Research Summary

Political Risk, Foreign Intervention and International Arbitration



The Empire Trap:  America's Attempts to Protect Property Rights Overseas, 1898-2008, is a history of the U.S. government's attempts to protect the property rights of American investors when they venture outside the boundaries of the United States.  Washington's willingness to deploy American power, soft and hard, varied dramatically across the century, but one pattern held until the 1960s:  U.S. governments would categorically reject interventionism designed to favor or protect Americans, only to find themselves drawn back into involvement in the affairs of foreign nations on behalf of private American interests.  What explains this pattern, how was it broken in the 1960s, and will it return in the future?

The Empire Trap argues that it is, as a general principle, very hard for democratic governments to credibly promise to ignore the interests of their citizens’ when they venture abroad.  The political reason is simple:  foreign policy is as subject to capture by private interests as any other public policy.  Private interests have multiple tools at their disposal.  They can mobilize nationalist sentiment.  They can create ways to tie their interests to other foreign policy interests of the United States.  They can find ways to insure that a failure to protect their interests will damage the executive's credibility in other spheres.  Finally, overseas investors can benefit from the fact that the benefits of U.S. intervention accrue largely to a small group, while the costs are diffuse and spread over society.  The economic characteristics of intervention facilitate these strategies.  Simply put, each marginal intervention by the U.S. government appears to have a small economic cost.  With each intervention, however, the government's credibility becomes more tied up with the policy's goal.  Once the U.S. government begins to actively support the activities of another, for whatever reason, policies become very hard to reverse.

The U.S. found itself sucked into the empire trap repeatedly over the 20th century.  The U.S. annexed the Philippines and Puerto Rico in 1898 for reasons that had nothing to do with the property rights of Americans.  The experience was not pleasant, and few people wanted to repeat the experience.  Yet by 1928 the U.S. government ran Haiti, the Dominican Republic, and Nicaragua; its officials were embedded in the governments of Bolivia, Colombia, Cuba, Honduras, and Panama; and it had explicit contingent commitments to intervene on behalf of its investors in Costa Rica, Guatemala, Peru, and Venezuela.  The massive shock of the Great Depression allowed the Hoover and Roosevelt administrations to disengage from those commitments, but even before the 1930s ended FDR (against his better instincts) had been drawn into using American economic power to force Mexico to compensate the expropriated oil companies.  After World War 2, the Eisenhower administration, to its chagrin, found itself manipulated into overthrowing foreign governments on behalf of American businesses.  The Eisenhower and Kennedy administration tried to ignore Third World expropriations, only to have Congress mandate the imposition of crushing sanctions in the event that a foreign government seized American properties. 

How was the cycle broken?  In the context of the Cold War, the potential cost of punishing foreign governments was huge.  The Soviets could move into any gap.  The empire trap had become a lot more dangerous.  The U.S., therefore, backed the creation of the institutions of international arbitration (the same ones that govern cross-border investment today) not to protect overseas property rights, nor solve international coordination problems, nor apply a new set of norms about "proper" international behavior.  Rather, said institutions were created give the American executive branch a credible political excuse not to act on behalf of American investors abroad.  The government could point business towards arbitration, and use the existence of international institutions to justify a refusal to sanction foreign governments. 

Today, however, the institutions created during the 1960s have come under strain, tasked with missions that they were not designed to carry out.  Should they be allowed to collapse, the empire trap could reopen.  Policy makers and business leaders need to think hard about the tradeoffs involved in getting the government back into the business of protecting property rights outside the boundaries of the United States, especially in a world where other countries, increasingly, will be facing their own versions of the empire trap.