How Sanctions Affect Global Trade

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The use of international sanctions as a political instrument go as far back as the Megarian decree in ancient Athens, which limited trade to neighboring Megara in 432 BC. Like this ancient example, modern nations also leverage the economy as a tool in foreign policy through the use of sanctions. 


Anyone taking part in international business must navigate these restrictions or risk running afoul of international law and suffering the consequences. 


This concern isn’t limited to financial institutions. Every industry and business with an international scope is affected.

Who Utilizes Sanctions?

Since World War II, the number of international sanctions has only increased. Fewer of the world’s largest economies want to engage in the costly,business of war and instead exert influence through their economy. 


The U.N. Security Council has enacted 30 separate sanction actions since its founding, 14 of which are ongoing. Many national governments and agencies, such as Her Majesty’s Treasury (U.K.), the FBI (U.S.), and the Office of Foreign Assets Control (U.S.), abide by and enforce the U.N.’s sanctions regimes. 


In addition, individual nations also deploy their own sanctions. The U.S. Government, representing the world’s largest economy, has imposed sanctions on more than 30 countries.

What Are Sanctions? 

Sanctions are political measures designed to influence foreign states, individuals, or parties to achieve a specific aim. Usually by affecting their economy or wealth. 


The most common example is forbidding the import or export of goods to and from a specific country in the hopes of deliberately damaging its economy. This can act as a means of non-military punishment or be used as leverage to convince the foreign state to some action.


A modern example was seen when the U.S. passed the H.R. 850 bill, which effectively ended Iran’s international sale of oil. This sanction was levied against them in response to Iran’s nuclear arms program.

What Types of Sanctions Exist? 

Sanctions can be identified broadly in two ways.


The Number of Nations:


  • Unilateral. A sanction deployed by a single country.

  • Multilateral (or Bilateral). A sanction deployed by multiple nations acting together.

The Method of Restriction: 

  • Economic Sanctions. A ban on trade goods. Either with a narrow focus, such as the import/export of a specific commodity, or a broad focus that cuts off all trade.


Common economic sanction methods include:

  • Quotas. Trade restriction on the number or monetary value of goods.

  • Tariffs. Limitation on a specific nation in the form of high taxes or fees

  • Non-tariff Obstacles. Barriers on trade unrelated to taxes, but may include requiring licenses, specific packaging, or standards.

  • Asset freezes and seizures. Prevents the moving or selling of a country’s assets abroad.

  • Embargos. A total ban on any trade or commercial activity with the target nation.

  • Diplomatic Sanctions. A removal or reduction of diplomatic elements, such as embassies or ambassadors.

  • Military Sanctions. A limit placed on a nation’s military strength. These are enforced either through economic sanctions or using actual military intervention to degrade the target’s military.

  • Sports Sanctions. A restriction on the target’s participation in international sporting events and tournaments.


In addition, sanctions are sometimes defined by the motivation for imposing them. 


  • Environmental sanctions. A type of economic sanction designed to punish a breach in environmental law or ethics.

What Are the Impacts of Sanctions?

On the Target Country

As per their design, sanctions have a powerful negative impact on the target country’s economic situation. A 2015 study examined 68 countries between 1976-2012 to measure the effect of U.S. and U.N. sanctions on a nation.


It measured the target’s real per capita GDP growth rate percentage points (pp). 


The study concluded that:

  • Moderate U.N. multilateral sanctions reduced a target’s GDP growth rate by up to 3.5pp.

  • Severe U.N multilateral Sanctions, which completely cut off the target from trade with U.N. members, reduced the target’s GDP growth by more than 5pp.

    • The adverse effect on a target of U.N. multilateral sanctions was measurable even ten years later.

    • The target’s aggregate decline in GDP-capita was 25.5% on average.

  • U.S. unilateral sanctions against a target country carried less impactful but still substantial GDP growth reduction of less than 1pp. 

    • The adverse effect on a target of U.S. Unilateral sanctions was measurable only seven years later.


Even just the threat of a sanction can have an impact in the form of an anticipation effect. The amount of trade will actually increase when the threat is levied, as the state and business within it stockpile needed goods to prepare for future limitations.

On The Imposing Country 

The target country suffers the worst effects, but the imposing country’s economy is also sanctioned in its own way. Its companies will have fewer available markets and investment opportunities. In addition, some experts fear that the overuse of sanctions results in an isolated, less influential economy. 


Recent research suggests that U.S. imposed sanctions are costing its own economy $15 – $19 billion in potential exports every year. This includes 200,000 potential jobs in the import/export industry. 


The negatives associated with economic sanctions have been given as a reason to discontinue their use.


In contrast, British diplomat Jeremy Greenstock famously suggested that sanctions are useful because “there is nothing else [to do] between words and military action if you want to bring pressure upon a government”

On Third-Party Countries

Sanctions may offer increased opportunities and markets for countries uninvolved in the sanction. If, after all, one country no longer accepts a product, the seller will look elsewhere.


For example, moderate unilateral sanctions from the U.S. will often be accompanied by a slight uptake in the aggregate bilateral trade of other G7 members who are not participating in the sanction.

On Businesses 

Sanctions from government agencies around the world create a maze of legal restrictions that must be followed. 


Failure to do so can result in harsh penalties:

  • Loss of export privileges

  • Incarceration

  • Criminal and administrative fines


In the past, international businesses had to rely on expansive spreadsheets to track each transaction and ensure its compliance to sanction laws, but now there are digital solutions.

Sanctions And The Future

The pattern of increased sanctions set since World War II is here to stay, and recent events show that their use has only increased with time. We can’t ignore their impact on global trade. 


No matter where or in which country we base our company, we must keep a close eye on the ever-changing political situation.

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