Charles Wheelan, Ph.D. The Naked Economist

I was struck recently by a New York Times article on the devastating impact of economic sanctions on Gaza. Since Hamas came to power in Gaza and refused to renounce violence, Israel has sharply limited what can go in and out of the territory, leaving Gaza "almost entirely shut off from normal trade and travel with the world."

That makes sense. One way to punish nations that violate international norms is to isolate them from the global economy. These rogue actors can't buy the best of what the rest of the world has to offer, nor can they earn income by selling their goods abroad.

How Sanctions Work

That's what we're trying to do in Iran. The United Nations has imposed two rounds of increasingly harsh economic sanctions on that country for not suspending its clandestine nuclear program. The United States is encouraging countries like Russia, China, and Germany to get even tougher.

And history buffs will recall that during the Civil War, a crucial part of the North's strategy was imposing a naval blockade on the South, preventing the export of cotton to Europe in exchange for manufactured goods.

Sanctions are a potent weapon because they can impose serious economic harm on the target country. Gaza has been enduring a "deep economic depression" since the economic blockade was imposed. The Christian Science Monitor reports that tougher sanctions on Iran "would hit the ruling mullahs hard by raising Iran's already high unemployment, and perhaps force trickle-up regime change."

A Self-Inflicted Embargo

So here's what I don't understand: Why do so many of our presidential candidates, and a surprising proportion of the American population, believe that we should impose trade sanctions on ourselves?

After all, if you believe that the United States should trade less with the world (or if you oppose the expansion of trade), then you're essentially calling for a self-imposed economic embargo -- sanctions on ourselves. If curtailing global trade is bad for Gaza and Iran, how could it possibly be good for us? The answer is that it's not.

Yes, I've made the pro-trade argument before. But reading about the effect of sanctions in Gaza -- the opposite of free trade -- made me see the issue in a new light. The best way to understand why expanded trade is good for the United States is to look at why cutting off trade is so devastating in a place like Gaza.

Hitting Where It Hurts

What happens when a country is on the receiving end of a trade embargo?

1. New jobs are created as the result of "import substitution."

Some people obviously go to work producing the goods and services that no longer come from the rest of the world, so-called import substitution. Of course, these new goods and services are likely to be more expensive or of lower quality than what was available before -- or else no one would've been buying the imports in the first place.

2. Jobs are destroyed in the export sector.

There can't be too many export-related jobs if there are no exports. The less obvious point is that export industries tend to be where a nation is most efficient relative to the rest of the world -- or else the rest of the world wouldn't have been buying those goods.

3. Jobs are lost in domestic industries that depend on imported inputs or capital equipment.

This is a more subtle point; a domestic firm making products exclusively for the domestic market could actually be devastated by a trade embargo if it uses commodities or machinery or chemicals that come from abroad. As the New York Times describes Gaza: "One result has been the quick collapse of Gaza's private sector, unable to import necessary spare parts or building supplies or cloth."

4. Jobs are lost because the average person has less money in his pocket.

If consumers have to pay more for goods that were previously imported, then they have less to spend everywhere else. That hits restaurants, retailers, services, and other businesses that would appear to have no exposure to trade on the surface.

Tricks of the Trade

To summarize, restricting trade creates jobs in industries where a nation is not productive relative to the world; it kills jobs in industries that are globally competitive. Consumers pay more for basic goods, leaving them with less purchasing power for other goods and services (which kills still more jobs).

In short, cutting off trade leaves a country poorer and less productive -- which is why we tend to do it to our enemies.

Expanding trade does the opposite. It destroys jobs in industries where consumers would prefer to buy imports. That's an unpleasant process, but if you believe in capitalism, that's pretty much how it works. Meanwhile, trade creates jobs in sectors where we do things better or cheaper than the rest of the world. The whole process puts more money in the pockets of a typical consumer, raising our standard of living.

Unintentional Punishment

Thus, I support economic sanctions on Iran and Gaza. I don't support economic sanctions on the United States.

In fact, that suggests a question for the protectionist candidates seeking the presidential nomination in both political parties: "Could you please explain why your plan for helping the American middle class is essentially the same policy that you're advocating to punish Iran for building nuclear weapons?"