Geoeconomics in a Multipolar World: Rules of Engagement for the Small Open Economy

Abstract

In 2022, the world is at war. There are political/military and economic dimensions and multiple fronts. The conditions for war were established by the relative decline of US power and by changed technological conditions that have unleashed geoeconomic competition to dominate the new general-purpose technologies based on big data, machine learning (ML) and artificial intelligence (AI). Symbolically, two events mark the end of the old world order: first, the shutdown of the World Trade Organization’s Appellate Body on 10 January 2019; and, second, hot on the heels of the US exit from Afghanistan on 30 August 2021, the Russian invasion of Ukraine on 24 February 2022. Given that China, Russia and the United States are all not signatories to the International Criminal Court, these moves represented strikes two and three to the rule of law internationally. Geopolitics and its handmaiden geoeconomics are now back in full force. Most countries lack the assets to be geoeconomic players but all have defensive interests. How should they play their hands and what are their rules of engagement in geopolitical/geoeconomic power plays launched by the great powers? Three principles suggest themselves: (a) prepare defenses: this includes diversifying trade so as to limit exposure to the weaponization of interdependence, and developing defensive industrial policy strategies to safeguard innovation systems, which are key to success in the modern economy, from predation; (b) play a sophisticated tit-for-tat strategy that features kindness, provocability, forgiveness, contrition and simplicity; and (c) weigh entanglement in geopolitical/geoeconomic power plays carefully, engaging in collective defense but avoiding offensive engagement, which can be escalatory and destabilizing in a multipolar world.

Keywords: Geoeconomics, geopolitics, multipolar, rules-based system, trade diversification, innovation systems, industrial policies, game theory, tit-for-tat, sanctions

JEL Classification: F13, F15, F51, F55, O33