Incoming U.S. President Donald Trump's administration has indicated it will make ample use of economic instruments to support its foreign policy once it takes office in January, including by imposing tariffs on foreign imports. In the case of Mexico, Trump has specifically threatened to increase tariffs on all the country's goods if its government does not rein in migration to the United States and crack down on drug trafficking. 

Trump, of course, is by no means the first leader who has sought to leverage his country's economic power to extract political concessions. But this tactic is becoming more normalized in international politics, which is why it is worth discussing what economic power and influence consist of within that context.

Economic Size and Resource Mobilization

Economic size, economic power and international influence are broadly correlated. Countries with larger economies sit on a larger potential resource base. If they are politically able to mobilize their economic resources in pursuit of foreign policy objectives, they will wield greater influence than countries with small economies, all other things equal. The ability to impose costs or confer benefits on other countries by restricting or promoting cross-border trade and financial transactions, including offering preferential access to markets and credit, is another important aspect of a country's international power. 

The size of an economy is a good proxy for resource availability. An important caveat is that countries with a high per capita income have a greater ability to extract resources before domestic consumption falls below sustainable or even subsistence levels, or before low investment weighs on the longer-term economic outlook than countries of equal economic size but lower per capita incomes.

Broad geopolitical influence is partly a function of a country's ability to mobilize greater resources than its antagonists, besides many other factors. Countries with a larger economy can often dedicate greater resources to defense and provide greater financial resources to third countries. Over the long run, differences in real GDP growth impact economic size and resource availability. However, an economy characterized by a low level of per capita income and a small population would need to grow significantly faster over an extended period to narrow the difference vis-a-vis a much larger and richer country in terms of being able to mobilize economic resources. Even if Luxembourg grows twice as fast as France, absolute differences in resource availability will not be much different 20 years from now. It is also true, however, that a country with faster underlying economic growth will be able to more quickly increase the amount of resources it can dedicate to, for example, defense spending. But in reality, this matters much more when countries are of roughly equal economic size.

If two economies are of similar size, differential growth can and does matter greatly. The United States will always spend more resources on defense and foreign policy than an economically much smaller economy like Mexico. However, the same does not apply to Chinese and U.S. defense expenditures. China's defense spending is growing more rapidly than the United States. China also has more room to increase that expenditure as a share of GDP given that it is currently spending less on defense than the United States. Differences in economic growth matter, but starting levels are equally important.

Means of Economic Coercion 

In addition to economic resources and the ability of governments to extract resources in support of foreign policy objectives, a country's ability to restrict or promote the cross-border exchange of goods, services, capital, technology and data is another important source of international economic power.

A high level of economic interdependence provides countries with opportunities to exploit economic-financial vulnerabilities by imposing or threatening to impose economic costs or conferring or promising to confer benefits onto other countries. This works best when interdependence is asymmetric and the target country finds it difficult to side-step the costs of adversarial measures.

There are at least four key ways a country can exploit such asymmetry, with respect to both trade and financial flows: 

1. Imposing tariffs: Taxing imports leads to lower exports and lower economic growth by the targeted country. While this also imposes economic costs on the country imposing tariffs, the costs to the target country are far greater if the relationship is highly asymmetric. If U.S. tariffs, for example, make it more difficult for China to export goods to the United States, China's economic growth will suffer more than U.S. economic growth. This is because China relies more on exports to the United States to fuel its economic growth than vice versa, thereby giving Washington the upper hand. By the same token, the United States can capitalize on Mexico's high economic reliance on the U.S. market to exert influence, in part because the U.S. economy is much less dependent on Mexico in terms of exports. In this case, interdependence is asymmetric, providing the relatively less dependent party (the United States) with the ability to impose high economic costs on the other party (Mexico).
2. Imposing export controls: Prohibiting the sale of specific goods to a specific country or company can cause significant economic disruption in the target country. Countries' ability to impose costs, and thereby potentially exercise power and influence, is significantly enhanced if restricted goods cannot be easily, or at all, replaced, increasing the opportunity costs of alternate supply, potentially prohibitively so. The United States' restrictions on exports of advanced semiconductors to China have undercut the Chinese tech industry. China, meanwhile, has restricted the export of select rare earths to the United States. For a historical example, the Arab oil producer embargo also massively increased prices and imposed significant costs on advanced economies in the context of the Yom-Kippur War of 1973, as those economies struggled to source sufficient energy imports from elsewhere to offset the politically induced supply shortage.
3. Providing or withholding financing: A country, or rather a government, can offer or withhold financing to another country to exert influence. To the extent that nobody else may be willing to extend financing at sufficiently attractive terms, for example during a financial crisis, the sender country may be able to exercise power, not least by withholding financing. India, for example, can exercise influence over Mauritius by providing the tiny island nation with financial support when no one else is willing to do so, or at least not on more attractive terms. Moreover, some countries, like the United States, also have significant institutional leverage due to their prominent position in international financial institutions, like the International Monetary Fund or the World Bank. In Europe, the larger eurozone members can similarly exercise power by vetoing the extension of credit to crisis-ridden members in the context of the euro area architecture, or use it to exert influence over the modalities of bail-outs.
4. Restricting investments: Outbound investment restrictions, as the United States recently introduced against China, aim to limit technology leakage to companies in other countries. Similarly, through inward investment restrictions, governments can exclude companies from specific countries from buying certain types of companies or making certain types of investments. Among other things, this often serves as a way of restricting other countries' access to technology and intellectual property, and can help weaken the longer-term development prospects of the targeted countries. In this case, power comes less from imposing immediate and tangible costs on another country (though it does this, too); rather, it comes from slowing the longer-term growth prospects of another country or its military capabilities by restricting the cross-border exchange of knowledge and technology. The flip side is that countries may seek to gain greater independence by developing their own indigenous technological base, which is what China has been doing in the context of Made in China 2025; if successful, such efforts to boost domestic industry's ability to produce restricted items locally can eventually erode the negative impact of investment restrictions and reduce the economic power of the country that imposed restrictions. 

Trade Sanctions and Risk Mitigation

In the case of trade sanctions, a target country's susceptibility to influence depends on its relative reliance on imports and exports from a sender country, as well as the target country's ability to neutralize adversarial measures. So-called third-party spoilers and black knights — state actors whose intervention is motivated by economic gain and geopolitical interests, respectively — can help limit the impact of sanctions and hence limit the degree to which sanctioning countries have power and exert influence. Most recently, Central Asian countries, Turkey, China and others have to some extent played these roles in the context of Western sanctions targeting Russia. This is why enforcement vis-a-vis third parties is often key, as Western policymakers have begun to discover.

In the same vein, academic research suggests that economic and financial sanctions are often more successful against allies than adversaries due to the former's closer economic ties with the targeting country. This does not mean sanctions never change an adversary's behavior (e.g., Iran before the Joint Comprehensive Plan of Action), but it is relatively rare, as seen in the case of Western sanctions targeting Russia. Additionally, even if sanctions do not change a country's behavior, they can still impose economic costs, act as deterrence or degrade a target country's economic base. 

Countries can limit their vulnerability to adversarial trade measures by reshoring, friend-shoring, and diversifying their supply chains and means of production. However, reshoring is costly, as production and supply chains typically move from low-cost countries to higher-cost countries. For example, it is more expensive to produce run-of-the-mill semiconductors in the United States than in Taiwan. Additionally, consolidating production domestically makes a higher percentage of companies' operations vulnerable to the same domestic and external shocks, thereby potentially increasing risk. Meanwhile, friend-shoring tends to be less costly than reshoring, as it allows companies in high-cost countries to take advantage of lower costs in partner countries rather than move all previously offshored production home. This strategy also somewhat limits the risk of disruption to supply chains from harmful economic measures, as a "friendly" government would be more likely to prioritize even-handed policies with companies based in partner countries. Finally, diversification is also costly, as it requires companies to build additional and redundant supply chains. However, redundancy helps mitigate risks and reduces geopolitical adversaries' ability to restrict the supply of goods. As a result, diversification typically offers the most attractive risk reduction tradeoff. Friend-shoring is typically the second best option, while reshoring comes last.

International Economic Power

International economic power and influence are functions of a country's ability to mobilize resources. They are also functions of a country's ability to exploit other countries' relatively greater dependence on the cross-border flow of goods, services, capital and technology. This power is underpinned by variables such as demographic size, economic size, per-capita income levels, technological development, and relative trade and financial openness, some of which will change slowly and predictably (demographics), while others can shift more rapidly and less predictably (technology). 

These factors will continue to undergird the ability of countries to use economic power to pursue geopolitical advantages and constrain geopolitical adversaries amid rising geopolitical competition. For instance, declining demographics and a dearth of technological innovation will weaken some countries economically, while the relative power of others will increase. As of now, the United States is ahead, Europe (including Russia) is falling behind, and China's continued rapid economic and technological development arguably looks less certain than it did a decade ago.