Sanctions are economic measures that governments use to influence the behavior of other countries or entities. They can take various forms, such as trade embargoes, asset freezes, travel bans, or financial restrictions. Sanctions compliance is the process of adhering to the rules and regulations that implement these measures.
Sanctions compliance can have significant impacts on international trade, both positive and negative. In this blog post, we will explore how sanctions compliance affects international trade. Specifically, we will look at some of these impacts and how they affect different stakeholders in the global economy.
Negative Impacts of Sanctions Compliance
1. Reduced Trade Volume and Value
One of the most obvious impacts of sanctions compliance is the reduction of trade volume and value between the sender and the target countries, as well as their trading partners. According to one study, (Afesorgbor 2019), sanctions can reduce bilateral trade by 25% on average, and by up to 80% in some cases. This can have negative consequences for the economic welfare and development of both sides.
2. Adverse Distributional Effects
Another impact of sanctions compliance is the adverse distributional effects on the poor and the civilian population of the target countries. Sanctions can limit access to essential goods and services, such as food, medicine, energy, or education. They can also trigger currency crises, inflation, unemployment, and poverty.
3. Perverse Incentives and Circumvention
A third impact of sanctions compliance is the creation of perverse incentives for economic agents within the sender and the target countries to anticipate and circumvent the sanctions. This can undermine their effectiveness and legitimacy. For example, some firms may engage in trans-shipment, smuggling, or money laundering to evade sanctions. Some countries may also seek alternative markets or suppliers that are less affected by sanctions.
4. Increased Operational Costs and Regulatory Risks
A fourth impact of sanctions compliance is the increased operational costs and regulatory risks for firms that engage in international trade. Sanctions compliance requires sophisticated screening solutions and due diligence processes to identify and avoid sanctioned entities or transactions. This can be time-consuming, complex, and expensive. Moreover, firms that operate in sanctioned markets or deal with sanctioned entities may face legal penalties, reputational damage, or customer dissatisfaction.
Positive Impacts of Sanctions Compliance
1. Promotion of Human Rights, Democracy, and Peace
Despite the negative impacts, sanctions compliance can also have positive impacts on international trade. One of these impacts is the promotion of human rights, democracy, and peace. Sanctions can exert pressure on the target countries or entities to change their objectionable policies or behaviors, such as human rights violations, nuclear proliferation, or terrorism.
2. Deterrence of Illicit Activities and Terrorism
Another impact of sanctions compliance is the deterrence of illicit activities and terrorism. Sanctions can disrupt the financial flows and networks that support criminal or terrorist organizations. They can also enhance cooperation and coordination among countries to combat these threats.
3. Deterrence of Illicit Activities and Terrorism
A third impact of sanctions compliance is the fostering of cooperation and dialogue among countries. Sanctions can create opportunities for negotiation and diplomacy between the sender and the target countries or entities. They can also encourage multilateralism and consensus-building among the international community. For example, the UN-led sanctions on Iraq’s invasion of Kuwait in 1990 resulted in a coalition of countries that liberated Kuwait and restored its sovereignty.
Sanctions compliance is a complex and dynamic process that affects international trade in various ways. It can have both negative and positive impacts on different stakeholders in the global economy. Therefore, it is important for governments, firms, and individuals to understand these impacts and how to manage them effectively.