Architectures of Geoeconomic Influence and Trade Fragmentation

 

Charles-Louis de Secondat, Baron de La Brède et de Montesquieu (1748)

Architectures of Geoeconomic Influence

Geoeconomic influence—the exercise of power by states upon other states through economic means—operates through three primary methodological frames: unilateral (a state’s net position relative to the world), bilateral (specific leverage over another state), and multilateral (leverage over a wide set of states).

Network Topography and Power Effects

Influence is rooted in natural resource endowments and productive capabilities but is mediated by the structure of international economic networks. Topographical influence manifests in two forms:

• The Panopticon Effect: The informational advantage gained by a state hosting a major network hub. Recent research confirms that controlling strategic nodes in global networks—such as SWIFT’s financial messaging system (which handled approximately 90% of global payment messages in 2020) or semiconductor design software ecosystems—provides unprecedented surveillance and control capabilities (World Economic Forum, 2025).
  
  

• The Chokepoint Effect: The ability of a state to sever or restrict flows that other actors depend on. This manifests in critical infrastructure control, from the Suez Canal (whose 2021 blockage disrupted $9.6 billion in daily trade) to digital infrastructure. Analysis of the weaponized interdependence framework shows that in bipolar network topologies, “spoke states” (third countries) now enjoy greater agency than in unipolar networks, as they can strategically navigate between competing hubs (Lehdonvirta, 2025).
  
  

Production and Service Hubs

Influence is exerted through the control of “hubs” in sparsely connected networks:

• Production Hubs: China’s dominance over 19 of 20 strategic minerals refining (roughly 70% of global capacity) exemplifies this power. However, 2025 evidence shows the “burn and choke” asymmetry: China’s rare earth export controls create immediate price spikes but trigger rapid Western diversification. In contrast, U.S. semiconductor controls function as a renewable choke point, blocking China’s learning loops and maintaining technological gaps through successive innovation generations (Camba, 2026).
  
  

• Financial Infrastructure Hubs: Belgium’s hosting of SWIFT exemplifies service hub power. Recent analysis reveals that fragmentation of the global financial system could reduce global GDP by up to 6%, making interoperability in payments infrastructure a strategic imperative (SWIFT/Economist Impact, 2025).
  
  

Coercion and Participation Constraints

The ability to project geoeconomic power is constrained by a “participation constraint”—hegemons must weigh how much they can induce a targeted entity to act against its private interests before that entity prefers to sever the relationship entirely. New research quantifies this dynamic:

• Geoeconomic Power Index: Christie et al. (2025) develop a quantitative methodology aggregating bilateral dependencies weighted by substitution elasticities, showing that the maximum economic cost a hegemon can inflict depends on the target’s “exit option” viability (FIIA Research Paper, 2025).
  
  

• Feedback Effects: Economic coercion effectiveness averages only 38% success rates, with diminishing returns as targets adapt. Recent sanctions on Russia prompted a 90% reduction in UK-Russia trade (2021-2024) but also accelerated dedollarization efforts and alternative payment system development (Chatham House, 2025).
  
  

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Architectures of Trade Fragmentation

Trade fragmentation involves the reconfiguration of global trade along geopolitical lines, characterized by decoupling and “friend-shoring.”

The Montesquieu Indeterminacy

The architecture of fragmentation is governed by “Montesquieu logic,” which suggests that trade and geopolitical conflict are jointly determined. Recent theoretical advances by Adolph, Kohler, and Müller (2025) formalize this as a system with two stable “polar” regimes:

• The Virtuous Circle: High trade integration coupled with low disruption risk

• The Vicious Circle: Low trade integration coupled with high disruption risk

Empirical validation: Analysis of bilateral trade flows (1966-2016) supports the indeterminacy hypothesis—intermediate trade levels prove unstable, with country pairs converging toward one extreme over time (CESifo Working Paper, 2025).

The Fragmentation Paradox and Security Dilemma

Groundbreaking 2025 research by Mayer, Méjean, and Thoenig introduces a crucial insight:

“While decreasing trade dependence on a geopolitical rival lowers the opportunity cost of war (reducing diplomatic costs and consumption losses if war occurs), this strategy can backfire by weakening incentives to show restraint during negotiations, thereby increasing the risk of armed conflict.”

Quantitative findings:

• In high global-safety environments (>90% peaceful de-escalation probability), the optimal U.S. tariff on Chinese imports is 8%—below the 13% traditional trade-theoretic optimum

• Only when peaceful de-escalation probability falls below 60% does the geopolitical rationale justify tariffs exceeding standard terms-of-trade optima

• The probability of war escalation increases with decoupling strategies despite improved bargaining positions (Mayer et al., 2025)

Geopolitical Distance and Friend-Shoring

Empirical evidence from McKinsey’s 2025 update:

• The average geopolitical distance of trade fell 7% between 2017-2024 (from 3.5 to 3.1 on a 0-10 scale)

• U.S.-China direct trade shrank 30% in 2025 in sensitive sectors, but “connector economies” (Mexico, Vietnam) intermediated flows—ASEAN’s electronics exports to the U.S. doubled from 10% to 20% (2017-2024)

• Value-added analysis reveals persistence: While gross U.S. imports from China fell sharply, Chinese value-added in U.S. final consumption declined more modestly, reflecting indirect dependencies through third countries (McKinsey Global Institute, 2025)

Invoicing Currency Patterns as Fragmentation Markers

Major findings from IMF Working Paper 2025/178 (Boz et al., most comprehensive dataset covering 132 countries, 1990-2023):

1. Dollar resilience: The U.S. dollar remains dominant despite tensions, but its role in least-aligned countries has declined since the early 2010s (driven primarily by Russia and a few key economies rather than broad-based shifts)
   
   

2. Renminbi acceleration: While global renminbi invoicing remains modest (1.5% of covered countries’ total imports in 2023), growth has been rapid:
   
   

• Expanded beyond Asia to Europe and Latin America

• Geopolitical correlation intensified post-2022: Countries distancing from the U.S./euro area increasingly substitute with renminbi, home currencies, or third-country currencies

• Settlement data overstates invoicing: China reports 50% of exports settled in renminbi (2023), but implied invoicing based on partner data suggests only ~6.5%

3. Euro patterns: The euro functions primarily as a trade currency with the euro area rather than a vehicle currency—its global invoicing share approximately matches euro area export destinations
   
   

4. Fragmentation acceleration post-2022: Since Russia’s invasion of Ukraine, the correlation between currency use and geopolitical distance to issuers turned significantly more negative, indicating emerging fragmentation along geopolitical lines (Boz et al., 2025)
   
   

Strategic De-risking: The “New Cold War” Environment

2025 policy landscape:

• Friend-shoring intensification: Ernst & Young identifies friend-shoring as the defining trade system for 2026, driven by the “new reality of geopolitics” (EY, 2025)
  
  

• EU Anti-Coercion Instrument (ACI): Europe’s “trade bazooka” aims to counter economic intimidation, representing institutional recognition of weaponized interdependence (Euro-American Observatory, 2025)
  
  

• Globally concentrated products: ~10% of global trade by value is “globally concentrated” (three or fewer economies provide >90% of supply), and 40% of this concentrated trade crosses wide geopolitical distances (vs. 20% of all trade), creating acute vulnerabilities (McKinsey, 2025)
  
  

Systemic Impacts of Export Controls

2025 escalation in critical technologies:

• Semiconductor controls evolution: Trump administration’s September 2025 extension to foreign affiliates, followed by China’s October 2025 rare earth restrictions, demonstrates tit-for-tat dynamics (Camba, 2026)
  
  

• China’s rare earth offensive (October 2025): Announcement No. 61 of 2025 implements the strictest rare earth and permanent magnet export controls to date, directly threatening U.S. defense supply chains. New licensing required for dysprosium, terbium, scandium, and five additional rare earth elements effective November 2025 (CSIS, 2025)
  
  

• Systemic feedback: Controls create new markets—post-2010 China-Japan dispute, rare earth prices increased ~10-fold, triggering permanent capacity diversification. Similar dynamics now emerging for semiconductors and critical minerals (IEA, 2025)
  
  

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ENHANCED REFERENCE LIST

Primary Sources Patterns of Invoicing Currency in Global Trade in a Fragmenting World Economy (IMF WP/2025/178)

• Geopolitical Conflict and Trade: Montesquieu Revisited (Adolph, Kohler, Müller, December 2025)

• The increasing importance of teaching and learning geoeconomics in a meaningful context (Vasilcovschi, CES 2022)

• Measuring geoeconomic power: An index for 41 major economies (FIIA, February 2025)

• A Sketch of Geoeconomic Power (Clayton et al., NBER framework)

• National Strategic Review 2025

• Rebalancing the Transatlantic Defense-Industrial Relationship (Besch et al., 2025)

• The Global Risks Report 2025 (World Economic Forum)

• McKinsey Global Institute: 2025 in charts

• The Transmission of Foreign Shocks in a Networked Economy (Aguilar et al., January 2026)

Additional Contemporary Sources (2024-2026)

Geoeconomic Theory & Network Power:

• Lehdonvirta, V. (2025). “Weaponised interdependence in a bipolar world.” Review of International Political Economy - Analyzes how third countries navigate competing hubs in bipolar networks

• Schmitz, L. (2025). “Hierarchies of Adaptation.” Columbia SIPA - Network topology and state power in supply chains

• Christie, E.H., Kristeri, T., & Wigell, M. (2025). “Measuring geoeconomic power: An index for 41 major economies.” FIIA Research Paper

Trade Fragmentation & Empirics:

• McKinsey Global Institute (2025). “Geopolitics and global trade—a 2025 update” - Comprehensive trade reconfiguration analysis with 2024 data

• Boz, E. et al. (2025). “Patterns of Invoicing Currency in Global Trade in a Fragmenting World Economy.” IMF Working Paper 2025/178

• Bonadio, B. et al. (2024). “The Empirical Landscape of Trade Policy Uncertainty.” VoxEU/CEPR

Security Dilemma & De-risking:

• Mayer, T., Méjean, I., & Thoenig, M. (2025). “The Fragmentation Paradox: De-risking Trade and Global Safety.” - Critical contribution showing decoupling increases conflict risk

• Adolph, J., Kohler, W., & Müller, G. (2025). “Geopolitical Conflict and Trade: Montesquieu Revisited.” CESifo Working Paper

Critical Technologies & Export Controls:

• Camba, A. (2026). “The Burn and the Choke: Why Semiconductor Controls Will Outlast China’s Rare Earth Weapon.” War on the Rocks

• CSIS (2025). “China’s New Rare Earth and Magnet Restrictions Threaten U.S. Defense Supply Chains”

• IEA (2025). “With new export controls on critical minerals, supply concentration risks become reality”

Financial Infrastructure:

• World Economic Forum (2025). “Navigating Global Financial System Fragmentation”

• SWIFT/Economist Impact (2025). “Growth at Crossroads: High Cost of Financial Fragmentation”

• Brookings Institution (2025). “Is the global financial system fracturing under geopolitical pressure?”

Sanctions & Coercion Effectiveness:

• Chatham House (2025). “Understanding and improving sanctions today”

• McGuirk, E. (2025). “Geoeconomics and Conflict: A Review and Open Questions”