The Rise of Geoeconomics

From the Covid-19 pandemic to the Suez Canal blockage to the war in Ukraine, singular events can yield ripple effects throughout the global landscape, causing political and economic disruptions. Due to the unprecedented speed of technological innovation in information and communication capabilities alongside the opening of global markets since the latter half of the 20th century, globalisation’s latest iteration has made countries more interdependent and the world a much smaller, densely connected network. This “Great Convergence”, as the economist Richard Baldwin coined it, has afforded global actors several opportunities for prosperity and development, but concurrently intense competition, exceptional policy challenges, and clashes.

The end of the Cold War in the 1990s marked a turning point in the way global politics would be conducted. Geopolitics, the traditional driving force behind foreign policy and strategy, would be replaced by geoeconomics – a term accredited to the American strategist and military consultant Edward Luttwak. Although the term is loosely defined, geoeconomics dictates that states employ their economic and policy instruments – such as investment policies, commodity restrictions, and financial sanctions – to achieve geopolitical aims, thereby promoting and securing national interests.deep economic integration has led to the exponential weight of economic policy instruments for global powers and aspirants alike to achieve strategic objectives  

While military strength remains a significant determinant of power and status, deep economic integration has led to the exponential weight of economic policy instruments for global powers and aspirants alike to achieve strategic objectives through carrot (e.g., aid) or stick (e.g., sanctions) policies. As spheres of influence and political interests overlap, rival powers have triggered a return to power politics and the rise of “weaponized interdependence” – the strategic use of political and economic power and authority to guide or shape international policymaking and political behaviour.

Global Investment Projects, Economic Retaliation and Trade Wars

Geoeconomics has thus become the means through which contesting powers, strategically aligned or otherwise, engage in competition or cooperation. Foreign investment and official development assistance have become an integral part of geoeconomics as they grant donor countries immense political favour and diplomatic leverage in exchange for investments in development projects that address infrastructure gaps and build capacities for trade.

The Belt and Road Initiative (BRI), China’s ambitious multi-trillion-dollar global infrastructure development project launched in 2013, has sought to revitalise and expand the Silk Road, connecting Asia with Europe and Africa through a network of ports and transnational railroads. The United States, together with its G7 partners, and the European Union have since launched analogous global investment programmes – Partnership for Global Infrastructure and Investment and Global Gateway, respectively – to engage in strategic competition with the rising power and counter its geopolitical ambitions.

Geoeconomics has thus become the means through which contesting powers, strategically aligned or otherwise, engage in competition or cooperation. Intense global competition at the firm level has further fragilised the relationship between the United States and China as each pursues policies that would provide its domestic industries with the ability to outcompete rival firms. China’s state capitalism model with its industrial policies favouring state-owned enterprises via subsidies has become the bane of many foreign competing firms pointing to market distortions and increasing operating costs across various service lines. The threat posed by China’s economic model has stimulated U.S. bipartisan support for a comprehensive manufacturing bill – the CHIPS and Science Act – designed to bolster America’s manufacturing industry and technological edge through subsidies and research and development funding as part of a long-term strategy to acquire strategic independence.

Along the commercial front, the series of tariffs levied by the Trump administration responsible for initiating a trade war with China in 2018 was ostensibly an attempt to reduce the United States’ trade deficit and address several grievances. While trade wars are often depicted as zero-sum games, “the truth is”, as the economist Paul Krugman put it, “trade wars are bad, and almost everyone ends up losing economically.” The Trump administration’s tariffs affected not only Chinese industries but also those of American allies like Japan and the European Union – straining relations, prompting retaliatory tariffs, and leading to a restructuring of global supply chains. Shortly after taking office, President Biden and his administration reversed tariffs adversely affecting its allies, but maintained or extended existing tariffs placed on Chinese imports in response to China’s failure to meet commitments that had been agreed upon in a deal signed in January 2020 – the Phase One Trade Agreement – and to threatening economic practices.

The rise of geoeconomics has posed challenges and limitations to the Bretton Woods Institutions, which have served as the bastions of the international rules-based system. For example, since 2019, the dispute settlement mechanism of the World Trade Organization (WTO) – arguably its most important function – has been crippled by the vetoing of proposed adjudicator appointments to the Appellate Body, thereby limiting its authority and increasing the chances of escalation.

WTO members involved in trade disputes, 1995-2021

The growing popularity of preferential and regional trade agreements such as the United States-Mexico-Canada Agreement and Trans-Pacific Partnership Agreement have been a response to increased interest in regionalisation, the WTO’s relative sluggishness to rally consensus around new rules, and multilateral deadlock. These bilateral and plurilateral agreements can address multiple provisions around commercial aspects such as regulations and investments while aligning policies around issues like climate and sustainability among signatories in a more expedient manner.

Towards a New Geoeconomic Order?

The multiple decades of growth and integration accelerated by globalisation’s latest iteration during the Pax Americana period opened up new venues for global players like China and the European Union to exert their economic power in a way that would facilitate the pursuit of national interests. As recent political developments have shown, confrontations between the United States and China have led to a rise in geoeconomic policies designed to either expand economic and political power or counter rival political influence. China’s prominence as a rising power and geoeconomic powerhouse has encouraged greater cooperation between the United States, the European Union, and other allies to limit their geopolitical dependency and halt its expansive growth.

Military strength remains a crucial component for security and deterrence; however, it has now become overlaid with economic policy instruments to effectively achieve multifaceted strategic objectives. The frequency of commercial clashes and disputes between large economies making headlines in recent years can be attributed to these policy choices; however, competition and coercion also express themselves in other ways. Economic sanctions remain the longstanding tool for countries seeking to shape political behaviour by applying pressure on key industries. This can be seen in Western powers’ sanctions against Russia after its annexation of Crimea and the recent invasion of Ukraine, Russia’s retaliatory cuts in energy supplies to Europe, or the Biden administration’s export controls on semiconductor technology moving into China to stymie its military and economic capabilities.We are now at a crossroads where conformations of major powers are aligning strategic policies and weaponising their capabilities to counter opposing forces  

We are now at a crossroads where conformations of major powers are aligning strategic policies and weaponising their capabilities to counter opposing forces and achieve economic and political dominance, security, and influence. The ability to sway governments, set global agendas, and strengthen or establish new institutions upholding norms favourable to one’s national interests has become key to most major players. While it is too soon to say what the future of geoeconomics will look like, one can expect a continued rise in the importance of resources (e.g., energy commodities and raw materials), advanced technologies, economic tools, and policy instruments in driving competition, bargaining, coercion, and cooperation.