Essays on Economic Sanctions

Abstract

Do economic sanctions impact the economy on a macro level? I address this question using Iran as a case study. Over the last 20 years, the share of Iran's total trade with western developed economies has declined. Like most other countries, Iran's trade share with emerging markets, like China and India, has risen rapidly. Unlike most other countries however, Iran has been subject to an escalating series of sanctions by the United States, United Nations, and European Union. The threat of sanctions and, in some cases, outright restrictions on trade could also explain the shift in trade behavior. This paper attempts to disentangle these two effects. I employ a methodology developed by Novy (2013), which can be used to infer a measure of bilateral trade costs from macro data on bilateral trade flows, while controlling for changes in production. In general, I find that trade costs between Iran and the Emerging Markets have fallen dramatically, indicating that output growth alone cannot explain this shift in trade. I also use a three country dynamic trade model to determine whether a disruption in trade akin to the EU oil embargo imposed on Iran in 2012 can account for the recession Iran experienced that same year. The model can accommodate heterogeneity across countries with respect to population, output, and trade flows. The environment is a three country version of Backus, Kydland, and Kehoe (B.K.K.) (1994), and I model the trade disruption by increasing bilateral trade costs. In this setting, changes in trade costs affect, not only the dynamics of capital formation, but also the steady state level of capital, and hence the long run level of per capita output. In addition, I account for the possibility of sanction evasion via transshipment by embedding a shortest path problem into the model. Goods can take multiple routes from origin to destination and, in equilibrium, flow along the lowest cost path. The model is calibrated to bilateral trade and output data, and used to evaluate the impact of the oil and gas embargo imposed by the E.U. on Iran in 2012. In addition, I use discrepancies in bilateral trade mirror statistics to test for sanction evasion via transshipment. I find that the E.U. oil and gas embargo can account for about five sixths of the 6.6 % contraction in output, none of the fall in aggregate consumption expenditures, and one fifth of the 17 % fall in gross capital formation.