Testimony of Jonathan Eaton--free trade, unilateral and economic trade sanctions

Testimony of Jonathan Eaton
Professor of Economics, Boston University,
Institute of Economic Development
Before the U.S. International Trade Commission
May 14, 1998
MR. EATON: Thank you very much. My name is Jonathan Eaton. I guess I am here largely because of two papers I wrote, one paper called Sanctions with Maximum Angers, which was published about seven years ago in the Journal of Political Economy, and I have recently written a survey piece with Alan Sykes of the University of Chicago School of Law on International Sanctions.
The use of international sanctions in the world economy has spawned at least two major academic controversies. One is a very general one of whether sanctions play a useful role in the world in maintaining a productive economic order. Another is the more limited question of whether sanctions can be effective in achieving the objectives of the countries that are using them.
The common perception is that sanctions almost never work, but this perception may be distorted by some spectacular failures such as the U.S. sanctions against Cuba. In fact, judging sanctions on the basis of situations in which countries have actually had to resort to imposing sanctions may give a very biased picture of how well they actually work.
The use of sanctions in the global economy has been the topic of some analytic research in economics. Although economic analysis can say very little about whether sanctions are good or bad for the world, it has been able to shed some light on the more narrow question of whether sanctions can ever succeed in achieving the goals of the countries that use them.
Research has proceeded on two fronts. One is the more abstract application of game theory to the question. The other is the statistical analysis of situations in which sanctions have actually been used.
In my review article that I mentioned with Alan Sykes, which I provided your staff, I list a lot of the sources of the work. My co-panelist has generated a lot of the research that I will be talking about, and she will probably add to that discussion.
Academic research has been pursued on two very different fronts. One is the more abstract application of game theory to the question. The other is the statistical analysis of situations where sanctions have actually been imposed. What is somewhat unusual is that while these lines of research are very different in their methodologies, the answers that we have received so far from these two fronts are fairly consistent with each other.
Before turning to the results themselves, I just want to discuss some conceptual issues. For a theoretical perspective, the use of sanctions poses something of a paradox. The sender, the country that is threatening to impose or is actually imposing measures against some target country, is doing something that more often than not is costly to itself, as well as to the other party.
The question is why should the sender carry out this threat? Why should the potential targets then be influenced by threats if the sender seems to have no incentive to implement or to continue to impose once implemented?
One answer is that some measures may not impose any cost on the sender at all. An example might be a cutting off of foreign aid. Sending countries usually lack the luxury of having many such measures at hand. In most situations, it is the sender's desire to maintain a reputation for carrying out sanctions that makes the threat to use them credible; that is, when the sanctions actually do cost the country that is imposing them, in our case, the United States. In such situations where it is simply a matter of maintaining reputation, how much can a sending country hope to achieve? Analyzing this question in a game theoretical context is rather complicated. It involves decisions and weighing costs and benefits over time, but the implications of the theory are fairly in accord with intuition.
They suggest that sanctions are going to be most effective when the measures in question impose a large cost on the target relative to the target's cost of acquiescing to what the sender wants it to do. Hence, sanctions are most likely to work when they seek only relatively modest changes in the target's behavior. Similarly, sanctions seem to work best when they impose a small cost on the sender relative to the benefit of changing the behavior overseas that it is seeking.
Finally, sanctions will work best when the sender places a great deal of weight on the future compliance of this particular target and of other potential targets relative to the current cost of imposing the measure. Obviously sanctions that are imposed in concert by a group of senders are more likely to impose more harm on the targets and cost less to the senders.
Another issue that has been addressed is whether sanctions should be discretionary or should their use be governed by rules that give the implementing authority little choice in deciding when and how to implement them. Here the trade-off is between the credibility o the sanctions, the credibility of the threat, nd the ability to fine tune the use of sanctions to the situation at hand. In subsequent situations, such as the threat to use sanctions against Japan in retaliation for their whaling activity in the 1970s, removing Presidential discretion appeared to strengthen the U.S. position.
The empirical work on sanctions has focused mainly on episodes in which measures were actually used. A problem, however, is that the very fact that the sender had to resort to imposing sanctions means that something went wrong. If the potential target had anticipated that certain actions would provoke retaliation so harsh as to render the behavior not worthwhile, it should not have engaged in that behavior in the first place. The very threat should have sufficed to serve as a deterrent. Hence, we should typically see measures invoked only when at least one of the parties got something wrong.
The target country, for instance, might have underestimated the harm the measure would impose on it, or it underestimated the sender's resolve to impose sanctions. In this case, sanctions should ultimately work. On the other hand, the sender may have overestimated the harm that the measure would have imposed relative to the target's cost of compliance. In these cases, sanctions will ultimately fail.
In might be the case, for example, that the threat of sanctions are extremely effective in keeping most countries in line to begin with. In rare cases that they do not, it is because the measure in question imposes a smaller cost on the particular target than avoiding the behavior that the sanction is targeting. Hence, when the measure is actually imposed, it may rarely get that particular target to mend its ways. Nevertheless, many other countries may be adhering to behavior as the sender desires in order to avoid sanctions.
At the other extreme, it may be the case that the sender has only bothered to impose measures in the rare cases when they think that they will do any good. In this case, analyzing situations in which measures are actually used may paint too rosy a picture of what sanctions can actually accomplish.
Just to give an example, the U.S. law with respect to nuclear non-proliferation. The fact that it failed to deter India's program does not mean that the legislation itself is ineffective. We need to ask how many of the over 100 countries not pursuing a nuclear agenda are swayed by the law, something inherently almost impossible to assess.
On the other hand, that the United States seems to have been tougher on India than on North Korea and China may be the consequence of a U.S. perception that measures against these other two countries would not work anyway, while with India there is some chance. In fact, several quantitative studies examining the explicit use of sanctions find that they can often succeed, but success is by no means a sure thing.
Moreover, factors important in the success of sanctions and eventually compliance are largely those suggested by the theoretical literature. A target is more likely to acquiesce when the measure has a lot of bite, when it imposes a lot of harm on the target, when the sought after policy change is fairly small and when taking the measures are not too costly to the sending country. International cooperation among senders seems to help.
In summary, academic research has been exploring economic sanctions on two fronts very distant from each other, the application of game theory and the statistical analysis of actual events, but the two fronts are sending back messages that are sketching a very consistent picture.
In appropriate circumstances, a country can influence behavior through the use of sanctions. What such countries can expect to accomplish through the use of sanctions is fairly modest.

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