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Corporate Preferences and Public Policies: Foreign Aid Sanctions and Investment Protection

Published online by Cambridge University Press:  18 July 2011

Charles H. Lipson
Charles H. Lipson
Affiliation:
Harvard University
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Abstract

Since 1959 Congress has tried to protect U.S. direct foreign investments from expropriation by quite explicit amendments to various foreign assistance acts. Probably the most important of these legislative efforts, the Hickenlooper amendment, the Gonzales amendments, and the effective repeal of the Hickenlooper amendment, are contradictory and have been applied only sporadically. By developing testable hypotheses that can accurately and parsimoniously predict these varied legislative and diplomatic policies, this article attempts to demonstrate the value of a radical analysis of American foreign policy. After those hypotheses are evaluated, they are compared with propositions derived from pluralist and bureaucratic analysis. Finally, the policy history is reconsidered to show that changes in the external environment, particularly the rise of economically powerful nationalist regimes, have let to a significant evolution in the policy preferences of large multinational firms.

Type
Research Article
Information
World Politics , Volume 28 , Issue 3 , April 1976 , pp. 396 - 421
Copyright
Copyright © Trustees of Princeton University 1976

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References

* I wish to thank James Kurth, Joseph Nye, Arthur MacEwan, and Bruce Andrews for their helpful criticism. An earlier version of this paper was delivered at the 1975 Convention of the International Studies Association, Washington, D.C.

1 Tucker, Robert W., The Radical Left and American Foreign Policy (Baltimore: Johns Hopkins Press 1971), 21Google Scholar.

2 The limitation is a vital one. Though the hypotheses are developed from concepts fundamental to radical analysis, they treat only one of its aspects. Certainly few radical analysts would argue that U.S. military interventions, for example, are explicable in terms of such hypotheses.

3 Its importance is disproportionate to its formal usage, which occurred only once, in Ceylon (1963). But frequently its sanctions have been contemplated or have become an important policy issue, for instance in Brazil (1962), Honduras (1962), Argentina (1964), and in Peru, Ecuador, and Bolivia in the late 1960's.

4 Foreign Assistance Act of 1962, Statutes at Large 76, sec. 301 (d)(3), 260–61 (1962).

5 Foreign Assistance Act of 1963, Statutes at Large 77, sees. 301 (e)(2)—(e)(3), 386–87 (1963).

6 Asian Development Bank Act Amendments, Statutes at Large 86, 57 (1972)Google Scholar; Inter-American Development Bank Act Amendments, Statutes at Large 86, 59 (1972)Google Scholar; International Development Association Act Amendments, Statutes at Large 86, 60 (1972)Google Scholar.

7 However, in 1959 the Brazilian State of Rio Grande do Sul had expropriated the American and Foreign Power Company. Compensation talks were fruitless, and the dispute festered into the early 1960's.

8 Many academic writers shared this concern; for instance, Tannenbaum, Frank, Ten Keys to Latin America (New York: Knopf 1962), 234–35Google Scholar. Representative Henry Gonzalez has said that his anti-expropriation amendments were inspired by Tannenbaum's work.

9 Kaplan, Jacob J., The Challenge of Foreign Aid (New York: Praeger 1967), 181, 303–10Google Scholar.

10 Feis, Herbert, Foreign Aid and Foreign Policy (New York: St. Martin's Press 1964), 132Google Scholar.

11 Congressional Record, 86th Cong., Ist sess., 1959, vol. 105, pp. 12583–587, 12956–960Google Scholar.

12 Mutual Security Act of 1959, Statutes at Large 73, sec. 401 (a), 252.

13 Levinson, Jerome and Onis, Juan de, The Alliance That Lost Its Way (Chicago: Quadrangle Books 1970), 71–73Google Scholar; Mason, Edward S., Foreign Aid and Foreign Policy (New York: Harper and Row 1964), 88–90Google Scholar.

14 Levinson and de Onis (fn. 13), 72. Corporate dissatisfaction with the early Alliance suggests that corporate preferences are not related “mechanically” to the U.S. Government's investment protection policy. Rather, we argue that the two are generally consistent. If one found repeated or long-term inconsistencies for policy instruments which were directly related to investment protection issues, this aspect of a radical argument would be falsified.

It might be argued that, in spite of its brevity, early Alliance policy demonstrated such an inconsistency. Clearly, multinational corporate interests were to some extent contradictory during that period. While there was unanimous support for the objective of insulating communism, there was also widespread corporate agreement that the common objective should be secured by a strategy that unambiguously preserved property rights. Thus, even though the Alliance's aspirations were compatible with the extension of investment and trade, there was substantial corporate opposition to a strategy that relied heavily on social reform. After all, a strategy that entailed redistribution was a risky one: it could undermine the ideological foundations of private property, as well as redefining the “legitimate” scope of state economic power.

It is particularly important to note that the Kennedy Administration could not continue to ignore investment protection issues when formulating Alliance policy. Multinational firms could act collectively, employing multiple channels to affect government policy. The Hickenlooper amendment, for example, was a clear message about the priority of investment protection. Directed at Latin American governments, it was a stick; at the Kennedy Administration, a pointer. Probably even more important was the cumulative effect of individual corporate decisions not to invest (or reinvest) in Latin America. Since the Alliance was admittedly dependent upon an influx of U.S. capital, continued “capital flight” effectively attracted the attention of decision makers.

15 Ibid., 144. AID acknowledged that the expropriations had seriously undermined the “climate” for foreign investment in Brazil. According to a 1962 AID report, the outlook for foreign investment there was “not encouraging” U.S., Congress, House, Committee on Foreign Affairs, Hearings on the Foreign Assistance Act of 1962, 87th Cong., 2d sess., pt. III, p. 512Google Scholar.

16 A similar, but much more extensive dispute had occurred in Cuba three years earlier. International oil companies had refused the Cuban Government's directive to refine Soviet crude; as a result they were among the first foreign companies to be expropriated.

17 Wilkins, Mira, The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1940 (Cambridge: Harvard University Press 1974), 371–72CrossRefGoogle Scholar.

18 The companies economic apprehension was obscured by appeals to anti-Communist values. See, for example, the speech by Senator Monroney, A. S., American Petroleum Institute, 1961 Proceedings, XLI (New York: American Petroleum Institute 1961), sec. 1, p. 12Google Scholar.

19 Moran, , “Transnational Strategies of Protection and Defense by Multinational Corporations: Spreading the Risk and Raising the Cost for Nationalization in Natural Resources,” International Organization, XXVII (Spring 1973), 273–87CrossRefGoogle Scholar.

20 Unfortunately, most respondents would discuss lobbying efforts and interdepartmental disputes only if they were promised anonymity. Participants in these interviews were members of the State Department, Treasury, AID, the Council on International Economic Policy, congressional committees (members and staff), presidential commissions on foreign aid, and several corporations and business organizations.

One important exception to this norm of confidentiality was George Pavlik, Senator Hickenlooper's aide, with whom a telephone interview was conducted. Asked which corporations had actively worked for the Hickenlooper amendment, he cited the firms listed in the text, all of which were confirmed in confidential interviews.

To some extent the serious scholarly problems presented by confidential interviews can be mitigated by carefully searching the public record. For example, Standard Oil (N.J.) took the most unusual step of praising the Hickenlooper amendment in its 7962 Annual Report. Harold Geneen's role is discussed by the New York Times, 05 11, 1962, p. 51Google Scholar, and by Sampson, Anthony, The Sovereign State of ITT (New York: Stein and Day 1973), 262Google Scholar. The National Foreign Trade Council openly attacked any social reforms, including agrarian reforms, which did not include “prompt, adequate, and effective compensation.” The N.F.T.C. Convention Recommendations applauded the Hickenlooper amendment in 1962 and its extension the following year. See National Foreign Trade Council, Report of the Forty-Ninth National Foreign Trade Convention, 1962 (New York: N.F.T.C. 1963), xx–xxiiGoogle Scholar; N.F.T.C, Report of the Fiftieth National Foreign Trade Convention, 1963 (New York: N.F.T.C. 1964), xlivGoogle Scholar. Kennecott's role in the amendment's 1963 extension is suggested in the Congressional Record, 88th Cong., 1st sess., 1963, vol. 109, p. 21762.

21 Telephone interview with John Newhouse, September 1974.

22 Congressional Record, 88th Cong., 1st sess., 1963, vol. 109, p. 2136Google Scholar; Congressional Record, 93rd Cong., 1st sess., 1973, vol. 119, p. 26189Google Scholar.

23 New York Times, 05 13, 1962, sec. Ill, p. 1Google Scholar.

24 The same corporate and legislative alignments produced a Hickenlooper-sryle amendment to the 1962 Sugar Act, denying expropriating nations a U.S. sugar quota. Sugar Act Amendments of 1962, Statutes at Large 76, sec. 15, p. 166.

25 U.S., President, Public Papers of the Presidents of the United States: John F. Kennedy, 1962 (Washington: Government Printing Office 1963), 04 7, 1962, p. 203Google Scholar.

26 The President's Office Files, Legislative File, 1962–1963, in the John F. Kennedy Library, Waltham, Mass., show, in 1962, 13 references to the Hickenlooper amendment, two to the Sugar amendment; in 1963, only one reference to the Hickenlooper amendment.

27 The State Department clearly recognized the amendment's inconsistency with re-distributive reform. See U.S., Congress, Senate, Committee on Foreign Relations, Foreign Assistance Act of 1962: Hearings on S. 2996 [hereafter referred to as 1962 Senate Hearings[, 87th Cong., 2d sess., p. 558.

28 Confidential interviews, confirmed by Brewer, Theodore S., “The Hickenlooper Amendment and Congressional-Executive Relations in Foreign Aid Policy,” B.A. thesis (Amherst College 1968), 59–66Google Scholar. As evidence of United Fruit's successful efforts at building this transnational coalition, Brewer cites interviews with now-retired company officials (named in his paper). See also Stokes, William S., “Honduras: Problems and Prospects,” Current History, L (01 1966), 23–24Google Scholar, which stresses the political effectiveness of United Fruit's reduced production.

29 Congressional Record, 87th Cong., 2d sess., 1962, vol. 108, pp. 21615–21Google Scholar. At the same time, the Senate Appropriations Committee issued a report urging strict interpretation of the Hickenlooper amendment. See U.S., Senate, Appropriations Committee, Foreign Aid and Related Agencies Appropriations Bill, 1963: Report to Accompany H.R. 13175, 87th Cong., 2d sess., 1962, S. Rept. 2177, pp. 22–23.

30 Exploration contracts were held by Standard Oil (N.J.), Union, Continental, Marathon, and Shell; development contracts by Pan American, Tennessee, Astra and Cadipsa, and Cities Service. Chayes, Abram, Ehrlich, Thomas, and Lowenfeld, Andreas, International Legal Process (Boston: Little, Brown 1969), II, 827Google Scholar.

31 U.S., Congress, Senate, Committee on Foreign Relations, Foreign Assistance Act of 1963: Report on H.R. 7885, 88th Cong., 1st sess., 1963, S. Rept. 588, p. 29Google Scholar.

32 U.S., Congress, Senate, Committee on Foreign Relations, Foreign Assistance Act of 1963: Hearings on S. 1276 [hereafter referred to as 1963 Senate Hearings], 88th Cong., 1st sess., 1963, p. 30Google Scholar.

33 Memorandum [hereafter referred to as “Bell Memorandum,”], November 2, 1963, p. 2 (President's Office Files, Departments and Agencies, AID, 1963, John F. Kennedy Library).

34 1962 Senate Hearings (fn. 27), 557.

35 Ibid., 558.

36 “Bell Memorandum” (fn. 33), 1–2. In a prescient analysis of the Peru-IPC dispute, the State Department also argued that a company's behavior could provoke expropriation and prevent settlement. Even if other corporations considered the proposed settlement reasonable, they could not force the corporation to accept it and, hence, could not prevent automatic sanctions which might damage their ow n firms. In 1962 this argument was abstract and ineffective.

37 The 1963 additions completed the amendment's foreign aid sanctions. A 1964 addition, the Sabbatino amendment, was directed solely at the U.S. courts‘refusal to adjudicate certain foreign investment disputes. Sabbatino is the subject of considerable legal scholarship.

38 1963 Senate Hearings (fn. 32), 273.

39 Memorandum for the President from Dean Rusk, Secretary of State, May 27, 1963, p. 1 (President's Office Files, Countries, Ceylon, 1963, John F. Kennedy Library).

40 Though potential sanctions included both bilateral aid and the sugar quota, they were commonly grouped together as the “Hickenlooper amendment.”

41 In Peru, as in Honduras, the intergovernmental dispute precipitated a transnational coalition. U.S. corporations opposing use of the Hickenlooper amendment worked closely with allies in Peruvian banking and legal circles. For example, the meeting between U.S. Special Envoy John Irwin and President Velasco—the legal pretext for not applying the Hickenlooper amendment—was arranged jointly by a Peruvian lawyer and a U.S. businessman. See “Editor's Note” in Sharp, Daniel A., ed., US. Foreign Policy and Peru (Austin: University of Texas Press 1972), 285–87Google Scholar.

42 Two contributors to Sharp's book reached different conclusions. John Powelson claims that “even IPC has not insisted on the application of Hickenlooper.” Ibid., 147. Charles Goodsell maintains that the company did want the amendment invoked. Ibid., 251–52. On the basis of confidential interviews, we would agree with both Powelson and Goodsell that there were important intracorporate divisions, but conclude that the company initially preferred the amendment's use and later changed positions.

43 Later, ITT, Grace, and others were expropriated. Their demands for overt sanctions met overwhelming opposition from most U.S. corporations in Peru. U.S. policy remained unchanged, as does our conclusion.

44 Gulf's chairman was once quoted as advocating use of the Hickenlooper amendment. New Yory Times, 10 31, 1969, p. 63Google Scholar. However, according to interviewees in Congress and the Administration, Gulf did not seek to have the U.S. apply the amendment in Bolivia, and later opposed Hickenlooper-type laws.

45 Nelson Rockefeller made this point when he testified that Hickenlooper sanctions in Peru would endanger Texaco in Ecuador, an exact reversal of the amendment's deterrent logic. U.S., Congress, Senate, Committee on Foreign Relations, Hearings on the Rockefeller Report on Latin America, 91st Cong., 1st sess., 1969, p. 29Google Scholar.

46 Swansbrough, Robert H., “The American Investor's View of Latin American Economic Nationalism,” Inter-American Economic Affairs, XXVI (Winter 1972), Tables 5 and 7Google Scholar.

47 U.S., President, National Security Council, Memorandum No. 131.

48 Quote is from President Nixon's January “Statement Announcing United States Policy on Economic Assistance and Investment Security in Developing Nations,;” in U.S., President, Public Papers of the Presidents of the United States: Richard M. Nixon, 7972 (Washington: Government Printing Office 1974), January 19, 1972, p. 33Google Scholar. For a knowledgeable analysis of the bureaucratic politics of the President's decision, see Einhorn, Jessica Pernitz, Expropriation Politics (Lexington, Mass.: D. C. Heath 1974), esp. chap. 5Google Scholar.

49 Haverstock, Nathan, “End to Retaliatory Legislation Sought,” Mexican-American Review, XLI (11 1973), 13Google Scholar.

50 Letter to Peter Peterson, Executive Director of the Council on International Economic Policy, from Jose de Cubas, President, Council of the Americas, August 27, 1971, cited by Einhorn (fn. 48), 107.

51 Though the Council later sent Senator Fulbright a letter suggesting opposition to new sanctions, it did not play an active legislative role until the bilateral amendments a year later.

52 U.S., Congress, House, Committee on Foreign Affairs, The Overseas Private Investment Corporation, 93rd Cong., 1st sess., 1973, Committee Print, 18Google Scholar.

53 Because Gonzalez's move was not elaborately planned, the heavy vote in his favor amply demonstrates the House's general ideological preference for hard-line measures. This substitute amendment was not prepared by his staff; according to several sources, it was probably drafted by Washington counsel to a major international oil firm.

54 Council of the Americas, Newsletter, December 26, 1973, p. 2Google Scholar.

55 Treasury forced a decision at the presidential level. Nixon supported State and the Council of the Americas, but he also wanted to avoid raising the issue's salience. Thus, his decision was “not for attribution.;”

56 Foreign Assistance Act of 1973, Statutes at Large 87, sec. 15, p. 722.

57 Congressional debates about investment protection have frequently considered corporate interests and preferences quite explicitly. However, such considerations were not preeminent for many legislators. Many invoked Palmerstonian imagery, conceptualizing corporations as citizens entitled to the full protection of their government. Senator Hickenlooper appealed to this notion, among others, in 1962 and 1963. Such imagery raises important questions about the social determination of a seemingly “” ideology.

58 Bauer, Raymond A., Ithiel de Sola Pool, and Lewis A. Dexter, American Business and Public Policy (New York: Atherton Press 1963), Part IV, esp. 421–24Google Scholar.

59 I am indebted to Robert Keohane for his comments on an earlier version of this section.

60 Einhorn (fn. 48), esp. chap. 6.

61 Art, Robert J., “Bureaucratic Politics and Foreign Policy: A Critique,” Policy Sciences No. 4 (1973), 472–76Google Scholar.

62 Ibid.; Krasner, Stephen D., “Are Bureaucracies Important?,” Foreign Policy, No. 7 (Summer 1972), 166–69Google Scholar.

63 See Andrews, Bruce, “Empire and Society: Toward a Contextual Explanation of American Aims and Policy in Vietnam,” Ph.D. diss. (Harvard University 1975), chap. 1Google Scholar.