The impact of the United States sanctions on Iran’s trade flows : A gravity model approach

Abstract: The Iranian economy has over 30-years been under several of US sanctions due to differences in their political objectives, affecting primarily their economic lifeblood, the oil business. Therefore during this period the Iranian economy has experienced setbacks in their development of national prosperity. This paper investigates the effect of the economic sanctions, during the time period 1975-2006, on Iran’s trade flows by incorporating the gravity model. Also, including geographical proximity and cultural ties further extends the model, which has been shown to strongly influence trade. The findings suggest that sanctions have negative impact on trade flows and are consistent with previous findings. Further estimation methods such as the Heckman- and PPML method are applied accounting for zero trade flows. The empirical  results indicate that sanctions have had a large negative effect on trade flows as expected. When further dividing the sanctions into five different time periods the results conclude the previous ones, however the five time periods have been influenced by sanctions in different varieties. Hence sanctions hamper trade and prevent the Iranian economy to thrive to its fullest potential.