What Is Geoeconomics?

Most of us have spent our entire working lives blissfully unaware of geoeconomics. We have lived in an era of globalization, a time when countries worked to lower barriers to global trade, international investment and, in some cases, the free movement of people. 

Since the end of the Cold War, countries have been guided by an idea expressed in the so-called Washington Consensus and promoted by institutions such as the International Monetary Fund, World Bank and U.S. Treasury. According to these bodies, stronger links between nations made sense not only economically but politically as well. Nations would become more interdependent for their economic welfare and, as a result, reap collective gains. They were mostly right: Over the past three decades, the world economy — including emerging markets — increased dramatically.

But belief in the benevolence of the Washington Consensus was never fully embraced. In retrospect, it was naive to expect countries would forever be motivated to cooperate for mutual gain and ignore the likelihood of relative gains, a scenario in which some countries benefit more than others and get stronger, faster.

Over time, the Washington Consensus seemed really good at keeping the U.S. on top of the economic heap. If other countries wanted to catch up, they couldn’t play by the same rules. Instead, some countries used the levers of global trade to make themselves stronger at the expense of others. This cold reality is at the heart of geoeconomics: the notion that economic tools can be used to achieve foreign policy objectives that may have nothing to do with economic welfare.

Today’s classic example is the imposition of tariffs by U.S. President Donald Trump. Trump convinced himself that if other countries ran persistent trade surpluses with the U.S., they were not playing “fair”. In his mind, he was justified in imposing tariffs (an economic tool) to lower those trade surpluses and stop countries from taking the U.S. for a ride (foreign policy objective).

Tariffs on imports are not only tool of geoeconomics. “Defensive” tools, for example, involve targeted embargoes, sanctions designed to inflict pain on an adversary’s economy and tariffs on specific people.

Practitioners of geoeconomics

There are two big countries practising geoeconomics right now: the U.S. and China.

The U.S. has enormous advantages in the global economy, built up over the past 70 years, that allow them to play this card. For example, people are forced to use and hold the U.S. dollar as part of their reserve currency, which gives the U.S. dollar enormous sway over how international business is conducted. Countries do not want to be inhibited to trade freely in U.S. dollars. Similarly, they do not want to be denied access to the SWIFT messaging system that facilitates international payments between banks. 

The U.S. can threaten not only individual countries with sanctions and embargoes. It can also compel an ally to use the same tools against an offending country, even if doing so violates the ally’s business interests or undermines their foreign policy goals.

For its part, China was the country that Trump and others argued took most advantage of the Washington Consensus to build up its economy as quickly and as powerfully as possible. Clearly, China’s intent was not merely to trade goods and services and build their economy. It was also to make them a geopolitical rival to the U.S.

At first, China didn’t possess an entrenched position of power to challenge or motivate others to act in their interest. But as they grew stronger, they set out to establish that position by focusing on emerging markets, places the U.S. largely ignored. Their Belt and Road Initiative was designed to build infrastructure — dams, ports and roads — to foster relationships, bind emerging markets to the Chinese trading orbit and ensure China had access to critical mineral resources.

We’re just getting started

Geoeconomics will continue to be a feature of the global economy. We are on the cusp of the Fourth Industrial Revolution; artificial intelligence, quantum computing, green energy transition technologies and similar advances all require scale. In each of these areas, only a few large companies will likely come to dominate, and global powers such as the U.S. and China want their own companies to be the leaders.

Yes, using economics as a tool to achieve foreign policy objectives can be costly. It is widely assumed that Trump’s tariffs will increase the cost of goods in the U.S. and gum up the gears of the economy. Global alliances will be more difficult to manage as countries become ever more suspicious of their trading partners. The world may become more economically regionalized.

But, increasingly, it is a cost that countries are willing to pay. The idea that they will simply let market forces play out without trying to gain an edge or mitigate weaknesses is not supported by historical evidence. It is unlikely to be the way industries of the future will be established. Nor will it settle who will prosper and who will be left on the outside looking in. Geopolitical competition does that.

For more background on geoeconomics, David Detomasi recommends: Economic Statecraft, by David A. Baldwin; War by Other Means, by Robert D. Blackwell and Jennifer M. Harris; and Choke Points, by Edward Fishman.