What’s it? Trade sanctions are formal penalties for a country to stop or reduce the purchase or sale of goods. The sanctioner may be a country with a strong economy, such as the United States, or several countries together or through an international organization.

We also often refer to trade sanctions as commercial sanctions. Commercial sanctions are part of economic sanctions, besides financial sanctions. Financial sanctions can take various forms, such as:

• Deferral of international financial rocks
• Prohibition of access to international financial markets
• Freezing of financial assets
• Prohibition of transfer of payments or financial transactions
• Rescheduling of debt payments

Trade sanctions vs. embargoes

Embargoes are similar to trade sanctions but represent a more severe form of economic punishment. While trade sanctions aim to limit or discourage specific trade activities, embargoes strive for a near-complete isolation of the targeted country. Countries may impose embargoes to pressure a sanctioned state into changing its policies or actions in order to achieve national interests. If trade sanctions fail to achieve the desired outcome, adopting countries might resort to harsher measures through trade embargoes and financial sanctions.

The scope of an embargo is typically broader than trade sanctions. Here’s a breakdown of the restrictions an embargo can impose:

• Prohibition of export or import transactions: This completely shuts down trade flows between the imposing countries and the sanctioned nation.
• Quota creation for quantity (limited to exceptional cases): In rare cases, a limited quota might be established for essential goods like food or medicine.
• Freezing of financial or non-financial transactions: This restricts financial dealings, including investments and asset transfers.
• Prohibits the sale or purchase of high-technology products: This can hinder the sanctioned country’s technological advancement and economic development.

The effectiveness of an embargo hinges on the level of international participation. When a significant number of countries join the embargo, it can have a crippling impact on the sanctioned country’s economy by severely limiting its trade and financial opportunities. However, a successful embargo also requires the sanctioned nation to have a high degree of economic integration with the imposing countries.

While undeniably painful for the sanctioned country in the short term, an embargo can also present an unexpected opportunity. Limited access to foreign goods and technology can trigger domestic innovation and self-reliance. However, this path to self-sufficiency typically comes at a significant cost, with potential economic hardship in the initial stages.

Reasons for imposing trade sanctions

Trade sanctions act as punishments to encourage desired behavior. This is closely related to foreign economic policy in politics and international relations. Imposing sanctions aims to change the behavior and policies of the government of the target country.

There are various reasons behind the trade sanctions, whether for political, economic, military, or even social reasons. All right, let’s take a few examples to understand the reasons for sanctions.

First, the political tension between countries. For example, the United States imposed a full embargo on Cuba in 1963 in protest against the country’s Communist government.

In 2018, the United States imposed a seven-year export ban on a Chinese telecommunications company, ZTE Corporation, for illegally exporting US goods to North Korea and Iran.

In 2006, Russia banned all imports from Georgia and cut natural gas supplies to Ukraine in response to plans for the two countries to join NATO.

Second, retaliation for unfair trade practices. For example, a country gives production subsidies to domestic firms to lower production costs. That way, the price of domestic goods is lower when sold abroad. Such practices are detrimental to the destination country’s products because they do not receive the same facilities.

Brazil forced trade sanctions on the United States in 2004 in response to the United States’ policy of subsidizing its cotton farmers. Brazil won a lawsuit at the World Trade Organization and has the right to impose $830 million in US product sanctions.

Third, preserve international peace and security. For example, a country may prohibit the export of arms from supporting the peace process. Another alternative is to freeze transactions related to terrorism or arms trafficking.

In 2006, the UN banned heavy weapons and individual goods exports in response to North Korea’s first nuclear test.

Fourth, a violation of human rights. In 2017, Canada imposed sanctions on Venezuela and banned any transactions, both goods and financial, to some Venezuelan officials.

In 2011, the United Nations also embargoed Libya in response to humanitarian violations during the First Libyan Civil War.

Types of trade sanctions

We’ve explored the motivations behind trade sanctions, but how exactly do countries put pressure on each other? Let’s dive into the various types of trade sanctions, categorized by who imposes them and the specific penalties involved.

By sanctioner

Unilateral sanctions: A single country, often a powerful nation, unilaterally imposes these sanctions on another country. This is a way to exert pressure and influence behavior, pushing the target country to change its policies or actions. Examples include addressing human rights violations, nuclear proliferation, or unfair trade practices.  However, unilateral sanctions can be controversial. They bypass international agreements and can strain relations with other countries who may not agree with the targeted nation’s behavior, but also object to the unilateral approach.

Multilateral sanctions: These sanctions carry more weight as they represent a united front. A group of countries or international organizations, like the United Nations (UN) or the European Union (EU), come together to impose sanctions on a target country. This demonstrates broader condemnation of the target country’s actions and can be more effective than unilateral sanctions. Additionally, multilateral sanctions often involve the resources of multiple countries, making them more impactful. However, negotiating and enforcing such sanctions can be complex, and achieving the desired outcome isn’t always guaranteed.

By penalty

Now, let’s look at the specific tools used to implement trade sanctions:

Tariff barriers:  Imagine a tax on imported goods.  This is what a tariff is.  By imposing high import duties, the sanctioning country makes products from the target country more expensive in their domestic market. This discourages consumers from buying them and reduces the target country’s export revenue.

Quota barriers:  Sometimes,  sanctions limit the quantity of goods a country can import or export. This is a quota barrier.  For example, a country might limit the amount of steel it imports from a sanctioned nation. This protects domestic producers but can also lead to shortages and higher prices for consumers.

Non-tariff barriers: These are regulations and requirements that make it more difficult and expensive to trade.  Examples include stricter product safety standards, complex licensing procedures, or longer customs delays.  While these might seem legitimate on the surface, they can be used as a disguised way to restrict trade from a targeted nation.

Export bans:  In some cases, a country might completely ban the export of specific goods to a sanctioned nation.  This is often done with strategically important items like weapons or technology.  The goal is to prevent the sanctioned country from acquiring these goods and potentially using them for harmful purposes.

Import bans:  The opposite of an export ban, an import ban prohibits a country from buying goods from a sanctioned nation.  This can be used to punish the target country’s economy or to prevent them from acquiring specific products.  For example, a country might ban imports of oil from a sanctioned nation to pressure them to change their policies.

Trade sanctions: pros and cons

Trade sanctions are a powerful tool in the international arena, but their effectiveness comes with a price. Let’s dissect the potential advantages and disadvantages of using trade sanctions.

The benefits of trade sanctions

• Foreign policy leverage: Countries can use trade sanctions to influence the behavior of others. By restricting trade, they can pressure a target country to change its policies or actions on issues like human rights violations, nuclear programs, or unfair trade practices.
• Encouraging change:  Sometimes, trade sanctions can push a sanctioned country to reform its behavior.  The economic pain caused by sanctions can incentivize the target country to address the concerns that led to the sanctions in the first place.
• Promoting peace and security: Trade sanctions can restrict the flow of sensitive goods, like weapons or technology, to countries deemed a threat to international peace and security. This can help prevent these countries from acquiring the means to carry out harmful actions.

The drawbacks of trade sanctions

• Escalating tensions:  Trade sanctions can backfire, leading to increased tensions and retaliation from the targeted country. This can damage international relations and potentially lead to trade wars or even military conflict.
• Economic hardship: The target country’s economy often suffers the most from trade sanctions. Reduced trade can lead to lower growth, job losses, and increased poverty for the sanctioned country’s citizens.
• Limited effectiveness:  The effectiveness of trade sanctions is debatable.  They may not always achieve the desired outcome, especially if the target country has strong economic ties with other nations.  Additionally, sanctions can take a long time to show results.
• Disruption of globalization:  Trade sanctions can disrupt the flow of goods and services around the world, hindering globalization. This can hurt economies in both the sanctioning and sanctioned countries.

The trade-off

The decision to impose trade sanctions requires careful consideration.  While they can be a tool for achieving foreign policy goals and promoting positive change, they also come with significant risks and potential unintended consequences.  Ultimately, the effectiveness of trade sanctions depends on several factors, including the specific situation, the level of international cooperation, and the resilience of the target country’s economy.