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What Are Economic Sanctions?

Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Economic Sanctions” A way of punishing errant countries, which is currently more acceptable than bombing or invading them. One or more restrictions are imposed on international trade with the targeted country in order to persuade the target's government to change a policy. Possible sanctions include limiting export or import trade with the target; constraining investment in the target; and preventing transfers of money involving citizens or the government of the target. Sanctions can be multi­lateral, with many countries acting together, perhaps under the auspices of the united nations, or unilateral, when one country takes action on its own. How effective sanctions are debatable. According to one study, between 1914 and 1990 there were 116 occasions on which various countries imposed economic sanctions. Two-thirds of these failed to achieve their stated goals. The cost to the country imposing sanctions can be large, particularly when it is acting unilaterally. It is estimated that in 1995 imposing sanctions on other countries cost the American economy over $15 billion in lost exports and 200,000 in lost jobs in export industries. Widely considered a notable success was the use of economic sanctions against the apartheid regime in south Africa, although some economists question how big a part the sanctions actually played. Clearly important was the fact that the sanctions were imposed multilaterally by the international community, so there were comparatively few breaches of the restrictions. But, arguably, the most crucial factor in persuading the government in Pretoria to cave in was that foreign companies fearing that their share price would fall because their investments in south Africa would attract bad publicity voluntarily chose for commercial reasons to disinvest. By Barry Norman, Investors Trading Academy - ITA