Winners and losers in the new age of geoeconomics

The term geopolitics has long been used to highlight the complexity of international affairs. Yet, geoeconomics has also risen in popularity in recent years as a concept that helps explain today’s world of potentially waning globalization.

Geoeconomics highlights the use of tariffs, sanctions, and wider financial measures as tools of statecraft. An example is the growth in the use of sanctions, as shown for instance by the 19 packages of measures that the EU alone has implemented against Russia since its invasion of Ukraine.

This agenda has become a key item at global leadership summits, including this year’s G7 events. In the latter forum in Canada, geoeconomics was one of Prime Minister Mark Carney’s major priorities in “building energy security and accelerating the digital transition,” including “fortifying critical mineral supply chains.”

This security-focused economic agenda has come to higher prominence since the Ukraine war, which exposed the huge reliance of Europe, and some other surrounding powers, on Russian energy. Since then, there has been an intensified emphasis by many advanced industrialised economies in diversifying dependence for energy and wider raw materials. This has seen a series of major trade deals, including the EU-Mercosur and UK-India agreements.

However, it is perhaps the Trump administration’s use of tariffs in his second term of office that is the best example of this pivot to geoeconomics. Yale University Budget Lab researchers estimate the overall average effective US tariff rate for imports has jumped to about 16.8 percent, the highest since the Depression of the 1930s, from roughly 2.4 percent at the start of 2025.

The flipside of this tariff agenda has been a series of economic deals, including with the UK, Indonesia, Vietnam, Philippines, Japan, and the EU, which are broadly favorable to the US. The same tactics were utilized by the US administration of threatening high tariffs before negotiating these down to still-historically elevated levels.

Take the example of the US-EU agreement framework where the EU was initially threatened with a 30 per cent tariff, which was ultimately reduced to 15 percent. Japan, too, was first offered a 25 percent tariff before this fell to 15 percent.

Even some critics of these tariffs believe that many of the measures may outlive the current administration — driven by political concerns that removing protectionist barriers will worry workers who fear losing their jobs.

Long-run estimates assert a significant hit to US gross domestic product and the loss of hundreds of billions in potential dynamic revenue as economic activity contracts. Yet, the impact is not only on the US.

Less trade, less confidence in global markets, less innovation, fewer economies of scale, and softer demand from the world’s largest economy are likely to reduce prosperity not just in the US, but much of the rest of the world, too.

Andrew Hammond

Unchecked, the medium to long-term results could be a dramatically different global economic system. This is not only with lower volumes of international trade, but also smaller capital flows, and slower growth in productivity and living standards worldwide.

Of course, it is true some countries outside the US engage in protectionist trade policies that have harmed many workers in industrial countries, including lost manufacturing jobs. However, the decision of the Trump team to launch a global trade war is suboptimal.

Instead, US policies should promote high value-add manufacturing jobs in transportation equipment, capital equipment, semiconductors, clean energy, and chemicals, for example. Tariffs on many low value-add products, including on agricultural products that the US does not grow, also make little sense.

The Trump tariff agenda is part of a wider platform that is eroding long-standing pillars of what is often called US economic exceptionalism. This includes predictable, stable economic policies, central bank independence, and a core government belief in private enterprise. Underpinning these foundations are the strengths of the US university research system, supportive regulatory and tax structures, and transparent government procurement processes.

This long-standing tradition of US economic exceptionalism has helped fuel US productivity growth, which has increased at more than double Europe’s rates. US per capita income is now more than one-third higher than European levels, and US equity markets today represent more than half of total global equity valuations.

Of course, Trump administration officials forecast a golden economic era ahead of renewed, perhaps even more outsized, economic exceptionalism, and many investors still share this narrative. The US economy has multiple formidable advantages, including a secure supply of energy, and a powerful science and technology base.

Nevertheless, investor scrutiny of US exceptionalism is becoming a significant headwind. Although US equity markets remain at elevated levels, despite recent falls, the potential risks of heightened policy uncertainty may be underestimated. Already, many global institutional investors are reassessing US economic exceptionalism with a view to redeploying more capital back to home markets.

The consequences of reduced US financial exceptionalism include smaller foreign capital flows to the US and slower US investment spending. Innovative US companies will grow less quickly, and the pace of global productivity growth is likely to slow.

Moreover, world living standards are likely to post smaller gains, too. More capital will flow to other markets, including the UK, EU, Japan, South Korea, and potentially some key Middle East nations. This should spark more innovation and growth in these markets.

However, it is not yet clear how potential benefits will net out for these countries in this new age of geoeconomics, because they will also experience downside effects from a less dynamic US economy. Less trade, less confidence in global markets, less innovation, fewer economies of scale, and softer demand from the world’s largest economy are likely to reduce prosperity not just in the US, but much of the rest of the world, too.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.