Introducing Tom Zylkin on Trade Sanctions

by robekulick

A couple of weeks ago, I was in Germany for the Lindau Conference of Nobel Laureates. Meeting the Nobel Laureates was of course very exciting. But among the real highlights of the conference for me was meeting Tom Zylkin, a Ph.D. student in Economics at Drexel University, and finding out he was interested in contributing to my blog. Tom’s research is focused on issues relating to trade and international conflict. Since I’m not particularly knowledgeable about those subjects, I think his insights will really expand the horizons of this blog. To that end, here is Tom’s first post. I’ll follow up with a few comments in the next couple of days.

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Robe has kindly asked me, as someone who does research on both trade policy and armed conflict, to give my thoughts on the economics of trade sanctions as they apply to the situation in the Ukraine.  Unfortunately, the main thrust of what I have to say is, “here’s why trade sanctions probably aren’t going to make much of a difference.”

I want to begin by highlighting a choice quote that appeared in my local Sunday newspaper  regarding the recent ceasefire signed by the Ukrainian government and its pro-Russian antagonists this past Friday in Belarus:

“The terms of the deal underscored Russia’s apparent willingness to commit far more resources than the West to achieve its aims in Ukraine.”

Perhaps the economic analysis of the conflict doesn’t need to be made more complicated than that. In a nutshell, the government in Kiev has agreed to enshrine the territorial gains that have been made by the separatists in Eastern Ukraine, frankly because they have no other choice.  With the rebels almost certainly receiving military aid from Russia (unless their news services are to be believed anyway), and no one in the West displaying any willingness to do the same for Ukraine, this latest spectacle just further solidifies what has been plain to see for some time: Ukraine matters more to Russia than it does to the rest of us.

That is to say, Russia is more willing to risk a larger conflict than anyone else is.  And thus it may well wind up achieving its aims in Ukraine almost by default.  While the situation bothers many of us in the Western World, it is all too obvious there is no political appetite for trying to oppose Russia using force.  Preserving Ukraine’s territorial integrity and independence from Russia simply is not high enough on our collective list of priorities to merit the kinds of actions that would be necessary to do something about it (and not without good reason, given the risks, one could certainly argue).

Still, with both the recent ceasefire and, in particular, the new round of proposed EU trade sanctions in the news this week, this is as good an opportunity as any to evaluate the kinds of actions the West has shown it is willing to take.  Could increased trade sanctions potentially pressure Russia into abandoning its meddling in Ukraine?

First and foremost, it’s worth pointing out that the history of trade sanctions doesn’t give us many success stories to go on.  It often seems to be the case that when conflicts become ideological, the economics become secondary.  Long-term trade sanctions have not done much to topple regimes in North Korea, Iran, Syria, or Cuba.  It’s also worth noting that the current level of sanctions (and talk of further sanctions) does not seem to have hurt Vladimir Putin’s popularity much.  Even in the cases where trade sanctions have seemed to make a difference, such as the recent reforms in Myanmar, it seems to be a very slow process.

But let’s take the optimistic view that there is some level of trade sanctions the West can impose that will cause Russia to reverse its course.  There is sound economic reasoning that would suggest this.  A paper from a few years ago by Phillippe Martin, Thierry Mayer, and Matthias Thoenig (which you can read about here) offered evidence that increasing trade between countries can pacify frosty relations: once countries become dependent on one another via trade, the logic goes, pursuing conflict becomes very costly because it disrupts the flow of trade.

It stands to reason then that the world’s major economies, especially when acting in concert, should be able to use the mere threat of trade sanctions to condition the behavior of individual states.  Except there is an inherent problem here—trade dependence cuts both ways.  It is no coincidence that the U.S., which by and large does not trade that much with Russia, has been the most openly hawkish about trade sanctions.  The European powers on the other hand have been slower to come around to this view, and have at times displayed an embarrassing lack of credibility in their pursuit of these policies.  Indeed, the U.K.  has already indicated willingness to lift sanctions if they can be convinced the terms of Friday’s ceasefire are going to be honored.  It is perhaps not surprising either that the ceasefire is already under threat of breaking down: if Ukraine and the West are willing to surrender so easily, why not grab more?

Trying to reason out solutions involving trade dependence and trade sanctions simply brings us back to the same intractable problem as before: Russia cares more about the conflict than the West does.  Even if trade sanctions could be effective, Russia has no reason to believe that threats to impose sanctions of the necessary magnitude are credible, because they would inflict more pain than Western countries are willing to tolerate for the sake of Ukraine.  No matter how stringent the next round of sanctions may be, Russia probably doesn’t believe they will be in place for the long haul.

How might the West make such threats more credible in Russia’s eyes?  Well, this most likely won’t be taken as an optimistic answer either, but one way is to convince them that we are genuinely serious about opposing them militarily if they do not respond to sanctions.  If Russia felt there was a significant chance of actual war in the future, it would immediately see that the West has a strong incentive not to trade with them in the present.  At that point, much higher levels of sanctions could be considered credible.  The West’s best strategy then would be to convince Russia that all options are on the table, even though they probably aren’t.  One might reasonably argue this has been the West’s strategy all along.  If so, it isn’t working.

-Tom

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