Geopolitics is an amplifier platform for economics. But the tradeoff between them is a false promise.
by
Danny Quah
Feb 2025
Richard Baldwin has posted on LinkedIn another truly excellent item describing the logic of comparative advantage. That post assesses how an awareness of geopolitics expands the sectors over which sensible policymakers might exempt from free trade. This is a version of guns vs butter reasoning: there is a tradeoff between guns and butter, and policymakers can either choose to have more of one (guns, security, geopolitics) or the other (butter, economics, efficiency).
In the hands of others less skillful than Richard, the analysis would come across as saying, Geopolitics is simply whatever is bad economics. It's possibly justified, but still bad economics.
I have a slightly different take on geopolitics and economics. This is that in fact there is no tradeoff between geopolitics and economics, and instead almost always they work together. However, depending on circumstances, their working together either drives in the direction of improved economic performance or against it.
During the Cold War (and a little bit thereafter) America wanted open markets and free trade because the Soviets wanted the opposite. America wanted to show the world that Soviet thinking would lead everyone to an unhappy place. At about the same time, Milton Friedman began to argue that the freedom to trade was essentially the same as political freedom: You cannot have one without the other. All America's big ideas on geopolitics and economics, therefore, were coherent, and globalisation emerged.
Today, China proclaims it wants open markets and free trade, and America's salespitch can't go there any more. Instead, today, in America and Europe, geopolitical tension provides an amplifier for whatever unhappiness that trade draws. But what unhappiness could trade surface, when comparative advantage tells us trade leads to the efficient allocation, that everyone should (Pareto) prefer?
Here's my alternative take: Most people don't get the idea of comparative advantage because their first instinct is almost never to wonder what is the efficient allocation. Instead it is to ask what happens to themselves when trade happens, are they better off or worse off.
If you accept that, then notice that whatever else trade does (whether it is fair or not, whether it leads to trade deficits or not), trade changes relative prices. That means some people have prices move in their favor, others the opposite. No society will ever be unanimous on trade. In economics we take efficiency seriously and are unanimously swayed by arguments on it. In the real world, no one ever does and hardly anybody ever is.
Geopolitics provides an amplifier platform to those who feel shortchanged by the international system. The more that, as economists, we bang on about comparative advantage and efficiency, the more distant we get from the geopolitical conversation. Policymakers do not hear "tradeoff" when we say open markets and free trade are good. Instead, they hear from us only things that neither they nor their stakeholders consider any longer real.
Baldwin, Richard. 2025. "Is Comparative Advantage Valid in A Geopolitical World?" (January) https://www.linkedin.com/posts/richard-baldwin-imd_as-the-trump-tariff-show-season-2-is-about-activity-7282003548790259712-khTC
Quah, Danny. 2024. "Correlated Trade and Geopolitics Driving a Fractured World Order" LKYSPP Working Paper (Aug) https://dannyquah.github.io/In-progress.html#correlated-trade-geopolitics
Quah, Danny. 2025. "Correlating Economic and National Security Under Great Power Rivalry: Industrial Policy and Geopolitical Competition", LKYSPP Working Paper (February) https://DannyQuah.github.io/Storage/2025.01-Danny.Quah-Correlating-Economic-National-Security.pdf