Economic Diplomacy and the Geography of International Trade

Economic Diplomacy and the Geography of International Trade

Peter A.G. van Bergeijk

The book presents an overview of the general aspects of trade uncertainty, a central element in the analysis of economic diplomacy, illustrating that some instruments, such as sanctions (both positive and negative), increase trade uncertainty, whilst others – multilateral trade policy, for instance – aim to reduce this uncertainty. Commercial policy and bilateral economic diplomacy are explored, and economic sanctions analysed. An extensive review of the literature and empirical investigations of 161 sanctions and the commercial relationships of 37 countries provide topical and empirical perspectives on how international diplomacy may both be a cost and a benefit of the key drivers of productivity growth. Finally, policy conclusions are drawn, and a future research agenda presented.

Chapter 7: The Expected Utility of Positive and Negative Economic Sanctions

Peter A.G. van Bergeijk

Subjects: economics and finance, international economics, political economy, politics and public policy, political economy

Extract

Sometimes sanctions actually work before they are even implemented. In 1921 the League of Nations was asked only to consider punitive economic measures against the Yugoslavian military incursions into Albania. The government of Yugoslavia, however, informed the Conference of Ambassadors within one week after this request that it would withdraw its troops from Albania. More recently, in 1996, Mercosul members succeeded to prevent a coup d’état merely by threatening to dispel Paraguay from this Latin American customs union. These sanctions were not ‘effective’, as the economic sanctions did not go beyond the threat stage. So ex post there was no damage done. The cases, however, were highly successful and efficient as the targets changed their behaviour very quickly and the sender countries did not have to forego the welfare gains of international trade and investment. Admittedly, cases in which sanctions work ex ante are not often documented (Hufbauer et al. 2008, report 9 cases in the period 1946–2000, or about 5%), but more than 40% of the successful sanctions require less than one year and two thirds of the successful sanctions achieve compliance within the relatively short period of two years. Economic theory that wants to deal with rather quick and sometimes even immediate successes should essentially be able to cope with an ex ante analysis of strategic economic threats. This means that our theory has to deal with key features of uncertainty, such as expectations and risk preference. At the start of the 1980s, however, the economic...

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