© 2007 Pearson Addison-Wesley. All rights reserved Trade Sanctions
10-2 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Trade Sanctions Two types: Export Embargos Import Boycotts Example: the Helms-Burton Act and the Iran/Libya Sanctions Act
10-3 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. Export Embargos US imposes export embargos to Cuba, but Russia still exports products to Cuba. This will affect the export supply curve in Cuba. It would be steeper due to the falling foreign supply. Sn: Supply curve for a non-executed country Se: Supply curve for an executed country
10-4 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. Export Embargos
10-5 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Welfare Analysis for Export Embargos Without trade sanction, the gains from trade for the USA=a; the gains from trade for Russia=b; With trade sanction, the supply curve is shifted up. In Cuba, the new quantities supplied is 15 since Russia exports more to Cuba, but consumers in Cuba has to pay more at a higher price. Cuba’s Loss=c+d due to the consumer loss U.S.’s Loss=a Russia’s Gain=c World Net loss=a+d
10-6 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.
10-7 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Import Embargos US imposes sanction to Iran, but Japan still import products from Iran. This will affect the import demand curve in Iran. How does it change? It would be steeper due to the falling foreign demand. Dn: Demand curve for a non-executed country De: Demand curve for an executed country
10-8 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.. Welfare Analysis for Import Embargos
10-9 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. Welfare Analysis for Import Boycott Without trade sanction, the gains from trade for the USA=a; the gains from trade for Japan=b; With trade sanction, the demand curve is steeper. In Iran, the new quantities demanded is 15 since Japan imports more from Iran, but producers in Iran now earn less for each quantity supplied. Iran’s Loss=c+d due to the producers loss U.S.’s Loss=a Japan’s Gain=c World Net loss=a+d
10-10 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. Evaluate Trade Sanction Which one is worse? The sanctioned or the killer? Depends If the sanctioned has low export supply elasticity or import demand elasticity, then it will get hurt dramatically due to the trade sanction; otherwise, it would not. Now consider a case that the sanctioned has a high export supply elasticity But the killer faces different import demand elasticity
10-11 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. Elastic & Inelastic Import Demand Curves
10-12 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. Elastic & Inelastic Import Demand Curves In case (a), the two countries didn’t get much hurt from the trade sanction since both of them have high elasticities. In case (b), the killer got much hurt from its sanction. Its loss=a >the counterpart’s loss=c+d
10-13 Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Copyright © 2006 Pearson Addison- Wesley. All rights reserved. What factors affect the sanction’s effect? Trade openness: the smaller openness level, the less importance of international trade, the higher the elasticity is. Characteristics of the importing products: luxury or necessity? Duration of the Sanction: the longer the sanction, the smaller the impact is. Sanction Coverage: the more the countries’ participation, the larger the impact is.