Cost of Sanctions: Estimating Lost Trade with Gravity

Julian Hinz. May 2019. In Disrupted Economic Relationships, CESifo Seminar Series at MIT Press, Volker Nitsch and Tibor Besedeš eds. Ch. 3.

Economic sanctions are a frequently used tool of foreign policy. Constraining trade flows towards or from the target country is supposed to coerce its government into changing certain policies. However, sanctions constitute an obstacle to trade, thereby affecting flows of all countries, including those of sanctioning countries themselves. I gauge the global impact of three recent sanctions regimes using a structural gravity framework and quantify the “lost trade” in a general equilibrium counterfactual exercise. Each of the episodes, sanctions against Iran, Russia and Myanmar, are instructive in their own way, due to the different nature of bilateral trade and severity of measures applied.

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