Paper co authored with Ruofan Ma, Ph.D. candidate at Harvard.

How do sanctions affect third-party states? While much research has focused on the direct impact of sanctions on the countries imposing and receiving them, less is known about their effects on the broader trade network. We propose a theory that states respond to the systemic risks caused by sanctions by diversifying their trade portfolios. We test this theory in two ways: First, we examine how sanctions affect the global trade system, where states learn about trade uncertainty through sanctions on their trading partners. Using trade concentration and sanction data from 1990 to 2020, we find that states diversify their trading partners when sanctions disrupt their networks. Second, we analyze the 2018 announcement by President Trump under Section 232, which imposed unilateral tariffs on steel and aluminum imports based on national security concerns. Through a difference-in-differences approach, we study monthly data on steel and aluminum trade and find that countries with strong trade ties to the U.S. have limited flexibility, while others reduce their reliance on the U.S. by expanding their trade partnerships. These findings highlight the spillover effects of sanctions and the dynamics of trade interdependence.