Global Value Chains in Time of Sanctions

In recent years, there has been a proliferation of economic sanctions imposed by the United States, the main proponent of such sanctions. Several authors have questioned their effectiveness, as targeted countries may try to evade or circumvent them. Economic sanctions have complex effects, particularly on the global value chain (GVC), which reflects the interdependence of economies. Participation in global value chains can create loopholes that allow sanctioned countries to mitigate their impact. This may be even more the case if sanctions are laxly applied. On the other hand, sanctions may permanently lock countries into low-value-added activities. This study examines the complex effects of US economic sanctions on the participation of targeted countries in global value chains. Using a panel of 102 developing countries from 1990 to 2018 and applying the entropy balancing method, it finds that US economic sanctions reduce participation in global value chains by 1.06 percentage points relative to non-targeted countries. Results show that trade and financial sanctions hinder global value chain participation, with a sanctioned country losing almost 5 years of progress in the GVC. The effects are more pronounced for highly trade-dependent and resource-rich economies, while countries with strong financial systems are more resilient. This impact is supported by an alternative method involving the use of an instrumental variable estimator. Relying on other alternative econometric methods does not change the main results. Lower foreign direct investment (FDI), reduced innovation capacity, exclusion from international financial networks and increased macroeconomic uncertainty, as measured by inflation and real effective exchange rate volatility, are the main drivers of the impact of economic sanctions on participation in global value chains.