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 sanctions lifted one to two years previously generally have negative signs, as expected, but they are not significant at the usual levels. Interestingly, there is some evidence of a pick-up in trade three to four years after limited or moderate sanctions have been lifted, but this evidence is tenuous because there are so few observations.

Because the United States is by far the largest user of unilateral economic sanctions, one might expect to find more robust evidence in US export patterns for lingering effects of sanctions after they have been lifted. Unfortunately, there is too little data to thoroughly analyze this question.

Another argument frequently heard in the debate is that US competitors move in and capture the business when the United States imposes unilateral sanctions. One way to explore this theory is by examining the country pairs with “positive residuals. Positive residuals indicate cases where actual trade is higher than the model would predict. If the “business capture” argument is correct, one would expect to find positive residuals for observations that pair major industrial countries such as France, Germany, and Japan, for example, with sanctions targets such as Iran, Libya, and China. This is, indeed, the case with respect to Cuba where the “positive residuals” indicate that Belgium, Canada, France, Germany, Ireland, Italy, Mexico, the Netherlands, and Spain trade more with Cuba than expected given size, income, and distance. In addition, Australia, Canada, and Germany export more to China than predicted by the model.

This calculation suggests that US exports were $15 billion to $19 billion lower than they would have been if not for the direct and indirect effects of sanctions in place in 1995. The estimated reduction in annual US exports to countries targeted by sanctions would be expected to continue as long as sanctions of similar intensity are in place. In fact, the impact probably would grow over time since, in the absence of sanctions, exports to these countries would normally rise as they increase their income levels.

JOBS AND WAGE EFFECTS OF SANCTIONS

The United States is now enjoying full employment, and in a full employment economy, lower exports do not spell an overall drop in employment. However, it does mean that fewer workers are employed in the export sector of the economy, and more workers are employed elsewhere. According to the most recent US Department of Commerce study (1996), in the year 1992, $1 billion of goods exported supported 15,500 jobs, both directly in the exporting firms and indirectly in their suppliers. Taking into account productivity growth, the figure in 1995 was probably about 13,800 jobs. If the $15 billion to $19 billion estimated reduction in US exports in 1995 was not offset by exports to other markets, the loss of jobs in the export sector (if not in the economy as a whole) was between 200,000 and 260,000 positions.

Jobs in the export sector pay better than average wages. This has been demonstrated by the careful econometric work of Richardson and Rindal (1996), and by the US Department of Commerce (1996). Thus, even in a full employment economy, the loss of exports means a loss of wages — the export sector wage premium. Taking into account both direct and indirect employment, the export sector wage premium is about 12 to 15 percent. In 1995, when the average wage in manufacturing was about $34,020, the premium paid by the export sector was about $4,080 per worker (12 percent of $34,020). What these figures mean is that, as a consequence of US sanctions, workers probably lost somewhere between $800 million and $1 billion in export sector wage premiums in 1995.

The US practice of using economic sanctions extensively has become a fixture of US foreign policy at least since President Carter (1977-1980). In some periods during the past twenty years, when the US economy did not enjoy full employment, and when jobs were not readily available, the loss of exports may have added to the unemployment rolls. But even if the loss of exports had zero effect on total employment, it certainly reduced the number of good paying jobs. If the next twenty years see the same frequent application of sanctions, the cumulative loss of wage premiums could exceed $20 billion (20 years times roughly $1 billion a year, not taking into account the rising annual loss of exports). This is a heavy cost.