Kartik Mittal examines the economic pros and cons of international trade sanctions in Law360

November 26 2019

The economic pros and cons of international trade sanctions

Kartik Mittal

This article was originally published in Law360 and can be accessed here

Sanctions have been back in the headlines this year in a big way. The most recent target in the international crosshairs of U.S. politicians has been Turkey. Following the October withdrawal of U.S. troops from Syria, President Erdogan decided to invade the north-east part of the country with which Turkey shares a border. Initially, President Trump consented to this anticipated military incursion against US-backed Kurdish militias who had been instrumental in defeating the jihadi group Isis. After all, Turkey is a longstanding NATO ally.

But under pressure from Democrats and Republicans alike, Trump did a volte-face, and tweeted: ‘I will totally destroy and obliterate the Economy of Turkey.’ He then proceeded to impose sanctions on several Turkish ministers and departments and stated that he would double tariffs on the country’s steel exports to 50 per cent.

A temporary ceasefire was called. Vice-president Mike Pence then announced that the Trump administration would not impose any more sanctions on Turkey and that it would remove recently imposed sanctions once a permanent ceasefire was in place. Meanwhile Turkey agreed to end its operations in northern Syria after the withdrawal of the Kurdish forces.

Nevertheless, US politicians remain split on the issue. The U.S. House of Representatives voted overwhelmingly - by 403 to 16 - to impose sanctions on Turkey, while Senate Majority Leader Mitch McConnell warned that they would cause economic damage and alienate the Turkish people. The situation remains in a state of flux with other issues being brought into play: The U.S. Congress is ready to impose sanctions on Turkey unless it abandons its Russian S-400 air missile defense systems, according to U.S. National Security Advisor Robert O’Brien.

The farcical flip-flopping of U.S. policy concerning Turkey does not disguise the very serious effects that the imposition of sanctions can have. This year, the U.S. has continuously used the strategy of sanctions to impose its will on other countries, with Lebanon, Venezuela, Iran and potentially South Africa, on the receiving end.

History is a guide to their effectiveness. Before World War Two, the League of Nations introduced them against Italy in an attempt to persuade Mussolini to withdraw his troops from Abyssinia. He refused. And in 1941, U.S. trade sanctions were imposed against Japan shortly before Pearl Harbor. Since 1945, The UN Security Council has imposed mandatory sanctions only twice: against Rhodesia’s white-minority government and South Africa’s apartheid regime. Ultimately, both actions helped to secure a peaceful transfer of power.

So, used sparingly, sanctions can work as an instrument of foreign policy and economic pressure to force a change in behavior. But as penalties levied on another country, or on citizens of another country, they can sometimes have unintended consequences. In 1973, the Organization of Arab Petroleum-Exporting Countries (OAPEC) issued an embargo on oil shipments to the U.S. in reprisal for its supplying Israel with arms. Intended as a foreign policy tool, it also served to exacerbate the 1973-4 stock market crash.

Various U.S. laws delegate an embargo power to the President with further specific laws prohibiting trade with certain countries – e.g. Cuba, Iran, and Libya. A sanctions map reveals the U.S. imposing them against assorted individuals and entities in multiple countries. But only six have had comprehensive sanctions imposed against them: North Korea (since 1950); Cuba (1958); Iran (1979); Syria (1986); Sudan (1993): and most recently, Venezuela (2019).

Sometimes the effect can be crippling. Without doubt, Venezuela has been hit very hard this year. The country had already been experiencing shortages and hyperinflation before US sanctions were announced. But their imposition has made things worse still, leaving the country struggling to buy vital supplies for its oil industry: oil revenues account for about 99 per cent of Venezuela’s export earnings.

In the worst crisis facing a country not at war for more than 70 years, sanctions have also accentuated a desperate humanitarian situation. Increased starvation, disease, crime and mortality has provoked mass emigration involving several million Venezuelans. Meanwhile the US has been trying to oust Venezuelan President Maduro since the start of 2019 and replace him on an interim basis with the leader of the opposition. To date, this has not happened, even though Venezuela’s oil output has dwindled much further as a result of sanctions, reaching its lowest level since the 1940s.

Sanctions can often take time to become effective. Although the immediate impact is that a country's exports are not purchased by the country imposing the sanction, significant economic loss may only result after months, and sometimes years. On occasion, it can become a two-way process: there can also be an increase in costs to consumers in businesses based in the countries that issue sanctions.

Much will depend on the target country's economic reliance on the exported goods or services. Only recently, Lebanon’s Jammal Trust Bank was forced to wind itself down as a result of US sanctions. In October, the IMF reported that Iran is suffering ‘severe distress’ from U.S. sanctions as the economy was forecast to contract by 9.5 per cent in 2019. 

They were imposed last year after the U.S. pulled out of the nuclear deal which had previously been agreed by President Obama. In response, Iran’s government has recently been forced to reduce large subsidies on gas prices to curb the impact of these sanctions on oil exports which have begun to bite hard on the domestic economy, leading to fuel riots in several cities.

Looking ahead, there is no reason to believe that the Trump administration will alter its position on sanctions. Whether the election twelve months from now will mean that the U.S. does change course, we will have to wait and see. 

But not everyone loses. Sanctions busting - the act of trading with a country with which trade is not officially allowed – is not uncommon. And although sanctions can have a detrimental economic impact on both the country imposing the sanctions and on the country targeted by them, it can also provide an opportunity to third countries: those which are willing to export/import goods and services to or from the sanctioned country despite sanctions being in place.

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