IB10061: Exempting Food and Agriculture Products
from U.S. Economic Sanctions: Status and Implementation

Remy Jurenas

Resources, Science, and Industry Division

March 30, 2001

CONTENTS

• SUMMARY
• MOST RECENT DEVELOPMENTS
• BACKGROUND AND ANALYSIS
• Recent Changes in U.S. Policy Allowing Agricultural Sales to Sanctioned Countries
• Impact of Sanctions on U.S. Agricultural Sector
• Debate on Agricultural and Food Exports in U.S. Economic Sanctions Policy
• Provisions Enacted to Exempt Food and Medical Products from U.S. Economic Sanctions
• Overview
• Status of Implementation
• Extension of Food and Medical Exemption to Cuba
• Debate on Proposed Regulations Governing Sales to Cuba
• Codification of Food/Medical Exemption
• Export Licensing Requirement
• Previous Licensing Rules
• New Law's Changes to Licensing Rules
• Debate over Proposed Licensing Regulations
• Payment and Financing Terms of Exempted Sales
• Current Prohibition and Restrictions
• Prohibition on U.S. Financing of Agricultural Sales to Cuba
• Prohibition on U.S. Private Financing of Licensed Exports to Other Countries
• Views on Proposed Private Financing Regulations for Other Countries
• Prohibition on U.S. Government Assistance for Export Sales
• Other Cuba-Related Provisions
• Definition of Products Covered by Exemption
• Congressional Role in Future Sanctions on Exempted Products
• Outlook for Sales to Cuba under the New Policy
• Legislation Introduced in the 107^th Congress
• Cuba-Specific Bills
• Other Sanctioned Countries
• Exemption Policy In General
• LEGISLATION
• Footnotes

For more information, please see the following CRS products:

CRS Report RL30806, Cuba: Background and Current Issues for Congress

SUMMARY

Falling agricultural exports and declining commodity prices led farm groups and agribusiness firms to urge the 106^th Congress to pass legislation exempting foods and agricultural commodities from U.S. economic sanctions against certain countries. In completing action on the FY2001 agriculture appropriations bill, Congress codified the lifting of unilateral sanctions on commercial sales of food, agricultural commodities, medicine, and medical products to Iran, Libya, North Korea, and Sudan, and extended this policy to apply to Cuba (Title IX of H.R. 5426, as enacted by P.L. 106-387; Trade Sanctions Reform and Export Enhancement Act of 2000). Related provisions place financing and licensing conditions on sales to these countries. Those that apply to Cuba, though, are permanent and more restrictive than for the other countries. Other provisions give Congress the authority in the future to veto a President's proposal to impose a sanction on the sale of agricultural or medical products.

Codifying the food and medical sales exemption for Cuba generated much controversy and delayed passage of the agriculture spending bill until late October 2000. Proponents of an exemption argued that the prohibition on sales to Cuba harmed the U.S. agricultural sector, and that opening up limited trade would be one way to pursue a "constructive engagement" policy. Opponents countered that an exemption would undercut a U.S. policy designed to keep maximum pressure on the Castro government to make political and economic reforms.

Cuban officials have strongly criticized the law's provisions, and have stated that no purchases will be made with these conditions in place. Analysts expect any initial sales to be quite small relative to the potential. Congressional opponents of Title IX's prohibitions on the private financing of agricultural sales, public financing of eligible exports, and tourist travel to Cuba have introduced several bills to repeal these provisions. The Bush Administration has signaled that while sales will be allowed under the enacted statute, its policy will be not to change the embargo until political reforms occur in Cuba.

Regulations to implement Title IX's provisions allowing commercial agricultural and medical exports to Cuba and the other countries were expected to be issued in late February 2001. Inter-agency disputes over how to interpret congressional intent, particularly with respect to Cuba, have delayed their release. The Department of Treasury seeks to apply to Cuba "restrictive" export licensing rules that it currently uses for other sanctioned countries. The Department of Commerce proposes a more "flexible" licensing approach that would apply to all sanctioned countries. Other issues in dispute include the level of detail used to define agricultural and medical products; whether commercial financing for sales to Iran, Libya, and Sudan should be allowed; and whether prior restrictions on medical product sales to Cuba should stay in effect.

Members of Congress and groups with an interest in this matter have weighed in with their views on which agency's draft regulations should be adopted. Because of the controversy, the White House is now involved in resolving this issue.

MOST RECENT DEVELOPMENTS

Inter-agency disputes have delayed the release of Executive Branch regulations that would implement statutory provisions enacted last fall to exempt from unilateral U.S. economic sanctions the commercial sale of food and medical products to Cuba and other countries. With this policy change scheduled to take effect on February 25, 2001, U.S. farm groups and agribusiness were expecting regulations to be issued about that time. Treasury's Office of Foreign Assets Control seeks to apply "restrictive" export licensing rules currently used for other sanctioned countries also to Cuba. Commerce's Bureau of Export Administration proposes a more "flexible" licensing approach that would apply to all affected countries. These disputes have been forwarded to the White House for resolution by the National Security Council, which has this matter under consideration.

On March 28, a coalition of farm, port, medical, religious groups and former government officials called on President Bush to issue regulations to permit food and medical sales to Cuba to begin.

BACKGROUND AND ANALYSIS

Recent Changes in U.S. Policy Allowing Agricultural Sales to Sanctioned Countries

The Clinton Administration on April 28, 1999, announced it would lift prohibitions on U.S. commercial sales of most agricultural commodities and food products to 3 countries -- Iran, Libya, and Sudan. Moreover, it indicated that it would not include these products in announcing future sanctions on other countries. The Administration's decision reflects the view that food should not be used as a foreign policy tool and officials' acknowledgment that U.S. sanctions policy has hurt the U.S. farm economy. On July 27, 1999, the U.S. Department of Treasury issued country-specific export licensing regulations to exempt commercial sales of food and medical products by U.S. companies that meet specified conditions and safeguards to Iran, Libya, and Sudan. Licenses are issued by the Treasury's Office of Foreign Assets Control (OFAC). Regulations issued June 19, 2000, to implement a White House decision announced in September 1999 now permit sales of agricultural products to North Korea without an export license. Licensed agricultural sales to Cuba under a policy announced in May 1999 are restricted only to private and non-governmental entities.

Since the new policy went into effect, Treasury has approved licenses that have resulted in U.S. sales of corn to Iran, durum wheat to Libya, and hard red winter wheat to Sudan. Also, President Clinton, in issuing executive orders in 1999 to impose U.S. economic sanctions on Serbia and the Taliban in Afghanistan, specifically exempted food and medical products from prohibitions imposed on all U.S. exports to these destinations.

The Trade Sanctions Reform and Export Enhancement Act of 2000 (Title IX of H.R. 5426, as enacted by P.L. 106-387 on October 28, 2000; referred to below as the "2000 Act") codified the lifting of U.S. sanctions on commercial sales of food, agricultural commodities, and medical products to Iran, Libya, North Korea, and Sudan, and extended this policy to apply to Cuba. In a significant policy move, this Act also gives Congress veto power over a President's proposal to impose a unilateral agricultural or medical sanction in the future.

Impact of Sanctions on U.S. Agricultural Sector

Prior to the Clinton Administration's announcements and the enactment of the 2000 Act, the six countries (Cuba, Iran, Iraq, Libya, Sudan, and North Korea) subject to U.S. sanctions in recent years accounted for a relatively small share of world agricultural trade. In 1998, they purchased $7.7 billion of agricultural products (almost 2% of worldwide agricultural imports). The U.S. Department of Agriculture (USDA) estimates that U.S. economic sanctions on these six countries reduced U.S. agricultural exports by roughly $500 million in 1996. CRS estimates that based on the USDA projections of "lost export sales," farm income may have been reduced by some $150 million, overall U.S. economic activity by an estimated $1.2 billion, and U.S. jobs by about 7,600 (CRS Report RL30108). This reduced farm income estimate would represent about one-quarter of 1% of 1996 U.S. farm income.

Debate on Agricultural and Food Exports in U.S. Economic Sanctions Policy

Farm organizations, agricultural commodity associations, and agribusiness firms favor changing U.S. policy to exempt export sales of agricultural commodities, food products, and agricultural inputs from the broad economic sanctions currently imposed on targeted countries. They argue that prohibitions only hurt U.S. farmers and business, undermine this country's reputation as a "reliable supplier," and do not change targeted countries' behavior. These groups have joined with firms in the pharmaceutical and manufacturing sectors to call for a comprehensive review of the economic impact of these sanctions and for limits on the executive branch's use of sanctions to restrict trade.

Opposition to exempting sales of agricultural commodities and food products from current sanctions is somewhat more diffuse. Opponents argue that current law gives the President sufficient flexibility to permit food to be shipped for humanitarian reasons, and that U.S. foodstuffs, if sold, could be misused by foreign governments or not made available to those in need. Some object to the loosening of trade restrictions with certain countries, such as Cuba. Coming largely from the foreign policy and defense community, they view sanctions as a "legitimate and effective" policy tool, and draw little distinction between prohibiting sales of food and prohibiting exports of all other products.

For additional information and data on the use of sanctions that have restricted U.S. agricultural exports and exceptions to their use, and on the arguments offered by both sides in the debate, see CRS Report RL30108, Economic Sanctions and U.S. Agricultural Exports.

Provisions Enacted to Exempt Food and Medical Products from U.S. Economic Sanctions

Overview. The most significant policy change made by the Trade Sanctions Reform and Export Enhancement Act of 2000 exempts commercial sales of agricultural and medical products to Cuba from the longstanding U.S. trade embargo on that country. At the same time, provisions make permanent a prohibition on Cuba's access to U.S. private and other public financing to purchase exempted products. Though press coverage suggested that the debate was solely over a Cuba-specific measure, this Act also codifies an exemption for sales of agricultural and medical products in the conduct of U.S. sanctions policy and the terms under which this exemption operates. It further codified Clinton Administration policy that prohibited making available U.S. government credits, credit guarantees, and other financial assistance to facilitate agricultural and medical product sales to sanctioned countries. Also, changes were made to the food and medical products exemption-from-sanctions policy exercised administratively by the Executive Branch since mid-1999. The 2000 Act: (1) broadens the exemption to allow for sales of non-food agricultural commodities and fertilizers, and (2) streamlines the process that U.S. exporters must follow to obtain licenses to sell exempted products to sanctioned countries.

The enacted exemption does not apply to Iraq, which is subject to a multilateral sanctions regime to which the United States subscribes and which the United Nations implements. Other provisions in the new law require that in the future the President secure congressional approval before he can impose for foreign policy or national security reasons a restriction or prohibition on the sale of agricultural and medical products, and limit the duration of any such approved sanction to not more than two years unless Congress approves an extension.

Status of Implementation. The provisions of the 2000 Act took effect on February 25, 2001. By that time, the Department of Commerce's Bureau of Export Administration (BXA) and the Department of Treasury's Office of Foreign Assets Control (OFAC) were expected to amend their existing sanctions regulations to reflect these statutory changes. However, because of the controversy over the differences between each agency's draft regulations, the issue of resolving these two proposals was forwarded to the White House's National Security Council to address. Still uncertain is the extent the Bush Administration might seek to shape the final regulations to reflect its foreign policy views towards Cuba, Iran, and other affected countries.

During the Presidential campaign last fall, George W. Bush stated that food and medical exports should be exempt from unilateral economic sanctions. In one response published in Farm Journal, he indicated that "if sanctions are used, they should be directed at the offending government, not at innocent populations." A Bush spokesman on October 18, 2000, following passage of the agriculture spending bill, stated that his candidate opposed "changing the sanctions against Cuba until Fidel Castro or the Cuban government allow free elections, free speech and freedom for political prisoners." This position has been reaffirmed in subsequent statements made by President Bush and by top Administration officials in appearances before congressional committees.

Extension of Food and Medical Exemption to Cuba. The 2000 Act allows licensed commercial sales of agricultural and medical products to Cuba. This policy change reflects the new law's requirement that the President "terminate any unilateral agricultural sanction or unilateral medical sanction" 120 days after enactment. This provision effectively supersedes statutory provisions in the Cuban Liberty and Democratic Solidarity Act of 1996 (P.L. 104-114). That law codified the-then regulatory prohibitions on all U.S. export/import and other transactions under the comprehensive U.S. embargo imposed on Cuba beginning in the early 1960s. Under this embargo, commercial sales of U.S.-origin agricultural products (and medical products at times) to Cuba generally were prohibited. Separately, the Cuban Democracy Act of 1992 allowed some commercial sales of U.S. medical products to Cuba, but under tight conditions.

Though the Clinton Administration did announce sanctions policy changes in 1999 and in 2000 to allow sales of agricultural and medical products to Iran, Libya, Sudan, and North Korea, it did not have legal authority to do the same with respect to Cuba. This explains why most of the congressional debate leading up to passage of the new law revolved around whether this same exemption should be statutorily extended to apply also to Cuba. As House debate and a compromise unfolded in early summer 2000, those opposed to this opening in trade with Cuba succeeded in adding a number of Cuba-specific provisions.

Under the new law, agricultural and medical sales to Cuba will be subject to various conditions and restrictions that are similar to those already in effect on similar product sales to the other sanctioned countries. U.S. exporters will be required to obtain licenses before any product can be shipped. Further, a permanent prohibition is in place against the use of any U.S. government export program or financing provided by U.S. private banks or state and local governments to facilitate licensed sales.

Debate on Proposed Regulations Governing Sales to Cuba. Members of the House who led the drive to exempt food and medical products from sanctions assert that the draft regulations proposed by BXA and OFAC do not fully repeal the agricultural and medical sanctions in place with respect to Cuba. They assert that the Bush Administration's reported decision to retain restrictions on the sale of medicine to Cuba is contrary to their understanding of Section 903 of the 2000 Act, which requires the President to terminate all medical product sanctions. Administration officials reportedly argue that this new provision does not supersede language in the Cuba Democracy Act of 1992, which allows sales of medicine only if the U.S. government can verify that a product is being "used for the purposes for which it was intended and only for the use and benefit of the Cuban people." Their view is that Congress would need to repeal this provision before the President could terminate this sanction on medicine sales. In a letter to Treasury, these Members of Congress "strongly recommend that sales of medicine be permitted under the [Act's] liberalized framework" and emphasize the need to accommodate transactions related to permitted exports in the final regulations. The latter refers to their request that the new regulations include a waiver of the current legal restriction that prohibits any ship that docks in a Cuban port from entering a U.S. port for 6 months.

Codification of Food/Medical Exemption. The Act enacts into law as U.S. policy the principle that commercial sales of food, other agricultural products, medicine, and other medical products shall not be used as a tool to conduct foreign policy or to address national security objectives (see description of the definitions for these products below). Provisions stipulate that this principle apply to all countries now subject to U.S. unilateral sanctions; and require that a President in the future justify to Congress why sales of these products to a sanctioned country or foreign entity should be limited, and obtain congressional approval before taking such action. Limits on agricultural sales are defined to be "any prohibition, restriction, or condition on carrying out ... any commercial export sale of agricultural commodities" or on using any USDA program authorized under four specified statutes or any U.S. government export financing ("including credits or credit guarantees") to facilitate such sales. For medical product sales, such limits are defined to be "any prohibition, restriction, or condition on exports of, or the provision of assistance consisting of, medicine or a medical device."

In immediate and practical terms, this law: (1) codifies earlier Clinton Administration decisions to allow agricultural and medical product sales to four countries (Iran, Libya, North Korea, and Sudan) and (2) amends the laws and related regulations authorizing the U.S. embargo on Cuba to allow commercial sales of agricultural and medical products.

The 2000 Act provides four exceptions to this general principle. These are when the United States acts against a foreign country or entity to impose a sanction that includes these products pursuant to: (1) its involvement in a multilateral sanctions regime or a mandatory decision of the United Nations Security Council; (2) a declaration of war, or specific statutory authorization for the use, or the imminent or actual involvement in hostilities, of U.S. armed forces; and (3) its export control to prevent potential military use under the Arms Export Control Act, the Export Administration Act, or other authority.

Export Licensing Requirement. Under the new law's exemption, exports of agricultural and medical products to governments and other entities in sanctioned countries are allowed only under an approved export license. Section 906(a)(1) requires that this export licensing requirement apply to sales to those countries that the Secretary of State (exercising authority under three cited statutes) has determined "have repeatedly provided support for acts of international terrorism." In practice, this means that sales of eligible products to governments of countries currently so designated (Cuba, Iran, Libya, and Sudan), or to any other entity in each of these countries, must be licensed before any shipment can be made. Though the Secretary of State has determined that the governments of North Korea and Syria also are sponsors of international terrorism, Section 906(a)(2) explicitly states that the license requirement does not apply to sales to these two countries. The Secretary has discretion to drop this licensing requirement for Iran, Libya, and Sudan if the determination is made that its government no longer supports international terrorism. ⁽¹⁾ No such discretion is permitted with respect to Cuba, meaning that this licensing requirement is made permanent for eligible sales to that country.

Relevant provisions in the Act seek to streamline and simplify the type of license an exporter must obtain to sell permitted products to sanctioned countries. These address concerns expressed by U.S. agricultural exporters that the Treasury regulations governing the licensing of agricultural sales to Iran, Libya, and Sudan have been cumbersome and time consuming. Differences between current licensing rules and the relevant enacted provisions that could modify these rules are described below.

Previous Licensing Rules. For countries covered by the Clinton Administration's 1999 food and medical exemption policy (Iran, Libya and Sudan), the Department of Treasury's Office of Foreign Assets Control (OFAC) issues two types of export licenses - general and specific. The type required, and the relevant conditions and procedures that apply to each, depend on the nature of the product the exporter wants to sell, the end user of the proposed sale, the details of the terms of a sales contract, the date of contract performance, and on how the sale will be paid for (see Payment and Financing Terms of Exempted Sales for important related conditions). A general license authorizes certain transactions without the need for an exporter to file an application providing all the details of each individual transaction. A specific license is issued on a case-by-case basis to an individual or company allowing an activity or transaction to take place.

OFAC's food exemption regulations set up two different procedures for obtaining licenses, depending on the product to be sold. The conditions that an exporter must meet vary according to which procedure is followed. An expedited licensing process applies to prospective sales of specified bulk agricultural commodities. A "specific license" authorizes an exporter to enter into "executory contracts" (i.e., respond to requests for bids, enter into binding contracts, and perform against contract terms), and covers transactions over a specified time period. Certain conditions must be met to obtain this license. For sales of all other food products, medicines and medical equipment, OFAC uses a two-step licensing procedure to review each contract on a case-by-case basis. First, an exporter must obtain a "general license" to enter into an executory contract that makes performance contingent upon prior approval by OFAC, disclose all parties with an interest in the sale, and lay out all terms of the sale. Second, the exporter must apply for a "specific license" permitting performance of the executory contract before the sale can be completed. OFAC issued these regulations under the Export Administration Act of 1979 (as extended) that requires a "validated license" to export any good to a country determined to be a sponsor of international terrorism.

For Cuba, the Department of Commerce's Bureau of Export Administration (BXA) administers different licensing rules applicable to shipments of eligible food and agricultural commodities, farm inputs, and medical products. Though various statutes and regulations prohibit most exports of U.S. origin to Cuba, there are some exceptions. Three exceptions allow for the donation and sale of food and agricultural products only to individuals, eligible non-governmental entities, and private businesses. First, regulations allow U.S. individuals to ship gift parcels of food, seeds, veterinary medicines and supplies, among other specified items, to individuals in Cuba without a license. Eligible U.S. charitable organizations with an established record in delivering humanitarian donations may also export food without license to non-government entities in Cuba. Second, BXA regulations require a specific export license to ship donated food (among five other permitted categories) for humanitarian purposes to eligible beneficiaries in Cuba. Third, President Clinton announced on January 5, 1999, that U.S. policy will now allow "the sale of food and agricultural inputs to independent non-governmental entities, including religious groups and Cuba's emerging private sector." BXA's final rule issued on May 13, 1999, authorizes specific export licenses for each sale of permitted products to these recipients in Cuba and spells the procedures permitted to transport such exports. Regulations specifically prohibit financing for such sales. The underlying rationale for these limited exceptions as set out in statute or regulation is to ensure that the Cuban government, operating through its import entities, does not receive any financial benefit from agricultural or medical products that it imports directly from the United States or from a U.S. firm operating in a third country.

New Law's Changes to Licensing Rules. Section 906(a) of the 2000 Act allows sales of exempted agricultural and medical products to sanctioned countries on terms that appear to be slightly less restrictive than under previous policy (see above). The new law stipulates that such exports "shall only be made pursuant to one-year licenses ... for contracts entered into during the one-year period of the license and shipped within the 12-month period beginning on the date of the signing of the contract" and that "such one-year licenses shall be no more restrictive than license exceptions administered by the Department of Commerce or general licenses administered by the Department of Treasury." The intent of this language appears to require BXA and OFAC to consider license applications on a streamlined and less conditioned basis rather than on the present case-by-case and highly regulated basis. In other words, the aim is to move away from a complex and time consuming process that may require an exporter to walk through a multiple step process to seek approval for the several transactions involved in completing one sale. The new law removes executive branch discretion in determining the time period that applies to transactions covered by an export license, by placing a defined time parameter on the period during which an approved license covers eligible product transactions. One related provision is intended to ensure that other licensing conditions and procedures cover multiple types of transactions (e.g., an exporter submits one application providing the information required for all of the sales transactions covered by a license). Another proviso requires that regulations must ensure procedures that will deny licenses for exports to any entity, or "end user," within an affected country that promotes international terrorism.

Debate over Proposed Licensing Regulations. BXA and OFAC each have drafted licensing rules to implement the new law's exemption. These, reportedly, differ in some key respects. BXA proposes for the countries under its jurisdiction (Cuba, North Korea, and Syria) an "arrangement" that allows companies during a one-year period to export eligible products without the need to secure an individual license for each shipment. BXA reportedly would grant a "license exception" if a company agrees to monitor sales of eligible products using a prescribed set of parameters. Under this exception, sales would still be subject to a government audit. OFAC proposes for all affected countries (Cuba, Iran, Libya, North Korea, Sudan, and Syria) a case-by-case licensing system that includes end use verification. Its proposal is similar to rules already in effect for Iran, Libya, and Sudan. This two-step licensing process involves first approving a license to allow an exporter to enter into negotiations to make sales, and then issuing another license that covers actual shipments. The differences apparent in these proposed regulations reflect conflicting views on how to interpret the 2000 Act's provisions as well as language that some observers suggest is unclear and contradictory.

As these differences became known during February 2001, Members of Congress and key interest groups began to weigh in with their views. Though all agree that the Act's general principle is to liberalize the export of U.S. agricultural and medical products, those that favor a restrictive licensing approach refer to statutory language that places conditions on such sales (e.g., two of the exceptions listed above in Codification of Food/Medical Exemption prohibit the export of any product having potential for military use, and the proviso denying licenses to any entity determined to promote international terrorism).

Members of the House and Senate who last year advocated the food and medical statutory exemption (Representatives Nethercutt and Emerson, and Senator Dorgan) have called on the Bush Administration to consolidate in BXA the responsibility for controlling food and medical exports to all the countries covered by the Act. They contend that this would result in a uniform licensing regime and reduce as intended the burden on U.S. firms seeking to export these products. A letter from Senators Dorgan, Roberts, and Enzi points out that BXA already has an established licensing system in place to facilitate exporters' efforts to sell overseas. Therefore, their view is that having OFAC administer separate regulations for Iran, Libya, and Sudan "will inevitably lead to confusion." Exemption advocates further urge that BXA's proposed "license exception" approach apply to all eligible exports to all countries. They view OFAC's proposed 2-step licensing process on current sales to Iran, Libya, and Sudan as "unnecessarily complex." Agriculture groups also have expressed concern that the statutory proviso calling for rules to deny sales to entities within a country that promote terrorism (intended to apply to Iran) could be used to restrict sales to Cuba. They contend that the U.S. Department of State has not found evidence that any Cuban entity is engaged in such activity, but worry that opposing political interest may make such changes in order to get around the new law's intent.

Other Members of Congress support OFAC's proposed stricter licensing rules for Cuba to those proposed by BXA, and oppose any role for Commerce in controlling exports to countries now under the jurisdiction of Treasury's OFAC (Iran, Libya, and Sudan). The chairmen of the House International Relations and Senate Foreign Relations Committees contend that OFAC's approach reflects congressional intent that there be a "government review of proposed end-users" to prevent exports with potential military applications and to any entity that promotes terrorism. Representative Hyde in a letter to Treasury charged that BXA's proposed regulations "fall short of meeting the minimum requirements of the law" in ensuring end-use verification. Senator Helms expressed concern that BXA's proposal asserts jurisdiction over OFAC's "regulatory responsibilities with respect to commerce with terrorist states other than Cuba," which he terms "inappropriate and indicative of a misunderstanding of legislative intent." The Cuban American National Foundation, opposed to any opening in the U.S. embargo, in a letter to Commerce urged that BXA's draft regulations be modified "to ensure that the [Bush] Administration's position on maintaining sanctions against the Castro dictatorship is not undermined."

Payment and Financing Terms of Exempted Sales. U.S. policy seeks to ensure that sanctioned countries do not receive any financial benefit from permitted, or licensed, transactions. It also prohibits such countries from accessing bank accounts and other assets that their governments, or organizations or firms in these countries, hold in the United States. The new law does not change current policy, meaning that U.S. banks cannot offer trade financing to facilitate export sales of exempted products to such countries. With respect to Cuba, the 2000 Act codifies two of the three types of financial transactions that OFAC regulations permit to facilitate licensed food and medical product sales to Iran, Libya, and Sudan. Other provisions prohibit any U.S. government support of such sales to sanctioned countries (see Prohibition on U.S. Government Assistance for Export Sales below).

Current Prohibition and Restrictions. OFAC regulations specifically prohibit U.S. banks from extending financing to countries subject to U.S. unilateral economic sanctions. This policy is reflected in the current payment and financing rules that apply to licensed sales of agricultural and medical products to Iran, Libya, and Sudan under Clinton Administration policy, and to Cuba under embargo regulations. With respect to the first three countries, OFAC regulations allow only for payment of cash in advance to be made to the U.S. seller for a sanctioned country's purchase of exempted products. The two permitted trade financing, or credit, terms are (1) sales on open account ⁽²⁾ with certain limitations, and (2) financing by third country banks that are neither an overseas office of a U.S. bank nor entities of the governments of these three countries. ⁽³⁾ U.S. banks are permitted to advise or confirm letters of credit ⁽⁴⁾ issued by third country banks, but are prohibited from providing any trade financing. An exporter must obtain a general license from OFAC for each of these payment or credit terms. OFAC also will consider an application from U.S. banks for a specific license to participate in financing sales on a case-by-case basis, where such financing arrangements would not undermine overall compliance with U.S. sanctions.

Prohibition on U.S. Financing of Agricultural Sales to Cuba. Section 908(b) of the Act prohibits the financing of agricultural sales "to Cuba or any person in Cuba" by U.S. banks, any state or local government, the federal government, or any other U.S. private person or entity. This prohibition effectively codifies a provision in the Cuban embargo regulations (31 CFR 515.533(f)) that does not allow trade financing for the commercial sale of food or agricultural commodities to Cuba that BXA is authorized to license under a 1999 policy change. Language in the 2000 Act stipulates that licensed sales can occur only on a cash-in-advance basis, or if financed by a third country bank. In codifying this financing prohibition, the Executive Branch no longer has discretion to revise the financing rules should it determine the nature of the U.S.-Cuban relationship is changing. In practical terms, this results in a financing policy that treats Cuba no different than other sanctioned countries under current regulations with respect to licensed sales.

Prohibition on U.S. Private Financing of Licensed Exports to Other Countries. Though the issue of prohibiting any U.S. private financing of agricultural exports to Cuba received much attention during the legislative debate, none of the 2000 Act's provisions require any change in OFAC regulations that prohibit U.S. private financing of agricultural and medical product sales to Iran, Libya and Sudan.

Views on Proposed Private Financing Regulations for Other Countries. With respect to Iran, Libya, and Sudan, OFAC's proposed regulations are reported to continue the current prohibition on U.S. private financing of licensed sales. Though some thought that the new law would allow these three countries to take advantage of U.S. private financing despite the statutory prohibition imposed on Cuba, no provision in the Act explicitly addressed this issue to change existing regulations. Members supportive of the financing exemption argue that since Congress did not place in the law any restrictions on commercial financing for these three countries, new administrative regulations should not include restrictions that run counter to the congressional intent to eliminate sanctions on those tools (e.g., credit) that can facilitate eligible commercial sales. OFAC's reported view is that since the thrust of U.S. policy is to restrict currency flows to sanctioned countries, it would be burdensome to set up a mechanism to allow for the financing of agricultural and medical product sales, and thus better not to permit it.

Prohibition on U.S. Government Assistance for Export Sales. Section 908(a) of the Act prohibits making available any U.S. government assistance (including foreign aid, credit or guarantees, and export assistance) "for exports to Cuba or for commercial exports to Iran, Libya, North Korea, or Sudan." Language grants the President authority to waive this prohibition for humanitarian reasons, or if he determines it is in the national interest to do so with respect to Iran, Libya, North Korea, and Sudan. This waiver authority does not extend to Cuba. Statutory wording further differentiates between the 5 above-cited countries by applying this prohibition on all exports (and not just commercial exports) to Cuba. Clarifying language also stipulates that this U.S. government assistance prohibition does not "alter, modify, or otherwise affect" certain provisions of the Cuban Liberty and Democratic Solidarity Act of 1996 that authorize the President "to furnish assistance and provide other support for individuals and independent nongovernmental organizations to support democracy-building efforts for Cuba" and that require the President to "take all necessary steps to ensure that no funds or other assistance is provided to the Cuban Government."

The Bush Administration has not indicated its position on the exercise of Presidential waiver authority on this issue. Although some Members of Congress since mid-1999 have urged that credit guarantees be made available to facilitate agricultural sales to Iran, U.S. policy (reaffirmed by the 2000 Act) is not to extend any government assistance in support of permitted commercial sales to a sanctioned country listed as a sponsor of international terrorism. This position is primarily based on the statutory prohibition found in Section 620A of the Foreign Assistance Act of 1961 (22 U.S.C. 2371), which the new law affirms..

Other Cuba-Related Provisions. Sections 909 and 910 codify current Cuban embargo regulations by prohibiting merchandise imports from Cuba, and prohibiting travel-related transactions that Treasury regulations in effect on June 1, 2000 did not expressly allow, such as for travel for tourism. The new law does expressly permit travel to, from, or within Cuba related to negotiating sales of agricultural commodities to Cuba under the new exemption policy by specific license on a case-by-case basis. This is similar to OFAC regulations that currently allow travel related to making sales of exempted food and agricultural products to Iran, Libya, and Sudan. Though not addressed by the new law, commercial exports of all other U.S. products to Cuba continue to be prohibited under current Cuban embargo regulations. (For additional information, see CRS Report RL30628 (pdf) Cuba: Issues and Legislation in the 106^th Congress; CRS Report RS20409 Cuba: U.S. Restrictions on Travel and Legislative Initiatives in the 106^th Congress; and CRS Report 95-248 Cuba: U.S. Economic Sanctions.)

Definition of Products Covered by Exemption. Compared to OFAC's current policy, the 2000 Act broadens the types of agricultural products covered by the enacted exemption (Sections 775 and 902(1)). Such products include "any agricultural commodity, food, feed, fiber, or livestock," and any derived product. Livestock is defined to include "cattle, sheep, goats, swine, poultry (including egg-producing poultry), equine animals used for food or in the production of food, fish used for food, ... other animals designated" by the Secretary of Agriculture, and insects. Conferees on October 5 accepted an amendment that added "fertilizer" and "organic fertilizer" to the definition of an agricultural commodity. Exports of these inputs are allowed, unless subject to export control under other specified statutes. Section 902(4) and (5) of the new law defines medical products with reference to terms used in statutes administered by the Food and Drug Administration. ⁽⁵⁾

Treasury regulations issued to implement the Clinton Administration's 1999 policy governing sales to Iran, Libya, and Sudan list the bulk agricultural commodities and some food products eligible to be licensed. OFAC's list encompasses most of the products covered by the enacted definition, but does not allow for sales of non-food commodities like cotton (a fiber), tobacco, and wood products. Treasury's stated rationale for excluding these non-food commodities was that they could be used for military purposes. OFAC's regulations do not detail the other food products nor specify any medical product that can be sold, and thus require an exporter to apply for a license to ascertain whether a product could be sold. Concern about the use of fertilizer and agri-chemicals for military purposes is reflected also in current OFAC regulations, which do not allow sales of these items (including insecticides and pesticides) as agricultural products to sanctioned countries. Though some Executive Branch export control officials generally oppose any broadening of the definition of agricultural product to include non-food commodities, the regulations expected to be issued likely will allow for the licensing of the additional commodities and fertilizers as broadened by this Act. However, the level of detail to be included in the list of medical products to be issued as part of the regulations is still reportedly being debated.

Congressional Role in Future Sanctions on Exempted Products. The new law, in effect, gives Congress veto power over a President's proposal to impose a unilateral agricultural or medical sanction in the future. Section 903(a) requires a President to first secure congressional approval before he can restrict or prohibit the sale of agricultural and medical products on a targeted country for foreign policy or national security reasons. The President must report to Congress not later than 60 days before he plans to impose a sanction. This report must describe the proposed sanction and the activities by the foreign country or entity that justify the sanction. Before a sanction can take effect, two procedural steps must occur. First, a Member of Congress must introduce a joint resolution with the required wording within 10 session days after Congress receives the President's report. Second, Congress must pass a joint resolution stating its approval of the President's report. If both steps occur, the President may proceed. However, if these two actions do not occur within the 60 day period, the President cannot proceed with the planned sanction. This requirement and the process to be followed appears to remove any authority that the President might exercise under other statutory authorities to set sanctions policy on the sale of U.S. agricultural commodities and medical products, unless Congress first allows him to do so, and does so within a specified time period.

The Presidential reporting requirement appears also to apply to an Executive Branch decision in the future to no longer allow a targeted country to take advantage of any U.S. government export financing (credit or credit guarantees) program or certain USDA programs to purchase or receive U.S. agricultural commodities. These include: the P.L. 480 (Title I - concessional credits, Title II - food aid, and Title III - food for development) programs, the Section 416 surplus commodity overseas donation program, the export credit guarantee (GSM-102 and GSM-103) programs, the direct export credit program, the Export Enhancement Program, and the Dairy Export Incentive Program. The new law's inclusion of restrictions on the proposed, or continued, use of any of these programs in defining a unilateral "agricultural sanction" appears to be intended to prevent a repeat of a situation that occurred in 1998, when the Clinton Administration interpreted the nuclear nonproliferation sanctions provisions in the Arms Export Control Act to suspend the availability of GSM-103 credit guarantees to Pakistan, effectively denying that country access to private financing in order to purchase U.S. wheat. Congress subsequently passed P.L. 105-194 to overturn this interpretation. For background, see CRS Report 98-770 U.S. Agricultural Exports and the Nuclear Nonproliferation Sanctions on India and Pakistan.

Section 904 specifies that the requirement for the President to report to Congress on a proposed sanction does not apply when the United States is at war or involved militarily against a target country, when the sanctioned product is controlled under specified export control laws or could be used to facilitate the development or production of a chemical, biological, or nuclear weapon, or when it is imposed as part of a multilateral sanctions regime or a mandatory decision of the United Nations Security Council.

Section 905 provides that any unilateral agricultural or medical sanction approved by Congress (described above) automatically ends not later than 2 years after it goes into effect. The President may request that Congress extend the sanction for another 2 years. This process can be repeated as many times as Congress enacts a joint resolution approving the President's request for continuing the sanction. These provisions dealing with future sanctions took effect upon enactment (October 28, 2000).

Outlook for Sales to Cuba under the New Policy

While sales to Iran, Libya, and Sudan under the Clinton Administration's 1999 exemption policy have been quite small relative to their total agricultural imports, U.S. farmers, commodity groups, and agribusiness eye Cuba as a promising market. Calling last year for a broadening of U.S. policy to also exempt food from sanctions in Cuba, they argue that U.S. agriculture has lost out to foreign competitors in making sales to a sizable, nearby market.

Cuban agricultural imports averaged almost $700 million annually in the 1996-1998 period. Leading commodities imported were wheat, rice, lentils, flour, and corn. Food and agricultural imports represented 18% of total Cuban merchandise imports, and have declined as a share of total imports since the early 1990s. Top suppliers are France, Argentina, Canada, Spain, and China, which accounted for some two-thirds of Cuba's food imports. In addition, Cuba's tourism industry reportedly imports an additional $250 million in food products to cover the needs of visiting tourists.

U.S. agricultural interests argued that exempting agricultural exports from the U.S. embargo on Cuba would result in an opening that yields substantial sales. They hold that such a policy change will give U.S. exporters (particularly of rice and wheat) a competitive edge if Cuba takes advantage of its proximity to buy from its nearest supplier in order to save the cost of transporting commodities and food from its current suppliers (France, Canada, Argentina) located much farther away. Cuba reportedly could save up to $100 million in transportation costs if officials decided to buy primarily from U.S. agricultural exporters.

Expectations of large immediate U.S. sales to the island may be unrealistic, however, according to some analysts. They point to Cuba's limited financial resources, its reliance on barter and credit transactions to finance agricultural imports, its denial of access to U.S. government programs and to all public and private financing, and the possible application of other restrictive rules under current embargo regulations that could hamper such sales. They also suggest that it is uncertain that Cuba would purchase from the United States. There may be pressure to maintain trade ties with some of its "socialist partners" supplying such key commodities as rice, and resistance to relying on just one single supplier.

Projections on sales to Cuba vary by the conditions imposed and by time horizon. Some analysts project that first year sales taking into account a financing prohibition could be in the $25-$50 million range. A multinational agribusiness estimates sales within a 12-24 month period could reach $100 million. A June 2000 study projected an opening could result in $400 million in U.S. agricultural exports to Cuba within 5 years. The U.S. International Trade Commission in a February 2001 analysis estimated that if the U.S. embargo had not been in place in 1996-98, U.S. firms would have sold from $241 to $342 million in agricultural and food products to Cuba each year.

Some have observed also that the Cuban government may not be prepared for or interested in taking advantage of this possible U.S. trade opening. Top Cuban officials, including Castro himself, reject the enacted measure. They have strongly criticized its financing, travel, and other prohibitions as "unworkable" and "insulting," viewing it as a tightening rather than an easing of the embargo, and stated that Cuba will not buy any U.S.

product with such conditions in place. Some observers view such talk as political rhetoric and speculate that pragmatists in the Cuban government seeking to save scarce resources may in time influence a softening in the leadership's views once the provisions take effect.

Legislation Introduced in the 107^th Congress

Members have introduced several bills this year to revise U.S. policy on how food products are handled in sanctions regimes. Most seek to terminate the export financing and travel prohibitions imposed on Cuba by the Trade Sanctions Reform and Export Enhancement Act of 2000. One focuses on the U.S. role in the multilateral sanctions regime imposed on Iraq. Two other measures revisit the broader issue of the parameters and process to be followed to exempt agricultural sales from being included in U.S. sanctions policy.

Cuba-Specific Bills. Provisions vary in approach and in scope. H.R. 173 simply repeals the prohibition on U.S. private financing of agricultural sales to Cuba. Seven measures (Section 2(h) of H.R. 174; H.R. 797/S. 402; Section 3(f) of H.R. 798/S. 400; S. 171; and S. 239) are broader in their coverage, proposing to drop 3 provisions in the 2000 Act. These are (1) the requirement that eligible exports to Cuba be licensed in advance, (2) the prohibitions on U.S. government assistance/financing of food and medical product sales and on private financing of agricultural sales to Cuba, and (3) the prohibition on tourist travel to Cuba. Some bills repeal specific provisions; S. 239 broadly states that irrespective of the 2000 Act, "the prohibition or restriction on trade or financial transactions with Cuba shall not apply" to the export of agricultural and medical products, or to travel related to the sale or delivery of these products, to Cuba. Additional language found only in H.R. 797/ S. 402; H.R. 798/S. 400; and S. 239 effectively repeals the current restriction that ships entering Cuba cannot enter a U.S. port for 6 months. This would allow such vessels to transport U.S. agricultural and medical shipments to Cuba. Some of these bills would retain restrictions or prohibitions on agricultural/medical product exports to Cuba to meet broader export control and national security objectives. In most of these bills, the referenced provisions are part of broader legislative efforts to modify or terminate some or all aspects of the U.S. embargo on Cuba.

Other Sanctioned Countries. One measure seeking to amend the 2000 Act is broader in the range of countries to be covered. S. 171 would repeal the 2000 Act's prohibition on U.S. government assistance and financing of sales not just with respect to Cuba, but also with respect to Iran, Libya, North Korea, and Sudan. Focusing on just one country, H.R. 742 stipulates that U.S. restrictions and prohibitions imposed under the Iraq Sanctions Act of 1990 or other laws not apply with respect to the export of food, agricultural commodities, and medical products, or to travel related to their sale or delivery, to Iraq. Other provisions are intended to allow for the free flow of humanitarian aid to Iraq without the threat of prosecution by waiving the requirement that exports be licensed in advance. Exporters would be required to notify the Department of Commerce of such shipments. (For background on U.S. and United Nations sanctions policy toward Iraq, see Iraqi Compliance with Cease-Fire Agreements, CRS Issue Brief IB92117, and Iraq: Oil-For-Food Program, CRS Report RL30472 (pdf).)

Exemption Policy In General. Two measures address broad U.S. policy on the issue of exempting agricultural exports from export control or sanctions regimes. Title IV of S. 149, as introduced, proposes to exempt agricultural commodities, medicine, and medical supplies from export controls imposed for foreign policy reasons. Language specifies that this exemption would not apply to any such items subject to national security export controls imposed under Title II of this bill or listed on the U.S. Munitions List, nor to their export to a country against which an embargo is in effect under the Trading With the Enemy Act (Cuba and North Korea). During Senate Banking Committee markup on March 22, 2001, all of Title IV was deleted. This action may reflect Senate recognition that this issue was addressed by the 2000 Act, and the possibility that the Bush Administration did not want to see this language in this comprehensive export control re-authorization measure.

Separately, an identical Title IV in H.R. 627 and S. 333 exempts (under different parameters than laid out in the 2000 Act) agricultural commodities from U.S. unilateral sanctions. The exemption would apply to any prohibition, condition, or restriction on commercial sales, unless the President determines that these commodities should be included in a sanction on a foreign country or entity "for reasons of the national interest" and Congress does not disapprove.

LEGISLATION

Note: Most of the House-introduced bills listed below were referred to more than one committee. H.R. 173, H.R. 174, H.R. 797, and H.R. 798 will be handled under a rule that allows the Speaker to determine the time period each committee has to consider a measure. Each referral also is for consideration of only those provisions that fall within each committee's jurisdiction.

H.R. 173 (Serrano)
To amend the Trade Sanctions Reform and Export Enhancement Act of 2000 to allow for the financing of agricultural sales to Cuba. Introduced January 3, 2001; referred to the Committee on Financial Services, and in addition to the Committees on International Relations, and Agriculture.

H.R. 174 (Serrano)
Cuba Reconciliation Act. Section 2(h) is identical to H.R. 173. Introduced January 3, 2001; referred to the Committee on International Relations, and in addition to the Committees on Ways and Means, Energy and Commerce, the Judiciary, Financial Services, Government Reform, and Agriculture.

H.R. 627 / S. 333 (Lugar / Boehner)
Rural America Prosperity Act of 2001. Title IV (Agricultural Trade Freedom Act) amends the Agricultural Trade Act of 1978 to exempt commercial sales of agricultural commodities from a unilateral economic sanction imposed by the United States for reasons of the national interest. Introduced February 14, 2001. In House, referred to Committee on Ways and Means, and also to the Committees on Agriculture, Rules, and Government Reform. In Senate, referred to Committee on Finance.

H.R. 742 (Conyers)
Humanitarian Exports Leading to Peace Act of 2001. Provide the people of Iraq with access to food and medicines from the United States. Introduced February 27, 2001; referred to the Committee on International Relations.

H.R. 797 / S. 402 (Rangel / Baucus)
Cuban Humanitarian Trade Act of 2001. Makes an exception to the U.S. embargo on trade with Cuba for the export of agricultural commodities, medicines, medical supplies, medical instruments, or medical equipment. H.R. 797 introduced February 28, 2001; referred to the Committee on International Relations, and also to the Committee on Ways and Means. S. 402 introduced February 27, 2001; referred to the Committee on Finance.

H.R. 798 / S. 400 (Rangel / Baucus)
Free Trade With Cuba Act. Section 3(f) is identical to H.R. 797 / S. 402. H.R. 798 introduced February 28, 2001; referred to Committee on Ways and Means, and in addition to the Committees on Energy and Commerce, the Judiciary, Financial Services, Government Reform, and Agriculture. S. 400 introduced February 27; referred to Committee on Finance.

S. 149 (Enzi)
Export Administration Act of 2001. As introduced, Title IV exempts agricultural commodities, medicine, and medical supplies from the foreign policy export controls imposed under Title III of this Act. Provides for exceptions to this exemption. Introduced January 23, 2001; referred to Committee on Banking, Housing, and Urban Affairs. Hearings held February 7 and 14. A manager's amendment deleted Title IV from the measure the Committee approved (19-1) during a markup on March 22.

S. 171 (Dorgan)
Repeals certain travel provisions relative to Cuba and certain trade sanctions relative to Cuba, Iran, Libya, North Korea, and Sudan. Introduced January 24, 2001; referred to Committee on Foreign Relations.

S. 239 (Hagel)
Cuba Food and Medicine Access Act of 2001. Improves access to the Cuban market for U.S. agricultural producers. Introduced February 1, 2001; referred to Committee on Foreign Relations.

Footnotes

1. ^(back)In practice, the State Department under these statutes has never changed, or reversed, a "sponsor of international terrorism" determination made with respect to a foreign government.

2. ^(back)Sales on open account refers to a transaction in which goods are released to a buyer prior to payment, or a promise of payment. Because the exporter bears all the risk of non-payment by the buyer, this type of transaction requires a high level of established trust between both parties. An exporter, however, may view sales on these terms as providing entry to a potential market that outweighs such risk. Such terms allow a buyer to delay payment until the imported products have been examined.

3. ^(back)An example of third country financing would be a French bank providing trade finance for a U.S. exporter's sale of wheat to Iran. This bank must not be an affiliate of a U.S. bank nor of any Iranian state financial institution.

4. ^(back)A letter of credit (L/C) is used when the importer/buyer's ability to pay is uncertain, or when the exporter/seller needs it to obtain financing. A L/C gives the buyer the financial backing of an issuing bank, which makes payment within a specified time period to the seller via the seller's bank upon presentation of certain documents (e.g., those that reflect the carrying out of a sales contract's terms). To the seller, a L/C substitutes a bank's credit for that of the buyer, provides assured prompt payment, and protects against cancellation of the underlying sales contract. To the buyer, a L/C provides reasonable assurance that proper shipment is made prior to payment. The buyer also may obtain a lower price for the imported product due to the seller being exposed to a lower risk. In this case, an advising bank (a U.S. bank) would notify the availability of the third country's L/C to the U.S. exporter. This bank is responsible only for authenticating and forwarding the L/C, but makes no commitment to pay unless it agrees to act as a confirming bank. A confirming bank (a U.S. bank) adds its commitment to pay for compliant documents of, for example, the third country bank that issues the L/C for the Iranian importer.

5. ^(back)"Medical device" means "an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is - (1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them, (2) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (3) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes." "Medicine" refers to the meaning of "drug," defined as "articles recognized in the official United States Pharmacopoeia, official Homoeopathic Pharmacopoeia of the United States, or official National Formulary, or any supplement to any of them; ... articles intended for in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals; ... articles (other than food) intended to affect the structure or any function of the body of man or other animals; and articles intended for use as a component of any article specified" above.

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