A Theory of Economic Coercion and Fragmentation

Hegemonic powers exert influence on other countries by threatening the alteration of financial and trade relationships. Mechanisms that generate gains from integration, such as external economies of scale and specialization, also increase the hegemon’s power because in equilibrium they make other relationships poor substitutes for the hegemons. Other countries implement economic security policies to shape their economies in order to insulate themselves from hegemonic pressure, but can inefficiently fragment the global economy. A hegemon can benefit from committing to limit coercion to attract participation in its economic network and preserve power. We estimate that U.S. geoeconomic power relies on financial services, while Chinese power relies on manufacturing.