Sanctions are imposed on a target country to exert political and economic pressure. But there is little evidence on how exporting firms regard trade with the sanctioned country. This column uses detailed monthly customs data from French firms to investigate the extensive margin of trade in episodes of sanctions-use against Iran, Russia, Cuba, and Myanmar. It finds the impact of sanctions is heterogeneous along firm dimensions and advises caution in the use of a policy tool with imprecise and unpredictable results. Evidence on the firm-level reaction to the imposition of sanctions is scarce (for an overview of the literature, see Felbermayr et al. 2020). Haidar (2017) shows that Iranian firms have in part successfully avoided the impact of sanctions by
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Sanctions are imposed on a target country to exert political and economic pressure. But there is little evidence on how exporting firms regard trade with the sanctioned country. This column uses detailed monthly customs data from French firms to investigate the extensive margin of trade in episodes of sanctions-use against Iran, Russia, Cuba, and Myanmar. It finds the impact of sanctions is heterogeneous along firm dimensions and advises caution in the use of a policy tool with imprecise and unpredictable results.
Evidence on the firm-level reaction to the imposition of sanctions is scarce (for an overview of the literature, see Felbermayr et al. 2020). Haidar (2017) shows that Iranian firms have in part successfully avoided the impact of sanctions by diverting their exports to non-sanctioning countries. Ahn and Ludema (2020) analyse the introduction of ‘smart sanctions’ vis-à-vis Russia and the extent to which the Russian government intervened to shield specific firms from harm by these sanctions. Gullstrand (2020) and Crozet and Hinz (2020) estimate how much Swedish and French firms, respectively, have decreased their exports to Russia in response to sanctions. In fact, sanctions may lead firms to question their entire activity in these markets – either by exiting or by not entering to begin with. In a recent paper (Crozet et al. 2021), we analyse this unexplored firm-level extensive margin. By how much is the firm-level probability of serving a market lowered by the imposition of sanctions on these markets? Are firms that were active in the market before the imposition of sanctions differently affected? And are the effects of sanctions heterogeneous along sanction episodes and firm characteristics?
We explore these questions by relying on highly detailed monthly customs data on the universe of French firms and making use of recent econometric advances in the estimation of binary choice models.
For the Iranian and Russian sanction episodes, we find that affected firms are, on average, 7.5 percentage points and 5.7 percentage points less likely to export to Iran and Russia, respectively, due to the sanctions imposed. Given these firms’ average probability levels – serving the two markets of only 11.4% and 18.6% – these are strong effects. The drop in the probability also translates into a lower number of firms predicted to be active in Iran and Russia. This is illustrated in Figures 1 and 2, which show the evolution of the observed (in red) and predicted (in green) number of firms exporting to Iran and Russia. Additionally, they plot the estimated counterfactual predictions if no sanctions had been imposed (in blue). The number of French exporters to Iran is estimated to have dropped by 39.2% and to Russia by 23.4%.
Figure 1 Number of firms exporting to Iran
Source: Crozet et al. (2021)
Figure 2 Number of firms exporting to Russia
Source: Crozet et al. (2021)
We also consider whether the (temporary) lifting of the US embargo against Cuba in 2015 and the abolition of international sanctions against Myanmar in late 2012 made French exporting firms more likely to serve these markets, and find no effects for Cuba and only a very small recovery for Myanmar.
However, these average numbers gloss over significant heterogeneities in the applied policies, as well as reactions by targeted countries. We therefore analyse how the effects vary along a number of different dimensions:
- Previous experience. We find that firms with recent records of exporting to the sanctioned country tend to be more resilient; in the case of Iran, the impact of sanctions is 1.6 percentage points lower for experienced firms. This indicates that sanctions resulted in increased entry costs in the targeted market.
- Firm size and multi-product firms. Larger firms (and multi-product firms) were much more likely to leave or not to enter the Iranian market due to the imposition of sanctions than smaller firms. In the case of the Russia sanctions, there is no significant difference in the firms’ behaviour.
- Trade finance intensity. In both sanction regimes where significant financial sanctions were imposed (Russia and Iran), firms that export products that make greater use of trade finance instruments were much more affected. This mirrors results from the intensive margin of trade (Crozet and Hinz 2020).
- Product mix. Firms selling consumer products were more severely affected than others in the case of the Russia sanctions, as at least some Russian consumers were staging a general boycott against Western consumer products. In the case of Iran, those firms exporting intermediate products were more affected, possibly linked to some French firms previously operating joint ventures in the country.
- Specialised firms. Firms exporting to other ‘tough’ markets, as indicated by the French foreign ministry issuing travel warnings, fare significantly better in the sanction-targeted countries. Firms that previously reported sales to neighbouring countries of the sanctioned economy, on the other hand, appear to leave (or not enter) far more frequently, which may be evidence for the circumvention of sanctions policies.
Sanctions are policy tools that should be used cautiously. They have strong effects on trade – on its intensive and, importantly, extensive margin – and it is generally hard to know who will be hit, how, and for how long. We find various sources of heterogeneity in the impact of sanctions on firms’ exporting behaviour, along the lines of idiosyncrasies and particularities of the respective sanctions case. While certain sanctions measures are styled as surgical and precise, the results suggests that it is hard to have reliable regularities that would allow us to predict who will be hit the most. The design of the sanctions, pre-existing trade relationships, the counter party’s policy response, and the public’s reaction matter a lot.
Authors’ note: The paper on which this column draws was supported by European Union Horizon 2020 research and innovation grant 770680 (RESPECT).
Ahn, D P and R D Ludema (2020), “The sword and the shield: the economics of targeted sanctions”, European Economic Review 130, forthcoming.
Crozet, M and J Hinz J (2016), “Collateral damage: The impact of the Russia sanctions on sanctioning countries' exports”, VoxEU.org, 5 July.
Crozet, M and J Hinz (2020), “Friendly Fire: The Trade Impact of the Russia Sanctions and Counter-Sanctions”, Economic Policy 35(101): 97–146.
Crozet, M, J Hinz, A Stammann and J Wanner (2021), “Worth the pain? Firms’ exporting behaviour to countries under sanctions”, European Economic Review, 18 February.
Felbermayr, G, A Kirilakha, C Syropoulos, E Yalcin and Y Yotov (2020), “The Global Sanctions Data Base”, VoxEU.org, 4 August.
Haidar, J I (2013), “Sanctions and trade diversion: Exporter-level evidence from Iran”, VoxEU.org, 9 April.
Haidar, J I (2017), “Sanctions and export deflection: evidence from Iran”, Economic Policy 32(90): 319–35.
Gullstrand, J (2020), “What goes around comes around: The effects of sanctions on Swedish firms in the wake of the Ukraine crisis”, Technical report, Lund University.