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I'm trying to understand the English in this article (bolding mine):

“I think it was a genius action from Lula da Silva” said Mujica in an interview with the Brazilian daily Folha de Sao Paulo, when he argued it was a “gross mistake” of the international community to isolate Ahmadinejad.

The more you fence in Iran, so much harder it will be for the rest of the world. What Lula da Silva is doing is something which I consider simply brilliant. Life has taught me that you can’t surround, fence in someone. It’s a mistake. This forces the other side to react, to fight back…The world does not need any more wars. It needs solutions, ways out to this kind of situations”, underlined the former guerrilla leader.

What does the sentence mean, The more you fence in Iran, so much harder it will be for the rest of the world.? I guess to fence in means to isolate? But as for the second part, so much harder it will be, what is it that is harder?

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Here, you want to read for meaning based on context. Based on what is said later in the second paragraph, it seems that the author is trying to convey that "harder" means the stance that Iran takes toward the rest of the world. If Iran is surrounded, then it is more likely to react and fight back, possibly causing war and bloodshed.

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You're right.

Fence in: enclose with a fence.

In this case, the in preposition may lead to misunderstanding, as if the fence is going to be built inside the place actually being enclosed. This may happen if you translate fence literally.

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    My first association was with fencing in Iran, but I gathered that couldn't be what was meant :) – gerrit Jan 24 '13 at 16:10
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It means it will be harder for the rest of the world to interact, communicate, deal with, do business with Iran due to them isolating (fencing themselves in) themselves from the rest of the world.

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One of "Newton's laws of motion is, "every action will generate an equal and opposite reaction."

Meaning, if you fence in Iraq (a strong hostile action), you will generate an equally strong and hostile reaction "that will make it hard for the rest of the world."

And the MORE "fencing in," the hardER for the world.

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