Finn Marten, Kiel University & Kiel Institute for the World Economy*
The international economic system has changed dramatically over the last few years. Geopolitical events like the US-China rivalry and Russia’s invasion of Ukraine destabilized international economic systems, causing a full-scale trade war and an unprecedented sanctions regime. Such events signal a rise in “geoeconomics”—the strategic use of economic instruments like financial sanctions or tariffs to achieve geopolitical ends.
Since the end of World War 2, globalization has fostered economic growth and global welfare by connecting economies. As countries increasingly resort to economic statecraft to advance national interests, concerns about the future world economy grow. Does the rise of geoeconomics shift the world economy toward fragmentation? This question is explored through analyzing the U.S.-China trade war and Russia’s invasion of Ukraine.
To illustrate changes in the world economy, Figure 1 plots the annual number of global economic interventions by type. The number of new interventions has roughly increased tenfold since 2009, with both liberalizing and discriminatory measures growing. However, starting in 2018, discriminatory interventions—like tariffs and sanctions—have made up the vast majority, reflecting the recent rise of geoeconomics. A similar trend can be observed in national-security-based policy notifications reported to the World Trade Organization (WTO), which began to spike in 2019.
This sudden increase is mainly linked to the U.S.-China trade war. Sparked by disputes over allegedly unfair Chinese trade practices like subsidies, the world’s two largest economies imposed multiple waves of retaliatory tariffs against one another. Figure 2 shows that US-China tariff rates increased substantially in June 2018 compared to other nations. Tariffs have since remained near peak levels after a mutual agreement to stop further escalation in early 2020.
Previous geoeconomic trade conflicts, like China’s use of trade barriers against the Dalai Lama’s host nations, were mainly temporary and of limited scope. In contrast, the 2018 trade war impacted $350 billion in imports from China to the US and $100 billion in imports from the US to China, corresponding to 17.6% of total 2017 US imports and 11% of total 2017 Chinese imports. For some, such unparalleled geopolitical escalation of trade tensions marked the final blow to the US-led, rules-based, free-trade system and a return to national protectionism. The bilateral conflict also affected third-party countries like Mexico or Korea, which increased their trade of initially taxed products.
In addition to the US-China tensions, Russia’s invasion of Ukraine furthered the rise of geoeconomics, leading to historical highs in global annual sanctions in 2022 and 2023 (Figure 3). Various sanctions aimed to isolate Russia from the world economy and weaken its war spending. Export sanctions cover arms, aircraft, and dual-use goods (parts suitable for both civilian and military purposes). Import sanctions mainly focus on Russian energy exports. While the EU quickly decoupled from those imports, sanctions were undermined by increased energy imports from Russia by China and India. Similarly, the simultaneous spike in EU and Russian commodity trade with East Asian and Caucasian economies following the invasion are indicative of efforts to bypass export sanctions.
The invasion also facilitated the use of geoeconomics in international finance flows. Western allies provided Ukraine with $285 billion in aid, froze Russian central bank assets worth $300 billion, and used corresponding interest payments to further support Ukraine. Belgium-based SWIFT, the leading network for between-bank communication, was forced to cut off selected Russian banks, limiting their ability to conduct international business. This approach leveraged European jurisdiction over a crucial global network by a private firm, a move called “Weaponized Interdependence.” Similarly, the G7 price cap on seaborne Russian oil exports was enforced through European maritime service and insurance companies, prohibiting firms from doing business with non-compliant entities. Although geoeconomic utilization of economic relations for coercion benefits powerful economies, it inflicts costs on adversaries and neutral bystanders.
On the other hand, the impact of geopolitical conflicts on the overall world economy remains murky. Leading policymakers and researchers argue that the world economy experienced fragmentation into geopolitically aligned US-EU and China-Russia-centered trading blocks. Their estimations show that trade and foreign direct investment (FDI) flows between countries from geopolitically distant blocks experience 12% (trade) and 20% (FDI) larger declines than flows within aligned blocks. Fragmentation also benefits “connector” countries like Mexico, Vietnam, or India, which are not aligned with a single block, through their simultaneous relations with both geopolitical trading blocks.
Geoeconomics already plays a crucial role in large geopolitical events. From discriminatory interventions and tariffs to financial sanctions, governments frequently resort to economic instruments to achieve political aims. Such policies contribute to economic fragmentation between rival nations. Classic political economy trade-offs will shape the extent of fragmentation in the world economy. Geoeconomics does not guarantee success. Neither China nor the US emerged victorious from the trade war, and Russia continues to evade international sanctions to finance its war in Ukraine. Policymakers must balance pursuing foreign policy objectives with managing domestic repercussions, like higher import prices and reduced trade volumes. Fragile alliances, among both established allies and neutral “connector” countries, and slow global economic growth will force policymakers to carefully assess when, against whom, and with what intensity to deploy geoeconomic strategies.
Understanding these trade-offs and geoeconomics’ impact on the world economy is limited because such issues have long been viewed through a singular economic, security, or political lens. As such, interdisciplinary research between political science, law, finance, and international economics is crucial to better understand the nuances of geoeconomics. Furthermore, historical studies could cover rare events like hegemonic competition or war. In times of multiple geopolitical crises around the world and ever-rising US-China competition, policymakers need to adapt to fragmentation and learn the new game’s rules instead of clinging to the declining globalized world economy. Strategic consideration of economic dependencies, relations, networks, and the private sector is necessary to effectively traverse upcoming geopolitical challenges. Joint efforts with key allies are essential to successfully navigate through a fragmented world economy.
*The author is a student at Kiel University and a student research assistant at the Kiel Institute for the World Economy. The responsibility for the contents of this commentary rests only with the author and does not represent the views and work of Kiel University or the Kiel Institute for the World Economy. Please feel free to get in touch for suggestions and comments: finn.ma7@gmail.com