When countries practice geoeconomics, they use their economic might to win concessions from other nations. Geoeconomics can include tools like industrial policy, tariffs, and embargoes.

But some say these economic coercion tactics could reduce trust and cooperation among nations – and have critical impacts on global trade.

Watch the panel discussion with economists Douglas Irwin, Karen Dynan, and Caroline Freund and download the paper given by professor Jeffry Frieden at the Boston Fed’s 69th Economic Conference, “The U.S. Economy in a Changing Global Landscape.”

Allison Ross:

What is geoeconomics?

A jaded answer might be, “It’s how the world works.”

But here’s a straighter definition: Its governments using their economic might to win both economic and non-economic concessions from other governments.

It’s long been a part of the world order. And Columbia University public affairs professor Jeffry Frieden says it’s seeing a resurgence.

Jeffry Frieden:

Economic policies are now being used very widely for non-economic means.

Allison Ross:

An example of geoeconomics today is the oil embargos on Russia by the U.S., the European Union, and the UK to hamper Russia’s ability to fight in Ukraine.

Another is the Trump administration’s tariffs – which aim to get countries to change policies on everything from drug enforcement, to migration, to trade.

Of course, the more coercive tactics of geoeconomics don’t always prevail. Multilateralism – agreements between three or more parties – is based on cooperation.

Entities like the United Nations and European Union are examples of it. So is the United States-Mexico-Canada Agreement, a current pact governing hundreds of billions in trade.

Both approaches can claim success. So, why would geoeconomics be on the rise?

Economists say part of it is backlash against the globalization of trade, which had huge costs for people and regions around the U.S.

And, ironically, a more open approach to global trade may have made the coercive approach of geoeconomics more effective – and appealing.

In new global production chains, multiple nations collaborate to build a single product. Boston Fed senior economist Omar Barbiero says this creates dependencies that can boost geoeconomics.

Omar Barbiero:

I think one of his main points is that it's different now due to how deeply integrated the world economy is, and how this exposes vulnerabilities that countries can exploit as concessions from one another.

Allison Ross:

Frieden said the world seems to be moving toward geoeconomics as the norm. That makes it important to weigh its benefits and costs.

Jeffry Frieden:

The question I’m going to ask is, what’s the counterpart? Life is full of tradeoffs, nothing comes easy, nothing’s free. And I’m going to ask us to consider what we are giving up when we think about using economic policy for noneconomic purposes.

Allison Ross:

I’m Allison Ross, and you’re listening to the Boston Fed’s Six Hundred Atlantic podcast. The effectiveness of geoeconomics and one of its primary tools, industrial policy, were key topics during the Boston Fed’s 69th Economic Conference. And we’ll cover that in this episode.

The materials and quotes in this episode are taken primarily from the discussion, papers, and presentations at the conference, called The U.S. Economy in a Changing Global Landscape.

We also used material from post-conference interviews with Barbiero and Boston Fed’s research director Egon Zakrajsek.

Frieden didn’t argue that geoeconomics never works. In fact, he said it clearly has. But he did focus on its potentially high price and said it’s important to keep some things in mind:

Jeffry Frieden:

That what look like short-term benefits may turn out to be long-term costs. That what gains short-term advantage may be a long-term reputational disadvantage. Economic coercion has real and measurable costs. The benefits may justify its use, but they do require transparent evaluation.

Allison Ross:

Frieden said two kinds of countries can effectively engage in geoeconomics: Those whose behaviors affect their partners, but not the whole world. And those whose behaviors do have global impact.

The United States is in the latter group. The U.S. practiced geoeconomics in its Cold War with the Soviets. But geoeconomics wasn’t always its first policy choice – then or in the decades that have followed.

Frieden said that since the end of World War II, the U.S. has led the world economy in multilateral and stabilizing ways.

That leadership has always been based on the U.S. acting in its own self-interest. But Frieden said the multilateralism the U.S. practiced was a guarantee that it wouldn’t misuse its power.

Jeffry Frieden:

You can’t get people to go along with American leadership if they don’t have at least some voice in how that leadership is going to be exercised.

Allison Ross:

But Frieden said there’s been a change. He said in the last 15 years, nations great and small are deploying geoeconomic policies, quote, “with force.”

A common sentiment among those who practice geoeconomics is that it’s simply a response to being treated unfairly in the past. But it’s also been fueled by what Frieden and others describe as the mismanagement of the globalization of trade.

Zakrajsek says the multi-decade integration of global trade has had clear and significant benefits – including among urban, educated, and technically proficient populations. But he says society didn’t adequately account for the costs.

Egon Zakrajsek:

It came with costs that there were certain communities, certain areas that relied on traditional, say, manufacturing jobs, that essentially became … they were gutted. That displacement happened in a very short period of time. It was very abrupt, and we did not have policies that really provided support for these people.

Allison Ross:

Those left behind felt cut loose and betrayed, and they have led and energized political movements which see geoeconomics as the best way forward.

Jeffry Frieden:

Globalization as it evolved after 2000, especially after the Great Financial Crisis of 2007 through ‘09, led to a series of distributional effects in the major countries of the world, and especially in the U.S., that were politically unacceptable to large portions of the population.

And if you want to be simple-minded about it, globalization was mismanaged. Or it was managed in ways that were not acceptable to very large portions of our populations.

Allison Ross:

But if global economic integration had underappreciated costs, Frieden warns that geoeconomics will as well.

He said it can push your allies into your rivals’ arms and strengthen those rivals. Frieden noted Brazil and India have responded to U.S. tariffs by turning more toward China as an economic partner.

He added that another cost is more adversarial and potentially less fruitful trading relationships. He said it’s what happens when you stop trying to convince people to do what you want and start trying to force them to.

Jeffry Frieden:

So, opportunity is lost here for world order. Geoeconomic coercion, I think, weakens multilateralism. It leads to less trust among nations, therefore, less trade, less cooperation, less capital flows, fewer capital flows. Coercion that is implied, that is imposed, for short-term purposes, by affecting a country’s reputation for reliability and stability, can lead to long-term decoupling.

Allison Ross:

Tierra Del Fuego is a cluster of islands at the southern tip of South America that’s known for glaciers, the Andes Mountains, the treacherous rocks, wind, and waves of Cape Horn, and …

… smartphones.

The Argentinian section of Tierra del Fuego produces about 90% of the country’s smartphones.

That’s because the government imposed a series of tariff and tax restrictions that made it prohibitively expensive to import smartphones and other electronics like laptops and televisions.

The idea was to shift production – and people – to the remote region.

And it’s done that. Thousands of Argentinian workers there assemble smartphones and other electronic parts shipped by foreign manufacturers. But a premium cell phone in Argentina costs nearly $2,600, compared to about $1,150 in the U.S.

This is “industrial policy” in action, and it’s one of the main tools of geoeconomics.

Here’s Barbiero with a definition.

Omar Barbiero:

Industrial policy is when a government deliberately tilts the playing field to build up certain industries because they seem strategic for jobs, technology, resilience, security, like military security. And it is one of the tools of geoeconomics.

Allison Ross:

Just like broader geoeconomics, industrial policy is widely practiced, and its effectiveness is vigorously debated.

This year in Argentina, the government moved to eliminate tariffs on smartphones – which consumers cheered but local workers criticized as a job-killer.

Barbiero says industrial policy has worked, but it’s also flopped, and it’s very hard to get right.

A success story is Taiwan’s efforts to grow its semiconductor sector, which is now a global leader. Unsuccessful efforts include work to establish the Malaysian car industry and the Brazilian computer industry.

Omar Barbiero:

So, it's really about how you do it, picking the right winner, which is very hard, knowing exactly who's going to be successful or not, and design it with an economic mind(set) as opposed to maybe a political mindset.

Allison Ross:

For governments, the cost of industrial policy is incurred through tax credits, grants, subsidies, and loan guarantees. And the price tag can be extremely high.

For example, Dartmouth economics professor Doug Irwin says it costs Argentina $1 billion a year to implement its industrial policy. Countries with shaky finances simply can’t afford that.

Doug Irwin:

Most developing countries are in a very precarious fiscal situation. And to the extent that industrial policy requires more outlays, more subsidies, that’s putting things at risk. So, the fiscal cost of industrial policy is something I think most countries have to take very seriously.

Allison Ross:

Irwin also argued that global corruption is a huge factor.

Corrupt governments direct resources toward the politically connected – not the most effective or innovative. So, resources are squandered and the policy is short-circuited.

Doug Irwin:

Turns out it doesn’t take much corruption to sort of undermine a lot of the net benefits that you might get from industrial policy.

Allison Ross:

Economist Karen Dynan of Harvard’s Kennedy School said industrial policy can be thwarted by the complex nature of today’s multi-party, multi-national production chains.

Karen Dynan:

The modern system is just very complex, and there are just so many interconnections. This makes reducing exposure to global supply disruptions through industrial policy extremely difficult. Robust supply chains, that’s going to take understanding who the suppliers are of key materials, but not just that. It’s the suppliers of the suppliers, and then the suppliers of the suppliers of the suppliers, and so on down the chain.

Allison Ross:

Dynan added that the architects of industrial policy often get caught trying to do too much at once. They try to make an “everything bagel.” But unlike real everything bagels, it doesn’t work.

She pointed to two recent examples of U.S. industrial policy: The CHIPS and Science Act and the Inflation Reduction Act.

The CHIPS Act aimed to strengthen domestic semiconductor manufacturing, and the Inflation Reduction Act sent billions to the green energy sector. But they also tried to do much more.

Karen Dynan:

Critics of the CHIPS Act and the Inflation Reduction Act have argued these initiatives just tried to serve too many objectives at once. They put too much on the bagel. Each law was seeking simultaneously to create good jobs, to accelerate the green transition, to strengthen supply chains, and to advance national security. So, this is an everything bagel strategy. It risks blurring priorities. It weakened the effectiveness.

Allison Ross:

Conference speakers noted that a recent catalyst of industrial policy has been China’s aggressive moves with its own industrial policies. For instance, “Made in China 2025,” is a massive government investment aimed at making China globally dominant in high-tech manufacturing.

It’s the kind of move rivals must respond to. But if successful industrial policy is so hard to execute, what’s the best way?

Irwin has an answer.

Doug Irwin:

There is a valuable industrial policy out there. And I think it should and could command bipartisan support. And that’s a generalized policy of supporting innovation. Because the social returns to innovation are very, very high.

When we’re targeting industries, it’s really hard to get those right. If we sort of generalize, and we want to support innovation, I think it’s harder to get that wrong.

Allison Ross:

Economist Caroline Freund, of the University of California San Diego, agrees. But she also said the U.S. should rely on its proven strengths and practice more multilateralism.

Caroline Freund:

I mean in my view, the best tool is the old tool, which is to lean into our strengths, immigration, education, and finance. But also work with our allies because together we’re actually a lot bigger than China and could lead the world.

Allison Ross:

Geoeconomics may be disadvantaged by uncertainty about its effectiveness. But it has the frequent advantage of motivated political constituencies.

For instance, the workers who lost jobs when production moved overseas make up a powerful, compelling, and often vocal interest group.

Meanwhile, the benefits of the open trade that cost them their jobs aren’t as vivid and easy to grasp. And that matters.

Here’s Frieden:

Jeffry Frieden:

The benefits of economic integration are countrywide and diffuse. There are some concentrated benefits. Many of the costs are very concentrated: concentrated on firms, on industries, and on regions. And, you know, one of the commonplaces of political economy is that concentrated interests beat diffuse interests every time.

Allison Ross:

NYU economist Richard Berner also pointed to a concept called the “tragedy of the horizon.” He said this comes into play when we consider innovation and research as alternatives to geoeconomics. The payoffs of that approach are past our short-term horizons.

Richard Berner:

In other words, we can invest in them now, but the impact is likely to accrue only slowly, not just to the innovator, but slowly over time. Whereas, industrial policy, we can do that with the snap of a finger, the writing of a Sharpie, and that is something that is very expedient from a political standpoint. People have to get reelected.

Allison Ross:

Zakrajsek adds that a major negative of geoeconomics is that it reduces competition. So, firms can be profitable without always seeking more efficiency. But he says a spirit of innovation needs to be protected.

Egon Zakrajsek:

The U.S. has always been a country that has thrived on attracting talent to its outstanding educational system, ability of people to integrate, its entrepreneurial spirit that is unique in a sense in that in the U.S., people come to innovate. They can innovate because here innovation is encouraged. You have deep capital markets, you have people who are willing to take the bets, the society thrives on it. And that really thrives in a very integrated global cooperative world.

Allison Ross:

As noted this episode, tariffs are a frequent tool of geoeconomics.

President Trump levied new tariffs in 2018 during his first term and then again in 2025, at the start of his second.

The full impacts of the latest tariffs aren’t yet known. But the execution of the 2018 and 2025 policies has been very different – and so has the reaction to them.

We’ll explore this on the next episode of Six Hundred Atlantic.

Allison Ross:

You can find links to the recordings, papers, and other material from the Boston Fed’s 69th Economic Conference in the show notes or at bostonfed.org under “news and events.” Subscribe to our mailing list and find interviews and seasons at bostonfed.org/six-hundred-atlantic. And we would greatly appreciate if you would rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app.

This episode was written by Jay Lindsay and edited by Amanda Blanco, Nick Brancaleone, Omar Barbiero, Egon Zakrajsek, and Darcy Saas. Chief consultant was Omar Barbiero. Graphics and web design by Michael Konstansky and Michael Sorokach. Production consultants are Nick Brancaleone and Michael Sorokach. Recording and engineering by Steve Osemwenkhae. Project managers are Allison Ross, Nick Brancaleone, and Peter Davis.

I’m Allison Ross, thanks for listening to Six Hundred Atlantic.