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CANCELLED

Matteo Maggiori (Stanford University): A Theory of Economic Coercion and Fragmentation

Abstract: 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 these countries’ power to exert economic influence 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 ways that insulate them from undue foreign pressure. These policies faces 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 lead to inefficient fragmentation of the global f inancial and trade system. We study financial services as a leading application both as tools of coercion and an industry with strong strategic complementarities. We estimate that US geoeconomic power relies on financial services, while Chinese power relies on manufacturing. Since power is non-linear and increases disproportionally as the hegemon approaches controlling the entire supply of a sectoral input, we estimate that much economic security could be achieved with little overall fragmentation by diversifying the input sources of key sectors currently controlled by the hegemons.