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The Case Against Embargoes

By Christopher Farrell For more than four decades, the U.S. has imposed an economic embargo against Cuba in an attempt to topple Fidel Castro. The trade restrictions were further tightened after the end of the Cold War when the Soviet bloc disintegrated. President George W. Bush moved to further isolate the Caribbean nation during the 2004 Presidential election campaign in a bid to appeal to Florida's large Cuban-American community.

Yet the policy has failed miserably. Castro, who has ruled Cuba since 1959, remains in power at age 78. And the embargo has helped sustain his rule by allowing him to blame the U.S. for many of the island's self-inflicted wounds: The ordinary Cuban citizen has suffered, not benefited, from the U.S.'s stance.

ECONOMIC "CARROTS." A similar tale holds for Iran. Ever since the country's 1979 revolution, the U.S. has mostly pursued a policy of broad economic sanctions against Iran. No doubt, much is loathsome about the kleptomullahs who run the country. They've sponsored terrorism, beat back the domestic forces of reform, and presided over the breakdown of the economy. Now to the consternation of everyone from Washington to Paris, Iran is going nuclear. And the mullahs are still in power, still railing against the U.S., the "Great Satan."

Now, however, the Bush Administration is finally changing its approach to Iran. Despite a fierce internal debate, the government is supporting the European Union's effort to offer the Iranian regime economic incentives in exchange for curbing its nuclear program.

In addition to some exemptions to the embargo already in place, such as markets for American wheat and corn, the Administration is willing to offer a number of economic "carrots" in exchange for Iran abandoning any nuclear weapons ambitions. Among the incentives is support for Iran's bid to join the World Trade Organization.

ANIMAL SPIRITS. A critical lesson from the long experience of economic sanctions against Cuba and Iran should shape future U.S. foreign policy initiatives. For one thing, unilateral sanctions don't work because Cuba and Iran still trade with many other nations. For another, forget outright embargoes and broad economic sanctions if you want to bring down a caudillo or end the leadership of corrupt mullahs.

Instead, flood the country with investment and trade. Tap into the power of the global market revolution that's transforming the way people live and work. Unleash the animal spirits of capitalism, in the memorable phrase of John Maynard Keynes.

Americans should hold their noses and encourage U.S. multinationals and entrepreneurs to develop business ties in Cuba, Iran, and elsewhere. American corporations should be allowed to invest in moneymaking ventures, maybe even establish some offshore outposts for skilled workers. Washington should applaud the kind of deal the oil-services giant Halliburton (HAL) struck to develop some Iranian gas fields, rather than pressure companies to pull out.

"BONDS OF PEACE." The reason for embracing trade even with countries under unsavory regimes is that commerce between nations isn't just about exchanging goods, services, and money. No, the process is far more dynamic than that. Trade and investment open up economies to new ideas. Cell phones, the Internet, and other high-tech communication technologies are inimical to closed-minded bureaucracies. Faster economic growth can help ease the bite of poverty.

It also gives some negotiating room for more pragmatic leaders to strike a conciliatory note. As Britain's Richard Cobden said in an 1845 speech, free trade is "that advance which is calculated to knit nations more together in the bonds of peace by means of commercial intercourse."

Of course, there's no guarantee that trade leads to peace. Yet at the very least it raises the cost of waging war. It also allows for communication between citizens, entrepreneurs, and businesspeople of different countries rather than just a handful of elites.

CAN'T BE WORSE. Good examples abound of trade nurturing civil liberties and lowering tensions. In the 1990s the Clinton Administration was under a lot of pressure to impose sanctions against China for its egregious human-rights violations and civil-rights abuses. Yet the U.S. government has mostly pursued a policy of commercial engagement with China.

While the Beijing dictatorship is still unsavory, the payoff has been a Chinese economy well integrated into that of the rest of the world. In another era, increased trade with Poland and other East bloc countries hastened the downfall of communism.

The case for freer trade with nasty regimes is never simple. But why not lift the Cuban embargo and the Iranian sanctions and see what happens? The result can't be worse than the experience of the past several decades - and the outcome could be a win-win for the people of Cuba, Iran, and the U.S. Let the business invasion begin. Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Sound Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online

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