SRA-E Lisbon 2017

It is well established that free trade generates larger gains. However, various forms of export control such as tariffs, quotas, taxes, etc. applied by developed and developing countries may substantially reduce gains from international trade. In this paper we apply a unique methodological refinement of the computable general equilibrium (CGE) approach to understand the effect of various types and levels of international sanctions on the severity and dissipation of economic losses over time.

For this purpose, we estimate the direct and indirect effects of differing types and levels of sanctions on the export of restricted goods in targeted economies and the use of international transport using the modified version of the dynamic Global Trade Analysis Project (GTAP) model of global trade. We introduce the substitution between different modes of transport into the dynamic version of the GTAP model using the elasticities and approach developed by Avetisyan et al. (2017)¹. The modal substitution elasticities ranging from of 0.9 to 2.8 generate significant response to changes in the relative price of different modes of goods transport.

Economic sanctions are typically designed by sender countries in a way that the targeted country suffers greater losses than the sender. Reducing or eliminating certain goods from entering the sanctioned country’s market makes them relatively expensive, and spurs the import of such goods from the target’s other trading partners. These alternative markets may be necessary to ensure the supply of goods, even if they are inefficient when compared to pre-existing patterns of trade with the sanctioning country. Also, the sanctioned goods typically become cheaper in sending countries due to increased domestic supply. However, while sanction senders are typically advantaged in the short run, the long run negative impacts of international sanctions on targeted countries may dissipate and undermine the intended effects in the targeted economy over time. These effects are likely to occur due to adjustment to sanctions in the targeted country, such as increased domestic production of targeted goods and trade substitution with other trading partners.