Economic sanction games among the US, the EU and Russia: Payoffs and potential effects

• Published in: Economic modelling 2018-06, Vol.73, p.117-128
• Main Authors: Dong, Yan, Li, Chunding
• Format: Article
• Language: English
• Subjects: Economic effects; Economic sanction; Game solution; Numerical general equilibrium
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2018.03.006

Economic sanctions of the US and EU on Russia because of Ukraine crisis in 2014 last for a long time and are still a hot policy topic. This paper uses a 16-country or region numerical general equilibrium model with trade cost and exogenous trade imbalance to explore this three-country economic sanction game payoffs, and simulate the effects of sanctions on individual countries. Our analysis find that all sanction involved countries will be hurt, but comparatively Russia will be hurt more, and the US and EU will be hurt less. Sanction measures of EU have larger impacts to Russia than the US measures, and meanwhile Russian counter-sanction measures will generate larger impacts on the EU than on the US. From the economic perspective, the optimal choice for US and EU is to give up sanction measures to Russia, and retaliation is Russia's optimal choice when faced with sanction measures. Countries out of the sanction game will gain because of trade diversion effects. •We explore the three-country economic sanction game solutions.•We simulate the effects of sanctions on individual countries.•Russia will be hurt more, and the US and EU will be hurt less.•Russian counter-sanction measures will generate larger impacts on the EU than on the US.