Shultz got them to drop it.
U.S. Diplomatic and Commercial Relationships with Iraq, 1980 - 2 August 1990
Prepared by Nathaniel Hurd.
15 July 2000 (updated 12 December 2001 by Nathaniel Hurd and Glen Rangwala).
1984
According to the Washington Post, the CIA began in 1984 secretly to give Iraq intelligence that Iraq uses to "calibrate" its mustard gas attacks on Iranian troops. In August, the CIA establishes a direct Washington-Baghdad intelligence link, and for 18 months, starting in early 1985, the CIA provided Iraq with "data from sensitive U.S. satellite reconnaissance photography...to assist Iraqi bombing raids." The Post’s source said that this data was essential to Iraq’s war effort.<17> The United States re-established full diplomatic ties with Iraq on 26 November,<18> just over a year after Iraq’s first well-publicized CW use and only 8 months after the UN and U.S. reported that Iraq used CWs on Iranian troops.
1985
In 1985 the U.S. House of Representatives passed a bill to put Iraq back on the State terrorism sponsorship list.<19> After the bill’s passage, Shultz wrote to the bill’s sponsor, Rep. Howard Berman, cited the U.S.’ "diplomatic dialogue on this and other sensitive issues, " claimed that "Iraq has effectively distanced itself from international terrorism," and stated that if the U.S. found that Iraq supports groups practicing terrorism "we would promptly return Iraq to the list."<20> Rep. Berman dropped the bill and explicitly cited Shultz’s assurances.<21>
1986
The Defense Department’s (DOD) Under Secretary for Trade Security Policy, Stephen Bryen, informed the Commerce Department’s (CD) Assistant Secretary for Trade Administration in November that intelligence linked the Saad 16 research center with ballistic missile development.<23> Between 1985 and 1990, CD approved many computer sales to Iraq that go directly to Saad 16. CD approved over $1 million worth of computer equipment for sale to Saad 16 after Commerce received the above-mentioned November letter from DOD.<24> As of 1991 Saad 16 reportedly contained up to 40% U.S.-origin equipment.<25>
1988
The CD approved exports in January and February to Iraq’s SCUD missile program’s procurement agency. These exports allowed Iraq to extend SCUD range far enough to hit allied soldiers in Saudi Arabia and Israeli civilians in Tel Aviv and Haifa.<26> On 23 March, London’s Financial Times and several other news organizations reported from Halabja, located in Iraqi Kurdistan, that several days prior Iraq used CWs on Halabja’s Kurds.<27>
Note: This link also inlcludes 1988's Prevention of Genocide Act
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http://www.cam.ac.uk/societies/casi/info/usdocs/usiraq80s90s.html