Mr. Garry Clyde Hufbauer, Senior Fellow, Institute for Interntaional Economics, Washington, D.C.

Statement of Mr. Gary Clyde Hufbauer, Senior Fellow, Institute for International Economics, Washington, D.C.

Testimony Before the Subcommittee on on Tax, Finance, and Exports
of the House Small Business Committee

"Do Unilateral Economic Trade Sanctions Unfairly Penalize Small Business?"

June 24, 1999

Modern debate over the role and utility of economic sanctions began after the First World War when the League of Nations was launched with great hopes. Despite numerous frustrations with their deployment, the use of sanctions as a foreign policy tool has increased, decade by decade, since the 1920s. When military intervention is too costly and diplomacy ineffective, governments often resort to sanctions as a means of conducting foreign policy "on the cheap". In recent decades, economic sanctions have been deployed to stop military adventures, arms proliferation, drug trafficking, terrorism, and human rights abuses, among other objectives.

No country in the world has employed economic sanctions in pursuit of its foreign policy goals as often as the United States has. U.S. sanctions currently in place range from comprehensive embargoes, such as those on Iraq, Cuba and North Korea, to far less severe sanctions, such as those imposed on China.

Empirical research by the Institute for International Economics (IIE) on the effectiveness of economic sanctions suggests a decline in the effectiveness of economic sanctions in achieving foreign policy goals, especially when used in isolation from other instruments. The success rate of U.S. sanctions, both unilateral and multilateral, has dropped sharply from the early postwar period. Prior to the 1970s, sanctions episodes in which the U.S. was involved, either alone or with others, succeeded to some extent in about half of the cases. Between 1970 and 1990, however, unilateral U.S. sanctions were successful in achieving foreign policy goals in only 13 percent of the cases (Table 1).

Many factors contribute to these results, but a major explanation for the declining effectiveness of unilateral sanctions is globalization. In 1995 by comparison with 1965, target countries find it much easier to tap into world trade and capital markets for alternative goods and finance. Unless other major OECD countries are willing to cooperate, it is nearly impossible for the United States alone to deny a target country access to vital markets and money. The diverse security interests of other industrial countries, however, complicate the task of building multilateral coalitions.

Although successful sanctions episodes are infrequent, our research identified certain conditions that seem to enhance the chances for success. Sanctions are most likely to be effective when:

The policy goal is relatively modest. Sanctions seldom work as a substitute for military force.

The target country is much smaller than the country imposing the sanctions, and is economically weak and politically unstable.

The sender and target country had substantial trade, investment and financial ties prior to the imposition of sanctions.

The regime of the target country is to some degree democratic and sensitive to world opinion. Isolated authoritarian regimes are much less susceptible to sanctions.

The sanctions are imposed quickly and decisively to maximize impact.

The sanctioning country avoids a high cost to itself.

While the success of a sanction episode is often uncertain and the benefits elusive, the costs of sanctions are not. An IIE study measuring the direct as well as indirect costs of sanctions to the U.S. economy suggests that even limited sanctions, such as restrictions on foreign aid or narrowly defined export sanctions, can reduce bilateral two-way trade by an average of 27 percent. The reduction of bilateral trade for moderate sanctions was 36 percent and severe sanctions, such as comprehensive trade and financial sanctions, and asset freezes, diminished bilateral trade flows by an average of 91 percent (Table 2). Our study estimated that U.S. exports to 26 countries subjected to sanctions in 1995 were as much as $19 billion lower than they would have been in the absence of sanctions. Assuming that exports to other markets did not compensate for these lost sales, lower exports of $19 billion would mean a reduction of more than 200,000 jobs in the highly productive U.S. export industries. Export industries in the United States pay on average about $4, 000 more per year than the average in manufacturing industries. Thus, the calculated shift in the composition of U.S. employment (assuming that every worker finds a new job) would result in a loss of about $800 million to a $1 billion annually in wage premiums otherwise earned in export sector jobs by comparison with other jobs. Although the estimates were calculated using trade in the base year of 1995, comparable costs would be incurred each year similar sanctions are in place.

In a $9 trillion economy such costs may not be huge but they mean a lot to the affected U.S. firms, workers and communities. Small firms that sell a limited range of products to a few markets, or that depend on raw materials from a few suppliers, will be especially hard hit when their exports and imports are cut off.

It is worth pointing out that the sectors and firms involved in international trade and investment are often the most competitive and productive in the American economy. Research by my colleagues J. David Richardson and Karin Rindal shows that:

Workers in plants involved in exporting are more productive and more highly compensated than workers in comparable plants that do not export.

Employment growth is nearly 20 percent higher in the exporting firms and plants than those that never exported or have stopped exporting.

Exporting firms and plants have a lower probability of going out of business in any given year.

Richardson and Rindal also conclude that the share of small and medium-sized exporters in overall U.S. exports has been increasing and now accounts for about 70 percent of U.S. exports. Small and medium-size exporting firms are affected by sanctions directly through the loss of their export markets and indirectly as suppliers of larger exporting firms.

In sum, a rapidly changing global economy means that the benefits derived from the imposition of unilateral sanctions are decreasing while the costs are increasing. The cost are particularly severe for small firms. The Crane bill, which seeks to reform the U.S. sanctions process, could be a useful step towards better matching the costs of sanctions to their anticipated results.

Return to Top