Barry Eichengreen explains why a book published in 1945, and all but ignored at the time, is redefining how we understand trade

In 1945, at World War II’s close, the economist Albert O. Hirschman published National Power and the Structure of Foreign Trade, in which he analysed how nation-states shape trade patterns to their strategic advantage. The book sank like a stone. It garnered just one brief summary in the American Political Science Review and was rarely if ever cited by other economists and authors.

Today, Hirschman and the field he invented, known as “geoeconomics,” have re-emerged with a vengeance, building on his seminal ideas. These start with his “influence effect,” which showed how a dominant state could structure its trade so that disruptions hurt its partners more than itself. By threatening to withhold exports or market access, this dominant state could then coerce and extract concessions from its partners.

In the last year, we have seen multiple instances of US President Donald Trump using tariffs and export controls to coerce countries to invest in the United States or grant US firms favored market access. Unlike Hitler’s Germany, Hirschman’s original example, the Trump administration can’t be credited with having consciously shaped US trade to amplify this effect. Trump inherited a large US market and America’s high-tech leadership, which granted him leverage. But the resulting strategy is the same.

Hirschman also pointed to a second mechanism, the “supply effect,” where trade is used to stockpile resources and channel transactions toward reliable partners, strengthening economic resilience and limiting vulnerability to foreign influence. Today, we see countries friendshoring their trade and investment, enhancing their self-sufficiency in semiconductors, and stockpiling rare earths. The more things change….

But some things have not remained the same. International financial markets, having fallen into disarray in the 1930s, were inactive when Hirschman was writing. Now, by contrast, they are a major arena for geoeconomics. The US notably capitalised on Russia’s financial dependence following the full-scale invasion of Ukraine in 2022 by freezing the Kremlin’s overseas dollar deposits and denying it access to the US correspondent banking system.

China uses its Belt and Road Initiative not only to build secure supply chains but also to cultivate other countries’ dependence on its financial resources. Those other countries are not unaware: in 2023, Italy terminated its participation in the BRI precisely because of uneasiness about its financial dependence on China.

Critics of financial sanctions worry that such measures will erode the leverage of governments applying them. Russia and other countries worried that they, too, will find themselves on the sharp end of US sanctions have an incentive to seek other ways to hold foreign assets and make foreign payments.

Russia is pushing its System for Transfer of Financial Messages (SPFS) into the domain of cross-border transactions. A more serious competitor for the dollar and the US correspondent banking system is China’s Cross-Border Interbank Payment System (CIPS), now with some 1,700 banks participating directly and indirectly. Analysts warn that willy-nilly use of sanctions will lend more impetus to such initiatives and end up undermining the global role of the dollar, eliminating America’s ability to leverage finance to its advantage.

Similarly, countries like China that are on the receiving end of US export controls have reason to accelerate their own investments in dual-use (civilian and military) technologies. If so, the US may end up facing an even more powerful and technologically sophisticated rival as a result of its geopolitical measures.

Such responses should not come as a surprise. They are exactly what Hirschman’s framework would lead one to expect: countries targeted by America’s “influence effect” would resort to their own “supply effects” to limit their vulnerability.

Targeted countries will also retaliate in an effort to deter aggressive action by the initiator. Hirschman devoted little attention to this, given the power imbalance between Nazi Germany and the Central and Eastern European countries it targeted. By contrast, today’s China possesses leverage. It responded to Trump’s tariffs and export controls with tariffs on US products, export controls on critical minerals, and investment restrictions for US companies.

Late last year, the two countries drew back from the brink, negotiating a “tactical truce” to de-escalate their trade war. But their tit-for-tat retaliation could easily have spiraled out of control. This danger remains. Now that the Supreme Court has forced Trump to reconfigure his tariffs, the entire situation will have to be revisited.

This is our dangerous new world. It is one of alarming parallels between nuclear deterrence theory and Hirschman’s geoeconomic theory. As with nuclear weapons, the consequences of miscalculation by those wielding geoeconomic weapons would be devastating.

The globalisation to which we have grown accustomed has survived recessions, financial crises, and a worldwide pandemic. It is not clear that it will survive escalating geoeconomic conflict. Geoeconomic warriors should think twice. They proceed at their – or, more precisely, our – peril.

Barry Eichengreen, Professor of Economics at the University of California, Berkeley, is the author, most recently, of In Defense of Public Debt (Oxford University Press, 2021). Project Syndicate, (c) 2025, published here with permission.