Introduction
Thirty-five years after military strategist Edward N. Luttwak coined the term “geoeconomics,” the concept is regaining relevance. However, employing economic tools such as tariffs and export licenses to advance geopolitical objectives may prove ineffective or even counterproductive.
Shifting Global Trade Perspective
Not long ago, there was a global consensus on free trade: the freer, the better. Trade policy details were the domain of obsessive economists, and few (except for special interest groups) defended protectionism. Low tariffs prevailed, most governments sought foreign investment, and technology transfers were seen as a means to spread prosperity. Those days are gone.
Thirty-five years after Luttwak described geoeconomics as the intersection of “the logic of conflict” and “the grammar of commerce,” the concept is once again popular. A growing consensus in many countries views trade policy primarily through a geopolitical lens.
The Paradox of Geoeconomics
As Luttwak observed, geopolitical conflict is at best a zero-sum game: what one party gains, another loses. In contrast, trade is typically a win-win situation, though President Donald Trump vehemently argues that other nations are cheating the U.S. This creates an inherent tension, and any attempt to use economic measures for geopolitical ends will eventually clash with it.
However, most politicians don’t go that far. Trump’s blunt tariff strategy, for example, can only be counterproductive. This is especially evident in his trade war with China.
The Futility of Tariffs
In war, the objective is to inflict more damage on the enemy than on oneself. Yet, simulations of various tariff scenarios reveal that the U.S. would lose more than China. The reason is simple: both nations represent roughly a quarter and a fifth of the global economy, respectively, but China has a slight edge in exports, with around 80% of them going to non-U.S. countries.
This means the U.S. lacks the power to inflict significant economic damage on China. Instead, high tariffs make imports more expensive for U.S. businesses and households, either because they’ll have to pay the tariffs (which importers pass on to consumers) or because they must replace cheaper imported goods with more expensive alternatives from other sources.
This might have been a significant factor in the truce Trump agreed to with China.
Ineffectiveness of Geoeconomic Tools
Regardless of other countries, tariffs aren’t a useful tool for weakening a geopolitical adversary due to varying economy sizes and trade volumes. Similarly, other geoeconomic tools like restricting essential input supplies don’t work well.
For instance, this year China began requiring export licenses for rare earth minerals. While it may seem like a winning strategy—as these minerals are crucial for high-tech products—their economic importance is overstated.
Rare earth mineral trade occurs in two forms. When commentators and policymakers lament that about 70% of U.S. rare earth mineral imports come from China, they’re referring to unprocessed metals. However, total U.S. imports of these metals only amount to $22 million annually, a negligible portion of overall U.S. imports.
More important is the trade in processed rare earth compounds, which have higher value. The U.S. maintains a significant surplus here, especially with China. U.S. exports of rare earth compounds amount to $355 million (more than double the $161 million in imports) and nearly 90% go to China.
This isn’t surprising. The U.S. industrial sector is small and specialized, focusing on niche high-tech products. It doesn’t need large quantities of rare earth compounds. Though they’re used in some military equipment, like fighter jets (one F-35 requires hundreds of kilograms of rare earths), the number of such jets produced is small. Meanwhile, millions of smartphones and similar devices are manufactured annually, mainly in China.
If China restricts rare earth mineral exports—which are relatively cheap—it threatens the supply of processed rare earth compounds its industrial sector needs. This might explain the muted market reaction: though rare earth prices are highly volatile due to the small market size, they’ve barely moved since China introduced export license rules. Only two elements have increased significantly (by 30% since January 2025), and they’re still below their 2022 peak.
Even if prices surged, the economic impact on the U.S. would be limited since rare earth imports only amount to twenty million dollars. Even if permanent magnets without rare earths became ten times more expensive, the U.S. cost would be $200 million—a rounding error for an economy the size of the U.S.
Moreover, there’s another issue with these geoeconomic tools: they’re usually one-time use. Faced with supply restrictions (through tariffs, export licenses, or other means), importers will quickly adapt (e.g., by finding alternative suppliers or stockpiling) and subsequent restrictions won’t affect them.
This should serve as a warning: blindly adopting geoeconomic activism can be not only ineffective but also counterproductive, applicable to both China and the U.S.
