Weaponizing trade: who pays?
Jeffry Frieden’s paper is an analytical policy essay focusing on the the economic costs borne by the sender country i.e. the one wielding the geoeconomic weapon. He argues that the geopolitical benefits of coercion are nearly impossible to quantify (how do you measure the value of deterring an invasion?) so he sets them aside.
First, he builds a conceptual taxonomy of cost categories rooted in standard trade theory — comparative advantage, gains from specialization, credibility, and distributional political economy — to show that coercion is never “free” for the sender. Second, he uses historical case studies (mercantilism, interwar Germany, Cold War export controls) to illustrate how these cost categories have played out across different eras. Third, he grounds the contemporary application in recent empirical literature (2024–2025 papers on US sanctions, the Trump trade war, and dollar reserve trends), citing others’ econometric findings as evidence for each cost category rather than running his own regressions
Findings
Frieden identifies six distinct categories of costs that geoeconomic coercion imposes on the sending country:
- Aggregate welfare losses: Restricting trade and investment pulls the sender away from its comparative advantage, reducing productive efficiency.
- Costs to specialization: The most profitable bilateral economic relationships tend to be the most specific and hardest to replace. Paradoxically, this means the most effective geoeconomic weapons are also the costliest to use for both sides.
- Costs to innovation: US export restrictions are empirically associated with declining R&D in affected American firms . Simultaneously, the threat of sanctions has been found to stimulate innovative activity in adversaries, a lose-lose dynamic for long-run US technological leadership.
- Credibility erosion: Financial sanctions by a major financial center raise its own sovereign borrowing costs. The Trump trade war has been estimated to similarly impair confidence in US commitments and reduce firm profitability. Combined, US sanctions and tariffs have “appreciably reduced the use of the dollar in reserves,” undermining the exorbitant privilege the US derives from dollar dominance.
- Intertemporal risks: Geoeconomic measures are investments with uncertain returns. Targeted countries reduce future vulnerability by reorienting trade elsewhere. For example, Brazil, India, and South Africa, after being hit with 2025 tariffs, are reportedly shifting economic activity toward China. The short-term political gain risks substantial long-term economic losses.
- Distributional conflicts: Geoeconomic tools fall unevenly on domestic groups. Concentrated, politically powerful industries can shield themselves; weaker sectors (e.g., soybean farmers when China retaliates) bear the costs. European retaliation under Trump has strategically targeted industries in Republican-leaning US states, amplifying these distributional tensions.
The costs of coercion
Author: Jeffry Frieden
From: Columbia University
Global shocks, hidden vulnerabilities
Şebnem Kalemli-Özcan and Muhammed A. Yıldırım, in this paper, build a multilayer global network model that integrates trade, production, and financial linkages across 65 countries and 35 sectors, using OECD Inter-Country Input-Output (ICIO) tables from 2019 as its empirical backbone. The core innovation is modeling shocks not as standard productivity or tariff shocks, but as sectoral factor supply shocks, capturing events like pandemic-related labor shortages, rare earth restrictions, or geopolitics-driven semiconductor embargoes.
The model features a nested CES structure on both production and consumption sides, with empirically calibrated, sector-specific trade elasticities that allow for both substitution and complementarity between inputs, a key departure from models that assume a single Armington elasticity. For the 2025 trade war application, the authors extend the framework into a full New Keynesian Open Economy (NKOE) setting with price rigidities, incomplete markets, and multi-country monetary policy responses, allowing them to capture short-run inflationary and output dynamics alongside long-run general equilibrium effects.
Findings
The central finding challenges conventional wisdom: the US is far more exposed to global shocks than its low trade share and dollar dominance imply, once indirect network linkages and second-round spillovers are accounted for. Three applications illustrate this:
- COVID-19: The worst-case scenario for the US was a world where only the US got vaccinated because US production is deeply embedded in global supply chains regardless of headline trade openness.
- Geopolitical fragmentation: Sector-specific barriers (EVs, semiconductors, steel, critical minerals, solar cells) generate large asymmetric unemployment effects, with the US facing significant costs from stabilizing inflation in a fragmented world via tighter monetary policy.
- 2025 trade war: The model estimates a 0.2–0.5 percentage point rise in US inflation and a real GDP drop of up to 1% in the long run from the 2025 tariff shock. Critically, tariff threats (policy uncertainty) are shown to be worse than actual tariffs as they cause a larger short-run output contraction, are deflationary rather than inflationary, trigger dollar depreciation, and worsen the trade deficit as agents front-load imports.
Global Networks, Risks and the U.S. Economy
Authors: Şebnem Kalemli-Özcan, Muhammed A. Yıldırım
From: Brown University, Harvard University
