Thread by @yarbatman

1. So there is this phenomenon I call "import reflection" that explains how #Iran continues to source intermediary inputs under sanctions. If you look at 2012 and compare to 2018/19, we can draw some conclusions about how sanctions hit industrial economies.

2. One of the conclusions I am reaching is that financial sanctions are actually pretty ineffective against an economy like Iran, which has A) a large industrial base, B) a big consumer market, C) low levels of financialization. Sanctions cause short-term shocks and volatility.

3. But an economy like Iran's can ultimately adjust because the country enjoys the fruits of early globalization—diverse trade relationships—but lacks the financial linkages of late globalization—namely direct dependency on the US financial system (unlike Russia or Turkey).

4. So while sanctions may shut the door to investment, creating a drag on growth that becomes clear over the long-term, they can't fully shut the door to trade given recourse to basic payment channels and new suppliers who are not deterred by direct/indirect sanctions pressures.

5. There are two sides here. As @JIHaidar has shown, Iran shifts exports from "sanction countries" to "non-sanction countries" through "export deflection." I'm looking at a complimentary process where Iran sources intermediate inputs from new markets through "import reflection."

6. In the economic war that the US is waging, Iran enjoys the metaphoric high ground. It achieved just enough development before 2012, having expanded its bilateral trade relationships both East and West, to have the ability to sustain trade (and output) in the face of sanctions.

7. Crucially, the idea that Iran's economy is relatively immune to sanctions is not inconsistent with the reports from Iran that the sanctions are having serious detrimental impacts on many Iranians. The best way to explain this is with an analogy.

8. Sanctions act as an external shock to Iran's economy. In 2012 and 2019 that shock saw contractions of >7%. Just as in the US, recessions hit households hard. Those who lose jobs or spend savings or downsize may struggle for years afterward, *even if the economy recovers*.

9. Readjustments at the macro level don't necessarily mean full relief at the micro (household/firm) level. Seen in this way, it is totally possible for sanctions to do little to weaken Iran's economy in the medium-term but a lot to harm hundreds of thousands of Iranians.

10. Importantly, the previous sanctions period really ran from 2012-2016, but initial relief came as early as 2013 with the JPOA. So we don't know what will happen if Iran's current situation extends into a second year. This is especially important given low oil exports.

11. But we shouldn't assume that sanctions being in place longer makes them more damaging. The experience from 2012-2016 suggests that readjustments take place, especially in trade, that may mitigate harms over time (*if* partners, like China, play ball).

12. Seen in this way, the political problem with sanctions for the targeted country is about the misery they impose on ordinary people and the opportunity cost of foregone development (via investment). But there is an easy solution for the elite—change the discourse.

13. What is frustrating is that Washington consistently overstates the impact of sanctions and elides the true political costs. Sanctions policy pretends to hurt the elites, but hurts the people. It masquerades as an existential threat (economic war!) but offers minimal leverage.

14. Instead of trying to prune back some branches, the Trump administration is using an ax to try and cut down a redwood.

That is not to say this is a healthy redwood—Iran has plenty of economic challenges.

15. But as I recently wrote, we don't have a good enough picture of Iran's economy under sanctions, so these key questions of economic resiliency are just more or less absent from the debate on the efficacy + prudence of US sanctions policy.

If the policy seems dumb, that's why.