Economic Sanctions: A Hidden Cost of the New World Order

The New World Order (NWO) that could result from the present East-West détente will have to rely increasingly on economic sanctions, whereas coercion in the international system previously was essentially a military task. The benefits of the NWO (the so-called peace dividend) have been well understood by economic policy-makers. The costs related to the NWO, however, have not been so obvious. This chapter points out some of these hidden costs, which are essentially related to the negative consequences of the use of trade-related measures to enforce international law and order. The first section reviews economic theory on economic sanctions and stresses the importance of an analysis which takes into account the uncertain character of the outcome of situations in which sanctions are being applied. Clearly the NWO has to be analysed within a utility setting that acknowledges uncertainty. The next section focuses on the target country’s subjective probability that a sanction threat will be executed upon misconduct, and discusses the importance of the reputation of a country (for example, the USA) or an organization (the UN) as an executor of sanctions. From the point of view of the NWO sender country or organization it may be advisable to use sanctions now and then; but there is a clear danger in excess. Intensified use of the sanction instrument in general may impair its effectiveness in specific cases. The third section points out that sanctions sometimes have to be considered an inappropriate instrument. It shows that a too large sanction leads to unnecessary costs for both the sender and the target. The fourth section deals with the increase in uncertainty about the international trade regime which forces countries to specialize to a lesser extent (and sometimes even against their comparative advantages), implying efficiency losses for the world economic system.