In a nutshell
Export sanctions by a given destination on Iranian exporters are expected to lead to export redirection – surges in Iranian exports to destinations not imposing sanctions.
Following the March 2008 imposition of export sanctions, two thirds of Iranian exports were indeed redirected to non-sanctioning countries.
Exporters typically redirected exports to destinations where they were already active before sanctions as well as to destinations that are ‘politically-friendly’ to Iran.
Writing in Newsweek back in 1980, economics Nobel laureate Milton Friedman said that ‘all in all, economic sanctions are not an effective weapon of political warfare.’ “Economic Sanctions,” Newsweek, 21 January 1980, p. 76. This statement is not necessary always true.
When assessing the effectiveness of economic sanctions – whether they are imposed on exports, imports, financial flows or banking – it is important to distinguish between different types. Economic sanctions are heterogeneous by definition, and their impacts should not be stereotyped. In a recently published study, I highlight the effects of a specific type: export sanctions (Haidar, 2017).
Export sanctions continue to be used by countries attempting to change the behaviour of other governments – and they still surface in current policy debates about Iran. But we lack complete understanding about the impact and effectiveness of export sanctions – see Hufbauer et al (2007) and related works by Davis and Engerman (2003), Eaton and Engers (1992) and Levy (1999).
Between January 2006 and June 2011, Iran’s non-oil exports increased. In March 2008, 31 countries imposed export sanctions against Iranian non-oil exporters. Thus, the unexpected increasing trend following export sanctions triggers various policy concerns.
One policy concern is whether export sanctions lead exporters to redirect their exports to alternative destinations. To address this concern, one can analyse the experience of Iran, which serves as a suitable case study for various reasons:
- First, the export sanctions against Iran in March 2008 are similar to the export sanctions that are typically imposed.Exports sanctions are different from embargoes: while export sanctions represent higher export costs (i.e., they raise cost of exporting at the exporter-destination level), embargoes represent a shift to autarky via a trade blockade. In section 2 below I explain in more detail the exports sanctions against Iran.
- Second, the export sanctions that Iranian exporters faced are unique as they involved many countries.
- Third, the ability to access highly disaggregated data of Iranian export flows makes Iran an outstanding case study for this research.
Using disaggregated Iranian customs data, my research looks at whether exporters exited export markets or shifted to new destinations following sanctions. Without such data, one cannot know whether exporters stop exporting following export sanctions or whether they just reduce their exports to destinations imposing sanctions. Also, one cannot know whether and how (some or all) exporters redirect their exports to new destinations following export sanctions.
I show how following the imposition of export sanctions, non-oil Iranian monthly exports decreased sharply to destinations imposing sanctions and increased significantly to destinations not imposing sanctions.
Sanctions are not usually imposed as a complete cessation of all trade relationships. Rather, they are imposed using regulations that make trade more expensive or cumbersome.To save space, I present results for selected products in these two figures. Results for other non-oil products are available and show similar trends. The dramatic fall in exports to destinations imposing sanctions (export destruction) was associated with a substantial increase in exports of the same products to destinations not imposing sanctions (export redirection).
Export sanctions by a given destination on Iranian exporters are expected to be associated with export destruction – a reduction in Iranian exporter-level export growth to that destination. Export sanctions by a given destination on Iranian exporters are also expected to lead to export redirection – surges in Iranian exporter-level exports to destinations not imposing sanctions.
In simple terms, export redirection is a change in the destination of exports in response to an increase in a trade barrier in another market, as when a rise in a tariff on exports from A to B causes the exports to be sold instead to C.
My research examines whether export sanctions cause export redirection. Using exporter-level data, I show how two thirds of Iranian exports were redirected to non-sanctioning countries, and at what cost.
I show that aggregate Iranian exports actually increased after sanctions. But even though sanctions did not reduce Iranian exports, they exercised pressure on Iranian exporters, who incurred welfare losses as they had to reduce prices and increase quantities while exporting to a new destination. I define exports deflection as a change in the destination of exports in response to an increase in a trade barrier in another market, as when a rise in a tariff on an export from A to B causes the exports to be sold instead to C.
Policy-makers need to be aware of who is affected more by export sanctions and how export redirection typically happens following export sanctions. My research also indicates that:
- Small exporters were more affected by sanctions than large exporters.
- Larger and more experienced exporters had a higher probability to redirect more of their exports than smaller exporters.
- The decision to redirect exports is not random at the exporter level: exporters exercised product selection while redirecting exports. To be precise, they tended to redirect their core-competence products as well as products for which it is easier to find consumers – homogeneous products rather than differentiated products.
- Exporters reduced product prices when they redirected exports to new markets.
- Exporters redirected exports to destinations where they were already active before sanctions as well as to destinations that are ‘politically-friendly’ to Iran.
In a nutshell, if the goal is to reduce total exports, export sanctions may be less effective in achieving this goal as exporters can redirect their exports from one export destination to another. The idea that one country can impose trade sanctions on another may not necessarily prove effective in this case unless the exporters of the targeted country do not have or cannot find compensating alternatives and new trading partners.
Davis, Lance, and Stanley Engerman (2003) ‘History Lessons: Sanctions – Neither War nor Peace’, Journal of Economic Perspectives 17(2): 187-97.
Eaton, Jonathan, and Maxim Engers (1992) ‘Sanctions’, Journal of Political Economy 100(5): 899-928.
Hufbauer, Gary, Kimberly Ann Elliott, Barbara Oegg and Jeffrey Schott (2007) Economic Sanctions Reconsidered: 3rd Edition, Peterson Institute for International Economics.
Haidar, Jamal Ibrahim (2017) ‘Sanctions and Export Deflection: Evidence from Iran’, Economic Policy 32(90): 319-55.
Levy, Philip (1999) ‘Sanctions on South Africa: What Did They Do?’, American Economic Review 89(2): 415-20.