4
1970s and 80s, a period that inspired much of the sanctioning literature. During that unique
moment, commercial banks provided not only short-term trade credits but also long-term
sovereign loans, making a strategy of linking debt and trade more feasible. Tomz (2004) shows,
however, that during this period countries repaid their bondholders while defaulting on
obligations to commercial banks. This tendency to favor bondholders, the very creditors who
have no ability to withhold commercial credit, counts as strong evidence against the trade credit
story.
The third form of linkage is harder to dismiss. Although private bondholders and
commercial banks cannot impose trade barriers themselves, they may enjoy assistance from their
home governments. Perhaps the home government is willing to raise tariffs against a foreign
defaulter or to prohibit the export of essential products to the offending state. If so, governments
may repay their debts to avoid retaliation, not by private investors, but by the politicians who
serve them through control over trade policy.
This hypothesis builds upon the notion that government caters to the wealthy and directs
its foreign policy accordingly. Scholars continue to advance the hypothesis today. Economist
Jeffrey Sachs writes that “most debtor governments pay their debts not out of fear of the banks,
but out of fear of a foreign policy rupture with the United States.” In particular, the debtor
government “might fear retaliation in the form of hostile trade policies.”
6
Political scientist
Lawrence Whitehead echoes this view: “in the long term the most powerful … influence
available to creditors is the ability to offer or to withhold market openness.” Defaulters,
6
Sachs (1988: 710).
Convention