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The federal government uses sanctions on foreign commerce to influence the activities of other nations. Those sanctions can have costs for the United States as well as for the countries that they target. This Congressional Budget Office (CBO) study, prepared at the request of the Chairman and the former Ranking Democrat of the House Committee on International Relations, examines the size and nature of the domestic costs of sanctions. In accordance with CBO's mandate to provide objective and impartial analysis, the study contains no recommendations.

Richard D. Farmer of CBO's Natural Resources and Commerce Division (NRCD) wrote the study under the supervision of Jan Paul Acton and Elliot Schwartz. Bruce Arnold of NRCD, Christopher Williams of the Macroeconomic Analysis Division, and Joseph Whitehill of the Budget Analysis Division provided internal review. The study also benefited from comments by Kimberly Elliott of the Institute for International Economics, Mun Ho of Harvard University, Warwick McKibbin of the Australian National University, Dianne Rennack and Bob Shuey of the Congressional Research Service, and Robert Stern of the University of Michigan.

Christian Spoor edited the manuscript, and Leah Mazade proofread it. Rae Wiseman typed the many drafts. Kathryn Quattrone prepared the study for publication, and Laurie Brown prepared the electronic versions for CBO's World Wide Web site, both assisted by Martina Wojak-Piotrow.

Dan L. Crippen
Director
March 1999
 
 

SUMMARY

ONE - INTRODUCTION

• What a Sanction Is and Is Not
• The Federal Government's Use of Sanctions
• The Role of Foreign Commerce in U.S. Output and Income
• How Economists View the Costs of Disrupting Trade
• Economic Considerations in a Decision to Impose Sanctions

TWO - TYPES OF SANCTIONS

• Restrictions on International Transport, Travel, and Communication
• Limits on Exports
• Limits on Imports
• Restrictions on Government Assistance
• Restrictions on Private Financing of Trade and Investment
• Comprehensive Restrictions on All Aspects of Trade and Investment
• Extraterritorial Restrictions: Limits on Commerce with Third Countries

THREE - FACTORS THAT LIMIT THE EFFECT OF SANCTIONS

• Limits on Aid to One Country That Do Not Alter Total Assistance Spending
• Redundant or Symbolic Actions
• Executive Discretion That Delays Implementation
• Actions to Soften the Impact
• The Need for Multilateral Participation

FOUR - WHAT ECONOMIC THEORY SAYS ABOUT THE DOMESTIC COSTS OF SANCTIONS

• The Net Cost Will Be Smaller Than the Direct Loss of Trade
• Costs Can Be Big When the Targets Are or Will Be Major Trading Partners
• Costs Will Be Small When the Targets Are Not Economic Powers
• Government Programs to Minimize Adjustment Costs

FIVE - ESTIMATES OF THE DOMESTIC COSTS OF SANCTIONS

• Studies of Costs to the Nation
• Studies of Costs to Particular Markets
• Other Cost Considerations

APPENDIX - A Critique of Research by Hufbauer and Colleagues on the Direct Costs of Sanctions

SELECTED BIBLIOGRAPHY
 

TABLES
1.	Major Laws That Potentially Restrict Foreign Commerce, by Type of Activity
2.	Countries Named in Current Laws That Potentially Restrict Foreign Commerce, by Type of Activity
3.	Estimates of the Federal Government's Use of Sanctions
4.	Types of Federal Sanctions and the Foreign Commerce They Directly Affect
5.	Discretionary Spending on U.S. International Assistance Programs, Fiscal Year 1997
6.	Federal Direct Loans and Loan Guarantees to Promote U.S. Exports, Fiscal Year 1997
7.	U.S. Trade in Goods, by Country or Region, 1997
8.	U.S. Trade in Services and Income from Foreign Investments, by Country or Region, 1997
9.	Net Increase in U.S. Private Assets Abroad, by Country or Region, 1997
10.	Selected Studies of the Economic Welfare Gains from Changes in Trade Policy
11.	Estimates of the Relationship Between Changes in Economic Welfare and Changes in Exports
12.	Selected Estimates of the Direct Annual Costs of U.S. Sanctions on Exports
FIGURE
1.	U.S. Exports and Foreign Investment as a Percentage of Gross Domestic Product, 1960-1997
BOX
1.	Sanctions and the Development of Foreign Oil Resources

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