Trade Sanction: Meaning, Reasons, Types, Pros, Cons

What’s it: Trade sanction is formal penalties for stopping or reducing the purchase or sale of goods to a country. 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

Difference between trade sanctions and embargoes

Embargoes are similar to trade sanctions but represent more severe penalties. Countries impose embargoes, usually attempting to obtain national interests from the sanctioned state. If trade sanctions fail, adopting countries can adopt harsher economic sanctions through trade embargoes and financial sanctions.

Embargoes can take the form of:

• Prohibition of export or import transactions
• Quota creation for quantity
• Freezing of financial or non-financial transactions
• Prohibits the sale or purchase of high technology products

The effectiveness of the embargo is proportional to the level of international participation of the sanctioned country. When it has significant participation, embargoes can be powerful tools to significantly impact the country’s economy.

Meanwhile, although painful, for a sanctioned country, an embargo can be an opportunity to develop independence more quickly. However, indeed, in the short term, they will have to suffer.

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 from 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

Based on the sanctioner, trade sanctions fall into the following two categories:

1. Unilateral sanctions. One country imposes sanctions on other countries. Usually, the sanctioner is a country with a strong economy, or that feels disadvantaged.
2. Multilateral sanctions. The sanctioner involves two or more countries. It usually involves an alliance of countries or international organizations such as the United Nations and the European Commission.

Furthermore, based on penalties, trade sanctions can take the form of:

• High import tariffs to make the target country’s goods more expensive when entering the domestic market.
• Quotas limit import and export volumes during a specific period.
• Non-tariff barriers such as license terms, product standards, and other terms, which increases trading costs.
• Prohibits export of certain products, such as weapons
• Stop imports of products from sanctioned countries
• Prohibit terrorism-related technical assistance, training, and funds transfers

Trade sanctions pros and cons

While sanctions are a useful tool for putting pressure on a country, they are a topic of pros and cons for reasons of both effectiveness and subjectivity. Subjectivity means that sanctions act in the sanctioner’s interests, which may not be the best solution that the government or citizens in the target country want.

Benefits of trade sanctions include:

• A useful foreign policy tool to influence and retaliate against other countries
• Reforming the behavior of the sanctioned country 
• Stabilizing a regime that is cruel and violates human rights
• Support international peace and security as in the case of an arms embargo

Disadvantages of trade sanctions include:

• Increase tensions in international relations where the target country can form counter alliances to retaliate, lead to trade wars or even open warfare
• Raises the economic costs of the target country such as low growth, lost income and jobs, and poverty
• Deglobalization because it alienates target countries from international trade

What to read next

• International Trade: Why It Matters, Advantages, Disadvantages
• Reasons Why International Trade Exists
• What are the Benefits of International Trade?
• Import: Types, Influencing Factors, Impacts
• Exports: Importance, Types, Influencing Factors
• Trade Balance: Formula, Calculation, Impacts, and Affecting Factors
• Trade Surplus: How to Calculate, Affecting Factors, Pros, Cons
• Trade Deficit: Formula, Causes, Impacts
• Terms of Trade: Meaning, How to Calculate, Impacts
• Trade Sanction: Meaning, Reasons, Types, Pros, Cons
• Trade Restriction: Reasons, Types, and Impacts