Governments use their countries’ economic strength from existing financial and trade
relationships to achieve geopolitical and economic goals. We refer to this practice as
geoeconomics. We build a framework based on three core ingredients: limited contract
enforceability, input-output linkages, and externalities. Geoeconomic power arises from
the ability to jointly exercise threats across separate economic activities. A hegemon,
like the United States, exerts its power on firms and governments in its economic
network by asking these entities to take costly actions that manipulate the world equilibrium in the hegemon’s favor. We characterize the optimal actions and show that
they take the form of mark-ups on goods or higher rates on lending, but also import
restrictions and tariffs. Input-output amplification makes controlling some sectors more
valuable for the hegemon since changes in the allocation of these strategic sectors have
a larger influence on the world economy. This formalizes the idea of economic coercion
as a combination of strategic pressure and costly actions. We apply the framework to
two leading examples: national security externalities and the Belt and Road Initiative.
ፍትህ ለሁሉም / Justice for All