Matteo Maggiori and Jesse Schreger on Geoeconomics and its Policy Implications
Dec 4, 2023
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Matteo Maggiori and Jesse Schreger, along with David Beckworth, discuss geoeconomics and its policy implications. They explore the basics and core concepts of geoeconomics, the key elements of a global hegemon, and real world examples. They also discuss China's influence on the entertainment industry, debt repayment, US financial sanctions, and the future of geoeconomics research and policy agenda.
Geoeconomics is the use of a country's economic strength to achieve geopolitical goals by leveraging economic relationships.
The power of geoeconomics relies on incomplete contracts and input-output linkages to create incentives for compliance and dependencies.
Effective geoeconomics requires careful consideration of the interests and limits of the countries involved to prevent backlash or diminished influence.
Deep dives
Geoeconomics: Using economic strength for geopolitical and economic goals
Geoeconomics is the use of a country's economic strength from existing financial and trade relationships to achieve geopolitical and economic goals. This power is not based on military force or complete contracting, but rather on the ability to leverage economic relationships. By threatening to withdraw or limit access to economic activities such as loans, exports, or market access, a country can exert influence and induce other countries or firms to comply with its demands. This power is often used to negotiate economic benefits, restrict certain technologies, impose sanctions, or shape market behavior. While geoeconomics is receiving more attention recently, the concept has a long history, with powerful countries using economic relationships for their advantage throughout time.
The Power of Incomplete Contracts and Input-Output Linkages
A key aspect of geoeconomics is the use of incomplete contracts and the influence of input-output linkages. Incomplete contracts refer to situations where contractual enforcement is challenging or when specific actions cannot be explicitly stipulated. By threatening to withdraw economic activities across different dimensions, such as trade, finance, or investment, a country can create incentives for others to behave according to its demands. Moreover, input-output linkages, such as the need for imported intermediates for infrastructure projects, create dependencies that make countries less inclined to walk away from economic relationships. This power exists as long as there are limited alternatives available to the target country. While geoeconomics can lead to positive outcomes, such as facilitating infrastructure development, it can also result in negative consequences, such as distortions or non-economic demands.
The Challenges and Consequences of Geoeconomic Power
One challenge of geoeconomic power is the need to offer something of value to the target country or firm. Geoeconomic power is not absolute and depends on the benefits that the hegemon provides to maintain cooperation. Examples include access to markets, financial benefits, or protection from certain technologies. Overuse or misuse of geoeconomic power can lead to backlash or a reduction in the effectiveness of the hegemon's influence. When countries perceive that their national interests are compromised or when the costs of compliance outweigh the benefits, they may seek alternatives or push back against dominant powers. The role of the US dollar as a global currency and the use of financial sanctions are cases in point. Therefore, effective geoeconomics requires careful consideration of the interests and limits of the countries involved.
Influence and power of a Hegemon in the international financial system
The podcast episode discusses the concept of a Hegemon and its influence in the international financial system. The speaker highlights that a Hegemon, such as the United States, has the ability to exert power over multiple domains, including intermediate inputs, finance, and large markets, which allows them to request actions from other countries that may be personally costly for them. The speaker also emphasizes the importance of input-output linkages, limited contracting forceability, and externalities in understanding and analyzing the power dynamics in the global financial system.
Examples of geoeconomic power and its implications
The podcast provides two examples to illustrate geoeconomic power. The first example focuses on the United States' efforts to convince its allies not to adopt Huawei's 5G technology due to national security concerns. The United States, through its positive relationships with firms in Western Europe, was able to persuade a subset of firms and sectors within Western Europe to reject Huawei's technology, resulting in network effects that made it less appealing for other countries to adopt it. The second example discussed the US government's restrictions on computer chips and parts being sent to China, with the goal of limiting Chinese technological capabilities and directly reducing the productivity of sectors that could strengthen the Chinese military. However, there is a limit to how much the US can ask individual firms to cut their profits, as it risks losing the entire market to China. The podcast concludes by highlighting the need for empirical research on state acquisitions, differences between state-owned and private firms, and the development of optimal policy instruments to navigate the complexities of geoeconomics.
Matteo Maggiori is a professor of finance at Stanford University and a returning guest to the podcast, and Jesse Schreger is an associate professor of economics at Columbia University. Matteo and Jesse, along with Christopher Clayton, have recently authored a paper titled, *A Framework for Geoeconomics,* and they join David on Macro Musings to discuss it. Specifically, Matteo, Jesse, and David also discuss the basics, core concepts, and real world examples of geoeconomics, the key elements of a global hegemon, the future of the discipline, and a lot more.
