Matheus Fialho Vieira – February 5, 2020
On January 10, Secretary of State Mike Pompeo and Secretary of the Treasury Steve Mnuchin announced new economic sanctions imposed on Iran in response to its missile strikes against US forces in Iraq. The sanctions target enterprises operating in the manufacturing, textile, construction, and mining sectors. President Trump said that “These punishing sanctions will remain until the Iranian regime changes its behavior.”
The Iranian strikes were in retaliation to the US drone attack that killed Qasseim Soleimani, the powerful Iranian general and leader of the Quds Force. Thankfully, President Trump has chosen not to respond with any military action so as to avoid a full-blown war.
Nevertheless, new sanctions on Iran probably won’t change much. A long history of failed sanctions, which weren’t able to change the opposing regimes, can attest to that.
The Unintended Economic Consequences of Trade Sanctions
Almost ten years ago, Jonathan Catalán wrote an article on this same issue for the Mises Wire. Things haven’t changed since then. Governments continue to enforce trade restrictions on rival nations. Catalán explained that:
Trade sanctions are meant to destabilize regimes, forcing them to compromise with the aggressing government. Sanctions do this by threatening the regime’s survivability, by undermining any support it may have amongst the population.
Indeed, the target of these measures is the population of the nation, not its government. In a weakened economy, people may turn against the regime they live under. In Iran this has not occurred, although the regime has had embargoes placed on it since the Revolution of 1979.
Sanctions weaken these nations’ economies, because they prevent exchanges that would have been made otherwise. Since any exchange is only made because it’s mutually beneficial, both parties end up worse off. We can illustrate this in terms of a trade between two individuals. Suppose Jim works for the textile industry in Iran and wants to buy cotton from Josh, who grows it in New Zealand. With the new embargoes, Josh’s cotton becomes too expensive, and Jim is forced to buy from a less productive national dealer. If Jim can’t cut costs, he must raise prices and his business might even become unprofitable outright.
Josh is also worse off in this scenario. He has lost a client, perhaps a long-time and trustworthy one. Both sides of the transaction lose with a prohibition such as this. Not only do Iranian importers lose their ability to buy cheaper and/or better products from abroad, but foreigners likewise lose their ability to buy Iranian products.
Sanctions destroy the international division of labor, which, as Ludwig von Mises explained, is the foundation of civilization itself. If the division of labor allows for specialization in an economy, the resources tend to shift to those locations where they are more value productive, and sanctions hamper this wealth generation and distribution mechanism.
Of course, the size of the harm is proportionate to the strength and scope of the embargo. In Iran, we have seen various cases of the consequences of disrupting these individuals’ and enterprises’ position on the global market. Catalán continues:
trade sanctions that have been in place since 1979 have made it too difficult for Iranian airlines to modernize their aircraft fleets, or to procure the spare parts necessary to maintain them. The unfortunate result has been an increasing rate of aerial accidents, leading to the injury and death of at least dozens — if not hundreds — of individuals. It could not possibly be the fear that spare parts meant for Iranian civilian airlines may be used to maintain Iranian combat aircraft. It’s doubtful that two very complex and very different machines use the same parts.
In addition to that, the most recent sanctions on financial institutions have caused medicine shortages. Although the trade of humanitarian goods is still allowed, many foreign banks and outside suppliers are breaking off their relations with Iranian partners, which endangers the importation of vital goods and equipment used in the treatment of serious illnesses.
In an article written for the medical journal The Lancet, three doctors working at MAHAK Pediatric Cancer Treatment and Research Center in Tehran noted that the establishment of sanctions have caused a “scarcity of drugs due to the reluctance of pharmaceutical companies to deal with Iran.” They also warned that
Within the next 3 months, shortages of vincristine and ifosfamide will prevent proper treatments of CNS tumours, lymphomas, Wilms’ tumour, sarcomas, and retinoblastoma. An unsustainable situation will rapidly develop because essential medicines for paediatric cancer treatments in low-income and middle-income countries listed by WHO are the 30 most prescribed drugs in our hospital. The purchase of any medical equipment…will become all but impossible and further jeopardise treatment conditions. During the previous embargo, radiation treatments in our hospital were interrupted for 2 months until spare parts could be imported.
The Failed History of Trade Sanctions
But what if, from the point of view of the US government, the trade sanctions meet their objectives? Couldn’t these undesired consequences just be the opportunity cost of a peaceful and prosperous Iran of the future, when the current regime is dethroned and a democratic regime instituted for the rest of time?
Historically, this hasn’t been the case at all. Iran is itself a great example. The first embargo, as we have discussed, was issued in 1979, when a terrorist group held hostages at the US embassy in Tehran. This embargo froze Iranian assets in American banks and developed into a full trade sanction. It lasted until 1981, when a deal was signed with the Iranian government.
But sanctions were again instituted in 1987, in 1995, in 2011, and in the last couple of years as well. The United Nations also imposed sanctions in 2006, 2007, 2008, 2010, 2011, 2012, and 2015. Iran hasn’t transitioned to a democratic regime since 1979, and it doesn’t seem to be happening any time soon. The government’s nuclear program isn’t being tossed out, either.
Another example of failed sanctions is Cuba. It has been the target of embargoes since 1960 as a response to the expropriations of Americans citizens and companies by the Cuban revolutionary government. According to Nelson Rodríguez Chartrand:
In 1992, the embargo turned into a law and, in 1996, the United States Congress passed the so-called Helms-Burton Act, which prohibited American citizens from doing business within the Island or with the Cuban government — although the justification for the embargo has been, for long, the lack of civil liberties and the human rights violations by the Cuban regime.
Besides having to endure the regime’s imposed collectivist economy, the population has to live with an additional strangulation of wealth caused by sanctions. Of course, the main cause of Cuba’s poverty is socialism, which makes capital accumulation and a rational resource allocation impossible. But the embargoes do help keep Cubans poorer. Yet, there’s no reason to believe the Cuban population is any closer to overthrowing the Cuban state than it was in 1960. And if the population does rise in revolt, there’s no reason to assume the uprising is due to American sanctions.
Free Markets and Free People
If the history of sanctions is a thoroughly failed one, then what could be a way out for Iran? We have to exchange war, restrictions, and prohibitions for peace, trade, and information.
If history has taught us a lesson, it certainly is that interventionism doesn’t work. In the economic arena it causes impoverishment, and on battlegrounds it causes death, suffering, and unnecessary harm. Now is the time to end impoverishing and ineffective economic sanctions in all their forms.
Image source: Getty