Welfare and migration effects of the lifting of all German sanctions

_ Yuri Kofner, economist, MIWI Institute. Munich, 20 December 2021.

The cost of the sanctions

Sanctions are often viewed as “war by other means”, primarily through financial and trade channels designed to put pressure on other states, organizations and individuals believed to have violated international norms or principles.

As part of the transatlantic community (NATO), Germany also participates in Western sanctions. In 2018, 30 countries, including Iran, Libya, Syria and Russia, were affected by German participation in multilateral sanctions. [1]

Research results of the IfW Kiel, which were determined with trade gravity models for the years 2012-2016 and 2019-2020, show that the trade and social costs of sanctions and counter-sanctions are an average of 0.2 percent of German GDP (6.8 billion euros). [2], [3] A trade gravity simulation by the author using the Global Sanctions Data Base [4] for 2015 came to similar results of 0.19 percent of GDP (Formula 1).

(1) [5] Xij = exp(b1lnDISTij + b2CNTGij + b3BRDRij + b4_COMCURij + b5_FTAplusij + b6_CUplusij + b7_MILSANCTij + b8_TRADESANCTij + b9_FINSANCTij + b10_TRAVSANCTij + pi  + cj) + eij

According to a current study by the ifo Institute, the sanctions against and from Russia alone cause 4/5 of the total sanction-related welfare losses for Germany (0.16 percent of GDP or 5.5 billion euros). [6]

In this context, the impact of US extraterritorial sanctions on Europe should not be forgotten. Between 2009 and 2019, US companies paid only 3 percent of the fines for US sanctions against Iran, Cuba, Crimea, etc. In the same period, EU companies paid 83 percent of all fines for violating US sanctions against third countries. Together with Swiss companies, it was 94 percent. The total fines imposed on European and Swiss companies amounted to US $ 5.3 billion. [7]

Overall, the federal government’s sanctions policy means that German citizens are poorer by an average of 82 euros a year.

Lifting of all sanctions

As part of a realignment of its foreign policy security policy, official Berlin should end its participation in all international sanctions. Such a step would mean that all sanctioned states would probably also lift their counter-sanctions against Germany.

This would not only reduce the economic costs of the sanctions policy from 0.2 to 0 percent of German GDP – a welfare gain of 6.8 billion euros or 82 euros per citizen – but the lifting of the spiral of sanctions would also boost economic growth in the main countries of origin of those coming to Germany Boost refugees.

The author’s gravity simulation mentioned above shows that in such a scenario the real gross domestic product of Syria by 0.2 percent, Iran by 0.3 percent, Afghanistan by 0.8 percent, Somalia by 1.6 percent, Eritrea by 1.7 percent and Libya’s would rise by 2 percent.

According to the author’s own calculations based on the results of regression models from the Kiel Institute for the World Economy (IfW Kiel) [8], this economic growth would reduce the cumulative rate of emigration from these countries to Germany by 0.5 percent.

Notes

[1] Deutscher Bundestag (2018). Gegensatz der Bundesrepublik Deutschland gegen Drittstaaten. URL: https://www.bundestag.de/resource/blob/568274/257a1eb646467e1e33d595696f61c3e1/WD-2-094-18-pdf-data.pdf | Ukraine is not counted by the author, as the Western sanctions are not directed against Ukraine, but against individuals and companies in Crimea and the Donbass region.

[2] Chowdry S., Felbermayr G., et. al. (2020). The Economic Costs of War by Other Means. IfW Kiel. URL: https://www.ifw-kiel.de/publications/kiel-policy-briefs/2020/the-economic-costs-of-war-by-other-means-15301/

[3] Hinz J. (2017). The Cost of Sanctions: Estimating Lost Trade with Gravity. IfW Kiel. URL: https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/Julian_Hinz/the-cost-of-sanctions-estimating-lost-trade-with-gravity/kwp_2093.pdf

[4] Felbermayr, G., A. Kirilakha, C. Syropoulos, E. Yalcin, and Y.V. Yotov. (2020). The Global Sanctions Data Base. European Economic Review, Volume 129. URL: https://ideas.repec.org/p/ris/drxlwp/2020_002.html

[5] Where Xij is the commodity trade flow from exporter i to importer j; DISTij is the population-weighted distance between i and j; CNTGij is a contiguity dummy; BRDRij is a border / international trade dummy; COMCURij is a dummy if exporter i and importer j have a common currency; FTAplusij is a dummy if exporter i and importer j are part of a comprehensive free trade agreement; CUplusij is a dummy if the exporter i and the importer j are part of a customs and economic union; MILSANCTij is a dummy for a military aid sanction of exporter i against importer j; TRADESANCTij is a dummy for a trade sanction of exporter i against importer j; FINSANCTij is a dummy for a financial sanction of exporter i against importer j; TRAVSANCTij is a dummy for a travel sanction of exporter i against importer j; pi is the exporter with fixed securities; cj is the importer fixed effects; eij is the error term.

The counterfactual scenario is implemented by setting the respective sanction dummies from one to zero. A more detailed description of the methodology and the other data sets used can be found here: Kofner Y. (2021). Trade and welfare effects of European core country unification. MIWI Institute. URL: https://miwi-institut.de/archives/866

[6] Flach L., Larch M., Yotov Y., et al. (2020). Die volkswirtschaftlichen Kosten der Sanktionen in Bezug auf Russland. ifo Institut. URL: https://www.sihk.de/servicemarken/presse/pressemeldungen/dezember2020/sihk-russland-sanktionen-kosten-5-45-milliarden-euro-pro-jahr-4979864

[7] Timoveef I. (2020). The European paradox: US sanctions policy on EU businesses. MGIMO University. URL: https://russiancouncil.ru/analytics-and-comments/analytics/evropeyskiy-paradoks-politika-sanktsiy-ssha-v-otnoshenii-biznesa-stran-es/

[8] Bencek D., Schneiderheinze C. (2019). More development, less emigration to OECD countries – Identifying inconsistencies between cross-sectional and time-series estimates of the migration hump. IfW Kiel. URL: https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/Claas_Schneiderheinze/KWP_2145.pdf

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