Geoeconomics

In an era when great powers possess nuclear weapons that make direct confrontation potentially suicidal, competition has migrated to new domains. The United States and Soviet Union accumulated over 70,000 nuclear warheads at the Cold War’s peak, ensuring that any direct conflict could end civilization. Today’s great powers—the U.S. with approximately 5,550 warheads, Russia with 5,900, and China with an estimated 500 and growing—face similar constraints. Geoeconomics represents the resulting shift: the use of economic means to achieve geopolitical ends, and the analysis of economic actions through a strategic lens. As Edward Luttwak memorably described it in his seminal 1990 essay, geoeconomics is “the logic of conflict in the grammar of commerce.”

Defining the Field¶

Geoeconomics occupies the intersection of economics and strategy, combining insights from both disciplines while transcending their traditional boundaries. Traditional economics assumes markets operate according to efficiency principles, with states intervening primarily to correct market failures; it treats borders as friction to be minimized and views economic integration as inherently beneficial. Traditional geopolitics focuses on territory, military power, and the physical geography of strategic competition; it often neglects economic factors or treats them as mere enablers of military capability. Geoeconomics fuses these concerns, recognizing that:

• Economic relationships create dependencies that can be exploited for political leverage: Germany’s dependence on Russian gas (approximately 40% of imports before 2022) gave Moscow influence over Berlin’s foreign policy
• Control over supply chains, financial networks, and technology standards confers political power that may exceed military capability: the U.S. can impose devastating sanctions because the dollar clears 88% of all foreign exchange transactions
• States pursue economic policies not merely for prosperity but for power: China’s Belt and Road Initiative ($1 trillion+ in cumulative investment) builds infrastructure but also creates political dependencies
• Commercial actors—firms, banks, investors—become instruments and targets of statecraft: Huawei is simultaneously a telecommunications company and a vector of Chinese state influence

The field gained prominence after the 2008 financial crisis revealed the strategic vulnerabilities embedded in global economic interdependence. When Lehman Brothers collapsed, the contagion spread instantly to financial institutions worldwide, demonstrating how interconnected systems transmit shocks—and how states occupying central network positions (the U.S. Federal Reserve became lender of last resort to foreign banks) gain leverage. Geoeconomic analysis accelerated dramatically following the 2022 Russian invasion of Ukraine, which triggered the most extensive sanctions regime in history: over 16,000 individual measures against Russian entities, the freezing of approximately $300 billion in Russian central bank reserves, and the effective exclusion of major Russian banks from the SWIFT payment network.

The Instruments of Geoeconomic Power¶

States deploy multiple tools in geoeconomic competition, each with distinct characteristics, applications, and limitations:

Sanctions and export controls represent the most visible instruments of geoeconomic power. The United States has sanctioned Iran’s economy (reducing oil exports from 2.5 million barrels per day in 2018 to under 500,000 by 2020), frozen approximately $300 billion in Russian central bank assets (2022), and restricted advanced semiconductor sales to China (October 2022 controls on chips below 14nm process and advanced manufacturing equipment). These measures exploit American centrality in global financial networks (the dollar’s role in 88% of forex transactions) and technology supply chains (American-origin technology embedded in critical equipment worldwide). The U.S. Treasury’s Office of Foreign Assets Control (OFAC) administers over 30 sanctions programs targeting countries, terrorist organizations, narcotics traffickers, and weapons proliferators.

But sanctions are a double-edged sword. Overuse accelerates efforts to create alternative systems: Russia’s SPFS payment network, China’s CIPS (processing $14 trillion in 2023), and bilateral currency swap agreements all aim to reduce dollar dependence. Secondary sanctions—which punish third-country firms for dealing with sanctioned entities—strain alliances, as European companies forced to choose between American and Iranian markets discovered after 2018. The effectiveness of sanctions remains debated: Iran has not abandoned its nuclear program; Russia continues fighting in Ukraine; targeted regimes often shift costs to civilian populations while elites find workarounds.

Trade policy shapes economic relationships in ways that serve strategic purposes beyond commercial efficiency. Tariffs, quotas, market access negotiations, and regulatory standards can reward partners and punish rivals. The Trump administration imposed tariffs averaging 19% on approximately $370 billion worth of Chinese imports; the Biden administration maintained most of these measures while adding targeted restrictions. China’s informal boycotts demonstrate how trade can be weaponized without formal sanctions: South Korean goods faced import obstacles after THAAD missile defense deployment (Lotte Group lost an estimated $5 billion); Australian exports confronted restrictions after Canberra called for a COVID-19 origins inquiry (wine tariffs reached 200%, coal shipments were blocked); Lithuanian goods were effectively banned after Taiwan opened a representative office in Vilnius. These measures operate through customs delays, regulatory obstacles, and unofficial guidance to importers rather than formal policy—maintaining deniability while imposing real costs.

Strategic investment builds influence through infrastructure development, resource acquisition, and technology transfer. China’s Belt and Road Initiative represents the most ambitious contemporary example—financing ports (Hambantota, Sri Lanka; Gwadar, Pakistan; Piraeus, Greece), railways (China-Europe freight routes carrying over 80,000 containers monthly by 2023), telecommunications networks (Huawei 5G installations across Africa and Southeast Asia), and power generation (Chinese companies built 42% of global coal-fired generating capacity added between 2001 and 2020). Cumulative Belt and Road investment exceeded $1 trillion by 2023, spanning 150+ countries. Such investments create economic dependencies (debt service on Chinese loans), establish physical presence (Chinese workers and facilities in host countries), and sometimes include contractual terms that provide political leverage (the 99-year lease on Hambantota port after Sri Lanka struggled with debt repayment). The U.S. response—the Build Back Better World initiative, rebranded as the Partnership for Global Infrastructure and Investment with a $600 billion target—has struggled to match Chinese scale and speed.

Currency and financial leverage derives from control over the infrastructure of global finance, a form of power the United States possesses to a degree unmatched by any rival. The dollar’s status as the world’s reserve currency (approximately 59% of global foreign exchange reserves in 2023, down from 71% in 1999 but still dominant) gives Washington unique capabilities: dollar-clearing systems enable sanctions enforcement because most international transactions flow through American correspondent banks; access to dollar funding is essential for most international trade and finance; Federal Reserve interest rate decisions ripple through global markets. The SWIFT messaging system, though headquartered in Belgium, operates under effective American influence—exclusion from SWIFT devastated Iran’s international commerce and hobbled Russian banks after 2022.

This privilege has prompted discussion of de-dollarization, with China, Russia, and others promoting alternatives. Yet progress remains limited: the yuan comprises only about 3% of global reserves and 7% of trade finance; cryptocurrencies lack the stability for large-scale commerce; no alternative reserve currency matches the dollar’s network effects. The euro (20% of reserves) is the only plausible near-term competitor, but eurozone fragmentation and the absence of unified fiscal policy constrain its reserve currency potential.

Technology control has emerged as perhaps the most consequential domain of geoeconomic competition, with implications extending decades into the future. Semiconductors, artificial intelligence, quantum computing, and telecommunications standards increasingly determine economic competitiveness, military capability, and societal organization. The American campaign against Huawei—culminating in the 2020 restriction preventing any company using American technology from supplying Huawei—crippled the company’s smartphone business and slowed its 5G deployment. The October 2022 semiconductor export controls on China represented what National Security Advisor Jake Sullivan called “small yard, high fence” policy: restricting the most advanced chips (below 14nm), chip-making equipment (particularly ASML’s extreme ultraviolet lithography machines, which cost $150 million each and require 40 freight containers to ship), and the expertise to operate such equipment. China responded with restrictions on gallium and germanium exports (July 2023) and expanded domestic chip investment through a $47 billion semiconductor fund. The technology war will reshape global supply chains for decades.

The Logic of Geoeconomic Competition¶

Geoeconomic strategies operate through several mechanisms, each with distinct logic, applications, and limitations:

Coercion uses economic pressure to compel changes in target behavior. Sanctions against Iran aimed to halt nuclear development by making the economic costs unbearable—inflation reached 50% annually, oil exports collapsed, and GDP contracted sharply. Trade restrictions on Russia sought to impose costs for the 2022 invasion that would exceed benefits: Western nations aimed to deny Moscow the revenues and technology necessary to sustain its war machine. Coercion relies on the target’s vulnerability (small, trade-dependent economies are more susceptible) and the credibility of sustained pressure (targets often calculate they can outlast sanctions if they doubt imposer resolve). The historical record is mixed: economic pressure contributed to the JCPOA nuclear deal (2015) and South Africa’s abandonment of apartheid (1990s), but has failed to dislodge the Castro regime (61 years of embargo), end North Korea’s nuclear program, or force Russian withdrawal from Ukraine.

Deterrence threatens economic costs to prevent unwanted actions before they occur. The expectation that sanctions would follow Russian invasion may not have prevented the 2022 war—Putin apparently calculated that Europe’s energy dependence would constrain the response, or that regime survival justified any economic cost—but calculations about economic consequences shape behavior in many cases. Taiwan’s position in semiconductor supply chains (TSMC produces 90% of the world’s most advanced chips) creates economic deterrence against invasion: a war would destroy the factories and skilled workforce, imposing massive costs on China’s own technology industry. Whether this economic logic will prove decisive against nationalist sentiment remains uncertain.

Influence cultivation uses economic benefits to build political relationships and dependencies that yield diplomatic dividends. Development assistance, preferential trade terms, and investment flows create goodwill, employ local workers, and tie recipient economies to donor interests. China’s infrastructure financing in developing countries exemplifies this approach: ports, railways, and telecommunications networks address genuine development needs while creating relationships that translate into diplomatic support (African states’ UN votes often align with China’s positions), economic leverage (debt service obligations), and physical presence (Chinese companies and workers remain after construction). The United States built its postwar influence partly through Marshall Plan aid ($13.3 billion from 1948-1952, approximately $150 billion in today’s dollars) that reconstructed Europe while creating lasting economic and political ties.

Resilience building reduces vulnerabilities to others’ geoeconomic pressure, enhancing the ability to resist coercion and pursue independent policies. Strategies include: diversifying supply chains (the European Union’s effort to source critical materials from multiple suppliers rather than depending on any single country); developing domestic industrial capacity (China’s “Made in China 2025” program to achieve self-sufficiency in advanced manufacturing); accumulating foreign exchange reserves (China’s $3.2 trillion provides a buffer against financial pressure); and creating alternative payment systems (Russia’s SPFS, China’s CIPS) that reduce dependence on Western-controlled infrastructure. European discussions of strategic autonomy center partly on reducing economic vulnerabilities—though progress has been slow, as the 2022 energy crisis demonstrated when decades of dependence on Russian gas left Europe scrambling for alternatives.

Geoeconomics Versus Geopolitics¶

The distinction between geoeconomics and traditional geopolitics reflects changing strategic realities:

Yet this distinction is not absolute. Economic strength ultimately enables military power; military security makes economic activity possible. Geoeconomics complements rather than replaces traditional strategy. A state vulnerable to blockade remains constrained regardless of its economic sophistication; a state facing financial isolation may be compelled to military action it would otherwise avoid.

Contemporary Applications¶

Several ongoing contests illustrate geoeconomic competition with increasing intensity and sophistication:

U.S.-China technology rivalry centers on semiconductors, AI, and standards-setting, with stakes that extend far beyond commercial profit to military capability, economic competitiveness, and even societal organization. American export controls (October 2022, expanded October 2023) aim to slow Chinese technological development by denying access to advanced chips, chip-making equipment, and expertise; the restrictions affect an estimated $10-15 billion in annual trade while potentially setting back Chinese AI development by years. China responds with massive investment in self-sufficiency: the national semiconductor fund received $47 billion in new capital in 2023; domestic companies like SMIC achieved 7nm chip production earlier than expected; restrictions on gallium and germanium exports (materials essential for semiconductors) demonstrate China’s own supply chain leverage. The outcome will shape the global technology ecosystem for decades: will the semiconductor industry bifurcate into Chinese and Western spheres, or will one side achieve decisive advantage?

European energy security was transformed by the Ukraine war in what may prove the most consequential geoeconomic shift of the 2020s. Russia’s weaponization of gas supplies—cutting deliveries through Nord Stream by 80% in 2022, even before the pipeline’s mysterious sabotage—exposed four decades of energy dependence. Germany had imported approximately 55% of its natural gas from Russia, the Netherlands 25%, Italy 40%. Europe’s hasty diversification required building new LNG import terminals (Germany constructed three floating terminals in under a year, a process normally taking 5+ years), competing for global LNG supplies (raising prices for Asian importers), and dramatically accelerating renewable energy deployment. Gas prices spiked to over €300 per megawatt-hour in August 2022, compared to a historical average below €20. The episode demonstrated both the vulnerability of energy dependence and the difficulty—but possibility—of rapidly restructuring supply chains when survival demands it.

The Global South has become an arena of intensifying geoeconomic competition. China, the United States, the EU, Japan, and regional powers compete to provide infrastructure, investment, and market access to developing nations that collectively represent 80% of humanity and an increasing share of global economic growth. China’s Belt and Road Initiative leads in cumulative investment; the U.S. Partnership for Global Infrastructure and Investment promises $600 billion through 2027; the EU’s Global Gateway targets €300 billion; Japan offers the Partnership for Quality Infrastructure. Developing nations seek to leverage this competition—accepting Chinese infrastructure loans while maintaining Western security relationships, diversifying among multiple partners to avoid excessive dependence on any single power. The results vary: some nations like Sri Lanka have struggled with debt; others like Indonesia have successfully balanced competing suitors.

Financial infrastructure alternatives are emerging as states seek to reduce vulnerability to American financial leverage and the weaponization of dollar-based systems. China’s Cross-Border Interbank Payment System (CIPS) processed approximately $14 trillion in 2023, though this remains modest compared to SWIFT’s daily volumes; participation includes banks from over 100 countries. Russia’s SPFS (System for Transfer of Financial Messages) connected over 500 institutions before the Ukraine war, though its effectiveness proved limited when major banks were sanctioned. Discussions of BRICS payment mechanisms, potentially involving a common currency or blockchain-based settlement, remain conceptual but reflect genuine interest in alternatives. The dollar’s dominance will not disappear overnight—network effects, liquidity, and the absence of alternatives preserve its position—but the trend toward financial multipolarity seems irreversible.

Critiques and Risks¶

Geoeconomic competition carries significant dangers:

Economic fragmentation may reverse decades of efficiency gains from globalization. Duplicate supply chains, incompatible technology standards, and restricted market access raise costs and reduce innovation.

Escalation dynamics can spiral unpredictably. Sanctions invite retaliation; export controls prompt race-to-the-bottom restrictions; investment screening may become protectionism by another name. The line between defensive measures and aggressive ones often blurs.

Alliance strains emerge when geoeconomic measures impose costs on partners. Secondary sanctions force allies to choose between American markets and trade with sanctioned states; technology restrictions may disadvantage allied firms.

Blowback effects can harm the initiator. Weaponizing the dollar encourages alternatives; overusing sanctions dilutes their impact; cutting trade ties eliminates the leverage that interdependence provides.

Normative erosion threatens the rule-based trading system. When great powers routinely cite “national security” to justify economic restrictions, the distinction between legitimate and pretextual claims erodes, undermining the WTO and other institutions.

Critiques and Limitations¶

Geoeconomic approaches face significant limitations that temper their utility:

Economic costs to the wielder: Sanctions and export controls impose costs on the imposing country as well as the target. American firms lose sales to Chinese competitors not bound by export restrictions; European consumers paid higher energy prices after sanctioning Russia; agricultural exporters lost markets when Russia retaliated against Western sanctions with food import bans. These self-inflicted wounds create domestic political pressure to ease restrictions.

Declining effectiveness through adaptation: Targets of geoeconomic pressure adapt over time. Russia has restructured trade toward China and India; Iran developed sophisticated sanctions evasion networks; China invests heavily in semiconductor self-sufficiency. Measures that are devastating initially may lose effectiveness as alternatives emerge.

Alliance strain: Secondary sanctions and extraterritorial measures create tensions with allies forced to choose between American markets and other relationships. European companies abandoned Iranian contracts after U.S. withdrawal from the JCPOA; allied semiconductor equipment manufacturers face lost Chinese sales under export controls. Managing alliance relationships while pursuing geoeconomic objectives requires constant calibration.

Unintended consequences: Aggressive geoeconomic action can accelerate the very outcomes it seeks to prevent. Overuse of dollar weaponization encourages de-dollarization; technology restrictions may spur Chinese innovation that would not have occurred otherwise; economic pressure can strengthen nationalist sentiment in target countries rather than weakening regime support.

The Future of Geoeconomics¶

Several trends will shape the field’s evolution over the coming decades:

Selective decoupling rather than complete separation appears likely. Critical sectors—advanced semiconductors, pharmaceuticals, strategic minerals, defense supply chains—will see reduced interdependence as both the United States and China pursue resilience. Consumer goods trade may remain relatively open: Apple still manufactures iPhones in China; American soybeans still flow to Chinese processors. The question is where the boundaries fall between “strategic” and “commercial” activities—a line that shifts with political circumstances.

Middle power strategies will become more sophisticated as states like India (GDP $3.7 trillion), Indonesia (GDP $1.4 trillion), Turkey (GDP $906 billion), Brazil (GDP $2.1 trillion), and Saudi Arabia (GDP $1.1 trillion) navigate between competing blocs. These nations possess enough market size and strategic importance to maintain leverage without full alignment with either Washington or Beijing. They will extract benefits from both sides, resist pressure to choose camps, and potentially form their own coalitions (the expanded BRICS) that increase collective bargaining power.

New instruments will emerge that did not exist a generation ago. Central bank digital currencies could reshape international payments if China’s e-CNY or a hypothetical digital euro gains adoption. Carbon border adjustments—the EU’s Carbon Border Adjustment Mechanism becomes fully operational in 2026—create new forms of trade leverage tied to climate policy. Data governance frameworks determine where information can flow and who can access it, with implications for surveillance, commerce, and innovation. AI regulation could become a geoeconomic tool if different standards fragment the global AI market into competing ecosystems.

Climate as geoeconomic arena: The energy transition creates new dependencies (lithium, cobalt, rare earths), new technologies (solar panels, batteries, EVs), and new infrastructure (charging networks, grid modernization) that will become objects of geoeconomic competition. China currently dominates solar panel manufacturing (approximately 80% of global capacity) and battery production (77% of cell manufacturing capacity). The question is whether this will replicate the oil-based geoeconomics of the 20th century with different commodities and technologies.

The geoeconomic domain has become as consequential as any battlefield—and often more decisive, since economic pressure can achieve objectives that military force cannot. Understanding how economic tools serve strategic ends—and how strategic competition reshapes economic relationships—is now essential for navigating international affairs in the multipolar era taking shape.

Sources & Further Reading¶

• War by Other Means: Geoeconomics and Statecraft by Robert D. Blackwill and Jennifer M. Harris — The foundational contemporary text on geoeconomics, arguing that the United States has neglected economic tools relative to military instruments and must rebalance.

• The Geo-Economics of Global Affairs by Edward N. Luttwak — Luttwak’s seminal 1990 essay in The National Interest that introduced the term “geoeconomics” and predicted the shift from military to economic competition.

• Uses of Economic Statecraft in Strategic Survey (IISS Annual) — The International Institute for Strategic Studies provides regular analysis of how economic instruments are deployed in contemporary great power competition.

• Underground Empire: How America Weaponized the World Economy by Henry Farrell and Abraham Newman — Examines how the United States leverages its position in global networks to project power, and the risks of overusing this leverage.