Why Economic Sanctions Don’t Work (and Harm Ordinary Americans)

Uncle Sam has been imposing economic sanctions against its enemies (and perceived enemies) for more than 200 years.

In 1806, Congress passed the Non-Importation Act. The law forbade imports of many types of British goods. It was intended to force Great Britain to stop its interference with American trade; in particular, the kidnapping of US seamen and their forced service (impressment) on British ships.

In what became a foretaste of things to come, the law failed to end Britain’s coercive impressment policy. And in response, Congress doubled down with the Embargo Act of 1807, which closed all US ports to export shipping. The law also placed further restrictions on British imports.

Alas, the Embargo Act also failed to have the desired effect. As the Encyclopedia Britannica notes:

The act was a hardship on US farmers as well as on New England and New York mercantile and maritime interests, especially after being buttressed by harsh enforcement measures adopted in 1808. Its effects in Europe were not what Jefferson had hoped. French and British dealers in US cotton, for example, were able to raise prices at will while the stock already on hand lasted; the embargo would have had to endure until these inventories were exhausted. Napoleon is said to have justified seizure of US merchant ships on the grounds that he was assisting Jefferson in enforcing the act.

Indeed, in yet another foretaste of things to come, the United States only succeeded in ending British interference with American shipping by going to war over the issue. In the War of 1812, British troops occupied a substantial portion of the United States and burned most of Washington, DC, including the newly constructed White House and US Capitol. Great Britain finally agreed to end the war when it proved too much of a distraction from its ongoing conflict with French Emperor Napoleon Bonaparte.

Despite this dismal record, Congress continued to rely on economic sanctions in an effort to force its adversaries to comply with its foreign policy objectives. During the Civil War (1861-1865), Congress approved a law that prohibited transactions with the Confederacy, authorized the confiscation of goods involved in such transactions, and provided a licensing regime under rules and regulations administered by the Treasury Department. While the law (and the blockade imposed to enforce it) succeeded in preventing most cotton exports from the Confederacy, it failed to dissuade blockade runners from importing weapons to the South.

Eight decades later, in June 1941, the United States banned the export of iron, steel and oil to the Empire of Japan in response to the Japanese invasion of China. Six months later, the Japanese navy bombed Pearl Harbor, bringing the United States into World War II, and again demonstrating that economic sanctions can lead to war.

By the 1950s, in preparation for possible war with the Soviet Union and China, a more permanent solution to administer economic sanctions in peacetime seemed desirable. Spurred by the seizure of US property in Cuba after the Cuban Revolution, which ended in 1959, Congress created the Office of Foreign Assets Control (OFAC).

Since its inception, OFAC’s responsibilities have grown dramatically. OFAC now administers economic and trade sanctions against more than a dozen countries, under executive orders declared under presidential wartime and national emergency powers, as well as specific legislation. Comprehensive asset freezes and trade embargoes are in effect against Cuba, Iran, North Korea, Russia, and Venezuela. More limited sanctions are in effect against Afghanistan, Belarus, China. Iraq, Lebanon, Libya, Mali, Myanmar, Nicaragua, Sudan, and Yemen.

Realizing that economic sanctions imposed by a single country rarely work in isolation, Uncle Sam often teams up with its allies and international organizations to impose joint sanctions. For instance, both the European Union and the United Nations have imposed their own sanctions against Iran and North Korea.

But what history may eventually view as the penultimate use of sanctions came in the days following the Russian invasion of Ukraine on February 24, 2022:

Yet how well are sanctions working? It turns out they haven’t been all that much more successful than those imposed in the 1806 Non-Importation Act. 

American sanctions against Iran have been in place since 1979, yet that nation continues its military involvement in the Middle East and its nuclear research program. Sanctions against North Korea were first imposed in 1950, yet that hasn’t stopped it from building increasingly sophisticated nuclear weapons that are now capable of reaching US territory. Sanctions against Venezuela have shrunk its per capita GDP by more than 60%, but the country’s dictator, Nicolas Maduro, remains in power. Indeed, the Biden administration is now courting Maduro in an attempt to end US reliance on imported Russian oil.

And the sanctions against Russia don’t appear to be working any better. Take energy exports, for instance. In 2021, European countries purchased more than half of Russia’s oil exports. Thanks to sanctions imposed after it invaded Ukraine, Europe’s share of those exports has fallen by more than half. Today, China and India – the world’s two most populous countries – are purchasing nearly 75% of Russia’s exported oil.

The fundamental problem for sanctions, as  Mike “Mish” Shedlock points out, is that sanctions don’t work because they create new markets. Two centuries ago, when Congress forbade the export of raw cotton to Europe, French and British cotton dealers simply raised their prices to maintain their profits. Today, rather than withdrawing from Ukraine, Russia simply sells its energy exports to countries not participating in the sanctions against it.

At the same time, sanctions have a very real cost here at home. Within days of the embargo of Russian energy exports by the United States and its allies, domestic oil and gas prices soared. The resulting inflation rippled through the economy, with disproportionate impact on the poorest Americans.

As well, in authoritarian countries, the rulers are able to pass the impact of sanctions on to other countries. For instance, the United States imposed its most recent sanctions against Venezuela in December 2014. Since then, more than seven million Venezuelan citizens have fled the country. Hundreds of thousands of them have wound up illegally crossing the southern border of the United States, spurring perhaps the worst immigration crisis in US history.

There’s also a concerted move by Russia, China, and other sanctioned countries to bypass one of the most powerful weapons Uncle Sam has at its disposal: the “reserve currency” status of the US dollar. We wrote about this trend last May, and momentum away from the greenback has only accelerated since then. While we don’t believe there’s an imminent threat against the dollar’s domination of the global economy, it’s clear that going forward, weaponizing it will be an increasingly ineffective strategy against America’s adversaries.

Our view is that it would be in America’s best interest to trash its failed sanctions policies. The wisdom of this approach has long been recognized. George Washington, America’s first president, pushed for free trade with all nations, even with its former colonial overseer, Great Britain. And in 1797, in his farewell address, President George Washington suggested that “it is our true policy to steer clear of permanent alliances with any portion of the foreign world.” 

It’s long past time to return to this policy. The geographic isolation of United States makes it virtually impregnable to a military invasion. And while imposing economic sanctions or intervening in the world’s squabbles might seem morally justified, doing so only ensures blowback in the form of anti-American alliances, soaring inflation, and an unprecedented immigration crisis.

The world is a messy and bloody place. We can’t claim that pulling back from our failed sanctions programs will make it any less messy or bloody. But it would mean that American policymakers realize a basic fact proven over and over again for more than two centuries: sanctions simply don’t work. And in many cases, they actively undermine our own interests.

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