Global economy is increasingly shaped by geopolitics

Traditionally, economics and political science were regarded as distinct disciplines. Economic analysis was grounded primarily in the benefits of free competition and countries’ comparative advantages in determining patterns of trade, without giving significant weight to political considerations. Recent geopolitical developments, particularly the wars and associated turmoil in Ukraine and the Middle East, have heightened analysts’ interest in the interplay between political and economic factors. At the same time, growing strategic rivalry between the United States and China has reinforced concerns that economic relations are increasingly being shaped by geopolitical objectives rather than purely market considerations. This article argues that the growing use of economic interdependence as an instrument of geopolitical influence is reshaping global trade, prompting smaller economies to pursue selective industrial policies and greater market diversification. It has now become common, especially among major powers including the United States and China, to use political instruments to extend economic influence, deepen dependencies and achieve strategic economic objectives. While global trade remains substantial, accounting for approximately 60 per cent of world GDP in recent years, governments are placing increasing emphasis on economic security and supply-chain resilience alongside traditional efficiency considerations. To this end, the United States makes use of economic sanctions, trade tariffs and its influence over international payment systems, areas in which it enjoys a dominant position. More recently, access to advanced semiconductor technologies and artificial intelligence systems has become an additional instrument of economic statecraft. China pursues similar objectives by directing investment into strategic sectors of foreign economies and leveraging its dominant position in critical minerals and rare-earth supply chains. According to industry estimates, China accounts for roughly 70 per cent of global rare-earth production and close to 90 per cent of refining and processing capacity, giving it considerable influence over technologies ranging from electric vehicles to advanced defence and digital systems. Consequently, developments in global economic transactions and trade are increasingly shaped by geopolitical factors. International institutions, including the International Monetary Fund, have warned that a fragmentation of the global economy into competing geopolitical blocs could reduce efficiency, weaken technology diffusion and lower long-term global growth prospects. In response, medium-sized and smaller countries, including EU member states, the United Kingdom, Canada, Japan and Australia, as well as major developing economies, such as Brazil and India, are seeking to devise policies that address vulnerabilities arising from dependencies in critical sectors. Particular attention is being paid to energy, semiconductors, pharmaceuticals, critical minerals and digital infrastructure. Against this backdrop, the development of domestic industrial policies is gaining traction. In the EU, this shift is reflected in a range of initiatives, collectively known as the “Industrial Accelerator Act”, aimed at strengthening strategic autonomy, supporting investment in clean technologies, expanding domestic manufacturing capacity and improving economic resilience. Similar policy approaches have emerged in other advanced economies, reflecting a broader recognition that excessive dependence on external suppliers may create economic and geopolitical vulnerabilities. Many analysts have responded critically, arguing that domestic industrial policy can provide only limited relief from strategic dependencies and should therefore be implemented selectively and for limited periods. If applied more broadly, it may delay the diffusion of advanced technologies, reduce competitive pressures and increase costs for consumers and businesses. For this reason, subsidies for research, innovation and the development of new products are generally viewed more favourably than restrictions on trade and investment flows. Also attracting interest is an initiative advocated by Canadian Prime Minister Mark Carney, who has argued for stronger cooperation among the so-called middle powers through the development of regional and plurilateral cooperation frameworks. The objective is to mitigate risks arising from dependence on major powers in critical sectors, while preserving the benefits of an open international trading system through greater market diversification. For major powers, a policy aimed at creating dependencies may yield short- to medium-term benefits. At the same time, however, it encourages affected countries to identify alternative suppliers, develop domestic capabilities and expand economic ties with other partners. The pursuit of advantage through political instruments is therefore likely to become less effective over time as economies adapt. In the longer term, sustained prosperity is more likely to depend on innovation, competitiveness and mutually beneficial economic relationships than on the deliberate creation of economic dependencies.