The Power Of Economic Sanctions
A sanction is a penalty levied on another country. It is an instrument of foreign policy and economic pressure that can be described as a sort of carrot-and-stick approach to dealing with international trade and politics. The goal is to inflict enough economic loss on a country that it will change its ways.
There are a number of different types of sanctions that a country has at its disposal. While some are more widely used than others, the general goal of each is to force a change in behavior.
There are several ways to exercise a sanction. These include:
Sanctions are categorized in several ways. One way to describe them is by the number of parties issuing the sanction. A "unilateral" sanction means that a single country is enacting the sanction, while a "bilateral" sanction means that a group or block of countries is supporting its use. Since bilateral sanctions are enacted by groups of countries, they can be considered less risky because no one country is on the line for the sanction's result. Unilateral sanctions are more risky, but are more likely to be effective if enacted by an economically powerful country. (To learn more, check out our Economic Basics Tutorial.)
The second way in which sanctions can be described is by the types of trade they limit. "Export" sanctions block goods flowing into a country, while "import" sanctions block goods leaving the country. The two options are not equal and will result in different economic ramifications. Blocking goods and services from entering a country (an export sanction) generally has a lighter impact than blocking goods or services from that country (an import sanction). Blocking imports can create an incentive to substitute the blocked goods for something else. A case in which an export sanction could work is the blocking of sensitive technological know-how from entering the target country (think advanced weapons). It is harder for the target country to create this sort of good in house.
Blocking a country's exports through an import sanction increases the possibility that the target country will experience a substantial economic burden. If countries don't import the target country's products, the target economy could face industry collapse and unemployment, which can put significant political pressure on the government.
A Military Threat Alternative
While countries have used sanctions to coerce or influence the trade policies of others for centuries, trade policy is rarely the sole strategy employed in foreign policy. It can be accompanied by both diplomatic and military actions. A sanction, however, might be a more attractive tool because it imposes an economic cost for a country's actions rather than a military one. Military conflicts are expensive, resource-intensive, cost lives and can illicit the ire of other nations due to the human suffering caused by the violence.
In addition, it is not feasible that a country can react to every political problem with military force: armies are simply not large enough. In fact, some problems are simply not well-suited for armed intervention. Sanctions are generally used when diplomatic efforts have failed. (To learn more, read War's Influence On Wall Street.)
Why Sanctions?
Sanctions may be enacted for several reasons, such as a retaliatory measure for another country's economic activities. For example, a steel-producing country might use a sanction if another country tries to protect a nascent steel industry by putting an import quota on foreign steel. One highly publicized case involves the dispute between the United States' Boeing (NYSE:BA)and Europe's Airbus. Sanctions may also be used as a softer tool, especially as a deterrent to human rights or the treatment of people. The United Nations might condone the use of bilateral sanctions against a country if it perpetrates human rights abuses, or if it breaks resolutions regarding nuclear weapons. (For more, check out The Industry Handbook: The Airline Industry.)
Sometimes the threat of a sanction is enough to alter the target country's policies. A threat signals that a country does not approve of the target country's policies, and implies that the country issuing the threat is willing to go through economic hardship in order to punish the target country if change does not occur. The cost of the threat is less than military intervention, but still carries economic weight.
The domestic politics of the country looking to use a sanction play a big role. International trade and international politics can take the back seat when nationalism comes into play, and a government can use a sanction as a way to demonstrate resolve or to create a distraction from domestic trouble. Because of this problem, international organizations, such as the World Trade Organization (WTO) have been created to relieve some of the pressure and create arbitrary panels to objectively review disputes between countries. This is especially helpful because sanctions can lead to economically damaging trade wars that can spill over into countries that are not even part of the original dispute. (For more, see What Is The World Trade Organization?)
The extent of economic suffering cause by a sanction and who feels it the most is often not known immediately. Research has shown that the severity of the economic impact on the target country increases as the level of international cooperation and coordination in its creation increases. It also will be more pronounced if the countries involved in the sanction previously had close relations, since trading ties are more likely to be significant if the countries have a level of rapport.
Impact of a Sanction
The immediate impact of an import sanction on the target country is that country's exports are not purchased abroad. Depending on the target country's economic reliance on the exported good or service, this could have a crippling effect. The sanction might cause the sort of political and economic instability that results in a more totalitarian regime, or can create a failed state due to a power vacuum. The target country's suffering is ultimately borne by its citizens, who in times of crisis may solidify the regime in charge rather than overthrow it. A crippled country can be a breeding ground for extremism, which is a scenario that the initiating country would probably prefer not to deal with.
Sanctions may follow the law of unintended consequences. For example, the Organization of Arab Petroleum Exporting Countries (OAPEC) issued an embargo on oil shipments to theUnited States
Sanctions can increase costs to consumers and businesses in the countries that issue them because the target country is unable to purchase goods, resulting in economic loss through unemployment and a loss of production. In addition, the issuing country will reduce the choice of goods and services that domestic consumers have, and may increase the cost of doing business for companies that have to look elsewhere for supplies. If a sanction is made unilaterally, the effect of blocked imports or exports can be circumvented by the target country trading with third party countries.
The Bottom Line
The success of sanctions varies in accordance with how many parties are involved. Bilateral sanctions are more effective than unilateral sanctions, but the success rate in general is fairly low. In many circumstances the sanctions caused economic harm without changing the target country's policies.
Sanctions are ultimately blunt tools of foreign policy because their deployment is rarely precise enough to affect only the target economy, and because they presuppose that economic harm will lead to the sort of political pressure that will benefit the instigating country. By using a sanction a country is assuming that it is truly able to influence the leadership of the target country, a highly implausible assumption suggesting that other governments are pliable. Sanctions ultimately are a battle of political wills, with the loser being the country whose economy cannot withstand the pressure. (To learn more, read The Basics Of Tariffs And Trade Barriers.)
There are a number of different types of sanctions that a country has at its disposal. While some are more widely used than others, the general goal of each is to force a change in behavior.
There are several ways to exercise a sanction. These include:
- Tariffs – Taxes imposed on goods imported from another country
- Quotas – A limit on how many goods can be either imported from another country, or sent to that country
- Embargoes – A trade restriction that prevents a country from trading with another. For example, a government can prevent its citizens or businesses from providing goods or services to another country.
- Non-Tariff Barriers (NTBs) – These are non-tariff restrictions on imported goods, and can include licensing and packaging requirements, product standards and other requirements that are not specifically a tax.
Sanctions are categorized in several ways. One way to describe them is by the number of parties issuing the sanction. A "unilateral" sanction means that a single country is enacting the sanction, while a "bilateral" sanction means that a group or block of countries is supporting its use. Since bilateral sanctions are enacted by groups of countries, they can be considered less risky because no one country is on the line for the sanction's result. Unilateral sanctions are more risky, but are more likely to be effective if enacted by an economically powerful country. (To learn more, check out our Economic Basics Tutorial.)
The second way in which sanctions can be described is by the types of trade they limit. "Export" sanctions block goods flowing into a country, while "import" sanctions block goods leaving the country. The two options are not equal and will result in different economic ramifications. Blocking goods and services from entering a country (an export sanction) generally has a lighter impact than blocking goods or services from that country (an import sanction). Blocking imports can create an incentive to substitute the blocked goods for something else. A case in which an export sanction could work is the blocking of sensitive technological know-how from entering the target country (think advanced weapons). It is harder for the target country to create this sort of good in house.
Blocking a country's exports through an import sanction increases the possibility that the target country will experience a substantial economic burden. If countries don't import the target country's products, the target economy could face industry collapse and unemployment, which can put significant political pressure on the government.
A Military Threat Alternative
While countries have used sanctions to coerce or influence the trade policies of others for centuries, trade policy is rarely the sole strategy employed in foreign policy. It can be accompanied by both diplomatic and military actions. A sanction, however, might be a more attractive tool because it imposes an economic cost for a country's actions rather than a military one. Military conflicts are expensive, resource-intensive, cost lives and can illicit the ire of other nations due to the human suffering caused by the violence.
In addition, it is not feasible that a country can react to every political problem with military force: armies are simply not large enough. In fact, some problems are simply not well-suited for armed intervention. Sanctions are generally used when diplomatic efforts have failed. (To learn more, read War's Influence On Wall Street.)
Why Sanctions?
Sanctions may be enacted for several reasons, such as a retaliatory measure for another country's economic activities. For example, a steel-producing country might use a sanction if another country tries to protect a nascent steel industry by putting an import quota on foreign steel. One highly publicized case involves the dispute between the United States' Boeing (NYSE:BA)and Europe's Airbus. Sanctions may also be used as a softer tool, especially as a deterrent to human rights or the treatment of people. The United Nations might condone the use of bilateral sanctions against a country if it perpetrates human rights abuses, or if it breaks resolutions regarding nuclear weapons. (For more, check out The Industry Handbook: The Airline Industry.)
The domestic politics of the country looking to use a sanction play a big role. International trade and international politics can take the back seat when nationalism comes into play, and a government can use a sanction as a way to demonstrate resolve or to create a distraction from domestic trouble. Because of this problem, international organizations, such as the World Trade Organization (WTO) have been created to relieve some of the pressure and create arbitrary panels to objectively review disputes between countries. This is especially helpful because sanctions can lead to economically damaging trade wars that can spill over into countries that are not even part of the original dispute. (For more, see What Is The World Trade Organization?)
The extent of economic suffering cause by a sanction and who feels it the most is often not known immediately. Research has shown that the severity of the economic impact on the target country increases as the level of international cooperation and coordination in its creation increases. It also will be more pronounced if the countries involved in the sanction previously had close relations, since trading ties are more likely to be significant if the countries have a level of rapport.
Impact of a Sanction
The immediate impact of an import sanction on the target country is that country's exports are not purchased abroad. Depending on the target country's economic reliance on the exported good or service, this could have a crippling effect. The sanction might cause the sort of political and economic instability that results in a more totalitarian regime, or can create a failed state due to a power vacuum. The target country's suffering is ultimately borne by its citizens, who in times of crisis may solidify the regime in charge rather than overthrow it. A crippled country can be a breeding ground for extremism, which is a scenario that the initiating country would probably prefer not to deal with.
Sanctions may follow the law of unintended consequences. For example, the Organization of Arab Petroleum Exporting Countries (OAPEC) issued an embargo on oil shipments to the
Sanctions can increase costs to consumers and businesses in the countries that issue them because the target country is unable to purchase goods, resulting in economic loss through unemployment and a loss of production. In addition, the issuing country will reduce the choice of goods and services that domestic consumers have, and may increase the cost of doing business for companies that have to look elsewhere for supplies. If a sanction is made unilaterally, the effect of blocked imports or exports can be circumvented by the target country trading with third party countries.
The Bottom Line
The success of sanctions varies in accordance with how many parties are involved. Bilateral sanctions are more effective than unilateral sanctions, but the success rate in general is fairly low. In many circumstances the sanctions caused economic harm without changing the target country's policies.
Sanctions are ultimately blunt tools of foreign policy because their deployment is rarely precise enough to affect only the target economy, and because they presuppose that economic harm will lead to the sort of political pressure that will benefit the instigating country. By using a sanction a country is assuming that it is truly able to influence the leadership of the target country, a highly implausible assumption suggesting that other governments are pliable. Sanctions ultimately are a battle of political wills, with the loser being the country whose economy cannot withstand the pressure. (To learn more, read The Basics Of Tariffs And Trade Barriers.)
by
Brent Radcliffe
Brent Radcliffe is an analyst with a publishing company based in Washington, DC. He is a graduate of the University of Florida with a degree in International Economics, with minors in both French and International Relations. Radcliffe is a freelance writer covering topics related to economics, trade and investing.
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