From Geopolitics to Geoeconomics

The end of a world order dominated by one superpower allowed the re-emergence of a policy field which had drawn little interest for nearly two decades after the end of the Cold War: geopolitics. The most prominent examples of this include the annexation of Crimea and the occupation of Eastern Ukraine by Russia and its allied forces, China’s activities in the South China Sea, the conflict in Syria and Yemen, the geopolitical rivalry of the regional powers of Iran and Saudi Arabia, as well the US president’s ‘America First’ policy.

Overshadowed by geopolitics, another trend has so­lidified over the last ten years which will be far more ­important for world politics and Germany’s international role in the long term: the growing importance of geoeconomics.

Geoeconomics

The term includes two aspects: on the one hand, the use of political means to achieve economic goals. This comprises the traditional measures of foreign trade policy such as trade and investment agreements, state foreign trade promotion such as export credit insurance, chambers abroad, and delegation trips, but also increasingly governmental interference in securing raw materials. On the other hand, the term refers to the use of economic means to achieve political goals: control of markets, trade surpluses and currency reserves, strategic investments, economic sanctions.

Economic strength has always represented a central aspect of state displays of power, both in the form of ‘hard power’ as well as ‘soft power’. A country’s economic strength is a decisive parameter for the amount of resources a government can expend for diplomacy and military spending. NATO’s much-discussed two per cent target for its members’ military expenditure is determined by a proportion of the respective gross domestic product for good reason. Economic strength is also crucial for technological capacities, which in turn can be converted into instruments of power. Countries boasting economic strength are capable of making threats such as blocking exports or imports, stopping capital flows, and restricting investments; however, they can also turn these into positive elements and thereby create decisive cooperation incentives. Economic pressure is increasingly becoming the only remaining refuge when diplomacy fails.Furthermore, economic performance represents an important factor for attraction and thereby for a state’s soft power. Economic success increases the chances of other countries following suit voluntarily and often promotes a positive attitude towards foreign societies. Equally, the use of foreign policy measures to increase a country’s own economic strength is part of the standard repertoire of even the most principled nation with a market economy. In Germany, these measures are generally subsumed under the term foreign economic policy. Agreements are made with other nations in order to ensure market access and investment security for the country’s own companies; institutions such as chambers of commerce are supported with public funds to improve companies’ market prospects; state export credit insurances help minimise risks for companies. Other states go far beyond these official subsidy programmes. France has a long history of nearly all presidents of the Fifth Republic engaging in intensive efforts to enable successful business deals for its companies by politically influencing other heads of state. China pursues an intensive policy of securing raw materials for its own economy and assists companies by offering subsidies and cheaper bank loans for strategic takeovers of foreign companies.

A Relevant Trend

All of these are well-known and generally also widely accepted phenomena. So what is new and makes geoeconomics a relevant trend? Three things: to begin with, the significance of economic strength as a factor of power is increasing substantially compared to other factors. This can be traced back to the fact that the use or even just the threat of military force has considerably lost public acceptance in most nations. Particularly Western democracies face great difficulties in presenting military deployments as legitimate and justifying associated losses. This is why economic pressure is increasingly becoming the only remaining refuge when diplomacy fails. Additionally, as a result of modern media, economic success has become more visible, and the soft power of successful states has become greater.

Second, the accelerated globalisation process of the last twenty-five years and the associated emergence of global value chains and concentration of international financial flows have rendered countries more vulnerable to the use of economic instruments of power. Today, sanctions can be implemented in a more targeted way and can cause far greater damage than ever before. At the same time, there are stronger incentives for economic cooperation. For the EU, for example, free trade and association agreements represent crucial measures for binding other states to the union and enforcing their rules.

Chinese Geoeconomics

Third, there is one very powerful nation that has, for a number of years, been increasingly turning geoeconomics into the central anchor of its geostrategic approach: China binds other countries through raw material agreements and major infrastructure projects, thereby creating economic dependency in a first move, which can then be politically instrumentalised in further steps. With the “Belt and Road Initiative” (BRI), the country is raising its efforts to a new level. The US under the Trump administration seem to want to follow this example. The most recent version of the National Security Strategy focuses on the interplay between national security and economic strength as a core subject.

Back in 2013, China’s Head of State and Party Leader Xi Jinping announced the new large-scale project “One Belt, One Road” (OBOR), which although since renamed as BRI, is better known as the ‘New Silk Road’ in Germany. At the 19th party congress of the Communist Party of China in Beijing in 2017, the importance of this project was highlighted as one of the core missions of Xi’s presidency. Today, sanctions can be implemented in a more targeted way and can cause far greater damage than ever before. At the same time, there are stronger incentives for economic cooperation. A few months earlier, a large international conference had taken place at which representatives of about one hundred states were present. The dimensions are indeed tremendous. The project envisions the creation of six Eurasian land corridors and a maritime Silk Road. It comprises sixty-five nations in Asia, Europe, and Africa, which make up sixty-two per cent of the global population. Calculations are based on an investment sum of over one trillion US dollars. The plans for transportation and infrastructure corridors through Pakistan, Southeast Asia, and Central Asia all the way to Duisburg and Rotterdam are particularly ambitious. To ensure the participation of Eastern and Central Eastern Europe, China additionally set up the ‘16+1 format’, in which it exchanges ideas on economic cooperation plans with the nations in this region.

Geoeconomics in the United States

Evaluations of this large-scale geoeconomic project vary greatly. The initially dominating view that this project consisted mainly of relabelling existing plans or primarily served to export Chinese excess capacities in the construction and raw materials industry has since faded into the background. Now, the New Silk Road is mostly classified as China’s attempt to tap into new markets, generate economic dependencies, and implement Chinese norms and technology standards in the then accessible region. Ultimately, these economic measures serve the goal of establishing political power. Former Australian Prime Minister and prominent China expert Kevin Rudd says on the topic: “China has already become a more important economic partner than the United States to practically every country in wider East Asia. We all know where the wider strategic logic takes us. From economic power proceeds political power; from political power proceeds foreign policy power; and from foreign policy power proceeds strategic power. That is China’s strategy.” Better words can hardly be found to summarise the geoeconomic dimension of the New Silk Road.

For their part, the United States under the Trump administration have already taken considerable steps to unite geoeconomics and geopolitics. The most recent version of the National Security Strategy from 2018 emphasises in several places that economic strength is the central prerequisite for political power and national security, and that political interventions are justified when it comes to achieving this economic strength. It is therefore hardly surprising that the United States have justified their recent protective tariffs against steel and aluminium imports with the claim that these pose a threat to US national security. The close connection that has now been established between foreign trade and security is also reflected by the fact that, as of recently, regular joint meetings are taking place in the White House with the National Security Council and the National Economic Council. The term economic warfare is now circulating on the American think tank scene. However, the development of a geoeconomic strategy in the US is still on shaky ground. There is basically no other explanation for the fact that the newly inaugurated President’s first measure consisted of withdrawing from the Trans-Pacific Partnership – a free trade agreement meant to comprise eleven other Asian and American countries in addition to the US (including Japan, Canada, Mexico, Australia, and Vietnam). Aside from creating a large economic area, it was primarily aimed at curbing China’s influence in the Pacific region.

German Geoeconomics?

Aside from China and the US, one other country is usually mentioned within the context of geoeconomic power: Germany! Those who consider Germany to be a geoeconomic power present a number of arguments. One of these is that due to the government’s self-imposed restrictions in the use of military force, the only notable factor of ‘hard power’ available is that of economic strength. This factor especially played a role in shaping the European Union in accordance with German principles and forming relationships with European neighbours. The New Silk Road envisions the creation of six Eurasian land corridors and a maritime Silk Road. On the other hand, it is said that German foreign policy towards Russia and China primarily serves the pursuit of economic interests: securing energy imports, increasing German exports, and safeguarding German investments.

This derivation is in turn surprising to many German politicians involved in foreign affairs and security affairs. They qualify the importance of economic interests and also the scale of Germany’s economic influence and its instrumentalisation. Above all, the economic influence is not placed in a strategic context, nor are economic interests clearly defined. In consequence, it can be inferred that although Germany possesses considerable economic power, it is barely aware of it – or at least is not making itself aware of it. However, in recent times, the number of speeches by German politicians in which they have pointed to the country’s economic strength as the reason why other countries see Germany as important has increased. They have also talked about how important it is for German foreign policy to retain this strength. Additionally, it is evident that economic instruments such as free trade agreements or state transfer payments (allocating EU funds and development aid) are increasingly being placed in a geostrategic context.

Geoeconomics in 2030

Where will the development of the increasing significance of geoeconomics lead in the next decade? To begin with, we can assume that the economic balance between the world’s nations will have experienced a considerable shift by 2030. If we extrapolate the growth rates of past years, China will have replaced the US as the largest national economy; India will overtake Japan, Germany, Great Britain, and France; and Brazil, Indonesia, South Korea, Italy, Mexico, and Russia will follow in the top ten. Measured by gross domestic product (GDP), this means that the power of established industrial countries will be relativised, and so-called emerging countries will experience a considerable gain in power.

However, the size of the GDP is not the only factor of economic power. Another is the power of disposition over strategic raw materials. So far, in the area of energy, these have included oil and gas, which justifies Russia’s special importance to Europe and that of the Middle East to the world. If it became possible to increasingly substitute these energy sources with renewable energy and nuclear power, this would in turn substantially weaken the economic power of Russia and Saudi Arabia. However, the countries of North Africa, the Sahel, and the Arabian Peninsula could greatly benefit from an expansion of solar energy and experience an increase in importance.

Active National Raw Material Policy in China

In addition to energy sources, a series of additional strategic raw materials exist, control over which could lead to considerable economic power. As a result of current technological developments, these particularly include rare earths, lithium, copper, and cobalt. By means of an active raw material policy, China has secured for itself a substantial amount of control over these raw materials. Ninety per cent of rare earth is currently extracted in China; massive investments in lithium mining in Latin America and Australia as well as in cobalt mines in the Congo and copper mines there and in other African countries are securing the Chinese national economy’s raw material supply. In the Senkaku Islands dispute with Japan, China has already demonstrated its willingness to use its control over raw materials as a strategic weapon. It imposed a temporary boycott on the export of rare earths against its neighbouring country.

In terms of power factors, the ability to produce technological innovations will become an even more important one than control over raw materials in the coming years. In this area, European countries are also in danger of losing ground due to insufficient investments in research and development as well as a growing shortage of specialists. Because of its broad industrial basis, Germany still holds the best position, but is running the risk of falling considerably behind the US and China, especially in the area of artificial intelligence. Those who control key technologies in the future will not only be able to use these indirectly to exercise economic power, for example by hampering the economic development of other countries by withholding these technologies, but they will also be able to utilise these to directly damage other countries or at least threaten them. Already today, state-controlled cyber-attacks on essential infrastructures are seen as nearly as great a threat to national security as military force. In just a few years, warfare scenarios are conceivable in which battles are fought with fully automated drones and robots. Technological supremacy, especially in the field of artificial intelligence, will massively alter the existing distribution of power in such a scenario.

Implementing Standards

One economic factor for exercising power is frequently overlooked: the ability to enforce international standards and norms. In the past, it was mainly the cooperation between the US and the EU that gave standards their universal validity. This geoeconomic power is threatened by two developments: on the one hand, by the Trump administration’s questioning of multilateral coordination processes. On the other hand, China has now also discovered the significance of implementing their own standards internationally as a crucial element of economic and political influence. Some consider the setting of standards to be the central element of the New Silk Road project. Ninety per cent of rare earth is currently extracted in China. Siemens CEO Joe Kaeser has been quoted as saying that China’s New Silk Road is defining the new world trade order. On the other hand, the EU is often attributed the potential role of the actual regulatory power of the future. Its experience in this area and its ability to bring about regulatory harmonisation through a coordination process with twenty-eight members basically predestine the Union to assume a leading role in this field. After all, the effects of the US sanctions against Iran experienced by the European economy have once again elucidated the central importance of another economic instrument of power: the role of the US dollar as a reserve currency. It forces European banks to comply with American guidelines, as they would otherwise lose ­access to the reserve currency. However, the value of economic strength, its translation into geoeconomic power, is ultimately determined by the ability and willingness to use it strategically.

In this regard, China undoubtedly has the greatest advantages. The Chinese form of state capitalism not only provides the political leadership with nearly unlimited economic instruments of power, but the Communist Party of China also possesses the strategic vision to place these within a foreign and security policy context. At a far lower level of instruments and execution of economic power, the same can also be ascribed to Russia, India, Saudi Arabia, and perhaps also Turkey. Although countries such as the US, France, and Great Britain also have very great or great economic power and geostrategic concepts, access to these factors of power is severely restricted through their market economy. Meanwhile in Germany, both of these are lacking: access and geostrategic vision. If a ranking of geoeconomic power in the year 2030 were to be compiled based on these considerations, three nations would dominate the picture: China ahead of the US, followed by India. If the EU, however, succeeded in developing a shared foreign and security policy as well as in understanding and using its economic strength as a factor of power, Europe would follow closely behind China and the US.

Those who continue trends must be prepared to face potential breaks in these trends. Global history presents many moments in which ostensibly peripheral phenomena put a sudden end to the extrapolation of trends. Based on the growth rates and innovative capacity in the 1970s and 1980s, Japan would be the uncontested winner in the global economy today. Technological disruptions and surprising explorations of occurrences can fundamentally change the strategic significance of raw materials. There is also justified scepticism that the Chinese method of a government-determined, frequently planned-economy control of innovation and research will ultimately prevail. After all, the setting of standards is increasingly evading governments’ regulatory access. Many areas of technological development have been characterised by a speed that makes it nearly impossible for a state institution to contain it through regulatory stipulations or steer it in a certain direction. Microsoft, Google, and Amazon have set standards that are globally binding and which have shown little consideration for state regulations. In turn, the instrumentalisation of the dollar can impel other nations to flee from the reserve currency and to develop alternatives.

Uninhibited Military Capabilities

The second fault line of the growing significance of geoeconomics is already clearly recognisable and has always formed a component of international relations: the primacy of security policy and the supremacy of military force. Nations as well as non-governmental actors that have a critical level of military capacities at their disposal and show no reluctance to use them can put economically powerful actors in their place at any time and easily let geoeconomic strategies fail. While economic capacity does also limit the ability to exercise military power, nations prepared to engage in confrontation can punch far above their weight, at least temporarily. Russia’s approach during its military intervention in Georgia in 2008 presents an excellent example of this. Aside from China and the US, one other country is usually mentioned within the context of geoeconomic power: Germany! While Western, economically strong countries find it increasingly difficult to justify the costs and human sacrifice of military use of force to their people, President Putin used the deployment of the Russian military in Georgia, later in the Crimea, and finally in Syria to reestablish Russia as a relevant player in international politics and to stake out a sphere of influence. At the same time, this success helped him gain high poll ratings among the population. Russia is not the only example of military power trumping economic factors. Iran’s actions in the Middle East, North Korea’s nuclear weapons strategy, and Pakistan’s military force can be added to this list. Should the success of military strategies – even if it only has a temporary character – continue to repeat itself, this could cause even those nations which have primarily resorted to economic instruments in foreign policy in the past years to rethink their strategy and to attribute much greater significance to geopolitics than to geoeconomics.

A third fault line begins with one of the three initially named starting conditions for the trend of geoeconomics: globalisation and the resulting economic interrelationships. These create mutual dependencies which make the use of economic means of coercion or provision of incentives effective. If the EU succeeded in developing a shared foreign and security policy as well as in understanding and using its economic strength as a factor of power, Europe would follow closely behind China and the US. For years, a weakening of globalisation has been looming. This is increased by growing tendencies towards protectionism. The Trump administration openly speaks of economic nationalism, which has so far been expressed through a reduction of imports and backsourcing of value creation to the US. This greatly weakens global value chains. But also the countries that are or have been the target of economic sanctions are going to great lengths to reduce their economic dependency. After all, there is also a movement in China – even if currently weakened – that considers the outward orientation of the Chinese economy to be an undesirable development and is demanding a return to a focus on the national economy. This would undoubtedly be accompanied by a relativisation of the importance of geoeconomics.

The Tasks of German Foreign Policy

Still, even though breaks in the trend towards geoeconomics cannot be excluded, Germany is well advised to prepare for this trend. This preparation must contain three components: retaining economic strength, reducing one-sided economic dependencies, and developing a strategy that captures the value of economic strength.

Germany’s economic strength is mainly based on the competitiveness of its industrial sector and its embedding into the European Single Market. In contrast to other traditional industrial countries, Germany still demonstrates a high share of industrial value creation. It constitutes nearly a quarter of the GDP. A study recently published by the German Economic Institute in Cologne illustrates the extent to which this industrial sector has an impact beyond the immediate GDP share through the receipt of preliminary services and combined value creation. The products of German industry in turn make up the lion’s share of German exports. Industrial companies stand for the majority of foreign investments and thereby also for the penetration of foreign markets. The industry’s competitiveness has two main sources: first, the high expenditure on research and development and second, the availability of highly trained experts – not just on the level of engineers, but also and especially skilled workers. An economic policy that promotes research and innovation on the one hand, and contributes to preserving the quality of specialist workers on the other, is a vital prerequisite for Germany’s economic strength. As already described, Germany is currently at risk of falling behind other competitors in important sectors of the future such as artificial intelligence.

The second source of economic strength, embedding into the Single Market, is also endangered. Although the immediate threats caused by crises in the eurozone have ebbed in the past months, the Monetary Union’s stability is still fragile and the danger of other countries leaving the EU or questioning the integration level of the Single Market has not yet been averted. For this reason, a further consolidation of the Monetary Union and broadening of the Single Market are urgently required.

The bigger and safer the EU’s Single Market is and the more dynamic its development, the less likely it is that an economic weakness of Germany’s will come to light: the dependency on two major foreign markets outside of the EU, neither of which will hesitate to utilise their economic and political power. Germany’s economic strength is mainly based on the competitiveness of its industrial sector and its embedding into the European Single Market. China and the US represent approximately seven to eight per cent of German foreign trade, and seven and twenty-eight per cent respectively of German foreign investments. Up until a few years ago, the economic dependency on the US was not considered to be an issue due to close transatlantic relations; however, the extraterritorial effect of American sanctions and the rigid legal actions in the US against individual European companies, particularly in the banking sector, have significantly clouded this view. Following the Trump administration’s assumption of office, Germany is now facing a US government willing to take advantage of economic vulnerability as part of a geoeconomic strategy. A similar development has been discernible in China for some time now. Here, economic pressure on the part of the Chinese government has so far almost exclusively affected private companies. Meanwhile, within the framework of the geoeconomic orientation of Chinese foreign policy, the risk of the German government also becoming an affected party cannot be ruled out. In other countries – Japan, South Korea, and smaller Eastern and Southeast European countries –, this is already ascertainable. Additionally, there is a danger that companies which fall victim to economic pressure will pass this on to a government. Aside from the consolidation of the Single Market, the diversification of the foreign markets and investment locations is necessary in order to weaken one-sided relations of dependency. Furthermore, the EU must find ways to strengthen the role of the euro over the US dollar and counteract the reserve currency’s instrumentalisation for political purposes.

The situation is similar in the area of strategic raw materials. But contrary to what is generally assumed, the energy sector poses less of a problem here. In this area, Germany has succeeded in diversifying the oil supply. This is less the case in the gas sector. But due to the high investment costs in pipelines, supply relationships between gas producers and gas consumers are characterised not by one-sided dependency, but by interdependency. Nonetheless, the dependency on few supply countries for a series of non-mineral raw materials deserves more attention. The problem of the availability of rare earths has been known for a long time; similar constellations could arise for copper, cobalt, and lithium. For this reason, sustainable support of international mining and the conclusion of long-term, stable supply contracts are important. In 2010, the German government took the right steps with its raw materials strategy, but has since then done relatively little to generate further progress.

Nations as well as non-governmental actors that have a critical level of military capacities at their disposal and show no reluctance to use them can put economically powerful actors in their place at any time.

Should Germany succeed in retaining its economic strength and reducing its economic dependencies, it will have achieved solid prerequisites for successfully competing with others on a geoeconomic level or becoming an attractive cooperation partner for them. Ultimately, however, these solid prerequisites are worthless if economic strength is not embedded into a comprehensive strategy. This is where Germany faces a dilemma: its economic strength of the last ten years came as a result of German policy forgoing the opportunity to turn the economy into an object or instrument of its foreign and security policy through state regulations and interventions. Free trade agreements were primarily advanced for economic reasons; foreign trade promotion mainly served private-sector purposes, and companies were not encouraged to invest in certain countries or withdraw from others. There were repeated exceptions to this rule, most clearly in sanctions policy. Additionally, there have been political ‘encouragements’ recently to invest in countries such as Afghanistan to support governmental stabilisation efforts or in the originating countries of migration flows.

The question is therefore whether Germany can use its economic strength in geoeconomic strategies, but without undermining that exact strength. It is easiest to answer this question in terms of geoeconomic promotion measures. If the German government wants to solidify the relationships with third countries or particularly push economic development for strategic reasons, a number of funding instruments are available in the form of the chambers of commerce systems, export credit insurance, and as of recently, funding for large-scale strategic projects. This question is more difficult to answer when it comes to free trade and association agreements. Should negotiations primarily follow political or economic logic? And would one be willing, for example, to make economic concessions for free trade agreements in the case of India, in order to create closer political ties between India and the EU?

Implementing Geostrategic Concepts

Similarly difficult questions arise regarding the positioning towards large-scale geoeconomic projects in other countries. Should the German government encourage and support German companies’ participation in the New Silk Road through policy to gain an economic advantage or, on the basis of geoeconomic considerations, advance counter-strategies against China establishing economic access to Eurasia? Finally, this also raises the question of the role which development cooperation can and should play in the future implementation of geostrategic concepts. Answering these questions requires an intensive exchange between politics, economics, and society on priorities and the shaping of German foreign policy, which currently only exists to a minor extent.

Geoeconomics

How We Must Act

Germany must retain its economic power by:

  • Creating low-cost framework conditions for unfolding its industrial strength, funding private research and investing in innovation, and maintaining the high level of skilled labour education.
  • Further stabilising the Monetary Union and broadening the single market, especially in terms of digital aspects and services.
  • Further developing existing tools for promoting foreign policy and risk security.

Additionally, Germany must reduce one-sided economic dependency relationships by:

  • Encouraging the private sector to secure the supply of strategic raw materials and providing suitable funding instruments.
  • Supporting diversification strategies for the industry abroad to minimise dependency on the Chinese and US markets.
  • Developing alternatives to the US dollar as the ­reserve currency.

Ultimately, Germany must lead a strategic dialogue with the private sector on foreign policy, incorporating the following questions:

  • What role could/should companies play in foreign and security policy?
  • Are companies and the government pursuing the same goals regarding certain nations? If not, how could these interests be reconciliated?
  • Who are the primary strategic partners of the private sector and government? Which measures could strengthen these ties?
  • How should the private sector and the government act in light of the geoeconomic strategies of relevant powers?

Dr. Stefan Mair (55) is an Executive Board Member of the Federation of German Industries (BDI), where he is responsible for international and foreign trade matters. He studied Political Science, Economics, and Sociology at the Ludwig Maximilian University of Munich. From 1989 to 1991 he held a scholarship from the ifo Institute for Economic Research. He was subsequently awarded his doctorate in Political Sciences by the Ludwig Maximilians University in Munich. In the following years, he worked as an advisor on Africa at the German International Institute for International and Security Affairs (SWP), becoming head of the research group Africa and Middle East at the SWP in 1997. From 2002 to 2010, he was a member of the SWP’s management and also held the position of Director of Studies from 2007 to 2009.