A Framework for Geopolitics and Economic Coercion

We introduce a framework for analyzing geopolitical and economic competition around the world. Geopolitical power arises from the ability to jointly exercise threats arising from separate economic activities. Being able to retaliate against a deviating country across multiple arenas, often involving indirect threats from third parties also being pressured, increases the off equilibrium threats and, thus, helps in equilibrium to alleviate incentive compatibility constraints in global trade and production. A world hegemon, like the United States, can extract the benefits arising from relaxing these constraints. We characterize strategic industries, enforcement externalities, and the increasing returns to scale in strategic sectors that lead to the emergence of hegemons. We formalize the idea of economic coercion as a combination of strategic pressure points and extraction points. We then apply the framework to make sense of both modern and historical episodes. We explore the structure of China’s Belt and Road Initiative and China’s attempts at utilizing economic power for non-economic aims, and recent attempts by western countries to introduce measures to limit this influence