Explained: What is economic statecraft and why it matters in a fragmented world

In an increasingly fragmented global order, countries are relying less on military power and more on economic tools to pursue strategic goals. This approach — known as economic statecraft — has emerged as a defining feature of 21st-century diplomacy, shaping everything from trade policy and technology access to foreign aid and sanctions. 

What is economic statecraft? 

Economic statecraft refers to the use of economic instruments by governments to influence the behaviour of other states or actors in pursuit of national interests. These tools can be coercive, such as sanctions and trade restrictions, or incentive-based, including aid, investment, and preferential market access. 

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Unlike traditional diplomacy, economic statecraft operates through markets, supply chains, finance, and technology flows — areas that have become deeply intertwined with national security. 

Common tools of economic statecraft include: 

• Trade policy: tariffs, export controls, import bans 
• Sanctions: financial, energy, or sector-specific restrictions 
• Investment screening: limiting foreign ownership in sensitive sectors 
• Technology controls: curbs on semiconductors, AI, or critical minerals 
• Development finance and aid: loans, grants, and infrastructure funding 

Why has economic statecraft gained prominence? 

Economic statecraft has become more prominent as globalisation collides with geopolitics. Interdependence — once seen as a stabilising force — is now viewed by many governments as a vulnerability. 

Several factors have accelerated this shift: 

• Rising strategic rivalry, particularly between the US and China 
• Weaponisation of supply chains, exposed during the COVID-19 pandemic 
• Technological competition in areas like AI, chips, and clean energy 
• Declining appetite for military intervention, especially in democracies 

As a result, economic pressure is increasingly seen as a middle ground — more forceful than diplomacy, but less escalatory than military action. 

How is economic statecraft used in practice? 

Major powers have deployed economic statecraft in high-profile ways. Western sanctions on Russia following its invasion of Ukraine aimed to restrict Moscow’s access to finance, energy revenues, and advanced technology. The US has tightened export controls on advanced semiconductors to slow China’s technological progress, while Beijing has used market access and supply dominance — such as in rare earths — as leverage. 

Countries are also turning inward. Policies promoting “friend-shoring,” “de-risking,” and strategic autonomy reflect efforts to reduce dependence on rivals while strengthening ties with trusted partners. 

Why does economic statecraft matter for developing countries? 

For emerging economies, economic statecraft presents both opportunities and risks. Access to trade agreements, infrastructure financing, and supply-chain relocation can accelerate growth. At the same time, pressure to “choose sides” in major power rivalries can complicate foreign policy and economic planning. 

India, for instance, has increasingly framed trade, technology partnerships, and industrial policy as strategic tools — seeking to boost domestic manufacturing while deepening ties with multiple global partners. 

What are the limits and risks? 

While economic statecraft can be powerful, it is not without costs. Sanctions can hurt civilians, disrupt global markets, and backfire by encouraging targeted countries to build alternative systems. Overuse of economic coercion can also undermine trust in global institutions and accelerate economic fragmentation. 

Economic statecraft has become a central pillar of modern geopolitics. As trade, finance, and technology increasingly overlap with national security, governments are turning economic power into strategic leverage.