oversight

Economic Sanctions: Effect of Selected Measures on South Africa and Namibia

Published by the Government Accountability Office on 1990-04-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United   States   General   Accounting   Office

GAO                Report to the Honorable
                   Edward M. Kennedy, U.S. Senate



April   1990
                   ECONOMIC
                   SANCTIONS
                   Effect of Selected
                   Measures on South
                   Africa and Namibia




GAO/NSIAD-90-106
_.
.
National Security and
International  Affairs Division

B-226687

April 11, 1990

The Honorable Edward M. Kennedy
U.S. Senate

Dear Senator Kennedy:

This report responds to your request that we provide an analysis of South Africa’s role in the
world diamond market and the feasibility of imposing sanctions on South African diamonds.
As you requested, it also addresses the effect of U.S. sanctions on Namibia and the
implications of removing them on the enforcement of the remaining sanctions on South
Africa.

As agreed with your office, unless you publicly announce its contents earlier, we plan no
further distribution of this report until 30 days from the date of this letter. At that time, we
will send copies to interested parties and make copies available to others upon request.

This report was prepared under the direction of Allan I. Mendelowitz, Director of Trade,
Energy, and Finance Issues, who may be reached on (202) 275-4812 if you or your staff have
any questions concerning the report. Other major contributors to this report are listed in
appendix I.

Sincerely yours,




Frank C. Conahan
Assistant Comptroller General
                                                                                                    -
Executive Summaxy


                       In 1986, in an effort to force South Africa to change its policy of racial
Purpose                segregation, the United States imposed economic sanctions on selected
                       tr&ts&tions and products traded with South Africa and its former col-
                       ony Namibia. As requested by Senator Edward M. Kennedy, this report
                       examines

                   l   the   feasibility of imposing sanctions on South African diamonds.
                   l   the   effect of U.S. sanctions on Namibia, and
                   l   the   implications that removing sanctions against Namibia would have
                       for   enforcement of the remaining sanctions on South Africa.


                       South Africa is the world’s fifth largest diamond producer and mines
Background             about 9 percent of the world’s production. De&ers, a South African cor-
                       porationuntil March 1990 when it moved control of its foreign opera-
                       tions to Switzerland, owns, either wholly or partially, at least 36 percent
                       of the world’s production and has a near-monopoly in the diamond
                       trade-it   markets 75 - 85 percent of the world’s rough diamonds.

                       Namibia, a country in southwestern Africa, was formerly a South Afri-
                       can colonial possession and was subject to U.S. economic sanctions on
                       selected products and transactions. U.S. sanctions were removed when
                       LNarnibia became independent on March 21,199O.


                       A U.S. ban on diamonds of South African origin would have little effect
Results in Brief       on South Africa’s economy because diamond exports only account for
                       about 2 percent of its exports, and sales of diamonds to the United
                       States represent an even smaller percentage. Also, sanctions against
                       South African-origin diamonds are very difficult to enforce because the
                       country of origin for individual diamonds cannot readily be determined
                       by visual, chemical, or physical tests or guaranteed by certificates of
                       origin accompanying shipments. Such enforcement difficulties may be
                       overcome by government-to-government agreements guaranteeing coun-
                       try of origin.

                       U.S. sanctions against Namibia had very little economic effect because
                       the United States had a very low volume of trade with the country prior
                       to their implementation.

                       South African ports serve Namibia and other neighboring countries.
                       Because sanctions against Namibia were removed when it became inde-
                       pendent, South Africa could relabel its exports and imports to indicate


                       Page 2                                       GAO/NSIA.D9@106 Economic !hnctiom
                          Executive Summary




                          they originated in-or were destined for-Namibia     to evade sanctions.
                          However, South Africa could just as easily use the names of several
                          other neighboring countries.



GAO's Analysis

Feasibility of U.S.       Diamonds account for a maximum of 2 percent of South Africa’s export
                          revenues. Although accurate figures are not available, South African
Sanctions Against South   exports of diamonds to the United States are an even smaller portion of
African Diamonds          such revenues. Diamond production accounts for less than 1 percent of
                          South Africa’s gross domestic product. Therefore, even perfectly
                          enforced sanctions on South African-origin diamonds would have a lim-
                          ited economic effect.

                          Enforcement difficulties could weaken even this potential effect because
                          the country of origin of most diamonds cannot be identified either visu-
                          ally or by physical or chemical tests and because DeBeers has refused to
                          help with the identification and separation of South African diamonds.
                          According to an Indian diamond trader, a similar ban by India was inef-
                          fective because of enforcement problems. Such enforcement difficulties,
                          however, could be mitigated by government-to-government agreements
                          between the United States and the three other principal nations that cut
                          diamonds to ensure that no diamond shipments entering the United
                          States from these countries contain South African-origin stones.


US. Sanctions Against     U.S. sanctions had very little effect. Fish was the only major Namibian
                          export to the United States before sanctions were imposed in 1986 and,
Namibia                   at that time, had a value of only $177,000. However, some companies in
                          Namibia believe they lost opportunities to develop markets in the United
                          States for uranium and specialty wool. In addition, the U.S. ban on oil
                          exports to South Africa and Namibia may have increased the cost of
                          petroleum products and other products in Namibia.

                          Namibia, like some other countries neighboring South Africa, exports
                          and imports most products through South African controlled ports.
                          Potentially, South Africa could evade sanctions by labeling its exports
                          as originating in these countries and its imports as destined for these
                          countries.



                          Page 3                                     GAO/NSIMHO-106   Economic Sanctions
                  This report contains no recommendations.
Recommendations

                  At the request of Senator Kennedy, GAO did not obtain comments from
Agency Comments   any US. agency on this report.




                  Page 4                                     G.40/NSlAD-3&106   lkonomic   SAIIC~~OM
Page 5   GAO/NSIAD9@1(w   Economic Sanctions
contents


Executive Summary                                                                                   2

Chapter 1                                                                                           8
Introduction              Objectives, Scope, and Methodology                                        8

Chapter 2                                                                                          10
Feasibility of Imposing   South Africa’s Role in the World Diamond Market
                          The Difficulty of Enforcing Sanctions
                                                                                                   10
                                                                                                   12
Sanctions on South        Enhancing Enforcement With Government-to-Government                      15
African Diamonds              Guarantees
                          Conclusion                                                               17

Chapter 3                                                                                          18
Implications of U.S.      Namibia’s Main Industries and Exports
                          Effect of Sanctions on Main Industries
                                                                                                   18
                                                                                                   18
Sanctions on Namibia      Potential for South Africa Evading Sanctions Because                     20
for South Africa and           Sanctions Against Namibia Were Lifted
                          Conclusion                                                               21
Namibia
Appendix                  Appendix I: Major Contributors to This Report                            22

Tables                    Table 2.1: World’s Largest Producers of Gem Diamonds                     11
                          Table 2.2: Consumers of Diamond Jewelry, 1988                            12




                          Abbreviations

                          @Jo       Central Selling Organization
                          GAO       General Accounting Office
                          GDP       Gross Domestic Product


                                                                   GAO/NSIAl%~1O0   Economic Sanctiona
Page 7   GAO/NSIA.D90106   Economic Sanctions
Chapter 1

Introduction


                            In response to South Africa’s policy of racial segregation, the United
                            States imposed economic sanctions on selected transactions and prod-
                            ucts traded with the country and its former colony Namibia. In 1985, the
                            President issued Executive Orders 12532 and 12535 which, among other
                            things, administratively banned imports of South African Krugerrands
                            (gold coins); exports of nuclear goods and technology and computers to
                            apartheid-enforcing agencies; and new loans to South African govern-
                            ment entities. The Comprehensive Anti-Apartheid Act of 1986 legisla-
                            tively banned certain U.S. transactions with South Africa and Namibia,
                            including

                        . imports into the United States of coal, textiles, uranium, agricultural
                          products, iron and steel, and products from South African government-
                          owned or controlled entities, including gold;
                        l exports of oil, arms, nuclear goods and technology and computers to
                          apartheid-enforcing agencies; and
                        . new U.S. loans and investment in South Africa.

                            Since 1986, congressional debate on South Africa has focused on the
                            effectiveness of these existing sanctions and whether more should be
                            imposed.

                            The United States mediated          an agreement among Cuba, Angola, and
                            South Africa that provided         for a gradual transition to independence for
                            Namibia and the withdrawal           of Cuban forces from Angola. U.S. sanc-
                            tions against Namibia were         removed when Namibia became independent
                            in March 1990.


                            In a November 23, 1988, letter, Senator Edward M. Kennedy asked us to
Objectives, Scope,and       examine South Africa’s role in the world gold and diamond markets, the
Methodology                 feasibility of sanctioning South African gold and diamonds, the effect of
                            sanctions on Namibia, and the implications that removing sanctions on
                            Namibia would have for continued enforcement of those on South
                            Africa. We issued a report on July 14, 1989, on U.S. government enforce-
                            ment of the ban on imports from South African government-owned or
                            -controlled entities contained in the Comprehensive Anti-Apartheid Act,
                            noting that imports of South African gold bullion were covered under
                            the provision,l and on September 25, 1989, we reported on the feasibility


                            ‘South Africa: Enhancing Enforcement of the Comprehensive Anti-Apartheid Act (GAO/
                                     9-184).



                            Page 8                                                GAO/NSIAMO-106      Economic Sanctions
    chapter 1
    IINroduction




    of imposing additional sanctions on gold2 As agreed with Senator Ken-
    nedy’s office, this final report discusses the following topics:

. the   feasibility of imposing sanctions on South African diamonds,
l the   effect of U.S. economic sanctions against Namibia, and
. the   implications that removing sanctions against Namibia would have
  for   enforcement of the remaining sanctions against South Africa.

    To obtain information on the role of South Africa in the world’s diamond
    market and to obtain views on the feasibility of imposing sanctions on
    South African diamonds, we interviewed and obtained documentation
    from the DeBeers Central Selling Organization (cso) in London, which
    markets most of the world’s diamonds; DeBeers’ mining companies in
    Namibia and Botswana; diamond cutters and traders in Belgium and
    New York; experts on the science of classifying and cutting diamonds;
    independent analysts knowledgeable about the diamond market; anti-
    apartheid groups in London and the United States; the Commonwealth
    Secretariat in London; the government of Botswana; and the US. State
    and Interior Departments.

    To obtain information on the effect of U.S. sanctions on Namibia and the
    implications that removing them would have for continued enforcement
    of sanctions on South Africa, we interviewed and obtained documenta-
    tion from representatives of Namibia’s government and private sector,
    U.N. representatives, and independent analysts knowledgeable about
    Namibia.

    To obtain information on U.S. imports of diamonds and all imports from
    Namibia, we used the Department of Commerce’s Census database.

    We conducted this review from December 1988 to September 1989 in
    accordance with generally accepted government auditing standards. As
    requested, we did not obtain formal agency comments.




    %outh Africa: Feasibility of Imposing Additional Sanctions on Gold (GAO/NSIAD-89-232).



    PBgt 9                                                  GAO/NSIAD-S&lOC? Economic Sanctions
Feasibility of Imposing Sanctionson South
African Diamonds

                         Diamonds play a limited role in South Africa’s economy, accounting for
                         a maximum of 2 percent of its export earnings. Although no accurate
                         figures exist, South African diamond exports to the United States make
                         up an even smaller portion of such earnings. Diamond production
                         accounts for less than 1 percent of the country’s gross domestic product
                         (GDP).

                         A sanction on South African-origin diamonds might be difficult to
                         enforce because the country of origin of most diamonds cannot be identi-
                         fied visually or by physical or chemical testing and thus certificates of
                         origin accompanying shipments could be falsified easily. Furthermore,
                         DeDeers, a South African corporation until March 1990 when it moved
                         control of its foreign operations to Switzerland, is capable of identifying
                         the origin of most newly purchased diamonds through its position as the
                         dominant buyer and seller of diamonds in the world, but has refused to
                         help with identification. Such enforcement difficulties, however, might
                         be mitigated by government-to-government agreements between the
                         United States and the three other principal nations that cut diamonds to
                         ensure that no diamond shipments entering the United States from these
                         countries contain South African-origin stones.


                         Diamonds are classified for gem or industrial use by their quality. High
South Africa’s Role in   quality gem diamonds account for a lower percentage of total world pro-
the World Diamond        duction in carat weight and a higher percentage in dollar value. Because
Market                   of their much higher value, this report focuses on the gem diamond mar-
                         ket and South Africa’s role in it.


Diamond Production       South Africa produces about 3.7 million carats of gem diamonds a year
                         (9 percent of world production) and is the world’s fifth largest producer
                         behind Australia, Botswana, the Soviet Union, and Zaire. (See table 2.1.)
                         Although figures are not readily available, South Africa probably has a
                         greater monetary share of the world market because a substantial
                         amount of Australia’s and Zaire’s production involves lower quality gem
                         diamonds.




                         Page 10                                    GAO/NSIADWlO6   Economic Sanctions
                                              Chapter 2
                                              Feadbiity of Impoeing !Sanctiona on South
                                              African Diamonds




Table 2.1: World’s Largest   Producers   of
Gem Diamonds                                                                  1988 Estimated production           Percent of world
                                              Country                             (Thousands of Carats)                 production
                                              Australia                                           17,517                        40
                                              Botswana                                            10,801                        25
                                              Soviet      Union                                    4,500                         10
                                              Zaire                                                3,800                         9
                                              South Afrtca                                         3,739                          9
                                              Angola                                                 905                             2
                                              Namlbla                                                901                             2
                                              Others                                               1.443                             3
                                              World total                                         43.606                       100
                                              Source: U S Bureau of Mines




DebeersDominates World                        The leading diamond mining countries sell most of their rough uncut
                                              diamonds to the Central Selling Organization of DeBeers, the dominant
Diamond Marketing                             buyer of rough diamonds in the world.

                                              DeBeers mines almost ail diamonds in South Africa. It also mines
                                              diamonds in Botswana and Namibia and, together with its South African
                                              production, accounts for at least 36 percent of world production, but
                                              controls the trade by marketing about 75-85 percent of the world’s
                                              rough diamonds. After importing diamonds from the countries of origin
                                              and buying some of unknown origin on the open market, the cso sorts
                                              them into 5,000 categories by color, size, and quality. Once the diamonds
                                              enter the sorting process, production from each country is commingled
                                              and knowledge of each diamond’s country of origin is lost. The
                                              diamonds are stored in the company’s stockpile, which in 1989 had an
                                              estimated value of about $3 billion (approximately 70 percent of the
                                              value of 1 year’s worldwide diamond sales).


Diamond Cutting Centers                       To keep diamond prices high, the cso controls the quantity of each cate-
                                              gory sold into the market and sells only to a select group of about 150
                                              buyers, called sightholders, many of whom are in Antwerp, Belgium.
                                              Every 5 weeks, “sights” are held in which each sightholder receives a
                                              box of diamonds from the cso that is a mixture of various colors, sizes,
                                              and qualities; the sightholders must accept the diamonds offered them
                                              or risk being excluded from the sights. Individual traders and manufac-
                                              turers then trade and retrade diamonds to obtain the proper mixture of
                                              diamonds to meet their needs. Ultimately, rough diamonds are sold to
                                              the major cutting centers in Antwerp, Belgium; Bombay, India; Tel -4viv,


                                              Page 11                                            GAO/NSLUMO-106 EconomicSanctions
                                    chapter 2
                                    FeadbiUty of Impoeing Sanctiona on South
                                    AMcan Diamonds




                                    Israel; and New York in the United States. The United States, because of
                                    high labor costs, cuts only the biggest and most valuable diamonds,
                                    while Belgium and Israel cut stones of intermediate size and quality;
                                    India, with the lowest labor costs, cuts the smallest and most inexpen-
                                    sive stones. The Soviet Union, Thailand, and South Africa have smaller
                                    cutting industries.


Consuming Countries                 The United States and Japan are by far the two largest consumers of
                                    diamonds in the world. In 1988, the United States accounted for 30 per-
                                    cent of the value of world retail sales of diamond jewelry. The market
                                    for diamonds in Japan has expanded rapidly; with 31 percent of the
                                    world market, it has surpassed the dollar value of the U.S. market.
                                    Table 2.2 shows the consumers of diamond jewelry, both in value and
                                    number of diamond jewelry pieces sold.

Tablo 2.2: Consumera   of Diamond
Jewelry, 1988                                                                        Percent of the world market
                                    Country                                        Value     Diamond jewelry pieces   sold
                                    Japan                                              31                               15
                                    United States                                      30                               35
                                    Europe                                             18                               22
                                    Southeast Asia                                      6                                4
                                    Other                                              15                               24
                                    Source: Amencan Diamond Industry Association



                                    Sanctions on diamonds could include banning imports of rough stones
The Difficulty of                   produced in South Africa and/or cut stones of South African-origin.
Enforcing Sanctions

Difficulty in Identifying           Most diamonds cannot be distinguished by country of origin through
                                    visual inspection or physical or chemical tests, so enforcing a ban on
the Origin of Individual            South African-origin diamonds would be harder than enforcing import
Diamonds                            prohibitions on other products for which the country of origin can be
                                    identified. Expert diamond sorters cannot determine with certainty by
                                    visual inspection where most individual rough diamonds originate. It is
                                    not possible to test rough diamonds for their country of origin by physi-
                                    cal or chemical means, which are based on the identification of trace
                                    elements. Gem diamonds have few flaws where testable deposits of




                                    Page 12                                            GAO/NSLAlMO-1OtJ Economic Sanctions
                             chapter 2
                             Feasibiity of Lmpoeing Sanctions on South
                             African Diamonds




                             trace elements are found. Determining where diamonds originated once
                             they are cut is even more difficult.

                             Although the cso could separate newly mined South African diamonds,
                             because it buys most of the world’s diamond production directly from
                             producers, it has no incentive to do so and has already refused U.S.
                             sightholder requests to do so. According to a cso official, the company
                             would incur costs setting up a dual sorting and storage process for South
                             African and non-South African stones. Most South African diamonds
                             come from mines owned by DeReers. In addition, about 17 percent of the
                             value of the diamonds that DeReers markets are mined in South Africa.
                             Consequently, the cso has not cooperated. Even if the cso cooperated, it
                             could only identify the country of origin of newly mined diamonds
                             because its stockpile is sorted according to size, color, and quality of
                             stones rather than by country of origin.


Limited Ability to Enforce   To enforce a ban on South African diamonds, the United States would
                             have to rely on the import documentation accompanying diamond ship-
the Sanction                 ments and tips by informants. Because diamonds change hands so fre-
                             quently during the trading and manufacturing process, it would be very
                             difficult to ensure the accuracy of certificates of origin. The lack of posi-
                             tive identification would make it difficult to prove a violation of sanc-
                             tions in a court of law.

                             It is likely that a ban on South African diamonds would encounter wide-
                             spread evasion through false country of origin certificates for imported
                             diamonds. Diamonds are traded and retraded so often in the supply
                             chain that many opportunities would arise to create false certificates of
                             origin for diamonds of South African or unknown origin. Rather than
                             cooperate with U.S. sanctions, the cso could sell any diamonds normally
                             sold directly to cutting centers to dealers in trading centers, such as Ant-
                             werp, who could create false country of origin documentation for export
                             shipments to the United States. The Belgian government does not
                             require certificates of origin for import shipments of diamonds.

                             According to a major Indian diamond merchant, an Indian ban on
                             diamonds from South Africa has been circumvented by traders who use
                             false country of origin certificates and cso shipments of diamonds to
                             India that are accompanied by documentation citing their country of ori-
                             gin as “unlmown.”




                              Page 13                                     GAO/NSlAlMG106   Economic Sanctions
                      Chapter 2
                      Feasibility of Imposing Snnctions on South
                      African Diamonds




                      Furthermore, diamonds have a high value-to-weight ratio and can be
                      easily smuggled to evade sanctions. Millions of dollars worth of
                      diamonds can be smuggled in a traveler’s briefcase.


A Sanction on South   Because of the likelihood of widespread evasion, a ban on rough and/or
                      cut stones of South African origin would probably be ineffective.
African Diamonds
Probably Would Be     Even if diamond traders did not try to circumvent the ban by falsely
Ineffective           certifying origin, they could not honestly certify to the U.S. Customs
                      Service that their diamond imports were of non-South African origin.
                      Therefore, a ban on South African diamonds could result in a de facto
                      cutoff of all legal diamond imports.

                      If a U.S. sanction resulted in a cutoff of all rough diamond imports, the
                      U.S. cutting industry would be deprived of its flow of raw materials.
                      This cutoff would be felt within a period as short as 5 weeks, the period
                      between cso sales to sightholders. Faced with a long-term cutoff of raw
                      materials, the U.S. cutting industry could cease to function and might
                      eventually be forced to move to countries where sanctions did not affect
                      rough diamond supplies. Diamond cutting is not a capital intensive
                      industry and is therefore mobile, so relocation could occur quickly, as it
                      did before World War II when the Dutch diamond industry moved to
                      Belgium because of high Dutch taxes. In anticipation of potential sanc-
                      tions, U.S. sightholders have already asked the cso to exclude South
                      African rough diamonds from their sights, but the cso has declined to do
                      so, according to its president.

                      If a sanction disrupted the supply of cut stones to the United States, it
                      would harm foreign diamond cutting centers, and jewelry manufactur-
                      ers, retailers and consumers. According to the US. retail jewelry indus-
                      try, imported diamonds account for 45 percent of all retail jewelry sales,
                      so a cutoff of cut diamonds would severely hurt jewelry store sales. A
                      disruption of the U.S. market would also harm the overseas cutting cen-
                      ters, which are important components of their countries’ economies. For
                      example, diamond exports account for about 27 percent of Israel’s for-
                      eign exchange earnings, 16 percent of India’s, and 6 percent of E3eL
                      gium’s. The industry employs about 12,000 workers in Israel, 450,000 in
                      India, and 8,000 in Belgium.

                      Any ban on diamonds of South African origin cut and polished in a third
                      country might place the United States in violation of its obligations
                      under the General Agreement on Tariffs and Trade, according to the


                      Page 14                                      GAO,J’NSLAD~O-~O~Economic Sanctions
                   Chapter 2
                   Feasibility of Impodng Sanctiona on s0nt.h
                   African Diamond.9




                   Treasury Department. This might occur because the sanction would be
                   directed at imports from nations that cut diamonds rather than directly
                   at South African rough diamonds.

                   If cut diamonds of South African origin were banned but rough South
                   African stones were exempt’ to safeguard the supply of raw materials
                   for the U.S. cutting industry, South African stones that would normally
                   enter the United States as cut diamonds could enter as rough and be cut
                   here.


                   The enforcement difficulties noted previously might be mitigated if the
Enhancing          U.S. government obtained agreements with governments in the cutting
Enforcement With   center nations that they would certify that diamonds exported to the
Government-to-     United States did not contain South African-origin stones. The U.S. gov-
                   ernment has entered into similar agreements with foreign governments
Government         to certify that steel entering the United States from their steel producers
Guarantees         contained no prohibited Cuban nickel. The cutting centers in India,
                   Israel, and Belgium, which export 37 percent, 45 percent, and 37 per-
                   cent, respectively, of their diamonds to the United States, might have an
                   incentive to reach such agreements with the U.S. government. To make
                   such assurances, the cutting center governments would have to convince
                   DeBeers to identify and separate South African-origin stones. If DeBeers
                   refused to cooperate, the cutting centers would have to choose between
                   giving up the large U.S. market or terminating their relationship with
                   DeBeers and buying from the producing countries directly. If the cutting
                   centers bought diamonds directly from the producing countries, it would
                   increase the likelihood that the diamonds they were cutting and sending
                   to the United States were not of South African origin. If producing coun-
                   tries began to sell directly to the cutting centers, the cso’s control of the
                   market through its dominance in buying and selling diamonds would
                   likely disintegrate. If the cso’s control of the market disintegrated, the
                   U.S. cutting center in New York could also comply with the ban on South
                   African-origin diamonds by buying directly from the producers.

                   Even if such agreements were made and the cutting centers agreed not
                   to ship South African-origin stones to the United States, the market
                   might “reorder,” with the cutting centers selling these South African
                   stones to nations without sanctions and selling diamonds from other

                   ‘This could be done explicitly or effectively achieved by permitting imports of rough diamonds from
                   other countries of origin despite any unknowing imports of uncut South African diamonds, as pre
                   posed in s. 507.



                   Page 16                                                   GAO/NSlAIMO-106      Economic Sanctions
Chapter 2
Feasibility of Impodng Sanctiona on South
AfkicanDiamon&




producers to the United States. But only a few countries purchase most
of the world’s diamond jewelry (see table 2.2). If enough of these coun-
tries refused to import stones produced in South Africa, it could reduce
South Africa’s sales. However, it should also be recognized that because
diamonds have a high value-to-weight ratio and identifying their coun-
try of origin is difficult, smuggling stones into prohibited markets would
always be a problem.

If direct agreements between cutting centers and producers caused by
the government-to-government enforcement mechanism led to DeBeers’
loss of dominance in the diamond market, the company could be
severely hurt. However, it is not certain that diamond producing coun-
tries would choose direct agreements with the cutting centers to ensure
access to the U.S. market over remaining in the CSO’Smarketing arrange-
ment. Diamond producers depend on the CW’S expertise in advertising
and marketing diamonds and its policy of buying diamonds even when
the market is weak, as it was in the early 1980s. Industry sources indi-
cate that several major producers are considering marketing more of
their production outside the cso.

The replacement of DeBeers’ marketing dominance with direct agree-
ments between producers and cuttingcenters would temporarily disrupt
existing supply patterns in the diamond market and cause new ones to
be formed. The diamond market might be destabilized until the new sup-
ply patterns took effect, thus causing short-term economic harm to dia-
mond producing and cutting nations.

In the long term, disintegration of the c&s dominance as both a buyer
and seller could make diamond producers better off and cutting centers
and consumers no worse off. The cso profits from its position both as
the dominant buyer and seller of diamonds. If producers abandoned the
cso, they could either form a producer’s cartel or sell independently. In
either case, they would retain at least some of the profits that the cso
normally absorbed but would assume the market risk of changes in sup-
ply and demand.

If producers formed a cartel, they would retain most of the monopoly
profits previously earned by the CSO.A cartel might also assume the
marketing or advertising functions now performed by the CSO.Diamond
cutting nations, such as India, Israel, Belgium, and the United States,
and consuming nations, principally Japan, the United States, and Euro-
pean countries, would not benefit from lower rough diamond prices.



Page 16                                     GAO/NSlAD6MoB   Economic !3anctiom
             Chapter 2
             Feasibility of hnpo@ine %mtions   on !?outh
             African Diamond9




                                                                                .-
             If producers sold their diamonds independently, they would retain some
             of the profits previously earned by DeBeers but cutters and consumers
             might benefit from lower diamond prices. If a reduction in the GO’S
             dominance lowered diamond prices for American consumers and low-
             ered prices for rough stones imported directly from producing nations to
             the New York cutting center, the United States could experience a net
             benefit from the disintegration of DeBeers’ dominance in the diamond
             market.


             Enforcement difficulties and DeBeers’ dominance of the diamond mar-
Conclusion   ket could render ineffective a ban on imports of rough or cut South Afri-
             can-origin diamonds or a combination of both. The lack of a visual,
             chemical, or physical method of identifying the country of origin of most
             diamonds makes it virtually impossible to identify a diamond’s origin.
             As a result, the reliance on a system of certificates of origin would not
             be effective because it would be very easy to falsify such certificates.
             The cso might be able to identify the country of origin of many newly
             mined diamonds but has not had any incentive to do so. Therefore, the
             effect of a ban on the importation of South African diamonds enforced
             by a system of certificates of origin would be primarily symbolic.

             If the ban were enforced by government-to-government agreements
             between the United States and cutting center nations, it might be more
             effective. This method of enforcement might ultimately weaken
             DeBeers’ dominance in diamond marketing and prompt the producing
             countries to sell directly to the cutting centers. This, coupled with a cer-
             tificate of origin guaranteed by cutting center governments, could iso-
             late South Africa’s diamond production and reduce South African
             diamond sales. But a sanction enforced this way could cause a short-
             term disruption of the world marketing arrangements for diamonds,
             thus adversely affecting nations with economies that depend heavily on
             producing or cutting diamonds. In the longer term, these countries might
             benefit from the disintegration of DeBeers’ marketing dominance by
             absorbing some of the profits currently accruing to DeBeers.




             Page 17                                       GAO/NSIABW1M   Economic Sanctions
Chapter 3

Implications of U.S. Samtions on Namibia for                                                         -
South Africa md Namibia

                         After more than 2 decades of inconclusive fighting between South Afri-
                         can colonial forces and Soviet-backed guerrillas of the South West
                         Africa Peoples’ Organization (SWAPO), Namibia, which was Africa’s last
                         colony achieved independence. The move toward independence was ini-
                         tiated by U.N. Security Council Resolution 435 in 1978, but was made
                         possible by the signing of an agreement in December 1988 between
                         Cuba, Angola, and South Africa that also provides for the withdrawal of
                         Cuban troops from Angola. Namibia became independent on March 2 1?
                         1990, and U.S. sanctions were lifted.

                         Before and during the transition to independence, Namibia was adminis-
                         tered by a South African administrator general. As a result, the United
                         States had imposed sanctions on Namibia.


                         Like most developing countries, Namibia predominantly produces and
Namibia’s Main           exports primary products and imports manufactured goods and technol-
Industries and Exports   ogy. Its main industries are mining, farming, and fishing.

                         Mining, the largest sector of Namibia’s economy, accounts for approxi-
                         mately 25 percent of the GDP. Most of its mines, including all major pro-
                         ducers, are operated by the subsidiaries of foreign-based multinational
                         mining corporations, many of which have significant South African
                         interests.

                         Agriculture is the second most important sector of Namibia’s economy,
                         accounting for approximately 10 percent of GDP. Seventy percent of the
                         population depends directly or indirectly on agriculture for a living.

                         The fishing grounds off the Namibian coast were considered to be among
                         the richest in the world. During the 196Os, the fishing industry was a
                         greater source of export revenue than agriculture, but heavy exploita-
                         tion by foreign fishing boats has caused revenues to decline.

                         The main exports from the aforementioned industries are (1) diamonds,
                         (2) uranium oxide, (3) base metals (copper, lead, zinc, and tin), (4) beef,
                         (5) karakul wool, (6) and fish. Only diamonds and base metals were not
                         under U.S. sanctions.


                         U.S. sanctions against Namibia had little effect because Namibia shipped
Effect of Sanctions on   only a small amount of its major export products to the United States
Main Industries          before sanctions. Trade data indicate that fish was the only major


                         Page 18                                     GAO/NSL4D9O-106 Economic Sanctions
                      Chapter 3
                      Lmpkations of U.S. Sanctions on Namibia for
                      South Africa and Namibia




                      Namibian export to the United States before sanctions were imposed at
                      the end of 1986 but, even in that year, totaled only $177,000. In total,
                      we estimate that U.S. sanctions affected only an estimated $1.1 million
                      in trade.

                      Nevertheless, the sanctions may have prevented Namibia from opening
                      new markets. The market for uranium oxide has been poor because of
                      over-production and the lack of growth in nuclear power has reduced
                      demand for it as a fuel source. Rossing, Namibia’s sole producer of ura-
                      nium, had to decrease its production levels and reduced its work force
                      through attrition, according to company officials. If Rossing is unable to
                      obtain new sales to replace its long-term contracts that expired, it will
                      have to reduce its work force further. Even though Rossing did not sell
                      to the United States before sanctions, officials of the company feel that
                      this market could be profitable. More importantly, Rossing officials
                      believe the existence of U.S. sanctions discouraged potential customers
                      in other nations, such as Japan, from doing business with the company.
                      Japan and some other nations follow the U.S. lead on sanctions.

                      Some Namibian sheep industry’ representatives felt that the sanctions
                      prevented potential development of the U.S. market. They said that the
                      addition of the U.S. market would lead to an increased price for karakul,
                      which would, in turn, give farmers an incentive to expand the karakul
                      industry by increasing production.

                      Namibia did not export beef to the United States before sanctions, so the
                      measures had no direct effect on the industry. Namibia exports the
                      majority of its beef to South Africa.

                      Before sanctions, Namibia exported a small amount of seafood (hake
                      and rock lobster) to the United States. Since that time the hake, which
                      was only a small portion of Namibia’s total fish production, has almost
                      disappeared because of over-fishing by foreign countries’ fishermen.
                      Namibia replaced exports of rock lobster to the United States with sales
                      to Japan.


Indirect Effects of   One indirect effect of sanctions is the higher prices that Namibia paid
                      for all imported goods, which it obtained primarily from South Africa.
Sanctions             Most of Namibia’s petroleum imports, for example, come from South


                      ‘Karakul pelts are used to create fashionable garments that are popularin many parts of Europe.



                      Page 19                                                  GAO/NSIAD9&19i3      Economic !%xnctiona
                      Chapter 3
                      Implications of U.S. &mtions   on Namibia for
                      South Africa and Namibia




                      Africa. The U.S. oil embargo, part of an international oil ban, signifi-
                      cantly raised the cost of petroleum imports to South Africa and Namibia
                      because fees must be paid to middlemen to facilitate illegal shipments
                      that circumvented sanctions. In addition, because petroleum is used as
                      an energy source for the manufacture and transport of many South
                      African products, higher prices for petroleum increased the prices for
                      these goods.

                      Namibia was not affected by the ban on air flights between the United
                      States and Namibia because Namib Air never flew to the United States
                      and U.S. airlines never flew directly to Namibia.

                      During the ban on new U.S. investment, Namibia received inquiries from
                      American companies about the prospect for new investment. According
                      to Namibian officials, some companies are waiting to see what will hap-
                      pen politically after independence before investing. Some U.S. compa-
                      nies were reluctant to trade with Namibia because they were unfamiliar
                      with which Namibian products were under sanction or were apprehen-
                      sive that further sanctions would be imposed.


                      Namibia, like some other neighboring countries,:! uses South African-con-
Potential for South   trolled ports to export and import most products. South Africa could re-
Africa Evading        label its products as originating in Namibia, or any other neighboring
Sanctions Because     country, and export them from these ports without the cooperation of
                      these governments. Similarly, sanctioned goods from sanctioning nations
Sanctions Against     could be listed on shipping documents as bound for Namibia, or any
Namibia Were Lifted   other neighboring country, but could be diverted to South Africa when
                      imported through its ports.

                      To avoid the potential for such evasion, Namibia would have to ship all
                      its goods through a Namibian-controlled port to the United States. How-
                      ever, Walvis Bay, the only adequately developed port in Namibia,
                      remains under South African control even after independence.

                      Namibia has been studying various options for developing an alternative
                      port to WaIvis Bay, but none seem promising. Development of a new
                      port would require significant expenditures for infrastructure (such as
                      berths for ships) and deepening of a harbor; the newly independent
                      Namibia may not have the funds for such development. Such a port

                      ‘The countries neighboring South Africa are Botswana, Swaziland, Zambia, Lesotho. Zimbabwe.
                      Mozambique, Angola, Tanzania, and Malawi.



                      Page 20                                                 GAO/NSIAIMO-106     Economic Sanctions
             chapter 3
             Impliutiona of u.tk Su~ctio~ on Namibh for
             south Africa and Namibia




             would not be economical to develop or operate and would be established
             for political reasons- that is, to lessen Namibia’s dependence on South
             African-controlled Walvis Bay. A new port would probably not be able
             to compete with the facilities provided at Walvis Bay, and the three
             locations frequently discussed for a new port have drawbacks.


             U.S. sanctions against Namibia had very little economic effect because
Conclusion   the United States had a very low volume of trade with the country prior
             to their implementation.

             South African ports serve Namibia and other neighboring countries.
             Because sanctions against Namibia were removed when it became inde
             pendent, South Africa could relabel its exports and imports to indicate
             they originated in-or were destined for-Namibia      to evade sanctions.
             However, South Africa could just as easily use the names of several
             other neighboring countries.




             Page 21                                      GAO/NSIAlMO-106   Economic Sanction
Appendix I

Major Contributors to This Report


                              Steven Sternlieb, Project Director
National     Security   and   Ivan Eland, Project Manager
International Affairs         Delores Toth, Staff Member
                              Bruce Kutnick, Economic Advisor
Division, Washington,
D.C.

European Office,              Cheryl Goodman, Staff Member
Frankfurt




(483607)                      Page 22                              GAO/NSIALH@l(w   Economic Sanctions
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