When bilateral talks fail to resolve disputes between sovereign countries, aggrieved parties may turn to an international judicial body, such as the International Court of Justice in The Hague. Alternatively, treaties or agreements often incorporate provisions for arbitration or mediation of disputes by a pre-designated entity.
Similarly, the World Trade Organization's articles, which underpin the international trading system, outline procedures for member countries to follow when trading partners violate the organisation's rules, particularly the most favoured nation principle. But the WTO rules permit countries to take unilateral actions they deem necessary for national security, even if these measures require breaching agreed-upon tariff ceilings.
When former US President Donald Trump, citing national security concerns, imposed tariffs on steel and aluminium imports, many of the US's trading partners viewed this as a fig leaf for protectionism and filed complaints with the WTO. But US refusal to appoint new judges to the WTO's dispute-settlement body has left members without a functional mechanism to resolve such conflicts.
Goods sanctions are most effective when they are imposed by virtually the entire world. A notable example is the extensive sanctions levied against South Africa in the 1980s, which played a significant role in facilitating the downfall of the apartheid regime. Unless they are nearly universal, however, trade sanctions are often less effective than expected. As Richard Hanania observed in a 2020 Cato Institute analysis, US-imposed trade sanctions "almost always fail to achieve their goals."
One reason for this is that unless there is near-universal global participation, traders can easily redirect sanctioned goods through third-party countries. Iran, for example, has managed to circumvent Western sanctions by constructing a sophisticated oil-smuggling network. Similarly, sanctioned Chinese goods are reportedly still entering the US market as China-based firms reroute their exports through countries like Vietnam and Mexico.
Following Russian President Vladimir Putin's full-scale invasion of Ukraine in February 2022, the US and its allies imposed unprecedented trade and financial sanctions on Russia, including a ban on technology and military exports. They also introduced a $60-per-barrel price cap on Russian oil, designed to cripple Russia's economy while ensuring that Europe could avoid a politically destabilising energy crisis.
These curbs have been largely unsuccessful. While financial sanctions forced oil traders to secure ships with suitable insurance coverage before finalising transactions, the price of Russian oil did not fall below US$60 (2,000 baht) per barrel. By November, it had risen to $84.20 as Russian firms developed methods of circumventing Western restrictions. Meanwhile, more than $1 billion in sanctioned goods have reportedly vanished amid the expansion of the Russian "ghost trade".
Moreover, the Russia sanctions regime has given rise to a number of intermediaries, with countries like India, China, Armenia, Greece, Turkey, the United Arab Emirates, and Singapore effectively becoming "laundromats" for Russian oil and other sanctioned goods.
In response to the mounting evidence of sanctions evasion, the US and its allies have intensified their enforcement efforts. In December, the US Treasury Department imposed "sweeping" sanctions on more than 250 companies and individuals, including Chinese and North Korean entities.
This is not to suggest that the West should not seek non-military methods of exerting pressure on Russia. But the prevalence of sanctions evasion calls into question the effectiveness of the current regime and underscores the need for Western powers to consider the costs and risks to their own economies.
To be sure, Western sanctions have reduced Russia's revenues and dented its GDP, albeit to a lesser extent than many had hoped. But the longer the global financial system is used as a tool of economic warfare, the more governments and businesses in third-party countries will look for alternatives to the dollar, euro, and the Swift international payment system.
While sanctions may be an effective short-term tactic, their impact on the targeted parties tends to wane over time, even as the burden on the countries enforcing them increases.
Should the Russia sanctions regime significantly erode the dollar's prominence in international financial markets, the cost to the US and global economies could far exceed its benefits. ©2024 Project Syndicate
Anne O Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University.