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Don’t expect too much from sanctions

Summary:
Countries often rely on economic sanctions as a lever to change policy in foreign countries.  The recent example of Huawei provides a good example of why sanctions are often (not always) ineffective: American tech companies are getting the go-ahead to resume business with Chinese smartphone giant Huawei Technologies Co., but it may be too late: It is now building smartphones without U.S. chips. . . . “When Huawei came out with this high-end phone—and this is its flagship—with no U.S. content, that made a pretty big statement,” said Christopher Rolland, a semiconductor analyst at Susquehanna International Group. He said that in recent meetings, Huawei executives told him that the company was moving away from American parts, but it was still surprising how quickly it

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Countries often rely on economic sanctions as a lever to change policy in foreign countries.  The recent example of Huawei provides a good example of why sanctions are often (not always) ineffective:

American tech companies are getting the go-ahead to resume business with Chinese smartphone giant Huawei Technologies Co., but it may be too late: It is now building smartphones without U.S. chips. . . .

“When Huawei came out with this high-end phone—and this is its flagship—with no U.S. content, that made a pretty big statement,” said Christopher Rolland, a semiconductor analyst at Susquehanna International Group. He said that in recent meetings, Huawei executives told him that the company was moving away from American parts, but it was still surprising how quickly it happened.

In this case there seem to be two issues.  First, sanctions were weakened after US firms complained that they were losing valuable exports opportunities in China.  Second, the ability of firms to substitute away from key inputs is often greater than expected. Indeed this is a point that goes well beyond economic sanctions.  For instance, environmental regulations often prove to be less costly than expected, as firms find other (cleaner) ways of producing goods at a cost that is less than expected.

In my view, sanctions are only justified when there is a need to deter military aggression.  However one can make a reasonable argument for sanctions in the case of severe human rights abuses.  The situation in Hong Kong certainly does not justify sanctions; if there were a case, it would be the far more severe human rights abuses in Xinjiang.  But in that case it would be hard to justify not doing the same regarding India, which is committing severe human rights abuses against millions of Muslim citizens in Assam and Kashmir.  Do we really want to have sanctions against India, China, Russia, Saudi Arabia, North Korea, Syria, Iran and many other countries, comprising half the world’s population?  Or would that do more harm than good?

In general, economic growth is the best way to improve human rights in the long run.  In the short run it doesn’t always work (as we see in India and China) but it’s our best hope for the long run.

Don’t expect too much from sanctions

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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