Richard Nephew

Geopolitical Chess or Checkers?

Air Date: July 8, 2019

Former State Department officer and Columbia University Center for Energy Policy scholar Richard Nephew discusses sanctions, tariffs, and U.S. foreign policy.

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I’m Alexander Heffner, your host on The Open Mind. Today we discuss sanctions, tariffs, American energy, and national security. My guest is Richard Nephew, senior research scholar at the Center on Global Energy Policy at Columbia University. He’s the author of “The Art of Sanctions: A View From the Field.” He was previously Principal Deputy Coordinator for Sanctions Policy at the Department of State and the lead sanctions expert for the U.S. team negotiating with Iran from May 2011 through January 2013; Nephew served as the director for Iran on the National Security staff where he was responsible for managing an expanded array of US sanctions against Iran. He also served in the Bureau of International Security and Nonproliferation at the State Department and in the Office of Nonproliferation and International Security at the Department of Energy. Welcome, Richard, a pleasure to meet you.

NEPHEW: Thank you. Good to meet you.

HEFFNER: To begin with I wanted to ask you, that birds-eye view of American foreign policy and national security today, what are your expectations today having listened to the Trump inauguration in which he set the terms of what his vision was for a more nativistic and nationalistic American policy?

NEPHEW: Well, I think the President when he was being inaugurated kept true to his campaign, which was a viewpoint that America had come second too many times and that all the powers that we have as a country need to be applied for our own self interest. So what have we seen? We’ve seen a tariff policy that is fully dedicated towards securing the American economy no matter what damage it does both to other economies, to our foreign policy interests more generally and frankly to our own economy if you have a much broader view of things. We’ve seen a sanctions policy that is very aggressive and willing to use tools in ways that we’ve never seen before, breaking a lot of the different rules and approaches that we’ve had to how we separate foreign policy from economic policy. And then last of course we’ve seen an unwillingness to use force and to use a whole lot of diplomatic effort to try and address international problems.

Instead the President has kind of relied on the minimum necessary both of the Middle East and Latin America and beyond. And so it’s very much a withdrawn foreign policy that’s still is pretentions of international engagement, pretentions of international pressure but really is much more distant from their previous approaches.

HEFFNER: A new protectionism is that how you might describe it or how would we identify this brand of foreign policy, employing tariffs and sanctions to incentivize national security imperative and improve relations around the globe?

NEPHEW: Yeah, it’s a, it’s a weird combination of things. You almost want to call it neo isolationism, you know, in that we are not isolated. We’re still doing things internationally. But we’re only using the minimum necessary tools. And, frankly we’re using tools like economic pressure as much as possible, both trying to address trade issues and tariff disputes and you know, economic debates.

But also trying to address foreign policy issues. Take, Iran as an example of this. Iran was described by both the last administration and the current administration as s a problem that’s broad and regional needs to be addressed in a broad regional strategy. What has this President have done? He’s primarily used economic sanctions. He’s really done nothing much in Syria and Yemen and so forth. And that’s because ultimately he doesn’t want to project U.S. power abroad.

HEFFNER: Also, there’s not a human rights criteria that’s applied equally. It’s disproportionate and biased in favor of North Korea. Who would have thunk, right, and against Iran? Now it may be that Iran has intensified it’s abuses of human rights since the Obama Administration left office, and that that accord did not fundamentally alter civil society or promote civil society in that country. But I wanted to start from the very basics, Richard. You’re an expert on sanctions. The idea of the sanction in application in 2019 verses 1919 or 1819. What is the idea in 2019 – and is it different from the historical understanding of how sanctions would work?

NEPHEW: It’s definitely different. If you go back a hundred years ago, there was a very clear sense that sanctions were used against big trade things. You would boycott countries, you would blockade countries, you would prohibit raw materials and so forth from getting into a country. If you think back to World War One, you think back to World War II, that’s the kind of blockade we’re talking about. Germany is isolated from the rest of the world. Naval ships are preventing goods from getting in. And in that context, sanctions were part of a continuum of war and they were kind of part and parcel of that continuum. In the more modern era, sanctions are much more targeted, much more narrow and there are a lot less focused on individual goods getting from point a to point B. They’re focused on what we’d call the linkages between activities, things like financial services, things like insurance, shipping and so forth. And that’s both because those are vulnerabilities that don’t necessarily displace international industry and international trade as much. But it’s also because there are places where the United States in particular as the biggest user of sanctions, has a disproportionate advantage sitting at the center of a large part of these service based economies.

HEFFNER: So specifically you mean there is a greater financial onus on a nation for whom or for which sanctions are applied, meaning it is cutting off part of their circulation towards commerce, right, their ability to function. And in the United States you have a potentially robust trading partner and to limit the scope of your commercial availability means it can’t work. But sanctions have been applied first by the Obama Administration in the lame duck session against Russia, acknowledging the interference and disinformation campaign and then the United States Congress continued a sanction policy against Russia, Iran from the very beginning. How do the sanctions differ from the Russia situation to North Korea and Iran, those seem to be the three hotspots where sanctions are relevant right now.

NEPHEW: Yeah, I would say there are two primary differences. The first lies in the targets we’re talking about. You know, when we looking at North Korea, we’re not seeing a major supplier of anything, right? The North Korean economy has basically been a target because it’s been isolated for 50, 60 years. And so cutting off North Korea, you don’t damage the international economy if you were to try and just cut it off wall it off from the international economy in general, Russia’s the complete opposite, you know, not withstanding the fact that it’s smaller than the United States, the Russian economy is an important part of the global economy.

It’s supplies oil; it’s supplies, natural gas. It’s a vital part of the European general business scene. And so problem one is that amongst those different targets, there are different global vulnerabilities in addition to the country vulnerabilities that need to be managed. And I think that’s a core difference. The second core difference is that in the Russia case, we have attempted to use what I call micro targeting tools, where we’re not just going after financial services, we’re going after specific types of financial services, debt for instance, in very targeted, very specific manner.

HEFFNER: Or individual oligarchs.

NEPHEW: Exactly. Exactly. And the idea being that because Russia is important, you can’t just take a sledgehammer to it, you have to take a scalpel and you have to try and do minimum damage necessary to the rest of us while doing the maximum amount of damage to the Russians. And I think Iran frankly lies in between of those, where we’ve got a broader kind of global approach with things like the oil sanctions that we did, with financial sanctions that we did. But still we’re not talking about the kind of heavy-handed sanction on everything connected with Iran that you’d have with North Korea. And that’s because Iran is comparatively much more important to the global economy than North Korea and less than Russia.

HEFFNER: So in Iran and North Korea you have statewide sanctions in effect. In Russia, you have some statewide, but also specific to threats that we think may pose danger to our economy. For instance, an Oligarch who is the benefactor to disinformation campaign or is helping aid an anti American initiative. But how do we, one thing I’ve wondered that you can shed light on this administration specifically the Treasury Department has withdrawn some of those sanctions on oligarchs. So you know, Amy Knight an expert on Russian affairs was here within the last year or two and she said that that sanctions had really decimated the Putin economy. But do we know if those sanctions really are continuing in earnest, what’s the way for the American people to actually understand and track that?

NEPHEW: Yeah, yeah. The sanctions are still in place and they are still limiting the Russian economy. But one of the interesting things about sanctions, they have to have momentum in order to have a lot of efficacy. And in the Russia case, aside from what happened in 2017 with the new law that Congress passed, you don’t see a lot of momentum. You don’t see a lot of movement from 2015 when a ceasefire was negotiated between the Europeans and the Russians in Ukraine to where we are today in 2019. And so the result is that there’s been atrophy in the sanction system. The Russian economy is adapted as all economies do when they encounter a kind of problem. And so this is part of the reason why there are members of Congress now who are contemplating the next step in sanctions. They see that lack in momentum and they see people like Oleg Deripaska now being able to try and find new ways to conduct his business, so forth. And what they say is, listen, if we’re going to have sanctions have any kind of foreign policy effect, we’ve got to make them adaptable. We have to adapt to the circumstances we have at present.

HEFFNER: And the reality is that those sanctions have not normalized America, Russia relations in the way that we should want, which is that they’re not actively undertaking disinformation campaigns and troll farms are not promoting the doctored Pelosi Facebook video that went viral and these social media platforms refused to remove,

NEPHEW: Right.

HEFFNER: They’ve normalized them maybe in Donald Trump and his compatriots’ bank accounts, but not fundamentally in the area that we ought to be concerned for our national security.

NEPHEW: Right. And it, look, I think this goes to a kind of fundamental problem we have in Russia policy right now. We don’t have one Russia policies in the United States we have maybe three. We’ve got a congressional one, it’s very hawkish. We have a Donald Trump one which is very dovish and then we’ve got the, what I would call the administration, the foreign policy establishment approach, which is kind of doctrinaire, where it’s between both the congress and the president. And the reality is if you are the Russians, you are not entirely sure it’s worth your while to make a lot of concessions to the United States. Donald Trump doesn’t necessarily demand them. And it’s certainly not part of his mentality. And I think so long as they see things are working, the Russians are going to continue to play this game that they think is effective and certainly has been in the election of Donald Trump.

HEFFNER: Let’s turn to the other penalty. We talk about the penalty of sanctions, but now let’s talk about the penalty of tariffs. So Donald Trump professes he is the tariff man,

NEPHEW: Right.

HEFFNER: In actuality, how do you compare the economic impetus and the circumstances that will result from tariffs in the application of tariffs to what might be the application of sanctions against our enemies now, with some allies at least security allies we’ve contemplated as a country and now the Trump administration has enacted tariffs. What do those tariffs mean for national security?

NEPHEW: Well, I think, you know, first and foremost, we need to correct this misimpression that the president and others may have. Tariffs are not paid by the foreign country. They are paid by the United States importers of goods. And so if there are billions of dollars that are coming into the U.S. Treasury, those billions are not coming out of China. Those billions are coming out of Americans who are still paying to import goods. And this goes to a very important point. The tariffs that are being used are predominantly being used against major trading partners, which has a direct economic security implication for us but also happen to be foreign policy partners, whether they’re in Canada or in Europe for instance. And that general sense of tension and pressure that is created on our foreign policy partners through economic pressure, it can be very damaging to our ability to get them to work with us on other priorities, especially when you add sanctions in. Most of the time when we’ve use sanctions, we’ve targeted countries; we don’t have very strong trade relations with anyway, whether they’re North Korea or Iran or even Russia. But others do, including some of our key U.S. allies like Europe with Russia. And so when we make demands of them for U.S. economic purposes via tariffs, at the same time make demands on them for U.S. foreign policy reasons, like with sanctions, we actually create a lot of pressure on that relationship. We can be very damaging to our national security.

HEFFNER: The cost factor for consumers is one thing to consider and that is why tariffs for by free traders had been considered taxes on commercial goods when the policy results in increased inflation in prices at the pump or in the supermarket. The argument historically for tariffs has been to potentially exclude foreign products from the marketplace and to promote American products.

NEPHEW: Right.

HEFFNER: So when the president says that the foreign countries are paying for it, the translation into something logical from illogical is that the possibility of foreign companies taking a hit financially is there,

NEPHEW: Right.

HEFFNER: I mean, that’s what a tariff scheme is intended to trigger so that American products are back in competition. Why is that logic, which he doesn’t express, but why is that logic not applicable in 2019, or is there any merit to that logic?

NEPHEW: Well look, there is absolutely some merit to the idea that if you have foreign trade practices that are discriminatory towards the United States or are prejudicial to the United States, then tariffs exists to address that, right? The World Trade Organization has a concept that permits retaliatory tariffs for violations of your trade agreements and trade provisions. And so tariffs exist as a policy tool. They need to exist as a policy tool for US industry and for US economic reasons. The problem is when you just simply apply tariffs against, say, imports of goods from China, and you make an assumption that applying that tariff means that you’re now going to build U.S. industry you’re forgetting a few things. You’re forgetting the global nature of business today. Companies that were going to do business in China are going to not necessarily shift back to Michigan. Instead, they’re going to shift to Malaysia. They’re going to shift to India; they’re going to shift to Africa. And that’s because we have a global economy and they can do that. Second, even though they, those companies are going to move their operations someplace else, it doesn’t mean that they’re going to be paying higher taxes, which allows for the kinds of more protectionist subsidization that the president has also encouraged to try and make farmers for instance, who are hurt by trade policy with China, whole. And so what you end up having is a scenario in which U.S. industry doesn’t change its behavior in terms of where it bases operations, either here or abroad. You also don’t actually have this income stream that allows you redistribution inside the United States that actually helps us workers. And so what do you have? Instead, you have stagnant wages. You have companies that are in fact basing a lot of their activities abroad and you don’t have the ability to address those problems through trade agreements. And this is the last point I’d make is look at the end of the day, the Obama administration and predecessor administrations recognize the problems of discriminatory treatment for US companies. They tried to negotiate trade agreements that would actually drop barriers and help the US compete, instead by raising barriers. If you’re going to do that, you have to add some degree of redistribution. And that is not something that the U.S. has traditionally liked doing and certainly not Republicans.

HEFFNER: So right now the tariffs are a moving target from China to Europe, Canada, Mexico; the idea of moving from country to country with application of tariffs, does that make any strategic sense?

NEPHEW: Well,

HEFFNER: Because of what you describe of China going to Malaysia – in the most recent case, the President’s using the tariffs not to address discriminatory practices in Mexico, but to try to address that what he perceives to be a border crisis in that region. So there are security motivations in his mind for pursuing that.

NEPHEW: Right. And this opens up a whole new can of worms. I mean of course there are strategic issues if you dart around the world imposing tariffs on Europeans, Canadians, Mexicans, and Chinese, you know, business drives without having a more comprehensive trade approach that addresses the totality of U.S. economic interests. But then kind of more fundamentally when you look at, for instance, tariffs against Mexico, the President has decided to invoke the International Emergency Economic Powers Act, which allows us to declare an emergency requiring the imposition of sanctions. It’s traditionally been done for national security purposes and the President has said that this would be done here, but usually the tools used our sanctions tools, not tariff tools and there are sanctions tools for instance you know, prohibiting visas for officials in a foreign country or asset freezes or things like that. When you mix these two things up and combine tariffs with sanctions policy, first of all, you create confusion in the marketplace because tariffs are supposed to be about trade, you know, disputes and addressing trade disputes.

Second, you create problems in the foreign country. They’re not entirely sure what it will take for them to resolve the problem. If, for instance, the Mexican government were to clamp down on illegal immigration as the president of put it by 5 percent does that mean the tariffs of 5 percent go away? What’s the percentage? What’s the relationship that exists between these two things, which is especially complicated by the fact that he just negotiated a new agreement, you know, to build on NAFTA with Mexico raising all sorts of questions of whether or not the trade policy is the important thing or the border security policy. So I think there’s a mismatch here between tools and policy decisions that are being made by the president, some capriciously.

HEFFNER: Do you think that there is merit to those critiques of NAFTA and CAFTA?

NEPHEW: Sure. Look, I think there is a simple economic reality. In this country our wages are much higher and expectations for our workers are much higher. And the products that we are producing are much more substantial, meaning that you are going to have displacement of economic activity from workers in the United States to other places. You know if we’re paying people double what they could potentially make in Mexico and if U.S. companies are free to base their operations in Mexico, why wouldn’t they? You know, it’s simple capitalism. Simple economic principle, reduce your costs. The problem is the solutions that are being suggested don’t actually address raising wages in the United States.

HEFFNER: You could very well have that scenario that you have in this country with unfettered capitalism,

NEPHEW: Right.

HEFFNER: Independent of NAFTA and CAFTA.

NEPHEW: Right.

HEFFNER: That was the trend we were on moving from the Reagan years through the Clinton administration and still –

NEPHEW: Right.

HEFFNER: In the minutes we have left Richard, thinking about the stress on farmers in Iowa right now, why is that happening because of the new tariffs?

NEPHEW: Well, look, I mean I think it’s very straight forward if you raise the prices of Chinese goods coming in. The Chinese in particular, and this is where soybeans tend to be talked about, raise the prices of U.S. goods by establishing retaliatory tariffs. And what does that do? It’s like putting a rock in the middle of the street. It diverts the water right. And some of that water is diverted to other people who can be providing goods to China, not coming from the United States. And what that all adds up to is a hard time for those farmers in Iowa for, you know, folks even in U.S. industry who are now going to find it much more difficult to sell their wares to places where they previously, were, they got to find new markets. But markets are difficult to establish and find, especially if the president is also pushing tariffs in other places, whether they’re Europe, or whether they’re in Canada or Mexico.

And so I think part of the problem here is there’s this idea that you impose a tariff and somehow this brings money in and allows the United States to transform itself. The reality is, you know, post a tariff, you mess with the price signals and you mess with the, the current flows of business activity which have to go elsewhere. And when they go elsewhere, if you don’t have any kind of plan to be able to address the losses that are made to those farmers and anyone else who’s trying to export goods that are now subject to foreign tariffs, you have real problem. And this goes to a fundamental point that ultimately the U.S. government is losing sight of the fact that we’re not the only ones who make decisions; that when we decide to act, whether it’s in sanctions or in tariffs, other countries get a vote.

HEFFNER: In this climate is there any correction course? Are there historical examples of where tariffs were applied and the result was a positive for the country in transitioning to a new period of nondiscriminatory or fairer economic practices?

NEPHEW: Yeah. Look, and this is again where I say within the WTO and the international system, there are rules for how one uses tariffs. And you could imagine the selective discreet and limited use of terrorists to address particular problems or even better the threat of tariffs to prompt negotiations that would allow for a dropping of trade barriers resulting in more positives. And I would say if you’re looking for examples, there are probably millions of examples of smaller discrete instances in which the United States has used tariffs or the threat of terrorist to negotiate with foreign partners. The problem is, is that, that’s not the approach we’re taking right now. Instead, what are being announced are massive tariffs against sweeping jurisdictions, without really a plan for how that’s going to be used to achieve the diplomatic economic activities and diplomatic economic interests of the United States thereafter. And so it’s much more of a means, ends problem than we have than whether or not the use of terrorists itself is something that shouldn’t happen.

HEFFNER: So you don’t see a conceivable end game here other than some more capricious withdrawal of the tariffs. It’s not really, that doesn’t have a rhyme or reason to it?

NEPHEW: Well, certainly there could be an end game. We’ve gotten negotiations ongoing right now with China. We’ve had negotiations ongoing with Europe to address our trade disputes there. We saw what happened with the USMCA or whatever we’re going to call it today. And we’ve also seen some people in administration talk about maybe there should be some sort of Trans Pacific partnership where we address trade just like the Obama administration negotiated. So there is a way out. The problem is, is as I understand it, that the President’s become convinced that tariffs are a solution to the problem ‘cause it puts money in the United States’ pockets. And so long as he’s got that vantage point, as long as he can make these decisions unfettered by Congress, I think we’re going to see a lot more of this.

HEFFNER: Do you think? Last question. Do you think any part of that view stems from the idea that Chinese business and Chinese government are one and the same and therefore when he says he’s burdening the Chinese with new costs, it’s not individual citizens, but it’s the business sector, and that is really at one with the government?

NEPHEW: Yeah. I think there are definitely some fundamental imprecisions, in how the President looks at foreign activity and foreign economic activity, China being a case in point. Well look, there’s something to that. At the end of the day there are a bunch of closer relationships between the Chinese government, Chinese economy than there are in, you know, free market systems like what we’ve got. But I think more importantly, the President’s viewpoint on tariffs was formed in the 1980s where he saw that if you want to try and win trade wars and you want to try and improve the situation in the United States, you use tariffs and you use tariffs aggressively and boldly and the U.S. is so attractive, people will have to do business with us, that’s the fundamental proposition I think he gets wrong that the United States is absolutely, irreplaceable. We may be today, but we are not irreplaceable always.

HEFFNER: Thank you for your time today, Richard.

NEPHEW: Thank you.

HEFFNER: And thanks to you in the audience. I hope you join us again next time for a thoughtful excursion into the world of ideas. Until then, keep an open mind. Please visit The Open Mind website at Thirteen.org/OpenMind to view this program online or to access over 1,500 other interviews and do check us out on Twitter and Facebook @OpenMindTV for updates on future programming.