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Sunday, September 23, 2012

Economic Sanctions: Predicting Utility

Copyright © 2000 by Ralph F. Couey

ECONOMIC SANCTIONS:

PREDICTING
UTILITY

The Challenge of Effective Foreign Policy
in a Monopolar World


By Ralph F. Couey

ABSTRACT
Can game theory be married with real-world cases to provide a predictive framework for economic sanctions? In this study, the theoretical work of Jonathan Eaton and Maxim Engers is applied to selected case studies from the data base of Gary Hufbauer, Jeffrey Schott, and Kimberly Ann Elliott. This application will demonstrate the utility of game theory in the real world and also provide the ability to predict the appropriateness and effectiveness of economic sanctions.

INTRODUCTION
Throughout human history governments have sought at various times to influence, or coerce, the policy directions of friends and foes alike. In cases where this diplomatic interaction has become hostile, states have resorted to force to settle disputes. In other cases, governments have used a superior economic position as a basis for imposing economic sanctions against other nations as an alternative to open warfare. With the improvements in the technology of warfare the ability of states to inflict increasing amounts of damage upon each other motivated governments to seek less destructive methods to settle disputes.


For most of the 20th century economic sanctions have been used as a leverage tool in disputes. Success in those cases has been mixed, at best. In recent years, as relative prosperity has become more widespread, and due to the fundamental shift from bipolar to monopolar global politics, the effectiveness of economic sanctions has declined. Despite their less than successful track record governments, particularly the United States and the United Nations, continue to resort to this ineffective tool in attempting to solve interstate disputes. To most governments, the resort to armed conflict is an anathema. Novelist John Ball wrote, “Nobody wants war; it’s an unmitigated horror. The only reason a sane nation involves itself in one is because the alternative is even less acceptable.” (Ball, 206) The imposition of economic sanctions has become the alternative of choice in international politics, one that requires a careful examination of costs versus benefits.

Hypothesis: Governments should weigh the cost of imposing economic sanctions against the gain realized by coercing a policy change in a target government.

In 1985, and again in 1995, Gary Hufbauer, Jeffrey Schott, and Kimberly Ann Elliott of the Institute of International Economics gathered what was the first large-scale study of economic sanctions. Initially looking at 116 cases, later expanding to 170, Hufbauer, Schott, and Elliott extensively researched incidences of the imposition of economic sanctions dating as far back as 432 A.D. This database has become the source of choice by which others have examined the problems associated with coercive diplomacy. However, despite the dozens of studies, there has not yet been formulated a proven method to be able to predict in advance the likely success or failure of waging trade warfare.
Jonathan Eaton and Maxim Engers proposed some analytic methods by which one might be able to predict outcomes, but they did not carry their proposal forward from the theoretical to the real. This study proposes to marry the theoretical analytics of Eaton and Engers with the real world of Hufbauer, Schott, and Elliott to settle the question of whether it is possible to accurately predict in advance of a particular situation the probable success or failure of economic sanctions.

REVIEW OF LITERATURE

The question of what precisely constitutes “success” has occupied the time of several political scientists, especially those who have taken issue with the wide interpretation employed by Hufbauer, et al. In their original study, Hufbauer, et al reported success in 40 of 115 cases, or about 34%. Although not an overwhelming number, it was nevertheless significant enough to influence an entire decade of foreign policy. The Pape study (1997) however, demonstrated that of the successes identified by Hufbauer, et al, only five were successful. Of the others, eighteen were settled by the direct or indirect use of force, in eight cases the target nation refused to change policy, and six cases, according to Pape, do not even qualify as economic sanctions. Pape concludes that the Hufbauer, et al study was fundamentally flawed.

Kimberly Ann Elliot, one of the co-authors of the Hufbauer, et al study, stoutly defends the conclusions criticized by Robert Pape (Elliot, K.A. 1997). She notes that Pape’s interpretations were far too narrow. She writes “...policy analysts - and certainly policymakers - who are looking for ways to strengthen sanctions and make them more effective are generally far more nuanced in their conclusions and more limited in their expectations of what sanctions can achieve.”(Elliott, 52) Although Pape cites their work as the "key evidence" supporting the perceived optimism that sanctions can achieve major foreign policy goals, Elliot maintains that Pape never cites Hufbauer’s, et al own interpretation of the evidence. Hufbauer, et al concluded that "although it is not true that sanctions 'never work,' they are of limited utility in achieving foreign policy goals that depend on compelling the target country to take actions it stoutly resists . . .. The success rate importantly depends on the type of policy or governmental change sought.” (Hufbauer, et al 216) They also found that the effectiveness of sanctions had declined sharply over time, with less than one in four sanctions having any success at all in the 1970s and 1980s and even fewer when the United States acted unilaterally.

Nevertheless, Elliot states the flip side of declining utility, that economic sanctions were a relatively effective tool of U.S. foreign policy in the early post-World War II era. Even with U.S. leverage reduced by a growing global economy and declining political hegemony, just over half of the episodes in which the United States took a leading role from 1945 to 1970 resulted in at least partial success.

Elliot also takes issue with Pape’s assertion that five successes are far too few to be optimistic about sanctions ever being effective. She complains that Pape defined sanctions so narrowly and set the bar for success so high that, indeed, few cases reach the threshold. Pape excludes cases where economic pressure is intended to complement military force, and he attributes policy success to economic sanctions only if it occurred in the absence of accompanying policies, such as military threats or covert action.

Elliot concludes that the greatest barrier to making economic sanctions an effective foreign policy tool is not inherent in modern political or economic systems; it derives from the lack of political will on the part of key leaders around the world.

Dashti-Gordon, Davis, and Radcliffe (1997) hypothesized that the probability of success depends on the cost to the target nation, extent of trade linkages, the stability of the target, the amount of time sanctions are in force, and whether financial sanctions are utilized. They also address Hufbauer, et al interpretation of success by relying only on the policy result to determine success. Dashti-Gordon et al conclude that the best way to assess the effect of sanctions is to understand the motive of the sender.

Drury’s analysis (1998) concludes that Hufbauer, et al overstated the importance of their variables and therefore questions are raised as to the accuracy of their recommendations. In fact, only four of the original findings are supported by Drury’s analysis. Therefore, he declares a necessity to carefully re-examine the Hufbauer et al study before actions are taken based on their conclusions. He suggests that future studies focus on reasons and conditions under which economic sanctions are applied.

Morgan and Schwebach (Morgan, et al 1997) propose a “sanction effectiveness theory” based on a spatial model of bargaining in international crises and then use the theory to develop a number of hypotheses that suggest when the use of economic sanctions should provide favorable policy outcomes. The model suggests that while sanctions will not work in many cases, they can have a slight effect if the costs of the sanctions are high enough relative to the values at stake.

Based on the spatial analysis, Morgan and Schwebach conclude that the effect of economic sanctions on dispute outcomes is negligible. Also, a lower proportion of cases end in compromise, which may indicate a use of economic sanctions as establishing points of negotiations rather than a demonstration of resolve. Sanctions are not a universal antidote to international disputes. They should be applied sparingly and they should be considered in light of the cost to the politically powerful in the target countries.

In Hendrickson (1994), the definition of acts usually identified with sanctions range from the withdrawal of military aid to steps that involve the active destabilization of the target government. Acts conventionally identified with "economic sanctions," in other words, occur on both sides of the concepts of international law. Rediscovering the separation between those distinctions is an important purpose of this essay. Perhaps the most striking feature of what Hendrickson calls the “democratist crusade” is its illegality under the traditional standards of international law, which forbids intervention in the internal affairs of states. Hendrickson lists the following supporting points:
  • First, the fact that these contradictory norms appear side by side in international legal documents.
  • Second, nowhere in the charters and declarations that ostensibly speak for all people are authorization given to employ either economic or military coercion to fulfill the rights proclaimed.
  • Third, there is a striking contrast between the purported near universal agreement on these norms and the lack of real consensus among existing nations and regimes. (Hendrickson, 20)
The author finds that the role of American leadership clearly seems to be crucial to the success or failure of sanctions. Normally, the consensus is achieved through American pressure, and it often happens that states swallow their real misgivings over the wisdom of U.S. action so as not to put at risk their relations with this country.

Drezner (1998) discusses how governments continue to implement economic sanctions despite the fact that there is little theoretical understanding of why or what determines success. Drezner develops a simple game-theoretical model of economic coercion to demonstrate that both senders and targets include expectations of future conflict as well as the short-term costs in their choices. Senders who anticipate numerous conflicts are more willing to initiate economic sanctions, even if costly. Senders that anticipate few conflicts will not threaten economic sanctions unless the costs are minimal to them and costly to the target. Target states that anticipate frequent conflict will make fewer concessions then if fewer conflicts were anticipated.

Drezner concludes that both sender and target governments will rationally calculate the respective costs to themselves before deciding to either impose sanctions or concede to them. Also, he suggests further studies to determine the impact of domestic factors and how governments choose their policy options.

Current research, while discussing the possibilities of predictive utility, has not wedded the predictive analytics of game theory with the realities of political interaction. This study will attempt to demonstrate that outcomes can be predicted using game theory, thereby providing sender governments a way to determine in advance the effectiveness of coercive diplomacy, and target governments the benefits or follies of balking.

METHODOLOGY

Hufbauer, et al describe incidences of economic sanctions as involving two parties:

“Sender:” The government applying the sanctions
“Target:” The government the Sender is attempting to coerce.
Occasionally, there are also other “players” such as allies of either party, or both, or organizations such as the United Nations, perhaps acting as mediators. However, to keep the ideas as clear and uncluttered as possible, the focus here will be solely on the two primary participants.
This study will utilize three situational concepts of Eaton and Engers:

I Imposing Hegemony
A sender seeking dominance over a number of potential targets, reasoning that successful application of sanctions with one target might convince others that resistance is futile.

II Stubborn Targets
Governments that assess that the costs of compliance are higher than the
costs of resistance. This forces the Sender’s hand in favor of punishment of the Target. This also requires the Sender to continually reassess the cost of continuing the actions in the face of the Targets’ balking.

III Pitbulls and Paper Tigers
Some governments repeatedly threaten sanctions but rarely follow through, or if they do, retract them when the Target shows resistance. This demonstrates to other targets that it is beneficial to stand up to the Sender, knowing retraction will likely follow. Other Senders are far more belligerent, following through on threatened sanctions and refusing to negotiate anything but total compliance.
Eaton and Engers provide a set of theoretical models forecasting each situation, which, even though not operationalized, are a solid framework for predictive analysis.

Eaton and Engers, for the purposes of these analytics, determine that the maximum cost to either sender or target is a value of 1. From that we construct this simple matrix:

Table 1
SENDER COST TARGET COST
Target Complies 0 1
Target Balks 1 0

For the sender, we identify the cost as Ps. For the target, Pt. Hufbauer, et al quantify the sender’s cost on a scale of 1-4, which we will alter to 0, .25, .50, .75, and 1.00 to keep the value synonymous with the maximum gain or loss of 1. The other element that requires definition is the discount factor, d. For that, we turn to Fudenberg and Tirole (p. 111) who refer to this as the “average discounted payoff.” This is interpreted as the percent of demands actually achieved through economic sanctions. An analysis of all 115 cases in the Hufbauer, et al database, determines that targets, which, for ease of computation will be rounded to 85%, met 84.37% of demands. In condition 1, “Imposing Hegemony,” for the sender to make punishment of the target worthwhile, sender’s cost must be less than the value in the following equation:

Ps <>
The sender controls the level of punishment of both the sender and the target Inserting the values, we find: .85 1-.85 = .56 Thus, if the sender’s punishment is greater than .56, than the imposition of sanctions will not be worthwhile since cost will be greater than possible gain. For condition 2, “Stubborn Targets,” a new variable is introduced, q. Eaton and Engers identify this value as “stubbornness” (Eaton and Engers, 411). For the purposes of this investigation, q will be valued as the amount of time in years the target resists, or balks, against the sanctions. Thus the expected returns must be higher (negative values and positive values treated equally):
(1-q) - qPs
For the sanctions to be worthwhile to the sender they must satisfy the stronger condition:
Ps < (1-q)ds 1- (1-q)ds

Under condition 3, “Pitbulls and Paper Tigers,” the target would accede after seeing one instance of punishment:
pPt > 1
For the target government to make the decision to balk, it must assess the resolve of the sender, here identified by the variable p. If the assumptions is made that the sender might threaten sanctions and not impose them, or if imposed sanctions will be either ameliorated to some degree or completely withdrawn if challenged, the target assumes that the sender is a Paper Tiger. If, on the other hand, the target perceives the sender as fully resolved to carry the coercive policy to the point of imposing sanctions and keeping them in place until the target concedes, the sender is a Pit Bull. The key to this perception is the sender’s immediate past history. The question posed is how often this government is challenged and what were the results? The value l refers to the type of sender based on it’s last interaction. Note here that Eaton and Engers acknowledge that there is often a difference between one’s perception and the situational reality. For both p and l the values will be 1.0 for a Pit Bull and 0.5 for a Paper Tiger. The amount of time between the imposition of punishment and the next instance when the Target feels balking is worthwhile is termed the “cycle of compliance” and is identified by the superscript t. (Eaton and Engers, 411).


The target then assesses the sender:

p = 1 + (2l - 1)t
2

From this basis, the target can now assess the risks of resistance before serious damage is done to its economy.
Data from following selected case studies in the Hufbauer, et al database will be operationalized and applied to the calculations. In this way, the outcome of the computations will be compared with the known historical results and the predictability will be proved.

REVIEW OF CASE STUDIES

To provide the most simplified inputs to the Eaton and Engers computations, six case studies from the Hufbauer, et al database have been selected. Three of them received a success score of 16, indicating significant success; the other three received scores of 1, indicating outright failure. Selecting cases from the extreme ends of the database spectrum should provide the Eaton and Engers framework ample opportunity to successfully “predict” the outcome that is already historically known.

Case 58-1
Union of Soviet Socialist Republics v. Finland

In April 1948, the Soviet Union and Finland concluded a Treaty of Friendship, Cooperation, and Mutual Assistance. Under the terms of this agreement, Finland was obligated to maintain friendly relations with the Soviet Union. Accordingly, Finnish President J. K. Paasikivi announced that Finland would “do nothing in conflict with the interests of the Soviet Union.” Finland therefore declined aid from the Marshall Plan.
In 1958, however, Finland moved to expand trade with Western Europe, causing a significant drop in Soviet imports. The Finnish mark was devalued by 39% and compulsory licensing requirements were removed on imports from the West. Then in July of that year, parliamentary elections led to the formation of a cabinet by a Social Democrat. Criticism in the Soviet press was immediate and harsh. In October, a political cartoon lampooning Nikita Khrushchev in a Finnish newspaper drew an official protest from the Soviet government. The Russians also requested that Finland block publication of the memoirs of an anti-Soviet Finnish Communist. The USSR then recalled their ambassador from Helsinki and delayed the signing of a fishing rights agreement for the Gulf of Finland. Discussions on ruble credit were suspended, as were talks on the lease of the Saimaaa Canal and planning for a power plant in the Soviet Union, which would have served Finland. Scientific, technical and trade meetings were postponed and Finnish imports were suspended. By winter of 1958 unemployment in Finland reached a record 100,000 and unemployment relief became the largest single line item in the Finnish budget.

On December 4, 1958, Social Democrat Prime Minister Fagerholm, now persona non grata with the Soviet Government resigned. President Kekkonen visited Leningrad and assured Khrushchev of Finland’s “good neighborliness” and agreed to purchase an additional 450,000 tons of Soviet petroleum. Trade negotiations, commerce, and normal relations resumed.
In this, the early years of the Cold War the Soviet Union, ever conscious of their borders, perceived that Finland was, through trade, moving into a closer relationship with the West. Anxious to protect what was for them a very necessary buffer state, the Soviets moved with dispatch to coerce Finland into returning to the fold. The effort was successful, even to the point of toppling a government. The relative cost to the Soviet Economy was minor, which bears out Eaton and Engers conclusion that success is “...more likely when the threatened measure costs the sender little relative to the gain from modifying the target’s behavior, while the damage to the target is large relative to his cost of complying with the senders will.” (Eaton and Engers, 409)

This incident would best be addressed by Section I of Eaton and Engers, entitled “Imposing Hegemony.” Eaton and Engers write, “We first must consider a sender seeking dominance over a bevy of potential targets. How she deals with one affects future relations with others.” (Eaton and Engers, 410) Clearly, it was in the best interests of the Soviet Union to demonstrate to other Eastern European states the risks inherent in moving too close in relations with the West.

For this case, Hufbauer, et al, assess that cost at .50, therefore making it less than the previously discussed value of .56, thereby making sanctions worthwhile. Likewise, the target can predict if balking would produce a cost to them greater than 1.0. Dividing the percent of cost to Finland’s GDP by the ratio of Finland’s GDP to that of the Soviet Union, we see:

Pt = 1.1
.58 = 1.89

Since the cost to Finland is 1.89, which is greater than the maximum cost 1.0, Finland must comply with Soviet demands.

Case 40-1
United States
v.
Empire of Japan

The enmity between Japan and the United States can be traced back to the passage of the Anti-Japanese Immigration Act near the turn of the 20th century. However, the seminal events that led directly to war occurred during the period April 1940 through December 7, 1941. Japan, having occupied Manchuria since 1931, in April 1940 bombed rail links between Indochina and China, which were being used by France to move munitions to China. In June, Japan demanded, and received assurances from the government of the Netherlands East Indies of continued shipments of oil. Japan, an island nation, had no oil of their own and was utterly dependent on imports. The U.S. Congress then passed the National Defense Act, giving President Roosevelt authority to control U.S. exports to Japan and Germany.
On the 17th of that month, France surrendered to Germany and, and acceding to Japanese demands, halted all military shipments from Indochina to China. On July 2nd, President Roosevelt licensed exports of various metals and equipment. On the 12th, Britain gave in to Japanese demands and closed overland transport routes from Burma and Hong Kong to China. Between the 18th and 20th of July, the United States, in cooperation with Great Britain, imposed a partial embargo on Japan, fearing a full embargo would precipitate Japanese moves against the East Indies.

In September, Japan asked the Netherlands East Indies to supply 3 million tons of oil annually for five years. The Dutch government stalled, and asked the United States not to embargo oil while the negotiations were in progress. Two weeks later, on the 24th, the Japanese Army moved some units into Indochina. Three days after that, the Tripartite Pact is concluded, linking Japan, Germany, and Italy into the Axis Powers.

In April 1941, the Japanese and the Soviet Union signed a neutrality pact. In June, talks between Japan and the Indies broke down, with Japan receiving less than half of the rubber and tin requested. Three days later, spurred by domestic scarcity, Roosevelt embargoed oil shipments from the U.S. east coast to Japan, while maintaining shipments to Britain. Then on July 26th, Roosevelt froze Japanese assets and limited Japan to pre-war limits on petroleum products. Britain followed by freezing Japanese assets and renouncing trade treaties. On the 28th the Netherlands East Indies limited all exports to Japan and embargoed exports of tin and rubber. Japan responded with a major movement of troops and warships into Indochina.

In August and September 1941, despite repeated Japanese requests, the U.S. refused to recognized Japanese hegemony over East Asia. Prime Minister Konoye was rebuffed twice in attempts to meet personally with Roosevelt. Konoye’s failure to win concessions from the United States and Great Britain led directly to the collapse of his government in October. He was replaced by General Hideki Tojo who then internally set a deadline by which the decision to go to war became irrevocable. Finally, on December 7, 1941, Japanese forces commenced a broad attack in the Pacific from Southeast Asia to Pearl Harbor, beginning World War II.

The initial goal of the United States was to limit Japanese aggression in China. The situation rapidly deteriorated into one in which the Roosevelt administration found itself trying to prevent the outbreak of war throughout the Western Pacific. Once the Japanese government had decided on a policy of aggression, there was apparently no measure the western allies could take that would have deterred that action, short of agreeing to conditions that were little better than surrender. Instead of being the lesson that was intended, the sanctions proved to be a challenge, one that Japan gladly accepted. Hufbauer, et al assessed this incident as a 1, an outright failure.

In reviewing Eaton and Engers, this situation fits the requirements of section II, entitled “Stubborn Targets.” Eaton and Engers note, “Sanctions deter only those targets for whom the punishment’s pain outweighs the benefits of balking.” (Eaton and Engers, 411) It also points out a fundamental weakness in any kind of diplomacy. If your opponent has made a positive decision to go to war, especially a society with a warrior tradition where martial feelings run high, it is unlikely that any external influence will deter that intended action.

The value .75 represents Hufbauer, et al’s assessment of Sender’s Punishment. Thus, for the imposition of economic sanctions to be worthwhile, the sender must calculate the maximum possible return:

(1- 40) - 40 x .75 = .69

Then calculate the maximum possible cost of the sanctions:

.75 < (1- 40).85 = 0.9 1- (1-40).85

Since the cost .9 exceeds the expected return .69, sanctions would not be worthwhile in this case. Likewise, for Japan, the strategy of resistance to sanctions is a good one.
Case 61-1 United States v. Ceylon In January 1961 Socialist Prime Minister Sirivamo Bandaranaike of Ceylon (now Sri Lanka) introduced a bill to create the Ceylon Petroleum Corporation. The new enterprise actually consisted of expropriated assets of United States and British oil companies. The British and American governments filed diplomatic protests, warning that expropriation would deter private investment in Ceylon. Ceylon replied that the USSR would sell oil to them at 25 percent below market price.
From April through June, Ceylon Petroleum Corporation (CPC) expropriated approximately 20 percent of private company service stations and concluded a deal for favorable oil supplies from Soviet Bloc suppliers. In July, U.S. Ambassador Francis Willis warned that unless American oil companies were compensated, aid from Washington might be terminated. Accordingly, on August 1st, President Kennedy signed the Hickenlooper amendment, authored by Bourke Hickenlooper (R-IA), which barred aid to countries that expropriated U.S. property. However, not until January 1963 did the United States warn Ceylon of possible sanctions under Hickenlooper unless compensation talks moved forward.
Finally, in February David Bell, director of the U.S. Agency for International Development suspended aid to Ceylon, which responded by imposing a low ceiling price on imported oil, warning companies that failure to maintain supplies would result in complete nationalization. In January 1964, after the halt in petroleum shipments, Ceylon expropriated the remaining retail outlets. Ironically, CPC continued to purchase products from Esso, CALTEX, and Shell. By April of 1964, the Minister of Trade, Tl Bl Ilangaratne ordered the Ceylonese compensation tribunal to work quickly. The delay by the tribunal had cost Ceylon valuable aid. Then in March 1965, the Socialist Bandaranaike government fell to the conservative United National Party, which had used as its campaign theme a promise to settle the dispute within 24 hours.
The preliminary agreement was reached March 27, and the final agreement on June 23 provided a total of $11.6 million to the three oil companies.
Throughout United States history the interests of the nation’s companies have paralleled, or become the interests of the government. In this case, two of the three companies, Esso and CALTEX were American and the economic pressure brought to bear by the government brought induced a desperate situation for Ceylon, which ensured compliance with the demands.
Hufbauer, et al assessed this case as 16, a significant success. In Eaton and Engers, this situation fits the pattern of part III, “Pit Bulls and Paper Tigers,” with the United States playing a convincing pit bull. This situation takes the stubborn target case one step further. In this case, the observed pattern of the U.S. was as follows:
Table 2
Date of Sanctions Target Government Hufbauer, et al score
7/54 North Vietnam 1
11/56 U.K./ France 12
7/58 Laos 9
9/60 Dominican Republic 16
10/63 Cuba 1
The table has the U.S. imposing sanctions about every two years with mixed results including one outright success, two failures, and two others occupying a middle ground. Clearly, by observing this pattern, Ceylon might have perceived that challenging this particular hegemon might be worthwhile. The last chronological interaction prior to this case was United States v. Cuba, which because of the result, left the U.S. as a paper tiger and therefore vulnerable to balking, at least in the eyes of Ceylon. Another variable, superscript t, refers to the time between successful interactions, which, after analyzing the table, we will assign the number 4, representing the number of years between successful interactions. Inserting values previously discussed, we see:
p = 1 2
With Pt = 375 = 62.5 6
Hence, (.5)62.5 > 1
31.25 > 1

We can see here that the assumption of Paper Tiger status for the United States would be a serious mistake on the part of Ceylon by several orders of magnitude. Now, let us run this calculation again, now assuming a value of 1.0, the value of a Pit Bull:
p = 1

(1.0)62.5>1

62.5 > 1

In both situations Ceylon must comply regardless of the past record of the U.S. The disparity in resources and strength between the two countries is simply too great to overcome.

Case 48-3
Union of Soviet Socialist Republics
v.
United States, United Kingdom, and Republic of France.

Within three years of the end of World War II, serious disputes had arisen between the Soviet Union and her former allies the United States, the United Kingdom, and the Republic of France. The dispute first centered on the occupied territories of the former Nazi Germany, particularly Berlin. Predictably, the imposition of a totalitarian state in the Soviet Zone of Occupation, known as East Berlin, caused a flood of emigration to the West. To slow the movement the Soviet Military Administration in Berlin imposed restrictions on Germans traveling from East Germany to NATO-held areas of Berlin on March 10, 1948. On March 30, the Soviets imposed rail and highway restrictions between those areas. The restrictions were progressively broadened to include freight routes, barge traffic on the Elbe River, and tighter travel restrictions, all in June 1948. Finally, on June 24, the Soviets imposed a complete blockade around Berlin. NATO responded with the famous “Berlin Airlift” which kept vital supplies flowing into the blockaded areas. The West then responded with a blockade it’s own, stopping all traffic and manufactured goods from it’s zones into the Soviet zone. Despite the Soviet efforts, the West German government was created in Bonn in May 1949 and Berlin, despite being geographically isolated from the west, refused to be folded into East Germany. The blockade was lifted by the Soviets on May 12 and the Berlin Airlift was terminated by September 30.
Hufbauer, et al assessed this case as a 1, an outright failure. This situation is best fitted in Eaton and Enger’s Section III, with the Soviets anticipating Paper Tigers in the west.
While the imposition of the original blockade around Berlin was intended to coerce the Allies into abandoning Berlin, the counter blockade inflicted far more cost on the Soviet Union since most of the manufactured goods and machinery in Russia came from the West through Berlin. In this case, roles were gradually reversed. The USSR was initially the sender, but became the target. The Allies, on the other hand, were initially the targets, but became the senders, and the victors.
As before, the first step should be an assessment of the sender’s immediate past. However, this was the Soviet Union’s first foray into sanctions imposition, so the West had little information other than the surety that the Soviet government would be more likely to react strongly to any outside attempts to limit the exercise of it’s policy.

Assuming this resulted in a perception of a pit bull,
pPt > 1
(1.0)0.1 > 1
0.4

(1.0)0.25 > 1
.25 > 1
Since 0.25 is most definitely not greater than 1, the West should see that even if sanctions are imposed by the Soviets, they could be resisted successfully. However, there is another side to the outcome of this case, since the counter-sanctions imposed by the West were far more successful. So by reversing roles, we see:


(1.0)0.4 > 1
0.1

(1.0)4 > 1
4 > 1
So, from the standpoint of the West not only are counter-sanctions advisable, but also can be and were highly successful.

Case 75-1
United States and Dominion of Canada
v
Republic of Korea

The mutual strategy of M.A.D. (Mutually Assured Destruction) waged by the United States and the Soviet Union during the Cold War kept the nightmare of nuclear conflict alive for the entire world. Not only was there a very real fear of a catastrophic showdown between the two primary antagonists, but also the fear that states or groups with far less to lose, and therefore far less to risk, might obtain weapons for their own regional uses. Such was the case in 1974 when the Republic of Korea, commonly known as South Korea, attempted to obtain for itself a nuclear capability. In January 1974, the South Korean government approached France with questions about obtaining a nuclear reprocessing plant. Simultaneously, the Koreans negotiated the purchase of a heavy-water reactor from Canada. “Heavy Water” is a liquid containing lithium in water suspension and was, at that time, essential to the manufacture of weapons-grade materials.

In March 1975, the National Assembly ratified the Nuclear Non-Proliferation Treaty, which the government signed in 1968. However, in May the Korean government closed a deal with Canada on the 600-megawatt heavy water reactor. At about the same time a bill requesting approval of a $315 million loan for the R.O.K. from the U.S. Export-Import Bank was submitted to the U.S. Congress. In June, the South Korean government publicly disclosed its intention to buy the reprocessing plant from France. The United States knew that the possession of even the capability of weapons construction would seriously destabilize the fragile peace between North and South Korea as well as prompt the Soviet Union to provide a similar capability for the North, thereby increasing tensions between the Superpowers in an already volatile region of the world. Knowing this, the United States and Canada pressured South Korea not to go forward with the purchase of the plant by tightening the financing terms of nuclear transactions. The United States in particular threatened to block the purchase of reactors for peaceful purposes.
Then, on January 29, 1976, the U.S. government announced that the South Korean government had decided that the purchase of the reprocessing plant was not in its interests, remarking, “The United States made the strongest possible representation to the Korean and French governments.” (Hufbauer, et al 383) In an interview with the Washington Post on June 12, 1975, President Park Chung Hee stated, “If the United States withdraws their nuclear umbrella, we shall have to develop our own nuclear capacity to defend ourselves.” (Hufbauer, et al 374)
While the lever brought to bear on the Korean government only consisted of words, it was nonetheless effective in diverting the Koreans from embarking on a dangerous and destabilizing course of action. Accordingly, Hufbauer, et al rates this case as a 16, significant success. This situation fits Eaton and Enger’s part I, with the United States successfully imposing itself as the West’s Cold War hegemon.

As before, for the sender, Hufbauer, et al identifies the cost as Ps = .5, which falls within the permissible limit of .56 discussed previously. The U.S. and Canada can proceed with the sanctions, if necessary. For the target,
Pt = 87 = 12.79
6.8
Since this value is far in excess of the maximum allowed value of 1.0, South Korea must comply. In this case, the Korean government apparently read the cards correctly since the situation was resolved before sanctions were actually imposed.

Case 78-5
United States
v
Union of Soviet Socialist Republics.

The United States has always championed the cause of human rights throughout the world despite some less than savory episodes in it’s own history. Throughout the Cold War a frequent target of the U.S.’s complaints was it’s ideological adversary, the Soviet Union.
From spring 1977 through summer 1978 Soviet dissidents Alksandr Ginzburg and Anatoly Shcharansky were arrested and charged with high treason. The United States, through Secretary of State Cyrus Vance, condemned the arrests and trials and responded by canceling a planned visit by a scientific and environmental protection delegation. President Carter denied that either man had been a spy for U.S. Intelligence and promised to “let the Soviets know of our displeasure.” (Hufbauer, et al 487) Ginzburg and Shcharansky were subsequently found guilty and sentenced to exile and several years in prison and labor camps. Shortly after the convictions were handed down the White House canceled the sale of a computer to the Soviet Press Agency Tass and announced that exports of oil technology to the USSR would require validated licenses, thus giving the Department of Commerce a case-by-case review and veto power over the exports. The Soviets responded by purchasing a similar computer from the French. However, on April 27, 1979, Ginzburg and four other dissidents were exchanged in New York for two convicted Soviet spies.

In January 1980, after the Soviet invasion of Afghanistan, the Commerce Department suspended all outstanding validated licenses and new applications for the sale of oil and gas field technology. Finally in February 1986, Shcharansky and three westerners detained for allegedly spying were exchanged in Berlin for three Soviets imprisoned in West Germany. Shcharansky was released separately to avoid the implication that he was a part of the exchange. On January 15, 1987, Commerce Secretary Malcolm Baldridge lifted the license controls “despite our dissatisfaction with Soviet human rights efforts” but that “it is no longer in our national interest” to maintain them unilaterally. (Hufbauer, et al 488) Hufbauer, et al assessed the result of this case as 1, outright failure. Eaton and Enger’s section II, stubborn targets, applies to this case.
We start by valuating q as the amount of time in years the target resists, or balks, against the sanctions, in this case 9. Ps is rated at .5. Thus the expected returns must be higher (negative values and positive values treated equally):

(1-q) - qPs

or,
(1- 9) - 9 x .50 = 12.5

Thus, for the imposition of economic sanctions to be worthwhile,

Ps < (1-q)ds 1- (1-q)ds 12.5 < (1-9).85 1- (1-9).85 12.5 < -.68 .78 12.5 <>
We can see that while the United States might have held the moral high ground, economic sanctions in this case would have been, and the imposition was, a waste of time and effort.
FINDINGS
In each of the six cases, data from the Hufbauer, et al database were operationalized and inserted into the Eaton and Engers equations. Each of the three conditions (Imposing Hegemony, Stubborn Targets, and Pitbulls/Paper Tigers) was tested twice and the results were very successful. In each case, the proposed solutions were proven (see table 3). It has been shown that it is possible to for a target to use a reliable method to successfully predict if economic sanctions would be effective in a given situation, and if a target’s resistance to sanctions could be survivable.
Table 3
Case Condition Must Prove Proof
USSR v. Finland
Imp. Hegemony
Ps <> 1.0 1.89 > 1.0

US v. Japan
Stubborn Target
Ps <>
US v. Ceylon
Pitbull/Paper Tiger
cost and perception of 31.25 > 1.0
sender > 1.0

USSR v. Allies
Pitbull/Paper Tiger
cost and perception of 0.25 > 1.0
sender > 1.0 (sanctions fail)

US/Can. v. ROK
Imp. Hegemony
Ps <> 1.0 12.79 > 1.0

US v. USSR
Stubborn Target
Ps <>
For each side to fully utilize this method it will be necessary to fully and coolly assess the costs to the respective economies absent the inflated rhetoric that so often accompanies these occasions. Failure to do so could embark the subject government on a path to disaster. It should be noted also that these are economic considerations only. Quantifying the political fallout, both domestic and international, is far more difficult. Those assessments are often far more instinctive and highly situational and lie beyond the scope of this project.
CONCLUSION
Game theory, if carefully applied, is relevant to real-world data. It is altogether possible to carefully assess the relative weaknesses and strengths of two economies and be able to judge the appropriateness of economic sanctions in a given situation. Given this information, governments can make informed, calculated decisions whether it is the sender or the target. As we have also seen, governments, which fail to take those dangers fully into account, court disaster with their nations fiscal health. The hypothesis previously stated, that governments should weigh the cost of imposing economic sanctions against the gain realized by coercing a policy change in a target government, has been proven by the data presented. It only remains for the respective governments to insure that when they reach for the weapon of economic sanctions, that there are sufficient economic bullets to complete the job.
SUGGESTIONS FOR FURTHER RESEARCH
The knowledge of game theory applied to this study was admittedly rudimentary. It is suggested that others with more extensive knowledge and experience explore this subject with greater depth.
Even in the best light, economic sanctions are not the magic potion of diplomacy they are reputed to be. Governments need to have a reliable method of judging in advance if sanctions, or some other method might be more appropriate to the situation. The world continues to change and the perpetuation of stability and the ability to control instability in international politics will go a long way towards smoothing the road ahead. Eventually, there will have to be a more effective method of coercive diplomacy. The discovery of that method should be a top priority among specialists in the field of international economics and political science.
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Eaton, Jonathan and Engers, Maxim. “Ineffectiveness of Economic Sanctions.” American Economic Association Papers and Proceedings, May 1999, 89(2)
Elliot, K.A. (1997) “The Sanctions Glass: Half Full or Completely Empty?” (Response to Pape) 23 International Security 50 Summer 1998
Fudenberg, Drew and Tirole, Jean. Game Theory. Cambridge, MA: MIT Press, 1991
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