The Targets of Geoeconomic Coercion

Great powers, like the United States and China, use existing trade and financial linkages of their economies to the rest of the world to exert geoeconomic power. The targeted entities include both foreign governments and foreign private firms. We characterize conditions under which a hegemonic country optimally targets private entities or their government in a given targeted foreign country. An advantage of coercing private entities is that they internalize less than their own government the equilibrium consequences of acquiescing to the hegemon's coercion. This allows the hegemon to build its power by exploiting the difference between the private cost to the targeted entity of the costly actions it demands and the social value to the hegemon of those actions. Coercing the government gives up some of this advantage, but offers the ability of having the targeted government potentially influence firms in its domestic economy that the hegemon finds valuable to coerce but for which it had limited direct coercive power. The relative strength of these two channels determines the optimal mix of coercion targeted at private entities and governments.