Realist IPE and the Return of Economic Warfare: Why Liberal Trade Theory Is Dead

The old rules of global economics are crumbling. From semiconductor sanctions to strategic decoupling, states are weaponizing interdependence in ways that shatter decades of liberal assumptions about cooperation and trade.

The End of the Liberal Dream

For thirty years, we were told a compelling story: economic interdependence would tame geopolitics. Trade would bind nations together in mutual prosperity. Institutions would constrain the darker impulses of state power. The Washington Consensus promised that open markets and international cooperation would usher in an era of unprecedented peace and prosperity.

That story is over.

Today, we live in a world where the United States deploys export controls on semiconductors as weapons of strategic containment. Where China's Belt and Road Initiative doubles as a geopolitical chess game. Where European leaders speak openly of "de-risking" their economies from Chinese dependence. The COVID-19 pandemic and Russia's invasion of Ukraine have only accelerated these trends, revealing the fragility of global supply chains and the enduring primacy of national security over economic efficiency.

This isn't a temporary deviation from the liberal order, but it's the emergence of a new reality that demands a different theoretical framework. Realist International Political Economy (IPE) offers that framework, one that treats economic policy as an extension of national strategy rather than a technocratic exercise in optimization.

Why Liberal IPE Failed

The liberal approach to international economics rests on three fundamental assumptions that no longer hold:

1. States Prioritize Absolute Gains Over Relative Power

Liberal theory assumes that countries focus on maximizing their own economic welfare, regardless of how others fare. But look at actual state behavior: the U.S. Inflation Reduction Act and CHIPS Act aren't neutral efficiency tools, they're strategic weapons designed to counter China's rise in critical technologies. The EU's push to reduce dependence on Chinese rare earths isn't about market optimization, it's about reducing strategic vulnerability.

States aren't trying to get richer in absolute terms but they're trying to get stronger relative to their competitors.

2. Institutions Can Constrain State Behavior

Liberal theorists believe that international institutions create binding commitments that prevent states from acting unilaterally. But this ignores a crucial reality: institutions are shaped by power, not the other way around.

When core interests are at stake, institutional commitments evaporate. The U.S. withdrawal from the Trans-Pacific Partnership, its weaponization of the SWIFT payment system, and its extraterritorial application of sanctions all demonstrate that rules-based systems only work when powerful states want them to work.

3. Globalization Creates "Lock-in" Effects

Perhaps most naively, liberal theory assumes that economic integration creates irreversible interdependence that makes conflict irrational. But as scholars Henry Farrell and Abraham Newman have shown, globalization doesn't eliminate power it concentrates it in new ways.

Global networks create centralized chokepoints that allow dominant states to exert asymmetric pressure on others. Interdependence doesn't neutralize conflict; it becomes a terrain for it.

The Realist Alternative: Economics as Warfare by Other Means

Realist IPE begins with a simple but profound insight: in an anarchic international system, states must prioritize survival, autonomy, and relative power. Economic policy isn't separate from high politics, it's an extension of it.

This perspective explains what liberal theory cannot:

• Why cooperation breaks down: Because it was never really cooperation in the first place, but a temporary alignment of interests backed by power

• Why states prioritize autonomy: Because dependence creates vulnerability, and vulnerability invites coercion

• Why interdependence breeds conflict: Because it creates opportunities for strategic manipulation and asymmetric leverage

The State Remains Supreme

Despite decades of talk about globalization and the decline of state power, the state remains the primary actor in international economics. It's the state that:

• Controls borders and regulates markets

• Deploys sanctions and export controls

• Allocates strategic resources and industrial policy

• Reasserts authority during crises

When COVID-19 hit, it wasn't multinational corporations or international institutions that scrambled to secure vaccine supplies, it was states. When Russia invaded Ukraine, it wasn't the World Trade Organization that froze Russian assets, it was sovereign governments acting unilaterally.

Power Matters More Than Norms

Liberal theorists often argue that norms, identities, and shared understandings shape international outcomes. But norms are fragile when security is at stake. Rules-based systems cannot bind a rising power like China or a revisionist actor like Russia when these powers see compliance as undermining their strategic interests.

Power doesn't just matter more than norms, it shapes what norms emerge and which ones survive.

The New Reality: Geoeconomics Everywhere

We're witnessing the emergence of what scholars call "geoeconomics", that is, the use of economic instruments to achieve geopolitical objectives. This isn't a return to mercantilism; it's something new: the strategic deployment of interdependence itself as a weapon.

Consider these examples:

• Technology decoupling: The U.S.-China semiconductor war isn't about trade it's about technological supremacy and military capability

• Financial warfare: Sanctions on Russia's central bank represent a new form of economic coercion that treats finance as a strategic domain

• Supply chain weaponization: Control over critical materials and components becomes a source of geopolitical leverage

These aren't anomalies or policy mistakes, they're the logical result of states adapting to globalization by learning to exploit its vulnerabilities.

What This Means for the Future

The implications of this realist turn are profound:

For Policymakers

• Think strategically about economic policy: Every trade agreement, investment decision, and regulatory choice has geopolitical implications

• Prioritize resilience over efficiency: Supply chain diversification and strategic autonomy matter more than cost minimization

• Prepare for economic conflict: Sanctions, export controls, and financial warfare are now standard tools of statecraft

For Business

• Geopolitical risk is business risk: Companies can no longer assume that economic logic will prevail over political imperatives

• Diversification is essential: Dependence on single countries or suppliers creates unacceptable vulnerabilities

• Government relations matter: The line between business and national security has blurred permanently

For Citizens

• Economic security is national security: Trade-offs between efficiency and resilience are political choices, not technical ones

• Interdependence has costs: The benefits of globalization come with strategic vulnerabilities that must be managed

• Prepare for a more fragmented world: The era of seamless global integration is ending

Conclusion: Markets Disciplined by Geopolitics

The liberal dream of economics constraining politics has been inverted. Instead of markets disciplining geopolitics, we now live in a world where geopolitics disciplines markets. Economic instruments have been absorbed into the logic of strategic competition, and there's no going back.

This doesn't mean the end of international trade or cooperation but means the end of the illusion that economics can be separated from power politics. The sooner we abandon liberal fantasies about benign interdependence, the better we can navigate the realities of strategic rivalry in a multipolar world.

The age of economic warfare has begun. The question isn't whether states will use economic tools strategically, it's whether we'll develop the theoretical frameworks to understand and manage this new reality.

In a world where semiconductors are weapons and supply chains are battlegrounds, realist IPE isn't just an academic theory it's a survival guide.

This analysis draws from scholarship in realist international political economy, including work by Robert Gilpin, Henry Farrell, Abraham Newman, and others who have recognized the strategic dimensions of economic interdependence.