How economic sanctions work

Sanctions are punishments imposed on another country or individual citizens of another country. It is a tool of foreign policy and economic pressure, and can be described as a carrot and stick method of dealing with international trade and politics.

There are many different types of sanctions available to a country. Although some are more widely used than others, the overall goal of each is to force a change in behavior.

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Sanctions can take many forms

Sanctions can be imposed in a variety of ways. These include:

  • Tariff-a tax levied on goods imported from another country.
  • Quota-Limit the amount of goods that can be imported from or sent to another country.
  • Embargo-a trade restriction that prevents one country from trading with another country. For example, the government can prevent its citizens or businesses from providing goods or services to another country.
  • Non-tariff barriers (NTB)-These are non-tariff restrictions on imported goods and may include licensing and packaging requirements, product standards, and other requirements that are not specifically taxed.
  • Asset freezing or seizure-to prevent assets owned by a country or individual from being sold or transferred.

Types of sanctions

There are multiple classifications of sanctions. One way to describe them is through the number of parties that issued sanctions. “Unilateral” sanctions mean that a country is enacting sanctions, while “multilateral” sanctions mean that a group or group of countries supports its use. Since multilateral sanctions are formulated by a group of countries, they can be considered less risky because no country will be threatened by the results of the sanctions. Unilateral sanctions are more risky, but if implemented by countries with strong economic power, they can be very effective.

Another way to classify sanctions is based on the type of trade restricted by the sanctions. Export sanctions prevent goods from flowing into a country, while import sanctions prevent goods from leaving the country. These two options are not equal and will lead to different economic consequences. The impact of preventing goods and services from entering a country (export sanctions) is usually less than the impact of preventing goods or services from that country (import sanctions). Export sanctions can encourage people to substitute blocked goods for other things. One case where export sanctions may work is to prevent sensitive technical knowledge from entering the target country (think advanced weapons). It is more difficult for the target country to create such good things internally.

Preventing a country’s exports through import sanctions increases the likelihood that the target country will bear a huge economic burden. For example, on July 31, 2013, the United States passed the HR 850 bill, which basically prevented Iran from selling any oil abroad due to its nuclear program.The bill was enacted after Iran’s oil exports were cut in half due to international sanctions within a year. If the country does not import the products of the target country, the target economy may face industrial collapse and unemployment, which will bring huge political pressure to the government.

Targeted sanctions

Although the goal of sanctions is to force a country to change its behavior, there are big differences in the ways and targets of sanctions. Sanctions can target an entire country, such as imposing an embargo on a country’s exports (for example, the United States sanctions against Cuba).They can target specific industries, such as prohibiting the sale of petroleum weapons. Since 1979, the United States and the European Union have banned the import or export of goods and services to Iran.

Sanctions can also target individuals, such as politicians or business leaders-such as the aforementioned EU and US sanctions imposed on Putin’s allies in March 2014.The purpose of imposing such sanctions is to cause economic hardship to a small group of people, not to affect the population of a country. When political and economic power is concentrated in the hands of a few individuals with international financial interests, this type of sanctions strategy is most likely to be used.

Alternatives to Military Threats

Although countries have used sanctions for centuries to coerce or influence the trade policies of other countries, trade policy is rarely the only strategy adopted in foreign policy. It can be accompanied by diplomatic and military operations. However, sanctions may be a more attractive tool because they impose economic costs on a country’s actions rather than military actions. Military conflicts are expensive, resource-intensive, and life-saving, and they may arouse the anger of other countries due to the human suffering caused by violence.

In addition, it is not feasible for a country to use military power to deal with all political issues: the military is often not large enough. In addition, some problems are not suitable for armed intervention at all. When diplomatic efforts fail, sanctions are usually used.

When to impose sanctions

Sanctions may be issued for a variety of reasons, such as taking retaliatory measures against the economic activities of another country. For example, if another country tries to protect the emerging steel industry by imposing import quotas on foreign steel, the steel producing country may use sanctions. Sanctions can also be used as a softer tool, especially as a deterrent against human rights violations (for example, the United States imposed sanctions on South Africa during the apartheid era).If a country violates human rights or violates resolutions on nuclear weapons, the United Nations may tolerate the use of multilateral sanctions against a country.

Sometimes the threat of sanctions is sufficient to change the policy of the target country. Threat means that if there is no change, the country issuing the threat is willing to punish the target country through economic difficulties. The cost of the threat is lower than the cost of military intervention, but it still has economic weight. For example, in 2013, President Robert Mugabe of Zimbabwe and his inner circle were sanctioned by the United States for allegedly violating human rights.

Sometimes, a country may consider imposing sanctions for domestic reasons rather than international reasons. Sometimes nationalism comes into play, and a country’s government can use sanctions as a way to show determination or spread domestic troubles. Due to this problem, international organizations such as the World Trade Organization (WTO) seek to relieve some of the pressure and set up expert groups to objectively review disputes between countries. This is especially helpful in avoiding bigger problems in the future, as sanctions can lead to trade wars that harm the economy and can affect countries that were not related to the original dispute.

The extent of economic losses caused by sanctions is often not immediately known. Studies have shown that as the level of international cooperation and coordination increases, the severity of the economic impact on the target country will also increase.This situation will also be more obvious if the countries participating in the sanctions were close in the past, because if the relations between these countries are harmonious, trade relations are more likely to become important.

The impact of sanctions

The direct impact of import sanctions on the target country is that the country’s export products will not be purchased from abroad. Depending on the economic dependence of the target country on exported goods or services, this may have serious effects. Sanctions can lead to political and economic instability, leading to more authoritarian regimes, or countries that fail due to a power vacuum. The suffering of the target country is ultimately borne by its citizens, who may consolidate the regime in power rather than overthrow it in times of crisis. A paralyzed country may be a hotbed of extremism, and the sponsoring country may be unwilling to deal with this situation.

Sanctions may follow laws with unintended consequences. For example, the Organization of Arab Petroleum Exporting Countries (OAPEC) issued a ban on oil shipments to the United States in 1973 as a punishment for resupplying weapons to Israel. OAPEC used the embargo as a foreign policy tool, but its impact spread and exacerbated the 1973-74 global stock market crash.Capital inflows brought about by high oil prices led to an arms race in Middle Eastern countries—a destabilizing problem—and did not lead to the policy changes envisaged by OAPEC. In addition, many embargoed countries have reduced oil consumption and demanded more efficient use of petroleum products, further reducing demand.

Sanctions may increase costs for consumers and businesses in the issuing country, because the target country cannot purchase goods, resulting in unemployment and production losses and economic losses. In addition, the issuing country will reduce domestic consumers’ choices of goods and services, and may increase the operating costs of companies that must look elsewhere for supplies. If the sanctions are unilateral, the target country can use third-party countries to avoid the impact of blocked imports and exports.

Examples of Ukraine-Russia sanctions

For example, Russia’s annexation of Crimea in March 2014 is still a constant gift, releasing sanctions and counter-sanctions that seem to only escalate.In September 2015, Ukrainian Prime Minister Yatsenyuk announced that Ukraine would ban Russian aircraft from entering Ukrainian territory. The ban was originally scheduled to take effect on October 25, 2015.According to the Russian official news agency TASS, just a few days after Ukraine announced the news, the Russian Ministry of Transport responded by threatening to impose a retaliatory ban on Ukraine.

This is just the latest change in the familiar theme. These announced aircraft bans were issued more than a year after the United States and the European Union froze the U.S. and European assets of members of Vladimir Putin’s “inner circle” (including politicians, business leaders, and a bank) in March 2014.At that time, Russia responded with its own sanctions, including individual sanctions on several American politicians, including Speaker of the House of Representatives John Bonner, Senate Majority Leader Harry Reid, and Senator John McCain of Arizona.The impact of Russian sanctions on American politicians seems to be limited, and is treated with humor: John McCain was expressionless in his tweet on March 20, “I think this means that my spring break in Siberia is over, Gazprom The shares of the Industrial Joint Stock Company were lost and the secret bank account in Moscow was frozen.”

Although not all target Russians have foreign assets, they are facing financial pressure. They cannot conduct transactions denominated in dollars; banks are reluctant to help them because of fear of angering Western governments, and American companies cannot cooperate with them. However, in the long run, the impact of these sanctions may not be as strong as the broader sanctions on Russia’s energy exports to Europe. Approximately 53% of Russia’s natural gas exports to the European Union are estimated to be worth 24 billion U.S. dollars per year.

Bottom line

The success of sanctions depends on the number of parties involved. Multilateral sanctions are more effective than unilateral sanctions, but the overall success rate is lower. In many cases, sanctions caused economic damage without changing the target country’s policies. Sanctions are ultimately a blunt tool of foreign policy, because their deployment is rarely accurate enough to affect only the target economy, and because they presuppose that economic damage will lead to the kind of political pressure that is conducive to inciting the country.

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