Economic sanctions are a form of coercive action designed to incentivize a country to change its behavior or decisions by inflicting economic hardship and isolation. They are most often imposed by major powers or coalitions of states in response to military aggression or human rights violations. They come in many forms. Examples include trade restrictions (embargoes, export controls and import tariffs), asset freezes (prohibiting the transfer of assets to a targeted country), travel bans, or measures aimed at specific individuals.
The effectiveness of sanctions depends on their design, timing and implementation. Striking the right balance between pressure and restraint requires a nuanced understanding of a target country’s economy, trade relationships and social fabric. It also necessitates a thorough assessment of the impact on the sanctioner’s own domestic and international trade flows.
To estimate the trade effects of sanctions, we use a new empirical methodology that measures interruptions in cross-border trade in a country’s largest and most important markets, based on data from the World Bank’s Global Competitiveness Index. This approach differs from other estimates of the trade impacts of sanctions, which typically rely on anecdotal eye-witness accounts from affected firms and responsible government agencies.
Our results suggest that sanctions can cause significant economic disruption in some countries, but the degree of damage varies across economies. Economies with more undiversified commodity-based trade structures are much more sensitive to sanctions, especially those in the developing world. For example, a 10% decrease in the share of a country’s exports that consist of commodities leads to GDP losses three to four times larger than average.