Geoeconomics: A literature review
This paper by Cathrin Mohr and Christoph Trebesch provides a comprehensive literature review on geoeconomics which examines how international political rivalry, including war, shapes economic policies and outcomes. The field is interdisciplinary, bridging economics, political science, and international relations. It focuses on topics such as economic coercion, geopolitical risks, trade fragmentation, currency dominance, and the economics of war. The following are subfields of Geoeconomics:
Geoeconomic policy tools:
- Sanctions: Widely studied as tools to influence target countries’ policies. Research explores their effectiveness, costs, and collateral impacts using granular data.
- Embargoes and blockades: Drastic measures often linked to wars; recent studies assess their economic impacts during conflicts.
- Tariffs and trade agreements: Geopolitical motives increasingly influence their design, as seen in the US-China trade war.
- Export controls and investment screening: These tools aim to protect national security but can harm innovation and trade.
- Sabotage and cyberattacks: Emerging areas of research highlight their economic damage and spillover effects.
- Foreign aid: Often shaped by geopolitical considerations, with unintended consequences like increased conflict risks.
Geopolitics of trade:
- Trade can reduce war risks through interdependence but may also increase rivalries in a multilateral world.
- Political alignment drives trade integration, while fragmentation due to geopolitical tensions imposes significant economic costs.
Geopolitics of international finance:
Studies focus on currency dominance (e.g., the US Dollar) and state-directed capital flows (e.g., China’s Belt and Road Initiative). Geopolitical shifts are reshaping global financial systems.
Geopolitical risk:
Geopolitical risks negatively affect investments, employment, inflation, and asset markets. Advanced indices measure these risks across time and regions.
Economics of war:
Research explores the costs of war on GDP, trade disruptions, supply chains, and societal impacts. Studies also examine war financing methods (taxation vs. borrowing) and military production efficiency.
Future directions
The authors identify several research gaps particularly in measuring of geopolitical phenomena (e.g., alliances, fragmentation) and exploration of technology’s role in geopolitics (e.g., AI, green technologies).
Geoeconomics
Authors: Cathrin Mohr, Christoph Trebesch
From: University of Bonn, Kiel Institute for the World Economy
An economic model for geoeconomics
The theoretical model presented in the paper by Clayton, Maggiori, and Schreger offers a structured framework to analyze how Great Powers use economic threats to exert influence over smaller economies. The model focuses on a small open economy that is targeted by a hegemon (e.g., the U.S. or China). The economy consists of three main agents:
- Consumers: They derive utility from consuming goods and own the country’s resources (e.g., intermediate goods and profits from production).
- Producers: They produce final goods using intermediate goods sourced domestically or internationally.
- Government: It seeks to maximize domestic welfare, which includes economic consumption and geopolitical actions.
The government and producers face constraints based on their resources and trade relationships with other countries.
Economic threats
The hegemon uses various economic threats to influence the behavior of a country. These threats can be broadly categorized as follows:
- Export restrictions: The hegemon may threaten to stop selling critical inputs needed for production, such as advanced technology or raw materials. This increases production costs for the target country.
- Import restrictions: The hegemon may refuse to buy goods produced by the target country, reducing its export revenues and forcing it closer to economic isolation (autarky).
- Financial threats: These include freezing assets, restricting access to payment systems, or limiting foreign investment opportunities.
- Foreign aid withdrawal: The hegemon may offer aid as an incentive for compliance or threaten to withdraw aid if demands are not met.
- Technology restrictions: Limiting access to advanced technologies can reduce productivity in the target economy.
- Coordination threats: The hegemon may leverage strategic complementarities, such as financial stability or defense alliances, to punish countries that deviate from desired actions.
Participation constraint
At the heart of the model is the concept of a “participation constraint.” This represents the decision-making process for the targeted entity (government or producer). The entity compares:
- The “inside option”, which reflects the benefits of complying with the hegemon’s demands (e.g., avoiding sanctions or receiving aid).
- The “outside option”, which reflects the consequences of noncompliance (e.g., facing sanctions or losing access to markets).
The hegemon’s power lies in its ability to manipulate these options—either by improving the inside option (offering rewards) or worsening the outside option (imposing punishments).
Determinants of threat effectiveness
The effectiveness of economic threats depends on several factors:
- Substitutability: If inputs or markets targeted by threats are hard to replace, threats become more powerful.
- Expenditure share: If a large portion of the target’s economy depends on threatened goods or markets, compliance is more likely.
- Credibility: The hegemon’s ability to enforce threats consistently over time strengthens its influence.
- Anticipation and adjustment: Targeted entities may adjust their production and trade patterns ex-ante (before threats materialize) to reduce vulnerability. For example, firms may shift supply chains toward geopolitical allies or increase domestic production (friendshoring). Or, governments may subsidize domestic industries or promote alternatives to reduce reliance on hegemonic powers.
Key insights
- Economic power is not solely about size; it depends on how effectively a hegemon can manipulate participation constraints.
- Threats that increase dependency on the hegemon—such as coordinated financial systems—are particularly effective.
- Anticipatory actions by firms and governments reshape global trade patterns and reduce vulnerability to coercion.
Putting Economics Back Into Geoeconomics
Authors: Christopher Clayton, Matteo Maggiori, Jesse Schreger
From: Yale School of Management, Stanford University, Columbia Business School
