens, permanent residents or companies) to engage in trade with countries or parties which they find repugnant or act against their interests. This applies especially to trade which impact the national security and foreign policies of countries. 

enforcement jurisdiction - sniffer dog at workSecondly, at its core, national security remains a self-defined concept, left largely to the self-judgement of countries.

Although countries may no longer use force as a foreign policy instrument, they have some discretion to apply instruments short of the use of force. In this context, although controversial, economic coercion in itself, however unfair, is legally not defined as armed aggression. Think of the collateral damage caused by economic sanctions, especially to Iraq (1990-2003), the jingling of coins can be just as destructive as the use of military force.

Economic Sanctions_False_Sense_of_SecurityThirdly, an off-shot of the ever-present unilateralism, there is also no overall body of law which governs or regulates security related trade controls.

Unless the United Nations Security Council has decided to impose binding economic sanctions, given the decentralized nature of the international legal system, self-help usually dominates the application of security related trade controls. Countries usually justify the legality of their security trade controls themselves, as there is no permanent world court that can rule of these actions. Given the power imbalances in the world, security trade controls continue to harvest controversy, as the common belief is that they are instruments of powerful countries to impose their will on smaller and weaker countries. 

Economic statecraft in practice_comprehensive versus limited sanctions regimesFinally, all of the three factors make the operations of security related trade controls, extremely complex.

There are very few harmonized rules, which is paradoxical given that certain transnational security threats, such as the proliferation of weapons of mass destruction or global terrorism, require not only sustained international cooperation, but also global laws and regulations. 

In the absence of a common accepted compliance mechanism, security related trade controls have sometimes the effect to dangerously polarize our world, between the goods guys and pariahs, which is at odds in a time in which humanity is ever so closely connected, socially, economically and electronically. This is what makes the operations of security related trade controls so confusing; they are a coercive instrument which aim to address security threats of our time to create a global society where all people’s can live together in peace and mutual respect. Its odd then that there is so much unilateralism.

Economic sanctions and foreign policy_ hoover institutionThe Increasing Importance of Security Related Trade Controls

Through the ages, world leaders have applied security related trade controls. They were first employed in Ancient Greece, during the two World Wars and most extensively during the Cold War.

Therefore, they are not new and have evolved, most notably, with the rise of the modern state system and the rise of capitalism.

However, since the beginning of the twenty-first century governments have increasingly imposed security related trade controls. A reason for this is the new found activism of the United Nations at the end of the Cold War. Freed from the shackles of the super-power competition, the United Nations has increasingly applied economic sanctions.

Read More Reasons for Imposing Security Related Trade Controls in the 21st Century
The reasons can be summarized as follows:

  • the rise of asymmetrical security threats – global terrorism, violent ideological radicalization which aim to destabilize countries, regions
  • the threats of the proliferation of weapons of mass destruction
  • the rapid evolution of technology – which is widespread, ever quicker, and increasingly disseminated through intangible means, whereby access to technologies or information can contribute to destabilizing governments or infect the financial system
  • the rise of non-governmental stakeholders (e.g. rating agencies or ethical investment funds) which demand compliance with social responsible or ethical standards.

Impact for Industry

Security related trade controls impact the activities of exporters and companies in a number of different situations.

The obvious impact is for those organizations which trade in strategic goods, but also when companies invest in such organizations. In regard to economic sanctions, the impact concerns whether organizations are active in high-risk countries (sanctioned end-destinations) or if they are involved with high-risk parties in specific transactions (sanctioned parties).

For both types of trade controls, compliance efforts are focused to ensure immunity from example, unnecessary operational delays, contractual problems or criminal penalties. In this context, compliance risks can also originate outside of an organization – e.g. non-compliance of suppliers that can infect supply chains. Note that in many countries, strict liability applies for new mergers and acquisitions – whereby new owners can be held liable for non-compliance.

Read More Compliance Complexities
The complexities to implement controls for governments and/or compliance for industry, can be summarized as follows:

  1. The lack of international harmonized laws and regulations
    • despite the fact that certain countries have adopted common control lists for export controlled goods – e.g. dual-use items – there are (vast) differences in enforcement and licensing policies
  2. The impact of technology on international trade
    • unwanted transfers of technologies, data and knowledge make it extremely hard for governments to impose adequate controls which evolve and change rapidly
    • nature of global electronic networks for working environments – if your offices or manufacturing locations are located in different countries
    • ability to fully and timely screen, filter and distill transactions which are prohibited by sanctions – especially if you have high volumes of trade/payments or global expanding supply chains/ distribution networks

    Key compliance questions are, for instance, whether access to your networks are secure; persons sending/receiving information/data are permitted to do so; compliance risks are identified rapidly to prevent unnecessary delays – track-and-trace capabilities.

  3. The need for governments to apply extra-territorial jurisdiction
    • to enable “trace-and-track,” of domestic goods/transactions in other countries, which leads to tension at the political level as extra-territorial reach of certain countries controls, e.g. U.S., are considered an infringement of other countries jurisdiction, i.e. sovereignty or perceived to be a violation of international law
  4. The rise of non-governmental stakeholders (e.g. rating agencies or ethical investment funds) which demand compliance with social responsible or ethical standards.

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