Economic Diplomacy and Geoeconomics

Economic diplomacy and geoeconomics

Geoeconomics—the use of economic instruments to achieve geopolitical goals—is becoming increasingly important in international relations. Trade, investment, aid, sanctions—all these are tools not only of economic but also foreign policy. In the era of "great power competition," the boundaries between economics and security are blurring.

What is geoeconomics?

The term "geoeconomics" was popularized by Edward Luttwak in 1990. He predicted that after the Cold War, conflict between major powers would shift from the military sphere to the economic arena. States would compete for markets, technologies, resources, using economic instruments instead of armies. Geoeconomics is the logic of conflict, the grammar of commerce. Economic ties are not simply mutually beneficial exchanges, but an arena for struggle over power and influence.

Tools of geoeconomics

Trade policy. Tariffs, quotas, non-tariff barriers are used not only to protect industries but also to exert pressure on partners. Trade wars (USA-China)—geoeconomics in action.

Investments. Foreign direct investment creates dependency and influence. Control over critical infrastructure (ports, telecom, energy)—a geopolitical lever. Hence, screening of foreign investments for national security.

Technologies. Control over key technologies (semiconductors, AI, quantum computing)—a source of economic and military power. Export controls, restrictions on technology transfer, "technological nationalism."

Finance. The dollar is the main geoeconomic weapon of the US. Control over the international payment system enables the imposition of sanctions, disconnecting countries from financing.

Aid and loans. Economic aid is a tool of influence. China's "Belt and Road Initiative" is a large-scale geoeconomic project.

Resources. Control over energy carriers, rare earths, food—a source of power. Russia used gas as an instrument of pressure on Europe.

Economic interdependence: protection or vulnerability?

Liberal theory asserted that economic interdependence promotes peace: trading countries do not wage war. But interdependence also creates vulnerabilities and leverage for pressure.

Weaponized interdependence—a term coined by Henry Farrell and Abraham Newman. Global networks (financial, informational, manufacturing) have nodal points (hubs) controlled by certain states. Control over hubs gives power over the entire network.

Examples: The US controls the dollar system and SWIFT; China dominates in the production of rare earths and many consumer goods; Taiwan—in advanced semiconductors.

Decoupling and economic security

Awareness of vulnerabilities leads to "decoupling" policy—reducing dependence on geopolitical rivals: USA-China. Restrictions on technological cooperation, investment screening, encouragement of domestic semiconductor production (CHIPS Act). The goal is to reduce dependence on Chinese supply chains.

Europe. After the 2022 energy crisis—a path towards reducing dependence on Russian gas. "Strategic autonomy"—the European response to geoeconomic challenges.

Criticism of decoupling. Breaking ties is costly and inefficient. Global supply chains have formed over decades; restructuring is a slow and painful process. Full decoupling is impossible; more realistic is "de-risking" (reducing risks without complete severance).

Great power competition

Geoeconomics is the arena of competition among great powers:

USA. Uses financial dominance, technological leadership, alliance networks. Sanctions are its main tool. Risk: excessive use of sanctions undermines the dollar system.

China. "Belt and Road Initiative"—infrastructure investments in Asia, Africa, Latin America. Creation of alternative financial systems (CIPS, digital yuan). Domination in critical supply chains.

Russia. Energy levers (gas, oil). After 2022—a course toward economic rapprochement with China, circumventing Western sanctions.

EU. "Normative power"—spreading its standards through market weight ("Brussels effect"). Attempts to create autonomous instruments: anti-sanction legislation, investment screening.

Consequences of geoeconomicization

Fragmentation of the world economy. Risk of division into blocs with limited ties between them. Losses from reduced efficiency of global trade.

Politicization of the economy. Business is forced to take geopolitics into account. Companies become caught between conflicting requirements of different jurisdictions.

Subsidy race. Countries subsidize "strategic" sectors, violating WTO rules. Return of industrial policy.

Uncertainty. The rules of the game change; long-term planning is difficult; investment decreases.

Geoeconomics is the reality of the 21st century. Understanding its logic is necessary for analyzing international relations, economic policy, and business strategies in the era of great power competition.