Geopolitics plays a major role in the outlook for global economies. Today, I’ll describe how to look at the world through the prism of geoeconomics.
What is geoeconomics? Obviously, it’s a portmanteau of the words geopolitics and economics. There’s nothing new about considering those disciplines in the same context. Wars are geopolitical and are often won through industrial capacity, which is primarily economic.
The UK won the Napoleonic Wars in part because of its ability to impose a commercial blockade on continental Europe through the Royal Navy. The Japanese attack on Pearl Harbor was triggered in part by FDR’s freezing of Japanese bank accounts and the imposition of an oil embargo in the months ahead of the attack. Economics and global strategy have always been entwined.
What is new is the idea that economics is not just an adjunct of geopolitics but is now the main event. This doesn’t mean that warfare is over or that military prowess doesn’t count. It means that the major powers in a globalised age will base their calculations on economic gain and loss, and will use economic weapons not as ancillaries, but as primary weapons.
It’s the economy, stupid
This change was described at the beginning of the new age of globalisation by strategic thinker Edward N Luttwak in a seminal article titled ‘From Geopolitics to Geo-Economics — Logic of Conflict, Grammar of Commerce’, published in the Summer 1990 issue of The National Interest. Luttwak wrote that the end of the Cold War and the start of globalisation meant that armed conflict was too costly and uncertain for great powers. Economic interests would now be the arena for great power conflict.
Luttwak wrote:
‘The waning of the Cold War is steadily reducing the importance of military power in world affairs […] The deference that armed strength could evoke in the dealings of governments over all matters — notably including economic questions — has greatly declined and seems set to decline further. Everyone, it appears, now agrees that the methods of commerce are displacing military methods — with disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advance, and market penetration in lieu of garrisons and bases.’
Luttwak concluded:
‘While the methods of mercantilism could always be dominated by the methods of war, in the new “geo-economic” era not only the causes but also the instruments of conflict must be economic.’
To be clear, Luttwak’s analysis principally applied to great powers, including the US, China, Russia, Japan, members of the EU, and Commonwealth nations, such as Canada and Australia. Luttwak recognised that middle powers such as Israel, Iran, Iraq, Pakistan, North Korea, and some others might still find warfare beneficial.
He also didn’t rule out the fact that great powers might intervene in wars involving these middle powers, such as the US interventions in Iraq and Afghanistan and Russia’s involvement in Ukraine. His point was not that war was obsolete, but only that it wouldn’t involve direct confrontation between great powers. Interventions and wars involving lesser states would still be on the table.
How to think in the age of geoeconomics
Geoeconomics — great power competition using economics as a goal and a weapon — is an excellent tool for analysing hotspots dominating strategic thinking in the world today. One of these is China’s threat to Taiwan, which I will cover in a future issue, with a view to its impact on markets — especially stocks, interest rates, gold, and commodities.
While Americans are preoccupied with Capitol Hill games on the filibuster, voting rights, Build Back Better, and other stories that are mostly for show, more serious thinkers are applying themselves to oil, natural gas, gold, the dollar, technology, and other geoeconomic benchmarks. Let’s leave the Washington circus to others and focus on what really matters to investors. Let’s focus on geoeconomics.
In my next issue, I’ll describe one prevalent geoeconomics hotspot — the China-Taiwan conflict. Make sure you tune in for that one.
Regards,
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Jim Rickards,
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.
