The Great Game: A Model of Geoeconomic Competition

We build a model of two hegemons that have valuable trading relationships with each other and at the same time compete in exerting geoeconomic power over countries in the rest of the world. When the hegemons trade with each other their optimal policy is shaped both by classic economic considerations - the profitability of that specific trade - and by geoeconomic competition - how the trade affects the power of each hegemon vis-a-vis the rest of the world. We show that containment, a policy mix in which an hegemon attempts to limits sales of its inputs to the rival hegemon and uses its power to demand that the rest of the world shifts away from sourcing from the rival hegemon, arises when the two hegemons offer relatively substitutable exports since a stronger rival would offer a better outside option to the targeted countries. Accommodation between the hegemons, instead, occurs when power motives are small and the two hegemons focus on purely economic profit motives. We characterize how the rest of the countries welfare depends on the contain/accommodate regime of the hegemons.