Geoeconomics and Statecraft

Alexander Hamilton was America’s most forward-thinking Founding Father on practically all topics ranging from a strong presidency (“energetic executive”) to economic policy to abolitionism. By the early 20th century, the country had thrown off the past of Jeffersonianism and accepted a larger role for the federal government. One of his most forward-thinking strategies, though, was about the role of industry in turning the United States into a great power (what he would have called an imperial republic). His policies as Secretary of the Treasury included creating a national sales tax on whiskey and tariffs to fund the government, establishing a central bank, having the federal government take on states’ debts, and prioritizing manufacturing. While Hamilton believed his policies would help the US become economically strong, the basis of his decisions were primarily about achieving geopolitical independence from European great powers, especially the British Empire.

For example, half of the War of Independence was funded through conscription of resources from the populace. Hamilton foresaw that there would be future conflict with Britain, and he wanted to create a mechanism to fund the military when that should happen. President James Madison ending the central bank in 1811 prevented the US from successfully funding the military and was one of the reasons Britain defeated the fledgling republic. Hamilton’s motivation was to use economic tools to secure the national interest in geopolitical competition. Essentially, he was using geoeconomics.

Note: If you’re interested in exploring the thought of Hamilton further, I suggest reading Walling’s Republican Empire, Federici’s The Political Philosophy of Alexander Hamilton, Chernow’s Alexander Hamilton, Randall’s Alexander Hamilton: A Life, and Brookhiser’s Alexander Hamilton, American. ?

What is Geoeconomics?

How geopolitics relates to and impacts markets is important for political risk analysts because that is what corporations need to understand to reduce uncertainty in business decisions. There is a subgenre to this issue that analysts also need to understand, which is geoeconomics. Geoeconomics differs from political economy (the interaction between states and markets) because it deals with how states use economic tools for geopolitical ends. In addition, geoeconomics is concerned with the spatial and temporal characteristics connected to economics, e.g., choke points in trade routes or access to natural resources. Importantly, today's global markets are "deeper, faster, more leveraged, and more integrated than ever before" and "exert more influence over a nation's foreign policy choices and outcomes..." (Blackwill and Harris, War By Other Means, p. 37). That is why geoeconomics matters.

According to Blackwill and Harris, there are seven types of policies for geoeconomics that governments will use: trade, investment, sanctions, monetary, foreign aid, technology, and commodities. Each of these policies are utilized by powers because they are easier and cheaper than the use of force, and as national power is directly connected to economic performance, more countries are making them the primary tools of their foreign policies. Analysts need to understand the role geoeconomics plays in policy decisions on each of those tools to better forecast state behavior and their impact on markets.

America's Geoeconomics

The zenith of geoeconomics in American foreign policy came during the years 1941-1948 with the Lend-Lease Act, the Office of Economic Warfare, and the Marshall Plan in response to World War II and the early Cold War. The Marshall Plan in particular was useful for helping the US contain the spread of communism in western Europe because the continent had been devastated by the war. Desperate for even basic material, the US was able to bolster democratic forces against the Soviet Union by providing aid. It was only the threat from Nazi Germany and the Soviet Union that spurred American foreign policy towards the use of economic tools for geopolitical aims, which had not really happened since Hamilton. However, the US would not focus on using geoeconomic tools long term. Capable application of geoeconomics would decline once again and practically disappear by the 1980s, replaced with a renewed dedication to neoliberal economics that separated politics and markets with the blunt and ineffective use of sanctions as the only real geoeconomic tool used.

That would partially change under the Trump administration that prioritized economic issues over other geopolitical concerns. For example, Trump used Section 301 tariffs to try and contain China when it came to exporting material and products. In addition, the Committee on Foreign Investment in the United States (CFIUS) uses its authority to prevent investment by companies that threaten national security, which primarily effects Chinese companies that want to inappropriately use Americans’ data or gain access to important material. President Biden has also used some geoeconomic tools to punish Russia following its illegal invasion of Ukraine, such as removing Russia from Swift to harm their economy.

There are three primary problems with the US’s approach to geoeconomics. First, most administrations are often unwilling to harm American businesses to achieve strategic interests. Back in the 1960s, Congress led the way in liberalizing the embargo against the Soviet Union by passing an East-West trade bill because they thought the restrictions under the Export Control Act disadvantaged American businesses. Unironically, this was the same argument used by those opposed to sanctioning Russia following the first invasion of Ukraine in 2014. Second, the US primarily uses economic leverage for partisan political goals rather than strategic geopolitical ones, e.g., LGBT issues, unions, environmental regulations, and/or protecting domestic manufacturing are prioritized in trade negotiations over achieving specific national interests or interdependence. Finally, the US is dedicated to neoliberal economics that fundamentally dislikes the entanglement between politics and markets, so most administrations oppose economic policies just for geopolitical ends.

Energy and Geoeconomics

Energy remains an important aspect of geoeconomics because it is the basis for economic growth even in the digital age, and countries can easily wield it as a weapon. Russia and OPEC in particular have used embargos on oil and natural gas to try and bend other countries to their will. OPEC tried an embargo in 1973 because of America’s support for Israel in the Yom Kippur War. In contemporary times, Russia used natural gas exports to cajole European countries into accepting their foreign policy in Ukraine while simultaneously offering cheap gas to keep countries on a short leash, such as Moldova.

The US has taken a problematic approach to energy with both Democrats and Republicans choosing to not focus on what would give the country a real strategic and economic advantage. Cheap oil and natural gas would help bring in billions of dollars to country, increase domestic manufacturing (especially in petrochemicals and steel), and would make infrastructure development significantly cheaper. Allies in geopolitical competition would also benefit from cheaper American energy, such as Europe, Japan, and South Korea. These benefits could even be increased if the US worked with Australia to help them develop and produce their expansive hydrocarbon reserves. Energy independence will never be truly possible because of the global nature of energy markets, which is why oil and natural gas production are so important for achieving geoeconomic goals. However, the US has chosen to not explore energy production as a geoeconomic tool for a variety of ideological reasons.

China's Geoeconomics and Autocracies' Advantage

Because China is autocratic and mercantilist, the CCP can more effectively use geoeconomics, and they regularly use available tools to punish adversaries. The Chinese government has strong powers to apply geoeconomic pressure, including controlling access to its domestic market, ability to close off entire sectors, forcing joint ventures with state-controlled companies, directing FDI with its huge reserves, and manipulating its currency.

Territorial claims are a strong impetus for China to use geoeconomic tools to bolster its position in the region, and these claims are intimately connected to weakening the US's alliance system and strategic position. For example, the CCP imposed a rare earth metals ban over the Senkaku islands dispute with Japan. This ban was also done to test the US's support as an ally and determine the support America offer in a possible conflict. China has even engineered protests and boycotts over Japan's internal education policy. When Japan approved a new textbook in 2006 that Beijing thought glossed over Japanese wartime activities in China, the CCP encouraged protests and boycotts, increased inspections of imports, delayed work visas, and discouraged tourists from going to Japan.

Japan is far from the only country that has suffered from geoeconomics. "For those countries that are willing to host the Dalai Lama, one study shows that export levels to China drop by an average 8.1 percent after meetings between a prime minister or monarch and the exiled Tibetan leader, a decrease that takes roughly two years to return to normal" (War By Other Means, p. 130). China has also banned products from Australia over the country’s Covid investigation and banned bananas from the Philippines because of Filipino ships sailing around the Scarborough Shoal.

Geoeconomic policy choices typically help non-Western countries more because of the ease of the decisions. For example, former Brazilian president Dilma Rousseff and former Chinese leader Hu Jintao enhanced diplomacy by having Brazil Embraer sell thirty planes to Chinese state-owned airlines. American airlines couldn't be compelled to do that for US foreign policy. In addition, autocratic countries do not have to worry about negative consequences for their policy choices. Chinese workers and manufacturers do not walk away unscathed by the CCP's geoeconomic policies, but that exemplifies why autocratic countries can utilize these tools more effectively. Their workers can suffer without the government having to care about the unhappiness.

Analyzing Geoeconomics

Security professionals do not typically need to understand market economics, but they should have a basic understanding of geoeconomics in the age of great power competition. China, Russia, the US, EU, and other rising powers will use geoeconomic tools to achieve their foreign policy aims because war is too expensive, which means these policies will be chosen when there are political disagreements. More importantly, states do not usually go directly into war. Escalatory actions like sanctions, export bans, and investment limits will be used to indicate the possibility of conflict should relations continue to deteriorate. Geoeconomics tools are important variables in geopolitical risk analysis as both cause and consequence of further actions. Each tool will sometimes require deeper research, but a broad understanding of geoeconomics will help analysts improve their insight and forecasting.

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