Market structure and economic sanctions: the 2010 rare earth elements episode as a pathway case of market adjustment

Abstract

Studies identify cost as a key factor determining the effectiveness of economic sanctions. We argue that failing to account for market dynamics in the sector in which sanctions are imposed undermines the validity of estimates of the economic costs imposed on target countries, and we propose that market structure powerfully conditions sanctions effectiveness. To examine the effect of market structure, we trace the causal path through which economic sanctions purportedly lead to targets’ behavior changes, and we reveal the prevalence of adjustments that minimize the cost to the target. Our empirical data is drawn from a sanctions episode that can be evaluated as a best-case scenario for the imposition of effective economic sanctions: China’s 2010 embargo of rare earth elements supply to Japan. We show that Japan was able to adjust to avoid the Chinese sanction’s bite despite the dominance of Chinese producers and Japan’s seeming vulnerability as a key downstream consumer of rare earths. Our results show that measures of economic cost that fail to capture key components of market structure are not valid in assessing sanctions effectiveness, and the ability to impose economic costs on target countries is limited.