Economics Dictionary of ArgumentsHome
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| Trade sanctions: Trade sanctions are economic penalties that restrict or prohibit the exchange of goods and services with a targeted country or entity. They aim to exert pressure by limiting access to markets, imports, or exports. Common forms include embargoes (complete trade bans), export/import restrictions, and tariffs/quotas. See also Tariffs, Sanctions, Sanction effectivenes, Sanctions consequences, Financial sanctions._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Oleg Itskhoki on Trade Sanctions - Dictionary of Arguments
Itskhoki I 11 Trade Sanctions/Itskhoki/Ribakova: It is natural to assume that a country in full economic autarky is entirely insensitive to international economic sanctions. The most immediate departure from autarky is balanced international trade with a closed capital account. In recent history, even the most rogue regimes did not come close to full economic autarky, and essentially every country in the world participates in some form of international trade, even when shielded from international financial markets. This is sufficient for international economic sanctions to have a clear and measurable impact according to standard trade theory. We start the analysis from the following key principles of international trade (see, for example, the discussion in Helpman 2011)(1): 1. Trade results in overall welfare gains for both trade partners. This proposition emerges robustly across a variety of modeling frameworks, and the departures from this are generally of a pathological nature. Itskhoki I 12 2. Despite aggregate gains, trade generally results in a distributional conflict. That is, there are winners and losers from trade in each country, but the surplus of winners is usually sufficient to compensate the losers provided income transfers are feasible. 3. Adjustment to trade shocks, whether positive (like trade liberalizations) or negative (like trade wars and sanctions), is associated with a period of costly transition in which a part of the gains from trade is dissipated or losses are amplified. Trade sanctions operate via mechanisms #1 and #3, and “smart” trade sanctions are meant to also engage mechanism #2 (see Fajgelbaum et al. 2020)(2). >Sanctions, >Sanctions consequences, >Sanctions debate, >Sanctions effectiveness, >Sanctions evasion, >Sanctions history, >Sanctions policies, >Sanctions theory, >Trade sanctions, >Financial sanctions. Welfare costs of sanctions under balanced trade: Arkolakis et al. (2012(3); henceforth ACR) propose a simple way to quantify welfare gains from trade as: (1) Gain from trade for country i = 1 − λii 1/ε where λii is the expenditure share on domestic goods, hence 1−λiiis the expenditure share on imports, and ε is the trade elasticity. >Elasticity. Formula (1) applies across a number of widely-used models of international trade that give rise to a gravity structure of international trade flows, for which there is substantial empirical evidence.* Intuitively, formula (1) emphasizes two main forces – how much the country trades, 1−λii, and how easy it is to substitute the imported goods for domestically produced goods, . The effect of a trade shock can be judged by how much it affects the expenditure share on imports: (2) Change in welfare of country i = − 1 ε d log λii Note how the assumption of trade balance results in the import share being a sufficient statistic for welfare without conditioning on the effect on exports. Also note that formula (2) characterizes simultaneously the effect on welfare, real consumption and real GDP of the country, which may or may not be the main objective of sanctions. Itskhoki I 13 Given balanced trade, changes in real consumption also corresponds to the changes in the real purchasing power of income. Hence, if monetary policy stabilizes the local nominal wages, then it also corresponds to the inverse of consumer price inflation.** Formulas (1) and (2) can be extended to multiple-sector economies and economies with complex input-output linkages (see Costinot and Rodríguez-Clare 2014(4) and Baqaee and Farhi 2024(5)), emphasizing the ability to substitute various foreign goods and inputs with the domestic ones. The easier it is to substitute to domestic production, the smaller are the gains from trade, or equivalently the smaller are the losses from trade sanctions. >Sanctions evasion. Conversely, the presence of certain bottle-neck goods or industries, which are nearly impossible to substitute away from and which are centrally used in the production of other goods, may result in extreme losses from fragmentation (Ossa 2015)(6). Measurements: Another important insight is that the change in the aggregate (or sectoral) trade share is largely a sufficient statistic to evaluate the impact of a given trade policy on aggregate welfare (sectoral output). This makes it easy to immediately evaluate the impact of policies from trade data (provided estimates of trade elasticities), which is generally easier to procure than macro data.** Sanctions evasion: Furthermore, substitution across external trade partners that leave trade shares unchanged (assuming ε > 1), do not change welfare or allocations. Therefore, it is the aggregate trade share, not bilateral trade shares with specific trade partners, that is generally (but not always) most informative. The ability to substitute goods and input sourcing away from sanctioning coalition to allied and third-world countries grossly limits the effectiveness of sanctions. Itskhoki I 14 Size of countries The baseline result (1) has a clear implication about the role of the size of countries, both imposing and receiving sanctions. Historically, a reasonable assumption is that a country under sanctions is small, and hence there are no costs to sender. In general, however, formula (1) clarifies that the costs are two-way and inversely proportional to country size. >Lerner Symmetry Theorem. *Gravity equation in international trade predicts that larger countries are connected by larger trade flows and trade flows dissipate with distance between countries. Formally, ACR show that ε corresponds to the trade cost elasticity (which are conventionally linked to the geographical distance and other trade barriers) in the gravity equation after controlling for other economic determinants of trade (such as the size of countries and their trade network). See Head and Mayer (2014(7)) and Costinot and Rodriguez-Clare (2014)(4). ** Noteworthy, Russia immediately classified many sources of internal macroeconomic and trade data. Nonetheless, it was still possible to assess international trade with Russia using the data of its trade partners. 1. Helpman, Elhanan. 2011. Understanding Global Trade. Harvard University Press. https://doi.org/10.2307/j.ctt24hhh9. 2. Fajgelbaum, Pablo D, Pinelopi K Goldberg, Patrick J Kennedy, and Amit K Khandelwal. 2020. “The Return to Protectionism.” The Quarterly Journal of Economics 135 (1): 1–55. https://doi.org/10.1093/qje/qjz036. 3. Arkolakis, Costas, Arnaud Costinot, and Andrés Rodríguez-Clare. 2012. “New Trade Models, Same Old Gains?” American Economic Review 102 (1): 94–130. https://doi.org/10.1257/aer.102.1.94. 4. Costinot, Arnaud, and Andrés Rodríguez-Clare. 2014. “Chapter 4 - Trade Theory with Numbers: Quantifying the Consequences of Globalization.” In Handbook of International Economics, edited by Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff, 4:197–261. 5. Baqaee, David Rezza, and Emmanuel Farhi. 2024. “Networks, Barriers, and Trade.” Econometrica 92 (2): 505–41. https://doi.org/10.3982/ECTA17513. 6. Ossa, Ralph. 2015. “Why Trade Matters after All.” Journal of International Economics 97 (2): 266–77. https://doi.org/10.1016/j.jinteco.2015.07.002. 7. Head, Keith, and Thierry Mayer. 2014. “Chapter 3 - Gravity Equations: Workhorse,Toolkit, and Cookbook.” In Handbook of International Economics, edited by Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff, 4:131–95. Handbook of International Economics. Elsevier. https://doi.org/10.1016/B978-0-444-54314-1.00003-3._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Itskhoki I Oleg Itskhoki Elina Ribakova The Economics of Sanctions: From Theory Into Practice. Brookings Papers on Economic Activity, Fall 2024. The Brookings Institution 2024 |
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> Counter arguments against Itskhoki
> Counter arguments in relation to Trade Sanctions
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