Suspending Sovereign Immunity Could Lead To A Global Economic Crisis

The emotions surrounding the passage, veto, and subsequent veto override of the Justice Against Sponsors of Terrorism Act (JASTA) are real and undeniable.  However, after getting past the visceral reaction to the passage of the legislation, there are also fiscal policy issues that need to be considered. One potential unintended consequence that has received insufficient attention is the role JASTA might play in freezing the global flow of capital.

Much has been written about how JASTA disrupts the principle of sovereign immunity – a legal understanding that prevents governments and their officials from being sued by a foreign national. This concept has traditionally allowed nations to negotiate deals, treaties, agreements and alliances without threat of litigation from private citizens.

Many arguments against JASTA have fallen on deaf ears: That it will give unelected judges and trial lawyers a say in the United States’ foreign policy; that certain clauses within the law prohibit 9/11 families from even benefiting from it; that we weaken our global counterterrorism efforts by alienating an ally; that it invites copycat measures in other countries likely to target the U.S.

Many of these arguments are the same overblown fearmongering we see during any contentious legislative dispute. But that last argument needs to be fleshed out a bit and taken to its logical conclusion.

Let’s envision a scenario in which lawsuits continue forward in a post-JASTA world. Saudi Arabia would immediately move to protect its physical and financial assets in the U.S. As the Detroit News pointed out in a recent editorial, “The [Saudi] kingdom is threatening to liquidate hundreds of billions of dollars of U.S. assets should the lawsuits proceed. That could throw the American economy into turmoil.”

Here’s where the copycat measures come in. The degradation of sovereign immunity incentivizes foreign nationals to target the U.S. for similar lawsuits. Over the past decade-and-a-half, the U.S. has engaged in two wars in which all manner of atrocities have been alleged, most false or exaggerated, though some legitimate. As the largest fish in the global economic pond, the U.S. instantly becomes a big target. And it would in turn be wise to liquidate its overseas assets, as the Saudi’s have threatened to do.

What happens next is anyone’s guess. But a possible, even likely, scenario is a replay of the Smoot-Hawley debacle of the 1930s. Congress reacted to the Great Depression by raising tariffs on foreign goods. This action by the U.S. sparked a cascade of similar laws throughout the world, which severely hindered the free flow of capital and exacerbated the depression.

If the U.S. were to take the logical step of protecting itself by liquidating its overseas assets, it is easy to imagine a series of events that could lead to a similar stagnation of capital flow.

With JASTA, Congress took a step to help the 9/11 families because that is the right thing to do. However, in doing so Congress exposed the U.S. to unintended consequences that now need to be addressed. Republican leaders recognize this and are preparing a rewrite of the law.  Congress has a rare opportunity to fix a law almost as quickly as it was passed.

David Williams is the President of the Taxpayers protection Alliance.