Trade Sanctions

Trade Sanctions In the world we are living in today, countries no longer trade domestically within its own country. Instead of producing and consuming in domestic market, people now trade worldwide in the international economy. As we are not living in a fantasy world where there is only one country and one government, trading internationally means a collision of different countries’ economy. No human beings are identical, so do countries. Therefore with different culture and government perspective, economy in different countries runs differently. There are many issues that arise when different countries trade with each other such as price different, protection of domestic production and also product restriction. In order to achieve foreign policy objectives, government uses tools such as economic sanctions to gain benefits for the country. What are economic sanctions? Economic sanctions can be defined as coercive economic measures taken against one or more countries to force a change in policies, or at least to demonstrate a country's opinion about the other's policies. Economic sanctions are penalties to protect the imposing country’s benefit. Such penalties work as a trade barrier or financial restriction by one or multiple countries against one or multiple countries. Economic sanctions typically include measures such as trade embargoes; restrictions on particular exports or imports; denial of foreign assistance, loans, and investments; or control of foreign assets and economic transactions that involve U. S. citizens or businesses. Circumstances for imposing economic sanctions include economic, political and social issues. Whenever issues are unresolved between countries, countries may use military force or economic sanctions to achieve policy goals. Economic sanctions are tools mostly used by many governments in resolving issues. This is because war may cause massive destruction. Among the broad economic sanctions, it includes trade sanction. So what are trade sanctions? The Investopedia website defines it as “a trade penalty imposed by one nation onto one or more other nations. Sanction can be unilateral, imposed by only one country on another country, or multilateral, imposed by one or more countries on a number of different countries. Often allies will impose multilateral sanctions on their foes.” There are quite a number of trade sanctions used throughout the history of the United States. Reasons for such trade sanctions imposed vary from time to time and they are not necessarily related to trade. It has been a question whether that these trade sanctions were to be able to meet their stated objectives. Economic sanctions include many tools that government can use to achieve political, economic and social policy objectives. Embargo is one of the economic sanctions the United States uses. An embargo will restrict all trade with a country. However unlike embargo that restrict trade in an extreme way, trade sanction act as a partial embargo that only restrict trade in a certain area of the economy. Trade sanctions are used whenever a government felt threatened by other countries’ policy or intend to interfere in order to promote own foreign policy. Usually government would implement sanctions whenever there are countries that trade unfairly or develop massive destruction weapon such as nuclear weapon. Every trade sanctions applied has its effect not only on the sanction-imposed country and the sanction-imposing country, but also affecting other countries economy. This is because in the international economy every product traded are correlated to each other in many different economies. Sometimes the impact of the sanctions on the economy can be greater than what the economists predicted it should be. Trade sanctions are interference in the economy and thus causing welfare effects on the world, that is, on the countries on which the sanctions are imposed and the sanction-imposing countries. So, what welfare effects on the world can trade sanctions affect? Tariff and quota are examples of trade sanctions. Tariff is tax applied on imported products in order to restrict trade. The purpose of the tariff is to protect domestic industries against the competition of foreign market. This kind of protection is for the better growth of the domestic industries. As some countries are not as advanced as their competitive countries, better and more advance products from foreign would cause the domestic industries to shrink and eventually disappear as the domestic industries cannot compete within the same level. Besides that without any interference, domestic producers would face situation where their products are unable to be sold as the consumers would choose cheaper products from foreign countries. It seems that without trade sanctions, trade volumes would drop. This is because as tariff is imposed on certain product, the product price in homeland which imported the product will increase and the price in foreign market which exported the product will drop causing the volume of export to decline. Welfare effects can be seen as the producer in homeland and consumer in foreign market will benefit from it by gaining a surplus, while the consumer in homeland and producer in foreign market will lose their surplus. Thus, there are welfare transferred from the consumers to producers in homeland and welfare transferred from producers to consumers in the foreign market. Moreover, there will also be deadweight loses occurs during the redistribution of welfare. Quota as another form of trade sanctions function as a limitation on the quantity crossing the country’s border. Similar to tariff, quota also has it effect in increasing the imported products in order to protect the domestic industries. With quantity limitation across border, welfare will eventually transfer from the consumers to producers in homeland and welfare transfer from producers to consumers in the foreign market. There has been debate on the effectiveness of sanctions in achieving their stated objectives. In a debate at DEBATE.ORG titled “Are sanctions a useful foreign policy tools?”, it shows that there is 54% of debaters side with sanctions as useful foreign policy tools while 46% of the debaters side with sanctions as not a useful foreign policy tool. This debate shows a half to half situation where there are people agree and disagree about the effectiveness of sanctions. So, does imposing trade sanctions really do help in achieving the stated objectives? To judge the effectiveness of sanctions requires identifying the goals sought, the appropriateness of the sanction to the event, and determine the impacts on the targeted country. A trade sanction would be consider effective if it meets its goals. Trade sanctions should be a short period restriction as if it were to be successful, it would have been terminated in short period. However if the trade sanctions exist for a very long period, it seems that the trade sanctions fails in meeting its objectives and considerations should be made whether to terminate the sanctions and imposed a new sanctions that are more appropriate to the situation. If the purpose of the sanction is to protect domestic industries, imposing tariff would work as it will increase the imported goods price leading consumer to buy domestic goods. But some would suggest that the tariff would also hurt the domestic. For example, Toshio Yoshida (Director, Cultural and Information Center, Consulate-General of Japan) suggests that the US sanctions on Japanese cars will hurt the US economy. This is because the Japanese automobile manufacturing facilities provide jobs for more than 35,000 Americans and if tariff is high it may cause these facilities to reduce employment due to cutting down cost thus increasing the U.S. unemployment rate. Even though Toshio Yoshida may be correct that the tariff would hurt U.S. economy, but the main purpose of the tariff was not lowering unemployment instead it was protecting domestic industries such as cars and trucks industries. There is no one solution that can solve every problem. Thus if the purpose of the sanctions is met, the sanctions should be counted as effective sanctions. Any sanctions that have contradictory goals would eventually be ineffective. For example, the sanctions against Panama in 1987 in order to destabilize the Noriega regime by the Reagan and Bush administrations fail because of contradictory goals. The main purpose of the sanctions should be just to destabilize the Noriega regime, but at the same time government also wanted to protect their own assets in the region. The use of exemption for assets protection actually weakens the sanction. The existence of exemptions caused a conflict with the main purpose of the sanctions that is to weaken the Noriega government. Thus the sanctions fail as the objectives were not met. Over the years, there have been quite a number of sanctions that exist in the economy. Some successful in achieving their goals but some still keep going on or even terminated as there are no signs of fulfilling the goals. One of the known sanctions is the sanctions imposed on Iran. Sanctions imposed against Iran are multilateral sanctions. A number of countries have been imposing sanctions on Iran due to security purpose. Iran refusal to suspend its uranium enrichment program leads to the adoption of United Nations Security Council Resolution 1696 which demands Iran to stop its uranium enrichment program as countries continues to worry that Iran might have the intentions of building nuclear weapon. Countries such as China, Australia, Canada, India, Israel, Japan, South Korea and Switzerland all imposed varies sanctions against Iran. United States is one of the leading countries continuing in putting effort in imposing sanctions on Iran. The objectives of these sanctions is to suppress Iran support for international terrorism, its aggressive actions against non-belligerent shipping in the Persian Gulf, and Iran’s active pursuit of weapons of mass destruction. All sanctions imposed by the United States are being administrated by the OFAC which stands for U.S. Treasury Department’s Office of Foreign Assets Control. These sanctions are meant to place trade restrictions on Iran in order to force Iran’s government to compromise to the United States government foreign policies. Contents of the sanctions are restrictions on the trading and investment activities between the United States and Iran. It includes restriction on exports to Iran where, “In general, unless licensed by OFAC, goods, technology, or services may not be exported, reexported, sold or supplied, directly or indirectly, from the United States or by a U.S. person, wherever located, to Iran or the Government of Iran. The ban on providing services includes any brokering function from the United States or by U.S. persons, wherever located.” Not only in the export market, these sanctions also prohibited any trading and transaction of Iranian’s products into United States. The purpose of the sanctions does not only force to suppress the Iranian government intention in building nuclear weapon, it also meant in restricting trade into Iran in order to make it difficult for Iran to acquire the needed parts for the uranium enrichment program. This can be seen in imposing trade sanctions on restricting trading of oil and petroleum product and forbidding aviation product into Iran. Trade sanctions against Iran does has it impact on the world. With restriction of oil trading in Iran, technology could not be transferred into Iran causing low production of oil. With the demand of oil increasing every year, a declining production of oil of one of the oil exporter country has it effect on the world oil price. If the trade sanctions on oil production were to be lifted, world price of crude petroleum could be reduce by 10% thus saving $76 billion annually for the United States government. It has already been a few decade sanctions are imposed against Iran, however though there are harm done to the economic and social situation in Iran, it seems that Iran are not giving up easily. These sanctions imposed against Iran seems to be not so effective as the recent news on Bloomberg reported that ““Congress is running out of patience,” Mark Dubowitz of the Foundation for Defense of Democracies in Washington, who’s advised lawmakers and the administration on Iran sanctions, said in a telephone interview yesterday. “New measures under consideration will massively intensify the economic pressure on Iran and move the sanctions regime closer to a de facto commercial and financial embargo on Iran.”” Other than trade sanctions meant against other country in order for compromises, the United States also impose trade sanctions for the purpose of self-protection. Beginning in 1919, American farm products prices decreased rapidly as European demand for American farm products fall due to tariff barriers set by Europeans to close their markets. In order to protect local farmers, Emergency Tariff of 1921 was enacted. The Emergency Tariff protected the local farmers by increasing rates on the imported agriculture goods. This eventually raises the purchasing powers of the farmers. However, the effectiveness of the Emergency Tariff seems to be unclear as the world was under post-war recession at that time.

Reference * Barry E. Carter, International Economic Sanctions: Improving the Haphazard U.S. Legal Regime, 75 Cal. L. Rev. 1159 (1987), http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1924&context=californialawreview (July 1, 2013) * Dianne E. Rennack, Economic Sanctions to Achieve U.S Foreign Policy Goals, CRS Report for Congress, www.fas.org/man/crs/crs-sanction.htm (July 1, 2013) * Trade Sanction, Investopedia, www.investopedia.com/rerms/t/tradesaction.asp (July 1, 2013) * Embargo, Investopedia, http://www.investopedia.com/terms/e/embargo.asp (July 1, 2013) * Tariff, Investopedia, http://www.investopedia.com/terms/t/tariff.asp (July 1, 2013) * Are sanctions a useful foreign policy tool, http://www.debate.org/opinions/are-sanctions-a-useful-foreign-policy-tool (July 1, 2013) * Kimberly Ann Elliott, The Concise Encyclopedia of Economics: Sanctions, http://www.econlib.org/library/Enc/Sanctions.html (July 1,2013) * Tariff and Trade, The Seattle Times, http://community.seattletimes.nwsource.com/archive/?date=
19950606&slug=2124880 (July 1, 2013) * Kimberly Ann Elliott, The Concise Encyclopedia of Economics: Sanctions, http://www.econlib.org/library/Enc/Sanctions.html (July 1,2013) * Overview of O.F.A.C. regulations Sanctions against Iran, U.S. Department of the treasury Office of Foreign Assets Control, Pg 1, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran.pdf (July 2, 2013) * Overview of O.F.A.C. regulations Sanctions against Iran, U.S. Department of the treasury Office of Foreign Assets Control, Pg 1, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran.pdf (July 2, 2013) * Sanctions against Iran, Wikipedia, http://en.wikipedia.org/wiki/Sanctions_against_Iran (July 2, 2013) * Indira A.R. Lakshmana, Sanctions on Iran, Bloomberg, April 9,2013, http://www.bloomberg.com/news/2013-04-09/u-s-senators-seeking-tougher-economic-sanctions-on-iran.html (July 2, 2013) * Emergency Tariff of 1921, Wikipedia, http://en.wikipedia.org/wiki/Emergency_Tariff_of_1921 (July 2, 2013)

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[ 1 ]. Barry E. Carter, International Economic Sanctions: Improving the Haphazard U.S. Legal Regime, 75 Cal. L. Rev. 1159 (1987), http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1924&context=californialawreview (July 1, 2013)
[ 2 ]. Dianne E. Rennack, Economic Sanctions to Achieve U.S Foreign Policy Goals, CRS Report for Congress, www.fas.org/man/crs/crs-sanction.htm (July 1, 2013)
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[ 5 ]. Tariff, Investopedia, http://www.investopedia.com/terms/t/tariff.asp (July 1, 2013)
[ 6 ]. Are sanctions a useful foreign policy tool, http://www.debate.org/opinions/are-sanctions-a-useful-foreign-policy-tool (July 1, 2013)
[ 7 ]. Kimberly Ann Elliott, The Concise Encyclopedia of Economics: Sanctions, http://www.econlib.org/library/Enc/Sanctions.html (July 1,2013)
[ 8 ]. Tariff and Trade, The Seattle Times, http://community.seattletimes.nwsource.com/archive/?date=
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[ 9 ]. Kimberly Ann Elliott, The Concise Encyclopedia of Economics: Sanctions, http://www.econlib.org/library/Enc/Sanctions.html (July 1,2013)
[ 10 ]. Overview of O.F.A.C. regulations Sanctions against Iran, U.S. Department of the treasury Office of Foreign Assets Control, Pg 1, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran.pdf (July 2, 2013)
[ 11 ]. Overview of O.F.A.C. regulations Sanctions against Iran, U.S. Department of the treasury Office of Foreign Assets Control, Pg 1, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran.pdf (July 2, 2013)
[ 12 ]. Sanctions against Iran, Wikipedia, http://en.wikipedia.org/wiki/Sanctions_against_Iran (July 2, 2013)
[ 13 ]. Indira A.R. Lakshmana, Sanctions on Iran, Bloomberg, April 9,2013, http://www.bloomberg.com/news/2013-04-09/u-s-senators-seeking-tougher-economic-sanctions-on-iran.html (July 2, 2013)
[ 14 ]. Emergency Tariff of 1921, Wikipedia, http://en.wikipedia.org/wiki/Emergency_Tariff_of_1921 (July 2, 2013)