Back to Sender: Sanctions’ Effects on Bilateral Trade with Third-party Countries

What are the effects of sanctions on trade with third countries in a context of globalization and increasingly interconnected economies? This paper addresses this issue, using the new Global Sanctions Database (GSDB) and a gravity model estimated on a global sample of 191 countries, from 1960 to 2021. First, it emerges that the imposition of sanctions initially favors trade between the sanctioning country and third countries. However, a decrease in exports with third countries (back to sender effect) occurs when the number of countries sanctioned by the sender exceeds a threshold. Second, sanctions disrupt the targeted country’s exports to third countries. However, there is evidence of a non-linear relationship with an increase in exports to third countries as the number of countries imposing sanctions on the target exceeds a threshold (back to equilibrium effect). These effects are made possible on the one hand by the implicit sanctions imposed by consumers and companies in third countries, and on the other by their involvement in evading sanctions. The results suggest that sanctioning countries need to be transparent, credible and honest about their objectives, to win the support of third countries in international organizations, or face significant costs in terms of export losses as the number of sanctioned countries increases. The back to equilibrium effect in the sanctioned country suggests the exploration of alternative avenues such as diplomacy in the resolution of international conflicts to avoid huge economic losses for both sanctioned and sanctioning countries.