Economic sanctions, the imposition or threatened imposition of economic measures to achieve political goals, have become increasingly prevalent due to growing global interdependence. While sanctions aim to achieve various policy objectives (geopolitical interests, promoting democracy, counter-terrorism), they inflict economic damage on both sender and target countries, disrupting international trade and potentially threatening political stability and human rights. Countries targeted by sanctions seek countermeasures, including supply chain decoupling and retaliatory measures. However, the effectiveness of these counter-sanctions remains debated. This study addresses this gap by proposing a data-driven game-theoretical framework to analyze the interplay between sender and target countries during economic sanctions, focusing on the effectiveness of various counter-sanction strategies.

Existing literature extensively discusses the effectiveness of economic sanctions, with varying conclusions. Some argue for reducing reliance on trade with potential sender countries through decoupling, while others highlight the impossibility of complete decoupling in a globally integrated economy. Retaliation is another proposed countermeasure, but its efficacy against powerful countries is questioned. 'Collective resilience,' where vulnerable countries collaborate against a common adversary, is presented as a potential alternative. However, a comprehensive, data-driven evaluation of counter-sanction measures under different scenarios is lacking. This research aims to fill that gap.

The authors develop a three-stage sequential game of perfect information: the threat stage (target country chooses to comply or violate), the sanction stage (sender imposes sanctions or not), and the counter-sanction stage (target retaliates or not). The game focuses on trade sanctions (import/export restrictions). Economic loss is quantified using an adaptive multi-regional input-output model (short-term effects) and a general equilibrium model with input-output linkages (long-term effects). The global supply chain network is constructed using the GTAP 10 database. Three counter-sanction measures are analyzed: decoupling, individual short-term retaliation, and collective short-term retaliation. The hypothetical extraction method is used to measure GDP loss. The effectiveness of sanctions is defined as the probability of success (target compliance), and the effectiveness of counter-sanction measures is the reduction in sanction effectiveness. The capability of and vulnerability to sanctions are defined based on the pre-sanction trade-to-GDP ratio and largest pre-sanction trade-to-GDP ratio. The feasibility of collective retaliation is assessed by evaluating the payoff gain for each bloc member. The model is solved using backward induction.

The study reveals a significant asymmetry between countries' capability to impose sanctions and their vulnerability to them. Large economies dominate the capability to impose sanctions, following a Pareto distribution, while vulnerability is more uniformly distributed. The effectiveness of import restrictions is higher when targeting sectors with higher trade-to-GDP ratios for the affected country. Analyzing two scenarios (high bilateral and high unilateral interdependence), the research demonstrates that decoupling is an impractical counter-sanction measure due to significant long-term GDP losses. Individual short-term retaliation is more effective under high bilateral interdependence. Collective short-term retaliation increases effectiveness but mainly due to the major contributor’s efforts, making it often infeasible since major contributors face negative payoff gains from joining the bloc. The study formally presents three propositions supporting these findings: 1) Decoupling is impractical; 2) Individual retaliation is more effective under high bilateral interdependence; and 3) The additional effectiveness of collective retaliation is less significant under high bilateral interdependence. These findings are illustrated using examples such as China-US, Germany-France, China-Indonesia, and US-Singapore.

The findings challenge the conventional wisdom surrounding economic sanctions' effectiveness. The significant asymmetry in sanctioning capability highlights the disproportionate power of large economies in weaponizing trade interdependence. While collective resilience shows promise, its practicality is limited by the unwillingness of major contributors to bear losses despite increased overall effectiveness. This suggests that focusing solely on retaliatory measures might be counterproductive. The study's results underscore the need for a more nuanced understanding of the complex interplay between economic interdependence and political goals in international relations.

This research demonstrates that economic sanctions are often ineffective, particularly against large economies, and that countermeasures like decoupling and collective retaliation have limitations. The study emphasizes the importance of fostering cooperation and dialogue as superior alternatives to coercive measures in managing geopolitical conflicts. Future research should incorporate political and cultural factors, decision-makers' individual payoffs, and dynamic trade network evolution to refine the model's predictive capabilities.

The model simplifies the complex reality of economic sanctions by primarily focusing on trade sanctions and neglecting other factors such as political and cultural influences, decision-makers' individual incentives, and the dynamic evolution of global supply chains. The model also assumes a static structure of global supply chains under short-term sanctions and counter-sanction measures. Further research could address these limitations for a more comprehensive understanding.