## THE COST OF GEOECONOMIC COERCION

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### Close connection: historical context and recent trends
- Mercantilism (15th to early 19th centuries) linked military control of shipping and colonies to extraction of resources and financing of military spending; quote from Sir Walter Raleigh: “Whosoever commands the sea commands the trade; whosoever commands the trade of the world commands the riches of the world, and consequently the world itself.”
- 19th-century shift led by Britain moved major powers toward freer trade and financial flows, separating economic from great-power politics and enabling very rapid economic growth.
- Late 19th and early 20th centuries saw a return of geoeconomic competition as countries pursued economic nationalism while catching up to Britain; parallels drawn with contemporary trends.
- Cold War: Western powers largely sealed off the Soviet Union and its allies from international trade and investment, while Western economic integration grew.
- Post–Cold War globalization in the late 1980s and early 1990s led many governments to operate international economic relations with less regard for geopolitics—an expectation that has since been overturned.
- Recent developments bringing geopolitics back into economic policy: Western sanctions on Russia, ongoing China–United States trade conflicts, the global pandemic’s supply-chain concerns, and the full-scale Russian invasion of Ukraine.

### Benefits of coercion: why governments use geoeconomic tools
- Geoeconomic measures cited: export bans, financial sanctions, trade tariffs, embargoes, asset freezes, export controls.
- Key advantages:
  - Can coerce adversaries without threat or use of military force.
  - Can impose costs on target governments and induce domestic pressure within target countries to change behavior.
  - Can persuade allies to coordinate and compel an adversary to make concessions.
- Many geopolitical goals are intangible and hard to quantify (examples given: national security, isolating an adversary, cementing an alliance, staving off an attack, avoiding war), making benefit measurement difficult.
- Policymakers should weigh these intangible geopolitical benefits against directly measurable economic costs.

### Coercion’s costs: varieties of loss imposed on the sender
- General observation: coercive economic policies typically impose costs on the country that uses them; costs are more directly economic and amenable to analysis than the often intangible benefits.

- Costs to economic efficiency
  - Geoeconomic policies move an economy away from its most productive uses.
  - Restricting imports limits access to goods more efficiently produced elsewhere.
  - Restricting exports limits access to profitable foreign markets.
  - Measures that restrict movement of goods and capital can compromise comparative advantage and reduce productive efficiency.
  - Cited economic tradition: Adam Smith, David Ricardo, John Maynard Keynes; Keynes quote: “The community as a whole cannot hope to gain by making artificially scarce what the country wants.”
  - Governments consciously trade aggregate (economic) welfare for geopolitical objectives.

- Costs to specialization
  - Specialization is central to productivity and growth; division of labor is “limited by the extent of the market.”
  - Losing access to broader markets constrains the degree of useful specialization.
  - Specialized activities are particularly valuable and particularly vulnerable: valuable because of scarcity and specificity; vulnerable because they are hard to replace.
  - Resulting policy response: governments try to avoid dependence on other nations’ specialized products; diversifying ties reduces vulnerability but can also reduce economic efficiency.

- Costs to innovation
  - Limiting market access reduces incentives for domestic producers to innovate.
  - Export controls that cut off target economies can, however, incentivize those targets to innovate (historical example: Nazi Germany developed synthetic rubber and methadone under Allied blockade).
  - Empirical pattern: sanctioned countries have invested heavily in research and development to replace unavailable goods—examples named: Russia, China, Iran.
  - Cited research in references supporting sanctions–innovation dynamics.

- Costs to credibility
  - Reputation for reliability in trade, finance, and investment is valuable.
  - Sanctions, asset freezes, or violations of implicit/explicit contracts can erode trust in the sender.
  - As trust erodes, foreign governments and private firms become less willing to enter economic commitments that might later be violated, reducing future trade, investment, and financial ties.

- Costs to domestic politics
  - Distributional effects: costs and benefits of geoeconomic policies are uneven within the population.
  - Negative impacts on businesses that lose profitable ties can generate domestic opposition.
  - Successful policies may create winners—industries receiving market access or favorable treatment—sparking resentment from those who lose.
  - Domestic political backlash or controversy can reduce the credibility or durability of geoeconomic policy.

### Complete picture: trade-offs and policy implications
- Near-term geopolitical urgency can obscure long-term economic costs, including lasting damage to financial or commercial reputation that could outweigh temporary advantages.
- Geoeconomic policies:
  - Limit efficient functioning of the national economy and reduce incentives to specialize for maximum productive efficiency.
  - Can discourage domestic innovation while stimulating innovation among targeted rivals.
  - Limit activities available to national firms and industries.
  - Can damage a country’s long-term economic prospects by harming its reputation for reliability.
  - May create politically contentious redistribution of gains and losses domestically.
- Normative point: Geoeconomic policies are valuable foreign-policy tools that can have substantial benefits—especially if they help avoid military conflict—but there are times when the costs may outweigh the benefits.
- Prescriptive implication: Policymakers, analysts, and citizens need a clear, comprehensive accounting of costs and trade-offs to determine whether net benefits are positive.

### Select references and authorship
- Author: jeffry frieden is professor of international and public affairs and political science at Columbia University and professor of government emeritus at Harvard University.
- Selected references cited in the source:
  - Clayton, Christopher; Antonio Coppola; Matteo Maggiori; Jesse Schreger. 2025. “Geoeconomic Pressure.” NBER Working Paper 34020, National Bureau of Economic Research, Cambridge, MA.
  - Flynn, Joel; Antoine B. Levy; Jacob Moscona; Mai Wo. 2025. “Foreign Political Risk and Technological Change.” NBER Working Paper 33964, National Bureau of Economic Research, Cambridge, MA.
  - Gao, Hao; Nemit Shroff; Pengdong Zhang. 2025. “Sanctions Paradox: Do U.S. Export Restrictions Hurt Domestic Innovation?” MIT Sloan Research Paper 7328-25, Massachusetts Institute of Technology, Cambridge, MA.
  - Liu, Xueyue; Yu Liu; Alexey Makarin; Jaya Wen. 2025. “Export Controls and Innovation in Sanctioned Countries.” Harvard Business School Working Paper 25-004, Harvard University, Cambridge, MA.

*Source: JUNE 2026 F&D chapter by Jeffry Frieden.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/06/frieden.pdf_