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Last weekend in Washington, near the White House, dozens of economists from universities and institutions such as the IMF gathered to discuss the state of “geoeconomics”.
Geo-what? some readers might ask. No wonder: until recently, this word was little used, since it seemed at odds with modern norms.
That is because the phrase describes how governments can use economic and financial policies to play power games. But in the 20th century free-market intellectual framework — which is the one in which most western professionals built their careers — it was generally assumed that rational economic self interest ruled the roost, not grubby politics. Politics seemed to be derivative of economics — not the other way around.
No longer. The trade war unleashed by US President Donald Trump has shocked many investors, since it seems so irrational by the standards of neoliberal economics. But “rational” or not, it reflects a shift to a world where economics has taken second place to political games, not just in America, but many other places too.
So universities like John Hopkins, Dartmouth, Kiel and Stanford are looking to expand their “geoeconomics” programmes (with the latter using machine learning for that end), along with entities such as the IMF, the Milken Institute and Atlantic Institute. And Dane Alivarius, a former US Treasury official, is also now urging companies to create a new role of “CGO” — or chief geopolitics officer — “to navigate the increasingly blurred lines between commerce and statecraft” where “referees [ie governments] have changed the rules”.
It remains unclear if companies will actually adopt that idea. But in the meantime, investors and business leaders would do well to note five key points about this geoeconomics debate.
First, this phenomenon is not simply about one man (Trump), but rather marks a much bigger turning point in the intellectual zeitgeist — of a sort we have seen a few times before.
One such shift occurred just over a century ago, when the globalist, Imperialist vision of capitalism that reigned before the first world war was displaced by nationalist, protectionist policies. Another came after the second world war, when Keynesian economics took hold. Then, in the 1980s, free-market neoliberal ideas displaced Keynesianism.
The fact that the intellectual pendulum is now swinging again, towards more nationalist protectionism (with a dose of military Keynesianism), thus fits a historical pattern — although few predicted that the swing would take quite this form.
Second, one important facet of this zeitgeist shift is that governments are no longer “just” focused on their country’s absolute wellbeing, but on their relative positions too. This distinction might sound subtle. But it matters deeply, as a paper co-authored by Aaditya Maddoo, a World Bank economist, along with Michele Ruta and Robert Staige, spells out.
That is because an “absolute welfare” mentality supports trade co-operation, but unravels “if rivalry eclipses any consideration of own- country wellbeing,” the authors say. Trump’s angry rhetoric about America being “ripped off” by competitors, in other words, reflects a bigger mental shift.
Third, an (obvious) factor behind this rivalry is that China is now challenging America’s incumbent dominance. This pattern has often been seen before, as Ray Dalio, the hedge fund luminary, notes in a provocative forthcoming book. Investors should also note that Dalio suggests such conflict is rarely resolved quickly or smoothly — least of all when there is a debt cycle involved.
Fourth, as the US and China resort to geoeconomic strategies, other countries are following suit in response. Just look at how the European Central Bank is racing to develop a digital euro, Saudi Arabia is developing its own tech stack, or Japan is using its Treasury holdings as a “card” in trade talks. That means that tech, trade, finance and military policies are mingling in a manner not seen during the neoliberal age.
Fifth and finally, industrial policy is back. This started in America under President Joe Biden. But Trump is doubling down, with tariffs. To understand this, look at a striking new book called Industrial Policy for the United States by Marc Fasteau and Ian Fletcher, two economists beloved by the Maga crowd. They champion tariffs but also stress the need for other industrial policies too, citing South Korea, Japan, China and Germany as examples to emulate.
It is unclear if Trump will follow their advice. But what is evident is that there is rising acceptance in the US that government should shape commerce in the national interest. This will invariably prod regions such as Europe to follow suit.
All of which will horrify many observers, particularly those raised in that neoliberal era. But don’t expect the intellectual pendulum to swing back soon — even if the US cuts a few trade deals, as Dan Ivascyn of Pimco notes, Trump’s love of tariffs runs deep. For better or worse, we all need to learn to navigate geoeconomics. We cannot just wish it away.