Trade reliance and the success of economic sanctions

"It is the only option between diplomacy and war and has thus become the most crucial foreign policy tool in the U.S. arsenal. And yet, nobody in government is sure this whole strategy is even working."

William Alan Reinsch, Center for Strategic and International Studies.

Abstract

What determines the success or failure of economic sanctions? Theoretical research emphasizes the anticipated costs to both sender and receiver countries, but empirical findings remain inconclusive. This study introduces a novel measure of sanction costs by developing a bilateral reliance metric, which quantifies the welfare losses incurred when trade ties are severed. The metric is derived from an international trade model incorporating multiple sectors, sector-specific trade elasticities, and intermediate production networks. Results show that while the absolute magnitude of bilateral reliance depends on the complexity of the trade model, its changes over time remain stable. Empirically, I find little evidence that the economic costs to the receiver country influence sanction success. However, there is suggestive evidence that lower costs to the sender increase the likelihood of success—a finding that holds across different model specifications, samples, and databases.

Appendix

1.1 Eliminating trade deficits

To validate my approach of eliminating trade deficits in the raw input–output data before conducting counterfactual analyses, I plot the predicted welfare losses for the U.S. and China under varying trade cost changes ($\widehat{\tau }$) when trade ties between the two countries are severed. The solid lines represent welfare predictions without eliminating trade deficits, while the dashed lines reflect predictions after their removal.

As shown in Fig. 14, the model’s predictions remain largely unaffected by whether trade deficits are eliminated beforehand, indicating that this adjustment does not significantly influence the results.

Fig. 14

The effect of bilateral trade cost changes on US and Chinese welfare. Note: This figure shows welfare predictions of trade cost changes between the US and China. Solid lines represent predictions when trade deficits were not eliminated before performing the counterfactual, dashed lines represent welfare predictions when trade deficits are eliminated in the data. Data comes from ICIO

1.2 Countries and sectors

Below I summarize the countries and sectors included in the analysis, along with their corresponding ISO and ICIO codes. Table 4 provides the set of economies covered in the dataset, which together account for the overwhelming majority of world trade. Table 5 shows the sectoral aggregation used in the model, mapping detailed ICIO industries into 15 composite sectors. For each aggregated sector, the corresponding trade elasticity represents the average across constituent industries and determines the responsiveness of trade flows to changes in trade costs. These classifications ensure consistency across data sources and comparability of results across different model specifications.

Table 4 Countries

Table 5 Sectors

1.3 Short-run trade elasticities

See Fig.15.

Fig. 15

Short-Run vs. Long-Run Trade Elasticities. Note: Each panel illustrates a bilateral welfare losses (in %) from trade severance for a given country pair under two elasticity specifications: long-run elasticities from Fontagné et al. (2022) (dashed lines) and short-run elasticities constructed by scaling (Fontagné et al., 2022) estimates by the one-year to ten-year ratios from Boehm et al. (2023) (solid lines). The underlying model is a multi-sector model without intermediate goods. Data comes from ICIO

1.4 Examples of sanction outcomes

This appendix provides illustrative cases corresponding to the sanction outcome categories used in the Global Sanctions Database (GSDB) and the Threat and Imposition of Economic Sanctions (TIES) database. The GSDB examples, discussed in Felbermayr et al. (2020), clarify how success or failure is classified in implemented sanctions. The TIES case illustrates how success can also occur at the threat stage, without the need for actual imposition.

See Tables 6 and 7

1.5 GSDB classification

1.5.1 Full success

A sanction is considered fully successful when the target state fully complies with the sender’s demands.

Example: In 1991, the United States imposed sanctions on Haiti after a military coup deposed President Jean-Bertrand Aristide. The sanctions remained in place until 1994, when Aristide was reinstated. The UN and the US lifted economic sanctions following his return, although some military-related restrictions remained.

1.5.2 Partial success

A partial success is recorded when the target state accepts only some of the sender’s demands.

Example: In 1995, the United States imposed arms sanctions on Ecuador and Peru following a border conflict. That same year, the U.S. State Department announced a partial lifting of sanctions on Ecuador, indicating some compliance with U.S. demands.

1.5.3 Settlement by negotiations

This category captures cases where both sides agree to a negotiated solution to the conflict, often involving reciprocal concessions.

Example: In response to the conflict between Ethiopia and Eritrea, the EU imposed arms sanctions in 1999. In 2001, the EU announced that both countries were expected to fully implement a peace agreement, which had been negotiated as part of the resolution process.

1.5.4 Failure / enhancement

A sanction is considered a failure when the target does not comply and the issue either remains unresolved or worsens.

Example: The U.S. imposed sanctions on Indonesia in response to human rights violations in East Timor. Despite this, the U.S. lifted the sanctions in 2001 without achieving its stated goals, reflecting a shift in foreign policy priorities and no significant change in Indonesian behavior.

1.5.5 Ongoing

A sanction is classified as ongoing if it remains in effect or is replaced by a similar measure, with no clear resolution.

Note: Many recent sanctions fall into this category, especially those involving complex or evolving policy targets. These are not classified as successful or unsuccessful due to the continued nature of the sanction episode.

1.6 TIES classification: threat-stage success

While the GSDB focuses on the outcomes of implemented sanctions, the TIES database distinguishes between threats and actual impositions, allowing for a more nuanced understanding of how sanctions influence target behavior. To illustrate how TIES defines success—particularly at the threat stage—the following case highlights a successful episode in which the sender achieved its objectives without the need to impose sanctions.

In 2000, Canada concluded a longstanding trade dispute with Australia concerning Australia’s ban on imports of fresh, chilled, and frozen Canadian salmon. The WTO had ruled the ban inconsistent with the SPS Agreement, and gave Australia until July 6, 1999 to comply. After Australia failed to act, Canada formally requested authorization to retaliate and published a list of Australian imports subject to a proposed 100% surtax in response. Before any tariffs were imposed, Canada and Australia negotiated a bilateral settlement in May 2000: Australia lifted the ban while introducing revised quarantine measures, and Canada withdrew its request for retaliation. In TIES terms, this is coded as a success at the threat stage—Canada’s credible threat prompted the desired policy change without actual sanctions being imposed.

1.7 Domestic expenditure and sales shares

Figure 16 decomposes the bilateral reliance measures discussed in the main text by showing the evolution of domestic expenditure and sales shares for China and the United States. These indicators capture the share of domestic absorption in total expenditure (panel a) and the share of domestic sales in total output (panel b). The patterns confirm the trends highlighted in Fig. 7: U.S. reliance on Chinese goods has increased substantially over time, while China’s dependence on foreign markets for its exports remains pronounced, reflected in its persistently lower domestic sales shares. Together, these patterns underscore the asymmetry in the two countries’ integration into global value chains (Tables 7 and 6).

Fig. 16

Domestic sales and expenditure shares. Note: Panel a illustrates domestic expenditure shares for the US and China over time. Panel b illustrates domestic sales shares for the US and China over time. Data comes from ICIO

1.8 Ratio of receiver to sender costs

This appendix presents regression results using the ratio of receiver to sender costs as the key independent variable, rather than the absolute levels of costs. This approach allows for a more direct test of the theoretical prediction that sanction success depends on the relative burden of sanctions on the target compared to the sender.

Table 6 Sanction threats, impositions and successes - ratio of receiver to sender costs

Table 7 Sanction success - ratio of receiver to sender costs