Economic sanctions are tools that can be used to leverage international cooperation or to punish countries that engage in harmful behaviour. In particular, they can be used to punish countries that condone terrorist activities or that do not comply with UN treaties and resolutions. They can be imposed in various forms, including financial restrictions like cutting off access to the global banking system (an embargo) and trade boycotts, as well as the exclusion of countries from the SWIFT payment system and denial of foreign aid. They can be a powerful tool, but they also come with costs that must be carefully weighed. These costs can be in the form of higher black market prices for the sanctioned country or of lower economic growth in the neighbouring countries. They can also include indirect costs such as high unemployment and social unrest.
These costs can be hard to quantify, but they are important. For example, a recent study of US bilateral trade with Iran found that excluding Iranian banks from the SWIFT system cost the US economy about $1 billion per year and caused some firms to relocate production overseas to avoid future sanctions episodes.
Another concern is that if US sanctions hurt the economy of other countries, they may stop buying from US firms even after the sanctions are lifted. This “business capture” can be difficult to measure, but evidence from regressions of trade flows with different lag variables suggests that it is significant.