Matteo Maggiori and Jesse Schreger on Geoeconomics and its Policy Implications

Episode Summary

Executive Summary: David Beckworth interviews Matteo Maggiori and Jesse Schrager about their framework for geoeconomics: how powerful states use trade, finance, and market access to induce behavior abroad. The discussion explains geoeconomic power through incomplete contracts, input-output linkages, and externalities, then applies the framework to Huawei, semiconductor controls, China’s Belt and Road, and U.S. financial sanctions.

Main Topics: Defining geoeconomics (Priority: 5/5): Geoeconomics is framed as the use of economic strength embedded in existing trade and financial relationships to achieve geopolitical or economic goals, sitting between war and complete contracting. Intellectual roots in Hirschman and political science (Priority: 4/5): The guests trace the intellectual lineage to Albert Hirschman’s work on power and trade, and to modern IR work on weaponized interdependence and economic statecraft. Mechanics of geoeconomic power (Priority: 5/5): Power arises when a country or firm has multiple relationships it can jointly threaten to withdraw, making access to markets, finance, and inputs a credible bargaining tool. Positive-sum and negative-sum dimensions (Priority: 5/5): Hegemons can solve commitment problems and enable useful cross-border activity, but they can also extract rents or impose distortions through coercive threats. Case studies: Huawei, chips, and China’s leverage (Priority: 5/5): The conversation applies the framework to U.S. pressure on Huawei, chip export controls, and China’s ability to shape firm behavior through market access and reputational pressure. Belt and Road and sovereign debt (Priority: 4/5): China’s infrastructure lending is interpreted as a bundled contract: debt finance plus procurement and contractor dependence, which strengthens repayment incentives and can buy political concessions. Sanctions and the future of the dollar (Priority: 5/5): U.S. sanctions are discussed as powerful but potentially risky because overuse could make dollar assets feel less universally safe and encourage alternative reserve demand.

Key Arguments: Geoeconomics is not just coercion; it is the use of economic relationships to solve incomplete-contract problems and influence foreign actors. A hegemon’s power comes from combining multiple channels—finance, trade, inputs, and market access—so that losing one relationship is costly because it endangers others. The global hegemon can create welfare gains by enforcing deals and enabling investment or infrastructure that otherwise would not happen due to expropriation or default risk. The same power can be used to extract rents, impose markups, and obtain geopolitical concessions, making the outcome partly negative-sum. Externalities matter because coordinated pressure on one firm or country can change the broader equilibrium, not just the targeted actor’s private payoff. U.S. pressure on Huawei worked partly because allies’ access to the U.S. market and financial system was more valuable than the private benefit of adopting Huawei technology. Semiconductor restrictions are closer to a direct national-security strategy, where the U.S. aims to slow Chinese productivity in strategically relevant sectors. China’s Belt and Road can be understood as pairing loans with procurement and contractor ties, making default less attractive and creating leverage for non-economic asks such as diplomatic alignment on Taiwan. Sanctions can weaken the perception that dollar assets are universally safe if foreign states conclude U.S. liabilities are only valuable when relations are friendly. China could become a partial alternative reserve-provider, but capital controls, rule-of-law concerns, and the need to supply large quantities of safe liabilities limit that possibility. The right policy debate is not free-market absolutism versus protectionism; it should be about second-best institutions, anti-coercion tools, and how to reduce genuine inefficiencies without overreacting.

Data Points: Trump administration exit from Iran deal: 2017 - Referenced as a moment when the U.S. used hegemonic financial influence to pressure European firms and banks regarding Iran. Iran nuclear deal agreement year: 2015 - Used as the starting point for European business engagement with Iran before the U.S. withdrew. Russian reserves frozen: over $600 billion - Example of multilateral sanctions and the ability of the U.S.-led system to freeze central bank assets after Russia invaded Ukraine. Belt and Road financing scale: trillion dollar plus - Described as China’s large-scale overseas infrastructure lending and investment program. Developing-country default/debt tolerance range: 10% to 15% of GDP - Cited from debt-intolerance literature to explain why sovereign borrowing is often constrained in poorer countries. Foreign ownership in Chinese bond market at the height cited: 4% to 5% - Used to explain why recent capital outflows from China have been manageable so far. Potential foreign ownership scenario: 20% of the Chinese bond market - Hypothetical example illustrating how a larger foreign investor base could make capital flight and financial crisis more severe. Initial foreign exposure to Chinese bond market: 4-5 percent - Reiterated in the discussion of capital flight and the risks of liberalization.

Pivotal Quotes: "countries have existing trade and finance relationships that they can use to get other countries or other firms to do things for them" — David Beckworth / framing of guests' definition: Opening explanation of geoeconomics in the interview. "the threat of shutting down access to financial markets or to the dollar from the US" — Matteo Maggiori: Illustrating how hegemonic power works through a credible joint withdrawal threat across multiple relationships. "the key is when you're able to exert influence across multiple areas, that's where the threat of cutting off a relationship with you carries the most downside for a country" — Jesse Schrager: Explanation of how hegemonic power becomes strongest when multiple domains are linked.

Implications: Geoeconomics is becoming a central policy domain. States will likely use market access, finance, and supply chains more strategically, while firms and smaller countries must manage political risk, sanctions exposure, and coercive dependence more carefully.