{ "title": "Understanding Geoeconomics in a Volatile World", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori", "canonical": "https://www.imf.org/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori", "overlayPath": "/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/index.md", "summary": "How new economics tools explain global power dynamics", "sections": [ { "heading": "Overview", "content": "- Theme: The resurgence of geoeconomics—use of financial and trade relationships to achieve geopolitical and economic goals—driven by increased great-power competition and the growing use of tariffs, sanctions, and export controls.\n- Historical anchor: Albert Hirschman’s 1945 National Power and the Structure of Foreign Trade reframed trade asymmetries as sources of power.\n- Goal of the authors’ research agenda: Provide an economic modeling framework for geoeconomics to achieve theoretical clarity, empirical testing, and policy counterfactuals." }, { "heading": "How geoeconomic power is built", "content": "- Mechanisms of leverage:\n - Control of critical intermediate goods allows a country to threaten withholding inputs to induce compliance.\n - Power increases when a country controls multiple related economic relationships (e.g., intermediate goods plus foreign capital).\n - Hegemons can demand monetary transfers, changes in markups, surcharges on loans, trade restrictions (tariffs, quotas), or political concessions.\n- Examples:\n - China’s Belt and Road Initiative bundles loans, infrastructure projects, and access to manufactured goods; default risks threaten multiple relationships simultaneously, increasing leverage.\n - Network effects magnify influence: pressure on some countries to reject Huawei’s 5G technology reduced its attractiveness to others." }, { "heading": "Choke points and dependencies", "content": "- Definition: Inputs are choke points (critical dependencies) when a hegemon controls a dominant market share of the input in the targeted economy and alternatives are difficult to find.\n- Empirical note: The US and its allies control an overwhelming share of global financial services, \"upward of 80 to 90 percent in many countries.\"\n- Nonlinearity of power:\n - Power grows disproportionately as control approaches complete dominance; the difference between controlling \"95 percent and 85 percent\" of an input is disproportionately large.\n - At \"95 percent\", targets have almost no viable alternatives; at \"85 percent\", meaningful options exist and leverage dissipates rapidly.\n- Strategic dynamics:\n - A small alternative market share can disproportionately blunt hegemonic power: gains by alternatives from \"1 percent to 10 percent\" can cause large reductions in the hegemon’s coercive edge.\n - Russia’s post-2014 efforts to reduce dependence on the US-led coalition (develop domestic payment systems and connect to China-based systems) helped mute the effect of sweeping sanctions after \"2022\".\n - China and India are building alternative payment and settlement systems; euro area countries are advancing a digital currency for greater monetary sovereignty." }, { "heading": "Risks of fragmentation", "content": "- Trade-off: Economies of scale and specialization that generate gains from trade also generate economic dependence and exposure to coercion.\n- Collective dynamics:\n - Individual anti-coercion policies (targeted diversification, alternative architectures) can be rational and successful for single countries but may collectively trigger excessive fragmentation.\n - When participants leave or reduce reliance on a system, the system’s attractiveness falls (network externalities), encouraging further exits and decoupling.\n- Surprising conclusion: Hegemons can increase their own welfare by credibly constraining coercion (e.g., submitting to international rules), preserving the size and attractiveness of their economic network.\n- Institutional role: Postwar institutions (IMF, World Bank, WTO) function as commitment devices that limit aggressive exploitation of dominant positions and thereby sustain participation in the system." }, { "heading": "Measurement challenges and empirical approaches", "content": "- Need: Translate theoretical models into testable, data-driven implications for policymakers.\n- Two promising empirical strategies:\n - Use advances in trade modeling and bilateral trade data to estimate the cost to a target of losing access to hegemon-controlled inputs, including goods and capital flows.\n - Use large language models (LLMs) to analyze texts (analyst reports, earnings calls) for evidence of threatened but unrealized geoeconomic actions.\n- LLM findings reported by the authors:\n - LLMs can extract firm-, instrument-, and reaction-specific signals about geoeconomic pressure in near real time.\n - Empirical results:\n - Chinese firms responded to US export controls on semiconductors by increasing domestic research and development.\n - Western firms largely reported complying with US demands to lower sales to China of specific technologies.\n - US firms report being overall negatively affected by US tariffs and intending to raise sales prices while facing higher input prices." }, { "heading": "Policy recommendations and a path forward", "content": "- For countries pursuing anti-coercion policies:\n - Pursue targeted diversification in true choke points—sectors where dependence is greatest and alternatives are scarcest—to reduce vulnerability without wholesale decoupling.\n - Focus resources on identifying and addressing specific strategic complementarities and economies of scale that create critical dependencies.\n- For hegemons:\n - Commit credibly to limited and rules-based use of power to keep the global system attractive and prevent defensive decoupling by other countries.\n - Reserve coercive instruments for clear and limited purposes; maintain commitments to international institutions as commitment devices.\n- Strategic balance:\n - Optimal outcome avoids total fragmentation by combining targeted diversification by vulnerable countries and credible self-restraint by hegemons.\n - The alternative—widespread fragmentation—would leave everyone, including the hegemon, poorer and less secure.\n\nSource: Understanding Geoeconomics in a Volatile World, F&D Magazine, June 2026.\n\n---\n\n Content in this bundle\n\n- Understanding Geoeconomics in a Volatile World\n - Understanding Geoeconomics in a Volatile World (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Understanding Geoeconomics in a Volatile World (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/bundle-manifest.json)", "Authors: CHRISTOPHER CLAYTON, MATTEO MAGGIORI, JESSE SCHREGER", "Published: June 2, 2026", "Theme: The resurgence of geoeconomics—use of financial and trade relationships to achieve geopolitical and economic goals—driven by increased great-power competition and the growing use of tariffs, sanctions, and export controls.", "Historical anchor: Albert Hirschman’s 1945 National Power and the Structure of Foreign Trade reframed trade asymmetries as sources of power.", "Goal of the authors’ research agenda: Provide an economic modeling framework for geoeconomics to achieve theoretical clarity, empirical testing, and policy counterfactuals.", "Mechanisms of leverage:", "Examples:", "Definition: Inputs are choke points (critical dependencies) when a hegemon controls a dominant market share of the input in the targeted economy and alternatives are difficult to find.", "Empirical note: The US and its allies control an overwhelming share of global financial services, \"upward of 80 to 90 percent in many countries.\"", "Nonlinearity of power:", "Strategic dynamics:", "Trade-off: Economies of scale and specialization that generate gains from trade also generate economic dependence and exposure to coercion.", "Collective dynamics:", "Surprising conclusion: Hegemons can increase their own welfare by credibly constraining coercion (e.g., submitting to international rules), preserving the size and attractiveness of their economic network.", "Institutional role: Postwar institutions (IMF, World Bank, WTO) function as commitment devices that limit aggressive exploitation of dominant positions and thereby sustain participation in the system.", "Need: Translate theoretical models into testable, data-driven implications for policymakers.", "Two promising empirical strategies:", "LLM findings reported by the authors:", "For countries pursuing anti-coercion policies:", "For hegemons:", "Strategic balance:", "**Understanding Geoeconomics in a Volatile World**" ], "related": [ { "title": "Understanding Geoeconomics in a Volatile World", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2026/06/maggiori.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2026/06/maggiori.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/files/publications/fandd/article/2026/06/maggiori.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/index.md", "json": "/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/index.json", "bundleManifest": "/en/publications/fandd/issues/2026/06/understanding-geoeconomics-in-a-volatile-world-matteo-maggiori/bundle-manifest.json" }, "generatedAtUtc": "2026-09-15T20:33:44.779Z" }