The reality is that there is a trade-off between gains from trade and economic security. The same mechanisms that are the classic foundations of the gains from trade—economies of scale and specialisation—also generate economic dependence. The domestic alternatives that countries did not build up are poor substitutes for globally dominant inputs, such as Chinese manufacturing or US financial services and technology. This lack of alternatives leaves countries exposed to coercion.
Strategic Complementarities and Increasing Dependence
As the global economy increasingly relies on goods and services that have strategic complementarities and economies of scale, these mechanisms are likely to increase in importance. This applies to payment systems, but also to information technology and artificial intelligence. As geoeconomic power has risen to the forefront of international relations, hegemons want to hyperglobalise the system to increase everyone else’s dependence on what they control, while countries that are heavily dependent on hegemons have begun pursuing anti-coercion policies to reduce their vulnerability to pressure.
Examples of Anti-Coercion Policies
The Chinese alternative financial architecture is one example; another is the European Commission’s European Economic Security Strategy, explicitly aimed at countering the weaponisation of economic dependencies. These policies might be individually optimal, and, as demonstrated by the nonlinearity of choke point sectors, are likely to be successful for the countries implementing them appropriately. However, taken together, they can lead to a troubling collective dynamic.
The Collective Action Problem of Fragmentation
When one country reduces its reliance on the global system, the system itself becomes less attractive to others because its value often depends on the number and size of its participants. This shifts the calculus for other countries in favour of decoupling as well, triggering further exits. The result is excessive fragmentation, a world where the gains from trade and financial integration degrade to a degree that leaves everyone, including the hegemon, worse off.
A Surprising Conclusion for Hegemons
This dynamic leads to a somewhat surprising conclusion: hegemonic powers can increase their own welfare by voluntarily and credibly constraining their use of coercion. A hegemon that commits to limiting its demands, for example by submitting to the rules of international organisations, can dissuade other countries from pursuing costly anti-coercion policies. The hegemon gives up some of its flexibility to coerce, but in return it preserves the size and attractiveness of its economic network, which is the source of its power.
The Postwar Liberal Order as a Commitment Device
Viewed this way, the postwar liberal order, composed of institutions like the IMF, World Bank, and World Trade Organisation, can be understood not as the opposite of hegemonic power but as one of its most sophisticated expressions. These institutions serve as commitment devices: by credibly promising not to exploit dominant positions too aggressively, the US and other hegemons keep other nations within the same economic system. As these rules-based constraints weaken, if hegemons are perceived as willing to exert their geoeconomic power unpredictably or erode their institutional commitments, other countries rationally respond by developing their own economic security policies and accelerate disintegration from the hegemons’ networks. This is what the hegemons would like to discourage at any cost!
Short-Term Outlook and Strategies
In the short term, the world is unlikely to return to the era of globalisation that preceded the heightened US-China rivalry. Geoeconomic competition is a defining feature of the current moment and almost certainly of the years ahead. For countries desiring to pursue anti-coercion policies, targeted diversification in key sectors controlled by the hegemons can dramatically reduce a country’s vulnerability without requiring wholesale decoupling. For hegemons, maintaining power in a global environment that fears geoeconomic pressure will involve committing to limited use of power in the interest of encouraging smaller countries to remain in a system that benefits everyone.
The Most Effective Hegemonic Strategy
The most effective hegemonic strategy is one that maintains credible commitments to rules-based behaviour, keeps the global system attractive to participants, and reserves coercive instruments for clear and limited purposes. Geoeconomic competition will shape the next decades of international relations. Countries that understand the nonlinearity of power, the value of targeted diversification, and the principle of self-restraint will navigate this period more successfully than those that do not.
Implications for Pakistan
Pakistani leadership will need to grapple with these realities and to come up with a prudent policy that not only navigates the country through the emerging challenges but, in turn, also optimises the potential of economic return by forming correct financial and trade alignments. Dr Kamal Monnoo, an entrepreneur and economic analyst, noted that understanding these dynamics is crucial for Pakistan's strategic positioning.
