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News Release

Economic Sanctions Reduce US Exports by $15 Billion to $20 Billion Annually

April 16, 1997

Contact:    Kimberly Ann Elliott    (202) 328-9000

Washington, DC—A new study by the Institute for International Economics concludes that US exports to 26 target countries were reduced by $15 billion to $20 billion in 1995 as a result of economic sanctions implemented by the United States to pursue various foreign policy goals. Resulting job losses in the export sector may have been as high as 200,000 to 250,000. Since export jobs pay 12-15 percent more than the average manufacturing wage, about $1 billion in export wage premiums were lost. Similar losses will continue to accrue annually as long as similar sanctions remain in place.

The estimated cost of $15 billion to $20 billion roughly equals the US foreign affairs budget, effectively doubling the amount of resources allocated to pursuing the nation's foreign policy goals. These costs, however, are nontransparent and off-budget. Moreover, the price is paid through a highly discriminatory “tax” imposed on US firms and workers that participate in export markets.

These results derive from a new extension of the Institute's continuing research, begun in 1982, on the effectiveness of sanctions throughout the twentieth century. In Economic Sanctions Reconsidered (second edition, 1990), authors Gary Clyde Hufbauer, Jeffrey J. Schott, and Kimberly Ann Elliott concluded that US sanctions had positive foreign policy outcomes in fewer than one in five cases in the 1970s and 1980s. There is no reason to believe that the utility of sanctions, especially those deployed unilaterally by the United States, has improved in recent years.

Hence the benefits from sanctions are often elusive and their costs are both high and distributed unfairly. Nevertheless, the United States continues to employ sanctions far more than any other country.

Since the United States has been enjoying a “full employment” economy for several years, the loss of jobs in the export sector due to sanctions (or other factors) is offset by the creation of jobs in the import or nontradeable sectors. A reduction of exports means a loss of wages, however, because the export-sector wage premium is roughly $4,000 per worker. Lost wages will thus total roughly $1 billion in each year that sanctions comparable to those in place in 1995 remain. Moreover, any substantial increase in total unemployment in the future will mean that such sanctions would have a net adverse effect on the level of jobs in the economy.

In addition to the direct and indirect costs in years when sanctions are in place, it is often argued that adverse effects linger long after sanctions are lifted because US exporters come to be regarded as unreliable suppliers. The new analysis finds only limited evidence of such lingering effects in the aggregate data.

However, there are several reasons to think these effects may be greater than suggested in the aggregate data. First, one would expect the long-term effects of sanctions to be relatively more severe for suppliers of sophisticated equipment and infrastructure equipment than for exports as a whole. Second, there were only a few cases where the United States lifted sanctions entirely and these were usually quite limited sanctions—suspension of foreign assistance or narrow export controls—that might not be expected to have significant lingering effects. Finally, 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.

The Institute study also examines the argument that foreign competitors are able to pick up market share when the US imposes unilateral sanctions. The authors conclude that, compared to what the model suggests is "normal," (i) several European countries and Canada export more to Cuba, and (ii) Australia, Canada, and Germany export more to China.

This new estimate of the costs of economic sanctions, supported by the National Foreign Trade Council as part of its broader project on sanctions, is based on an analysis of trade between OECD countries and their 88 leading trading partners (including each other). The “gravity model” used in the study controls for trading partner size, income, “closeness” (defined as geographic distance, having a common border, or sharing a common language) and membership in a common trade bloc. The authors analyzed 15 years of sanctions, which they classified as either “limited”, “moderate” or “extreme”, and their impact on total bilateral trade (exports plus imports ) in 1985, 1990, and 1995. The central results presented here derive from their analysis of 1995 exports, the primary concern of the study. The methodology permits investigation of the indirect as well as direct effects of sanctions across a large number of countries.

The new study is available from the Institute. It represents a portion of the forthcoming third edition of the Institute's sanctions project entitled Economic Sanctions After the Cold War.