(Trade) War and Peace: How to Impose International Trade Sanctions

Abstract

Trade sanctions are a common instrument of diplomatic retaliation. To guide current and future policy, we ask: What is the most cost-efficient way to impose trade sanctions against Russia? To answer this question, we build a quantitative model of international trade with input-output connections. Sanctioning countries simultaneously choose import tariffs to maximize their income and to minimize Russia's income, with different weights placed on these objectives. We find, first, that for countries with a small willingness to pay for sanctions against Russia, the most cost-efficient sanction is a uniform, about 20% tariff against all Russian products. Second, if countries are willing to pay at least US$0.7 for each US$1 drop in Russian welfare, an embargo on Russia's mining and energy products -with tariffs above 50% on other products -is the most cost-efficient policy. Finally, if countries target politically relevant sectors, an embargo against Russia's mining and energy sector is the cost-efficient policy even when there is a small willingness to pay for sanctions.

Challenges to international trade and the global economy

“…To account for the V-shape of the trade collapse in this period as well as for the fact that Mineral fuels and oils saw some of the largest declines in 2020 and then recovered rapidly in 2021, two alternative versions of the index were also calculated. The version that treats 2020 and 2021 trade jointly 3 shows that some of the changes of 2020 were indeed reversed in 2021 (hence the smaller decline in the corresponding Finger-Kreinin index), but not so much when Mineral fuels and oils are excluded from the share calculation. 4 This suggests that up until the end of 2021 the change in structure of trade cumulated over this period was still quite different from the structure of trade seen immediately before the pandemic.…”

“…CGE models can measure the direct and indirect effects on output, income and prices (which are not captured in ICIO analysis) with greater detail at the sector level than macro models. Accordingly, the analyses presented in this subsection adds to the literature of CGE analysis looking into the past and current economic sanctions on Russia (Kutlina-Dimitrova (2015 [2]), Chepeliev, Hertel and van der Mensbrugghe (2022 [3]), Mahlstein et al (2022[4]), WTO (2022[5]), Nilsson, Antimiani and Schmitz (2022 [6])).…”

“…In the short run analysis presented in the document, import elasticities on all products were reduced by 30% under the assumptions that substitution between exporters, particularly oil and oil products, are more difficult in the short run. Reducing elasticities to further emphasise the shortterm nature of the analysis is common approach applied by recent studies on the Russia-Ukraine crisis including WTO (2022[5]) and Chepeliev, Hertel and van der Mensbrugghe (2022 [3]). As a sensitivity check, the simulation on the 'medium term' oil ban scenario was run using the default GTAP elasticities.…”

Regulatory Protection and the Role of International Cooperation

“…Since the influential work of Ossa (2014), a number of studies have analyzed the welfare effects of cooperative and noncooperative trade policies through numerical optimization (Mei, 2020; Bagwell et al., 2021; Beshkar et al., 2022; de Souza et al., 2022). Several recent works have also advanced this strand of literature by providing analytical characterization of optimal trade and industrial policy (Beshkar and Lashkaripour, 2020; Bartelme et al., 2021; Lashkaripour, 2021; Lashkaripour and Lugovskyy, 2023).…”