Foreign Policy in U.S. markets

Financial Times, 24 May 2000
By Thomas Catn, Joshua Chaffin and Stephen Fidler

To enforce its will around the world, Washington has traditionally relied on the
time-honoured
trade embargo. But under a new set of legislative proposals, the US could also start to use its
capital markets as a foreign policy tool.

Fred Thompson, a Republican senator from Tennessee, is preparing to introduce an
important but
little-noticed amendment to the current bill to grant China permanent normal trade relations. The
measure would call on the president to submit an annual review of China’s record on weapons
proliferation and impose a graduated series of economic sanctions for any transgressions. At their
most severe, these would prohibit companies owned by Chinese nationals from raising funds on
US debt or equity markets.

The proposal’s chances of becoming law do not appear great, but it reflects a growing body
of
opinion that the US should leverage the supremacy of its markets to help achieve its policy goals.

Last year’s Cox committee report concluded that China is using US capital markets as a
source
of military funding and a way to disguise efforts to acquire sensitive US technology. Another
report, prepared by former CIA director John Deutch, also concluded that the US “is not making
optimal use of its economic leverage in combating proliferation”.

“Trade sanctions are only one of the economic tools at our disposal,” the report said. “Access
to
US capital markets [is one of] the wide range of economic levers that could be used as carrots or
sticks as part of an overall strategy to combat proliferation.”

Supporters point to the four-decade US trade embargo against Cuba, which has failed in its
aim
to topple Fidel Castro while costing US industry untold business opportunities. In contrast,
capital market restrictions are a targeted economic sanction that avoids “collateral damage” to
US companies, they say.

This year, proponents have been emboldened by the successful opposition to a planned initial
share offering by PetroChina, the main operating subsidiary of China’s biggest oil company.
After an ad hoc coalition of left-leaning protest groups and conservative national security types
united against it, PetroChina was forced to scale back its offering from $10bn to just $2.9bn.

Now, with the battle raging over permanent normal trade relations with China, Sen
Thompson is
trying to draw attention to what he says is the country’s record in helping rogue nations acquire
weapons of mass destruction. “It makes no sense for us to consider this trade issue in total
isolation from the real world that we live in,” he said.

“If we give the signal that we’re more interested in the dollar than our own security, it’ll have
all
kinds of ramifications.”

Sen Thompson insists that his proposals apply only to China, “which our intelligence
community
tells us is leading the pack in terms of proliferation activities.” However, such a law would
clearly set an important precedent for other nations – and possibly US companies.

The US Treasury has long held that there should not be restrictions on who can raise money
in
US markets, arguing that blocks would merely push the activity elsewhere. But recent events
have raised the idea’s profile.

“Prior to PetroChina, people had not thought about the security implications for our capital
markets,” said Frank Gaffney, president of the William J. Casey Institute.

“We believe investors are entitled to know what kind of transactions these countries are
involved
in.”