Understanding Trade Sanctions In International Economics

Trade Sanctions

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The prime purpose of this study is to establish clear understanding about trade sanctions in international economics. The concept about trade sanctions is briefly demonstrated here. Furthermore, it discusses about the theoretical welfare effects on the world economy. Along with that, the effectiveness of the trade sanctions is manifested as well. Apart from this, the study analyses two specific trade sanctions in order to strengthen the concept of the topic.

Before entering in the main discussion of trade sanctions, it is essential to build a concept of international trade. International trade defines the process of exchanging goods and services as well as capital across the international borders (Van den Berg, 2012). More specifically, the international trade helps to enhance the world economy where the demand, supply, and prices of the commodities and services affect the global events, as well as are affected by them too (Van Bergeijk, 2014). For example, in a case scenario, if the labor cost increases due to some political change in Asia, the manufacturing cost of an American sneaker company which is located in Asia increases. Thus, the consumers in America have to pay higher price for the sneakers that are exported by the company from Asia. Along with that, the consumers in Asia also purchase the commodity at a higher price. As a result, the economies of both the nations are affected (Van Bergeijk, 2014).

As opined by McGovern (2015), the countries and the consumers are able to generate the opportunity of getting all kind of goods and services through trading globally. It has been found that all kind of commodities are not available in one country and thus the nation imports it from international market. Apart from the commodities, the services like banking, transportation, consulting, and tourism are imported by other countries. As per the statement of Yarbrough & Yarbrough (2014), trade sanction is the trade penalty which is imposed by one country on another country or other countries. Moreover, the multilateral trade sanction is the penalty which can be imposed by more than one country on different nations. Patterson (2015) added in this context that the sanctions can be defined as pulling out the customary trade as well as the financial relations. In this context, it is important to mention that the financial relation is established for foreign and security policy purposes. The trade sanction might be comprehensive (Reeve, 2014). Reeve (2014) elaborated that the comprehensive form of trade sanction forbids two nations by law where they are involved in commercial activities. The longstanding Unites States embargo (limited or total export disruption) of Cuba is one of the examples that define the comprehensive form of trade sanctions. On the other way, Levinson (2013) mentioned that the trade sanctions may be targeted. The targeted form of trade sanctions is the policy by which the transactions with specific businesses are blocked.      

Theoretical Welfare Effects on the World

Hakanson & Dow (2012) explained the fact when the trade sanctions are used and for which purpose. This helps to understand how trade sanctions fit into broad economic sanctions. In this context, it is explained that the trade sanctions are mainly used for making the range of foreign policy goals more advance. The foreign policy goals include conflict resolution between nations, democracy and human rights promotion, nonproliferation, counternarcotics, and counterterrorism. Most recently, the cyber security is included in the foreign policy goals (Hakanson & Dow, 2012). McDonald (2016) defined trade sanctions as the form of intervention where the policies are considered as an alternative to military force. More specifically, trade sanction is the lower risk, lower cost and middle course of actions between diplomacy and war (McDonald, 2016). The policy makers of trade sanctions consider the policies in order to response to foreign crisis when military actions are not feasible there. However, Yarbrough & Yarbrough (2014) mentioned that the trades sanction policies and programs differ country to country (Refer to Appendix 1 and Appendix 2).  

As mentioned by Van Bergeijk (2014), the trade sanctions can be imposed by the European Union (EU), the UN Security Council, and any individual countries. However, the Security Council first instituted the trade sanctions and it was adopted later by the European Union in form of Council decisions and regulations (Van Bergeijk, 2014). Sometimes the purpose of the sanction imposing countries is to change the undesirable behavior. For example, such case has been marked when Syria is imposed trade sanctions by European Union. Furthermore, sanctions are imposed in order to restrain the opportunity for undesirable behaviors. Supporting with an example, trade sanctions are imposed in Iran where extensive restrictions are made on technology or knowledge in the nuclear sector. However, world economy is affected by both the trade imposed as well as the trade imposing countries (Giumelli & Ivan, 2013).

McDonald (2016) described that the trade sanctions have some welfare effects on the world economy. The trade sanction is considered as the protectionism policy that restrains the quantity of goods and services that need to be imported. The sanctions are widely practiced by the nations that enhance the trade openness in the world economy (Yarbrough & Yarbrough, 2014). Through imposing tariff on imported goods and with the help of restrictive quotas, the governments of the nations are maintaining the balance of the trade. Several legislations and regulations of governments limit the amount of commodities a country imports and the amount of goods and services a country exports (Hakanson & Dow, 2012). Thus, it can be stated that fair competition between imports and production is allowed by the trade sanctions. Yarbrough & Yarbrough (2014) added that the trade sanctions are imposed to protect the sunrise industries or the infant industries. In this context, it is important to define the sunshine industries; the firms which are involving new technologies in their business. The protectionism policy of trade sanctions allow such businesses develop, grow and become globally competitive (Cirone & Urpelainen, 2013). As the global competition increases, the world economy will be benefited more (McDonald, 2016). As the domestic industries are protected by these policies and programs, the possibility of enhancing comparative advantages also increases. In order to support it with an example, when certain firms are protected from competition and benefited from the economies of scale, they are able to expand their businesses. This further helps to acquire more competitive advantages. As a result, they might invest more in real capital as well as human capital and thus the skills and capabilities as a whole will be improved (Hakanson & Dow, 2012).

It has been mentioned before that through imposing tariff on imported goods and services, the balance of trade maintained. According to Hakanson & Dow (2012), the cost of imports is increased due to the imposed tariff. Hence, as a result, the consumers’ surplus is declined. It is way much difficult to find out the benefits of the consumers from the tariffs. For example, high tariff is imposed by European Union on United Kingdom on the agricultural products in order to protect the EU farmers. As a result, the consumers in United Kingdom had to pay higher prices for the agricultural products. The benefits are noted in the long run. The high tariff might drive the domestic firms to improve their businesses and hence the country would be able to produce more. On the other way, this agricultural tariff benefitted the European farmers as they had been protected from cheaper competition (McDonald, 2016). Furthermore, Van Bergeijk (2014) explained that the tariff increases the revenue of the government. As per the previous discussed case scenario, it can be stated that if the tariff increases by a small percentage, the revenue of the sanction imposing country will increase. On contrast, if the sanction imposing country imposes too high tariff, then no import will be made by the sanction imposed nation. As a result, the government revenue of the sanction imposing country will be declined (Cirone & Urpelainen, 2013). Thus, it can be stated that the benefits from the trade sanction depends on the factors of the sanctions (Van Bergeijk, 2014).           

As per the statement of Bapat et al. (2013), the objectives and purposes behind imposing trade sanctions vary from country to country. There is a need to explore the hidden agendas which are embedded in their imposing sanctions and stated goals as well. Giumelli & Ivan (2013) described the goals of imposing trade sanctions into five categories that include punishment (deterrence), compliance (coercion), destabilization (subversion), signaling, and symbolism (demonstrative effect). The punishment category defines that such sanctions are imposed to prevent wrong activities so that the economy as whole are not affected. The goal is not necessarily to rehabilitate the wrong-doers; it is for deterring others from such wayward behavior (Giumelli & Ivan, 2013). Cirone & Urpelainen (2013) defined the category compliance where countries impose trade sanctions in order to drive their target by altering policies and behaviors as well. Further, some nations impose sanctions to destabilize the target government. Supporting with an example, in the year 1948, Stalin imposed economic sanctions against Yugoslavia to replace Tito with a pro-Soviet leader (Bapat et al., 2013). According to Urpelainen (2013), the imposition of trade sanctions deliver a signal to the sanction imposing country to resolve both the target and allies. More specifically, certain polices incorporated in the sanctions ensure that the economic goals will be achievable by proper balance of exchanging goods. Cirone & Urpelainen (2013) stated that symbolism category defines that the policies embedded in the sanctions carry the symbol of success of the sanction imposing country.

The above discussion states that the trade sanction helps the imposing countries to acquire the objectives stated behind this. In context of the effectiveness of trade sanctions, Bapat et al. (2013) stated that sanctions allow the countries to serve trade bans as an essential policy lever. It helps the countries to block funds from flowing to rogue regimes unilaterally or multilaterally. Lowenberg (2015) argued in this context that trade sanctions are not an effective policy in achieving the objectives. The monetary pressure weakens the economic conditions of the sanction imposed countries and thus it hampers the trade relation of the countries (Bapat et al., 2013).

Rosenthal (2013) discussed about the sanction against Liberia which was imposed by the Security Council in the year 1992. The authority imposed ‘smart’ sanction on the country in order to achieve the objective of forcing Monrovia to cease support for the RUF (Revolutionary United Front) of Sierra Leone. As a result, this particular sanction necessitated an embargo form through which senior members of the Government of Liberia imposed bans on timber and diamond. Apart from this, Baldwin (2013) discussed about the sanction against Iraq which was imposed on 6th August, 1990. The sanction was imposed by UN Security Council after the Iraqi invasion of Kuwait. The oil industry and oil sale of Iraq was controlled totally by the US-UK Occupation Authority (The effect on oil production is referred in Appendix 3). Though the objectives behind the sanction was not achieved as a wide range of sanction issues were noticed (Baldwin, 2013).

Conclusion

The study concludes that the international trade helps to increase the world economy. In the international market, the demand, supply, and prices of the commodities and services are affected by the sanctions imposed by several nations. It further concludes that through this policy, the nations and the consumers are able to obtain the scope of acquiring all kind of commodities and services. It has been found that trade sanction is the trade penalty that is imposed by one state on other states. On the other way, the multilateral trade sanction is the penalty policy that is imposed by more than one nation. Moreover, the study brought out that the comprehensive form of trade sanction includes two nations by law where they are engaged in commercial activities. Furthermore, the targeted form of trade sanctions is the penalty by which the transactions with particular businesses are blocked. The study discussed both the positive and negative viewpoints of the economists in the context of effectiveness of the trade sanctions. The study has brought out and analyzed two specific trade sanctions that are sanction against Liberia and sanction against Iraq. 

References List

Baldwin, D. A. (2013). 2 UN/Unilateral Sanctions Regimes. A Strategic Understanding of UN Economic Sanctions: International Relations, Law and Development, 109, 19.

Bapat, N. A., Heinrich, T., Kobayashi, Y., & Morgan, T. C. (2013). Determinants of sanctions effectiveness: sensitivity analysis using new data. International Interactions, 39(1), 79-98.

Cirone, A. E., & Urpelainen, J. (2013). Trade sanctions in international environmental policy: Deterring or encouraging free riding?. Conflict Management and Peace Science, 0738894213491182.

Giumelli, F., & Ivan, P. (2013). The effectiveness of EU sanctions. An Analysis of Iran, Belarus, Syria and Myanmar (Burma)’. EPC Issue Paper, (76).

Hakanson, L., & Dow, D. (2012). Markets and networks in international trade: on the role of distances in globalization. Management International Review,52(6), 761-789.

Levinson, C. (2013). International Trade Unionism (Routledge Revivals). Routledge.

Lowenberg, A. D. (2015). Busted Sanctions: Explaining Why Economic Sanctions Fail. Journal of Economic Literature, 53(4), 1023-1024.

McDonald, B. (2016). The world trading system: the Uruguay Round and beyond. Springer.

McGovern, E. (2015). International trade regulation (Vol. 2). Globefield Press.

Patterson, G. (2015). Discrimination in International Trade, The Policy Issues: 1945-1965. Princeton University Press.

Reeve, R. (2014). Policing international trade in endangered species: the CITES treaty and compliance. Routledge.

Rosenthal, J. H. (2013). Economic Sanctions. The International Encyclopedia of Ethics.

Urpelainen, J. (2013). Promoting International Environmental Cooperation Through Unilateral Action: When Can Trade Sanctions Help?. Global Environmental Politics, 13(2), 26-45.

Van Bergeijk, P. A. (2014). Economic diplomacy and the geography of international trade. Edward Elgar Publishing.

Van den Berg, H. (2012). International Economics A Heterodox Approach. Routledge.

Yarbrough, B. V., & Yarbrough, R. M. (2014). Cooperation and governance in international trade: The strategic organizational approach. Princeton University Press.