Are Trade Sanctions Credible or Are They Cheap Talk?

Tibor Besedes
About This Project

By Gita Smith 

It is known that imposing sanctions against a country can restrict its ability to do business, putting political and economic pressure on the target country. But can sanctions also adversely affect the imposing country?

Professor Tibor BesedesA study by Georgia Tech School of Economics expert Tibor Besedes examined the effects of financial sanctions on the country imposing them. With his co-authors, Stefan Goldbach and Volker Nitsch, Besedes analyzed how German non-financial organizations (for example, manufacturers but not banks) reacted to sanctions on 23 countries from 1999 through 2014.

The study found four main results. “First, German financial activities with sanctioned countries are reduced after the imposition of sanctions. Second, firms doing business with sanctioned countries tend to be disproportionately large, often having other business opportunities,” the study explains. Third, firms affected by sanctions expand their activities with non-sanctioned countries, some of which keep close trade ties to the sanctioned country. This, the study notes, might create an avenue for a business to continue trading with the sanctioned country, thus evading sanctions.

Fourth, the research found that sanctions had no effect on employment or total sales enjoyed by the imposing nation’s firms. Besedes’ data allowed him to identify entities that declared business with the sanctioned country, beforehand, and, therefore, would be affected by the restrictive measures. The study found that entities became more active in international markets, acquiring numerous outside options to replace lost revenue from the sanctioned country. There also was consistent evidence that the businesses readily pursued such options, significantly expanding their business operations with non-sanctioned countries.

This research complements the sizable body of knowledge about the effects of sanctions on the target country by examining the economic costs of sanctions for the imposing country. Overall, the study concluded that the economic costs of financial sanctions to the sender country are limited. 

Read the full paper