The Economics of Geopolitics

Economics has always mattered for foreign policy, but today it matters more than ever given the higher degree of digital interdependence of organizations, people, and nations.¹ Economic tools—from tariffs and export controls to industrial policies—have become instruments of power on par with traditional military might. During his first term in office, President Donald Trump brought many of these issues to the forefront, wielding trade and investment measures as levers of geopolitical influence. His “America First” approach, though divisive to some, elevated supply chains, trade imbalances, and industrial capacity as national security priorities, foreshadowing today’s recognition that economic strength and security are inextricably linked.²

President Trump’s tenure marked a break with decades of economic orthodoxy that treated commerce as separate from strategy. By confronting China over technology and trade, pressuring allies on critical minerals and 5G networks, forcing a broad rethink of how supply chains are organized, and staking U.S. policy on the leverage of tariffs, the Trump administration clarified both the potential and the pitfalls of geoeconomic statecraft, anticipating many elements of the de facto economic security agenda now taking shape in Washington and other capitals. To understand this evolution, it is essential to examine the limitations of traditional economic models, the rise of complex systems thinking in strategy, and the lessons generated by tensions in the U.S.-China relationship. Trump’s record, viewed in this context, illustrates the early adoption of economic tools as geopolitical weapons and offers insights into their promise and limits.

The Limits of Traditional Economic Models

For much of the post–Cold War era, policymakers operated under a set of economic assumptions that, in hindsight, overlooked strategic realities. Classical models of free trade and comparative advantage promised that global market integration would yield mutual prosperity and lasting peace as countries became more economically interdependent. In the 1990s and 2000s, politicians and pundits largely “prioritized markets over security, hoping that economic liberalism and interdependence would underpin peace.”³ The implicit belief was that fostering integrated global supply chains and welcoming rising powers like China into the World Trade Organization would bind everyone’s interests together. U.S. National Security Strategy documents from that era devoted scant attention to supply-chain vulnerabilities, focusing instead on terrorism and nuclear proliferation, while other forms of kinetic warfare were thought to be less likely with more trade relationships. Economics and security occupied separate lanes of policy, with market forces presumed to take care of themselves in a benign international environment.

This conventional wisdom, however, had critical blind spots. It “hollowed out U.S. industry, welcomed a rising adversary (China) into free-trade arrangements, and riddled global supply chains with critical security vulnerabilities,” according to international affairs scholars Henry Farrell and Abraham Newman.⁴ Western economies became reliant on external sources for nonessential goods as well as the essential ones, assuming that interdependence itself was a safeguard. By the 2000s, the dangers of such assumptions became evident. For example, the 2008 global financial crisis demonstrated how complex and contagious economic networks could destabilize nations. Around the same time, China’s rapid economic rise, aided by far-reaching and often lopsided access to Western markets and technology, began to fuel concerns in Washington about economic coercion.⁵ Beijing’s mercantilist practices belied the notion that trade was purely a win-win proposition. But U.S. policymakers were slow to adapt.

And yet, the problem is not so much with markets as it is with the absence of them. Donald Trump’s election in 2016 coincided with a growing realization that the old economic playbook, which often relied on lip service to markets, was inadequate and culminated in unintended social and economic harms. Trump championed a view long held on the fringes of policy debates: that America’s massive trade deficits and deindustrialization were not just economic issues, but strategic liabilities. He pointed to the loss of factories and dependence on imports as evidence of American decline, rejecting the idea that such trends were benign side effects of globalization.

One of the temptations within economics research is to focus on answering research questions where there is good data. But many of the major, and often overlooked, consequences of the globalization era are hard to measure, ranging from nontariff trade barriers resulting from regulatory arbitrage to local economic and societal decay in much of the Midwest. As a result, there is much less work quantifying the harms of globalization on the American economy, save seminal research by David Autor, David Dorn, and Gordon Hanson.⁶

To that end, Trump moved aggressively to link economics with national security. Invoking a seldom used provision of U.S. trade law, his first administration imposed tariffs on steel and aluminum imports on national security grounds, arguing that a weakened industrial base would imperil defense production. This contrasted with traditional arguments by economists, who warned that tariffs would raise costs and provoke retaliation. President Trump’s view was that the orthodox models did not tell the whole story and ignored power dynamics. In particular, if the United States was “losing many billions of dollars on trade” with a country, that imbalance could be exploited to America’s advantage. Washington could wield tariffs and other barriers to force concessions, encapsulated in Trump’s famous quip that “trade wars are good, and easy to win.”⁷

The idea that the United States held leverage because of its big import market reflected a kind of raw game theory approach: Trump believed he had “escalation dominance” over any country with which the United States ran a large trade deficit. In theory, nations such as China or Mexico stood to lose more in a tariff war because they depended more on access to the U.S. market than the United States did on theirs. Traditional economic analysis would counter that such tariffs harm both sides and that global supply chains complicate the picture—a reality that indeed tempered the results of Trump’s trade fights. But by treating trade as a strategic contest rather than a reciprocal boon, Trump exposed the tension between classical models and real-world power competition. Policymakers could no longer ignore the fact that “the United States gets vital goods from China that cannot be replaced any time soon or made at home at anything less than prohibitive cost.”⁸ Reducing such dependence, however, is not as simple as flipping a tariff switch: it requires a deeper rethink of economic policy and national strategy.

The limitations of the old paradigm became even more apparent when the Covid-19 pandemic hit. Even setting aside the origins of the crisis, shortages of medical gear and pharmaceuticals in 2020 drove home the point that efficiency-driven supply chains, optimized for cost, had little redundancy for emergencies. Traditional models had prized just-in‑time production and offshoring to the cheapest supplier; national security was someone else’s department and ran in a silo. Now, supply chain resilience has begun to matter at least as much as efficiency, elevating a new strategic role for national statecraft alongside economic measures.

The Rise of Complex Systems Thinking

Replacing the simplicity of the old models is a more complex systems view of the global economy. Rather than seeing trade and investment in linear terms (“more is always better”), there is a growing recognition of the role that networks play and the feedback loops they create. On one hand, interdependency can create complementarities and even greater gains; strong trade links can boost competition and institutions of human capital production. On the other hand, interdependencies can also be leveraged for economic and/or geopolitical leverage. A single weak link or chokepoint can create cascading effects through a supply chain, and a savvy adversary can target those critical nodes to inflict outsized damage.

U.S. officials have come to appreciate that trade and technology ties cannot be disentangled from security when markets are intertwined with those of adversaries, consumer electronics can be weaponized, and high-end chips power artificial intelligence for military use. Put simply, the economy is not a benign, self-correcting system in today’s strategic context; it is a contested domain, prone to shocks and manipulation by other actors that use “the market” as a mask. In fact, many free trade proponents routinely point out the nontariff barriers that other countries have created that exacerbated the offshoring of American manufacturing due to regulatory arbitrage; the challenge, of course, is that these unintended effects are visible only in hindsight.

Trump’s approach, for all its bluntness, intuitively grasped aspects of this complex reality. His administration zeroed in on certain “choke points” in the global economic network where the United States held a position of advantage. One example was the semiconductor supply chain. Advanced computer chips are designed with U.S. software and manufactured with equipment from a handful of Western firms. In 2020, the Trump administration tightened export controls to bar China’s telecom champion, Huawei, from purchasing cutting-edge chips made with U.S. technology. It also pressured allied nations to follow suit in restricting China’s access to critical chipmaking tools. These actions demonstrated a new kind of economic statecraft: using control of a key node in a complex supply network as leverage over a rival’s capabilities. Subsequent measures to deny Beijing the semiconductors needed for military AI applications were “empowered and justified by the Trump administration’s reform of export control regulations.”⁹ Trump’s team rewired the regulatory system to enable today’s tech sanctions on China.

Alongside semiconductors, critical minerals became another focus of U.S. strategic planning. These raw materials, from rare earth elements essential in missiles and electric vehicles to lithium and cobalt for batteries, together form the backbone of modern technologies. They also epitomize the complex systems challenge: supply chains are highly concentrated, often in politically fraught locations, making them vulnerable to disruption.

China’s dominance in rare earths, for instance, had been a quiet concern for years, but it sprang into prominence after a dramatic incident in 2010. When a diplomatic dispute flared between Beijing and Tokyo, China allegedly halted rare earth shipments to Japan, a move that shocked industrial players around the world. “The world had awoken to the fact that overreliance on China for rare-earths supplies could put the international high-tech supply chain at risk,” according to Damien Ma.¹⁰ The United States, which had outsourced most of its rare earth production, took heed. By Trump’s presidency, ensuring access to critical minerals was seen as vital to economic resilience and defense readiness. His administration launched a strategy to “end American dependence on hostile foreign powers for critical minerals,” speeding up mine permits and even considering tariffs or quotas to spur domestic output. It was an early attempt to grapple with a complex interdependence problem: diversify the inputs, build redundancy, and reduce the leverage a single supplier—especially, in this context, China—could exert.

Complexity science emphasizes the role of feedback effects. Moves in the economic realm provoke reactions, which then require further adaptation. Throughout Trump’s first term, U.S. tariffs and tech bans squeezed China; Beijing did not sit idle. It doubled down on its “dual circulation” strategy to boost domestic consumption and self-reliance, particularly in sectors like semiconductors where the United States sought to choke off access. China poured unprecedented funds into indigenous chip development and began stockpiling critical components. The country’s leading tech firms, suddenly cut off from high-end U.S. chips, scrambled to develop in-house alternatives. “Beijing has given Chinese chip firms a blank check and every regulatory incentive imaginable” to fill the gap.¹¹ The initial impact of U.S. export controls was undoubtedly severe. Chinese companies found themselves unable to obtain top-tier chips such as cutting-edge graphics processors, setting back their progress. But their subsequent investments are growing.

In complex adaptive systems, pressure on one part of the network can lead to evolution in another part. For the United States, this means that economic strategy must be continually refined, balancing defensive measures with offensive ones and coordinating with allies to shape outcomes. The new mindset in Washington embraces this dynamic approach. Policymakers speak of “de-risking” rather than fully decoupling, aiming to reduce exposure to hostile leverage without severing all ties. They frame the challenge as building “systemic resilience,” so that the nation can withstand shocks and bounce back stronger. This involves difficult judgments around which economic links are too risky to tolerate—and which are too valuable to jettison.

Toward a New Economic Security Paradigm

While there is a growing recognition that economics and national security are linked, economic models offer little guidance on how to model geopolitical conflict. Even the most sophisticated macroeconomics and trade models fail to account for a wide array of first-order factors, ranging from leader personalities to fiscal cliffs to strategic complementarities in the production chain. That is not to say we need more “models of everything” in which analysts try to embed every potentially important feature into their quantitative model, but rather that we need to approach national security questions with a pragmatic economic lens and model what matters.

So, what does that look like? Perhaps obviously, we need to treat strategic sectors, such as critical minerals and semiconductors, as core to our national security. That does not mean giving them a blank check, like China did with its industries following the first Trump administration’s export controls, but rather additional strategic investments. Critics will often argue that President Trump’s vision of revitalizing our manufacturing base is gone, but not necessarily: if a country can spring from the ashes, as we have seen throughout history, so too can a manufacturing sector. But it will take work, and that is where smart economic investments come into play.

Empirical estimates suggest we have upwards of sixteen million people sitting on the labor market sidelines because they do not have the requisite credentials to match into the right jobs.¹² They may be employed but likely underutilized. And simultaneously, we also have far too many people with college degrees who cannot find adequate jobs, arguably driven by the mantra that everyone needs a college education. Coupled with the grade inflation that took place in universities over the past few decades, this has created an oversupply of college graduates, many of whom are now experiencing significant difficulties in finding jobs.¹³

Complex systems thinking with both a national and economic security lens in mind looks at the broader problem holistically, realizing that there are supply chain vulnerabilities that can only be fixed sustainably through targeted investments that revitalize our manufacturing sector. The extension of the Tax Cuts and Jobs Act (TCJA) undoubtedly plays a role, but so do more labor market policies that expand tried-and-true training and career development.

Another example is in how we use unconventional data to make economic and national security decisions. China has countered the recent tariffs from the Trump administration by imposing tariffs of their own and pushing back on any negotiations. The real question is how long they can last, especially since a major driver of their growth has been net exports, specifically to the United States. To study Chinese claims and assess the degree to which they can commit to their recent tariffs, we could use our satellite imagery data to create proxies of economic activity at a local level. If there has been a large and sustained contraction, that would tell us that they cannot credibly commit to their tariffs for a prolonged period of time.

These two examples show that bringing economics into national security is less about building a model that contains hundreds of bells and whistles and more about examining national security issues with an economic lens, one where incentives matter and influence decision-making. That’s not to say that monetary incentives are all that matter; if we have learned anything since Graham Allison’s seminal Essence of Decision (1971), we know that applying a purely classical or rationalist model to foreign actors leads us in the wrong direction.

Geoeconomics Under Trump II

Over the span of 2025, Washington and Beijing have increasingly linked the fate of social media platforms, advanced chips, and tariffs into one interconnected bargaining process. Rather than treating these as siloed disputes, both sides are using them as mutual leverage in a broader negotiation.

The first pillar is technology policy. In mid-September 2025, U.S. and Chinese officials even announced a tentative “framework” to place TikTok’s U.S. operations under American control, pending final approval in an expected Trump-Xi phone call. Then, the White House extended TikTok’s shutdown deadline yet again—this time to December 16, 2025, marking the fourth reprieve since a divest-or-ban law took effect in January.¹⁴ More recently, at the time of writing, the White House announced an additional 100 percent tariff on goods from China starting November 1, in addition to the 30 percent already in effect.¹⁵ The situation has been tense and volatile (to say the least) and may change again as this essay goes to print. But the message has consistently been that progress on TikTok would proceed in tandem with movement on tariffs and tech access, using tariffs as leverage for a deal.

Two features make TikTok central to the package. First, governance. ByteDance would reduce its stake below a control threshold and seat a U.S.-majority board over a spun-out TikTok U.S. entity, bringing the app out of “foreign adversary controlled application” status under the 2024 law. Second, code control and licensing. Because China treats TikTok’s recommendation engine as export-restricted technology, U.S. operations could run a licensed, vetted build rather than receive source code. In practice, divestment would hinge on ownership changes, local data residency, and IP licensing rather than a full technology transfer.

Semiconductors have emerged as the second pillar of the bargaining bundle. Beijing has underscored the linkage by wielding its regulatory powers in response to U.S. export controls. On September 15, China’s State Administration for Market Regulation announced a preliminary finding that Nvidia violated China’s Anti-Monopoly Law, citing commitments made when China approved Nvidia’s 2020 acquisition of Mellanox (an Israeli chip firm).¹⁶ Five years ago, Nvidia had agreed to continue supplying China with high-end GPU chips as a condition of that deal, but U.S. export bans under the Biden administration later forced Nvidia to halt sales of its most advanced processors to Chinese customers. Chinese regulators are now hinting that Nvidia’s inability to meet those commitments constitutes a violation, potentially opening the door to fines or other penalties. Secretary of the Treasury Scott Bessent publicly called the announcement “poor timing,” and analysts noted it gave Beijing added leverage in the negotiations.¹⁷ In effect, China is using antitrust law as a counter-lever to U.S. tech restrictions. For Nvidia, which derived roughly 13 percent of its revenue from the Chinese market last year, the specter of a regulatory crackdown in China only compounds the uncertainty already created by Washington’s curbs on exports of high-end GPUs.

Nvidia is also adapting its products to U.S. rules. The company has been developing China-specific chips¹⁸ that thread the needle of U.S. export limits, namely a new AI chip based on its upcoming Blackwell architecture that will be more powerful than the current H20 model it is allowed to sell to China, while still remaining within the letter of U.S. restrictions. This new chip (tentatively called the “B30A”) would reportedly deliver about half the raw computing power of Nvidia’s latest flagship, and the company hopes to ship samples to Chinese clients in the near future. Whether U.S. authorities will tolerate these iterative “China variants” has become a live political debate. Hawkish voices in Congress argue that even scaled-down versions of advanced chips risk eroding the strategic impact of export controls, as they could help China narrow the AI capability gap. Other experts at the RAND Corporation, for instance, counter that allowing limited sales under tight conditions can preserve U.S. leverage by keeping Chinese firms dependent on American technology stacks (while also generating U.S. revenue).¹⁹

Tariffs form the third pillar of this triangle. Trade measures that were once treated separately are now explicitly linked to progress on tech issues. The “Madrid Agenda” for the recent talks bundled discussions on tariffs, export control frictions, and TikTok into a single package. Earlier in the summer of 2025, Washington and Beijing had reached a mini-deal to pause their escalating tariff war and ease tensions over critical minerals, creating a more constructive backdrop for the fall negotiations. In late June 2025, the two sides struck a framework agreement that lifted China’s export curbs on rare earth elements, allowing shipments of rare earth magnets and other critical minerals to resume flowing to the United States after months of disruption.²⁰ In return, Washington agreed to roll back or delay certain punitive trade measures of its own. This deal extended a tariff truce, dialing down what had been “crushing triple‑digit” retaliatory duties to more manageable levels and restarting the flow of materials (e.g., specialty metals for EVs and defense components) that China had been quietly holding back. The intent was to build goodwill and stabilize supply chains as bigger issues such as TikTok and chip exports were addressed.

Secretary Bessent has also explicitly linked tariff policy with broader geopolitical goals and has been “pressing allies to do their share,” urging European countries to coordinate with the United States by imposing secondary tariffs on Chinese (and Indian) goods if necessary to cut off revenue from Russian oil sales.²¹ In a joint interview during the Madrid meetings, Bessent emphasized that the United States would not impose new tariffs on China over its Russian oil purchases unless Europe stepped up first with steep duties of its own. By tying China’s trade actions to the enforcement of sanctions against Russia, Washington was broadening the negotiation: any comprehensive package with Beijing would hinge not only on market-access and tariff relief, but also on credible safeguards around strategic concerns like technology diversion and geopolitical alignments. In other words, each side is making its moves in one domain conditional on progress in others. Beijing, for its part, has signaled that the question of TikTok’s status or of semiconductor sales cannot be resolved in isolation; they are part of what Chinese officials call a need for “mutual respect and equal consultation” across the economic relationship.²²

Bundling these disparate issues has advantages and disadvantages. On one hand, linking multiple levers creates more avenues to reach a Pareto-improving deal. For example, Washington could trade a measured arrangement on TikTok in exchange for verifiable Chinese commitments to rein in chip diversion and a timetable for lowering certain tariffs. Beijing, in turn, could claim credit for protecting its companies’ IP and for regaining some semiconductor access, while securing relief from the most painful U.S. tariffs. In theory, a well-crafted package could leave both sides better off than a stalemate on all fronts.

On the other hand, tightly coupling these negotiations also raises the cost of any breakdown. A setback in one area can swiftly unravel progress in others. If export-control enforcement suddenly intensifies (i.e., if Washington blacklists new Chinese tech firms or stops approving chip export licenses), Beijing could retaliate not only in kind—for instance, by sanctioning a U.S. company or halting rare earth exports again—but also by backtracking on TikTok concessions or stalling trade talks. Likewise, a flare-up with tariffs could stifle the fragile TikTok deal or discourage Chinese firms from abiding by unofficial chip quotas. The interdependence means any mistrust or misstep reverberates widely, with potentially rapid spillovers through supply chains and financial markets. While the approach leaves less margin for error than decoupling the issues, it is ambitious and holds significant potential.

Internalizing the Externalities of Globalization

As the United States moves forward, the challenge will be to wield its vast economic strengths with strategic discipline and foresight. Striking that balance is difficult, but it is essential. In a sense, the United States is returning to an older understanding from past eras: that prosperity and power go hand in hand, and that maintaining one’s edge requires active engagement, vigilance, and at times intervention in the economic realm. The tools of statecraft have expanded to include supply chains and standards, and effective leadership in the twenty-first century will depend on mastering these tools.

Trump’s first presidency accelerated this awakening, and it has resurfaced once again to an even larger extent. Now, the task is to refine a strategy that can secure America’s economic future and, by extension, its national security. While we should continue working toward making markets freer, we also need to understand that we never lived in a world with genuinely “free trade” and, as a result, we must adopt an integrated vision of statecraft that treats factories, trade routes, data flows, and rare earth mines as strategic assets subject to agreed upon principles.

This article originally appeared in American Affairs Volume IX, Number 4 (Winter 2025): 68–78.

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Notes