Escaping Sanctions? Iranian Firm Response and Market Reallocation Under International Trade Sanctions

Tuesday, November 9th, 2021
12:30 p.m. – 2:00 p.m. EST
via Zoom

How do targeted firms respond to international trade sanctions? While the macroeconomic effect of trade sanctions has been extensively studied, little is known about how trade sanctions shape firm dynamics and their heterogeneous effects in a targeted country. Exploring detailed Iranian manufacturing firm surveys, I examine firm-level asymmetric effects of the 2012-2013 U.S. and EU trade sanctions against Iran due to Iran’s nuclear program. Empirical analysis shows that the sanctions cut Iranian firms’ exports in half and imports by over 30 percent and, on average, reduced firm-level productivity, profit, revenue, and employment. However, intriguingly, exporting firms were found to mitigate negative effects of sanctions through increased presence in the domestic market, transferring sanction shocks to non-exporting firms. At the same time, importing firms responded to sanctions by sourcing more domestic inputs at the expense of non-importing firms. Based on a stylized model featuring heterogeneous firms with capacity constraints, I show that the export sanctions increased consumer welfare by 4.35 percent with decreasing domestic prices for a given income level. In contrast, import sanctions led to a 7.5 percent consumer welfare loss by increasing prices. The stylized model implies alleviating exporting firm capacity constraints during adverse trade shocks increases positive impacts through export channels.

About the Speaker:

Ebad Ebadi is a Ph.D. candidate in Economics at George Washington University, where he researches the impacts of economic sanctions on firms and individuals and gender inequality in the Iranian labor market. He has written for numerous publications, including the Atlantic Council. He holds M.Sc. in Economics from the London School of Economics and Political Science (LSE) and the University of Tehran.