Site icon WallStreetWindow.com

Why Trade Embargoes So Often Fail – Peyton Gouzien

The most recent protests in Cuba against the current regime have once again brought us to a multi-sided debate on “what should be done” about Cuba. The Left claims that we should actually be emulating Cuba, praising it as a paradise with higher literacy rates and higher, life expectancy than Americans as if either is the end of all measuring prosperity, though will also say any downsides the nation has are due to harmful sanctions and embargoes. On the other, we have the American right advocating military and economic intervention into Cuba to “save” the Cuban people from their current regime with the most popular policy recommendations being more economic sanctions and embargoes. Both approaches are fundamentally wrong and are based on a lack of understanding of how embargoes and sanctions work—or I should say, don’t work.

The standard line on sanctions and embargoes from the left, right, and even some libertarians is that these policies restrict the trade of nations by essentially banning the export or import of their goods to their nation and for those more inclined to non-interventionism deprives the nations of necessary goods and starves them till their leaders give in to the demands of the nation imposing them. This assessment seems correct from a baseline theoretical analysis, but the reality shows a failure based on one concept and further demonstrated by empirical results.

The reason these policies fail to work is the same reason a cartel—a collection of companies (or states) agreeing to not compete in a market against each other in order to exercise monopolize power—fails. Cartels rely on the trust of each member to uphold the same policies of non-competition with each other. In the case of embargos and sanctions, in order to have a strong effect, the players would be every other nation in the world has to agree to also maintain these policies, something demonstrated time after time as impossible.

To demonstrate this let’s use Cuba’s biggest supporter in the 20th century, the USSR. During the Cold War, several embargoes and sanctions were placed on the nation by the United States and its allies and while it is obvious the USSR suffered, it was not because of these policies. Despite the intended goal of blocking off trade to the USSR, the nation was able to still import a wide variety of goods. The best example was the grain embargo imposed by the U.S. by President Carter in 1980. Instead of harming the USSR’s food production we actually saw relatively no harms to the nation and actually an increase in grain production and exporting. This was due to the USSR being able to circumvent the embargo by instead engaging in trade with nations like Argentina and Australia.

What the USSR example reveals most is that even close allies to the U.S. are not willing to follow them in embargos, as it would only hurt them. The potential for harm for other potential cartel members is partly why it is very difficult to enforce embargoes and sanctions.  

Cuba today is not an exception to this rule. A close, both in relations and geographically, ally of the United States currently trades and serves as a proxy for trade with the U.S. This would be Canada who has had a trade relationship with the nation since 1975 when the Organization of American States (OAS) lifted its sanctions on the nation. Almost every member of the organization, aside from the United States, engages in trade with Cuba despite the U.S.’s attempts to establish a cartel that would uphold its trade policies of sanctioning and embargo of the nation. The U.S. has in fact acted in a contrary attitude with the passage of Free Trade Agreements such as NAFTA. This again furthers the case that the United States can usually expect to encounter resistance and a lack of cooperation in forcing other nations to go along with embargos and sanctions, as they ask for others to take an economic loss for no economic gain and have the last resort of doubling down which sacrifices important economic and political relationships with our allies.

THIS ARTICLE ORIGINALLY POSTED HERE.

Exit mobile version