US markets 'could be foreign policy tool' By Thomas Catán and Joshua Chaffin in New York and Stephen Fidler in Washington
To enforce its will around the world, Washington has traditionally relied on the time-honoured trade embargo. But under a new set of legislative proposals, the US could also start to use its capital markets as a foreign policy tool.
Fred Thompson, a Republican senator from Tennessee, is preparing to introduce an important but little-noticed amendment to the current bill to grant China permanent normal trade relations. The measure would call on the president to submit an annual review of China's record on weapons proliferation and impose a graduated series of economic sanctions for any transgressions. At their most severe, these would prohibit companies owned by Chinese nationals from raising funds on US debt or equity markets.
The proposal's chances of becoming law do not appear great, but it reflects a growing body of opinion that the US should leverage the supremacy of its markets to help achieve its policy goals.
Last year's Cox committee report concluded that China is using US capital markets as a source of military funding and a way to disguise efforts to acquire sensitive US technology. Another report, prepared by former CIA director John Deutch, also concluded that the US "is not making optimal use of its economic leverage in combating proliferation".
"Trade sanctions are only one of the economic tools at our disposal," the report said. "Access to US capital markets [is one of] the wide range of economic levers that could be used as carrots or sticks as part of an overall strategy to combat proliferation."
Supporters point to the four-decade US trade embargo against Cuba, which has failed in its aim to topple Fidel Castro while costing US industry untold business opportunities. In contrast, capital market restrictions are a targeted economic sanction that avoids "collateral damage" to US companies, they say.
This year, proponents have been emboldened by the successful opposition to a planned initial share offering by PetroChina, the main operating subsidiary of China's biggest oil company. After an ad hoc coalition of left-leaning protest groups and conservative national security types united against it, PetroChina was forced to scale back its offering from $10bn to just $2.9bn.
Now, with the battle raging over permanent normal trade relations with China, Sen Thompson is trying to draw attention to what he says is the country's record in helping rogue nations acquire weapons of mass destruction. "It makes no sense for us to consider this trade issue in total isolation from the real world that we live in," he said.
"If we give the signal that we're more interested in the dollar than our own security, it'll have all kinds of ramifications."
Sen Thompson insists that his proposals apply only to China, "which our intelligence community tells us is leading the pack in terms of proliferation activities". However, such a law would clearly set an important precedent for other nations - and possibly US companies.
The US Treasury has long held that there should not be restrictions on who can raise money in US markets, arguing that blocks would merely push the activity elsewhere. But recent events have raised the idea's profile.
"Prior to PetroChina, people had not thought about the security implications for our capital markets," said Frank Gaffney, president of the William J. Casey Institute.
"We believe investors are entitled to know what kind of transactions these countries are involved in."