This post builds on Jeffry Frieden’s comment on geoeconomics in the NBER Macroeconomics Annual. Frieden’s central argument is that geoeconomic policy should not be analyzed as if states were unified actors without domestic constraints. Instead, the success of geoeconomic instruments depends on the domestic political economy of both the country using these instruments and the country targeted by them.
The comment is available here: Jeffry Frieden, “Comment,” NBER Macroeconomics Annual, vol. 40, 2026.
Defining Geopolitics and Geoeconomics
Geopolitics refers to the global distribution of political power and to the ways states, alliances, and other strategic actors seek to preserve, expand, or contest their influence within that distribution. It is concerned with questions of national security, sovereignty, military power, strategic resources, alliances, territorial control, technological leadership, and the ability of one actor to shape the behavior of another.
Geoeconomics, in this blog, refers to the use of economic instruments within this geopolitical struggle. Tariffs, sanctions, export controls, foreign aid, financial restrictions, investment screening, access to payment systems, and participation in trade or technology networks can all be used to influence the choices of other countries. In geoeconomics, economic policy is not only about efficiency, growth, or welfare. It is also about power.
This post builds on Jeffry Frieden’s comment on geoeconomics, which argues that geoeconomic policy cannot be understood only as a strategic interaction between states. It must also be analyzed through the domestic political economy of both the country using geoeconomic instruments and the country targeted by them.
The distinction is important. Geopolitics is about the broader struggle over power, security, and influence. Geoeconomics is about the economic tools used within that struggle. Put differently, geopolitics defines the strategic objective; geoeconomics provides some of the instruments used to pursue it.
But these instruments are never politically neutral. A sanction may pressure a foreign government, but it can also hurt domestic firms. A tariff may strengthen bargaining power abroad, but it can raise prices at home. An export control may protect national security, but it can reduce the profits of domestic exporters. This is why geoeconomics must be analyzed as a problem of political economy.
Three Simple Examples
A useful way to clarify the distinction is to compare political events, geopolitical events, and geoeconomic measures. The three categories are related, but they are not the same. A political event concerns the struggle over power and policy. A geopolitical event concerns the global distribution of political power. A geoeconomic measure uses economic instruments within that geopolitical struggle.
Political Events
A political event is primarily about power, authority, or policy within a domestic political system. It may have international consequences, but its immediate logic is domestic.
1. A national election. A presidential or parliamentary election is a political event because it determines who governs, which coalition controls the state, and which domestic policy agenda will be implemented.
2. A parliamentary vote on a budget. A vote on taxation, public spending, or pension reform is political because it concerns the distribution of resources and the balance of power among domestic groups, parties, voters, and institutions.
3. A government reshuffle or resignation. When a prime minister resigns or a cabinet is reorganized, the event is political because it changes the composition, authority, or stability of the domestic executive.
Geopolitical Events
A geopolitical event concerns the global distribution of political power. It usually involves sovereignty, territory, military power, alliances, strategic resources, or the ability of one actor to influence another in the international system.
1. Russia’s invasion of Ukraine in 2022. This is a geopolitical event because it directly concerns sovereignty, territorial integrity, military power, alliances, and the balance of power in Europe.
2. A military crisis in the Taiwan Strait. Such a crisis would be geopolitical because it would involve sovereignty claims, military deterrence, US-China rivalry, regional security, and the strategic balance in East Asia.
3. A dispute over control of a strategic maritime route. A confrontation over a strait, canal, or sea lane is geopolitical because maritime routes shape military access, trade flows, energy security, and the strategic position of states.
Geoeconomic Measures
A geoeconomic measure is the use of an economic instrument to pursue a geopolitical objective. The instrument is economic, but the purpose is strategic.
1. Financial sanctions. Freezing foreign reserves, restricting access to banks, or excluding institutions from payment systems are geoeconomic measures when they are used to constrain a state’s geopolitical behavior.
2. Export controls on strategic technologies. Restrictions on advanced semiconductors, artificial intelligence chips, or military-relevant equipment are geoeconomic measures when they aim to limit a rival’s technological or military capacity.
3. Tariffs used as bargaining leverage. Tariffs are geoeconomic when they are not imposed only for revenue or protection, but also to pressure another country to change its foreign policy, trade practices, or strategic behavior.
The distinction can therefore be summarized simply: politics concerns domestic power and policy; geopolitics concerns the global distribution of political power; and geoeconomics concerns the use of economic tools within geopolitical rivalry.
From Linkage to Leverage
A central idea in geoeconomics is that linkage creates leverage. A country can connect one issue to another: trade access can be linked to security cooperation, financial aid to political concessions, technology exports to strategic alignment, or market access to diplomatic behavior. By changing the outside option of another country, the sending country tries to make compliance more attractive than resistance.
For example, a government may say to another country: if you support our diplomatic position, you will receive financial assistance; if you refuse, you may lose access to our market, our technology, or our payment system. The economic instrument is therefore used to alter the geopolitical calculation of the target country.
This is why geoeconomics resembles bargaining. The sending country asks: how can economic tools alter the target country’s incentives? The target country asks: is it better to comply, resist, substitute away, or retaliate? Economic instruments become part of a strategic game.
Against an Abstract View of the State
In many models of international relations, the state is treated as a coherent actor. It has a national interest, chooses a strategy, and then uses the available instruments to maximize its objectives. This simplification can be useful, but it is also dangerous. It hides the fact that governments are embedded in domestic societies.
A government that imposes tariffs is not only affecting a foreign country. It is also raising prices for domestic consumers and for firms that use imported goods as inputs. A government that imposes export controls may weaken a geopolitical rival, but it may also reduce the profits of its own exporting firms. A government that provides foreign aid may gain influence abroad, but it must justify the cost to domestic taxpayers.
For example, a tariff on imported intermediate goods may look attractive as a bargaining tool. It may signal toughness and create pressure on the trading partner. But firms that use these imported goods in production will face higher costs. Consumers may face higher prices. The government therefore obtains geopolitical leverage only by creating domestic distributional conflict.
In other words, geoeconomic tools always have domestic consequences. They create winners and losers inside the country that uses them. This is why geoeconomics cannot be reduced to a simple confrontation between states. It is also a conflict among domestic groups, sectors, firms, voters, and institutions.
The Sender Also Has Constraints
A key contribution of Frieden’s argument is to emphasize that the country using geoeconomic instruments — the sending country — faces domestic constraints. It may want to pressure a target country, but doing so can be costly at home.
Export controls provide a clear example. A government may want to prevent a rival from accessing a strategic technology, such as advanced chips, military-relevant software, or specialized industrial equipment. From a geopolitical perspective, the policy may be attractive because it weakens the rival’s technological capacity.
But from a domestic political economy perspective, the same policy can be costly. The firms producing these technologies may depend on foreign sales. Their workers, suppliers, shareholders, and regions may oppose the restriction. The government must therefore decide whether the geopolitical gain is worth the domestic economic cost.
The same logic applies to sanctions. Sanctions may impose costs on the target country, but they can also hurt domestic firms that previously traded with that country. They are credible only if the sending government can withstand the pressure from the groups that bear these costs at home.
This means that geopolitical strategy is limited by domestic political feasibility. A policy that looks powerful from the outside may be difficult to sustain internally. The sending government must therefore ask not only whether a policy can hurt the target, but also whether it can survive the domestic backlash generated by its own instrument.
The Target Also Has a Domestic Political Economy
The target country is not a passive object either. It also has its own domestic political economy. A sanction, tariff, threat, or offer of aid will not automatically change the target government’s behavior. It will work only if it changes the domestic political constraints faced by that government.
Consider the example of foreign aid. Suppose a powerful country offers aid to a target government in exchange for a geopolitical concession. The aid may not produce the desired result if the concession is blocked by a powerful domestic actor, such as the military, a ruling party, an oligarchic group, or a strategic sector. The government may receive the aid but still be unable or unwilling to change policy.
This is why domestic linkage matters. If the military is the actor blocking the concession, general budgetary aid to the government may not be enough. The aid must affect the military’s own incentives. For example, military aid can be made conditional on the military accepting the concession. In that case, the external instrument is connected to the domestic veto player.
The broader lesson is that international pressure must pass through domestic politics. A policy that affects the national economy in the aggregate may still fail if it does not alter the incentives of the actors who actually control the relevant decision.
When Political Economy and Geopolitics Conflict
One of the most interesting tensions concerns goods with few substitutes. In standard trade policy models, such as the Grossman-Helpman framework, tariffs are often expected to be higher when import demand is less elastic. The intuition is simple: if consumers or firms have few substitutes for an imported good, they will continue buying it even when the price rises. A government can therefore tax that good more heavily without causing a large fall in imports.
This logic is close to Ramsey taxation. A government that wants to raise revenue while minimizing distortions should tax more heavily the goods for which demand is less elastic. If people cannot easily substitute away from a good, the tax changes behavior less. From this domestic economic perspective, goods with few substitutes can look like attractive tariff targets.
But geopolitics reverses the logic. If a good is difficult to substitute, it may not be a good target for tariffs. It may be a strategic vulnerability. If firms depend on a foreign intermediate input and cannot easily replace it, the foreign supplier gains leverage. The more inelastic the substitution possibilities, the more dangerous the dependence.
For example, suppose a country depends on a foreign supplier for a key industrial input. From a revenue or protectionist perspective, the government may be tempted to tax that input because demand is inelastic. But from a national security perspective, the same dependence may be dangerous. A tariff could provoke retaliation or interrupt access to a critical input. The government may instead want to diversify suppliers, subsidize domestic production, or build strategic inventories.
The same good can therefore be interpreted in two opposite ways:
- For domestic political economy, an inelastic good may be attractive to tax.
- For geopolitics, an inelastic good may be dangerous to depend on.
This is the core tension. Political economy may push the government to tariff inelastic goods more heavily, while geopolitics may push the government to protect access to these goods, diversify suppliers, or avoid provoking the foreign supplier.
Strategic Goods Can Also Be Profitable Goods
A second conflict appears when a good is strategically important to the target country but profitable for exporters in the sending country. The sending government may want to restrict exports in order to weaken the target. But domestic exporters may oppose the restriction because they lose revenue.
For example, imagine that firms in the sending country export a critical technology to a rival economy. The technology is valuable because the rival has few substitutes. This gives the sending country potential geopolitical leverage. Yet the same foreign market may be highly profitable for the sending country’s firms. Export restrictions therefore create a conflict between the national security bureaucracy and the export sector.
This is why export controls are politically difficult. They can serve national security objectives, but they impose costs on domestic firms. The more profitable the foreign market, the stronger the resistance from exporters. A government may want to deny a rival access to a strategic input, but the firms producing that input may lobby to preserve market access.
Targeted Sanctions
Sanctions also show why domestic political economy is central to geoeconomics. A sanction is not effective simply because it imposes economic pain. It is effective only if that pain changes the political incentives of the target government.
This explains why many sanctions are targeted. Instead of trying to damage the entire economy, the sending country may target individuals, banks, firms, military actors, or political supporters close to the regime. The purpose is to make influential domestic actors pressure their own government to change policy.
For example, sanctions against oligarchs, politically connected firms, or military-linked companies are not only economic punishments. They are attempts to change the domestic coalition supporting the target government. The sending country tries to turn external pressure into internal political pressure.
The mechanism can be summarized as follows:
- The sending country identifies actors with influence over the target government.
- It imposes costs on those actors through sanctions or restrictions.
- Those actors may then pressure the target government to change policy.
- The geoeconomic instrument succeeds only if this domestic transmission works.
Retaliatory Tariffs
Retaliatory tariffs follow the same political logic. Countries do not always retaliate against the economically largest sectors. They may target politically sensitive sectors. The objective is not only to impose economic costs, but to create political pressure inside the opponent’s domestic coalition.
For example, a country may retaliate against products produced in regions that support the government imposing the original tariff. The economic cost is then concentrated on voters, firms, or regions that matter politically. Retaliation becomes a way to transform an international trade dispute into a domestic political problem for the opposing government.
This is an important point: retaliation is not only about trade volumes. It is also about political geography. The choice of targeted goods can reveal which domestic groups the retaliating country wants to pressure.
Hegemony: Public Goods or Coercion?
Frieden also emphasizes that powerful countries can use geoeconomic power for different purposes. A hegemon can use its power to support a relatively beneficial international order, but it can also use its power coercively.
One positive example is the postwar American-led international order. The United States helped construct an economic and political system that benefited many members of the Western bloc, while also serving American economic and geopolitical interests. Multilateral institutions helped make American leadership more acceptable by limiting the fear that the hegemon would exploit its position too aggressively.
But geoeconomic power can also be used destructively. Frieden recalls Albert Hirschman’s analysis of Nazi Germany’s use of trade dependence in Central Europe. In that case, economic relationships were used to create dependence and strengthen the Nazi war machine. This is geoeconomics as coercion rather than cooperation.
These examples show that geoeconomic power is not inherently benevolent or malevolent. Its effects depend on the goals of the powerful state, the institutions it builds, and the domestic political economy behind those goals.
Networks and Domestic Support
The same reasoning applies to international networks. Trade networks, financial systems, payment infrastructures, technology platforms, reserve currencies, and alliances generate geoeconomic power. A hegemon becomes more powerful when other countries depend on its network.
For example, access to a dominant payment system, reserve currency, or trade network can become a source of leverage. A country inside the network benefits from liquidity, market access, information flows, and lower transaction costs. A country outside the network may face higher costs and weaker outside options.
But networks also create domestic constituencies. Firms, banks, consumers, and public institutions may benefit from belonging to a network. Once they benefit from it, they may pressure their government to remain inside it. The network therefore becomes politically embedded.
This process can reinforce the power of the network. As the network grows, it becomes more attractive. As it becomes more attractive, more domestic actors benefit from it. As more domestic actors benefit from it, governments become more committed to it.
But the process can also work in reverse. If a network begins to unravel, the benefits of participation decline. Domestic support weakens. Governments may then have fewer incentives to remain committed to the network, which can accelerate the unraveling.
Geoeconomics as Political Economy
The main lesson is that geoeconomics is not only about the use of economic tools for foreign policy. It is about the domestic political conditions under which these tools are chosen, sustained, and made effective.
The success of a geoeconomic instrument depends on two domestic political economies: the domestic political economy of the sending country and the domestic political economy of the target country.
In the sending country, the question is whether the government can bear the domestic costs of its own policy. Can it impose tariffs without provoking too much opposition from consumers and firms? Can it impose export controls despite resistance from exporters? Can it finance foreign aid despite taxpayer opposition? Can it maintain sanctions when domestic firms lose profitable markets?
In the target country, the question is whether the instrument changes the internal balance of power. Does the sanction affect actors close to the regime? Does foreign aid change the incentives of the relevant veto players? Does the threat alter the coalition supporting the government? Does economic pain translate into political pressure?
Conclusion
Frieden’s argument pushes us to move beyond an abstract geoeconomics in which states behave like unified actors with simple national objectives. Real governments operate under domestic political and economic constraints. They are influenced by firms, sectors, voters, taxpayers, bureaucracies, military actors, and interest groups.
This means that the effectiveness of geoeconomic policy cannot be judged only by its external logic. A tariff, sanction, export control, or aid package may look powerful in an international bargaining model. But it will succeed only if it is politically sustainable in the sending country and politically consequential in the target country.
The political economy of geoeconomics therefore asks four questions. What foreign policy objective is being pursued? What economic instrument is being used? Who bears the domestic cost in the sending country? And which domestic actors are affected inside the target country?
Only by answering these questions together can we understand why some geoeconomic strategies succeed, why others fail, and why the most powerful tools of international leverage are often constrained by domestic politics.
Reference
Frieden, Jeffry. 2026. “Comment.” NBER Macroeconomics Annual, vol. 40. Published by the University of Chicago Press for the National Bureau of Economic Research. DOI: 10.1086/738942.