What Are Secondary Sanctions and How Do They Impact Global Trade?

Governments apply sanctions across international borders as a powerful method to affect other countries and organizations. Many individuals recognize direct sanctions imposed by one nation on another, but they lack awareness of secondary sanctions. Countries rely heavily on modern foreign policy by using secondary sanctions as essential tools. People know about sanctions, but they want to understand their operational mechanics plus their effects on worldwide commerce.

In this article, we will see the impact of secondary sanctions on global trade.

Understanding Secondary Sanctions

A nation, typically the United States uses secondary sanctions to fine foreign organizations doing business with sanctioned nations or persons. Primary sanctions affect only the intended target, but secondary sanctions act against companies doing business with those who face primary sanctions.

The United States started deploying secondary sanctions as part of its international relations many years ago. When a European company keeps trading with Iran, the U.S. government may take action against that business without breaking any existing U.S. laws. The U.S. could weaken European businesses through sanctions against their U.S. finance connections as an indirect way to affect their target.

How Do Secondary Sanctions Work?

The U.S. leverage over global finance and its dominance of the dollar system gives this nation real power when using secondary sanctions. Businesses operating in other countries who take part in sanctioned actions face restricted use of the main U.S. bank systems.

The United States uses its sanctions against Iran as a clear demonstration of secondary sanctions. Starting in 2018, the United States restored harsh sanctions against Iran with special emphasis on its oil commerce and essential sector operations. The United States imposed economic penalties on Iran and gave foreign companies in the EU and beyond notice that carrying on business there faced major enforcement actions.

The European Union made the Instrument in Support of Trade Exchanges, or INSTEX (Instrument in Support of Trade Exchanges), as a solution to save Iran trade through non-U.S. dollar transactions. European businesses end their operations with Iran even though they support dealing with Iran due to secondary sanction risks.

Examples of Secondary Sanctions

Secondary sanctions guide international exchange between nations through diplomacy and trade relations in 2024. The United States government continues to wield OFAC secondary sanctions as its leading diplomatic tool. In 2024, the U.S. decided to limit foreign businesses that conduct business with North Korean companies that engage in illegal weapons programs.

Secondary sanctions risk extensive harm to the economic system. The Congressional Research Service findings show secondary sanctions reduced Iranian oil exports by 80% when the United States restored sanctions in 2018. Foreign nations filled vacant oil supplies but did so by charging more as a result of Iranian oil export reductions.

The secondary sanctions threat affects more nations outside of Iran and North Korea. In 2024, the United States expanded its  sanctions screening list against Russia because of its Ukraine invasion. Sanctions now target foreign companies selling to banned Russian companies through New York.

Bonus: Though the EU secondary sanctions, it has not entirely found a path to ignore them. EU businesses cut their trade levels with Iran and Russia because they fear the loss of opportunity to work with the United States.

Risks and Benefits of Secondary Sanctions

Secondary sanctions serve foreign policy well but bring substantial danger. They hurt the diplomatic connections between different countries. Severed U.S.-European ties now exist because the United States applies sanctions on European operations through secondary sanctions.

Secondary sanctions may have negative impacts that were not intended. Banned nations must switch to new business partners or discover ways to evade U.S. banking networks, which drives them to use digital currencies and trade goods directly with each other. Secondary sanctions tend to weaken over time when alternative methods replace U.S.-controlled options.

Secondary sanctions benefit as they increase the total pressure applied to sanctioned nations. They widen the effect of basic trade restrictions to make more nations collectively shun rogue states.

The Global Impact of Secondary Sanctions on International Businesses

Companies that do business globally need to consider the side effects of secondary sanctions. Companies everywhere must handle business dealings with sanctioned nations while staying within U.S. and major country secondary sanctions rules. Businesses face strong financial and market security risks that deter their operations globally.

Businesses from oil, energy, and financial technology companies lead all organizations impacted by secondary sanctions in 2024 because they need worldwide market connections. Organizations must now carefully assess their worldwide activities and political danger settings before working with sanctioned businesses.

The Future of Secondary Sanctions

U.S. foreign policy will continue using secondary sanctions as its main diplomatic strategy. They assist America in diplomatically defending globalization through sanctions while affecting international businesses that support sanctioned nations. Countries that resist secondary sanctions will now help determine changes in global political power over the next several years.

Secondary sanctions cause strong reactions because they shape multiple aspects of international business operations.