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A theory of economic coercion and fragmentation

Author

Listed:
  • Matteo Maggiori
  • Chris Clayton
  • Jesse Schreger

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.

Suggested Citation

  • Matteo Maggiori & Chris Clayton & Jesse Schreger, "undated". "A theory of economic coercion and fragmentation," BIS Working Papers 1224, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1224
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    References listed on IDEAS

    as
    1. Guido Lorenzoni & Iván Werning, 2023. "A Minimalist Model for the Ruble during the Russian Invasion of Ukraine," American Economic Review: Insights, American Economic Association, vol. 5(3), pages 347-356, September.
    2. Clayton, Christopher & Maggiori, Matteo & Schreger, Jesse, 2024. "A Theory of Economic Coercion and Fragmentation," SocArXiv j8wgx, Center for Open Science.
    3. Christopher Clayton & Matteo Maggiori & Jesse Schreger, 2023. "A Framework for Geoeconomics," NBER Working Papers 31852, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    geoeconomics; geopolitics; economic security; economic statecraft; payment systems;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages

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