Geoeconomics means a country's projection of economic power to achieve political or geopolitical aims. Economic power is based on existing trade and financial relationships.   

Geoeconomic tools include tariffs, boycotts, bans and embargoes on imports and exports.  In addition, financial transaction prohibitions and sanctions may be imposed on banking and financing activities.   

A country seeking to apply geoeconomic pressure must be a significant trading partner of the nation it means to pressurise. Similarly, a country's position in the global financing system may enable it to use geoeconomic measures.   

Geoeconomics is not a recent invention; geoeconomic tools have been widely used since the start of the twentieth century, at least. For example, the UK used its position in the coal and cotton trade to strong-arm Italy into entering the First World War. However, use of geoeconomic policy diminished as globalisation and free trade advanced, despite the frequent use of sanctions such as those against Iran.   

Geoeconomics has re-emerged in the last 10 years or so, sometimes even being applied as the chief means of economic pressure.   

Russia's attack on Ukraine had several geoeconomic impacts. With their clear geoeconomic dimension, tariffs – or the threat of tariffs – have constituted the key economic impacts of the Trump administration. The EU and China have also reached for the geoeconomic toolkit in recent years.   

New dimensions in international trade  

The return of geopolitics is changing states' approach to international trade.   

In general, such trade has had positive economic impacts; economists have seen extremely little reason to restrict trade. Perhaps the key rationale for tariffs concerns unfair competition (such as a trading partner's export subsidies) or the aim to grow an industry to obtain economies of scale.  

The merits of free trade are evident in the strong growth of many economies – and widespread low inflation – during the era of globalisation.   

Geoeconomics is changing the economic impacts of international trade: the key change is the inclusion of goals that have nothing to do with maximising the economic gains of trade. Countries may use trade to exert pressure on other nations, forcing them to act otherwise than they would prefer.   

Above all, a country has geoeconomic power if it is a key producer of a good or service, such as energy, rare minerals, semiconductor products and financial services.    

However, if geoeconomic power is applied, international trade may generate costs as well as benefits.   

International trade links can still enable living standards to rise in a national economy. An economy may produce certain goods and services more efficiently than others and exchange them for other goods and services through international trade. However, this can generate dependencies, enabling a trading partner to force the country into policies which involve economic costs.   

Due to geoeconomic risks, international trade can no longer be regarded as unambiguously positive: the benefits are now more case-dependent. In such circumstances, there can be a need to tighten restrictions on international trade. 

Geoeconomics' greatest cost lies in its reduction of international trade volumes.   

How the upsurge in geoeconomic events affects business cycles  

Geoeconomics can also have short-term economic impacts. Many recent events affecting the economy have had geoeconomic features.   

Key examples include Russia's attack on Ukraine and the war's consequences, the various phases of the Middle East conflict, the Trump administration's threatened and imposed tariffs, and the escalation in China's confrontation with the USA.  

Cyclical turbulence caused by geoeconomics seems to differ from typical economic cycles. Firstly, geoconomic shocks seem to have very rapid impacts. The consequences of Russia's attack and Trump's tariffs were felt in the real economy in just a few months, whereas a typical business-cycle shock takes several quarters to register.   

Secondly, shocks with geoeconomic characteristics cause major uncertainty. This may be because the related changes are so rapid and such shocks have not been experienced in recent history. Uncertainty can grow to the extent that it becomes the key driver in the economy.   

Geoeconomic events can cause both demand and supply-side shocks: supply-side shocks are particularly awkward for economic policymakers, since typical stimulus measures raise inflation. Policymakers must therefore make a difficult choice between curbing a downturn or inflation.   

In sum, the upsurge in geoeconomic events seems to have rapidly increased cyclical economic volatility. In addition, economic policymakers are finding it more difficult to react to downturns, because stimulus measures raise inflation.     

How does the new economic environment affect Finland?  

Geoeconomic measures are clearly interlinked; when one country starts to use them, other countries are tempted to follow suit.   

International trade and policy may return to following the rules, but there is very little sign of this. The new economic environment is impacting on different actors in different ways.  

States must weigh up the gains and losses of international trade more carefully. It may be that economic policy must include the prevention of dependencies that can be used against us.   

However, this should be weighed up carefully, because national security can easily be deployed as an excuse for restricting trade. In any case, the world has changed and this must be acknowledged in relation to trade.  

Companies and investors too must take account of geoeconomics. This is particularly true of strategically important sectors. In recent years, geopolitical moves have been made that affect semi-conductors, energy and the metals and mining industry. Companies in these sectors may be winners or losers due to geoeconomic policy.  

State action is generally playing a greater role in the above-mentioned sectors and could be a key factor – for better or worse – in a company's success.    

Households must learn to live with greater uncertainty than before. Because economic swings and uncertainty could be more powerful than in previous years, it's worth preparing – but no more than is reasonable.  Even the severest geoeconomic shocks have been overcome with relatively little economic loss.  

The resurgence of geoeconomics is bound to alter – and has already altered – the economic dynamic. We must learn to live with our new economic environment, which shows no signs of changing in the immediate future.   

However, the key lesson of the geoeconomic shocks already experienced may be that the economy is difficult to derail.