Is it punishment? Sovereign defaults and the decline in trade

Sovereign defaults are associated with declines in defaulting countries trade. Are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest? We devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines, bilateral trade with creditor countries should fall more than trade with other countries. We find that this is not the case. The analysis does not yield much evidence of broader punishment strategies including a league of major creditors either. These results contradict the predictions of the trade sanctions theory of sovereign borrowing.

► Are the declines in trade associated with sovereign defaults the result of trade sanctions?
►  This paper devises and implements an empirical strategy to evaluate this issue.
► If sanctions cause the declines, trade with creditor countries should fall more than with others.
► We find that this is not the case. There is not much evidence of broader punishment strategies either.
►  These results contradict the predictions of the trade sanctions theory of sovereign borrowing.