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North Korea: Witness to Transformation

Haidar on Iran: Sanctions and Trade Diversion

by | April 12th, 2013 | 07:00 am

We have a standing interest in sanctions: when they work and when they don’t. We have followed the sanctions efforts vis-à-vis Iran in particular, as it is the only current comparator case to North Korea: a regime that thrives on posing nuclear challenges to the rest of the world. VOX has recently posted a short piece by Jabal Ibrahim Haidar that does a particularly good job making a point we have suggested as well: that sanctions induce target states to divert exports to non-sanctioning states.

Haidar shows that—with a lag—Iran’s non-oil exports adjusted to the imposition of sanctions as firms diverted trade from the US and EU to Asian, African, and Latin American destinations.   Haidar makes the point not only with aggregate data, but with micro data on entry. He shows that entry rates—both for exporters and for particular products–decreased in destinations imposing sanctions, while they increased in destinations not imposing sanctions. Exit rates showed the opposite pattern.

What is the exact process through which this occurs? Again, Haidar’s micro data provide answers:

  • Larger and more experienced exporters were able to divert relatively more of their exports than smaller and less experienced ones.
  • Exporters reduced their product prices while diverting trade to new destinations.
  • Exporters pursuing diversion were rational: they targeted larger and closer markets, destinations with higher imports, income, and FDI growth rates, as well as destinations with fewer import restrictions and lower tariffs.

Hats off to Haidar; this is the sort of microeconomic work on sanctions we should be doing. It provides more fine-grained evidence for one of the longest-standing findings in the sanctions literature: that coordination is key to any sanctions effort. It is a certainty that North Korea is playing the same game, although to date that has meant growing reliance on China as the non-sanctioning magnet. Will that gamble pay off? And what needs to be done to bring more non-sanctioning states on board?