Sanctions and Exports Deflection

Exports sanctions continue to be a tool used by countries to influence policies of other governments, and export sanctions against Iran are no exception. Over the last century, sanctions were imposed 174 times by different countries. By definition, sanctions increase export costs. However, despite the importance of export costs in shaping export patterns, we still lack understanding about how exporters behave when faced with export sanctions by some destinations. Due to an increasingly globalized economy, many alternative markets exist for an exporting country hit by sanctions. Recent research[1] explores whether and how exports deflection happened following the imposition of exports sanctions against Iran in 2008.

This research uses disaggregated dataset which includes all Iranian non-oil customs records at the exporter-product-destination-value-day level for the period January 2006 to June 2011. The sample includes 1,814,146 daily transactions, 35,953 exporters, and 3,865 products classified at the HS-6 digit level. The data allows observing microeconomic adjustments. The empirical investigation for non-oil Iranian exports uncovers that:

  • While entry (exit) rates of exporters and products decreased (increased) in destinations imposing sanctions, they increased (decreased) in destinations not imposing sanctions.
  • Iranian exporters enhanced their export volumes to other destinations that they were already exporting to when certain destinations imposed sanctions on Iran.
    -Larger and more experienced exporters were able to deflect relatively more of their exports than smaller and less experienced ones.
  • Exporters typically deflected first (and more of) their core-competence products as well as their homogeneous products compared to differentiated products.
  • Exporters reduced their product prices while deflecting exports to new destinations.
  • The new destinations, which deflecting exporters targeted, are more politically-friendly with Iran.
  • Two-thirds of the value of Iranian non-oil exports thought to be destroyed by non-oil exports sanctions have actually been deflected to destinations not imposing sanctions.

While these findings add to the academic literature on exports costs and exports dynamics, they also contribute to the policy debate on sanctions. Sanctions may be less effective in a globalized world as exports can deflect their trade from one destination to another. The idea that one country can impose export sanctions on another may not necessarily prove effective unless the exporters from the targeted country do not have - or cannot find - compensating alternatives and new trading partners.

  1. Haidar, J.I. (2014): Sanctions and Exports Deflection. Mimeograph, Paris School of Economics. ↩︎