## How new economics tools explain global power dynamics

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### Geoeconomic power
- Geoeconomics: the use of financial and trade relationships to achieve geopolitical and economic goals.
- Mechanism of power:
  - Country A supplying intermediate goods to Country B can threaten to withhold them; if substitutes are scarce, Country B may comply.
  - Control over multiple related inputs (intermediate goods, foreign capital) increases leverage because joint threats can inflict greater losses.
  - Hegemons use joint threats to induce monetary transfers, changes in markups, surcharges on loans, trade restrictions (tariffs and quotas), or political concessions.
- Examples:
  - China’s Belt and Road Initiative bundles loans, infrastructure projects, and access to manufactured goods; default risks can jeopardize all relationships simultaneously, increasing bargaining power.
  - Network effects can amplify influence beyond direct pressure (example: US pressure on European governments and firms to stop using Huawei’s 5G technology reduced Huawei’s attractiveness to other countries).

### Choke points and dependencies
- Definition: Inputs are choke points, or critical dependencies, if a hegemon controls a dominant market share of the input in the targeted economy and it is difficult to find alternatives.
- Key figures and dynamics:
  - The US and its allies control an overwhelming share of global financial services, upward of 80 to 90 percent in many countries.
  - Power is nonlinear as market share approaches dominance: the difference between controlling 95 percent and 85 percent is disproportionately large.
  - A Chinese alternative increasing from 1 percent to 10 percent can produce a disproportionate dilution of US geoeconomic power relative to further gains.
  - Standard market-share reasoning can understate geoeconomic relevance: for a medium-sized economy, an alternative provider with even a 10 percent market share can blunt much coercion.
- Recent developments:
  - Russia built domestic payment systems and connected to China-based systems after 2014, reducing the impact of Western financial sanctions in 2022.
  - China and India are building alternative payment and settlement systems; Euro area countries are pursuing a digital currency to gain monetary sovereignty.

### Risks of fragmentation
- Trade-off: gains from trade (economies of scale, specialization) generate economic dependence and vulnerability to coercion.
- Strategic complementarities (payment systems, information technology, artificial intelligence) raise the importance of choke points.
- Collective dynamics:
  - Hegemons favor hyperglobalization to increase others’ dependence; dependent countries pursue anti-coercion policies to reduce vulnerability.
  - Individually rational anti-coercion measures can collectively trigger excessive fragmentation: when one country reduces reliance, the system’s attractiveness declines and others may decouple, degrading the gains from trade and financial integration.
- Surprising implication: Hegemons can increase their own welfare by credibly constraining use of coercion—commitments to limit demands (for example, via international organizations) preserve the size and attractiveness of their economic network.
- Institutional role: Postwar institutions (IMF, World Bank, WTO) function as commitment devices that reduce the perceived risk of exploitation and help maintain participation in a common system.

### Measurement challenges and new tools
- Need: Translate theoretical clarity into testable implications and empirical guidance for policy.
- Two promising empirical approaches:
  - Use advances in trade modeling and bilateral trade data to estimate the quantitative cost to a targeted country of losing access to hegemon-controlled inputs; apply similar logic to capital flows.
  - Use large language models (LLMs) to analyze text (analyst reports, earnings calls) for signals of geoeconomic threats that have been threatened but not materialized.
- Findings from LLM application:
  - LLMs can extract granular signals about geoeconomic pressure down to specific firms, instruments, and reactions in near real time.
  - Empirical results reported:
    - Chinese firms responded to US export controls on semiconductors by increasing domestic research and development.
    - Western firms largely reported complying with US demands to lower sales to China of specific technologies.
    - US firms report being overall negatively affected by US tariffs and intending to raise sales prices while facing higher input prices.
- Measurement caveat: The most powerful geoeconomic threats often do not materialize when targets comply; textual analysis helps observe threatened actions.

### Policy recommendations and scenarios ("A path through the storm")
- Short-term outlook: The pre-rivalry era of globalization is unlikely to return; geoeconomic competition between great powers will persist.
- For countries pursuing anti-coercion policies:
  - Pursue targeted diversification in key sectors controlled by hegemons to reduce vulnerability without wholesale decoupling.
  - Focus diversification efforts on true choke points—sectors with greatest dependence and scarcest alternatives—while preserving broader integration benefits.
- For hegemons:
  - Commit credibly to limited use of power and rules-based behavior to keep the global system attractive and deter costly anti-coercion responses.
  - Reserve coercive instruments for clear and limited purposes to maintain confidence in the hegemon’s commitment to global cooperation.
- Strategic balance:
  - Understanding the nonlinearity of power, the value of targeted diversification, and the principle of self-restraint helps navigate geoeconomic competition.
  - The world need not fragment completely to achieve economic security, and hegemons need not abandon leverage entirely to preserve it; striking this balance is challenging but preferable to a fractured global economy that leaves everyone poorer and less secure.

*Source: Christopher Clayton, Matteo Maggiori, and Jesse Schreger, June 2026.*

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