The Economics of Export Embargoes

The Case of the US-Soviet Grain Suspension

Per Lundborg

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138106840
• eBook ISBN: 9781351588805
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Export embargoes are imposed in the belief that enough economic damage will be inflicted on the target country to make it change course on some key political point. However, export embargoes also have economic consequences for producers in the country which imposes the embargo and for producers in third party countries. This book, first published in 1987, analyses the economic effects of export embargoes. It presents much general analysis on the topic and goes on, making use of a model, to examine in detail the 1980 US embargo on grain sales to the Soviet Union. Among the book's findings is the importance of expectations concerning how long the embargo will last in determining both the success of the embargo and the impact on produces in the country imposing the embargo.

1

Background to Export Embargoes

1.1 INTRODUCTION

Economic sanctions frequently occur in world trade despite evidence that they are, as a rule, inefficient. Since sanctions generally affect not only participating countries but also non-participants, the consequences can be considerable. In addition to the important welfare implications, the mechanisms that make some sanctions successful are of interest.

Sanctions imply a lowering of the trade or capital flow to or from a country (or group of countries) so as to force a change of policy. Since both political and economic systems are affected, sanctions have been analysed both in politics and in economics. This book is intended as a contribution to the economics of sanctions, and in particular to the economics of the export embargo. We shall discuss aspects of export embargoes by means of a number of different models. In the case of the US grain suspension to the USSR in 1980, we shall use a global general equilibrium model to carry out a simulation analysis.

The US grain embargo is one of the more publicised examples of embargoes in recent years. Our primary reason for examining it here at some length is that it affected a large number of countries, and therefore allows us to illustrate the problems of imposing an embargo efficiently.

There is no easy answer to the question why most sanctions fail. A necessary though not sufficient condition for an embargo to be successful is that a large enough number of nations participate. In those cases when the participation of more than one country is necessary, a primary threat to consensus is that the costs are unevenly distributed — both direct losses due to the trade restrictions, or indirect losses because of foregone revenues. The simulation approach we have chosen is a poor tool if used to analyse the political response to sanctions but it does illustrate how economic systems behave under different assumptions when export embargoes are employed.

1.2 PURPOSE, LIMITATIONS AND PLAN

Although we focus on economics, embargoes cannot be discussed without the political context, and we shall therefore discuss both the political and economic aspects of embargoes.

We have limited the scope of the study in several ways. There are many different forms of sanction, such as import restrictions or financial measures, but here we only deal with the export embargoes. Different types of sanction require different types of analysis, so it is appropriate to restrict the study in this way.

We also exclude commodities that often are exposed to export restriction but cannot be said to be embargoed — arms, for example. Switzerland, Sweden and almost all weapon exporting countries refuse to sell arms to countries which could use them for ‘immoral’ purposes, such as for attack rather than defence. Instead, we concentrate on embargoes that are imposed as a result of political events and direct conflicts where the purpose is to affect the policy of the country exposed to the embargo.

A central question concerns the conditions that must be fulfilled for an export embargo to be efficient. A crucial factor is to avoid leakages in international trade and to minimise the number of non-participating countries. For example, in studying the US grain suspension, we focus on the process of trade adjustment that the embargo caused. Several more specific questions will be raised in connection with the analysis of the grain suspension.

Such analysis demands a clear understanding of how an economic system is affected by an embargo, so as to be able to identify the crucial mechanisms. We therefore devote one chapter to models of embargoes. Conditions that lend themselves to efficient action will be explored with respect both to economic theory and to earlier experiences with export embargoes.

The bulk of the study is devoted to the US grain suspension. In assessing the welfare consequences, we use two types of simulation model. The first is a partial and atemporal model in which we assume the levels of production of grain and income to be given. When an embargo is imposed, world prices of grains change and so does demand, resulting in new trade patterns and new levels of consumption. The purpose of this model is to illuminate the short-term effects.

The second model is a more elaborate, intertemporal general equilibrium model. Here too, we assume given levels of grain output at the time of the embargo, but the succeeding years’ level of output is affected by the embargo, by farmers’ expectations as to when it would be lifted, and by US policy towards levels of grain stocks once the grain trade is restored.

One aspect that is stressed in the intertemporal model is the consequences of alternative expectations of farmers. Since there is a timelag between planting and harvesting, farmers are forced to form expectations about prices after harvesting. These prices depend on whether the government decides on an embargo or not. The embargo is therefore analysed via different assumptions regarding farmers’ expectations about future embargo policy.

The export embargo introduced other elements of importance for the production decisions of farmers in the following years. If the US government cancels exports to the USSR, it faces the options of storing the embargoed quantities, or selling them or parts of them domestically or to other countries. Hence, the simulations we do with the more elaborate model focus on three aspects: whether the embargo is continued or lifted in the following year, the storage policy of the US government, and farmers’ expectations about the government’s intentions. By changing the assumptions in these respects, we trace their effects on the global allocation of resources and world trade.

We have avoided studying at any length the consequences within the Soviet Union. The approach is not appropriate for such an evaluation and the closed character of the USSR complicates any analysis. By concentrating on accommodating trade flows and price changes caused by the embargo we focus on the major threats to its efficiency. Concerning the effects on the USSR, we restrict the analysis to a review of the existing literature.

The rest of this chapter gives a summary, relevant definitions, and some of the more interesting export embargoes that have been implemented during the twentieth century. Chapter 2 presents the economic theory of the export embargo. The purpose here is to show what qualitative economic effects one should expect from the imposition of an export embargo and to review the literature on the management of economies exposed to embargo threats.

In Chapters 3 and 4 we analyse the grain embargo. Chapter 3 describes the context, how the embargo was implemented, and its consequences in the short term. Chapter 4 analyses the grain suspension via the intertemporal model and draws conclusions.

1.3 MAIN FINDINGS

The simulations of the grain embargo indicate that producers’ expectations concerning a sustained embargo have allocational consequences and thereby affect the level of welfare. To avoid losses, a grain embargo should be followed by statements to producers about the length of the suspension and stocking policies so that their crop decisions are based on more appropriate information.

Concerning the welfare consequences for countries other than the US and the USSR, the model runs indicate that an exporting country like Argentina gained the most from the embargo. In particular Argentinian feed grain producers gain; domestic and foreign consumers of feed grain lose.

A major grain-importing country like Japan is not much affected. Japan imports mainly from the US, so when the embargo was imposed, prices fell, which improved the terms of trade of Japan and other importers.

Simulations indicate that stocks can be used as a policy tool in order to protect producers and consumers more efficiently in the embargo-imposing country and in third party countries.

Given the limited purpose of the embargo, it is claimed that it should not be looked upon as a failure, despite the poor support given the US by other exporters. The embargo had an impact on meat consumption in the USSR, which could have been considerable had it been sustained. Considering that grain is a commodity that can be stored, a grain embargo is less likely to be efficient in the short run than in the long, while a few successful harvests in the USSR could have made a sustained embargo impotent.

1.4 DEFINITIONS

In what follows we refer to the country that imposes the embargo as the sender while the country exposed to the embargo is called the receiver.

Following a distinction originally due to Galtung (1959) we talk about the expressive and the instrumental motives for an action. The expressive motives for an embargo are the domestic conditions of the sender; the instrumental motive aims at solving a conflict in which the receiver is involved.

Normally, the motives for sanctions are instrumental. Economic damage is incurred so as to force the receiver to change its policy. The motive should also be classified as instrumental if, by means of sanctions, the sender tries to slow the military build-up of the receiver (we quote examples later in this chapter).

Sometimes embargoes are imposed where it is unlikely the receiver will be damaged. The rationale is then classified as expressive, since the sender feels obliged to act, for moral reasons or domestic political considerations. Vocal domestic opinion can cause a seemingly irrational policy. Officially, the motives are almost always of an instrumental character.

Barber (1979) makes a distinction similar to the one above. He divides the objectives of embargoes into primary, secondary and tertiary. The primary objectives are related to the receiver, the secondary to the sender and the tertiary to international relations in a broad sense. In most sanctions, all three objectives can be identified.

Although an embargo can be imposed both on exports to a country and on imports from a country, some authors seem to restrict the term to the exports to the receiving country. They refer to the refusal to import from the country as a boycott. Most authors use the term embargo in both cases. When we refer to export embargoes in this study, we implicitly assume that exports are those of the embargo sender and not of the receiver.

1.5 THE HISTORY OF EXPORT EMBARGOES¹

The use of sanctions to achieve political goals is mainly a phenomenon of our century, even if single examples can be found as far back as ancient Greece. There are several reasons why embargoes were not used extensively before the present century. One is that, prior to the twentieth century, the amount of trade was too small to allow an embargo to have any decisive effect. Earlier embargoes were normally complementary to the use of military force. During this century, they have more often been a substitute for it.

The political element of embargoes became more pronounced after the American revolution, and the use of embargoes was gradually recognised as a political instrument during the nineteenth century in America, France and Great Britain. It is no coincidence that these countries dominated world trade, and that Great Britain and France were important international powers.

A crucial step in the history of the embargo is the creation of the League of Nations. The famous Article 16 of the Covenants of the League obliges every member to use sanctions, as a method of retaliation to acts of war. The League’s sanctions policy was exercised in the Abyssinian crisis — a case to which we shall return since it constitutes one of the more interesting examples of export embargoes.

During the twentieth century, the debate on economic sanctions has varied in intensity. Since sanctions are the result of international conflict, it is no surprise that the thirties represented a decade of frequent discussions. The decade favoured embargoes. The League of Nations used sanctions as part of its official anti-war policy, and the mere threat of sanctions was expected to deter nations from starting war.² The body of nations represented by the League was considered to constitute both necessary and sufficient conditions for successful sanctions.

The sixties began another period of debate on sanctions, but the objectives of sanctions were now more modest — limited to creating pressure on a country to change its policy. In general, sanctions were not expected to be able to prevent war. The United Nations, which had replaced the League of Nations, was less interested in sanctions than the League. However, it was quite common for one country or more to decide on sanctions. The measures were often of an expressive character and caused by the existence of domestic pressure groups. Only seldom were they based on a realistic evaluation of the effects on the target country. Beside the traditional diplomatic channels, the use of sanctions is a way for small countries to play a role in international affairs.

Most sanctions since the sixties were closely connected with monopoly power in certain markets, such as oil or grain, and were most often of the export embargo type. Monopoly power was not used as a means of acquiring monopoly profit but to affect the policy of one or several receiver countries. Despite the relatively sceptical view that most scholars take, sanctions have continued to be used frequently in foreign policy.

The United States has shown increasing interest in export embargoes, during the twentieth century, as an instrument of foreign policy.³ Although most sanctions have been considered failures, the US has continued to use them since they have been considered an appropriate measure when military action has been judged too dangerous or ruled out on other grounds.

1.5.1 Examples

It may be difficult to classify sanctions correctly or even to identify an embargo. One reason is their interdisciplinary character. An economist identifies a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Preface
• 1 Background to Export Embargoes
• 2 Economics of the Export Embargo
• 3 The US Grain Embargo: A Description and Short-term Evaluation
• 4 Intertemporal Analysis of the Grain Embargo
• References
• Index