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Extraterritorial Trade Sanctions: Theory and Application to the US-Iran-EU Conflict

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  • Eckhard Janeba

Abstract

Under extraterritorial sanctions the sanctioning country extends its policies to trade of third countries with the sanctioned country. A prominent example is former US President Trump’s decision to leave the Joint Comprehensive Plan of Action (JCPOA), a multilateral agreement with Iran. The decision led to a shutdown of EU trade with Iran. In this paper, I develop a game-theoretic model to explain the emergence of extraterritorial sanctions. Such trade sanctions i) do not arise when the harmful activity of the sanctioned country (“build a nuclear bomb”) is verifiable even if monetary transfers are ruled out, but ii) emerge if a second activity (“sponsor international terrorism”) is not verifiable, and the sanctioning countries differ in their gains from trade with the sanctioned country, their harm from the non-verifiable, and their reputational cost from abandoning the international economic order. In the context of the US-Iran-EU conflict, I argue that the oil and gas fracking boom in the US together with former President Trump’s ignorance of his international reputation are key factors in the emergence of extraterritorial trade sanctions.

Suggested Citation

  • Eckhard Janeba, 2022. "Extraterritorial Trade Sanctions: Theory and Application to the US-Iran-EU Conflict," CESifo Working Paper Series 9573, CESifo.
    • Handle: RePEc:ces:ceswps:_9573
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    References listed on IDEAS

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    1. Felbermayr, Gabriel & Syropoulos, Constantinos & Yalcin, Erdal & Yotov, Yoto, 2019. "On the Effects of Sanctions on Trade and Welfare: New Evidence Based on Structural Gravity and a New Database," School of Economics Working Paper Series 2019-3, LeBow College of Business, Drexel University.
    2. Kaemfer, William H & Lowenberg, Anton D, 1988. "The Theory of International Economic Sanctions: A Public Choice Approach," American Economic Review, American Economic Association, vol. 78(4), pages 786-793, September.
    3. Gary Clyde Hufbauer & Jeffrey J. Schott & Kimberly Ann Elliott, 2007. "Economic Sanctions Reconsidered, 3rd edition (hardcover)," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4075, January.
    4. James Feyrer & Erin T. Mansur & Bruce Sacerdote, 2017. "Geographic Dispersion of Economic Shocks: Evidence from the Fracking Revolution," American Economic Review, American Economic Association, vol. 107(4), pages 1313-1334, April.
    5. Stéphane CIRIANI, 2015. "The Economic Impact of the European Reform of Data Protection," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(97), pages 41-58, 1st quart.
    6. Maxim Engers & Jonathan Eaton, 1999. "Sanctions: Some Simple Analytics," American Economic Review, American Economic Association, vol. 89(2), pages 409-414, May.
    7. Afesorgbor, Sylvanus Kwaku, 2019. "The impact of economic sanctions on international trade: How do threatened sanctions compare with imposed sanctions?," European Journal of Political Economy, Elsevier, vol. 56(C), pages 11-26.
    8. Falvey, R. & Lloyd, P.J., 1999. "An Economic Analysis of Extraterritoriality," Department of Economics - Working Papers Series 675, The University of Melbourne.
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    Cited by:

    1. Konrad, Kai A., 2024. "Dominance and technology war," European Journal of Political Economy, Elsevier, vol. 81(C).
    2. Konrad, Kai A. & Thum, Marcel, 2023. "Elusive effects of export embargoes for fossil energy resources," Energy Economics, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    international trade; sanctions; extraterritorial sanctions; US-Iran conflict;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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