Read the full paper“A Theory of Economic Coercion and Fragmentation” is now available as an NBER working paper and on our research page. Hegemonic powers, like the United States and China, exert influence on other countries by threatening the suspension or 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 those with a global hegemon. Other countries can implement economic security policies to shape their economies in order to insulate themselves from undue foreign pressure. Countries considering these policies face a tradeoff between gains from trade and economic security. While an individual country can make itself better off, uncoordinated attempts by multiple countries to limit their dependency on the hegemon via economic security policies lead to inefficient fragmentation of the global financial and trade system.
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