Supply Chains, FDI, and MNCs PDF

Supply Chains, Foreign Direct Investment and Multinational Corporations Block II 2024 Dr. Toenshoff 1 Review Questions What is most true about the Smoot-Hawley Tariff Act of 1930? - It was started as a response to low industrial prices - It was a product of Congressional logrolli...

Supply Chains, Foreign Direct Investment and Multinational Corporations Block II 2024 Dr. Toenshoff 1 Review Questions What is most true about the Smoot-Hawley Tariff Act of 1930? - It was started as a response to low industrial prices - It was a product of Congressional logrolling - US tariffs stayed high until the end of World War II - It caused the Great Recession What is NOT a reason why democracies engage in more trade, according to our lectures? - Democracies are more trustworthy partners for trade agreements - Democracies rely less heavily on state-owned companies for government revenue - Democracies are more transparent and have fewer bargaining failures - Workers in developed democracies tend to support and vote for free trade 2 Where Does an iPhone Come from? Source Evera 2016 3 Global Supply Chain Exporters are Importers. Importers are Exporters. Many companies invest and have operations across the world. 4 GAME PLAN How do Supply Chains Affect Economic Interests? Foreign Direct Investment:  Why invest internationally?  FDI’s economic effects: the good and the bad Domestic Politics and FDI  Who attracts FDI?  Democracy/Autocracy  Is there a race to the bottom? International Efforts to Regulate FDI and MNCs 5 Interests, Ideas & Institutions Societal/Elite Elite Interests Interests Interpretation of interests (ideas/ideology) International Domestic Institutions Institutions Interpretation of interests (ideas/ideology) Policy Outcomes Political Interests 6 How do Supply Chains Affect Economic Interests? 7 Supply Chains and Economic Interests Not all import-competing sectors benefit from protectionism Some firms and workers in import-competing sectors are part of Global Supply Chains:  These firms also depend on imports as inputs for production  May receive foreign direct investment (more on that later) that depends on trade openness E.g. Milner and Jamal’s 2019 survey in Tunisia finds that workers in import-competing sectors that are embedded in Global Supply Chains are more supportive of free trade than those not embedded in Global Supply Chains 8  Trump’s Steel Tariff In February 2018 Trump imposed a 25% Tariff on Steel Imports from EU and elsewhere This should have led to record profits in the US steel industry… They should have performed better than traditional stocks. Trump’s Steel Tariff Did they help the industry? They did for a bit. However, when Trump imposed tariffs on other Chinese inputs, things changed. Chinese imports are key intermediate goods in the production of many products that also use steel. Less steel was demanded because the products making steel (like cars) became too expensive. The lesson:  The modern supply chain is complex. Simple tariffs can have complex results.  Maybe our models are too simple for the complex global economy. 10 Foreign Direct Investment and Multinational Companies 11  Two categories of foreign investment Portfolio investment  Investors have claim on some income, but do not manage the investment (less than a controlling percentage)  Investors only interested in the rate of return  Ex: Stocks, Bonds  Highly mobile, can be sold instantaneously  Includes sovereign lending  Lending directly to a country’s government (We’ll explore this in greater detail in a few weeks) Direct investment  Investment by a company that owns and controls facilities that are located in another country  Ex. Shell Oil Refinery in Nigeria  Ex. BMW factory in US  Ex. Foxconn factory in Brazil  Highly immobile, requires a fixed-investment When we talk about Multinational Companies, we are typically talking about direct investment 12 What is an MNC? Multinational Corporation:  A single corporate structure that controls & manages production establishments in at least 2 countries Emerged during the late 19th century  Maybe before (Dutch & British East India Companies) Initially UK companies dominated  1st US MNC in 1867  US overtook UK in 1920s as largest source of FDI  Since 1960s US dominance has diminished  Europe, Japan, and other countries/regions, have gathered steam MNCs are not new but the growth of MNCs is. 13 FDI Flows Across Time (World, Developed, Developing) 14  2 Types of FDI: Horizontal: Same level of production in multiple countries  E.g. Heineken brews beer across the world Vertical:Different parts of the value chain produced in different locations  E.g. Starbucks owns its own coffee farm in Costa Rica 15  Why invest abroad? 1. Locational Advantages = Is it profitable? 2. Market Imperfections = Why not just hire a foreign company? 16  Locational Advantages Large reserve of natural resources (vertical FDI) Enhance efficiency: (vertical FDI)  lower cost of the factors of production  match the factor intensity of a production stage to the factor abundance of particular countries:  Go where you get the most for your money  Design the Honda Accord in capital-abundant Japan, Assemble the car in labor- abundant Mexico Access a large local market (horizontal FDI)  market-oriented investments  “jump over” trade-barriers!  E.g. car factories in Brazil 17  Market imperfections: Horizontal Integration Intangible asset:  How much is the Coca-Cola formula worth? How about the inner workings of iOS? Or the details of management at a firm like VW?  The value is derived from knowledge or from a set of skills/routines possessed by a firm’s workforce  “know-how” It is difficult to sell or license intangible assets Paradox of information:  The value of the information for the purchaser is not known until she has the information… but then she has acquired it without cost The owner of the information is unwilling to share info, the purchaser unwilling to buy Rather than sell the information, the firm can simply set up shop in a new location 18 BMW Production Locations 19  Market imperfections: Vertical integration Specificassets – dedicated to a particular long-term economic relationship Difficult to enforce long-term contracts Oneparty in the long-term relationship can take advantage of the specific nature of the asset to extract a larger share of the value from the transaction  One party has leverage to make concessions of the other in the future and engage in opportunistic behavior Vertical integration eliminates this problem arising from specific assets 20 Example: Oil Producers and Pipelines Oil producers need a pipeline to transport oil from a remote oil field to the coast Time 1 Commission Time 2 Promise Pipeline Honor P O P commitment (5,6) (0,0) (0,0) (12, -1) Payoffs: (Pipeline Firm, Oil Firm) Time 1: Before Pipeline Built Time 2: After Pipeline Built 21 Time Inconsistency in Long-Term Contracts This is called a time-inconsistency problem What you want today is not what you’ll want tomorrow (and others know it!) You need to find a way to lock in your current preferences to solve the problem.  Easier said than done. In production, firms can eliminate this problem by cutting out the middle-man: vertical integration = the oil company buys the pipeline company Firms that rely heavily on specific assets are more likely to integrate vertically. 22 Oil Extraction around the World 23  Where and When do we get MNCs? MNCs are a “predictable” response to the economic environment in which firms operate Locational advantages tell us if MNCS are profitable Imperfections tell us whether a firm will internalize the production Oatley Table 8.4 Market Imperfection Intangible Assets Specific Assets Yes Horz. Integrated MNC Vert. Integrated MNC Market Based Natural resource based Locational Cost based Advantages? No Horz. Integrated Vert. Integrated Domestic Firm Domestic Firm 24 Why Attract FDI? 25 FDI’s Potential Economic Benefits 1. Transfers savings (capital) between states!!!  Aids economic growth 2. Technological and managerial experience  Spillover effects: Advanced technology that can be learned from 3. Integration into global markets  Opportunity to show “worth” to other firms 26 FDI’s Potential Economic Costs 1. Can potentially reduce domestic capital  Sometimes they borrow domestic capital and “crowd out” investment to other firms  (Over)charge affiliates with licensing fees & royalties for technology, “transfer pricing”  Require affiliates to purchase inputs abroad from MNC 2. Can drive local firms out of business  More competitive (better tech and management) than local firms. 3. Technology is often tightly controlled, limiting transfers & integration into global markets 4. MNC objectives might clash with domestic economic objectives  Can undermine industrial policy or other social policy goals. 27  MNCs in the developing world… After independence from colonialism, many states wanted to establish political & economic autonomy from former powers  Through nationalization or expropriation They took control of existing foreign investments and managed the terms of new investments Now, many developing countries are again open to foreign direct investment and actively try to attract it. Why give control back to foreign interests? 28 MNCs in the developing world… The economic benefits are attractive States try to manage FDI and MNCs to their advantage  Prohibited ownership of: utilities, extractive industries and other important industries.  Required some local ownership  Imposed performance requirements Countries varied in how they regulated FDI  Thus, competition to attract FDI was born. 29 10 Minute Break 30 FDI and Domestic Politics 31 A puzzle… Developed states have an abundance of capital, developing countries have a scarcity. Thus, we would theorize that FDI should flow from __________ to __________ countries 32  A puzzle… Developed states have an abundance of capital, developing countries have a scarcity. Thus, we would theorize that FDI flows should flow from Developed to Developing countries Yet, this is not what the data shows. 33  Where does FDI go? Advanced industrial countries!  Both the largest providers and recipients of FDI FDI to developing world is concentrated  Largely, in most populous and wealthy countries (BRICS) FDI has increased to developing world in past 30 years.  Still not as big as theory would predict. 34 A puzzle… 35  Bargaining for FDI The state wants the economic benefits The MNC wants a profit maximizing environment and limited risk State fears: Loss of economic policy control, other negative externalities MNCs fear:  Burdensome regulation  Expropriation of investments  Investments are fixed and difficult to remove (i.e. immobile)  The fixed investment can become a hostage. Obsolescing bargain:  Over time, bargaining power shifts towards the governments (b/c fixed investments grow) These fears (the time inconsistency problem) make attracting FDI difficult for states How can governments tie their hands? 36 Foreign Direct Investment and the Commitment Problem (Again) Time 1 Time 2 G Offer F Invest G Expropriate (T,0) (0,0) (0,0) (1,1) Suppose that T>1 37  Democracy and FDI Some states are better at tying their hands Generally, democracies attract more FDI because the costs of expropriation are greater Expropriation buys them little in terms of $$ to provide to a larger group of supporters  Those $$ buy a lot more support where the individuals needed to remain in power is smaller Plus, FDI has widespread benefits  Leaders will be punished (with poor economic growth) if they deter investment with expropriation. Democracies have more “veto players” that can constraint policy choices 38  Other Types of Risk Beyond expropriation, firms fear that other policies might eat their profits. Policy volatility:  Regulation changes that make conducting business difficult.  Environment, labor laws, tax policy Transfer risk  Restriction on ability to convert currency to move profits out of the country. Exchange rate risk  Unstable exchange rates (led by monetary policy) can also eat into profits. We’ll look at this in a few lectures. Violence risk  Civil conflict, terrorism, etc.  Can make doing business more costly or damage fixed assets. 39  Back to the Puzzle Economics would suggest FDI to flow from capital abundant to capital scarce countries. Instead, we see most flows b/w capital abundant states… Democracy provides a way for states to tie hands and give firms more certainty that they can keep the gains of their investments. Other factors, such as low levels of crime, stable exchange rates, low probability of a coup or violent regime change etc. also make countries more attractive Most countries with such conducive institutions are developed. Hence, the observed relationship. 40 Attracting FDI through a “Race to the Bottom”? 41  Do FDI and Supply Chains Enhance Welfare of Citizens? Does poor regulation attract FDI? Or can FDI it make things better? 42 The “Race to the Bottom” States want to attract FDI and thus offer incentives to firms Firms go wherever taxes are lowest, risk is lowest, and regulation is least burdensome.  Environmental standards, labor practices, kickbacks from governments Developing states are at a disadvantage b/c of their need for FDI and lack of economic diversity Countries that want to attract FDI might lower regulation and taxes 43  The “Climb to the Top” Firms don’t only want lower taxes and regulation. They also want public goods!  Infrastructure, educated workforce (human capital)  These are usually paid for with taxes Democracy (remember?) and public good investment may attract FDI Also, multinational firms can be subject to pressure to improve “Corporate Social Responsibility” FDI then (maybe) pressures governments to grow and incentivizes “better” political regimes and public good investments. 44  What Does the Evidence Say? When studying the impact of competition on labor/environment in developing world, it is not enough to say “look at these poor conditions, there is also FDI/trade” We must compare to a counterfactual to establish causal inference.  What are you comparing to? What do labor/environmental practices look like in the absence of foreign investment and competition? Think about countries cut off from global markets that attract no investment. Does it look like a worker’s paradise to you? What are these workers doing instead? 45 What Does the Evidence Say? There is no clear evidence of a race to the bottom on regulation… States that attract more FDI do not perform worse on labor rights, democracy, or environmental protection. FDI is positively correlated with labor rights & negatively associated with child labor However, in some specific industries there is some evidence for a race to the bottom.  Textiles, extractive industries, and a few others. Getting at an answer is tough as we need to disentangle FDI/trade  Foreign firms might hire local contractors to do their dirty work – e.g. Textile production at Rana Plaza 46 “Race to the Bottom” in Taxes through Transfer Pricing Companies can shift their profits into low-tax jurisdictions through “transfer pricing” without shifting production  For taxes, race to the bottom logic is the most credible https://www.youtube.com/watch?v=66ha_vhSJD0 47 International Regulation of FDI 48 International Regulation of MNCs No Multilateral Rules or Institutions like those that govern trade. Some “legal” norms of behavior but no enforcement mechanism Attempts thus far have been unsuccessful, countries’ interests clash:  Advanced industrialized countries want protections for investors  Developing countries want rights for host countries 49 Bilateral Investment Treaties (BITs) In the absence of global rules, states have turned to bilateral treaties to govern int’l investment BITS govern:  Treatment of foreign investors under the law  Protection of assets and flow of assets  Basically, they make sure foreign firms aren’t exploited by host governments BITS tend to be highly skewed towards the rights of foreign investors (as opposed to host countries) The Netherlands has BITS with over 100 Countries.  Almost all developing states. 50  Investor-State Dispute Settlement (ISDS) Provision included in many trade agreements (such as TPP) and BITS – should sound familiar from previous trade lectures Allows investors to sue countries for “expropriation” and rulings may take precedence over country’s laws  Traditionally expropriation meant the literal seizing of assets  Bot now often much broader, e.g. expropriation of expected profits through new regulations Suit is heard in private court adjudicated by a panel of arbitrators Cost of lawsuits might be crippling for poor countries. Many suggest the system is being abused and infringes on norms of sovereignty, countries have started pulling out/not renewing BITs over it (e.g. India, Indonesia, Ecuador, South Africa…) 51 Tabaco Company Lawsuits https://www.youtube.com/watch?v=6UsHHOCH4q8 6:00 –15:00 52 Progress on taxes: the OECD Minimum Tax 53 Countries Now Implementing the Minimum OECD Tax 54  Take Aways: Supply chains complicate the story about winners and losers of trade There are a number of economic reasons why companies invest abroad There are political obstacles to MNC investment  States and MNCs have different incentives  Time inconsistency problems & credible commitments Democracy and good institutions can help attract FDI Evidence for “Race to the Bottom” or the “Climb to the Top” mixed across types of governance and sectors No coherent international regime regulating FDI, but progress on international tax regime 55 Suggest your Own Quiz Questions 56 Next: Trade & Development Sanctions 57 Trade and Development, Sanctions Block II 2024 Dr. Toenshoff  Review Questions How do global supply chains complicate individual economic interests in trade policy? - Not all workers in export-oriented sectors benefit from free trade - Not all workers in import-oriented sectors benefit from protectionism - Not all consumers benefit from free trade - None of the above What combination of factors is most likely to lead to vertical FDI? - Intangible assets and natural resource-based locational advantages - Intangible assets and desire to access the local market - Specific assets and natural resource-based locational advantages - Specific assets and desire to access the local market 2 Game Plan Development and trade:  Import Substitution Industrialization  ISI In Latin America  Export Oriented Industrialization  EOI in East Asia Sanctions:  What are they?  (When) do they work? Examples of short answer questions in the exam 3 A very brief history of trade and development Up through WWII, developing countries had liberal trade policies (um… colonialism?) By late 1950s, turned protectionist as part of “Import Substitution Industrialization” By mid-1980s/1990s, many developing countries had opened back up to trade 4 Why the Move To and Away From Import Substitution Industrialization? 5  What is ISI? Substituting previously imported manufactured goods with domestically produced goods As opposed to focusing on producing goods that can be exported to international markets (export-oriented industrialization) 6  The Stages of ISI/EOI Everyone starts with EASY ISI: Domestic manufacturing of relatively simple consumer goods (soda, beer, apparel, shoes, furniture) for the home market  Technology and machines easily acquired from abroad  Relies on low-skilled labor Once benefits of easy ISI exhausted, two options: Start exporting easy ISI products to the world (East Asian Model) = Export Oriented Industrialization Secondary ISI: manufacture less simple goods for the home market (e.g. cars) (Latin American Model) 7 Government policies to promote (secondary) ISI Trade barriers Investment in activities the private sector would not produce:  Roads, transportation networks, electricity, telecommunications  Large-scale operations – steel plants, auto plants State-owned Enterprises (& mixed-owned)  Chemical, telecommunications, electricity, railways, metal fabrication Tax policies:  “Taxed” agricultural exports through “Marketing Boards”  Marketing Board – purchased crops from farmers at below-world market prices, then sell them on the world market at world market prices 88 “Neo-Liberal” Criticism of ISI States are bad planners  They can’t foresee which industries will be competitive and which will be successful  State are poor at distributing resources efficiently Gov’t had to cover industry losses  Created budget deficits  Industries weren’t profitable  Funded through borrowing  Increased national debts Persistent trade imbalance (Current Account)  Importing more than exporting  Agriculture was taxed and thus less efficient (less exports)  MFG goods not competitive internationally (more imports) 9 The Yugo - Worst Reviewed Car in US History 10 10  Why ISI? Why implement a policy economists tell us will lead to poor growth? 11 The Economic Ideas Behind ISI: Structuralism Dominant in Development Economics: Industrialization -> Development Prebish-Singer Hypothesis: Free trade does not benefit developing countries  Developing countries’ terms of trade (price of exports vs. price of imports) diminishes over time because demand in primary commodities is less elastic than demand in manufactured goods  Most research disputes this claim, but governments believed it (initially) Belief that industrialization wouldn’t happen by itself, required “Big Push” by governments  Coordination problems  Infant Industry Arguments  Need for government provided infrastructure 12 Interest-Based Explanations for ISI After independence, who were the winners from globalization? Tradepolitics in developing countries dominated by urban-rural cleavage 13 13  Who benefits/loses from ISI? Generally, developing countries are abundantly endowed with land and poorly endowed with capital… Agriculture is the Land-Intensive sector [Capital-Intensive/Land-Intensive]  Export-Oriented SECTOR [Export-Oriented/Import-Competing] Manufacturing is the Capital-Intensive sector [Capital-Intensive/Land-Intensive]  Import-Competing SECTOR [Export-Oriented/Import-Competing] So, land-owners should be pro-free-trade [pro/anti] Owners of capital should be anti-free-trade [pro/anti] 14 14  Who Held Political Power? Pre-WWI :  Land-owners (abundant factors) had political control (through less than democratic means) The depression and WWII: led to price shocks and closed markets  State had to produce their own goods  Land-owners lost income because of tough times  Capital and labor grew as political forces  Because of their new economic importance After WWII:  Capital (and some labor) now had political control and thus imposed protectionist (ISI) measures to maintain their incomes. 15 How did ISI perform? East Asian Model: Export Oriented Industrialization After WWII they adopt “easy”-ISI Late 50s-Early 60s: shift emphasis to exports  Forced manufacturers to worry about international competitiveness  Invested in domestic industries that were profitable in world markets (LA & Africa didn’t)  Path to development: Labor intensive -> capital intensive -> technology and skill intensive Relied on protectionism for their domestic markets BUT allowed selective liberalization to lower costs for “critical inputs” (just like Latin America) Also benefited from a stable macroeconomic environment  Low inflation (helped encourage savings)  Fairly valued exchange rate (helped promote exports)  Conservative fiscal policies (didn’t run deficits that required sovereign borrowing) 17 Why did the Asian “Tigers” reform and not the states of Latin America? One explanation: Interests and Institutions  “losers” from globalization gain power with Great Depression/World Wars worldwide  WWII decimated the political power of existing interest groups in Asia  In Asia, they start from a clean slate  In Latin America, interest groups remain intact  “losers” of globalization remain in power 18 Why didn’t states move away from ISI quicker? Politics:  The primary motivation of leaders is to remain in power  Good politics ≠ good policies Leaders that tried to adopt policies against the interests of their political supporters were removed (or threatened with removal) from office  Your book provides the example of Ghana (p.136) ISI persisted not because it was good policy but because those in political power would lose from liberalization.  Workers grew dependent on the manufacturing industries and subsidies  Farmers (who would benefit) lost power and couldn’t support politicians that would adopt export-oriented approaches.  ISI became entrenched East Asia didn’t have this problem because WWII provided a clean slate 19  How did states move away from ISI? States financed ISI through marketing boards, but also sovereign borrowing Trade imbalances and debts couldn’t last forever. Eventually: Latin American and Sub-Saharan African countries experience debt crises (1980s) – more on that later  creditors stopped financing loans and politicians couldn’t provide the goodies that individuals had grown accustomed to. In danger of losing power, they sought aid from the IMF and World Bank The IMF and World Bank made loans conditional on adopting neo-liberal policies  Known as “the Washington Consensus”  More on IMF, World Bank and their policies in a few weeks! 20 Core Take-Aways Two divergent policy paths: 1. Import Substitution Industrialization (ISI) 2. Export Oriented Industrialization (EOI) ISI and EOI adoption are a product of domestic interests/institutions, economic ideas and global forces.  Great Depression, WWII  IMF intervention in 1980s/1990s. Good politics ≠ good policies  Leaders (eventually) knew ISI wasn’t a strong path to growth but couldn’t adopt reforms without losing office 21 10 Minute Break Economic Sanctions 23 Economic Coercion Refers to the use of a state’s economic power, rather than military power, as a tool of foreign policy Goal: force another state to change policies or behavior 24  FIVE forms of Economic Sanctions: 1. Trade Sanctions (most common) Further distinction:  Export sanctions OR import sanctions Unilateral – One state 2. Aid (more on this in a later lecture) imposes sanctions  positive OR negative 3. Finance Multilateral – Many states  Lending and investment restrictions impose sanctions – the more  positive OR negative the better as there are few 4. Currency (Monetary) alternative markets.  Destabilize the value of country’s currency 5. Asset Targeting  Seizure of a country’s (or individual’s) assets Kirshner (1997) Micro-Foundations of Economic Sanctions 25 Western Sanctions Against Russia: https://www.youtube.com/watch?v=2tasyz_Q2eA Russian GDP 26 Sanctions usually require (inter)dependence Existing ties or dependence on another country is (often) necessary for sanctions to be useful. The US & EU give aid to many countries and have large consumer markets that are a magnet for imports. Many countries are dependent on their aid and market. 27  Domestic Economic Cost With interdependence comes mutual costs. Sanctions hurt the target state but also hurt the sending state Lost trade & investment These winners & losers are sometimes politically important constituents. Sanctions can be costly signals if they impose a significant cost on the sender.  The more it hurts the more resolved the sender is.  i.e. the more serious you know the sender is. 28 Do Sanctions Work? 29 No? Many in the policy community believe sanctions are ineffective  Are they right or do they have bad quantitative reasoning skills? Haubauer, Schott & Elliot (1990, 2009) Economic Sanctions Reconsidered  Collected data on each imposition of sanctions and stated goals  Found that 34% of sanctions have been effective at achieving goals Pape (1997) Why Economic Sanctions do not Work  But wait. Most economic sanctions compliment military threats/actions  When we consider only economic sanctions, only 4% are effective 30 There is a problem in this research design… Can you spot it? Think strategically about the process of using sanctions to get what you want. What would you do first before imposing sanctions? When are we most likely to see sanctions imposed? 31 To Sanction or not to Sanction… 32  Imposition is the failure of a threat Drezner (2003), Lacy & Niou (2004): We have a selection bias problem in observing only imposition effectiveness If sanctions get states to change behavior, simply the threat of a sanction should do so. States should be capable of determining, before imposition, if the costs of sanctions > the cost of policy change. Successful sanction events should end at the threat stage. 33  Why do we see impositions then? Miscalculation by the target  Target thought costs of sanctions for target < the cost of policy change.  Imposed sanctions can eventually work if the cost > cost of policy change  Hovi et al (2007) ”When do Imposed Economic Sanctions Work” World Politics Miscalculation by sender:  Sender thought : costs of sanctions for target > the cost of policy change. 34  Why do we see impositions then? Resolute target Sender has alternative goals – Baldwin (1985) Economic Statecraft: There is no reason that policy change be the only, or most important, goal or reason to impose sanctions  “making an example” (a wider audience)  Demonstrate meaningful threat  Appease domestic audience  Punishment  Deprivation of important military equipment 35  The Costs of Sanctions (For Target State) The costs of sanction often fall on average citizens.  This is often intentional as senders hope the people will overthrow or put pressure on the regime.  UN Sanctions on Iraq 1990s  Food prices increase 25 times over in 5 years (Hoskins 1997)  100k - 227k deaths (many young children) 1991- 1998 (Garfield 1999) Elites can benefit from sanctions.  They have a monopoly on essential products and can control black markets  Corruption in UN Food for Oil Program (Iraq) 36  Comprehensive vs. Targeted Sanctions Comprehensive sanctions target an entire economy – and thus impose widespread costs Policymakers have started to favor targeted sanctions that impose direct costs on policymakers or key supporters of the government. 37 Do Targeted Sanctions Work Better? Hard to tell as it is a recent phenomenon of the post 9-11 world. ”More Humane, Less Effective” - Drezner (2011) Anecdotal evidence that in a few cases it might have mattered.  Libya, Angola Comprehensive sanctions probably work better on democracies - Lektzian and Souva (2007) 38 Limits of Economic Coercion “Weaponized interdependence” may lead to states seeking to avoid interdependence with those that abuse economic relationships. Farrell & Newman (2019)  US/China abuse of economic leverage may backfire in the long run. Some problems are so fundamental to a regime’s survival that economic power is not sufficient  North Korean Nuclear Weapons  US sanctions on Cuba (regime change)  Russia backing down from Ukraine War Human rights sanctions can make repression worse when leaders see them as threats to their political survival  Though some success stories (Apartheid South Africa) 39 Core Takeaways Sanctions come in many forms Impossible to determine sanction effectiveness by looking at the effect of imposition  Threats matter! Sanctions require dependence and thus often imply costs at home There are important limits to economic coercion 40 Next: Monetary Policy