Finance & Development has published a five-paper symposium on “Geoeconomics” (June 2026)., which is the idea that in a global economy, national security policy needs to be incorporated into economic policy-making. Christopher Clayton, Matteo Maggiori, and Jesse Schreger contribute “Understanding Geoeconomics in a Volatile World.” They write:
The academic study of geoeconomics dates most prominently to 1945, when economist Albert Hirschman published National Power and the Structure of Foreign Trade. In it, he examines how Nazi Germany had structured its economy to maximize leverage over its neighbors during the interwar period. He rejected the naive view that because trade is voluntary and mutually beneficial, it is geopolitically harmless. Benefits can be mutual, Hirschman argues, without being symmetrical. And asymmetry is how power builds. Since Hirschman’s time, economists have left the study of global power dynamics largely to political scientists and historians, who have led the development of this area of research. Though almost every economics student encounters the Herfindahl-Hirschman Index, few know it was invented to measure the economic power of nations, not firms.
Clayton, Maggiori, and Schreger discuss some recent episodes of the use of economic sanctions, including those imposed on Russia, and draw some general lessons. For example:
Inputs are called choke points, or critical dependencies, if the hegemon controls a dominant market share of the input in the targeted economy and it is difficult to find alternatives to the hegemon’s inputs. For example, the US and its allies control an overwhelming share of global financial services, upward of 80 to 90 percent in many countries. Payment systems, settlement infrastructure, and dollar-denominated lending are basic inputs in a functioning economy. The lack of viable alternatives to the US financial infrastructure gives the country considerable geoeconomic power. Recently, it has wielded this power by imposing comprehensive financial sanctions on Iran and Russia, putting pressure on HSBC to disclose transactions linked to Huawei, and cutting Russian banks’ access to the SWIFT messaging system for international financial transactions.
However, there is a catch. The relationship between control over a sector and geoeconomic power is not linear; rather, power increases disproportionately as a hegemon approaches complete control. The difference between controlling 95 percent and 85 percent of an input is disproportionately large. At 95 percent, a target economy has almost no viable alternatives and must accept whatever terms the hegemon demands. At 85 percent, there is enough of an alternative to give the target meaningful options, and the hegemon’s leverage dissipates rapidly. …
Our work shows that there is a trade-off between gains from trade and economic security. The same mechanisms that are the classic foundations of the gains from trade—economies of scale and specialization—also generate economic dependence. The domestic alternatives that countries did not build up are poor substitutes for globally dominant inputs, such as Chinese manufacturing or US financial services and technology. This lack of alternatives leaves the countries exposed to coercion. As the global economy increasingly relies on goods and services that have strategic complementarities and economies of scale, these mechanisms are likely to increase in importance.
At one level, geoeconomics is just common sense: no one would want to see a nation’s security weakened to make some academic point about the merits of free trade. Thinking more seriously about diversificaition of global supply chains, and about interdependencies between nations, seems fully worthwhile. But as a matter of practical politics, claims about “national security” also deserve some skepticism. But when you run “national security” through the corridors of Washington, DC, you will find that it collects a lengthy wish-list of subsidies and tax breaks for industries, K-12 education, national health care, climate change, and government access to personal information and much more–are of which, amazingly enough, turn out to be core problems of “national security.” The “national security” label is no excuse for not considering whether the proposed policy is actually appropriate, the full costs of each policy, and the full range of alternative policy choices.
