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.
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.
Column 10 of Table 6 ranks sectors for which new tariff sanctions cause more self-harm to the US than they inflict harm to Russia. These sectors inflict a total of $46 million to the Russian economy, but also cause welfare losses to the US worth $116 million (resulting in a negative difference of $70 million in the US’s disfavour) (Note 13).
Observation 5: Target sectors with zero or negligible harm to Russia
As a special case of the previous observation, we note that there is a considerable number of targeted product groups for which US tariff action causes zero, or negligible, economic harm to Russia (Table 7). In the overwhelming majority of cases, the US simply has no importer power vis-à-vis Russian exporters. Russian exporters can pass (close to) 100% of US tariff increases on to US consumers, which causes economic pain uniquely in the US, but none in Russia (Note 14). US welfare losses in these particular sectors can easily exceed $1 million and reach almost 20% of total pre-sanction import values.
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.