A theory of economic coercion and fragmentation

Matteo Maggiori, Chris Clayton and Jesse Schreger

No 1224, BIS Working Papers from Bank for International Settlements

Abstract: Hegemonic powers, like the United States and China, exert influence on other countries by threatening the suspension or alteration of financial and trade relationships. We show that the mechanisms that generate gains from integration, such as external economies of scale and specialization, also increase these countries' power to exert economic influence because in equilibrium they make other relationships poor substitutes for those with a global hegemon. Smaller countries can insulate themselves from geoeconomic pressure from hegemons by pursuing anti-coercion policy: shaping their economies in ways that insulate them from undue foreign pressure. This policy faces a tradeoff between gains from trade and economic security. We show that while an individual country can make itself better off, uncoordinated attempts by multiple countries to limit their dependency on the hegemon lead to unwinding of the global gains from integration and inefficient fragmentation of the global financial and trade system. We study a leading application focusing on financial services as both tools of coercion by the hegemon and an industry with strong strategic complementarities at the global level. We provide estimates of geoeconomic power for the US and China and show empirically that the geoeconomic power of the United States relies strongly on financial services while that of China loads more on manufacturing trade.

Keywords: geoeconomics; geopolitics; economic security; economic statecraft; payment systems (search for similar items in EconPapers)
JEL-codes: F02 F12 F15 F33 F36 F38 F5 P43 P45 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-cna, nep-fdg and nep-int
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Related works:
Working Paper: A Theory of Economic Coercion and Fragmentation (2024)
Working Paper: A Theory of Economic Coercion and Fragmentation (2024)
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