Testimony

Evidence on the Costs and Benefits of Economic Sanctions

by Kimberly Ann Elliott, Peterson Institute for International Economics

Speech given before the Subcommittee on Trade Committee on Ways and Means
United States House of Representatives
Washington, DC
October 23, 1997

 


A nation that is boycotted is a nation that is in sight of surrender. Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It does not cost a life outside the nation boycotted, but it brings a pressure upon the nation which, in my judgment, no modern nation could resist.

President Woodrow Wilson, 19191

The reality, alas, has been far different from what President Wilson envisioned. The global, comprehensive, and vigorously enforced sanctions against Iraq and the former Yugoslavia have produced at best limited and tenuous results. Unilateral sanctions—even when imposed by the largest economy in the world—face far more difficult challenges, especially in an increasingly integrated international economy. Even against such small and vulnerable targets as Haiti and Panama, military force eventually was required to achieve American goals.

Extensive empirical research on the effectiveness of economic sanctions throughout this century suggests that these two cases are not unusual. Since 1970, unilateral US sanctions have achieved foreign policy goals in only 13 percent of the cases where they have been imposed. In addition to whatever effect repeated failure may have on the credibility of US leadership, other recent research suggests that economic sanctions are costing the United States $15 billion to $19 billion annually in potential exports. This, in turn, translates into 200,000 or more jobs lost in the relatively highly compensated export sector.2

 

Potential Benefits of Sanctions as a Foreign Policy Tool

The Institute's research program on economic sanctions began in the early 1980s, in the wake of the grain embargo, imposed in response to the Soviet invasion of Afghanistan, and the pipeline sanctions, imposed in response to the Soviet role in the Polish crackdown on the Solidarity trade union. The conventional wisdom then was that sanctions never work, that they are costly politically and economically, and that their use should be constrained.

Our research addresses these issues empirically, through assessment of the outcomes in 115 cases of economic sanctions beginning with World War I and ending in 1990. In addition to assessing outcomes, our research also identifies the conditions under which sanctions are most likely to achieve foreign policy goals.

We judged 35 percent of these cases to be at least partially successful and concluded that sanctions are most likely to be effective when:

Our forthcoming third edition will extend this dataset by roughly another 30 to 40 cases. Although the results to date are preliminary, we do not expect these conclusions to change significantly.

Of the 115 cases studied, the United States was a participant in 78, usually as the leading sanctioner and often alone. The results for US sanctions are broadly similar to those described above because the United States has been the dominant user of economic sanctions. Thus, the 33 percent success rate for US sanctions was virtually identical to that for the sample as a whole.

A striking result of our analysis, however, is the declining utility of US economic sanctions as a foreign policy tool, especially when they are unilateral (see table 1). Prior to the 1970s, sanctions in which the United States was involved, either alone or with others, succeeded at least partially just over 50 percent of the time. Between 1970 and 1990, however, US sanctions succeeded in just 21 percent of the cases initiated.

The results for unilateral US sanctions, those in which American policymakers received either no or only minor cooperation from other countries, are even more striking. In 55 post-war episodes, the success rate for such cases was only slightly below that for all cases involving the United States, 29 percent versus 33 percent. However, more than two-thirds of those successes occurred in the early post-war period, when the United States was successful nearly 70 percent of the time. In the 1970s and 1980s, a mere 13 percent of unilateral US sanctions achieved any success at all (see table 1).

Many factors contribute to these results but a large part of the explanation must be the effects of globalization. The United States is no longer as dominant in the world economy as it once was and its leverage has declined concomitantly. Given that these trends have continued in the 1990s, or even accelerated, there is little reason to expect that the utility of unilateral sanctions has improved in recent years.

 

Costs of Economic Sanctions

While the benefits of economic sanctions are elusive, the costs often are not. Trade sanctions deprive the United States of the gains from trade and frequently penalize exporting firms that are among the most sophisticated and productive in the US economy. As American sanctions have expanded and proliferated over the past 20 years, they have also led to increasing tensions between the United States and its allies and trading partners around the world.

In a recent extension of the IIE research, my colleagues and I estimated that economic sanctions cost the United States $15 billion to $19 billion in forgone merchandise exports to 26 target countries in 1995. The analysis tentatively suggests that even limited sanctions, such as restrictions on foreign aid or narrowly defined export sanctions, can have surprisingly large effects on bilateral trade flows (see table 2).

Lower exports of $15 billion to $19 billion 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 in export sector wage premiums.3 Though the estimates were calculated using trade in the base year of 1995, similar costs accrue each year that similar sanctions remain in place.

These effects could be overstated to the extent that exporters are able to redirect their goods to other markets. There are several reasons, however, to think the cumulative effects could be greater than suggested in this analysis. First, the study excludes investment flows and services exports, which in 1995 equalled nearly 40 percent of the value of goods exports. Second, 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.

Indeed, many American businessmen claim that the effects of even limited unilateral US sanctions go well beyond targeted sectors and that the effects linger 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 also 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. If perceived as precedents that are likely to be repeated, the secondary boycotts and extraterritorial sanctions passed last year in the Iran/Libya Sanctions Act and the Helms-Burton Act could exacerbate this unreliable supplier effect. This effect could explain why the estimated impact on US exports is higher than for the OECD countries as a group (table 2).

In a $7 trillion economy these costs may not be huge but they are tangible. Moreover, they are concentrated on sectors and firms involved in international trade and investment that are often the most sophisticated and competitive in the American economy. Research by my colleague J. David Richardson and Karin Rindal shows that:

Richardson and Rindal also conclude that the communities that host exporting operations, not just the workers and shareholders in those operations, benefit from having a relatively more stable, growing, and high-performance workforce and tax base.4

In sum, a rapidly changing global economy means that unilateral economic sanctions are decreasingly useful yet increasingly costly. If sanctions are to have any chance at all of producing favorable outcomes, they must be multilateral, they must be carefully formulated, and they must be vigorously enforced.

Table 1: Effectiveness of Economic Sanctions as a Foreign Policy Tool

Number of
successes
Number of
failures
Success ratio
(successes as a
percentage of total)

All cases 40 75 35%
Cases involving US
as a sanctioner
1945-90
1945-70
1970-90


26
16
10


52
14
38


33%
53%
21%
Unilateral US
sanctions:
1945-90
1945-70
1970-90


16
11
5


39
5
34


29%
69%
13%

 

Table 2: Estimated change in trade due to sanctions, 1995 (percent)

Scope of sanctions
imposeda
All countries,
exports plus
importsb
OECD countries,
exports only
United States,
exports only

Limited c -21.5 c
Moderate -31.2 -33.1 -68.0
Extensive -91.9 -78.0 -96.8

Notes:
a. Limited sanctions include narrowly defined trade, financial, trade, or cultural sanctions, such as suspension of foreign aid or restrictions on exports of narrow categories of goods or technologies; moderate sanctions cover more broadly defined categories of trade or finance; extensive sanctions usually encompass most trade and financial flows between two countries.
b. There are 88 countries in the database.
c. The coefficients on these variables suggest that even limited sanctions depress trade by 15 to 20 percent but in these tests the regression coefficients were not statistically significant at normal confidence levels.

 

 

Notes

1. Quoted in Saul K. Padover, ed., Wilson's Ideals (Washington: American Council on Public Affairs, 1942, p. 108).

2. Gary Clyde Hufbauer, Jeffrey J. Schott, and Kimberly Ann Elliott, Economic Sanctions Reconsidered: History and Current Policy, second edition, rvd. (Washington: Institute for International Economics, 1990). The third edition of this research should be available early next year. See also Gary Clyde Hufbauer, Kimberly Ann Elliott, Tess Cyrus, and Elizabeth Ann Winston, "US Economic Sanctions: Their Impact on Trade, Jobs, and Wages," Institute for International Economics Working Paper, April 1997.

3. The US Department of Commerce estimated that, in 1992, $1 billion of goods exported supported 15,500 jobs. Adjusting that figure for subsequent productivity growth gives an estimate of 13,800 jobs; multiplied by $15 billion to $19 billion gives a figure of 200,000 to 260,000 jobs. See US Department of Commerce, US Jobs Supported by Exports of Goods and Services (Washington, November 1996). This same study, along with research by Richardson and Rindal, also estimates that jobs in the export sector pay 12 percent to 15 percent better than comparable jobs in other sectors. Based on an average annual wage in manufacturing in 1995 of $34,020, the export sector wage premium would have been over $4000. See Hufbauer, et al. (1997), and J. David Richardson and Karin Rindal, Why Exports Matter: More! (Washington: Institute for International Economics and the Manufacturing Institute, February 1996).

4. See Richardson and Rindal (1996).



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