A TREASURY END RUN

President Bush’s inflammatory designation of Iraq, North Korea and Iran as an “axis of evil” in 2002 never accomplished much and now has dropped out of usage. The Iraq war is dragging into its fifth year, with growing pressure for a negotiated withdrawal; North Korea has agreed to phased nuclear disarmament, and tentative talks have begun with Iran.

So diplomacy seems, at least temporarily, to be replacing military force. Secretary of State Condoleezza Rice, who had sided with the hard-liners as national security adviser, has reverted to statesmanship. One of her first moves as secretary was to defy Vice President Dick Cheney and get rid of his neoconservative protege Undersecretary John R. Bolton to open the way for the agreement with North Korea. But Mr. Bolton, as ambassador to the United Nations and now as a think-tank commentator, continues to sneer at the agreement with North Korea.

More threateningly, a new antiterrorism unit in the Treasury Department obstructed the North Korea agreement for weeks and now has embarked on what amounts to an obvious effort at regime change in Iran by undermining its economy.

A key figure in what amounts to economic warfare against Iran is Stuart Levey, Treasury undersecretary for terrorism and financial intelligence. He led the economic action against North Vietnam and now is heading a mission to warn European bankers that they should stop doing business with Iran.

In both cases, he relies on a little-noticed section of the USA Patriot Act to apply “law enforcement measures” that are far more punitive than the United Nations sanctions. Section 311 authorizes Treasury to designate foreign institutions that are “of primary money laundering concern.” Any foreign bank named in this way finds itself cut off from the U.S. financial system.

Treasury applied this new tool against a bank in Macau said to have helped North Korea circulate fake U.S. $100 bills and used this action to block the agreement with North Korea until Secretary Rice prevailed with the argument that getting a denuclearized Korea was better than punishing counterfeiting.

Mr. Levey now is using the same squeeze against Iran. He seeks what he calls “actionable intelligence” against countries named as “rogue states.”

A parallel device for a short time was a Securities and Exchange Commission online “watch list” that automatically named corporations that had any connection with “sponsors of terrorism countries” identified as Sudan, Syria, North Korea, Iran and Cuba. The SEC dropped the list from its Web site after hearing bipartisan objections that it unfairly mentioned companies that had nothing to do with terrorism.

The German newspaper Der Spiegel quoted a German banker as describing the U.S. economic pressure as “downright blackmail.” The story noted that Germany and its bankers cooperate with the U.N. sanctions but want to continue their exports to Iran of locomotives and other non-nuclear products that amount to $5.45 million a year and create thousands of jobs.

Diplomacy comes as a welcome relief from threats and name calling. But it can hardly work alongside economic warfare.