Economic Sanctions Essay Research Paper Economic sanctions

Economic Sanctions Essay, Research Paper

Economic sanctions have resurfaced at the center of public policy debate. After a brief pause following the politically disastrous grain embargo and pipeline sanctions in the early 1980s, sanctions are once again the weapon of choice to enforce a heap of US foreign policy goals, from countering terrorism to battling drug trafficking. A recent National Association of Manufacturers (1997) study lists over 30 countries hit by new US sanctions during the period 1993-1996. Many of these actions were unilateral, reducing their impact in an increasingly globalized economy that has many alternative suppliers and markets. High-publicity initiatives, such as the Helms-Burton Act and the Iran/Libya Sanctions Act, which threaten to punish third-country corporations that conduct business in Cuba, Iran, and Libya, also raise the possibility that frustrated OECD governments (such as Canada and France) will retaliate against US companies.

In an increasingly integrated global economy, it is important to have a clear understanding of the costs and benefits of unilateral economic sanctions for the United States. Most of the analysis of the effectiveness of economic sanctions suggests they have limited the mutual aid for changing the behavior or governments of target countries. Previous research at the Institute for International Economics concluded that US sanctions had positive outcomes in fewer than one in five cases in the 1970s and 1980s. Much less is known about the costs of economic sanctions for the US economy.

The intent of trade sanctions is of course to reduce trade–exports or imports or both. Financial sanctions may also reduce trade by denying investment, foreign exchange or credit to the target country or by raising its cost of credit.

In addition to the immediate impact of sanctions on trade with the target, many American businessmen claim that the effects of even limited unilateral US sanctions go well beyond targeted sectors. They also argue that the effects remain long after they are lifted because US firms come to be regarded as “unreliable suppliers.” Sanctioned countries may avoid buying from US exporters even when sanctions are not in place, thus giving firms in other countries a competitive advantage in those markets.

Exports lost today may mean lower exports after sanctions are lifted because US firms will not be able to supply replacement parts or related technologies. Foreign firms may also design US intermediate goods and technology out of their final products for fear of one day being caught up in a US sanction episode. The secondary boycotts and extraterritorial sanctions passed last year in the Iran/Libya Sanctions Act and the Helms-Burton Act targeting Cuba are disturbing precedents that could increase the unreliable supplier effect in the future. These indirect effects may well extend beyond the sanctioned products and even beyond the time period sanctions are imposed.

A case study approach calculates trade interruptions that are identified by competent observers–for example, affected firms or responsible government agencies. The case study approach best captures subjective eye-witness reports but it may miss less visible secondary effects. In addition, it is difficult to reach general conclusions from a handful of cases.

We find that US sanctions in 1995 may have reduced US exports to 26 target countries by as much as $15 billion to $19 billion. If there was no offsetting increase in exports to other markets, that would mean a reduction of more than 200,000 jobs in the relatively higher-wage export sector and a consequent loss of nearly $1 billion annually in export sector wage premiums. This suggests a relatively high cost to the US economy while sanctions are in place.

However, we find only limited evidence that the negative impact of sanctions lingers long after they are lifted. This may reflect the highly aggregated nature of the data we use. Long-term effects of sanctions might be expected to be relatively more severe for particular sectors, such as sophisticated equipment and infrastructure, than for exports in the aggregate. And, as noted, continued use of extraterritorial sanctions could increase the effect for these sectors in the future. We also find, not surprisingly, that foreign firms have replaced US firms in Cuba and that Canada, Australia, and Germany export more to China than size, income, and geography would suggest.

Of primary interest here is the impact of economic sanctions on bilateral trade flows. When they are in place, extensive sanctions have a large impact on bilateral trade flows, consistently reducing them by around 90 percent. There is more variance in the estimated impact of moderate and limited sanctions and the results are not quite as strong, but they suggest an average reduction in bilateral trade of roughly a quarter to a third

There is only limited evidence, however, that sanctions continue to depress trade after they have been lifted. The results suggest that extensive sanctions lifted three or four years earlier reduced 1985 bilateral trade between the previous target and sender countries by nearly 90 percent. Unfortunately, there are no observations for extensive sanctions lagged three or four years in 1990 and 1995, so there is no way to know if the 1985 result is irregular. The coefficients for sanctio