Perspectives from Around the World 186

# The latest US tariff sanctions on Russia: A sectoral analysis

Christian LAU
Counsel at Sidley Austin LLP

For Christian LAU's full bio,

Kornel MAHLSTEIN
Senior Economist at Sidley Austin LLP

For Kornel MAHLSTEIN's full bio,

Simon SCHROPP
Managing Economist at Sidley Austin LLP

For Simon SCHROPP's full bio,

The US recently announced a new sanctions package that imposes higher import tariffs on 570 product groups from Russia. This column uses a sector-specific partial equilibrium model to quantify the impact of these tariffs on the Russian and US economies. It finds that the overall choice of target sectors is mixed: some sectors produce large welfare losses to Russia and/or welfare gains to the US. However, other selected sectors result in zero harm to Russia and/or greater harm to the US. These and other insights may provide guidance for the design of future tariff sanctions by G7 members and other allies.

Editors' note: This column is part of the Vox debate on the economic consequences of war.

At the last G7 Summit in Germany G7 leaders agreed to “coordinate” and “align” actions on imposing extra import tariffs on certain imports from Russia. The US subsequently announced plans to significantly increase tariff rates on hundreds of Russian products (Note 1). Effective as of 27 July 2022, Presidential Proclamation 10420 raised applicable tariffs on 570 product groups imported from Russia to 35% ad valorem. The Biden Administration explained the objectivespursued by these new tariff increases as imposing economic harm on Russia “while minimizing costs to US consumers”.

In a recent paper (Latipov et al. 2022), we set out to quantify the economic effects of these sanctions on the Russian economy and on the US economy itself. Using a sector-by-sector partial-equilibrium (PE) framework, we assess the new US sanctions list line-item by line-item and evaluate the intended and unintended consequences of including certain sectors in the overall sanctions package (Note 2). The model is based on a standard Armington-type framework of international trade and is implemented using 2021 trade data as well as elasticity estimates compiled by Soderbery (2018).

The academic literature on the economic effects of Russia sanctions is growing on a daily basis (e.g. de Jong et al. 2022, Hoang et al. 2022, or Schropp and Tsigas 2022 as very recent examples). While various contributions have applied partial equilibrium frameworks to evaluate (actual or potential) sanctions on Russia, and the sanction instrument of import tariffs in particular (Gros 2022a, Gros 2022b, Larch et al. 2022, Sturm and Menzel 2022, Sturm 2022a, Sturm 2022b), we are not aware of any paper that disaggregates specific sanction packages sector-by-sector and quantifies their economic effects on a sectoral level. Given this gap in the literature as well as the timeliness of the issue we believe that this paper can make a useful contribution to the policy discussion surrounding Russia sanctions.

## Results

Our model distinguishes 393 individual sectors that are included in the US’s new tariff sanctions and is able to generate estimates for 280 individual sectors (Note 3).

Table 1 summarises our estimates for the aggregate economic effects generated by new US tariff increases on hundreds of product groups. In total, the new tariffs affect trade worth $2.68 billion per year, which represents roughly 8.7% of all 2021 US imports from Russia. We estimate that these tariffs reduce trade in affected product groups by 62% (compared to pre-sanction imports in 2021). Moreover, they cause annual terms-of-trade losses (Note 4) of$98 million and welfare losses (Note 5) to Russia of $185 million; at the same time, they cost US consumers$98 million.

The aggregate values in Table 1 mask important dynamics that occur at the sectoral level. Effects in one sector may overwhelm, or even net out, those in other sectors. That is one of the reasons why a sector-by-sector assessment can add value to of the analysis of economic effects. Below, we make a couple of observations that our sectoral analysis generates (Note 6).

### Observation 1: Target sectors with positive welfare effects for the US

The sanction package selected by the US includes numerous sectors for which tariff increases result in welfare gains to the US economy (Note 7).

Table 2 lists all product groups for which new US tariff increases result in absolute welfare gains exceeding $250,000 (Note 8). For these sectors we estimate welfare gains to the US economy amounting to$26 million and Russian welfare losses of roughly $70 million. Next, Table 3 contains all product groups that generate particularly high relative welfare gains (i.e. high welfare gains as a percentage of pre-sanction trade flows) to the US economy. Overall, sectors with high relative welfare gains affect$113 million in imports, generate $13 million in economic gains to the US, and cause$21 million in welfare losses to Russia.

### Observation 2: Target sectors with particularly negative welfare effects on Russia

The US sanction package further covers many product groups whose inclusion causes particularly large welfare losses to Russia.

Table 4 lists all product groups for which new US tariff increases cause absolute welfare losses for Russia in excess of $1 million. These sectors inflict a loss of$170 million to the Russian economy. However, at the same time, new tariffs on these products cost the US economy $93 million (Note 9). Table 5 contains all product groups that cause high relative welfare losses to the Russian economy. While many of the product groups listed in Table 5 generally concern small import volumes, producer surplus losses of magnitudes exceeding 20% will certainly hurt any affected Russian exporter (Note 10). ### Observation 3: Target sectors for which imports from Russia are neither economically significant for the US economy, nor for the Russian economy The US adopted a ‘long-tail approach’: Rather than just going after the big and economically important import sectors, the US has targeted hundreds of product groups for which imports from Russia may be less significant to the US economy, but that collectively cause substantial additional harm to the Russian economy. Indeed, of the 393 sectors that our model can distinguish, 291 feature imports of less than$500,000 from Russia into the US. In relative terms, for 352 out of the 393 product groups, Russian imports account for less than 3% of worldwide US imports.

While there certainly are valid reasons for targeting sectors for which Russia is a minor import source (Note 11), there is one subgroup for which inclusion is not immediately obvious: those product groups for which imports from Russia are insignificant to the US economy and Russian exports to the US are insignificant for the Russian economy (Note 12). Over half of the sectors that our model can distinguish (226 out of 393 product groups) fall into this category. US tariff increases on these 157 sectors inflict only minute economic damage of roughly $4.4 million to Russia, but cause self-harm of$3.9 million to the US economy.

### Observation 4: Target sectors for which the balance of harm to Russia and self-harm to the US is unfavourable

Our analysis shows that there are multiple product groups for which new US tariff increases generate US welfare losses that exceed those inflicted on Russia.

## Concluding remarks

Our sectoral analysis shows that the US’s choice of target sectors produces mixed results. On the one hand, we identified features of the US sanctions package that contribute to the objectives pursued:

The US sanction package covers dozens of product groups whose inclusion causes particularly large welfare losses to Russia. These target sectors together affect more than $2 billion of US imports and inflict upwards of$170 million in harm to the Russian economy.

The US sanction package includes numerous sectors for which the US tariff increases generate particularly high welfare gains to the US economy. We estimate that the inclusion of these sectors achieves US welfare gains of more than $35 million. Moreover, new tariffs in these sectors also cause economic damage of nearly$90 million to the Russian economy.

On the other hand, we have also identified features of the US sanctions package that raise questions about its effectiveness for certain sectors:

More than half of the product groups targeted by the US involve sectors for which (i) imports from Russia are insignificant to the US economy and (ii) Russian exports to the US are insignificant for the Russian economy. US tariff increases on these sectors inflict only minor economic damage on Russia, while causing nearly equivalent self-harm to the US economy.

For multiple product groups, tariff increases even result in welfare losses to the US economy that exceed those inflicted upon Russia. Notable on this list of sectors is product group ‘semi-finished products of iron or non-alloy steel’, for which US tariff increases cause self-harm in excess of $100 million to the US economy, while inflicting ‘only’$42 million in welfare losses to Russia.

For a considerable number of targeted sectors, US tariff action of any kind causes zero economic harm to Russia, because the US lacks any market power vis-à-vis Russian exporters. Exporters from Russia are thus able to fully pass on higher tariff incidences to US customers.

Considering these mixed results from a purely economic angle we believe there is potential for modification of the current US sanction package so as to capitalise on the strengths detected and to avoid the pitfalls summarised above. Such a makeover could be conducted in close coordination with US allies. In any event, other sanctioning allies, such as the EU, could consider applying analytical models such as Latipov et al. (2022), and design alternative sanction portfolios that are best suited to their respective economies.

Authors’ note: All opinions expressed in this column are the authors’ and reflect neither the views of their employers nor the clients they represent.

This article first appeared on VoxEU on 22 August, 2022. Reproduced with permission.

Footnote(s)
1. ^ These import tariff increases were part of a wider-ranging package of economic sanctions. This package is only the latest in a growing list of economic sanctions that the US has imposed on Russia in response to its aggressive war on Ukraine. For an up-to-date overview of Russia-related sanctions, see, for example, the resources maintained by Sidley Austin LLP.
2. ^ Our assessment is guided purely by economic considerations. We appreciate that the issue of sanction design may equally be driven by political exigencies and opportunities.
3. ^ Our model is operationalised on the sectoral level, either on the four- or six-digit aggregation level of the Harmonized System (HS). The US tariff increases are, however, defined for 570 sectors at the HS 8-digit level. This requires us to aggregate the US target list to the HS 6-digit level. The aggregation reduces the number of distinguishable sectors from 570 to 393 individual product groups. The inevitable reduction in granularity likely makes our model over-inclusive of reported trade flows, because the model may include product groups that are not actually subject to the new slate of US sanctions on the HS 8-digit level, but are swept into a particular product group on the HS 6-digit level. Finally, we lack reliable elasticity estimates for 113 further sectors, and so are able to apply the model (i.e. quantify welfare results) to a total of 280 individual product groups.
4. ^ Whenever the importer has a sufficient degree of market power vis-à-vis an exporter, the exporter must absorb part of the tariff incidence by lowering its prices. Such lowering of export prices (‘pass-through’) improves the terms of trade (i.e. the relative price at which the countries exchange goods and services) of the importing country, while worsening the exporting country’s terms of trade by the same degree. Multiplied with post-sanction import values, Russian terms-of-trade losses quantify the reduced export value of those Russian sales that still occur after the tariff increase has gone into effect. These ‘income effects’ represent a pure net wealth transfer from Russia to the US.
5. ^ Economic harm to Russia is calculated as the sum of terms-of-trade losses and efficiency losses stemming from inefficiently low export volumes and the unfavourable resource reallocation within the Russian economy that ensues.
6. ^ The reader interested in further details is referred to Latipov et al. (2022).
7. ^ Welfare gains to the US economy emerge in those sectors in which (i) the US enjoys market power vis-à-vis Russia, and (ii) pre-sanction most-favoured nation (MFN) tariffs that were set at inefficiently low levels as far as Russian imports are concerned. Tariff increases are then economically beneficial, because the US can shift much of the economic costs of tariff increases on Russian exporters via terms-of-trade effects.
8. ^ This and other thresholds introduced below are somewhat arbitrary. Their selection is mainly driven by our intention to keep the number of rows in the tables manageable.
9. ^ Note that this list contains some product groups whose inclusion may be seen as problematic (see Observations 3-5, below).
10. ^ If affected exporters happen to have political clout in Russia, US sanctions in these sectors may be effective, even if trade volumes are relatively minor.
11. ^ The main motivation for including hundreds of product groups that are economically insignificant to the US most likely is that, while Russia’s share in US imports is negligible, the US may still be an important destination for Russian exports. Indeed, this is the case for at least 40 sectors (if we define as ‘insignificant’ Russian shares in all US imports of smaller than 3%, and as ‘important’ US shares in total Russian exports of larger than 20%).
12. ^ We again define as ‘economically insignificant’ shares of less than 3% of total imports and exports, respectively.
13. ^ Notable on this list is product group HS 720712 (‘Semi-finished products of iron or non-alloy steel’), for which tariff increases to 35% ad valorem by the US will entail self-harm in excess of $100 million, while causing ‘only’$42 million in welfare losses to Russia.
14. ^ In the cases mentioned, the US faces elastic (horizontal) Russian export supply curves. A horizontal supply curve in implies that the US is a ‘small’ import market with no market power in that sector; Russian exporters are able to fully pass on the US tariff increase to US consumers (see column 2 of Table 7) or to export their goods elsewhere (see ‘100%’ entries in column 3, signifying completely interrupted trade flows). At any rate, Russian exporters experience no efficiency losses.
Reference(s)

September 8, 2022

## Article(s) by this author

• ### The latest US tariff sanctions on Russia: A sectoral analysis

September 8, 2022［Perspectives from Around the World］