In this brave new world, the economy is highly political

Globe and Mail

13-06-2025

Christopher Collins is a visiting fellow at the Cascade Institute at Royal Roads University. Jens Hillebrand Pohl is the director of the Helsinki Geoeconomics School.
Thirty-five years ago, an American author named Edward Luttwak wrote a landmark essay popularizing the term 'geoeconomics.' Mr. Luttwak, an influential political scientist who has been called 'the Machiavelli of Maryland,' argued that as the Cold War ended, traditional military power would be joined by economics as a way for countries to exert power. We were entering an age where, as Mr. Luttwak wrote, the world order would be shaped by 'the logic of war in the grammar of commerce.'
This fusion of economics and geopolitics remained an obscure area of study for years following Mr. Luttwak's essay. Indeed, in the 1990s, the world went in the opposite direction; free trade, open markets and global investment soared in an era of hyperglobalization. Economics appeared increasingly disconnected from geopolitics, and economic activity was focused on maximizing value, rather than on projecting power. Some went so far as to argue the world had reached 'the end of history,' following the 'unabashed victory of economic and political liberalism.'
However, recent developments, such as the Russian invasion of Ukraine and escalating U.S.-China tensions, show that the world may be, as the late U.S. secretary of state Henry Kissinger said, 'in the foothills of a new Cold War.' As the IMF warns, increasing trade restrictions, technological decoupling, disrupted capital flows and migration restrictions are fragmenting the global economy, splitting the world into competing 'blocs.' However much we may have wanted to be done with geopolitics, it is not done with us.
In this era, economic policies are increasingly driven by political and power dynamics, and geopolitical questions are informed by economic concerns. All the components of the global economy – currencies, supply chains, technology, trade and capital flows, and information networks – have become tools of power and influence. More and more, these instruments serve as expressions of national sovereignty, whether through export licensing, cross-border data regimes, or control over investment standards. And across the world, economic policy is no longer reactive or technocratic: It is being politicized and weaponized.
As a resource-rich, trade-dependent middle power, Canada must navigate this increasingly fragmenting world while protecting its core economic interests.
To do so, Canada will first need to develop a sophisticated capability to engage in what experts call 'economic statecraft.' This will include developing economic tools to manage both bilateral and multilateral relations with the U.S., China and Europe. Fortunately, as history has shown, this is something at which Canadians are skilled. As Robert Bothwell, one of the leading historians of Canadian foreign policy, once said, when it comes to trade talks, Canadians 'are notoriously tough.'
Canada's private sector will also need to adapt to this new reality. Geoeconomic shifts have reshaped how companies do business around the world, leading to what some have called 'a new geography of manufacturing.' In this environment, firms are not just adapting to geopolitics, they are becoming its agents. Global businesses and investors must now align their operational models with geostrategic risks, navigate extraterritorial legal exposure, and anticipate shifts in access to data, talent and capital. Managing all of this will require new ways of thinking, something the CEO of one large global Canadian financial services firm likened to 'swapping out your cross-country skis for downhill skis midslope.'
Canadian investors will also be affected. As economist David Skilling has said, 'trade wars are a precursor to capital wars.' In a sign of the times, Larry Fink – the CEO of BlackRock, the world's largest asset manager – has argued that global capital markets are becoming more attuned to national goals in what he calls 'the second draft of globalization.' Canadians invested approximately $2.5-trillion abroad in 2024, and Canadian investors may increasingly find themselves caught between competing political pressures in a fragmenting global investment landscape.
Arguably, the most immediate challenge for Canada lies in managing its relationship with the U.S. while preserving economic diversification. Unlike some other middle powers, which can hedge between competing blocs, Canada's geographic position and economic integration with the U.S. make strategic ambiguity nearly impossible. For Canadian investors, a provision in Donald Trump's Big Beautiful Bill Act to increase tax rates on some foreign investors is particularly concerning. It signals a broader shift: the weaponization of access to U.S. capital markets as an instrument of statecraft.
As Mr. Luttwak predicted, economics is increasingly becoming a venue for geopolitical competition, especially among the great powers. Meeting this challenge will be tough. But, as we have seen before, Canadians are tough, too.