Economic sanctions and domestic diversion

The existing sanctions-impact literature has documented diversion effects favouring third countries for both merchandise trade and investment, but it has not considered sanctions diverting trade towards the domestic economy in sender and target countries. We contribute by using the Global Sanctions Database (Felbermayr et al. 2020a,b) in a structural gravity framework to provide evidence for domestic trade diversion. Our results show that the adverse effects of different sanction-types on senders’ bilateral manufacturing imports get accentuated (and any positive effects get neutralized) when the underlying data include internal trade flows, providing evidence for diversion towards domestic producers in sanctioning countries. A similar finding is observed on the bilateral export side suggesting that sanctions also divert trade towards domestic consumption. Moreover, we find sanctions to reduce senders’ cross-border imports when domestic suppliers in the sanctioning country are more competitive, thereby supporting the political economy of sanctions-imposition.