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viser, 1961-63; Assistant Legal Adviser for Economic Affairs, 1963-65; Acting Deputy Legal Adviser, 1964-65; Deputy Legal Adviser, 1965–66. Fellow John F. Kennedy Institute of Politics, Harvard University, 1966-67; Professor of Law, New York University School of Law, 1967-present.
Special Fields: International Law, International Economic Transactions, Conflict of Laws, Aviation Law.
Member: American Society of International Law, Council on Foreign Relations, American Arbitration Association, American Bar Association.
Author: International Legal Process (with Chayes & Ehrlich, 1968–69); Expropriation in the Americas (1971); Aviation Law (1972); International Private Trade (1975); International Private Investment (1976); Trade Controls for Political Ends (1977); The International Monetary System (forthcoming); as well as numerous articles in Harvard Law Review, Columbia Law Review, New York University Law Review, American Journal of International Law, American Journal of Comparative Law, Journal of Maritime Law and Commerce, Journal of Air Law and Commerce, Foreign Affairs, New York Times, etc.
Mr. LOWENFELD. Thank you, Mr. Chairman, members of the subcommittee. It is a pleasure for me to appear before this subcommittee and to be of such help as I can in your inquiry into section 5(b) of the Trading With the Enemy Act. I am honored to have been invited to appear before your subcommittee, and I appear solely in response to that invitation and not in representation of any client, organization or interest. My sole purpose here is to share with you some of my thoughts and experiences concerning this extraordinary statute.
I first became aware of the Trading With the Enemy Act as a private practitioner when I worked with counsel for the Netherlands in trying to untangle some of the conflicting claims to enemy property vested or blocked during World War II. Later, as a member of the Office of Legal Adviser in the State Department, I had frequent occasion to work on section 5(b) and to observe the consequences of its use for our foreign economic policy and our foreign relations in general.
More recently, in connection with a series of books on international economic law, I have published a book on trade controls for political ends which explores section 5 (b) of the Trading With the Enemy Act in the context of a general examination of political trade controls, including the export control program, the Arab League Boycott and the U.N. sanctions against Rhodesia.
I thought it would be most useful if I divided my presentation into four parts. First, an overview of the controls on international economic activity employed by the United States, focusing on how and where the Trading With the Enemy Act fits into the picture. Second, a discussion of some of the problems that have arisen from application of section 5(b) in our dealings with countries friendly to the United States. Third, a review of some of the uses of section 5(b) for purposes unrelated to the purpose of the statute or the emergencies that bring it into effect. And finally, a brief discussion of some of the legislative alternatives.
In doing this, I think the risks of overrefinement and oversimplification are about equally great. I am going to, I think, opt for oversimplification, subject to such correction as will come out. And I thought maybe for the first part I can summarize about 10 pages of my statement in a few sentences.
IMPORT AND EXPORT CONTROLS
Briefly, import controls have been imposed since the beginning of our republic and under fairly strict criteria, including hearings, publicity, and carefully stated authority.
Export controls are really more recent-essentially since World War II. They are applied under loose criteria and on the basis of a system that is made in and by the executive branch; essentially the bureaucracy built the system of export controls. There are stated criteria, there are regulations, there is licensing, and it is kind of a mixture of politics and law.
And then the Trading With the Enemy Act, in particular section 5(b), which relates to all other transactions-financial transactions, travel, remittances; anything and everything is controlled-and under no criteria whatever.
On the whole, import controls have been imposed for economic reasons with one major exception, which is the denial of most-favorednation treatment to Communist countries since 1951. As you recall, Poland was exempt from that in 1960, and pursuant to a trade agreement just recently, Romania now gets MFN treatment. Yugoslavia has always been treated differently.
Apart from that on the import control side we treat all countries the same, whether they are dictatorships or democracies; whether they are friendly to us or not friendly to us; whether they have trade agreements with us or not. And the emphasis is on goods, on the trade-off's between the benefits of trade and comparative advantage of export controls versus protection of domestic business and jobs.
Export controls are political, no question about that. Now and then there is an exception for a scarce commodity like scrap copper or soybeans a year or so ago. But basically, the notion is that you control export of strategic commodities, however you define those--there is a lot of controversy over it-to certain countries. You control them by saying you cannot sell without a license, and if you apply for a license, you have to answer some questions, and then maybe the license is granted, maybe it is denied.
The third type of controls under section 5(b) are all political, and they are not tied to goods. Their purpose is to express the strongest condemnation. It is interesting to see the difference, between export controls and controls under the Trading With the Enemy Act. Under the export control program which has been applied basically to the European Communist countries, there has always been some trade; We have never cut it off completely. Under the Trading With the Enemy Act, which has been applied to the Far Eastern Communist countries China (until 1972), North Korea, North Vietnam, more recently South Vietnam, and Cambodia-there has been no trade, no financial transactions, no travel.
Now that is changed with respect to China, but it is still true with respect to all of the other Far Eastern countries. Although you could in theory get a license, in fact vou never got it except for individuals in personal situations: somebody could send a package to a sick relative; that kind of thing.
There was never any licensing program with respect to commercial transactions involving these countries that we have condemned, the Far Eastern Communist countries, and since 1962 partly, and 1963 totally, Cuba.
For years there have been suggestions that the controls be eased one way or the other, and they have been met by the argument that to do that would give a misleading signal to the target country. It is interesting that, in fact, the early signals for a possible change to our policy to China did come in a series of small relaxations in the embargo with that country. First, tourist gifts were allowed; then the presumption that certain goods, like hog bristles and jade, were of Chinese origin, was removed. Then restraints on foreign subsidiaries of U.S. companies, were relaxed. Then the prohibition was lifted on the use of dollars in dealings with the Chinese. Finally, a general license was issued for nearly all trade with China shortly before Dr. Kissinger went on the famous trip to Peking in the summer of 1971.
As far as I know, none of these changes came in response to individual applications. All were steps in a political game. I suppose economics entered into the game in terms of calculating the effect on China and some of the other countries of the denial program, but there was no balance—as we have in the export control program-of gains to the U.S. economy against losses to the target country.
EXTRATERRITORIAL APPLICATION OF CONTROLS
Let me turn now to the second part of my outline and to the extraterritorial application of controls under the Trading With the Enemy Act. It is an interesting and perhaps unfamiliar subject.
Section 5(b) itself provides for the exercise of the authority granted with respect to "any person or any property subject to the jurisdiction of the United States." Then it authorizes the President to define all those terms, including "person," "property," and "jurisdiction." And that authority has been exercised in the Foreign Assets Control Regulations to assert jurisdiction over (i) all citizens of the United States, wherever they may reside; (ii) all residents of the United States, whatever their citizenship; (iii) all persons actually within the United States whatever their residence or citizenship; (iv) all corporations organized under the laws of the United States or any of its States or territories; and (v) all partnerships, corporations, or enterprises, wherever organized or doing business, linked to the United States by ownership and control. Of course, it is the fifth point that has been the sore point with a good many other countries.
The argument for the assertion of jurisdiction in this broad way is that it prevents evasion of the controls. You do not want the person in the United States to just go across the border to do what he is not allowed to do here. To use a current familiar analogy, the judgment has been that this is an area where we do not want the kind of shopping for favorable legal climate that we have with the flag of convenience shipping or offshore trusts, tax havens, and so on.
The argument the other way is that controls asserted by the United States over essentially foreign operations impinge on the sovereignty of foreign nations, make it difficult for them to maintain their own foreign economic policies and often make U.S.-based investment less welcome than it would otherwise be. I do not think we would dream
of applying, say, U.S. minimum wage laws to foreign subsidiaries of U.S. companies. We do tax earnings of U.S. corporations, but only as they are repatriated, and we give credit, for the most part, for taxes paid abroad.
But in the area we are talking about here, we purport to prohibit activities of foreign corporations, lawful-and often encouraged-in those countries where the activities are to be carried on by virtue of an ownership or management link to the United States.
In my statement, I go through a number of episodes where that happened, particularly with respect to Canada and with respect also to France. Maybe you want to come back to that. For the moment, for the sake of saving time, I just want to leave two thoughts with you on this aspect of section 5 (b).
It is, of course, a foreign policy statute, but it is not just foreign policy to Cuba, China, and Korea; it is also foreign policy with respect to Canada and France and England and other friends. In fact, the closer the interchange, as such is with Canada, the closer the number of citizens, for example, whom we have on boards or in management positions of foreign companies, the greater the frictions.
Second, I think it is fair to say that the Trading With the Enemy Act controls are, in large part-not exclusively, but in large partsymbolic. That is, we certainly do not expect to overthrow the Government of North Korea. We did not ever, I think, expect to overthrow Mao Tse Tung. We do not want to overthrow Fidel Castro. Perhaps we once did, but not now. I do not think we ever really expected to bring Castro down through economic sanctions.
It is a symbolic action; it has some value. It is the worst name you can call somebody without bloodshed, without war. But as we move toward the symbolic use of these controls, it seems to me we ought to be concerned less about possible evasion; furthermore, we ought to resolve doubts in favor of refraining to assert jurisdiction over foreign operations or corporations linked to the United States.
MISUSE OF SECTION 5 (b)
Let me turn next to what I have called misuse of the Trading With the Enemy Act. Perhaps using that term prejudges the issue. Your committee will have to judge whether you think it is proper use or misuse. But what I am really talking about is the reliance on section 5(b) for actions when other statutory authority was lacking or defective. I have referred to section 5(b) as a political weapon, economic warfare, if you will, in the context of a cold war of shifting intensity. But there are three points I want to mention—and others detailed by the committee in its committee print of last November-where section 5(b) has been used as an economic measure without connotation of enemy involvement. And a fourth point-repeated several times-section 5(b) has been used, I believe improperly, as a reserve authority for the export control program when that program's basic authority expired. I have four episodes I want to just briefly mention.
BANK HOLIDAY OF 1933
The first one is President Franklin D. Roosevelt's reliance on the Trading With the Enemy Act. As his first official act, he issued a proclamation closing the banks on March 6, which was the Monday
of his first term, 1933. I have been reading some of the history books about that first week. It seems Roosevelt was prepared to close the banks without any authority and was persuaded by the Cabinet that it is better to rely on some authority than no authority at all. And so he relied on the Trading With the Enemy Act. And he did that, even before the Trading With the Enemy Act read as broadly as it does now. Of course, there was very little having to do with "enemy" and, indeed, not much having to do with "foreign" in the step of closing
I think the proclamation was contrived. In fairness, it only lasted a few days, because Congress then passed a statute expressly ratifying and confirming everything President Roosevelt had done. But I still think it was wrong. I am not suggesting there was no emergency. We had 13 million people out of work. The banks apparently, literally were running out of money, and it may be that the experience may suggest some kind of standby authority, some kind of emergency authority, though not particularly in the international area. But relating such action to the war powers or to an enemy seems to me unfortunate, for a couple of reasons.
First, I think it breeds disrespect and cynicism about law, precisely among the persons who should be most careful about obedience to law; that is, the President and his senior advisers.
Second, I think our courts have a history-it is really almost a conditioned reflex-of staying away from challenges of governmental action when you mention the word "foreign affairs" or "War Powers" or "national security." If that is so, I think one ought to use that kind of authority with great reserve.
JANUARY 1, 1968: RESTRAINTS ON DIRECT FOREIGN INVESTMENT
A second episode I want to mention is President Johnson's implementation of his balance-of-payments program in January 1, 1968, when he placed restraints on direct foreign investments by U.S. companies, requiring repatriation of earnings and setting up what became an elaborate bureaucratic set-up of the foreign direct investments programs. It was a whole regulatory program really made up out of whole cloth.
Again, the program may have been advisable, though one could argue it postponed measures relating to the realinement of currencies that perhaps should have been taken sooner than they eventually were. For this purpose, I want to point out only the measures were taken without debate by or authority from the Congress, and they had no rational connection with the purpose of the Trading With the Enemy Act. It is interesting that President Johnson's Executive order cites "the continued existence of the national emergency declared by Proclamation 2914 of December 16, 1950."
Most people reading this would say it is the usual boilerplate: what does it matter? But I recognized that proclamation; I am sure by now, members of this committee will too. That was the proclamation issued by President Truman when the Chinese crossed the Yalu River in December 1950, after MacArthur had gone into North Korea: it was hardly related to the crisis of the dollar following the devaluation of the pound sterling a couple of months before.
Moreover-and this again is one of the recurring weaknesses of action under section 5(b)-President Johnson's action was not a 60