U.S. Trade Embargo Expected to Have Little Impact on Iraq : Economics: Analysts say Washington cannot push for worldwide sanctions without risking a recession at home.


The broad trade embargo that President Bush imposed on Iraq is not expected to have a major impact on that country's economy, analysts said Thursday, and Washington cannot push for worldwide sanctions without risking a recession at home.

In theory, analysts said that Iraq's heavy economic dependence on selling oil abroad should make it highly vulnerable to the kind of economic sanctions that Bush--and other American Presidents--historically have relied upon to achieve their foreign policy goals.

But in reality, economists said, Bush would find it practically impossible to push through economic sanctions severe enough to hurt Iraq without risking serious damage to the American economy--perhaps even pushing it into a deep slump.

Although broadening the economic embargo to involve other Western nations as well might hurt Iraq significantly, it also could easily backfire on the United States and any other industrial powers that might take part in such an effort.

"I'm afraid the U.S. is trapped between a rock and a hard place," said Alan Stoga, international economist for Kissinger Associates, the New York consulting firm run by former Secretary of State Henry A. Kissinger.

"Unilateral sanctions won't have very much impact at all, but the risk of a multilateral response to Iraq is that the potential effect on oil prices would be so severe as to do more harm than good," Stoga said.

Even if it were effective in cutting off Iraq's oil exports, a worldwide boycott of petroleum from Iraq and Kuwait would risk driving the price of oil up to as much as $40 to $45 a barrel and quickly tipping the already-sluggish U.S. economy into a recession.

The two countries together export more than 4 million barrels of oil each day.

The only way out of this dilemma, Stoga suggested, would be for the United States to provide Saudi Arabia with military protection against Iraq, if the Saudis agreed to pump enough additional oil to make up for the embargoed petroleum from Iraq and Kuwait.

Such a deal, Stoga and other experts conceded, is highly unlikely any time soon.

As a result, many analysts believe that Iraq may well get away with its sudden invasion of Kuwait, taking over one of the richest countries in the world and gaining effective control of almost 100 billion barrels of additional oil reserves.

"Iraq has moved to correct its own strategic position in the gulf in what amounts to a militarily imposed business takeover," said Patrick Connolly, a senior consultant at Cambridge Energy Associates in Cambridge, Mass.

Iraqi President Saddam Hussein "has almost doubled his reserves and productive capacity overnight, wiped out as much as $35 billion in financial obligations overnight and essentially solved his revenue problems," Connolly said. He added:

"I don't think anybody is in any position to do anything about it."

In imposing U.S. economic sanctions against Iraq, the Bush Administration froze all Iraqi and Kuwaiti government assets in the United States and in overseas branches of U.S. firms. The White House also banned virtually all trade with Iraq.

But independent analysts dismissed the U.S. actions--which are similar to those that the United States imposed on Libya several years ago for that country's terrorist activities--as relatively ineffective by themselves.

Iraq has almost no direct investments in the United States and relatively little trade with this country. The United States exported only about $1.2 billion worth of goods to Iraq last year, the vast bulk of it farm commodities.

Analysts said that the sanctions could have a significant effect on U.S. rice growers, however. Iraq is the largest export market for American rice, accounting for more than $116 million in sales--or roughly 23% of all U.S. rice shipments abroad.

The United States imports about $2.4 billion in goods from Iraq, almost all of it petroleum and oil products--making Iraq the sixth-largest oil supplier to America. In the absence of a worldwide embargo, however, the U.S. sanctions are expected to make little difference.

Iraq is likely to find another market elsewhere for its goods. At the same time, analysts said that American oil companies should have little trouble replacing the supplies from Iraq that the embargo is cutting off.

Iraq lost no time in retaliating against the American sanctions, halting its debt payments to the United States, the Qatari news agency reported.

According to the Institute for International Finance, Iraq owes about $22 billion to Western banks and governments and roughly $6 billion to the Soviet Union and East European nations.

But only about $1.6 billion of this total is actually owed to U.S. banks, and most of that is due the Atlanta branch of BNL, an Italian bank that extended an unauthorized loan to Iraq that was not discovered until late last year.

The BNL branch secretly agreed to lend Iraq $1.5 billion, but it only disbursed about $1 billion of that money, leaving another $500 million that was subject to Thursday's freeze.

The U.S. effort to protect Kuwaiti assets abroad from takeover by Iraq may prove more successful, but is expected to set off a prolonged legal struggle between the new puppet government and Kuwait's royal family.

Kuwait has an estimated $100 billion in overseas investments, analysts said--about one-third in U.S. stocks, bonds, real estate and holdings in energy firms.

Britain and France took similar steps Thursday to freeze Kuwaiti assets, in a move that British Foreign Secretary Douglas Hurd said was designed "to prevent a puppet regime in Kuwait from transferring" them elsewhere.

In hopes that Kuwait can eventually escape from under Iraq's thumb, McDonnell Douglas Corp. said Thursday that it would continue production on a $1.8-billion Kuwaiti order for 40 fighter jets despite the uncertainties stemming from Iraq's invasion of Kuwait.

Lee Whitney, a spokesman at McDonnell's St. Louis headquarters, said that the F/A-18 jets, scheduled for delivery starting in January, 1992, are in the early stages of production.

McDonnell and its major F/A-18 suppliers, including the Los Angeles-based Northrop Corp., will continue to work on the jets as if nothing had changed, he said.

Whitney said that the U.S. government, which controls all sales of military hardware to foreign governments, has not sought to stop continued sales to Kuwait.

But analyst Paul Nisbet of Prudential-Bache Securities told Reuters news agency that the sale ultimately could be in jeopardy if the new Kuwaiti government that emerges from the conflict is pro-Iraqi or otherwise proves unfriendly to the United States.

"The U.S. wouldn't want (the jets) to fall into the hands of Iraq," Nisbet said. "The assumption is that by 1992, the government of Kuwait will be independent again."

Meanwhile, U.S. Treasury officials were swamped Thursday by hundreds of telephone calls from business executives seeking to learn more about the impact of the new sanctions against Iraq. It was not immediately clear how the trade ban would affect goods already in transit.

"We have crisis teams set up to deal with that," one official said. "That's a policy question, and I think what we need to do is weigh the practicalities. It is a fairly full and complete economic and trade embargo."

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