Anti-Boycott Considerations

A reader from Israel sent me an interesting article about the apparent Saudi position on the long-standing Arab League boycott of Israel.

By way of background, U.S. law prohibits U.S. entities from engaging in activity that supports foreign-based boycotts not sanctioned by the United States. The primary objective of these laws is to prohibit compliance with the Arab League boycott, limit tax advantages for persons complying with the boycott, and requires the quarterly reporting of requests for compliance.

The kinds of activities that run afoul of the anti-boycott laws are:

• Agreements to refuse or actual refusal to do business with or in Israel or with blacklisted companies.
  
• Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality.
  
• Agreements to furnish or actual furnishing of information about business relationships with or in Israel or with blacklisted companies.
  
• Agreements to furnish or actual furnishing of information about the race, religion, sex, or national origin of another person.
• Implementing letters of credit containing prohibited boycott terms or conditions.

There are big time penalties for violations including prison time for willful violations.

Coincidental to my receiving the above-referenced article [gee, that sounds lawyerly], the Bureau of Industry and Security published today a proposal relating to boycott compliance and enforcement. The proposed rule attempts to do two things:

• Formalize the process for making voluntary disclosures of violations
• Establish factors BIS will use in the mitigation of penalties (one of which will be voluntary dislcosures)

Which brings me back to Saudi Arabia. According to the article, the Saudi Ambassador to the U.S. acknowledged that it is continuing to abide by the boycott with respect to its own primary activities. According to the statement, Saudi Arabia is no longer enforcing the "secondary" and "tertiary" boycotts, which prohibited business with business that had contacts with Israel. This is the kind of thing U.S. companies might see buried in a contract, for example, requiring that the U.S. seller not use an insurance company that does business in Israel. However, the Ambassador reportedly continues, the primary boycott on goods and services originating in Israel continues in force in Saudi Arabia.

This position is apparently in contrast to U.S. understandings of the Saudi position. That understanding was apparently part of the deal for U.S. support for Saudi admission to the WTO. All of which will lead to a round of activity at the White House and USTR to get this clarified. If the Saudi's do not back down, it could get sticky for the administration which has been dogged by a perception of an unusually close relationship with the Saudi royal family.

The politics and economics of boycotts in general are interesting. What we may view as a politically responsible boycott (think the Cuba embargo) is often viewed as a moral or political affront to the next guy. Is the U.S. better off in a geopolitical sense because we make it difficult for the average Cuban to secure the necessities of life? The average Cuban is in worse shape today than in 1990 due to the loss of Soviet funding. Rather than fill that void and show the average Cuban the benefits of free enterprise and democracy, we continue the embargo.

Other boycotts are purely symbolic. Did the U.S. gain some political, economic, or even athletic advantage by boycotting the 1980 Olympics after the Soviets invaded Afghanistan. No, but it was a good opportunity to make a moral stand. Are Catholics accomplishing anything by boycotting the DaVinci Code? Probably not, but they are doing what they think is right.

I am not for a minute defending the Saudi boycott of Israel. It is wrong. The fact that the boycott is morally wrong headed and inherently anti-Semitic is just part of the story. Commercial, cultural, and educational ties between countries and people are what bind the world into peace and stability. We don't fight with Canada and Europe because it would be against our own interests. Creating market skewing separations that don't let individual countries benefit from their comparative advantages will, in the long, run fail. Saudi Arabia has oil, financial services, and other industries. Israel has high-tech entrepreneurs, agriculture, and other advantages. Separating the two countries with a boycott is not, from a purely trade perspective, doing any good.