Geoeconomic pressure

Focus

Great powers use economic and financial strength to achieve geopolitical or economic goals. Examples include US efforts to limit China’s access to semiconductors, China’s threats to curb rare earth exports and western sanctions on Russia These moves are reshaping markets, the real economy and the international policy environment, prompting academics and policymakers to assess their implications.

Contribution

We use large language models (LLMs) to read earnings calls to measure how and why firms respond to geoeconomic pressure. A critical advantage of LLMs over classical natural language processing is their ability to extract subtle conditional relationships in prose, thereby going beyond a simple keyword count. We develop a simple reasoning pipeline that allows the LLM to determine whether the document states that the firm is undertaking a particular action in response to a geoeconomic pressure, and to summarise the rationale for it. 

Findings

Export controls prompt targeted firms to invest and innovate at home, especially Chinese firms facing US controls on semiconductors and artificial intelligence. Many report higher domestic R&D to build local substitutes, while firms in imposing countries report lost sales and thinner margins in restricted markets. Sanctions on Russia show two patterns. Coalition firms (US and Europe) report lost revenue, asset writeoffs and higher frictions; Europe also faces energy cost shocks, while some US energy and shipping firms gain. Thirdcountry firms, notably in China and India, fill market gaps and benefit from discounted oil and rerouted trade. Tariffs mostly hurt US firms that rely on imported inputs: costs rise, prices increase and margins compress. A smaller group of domestic producers gain market share and margins as rivals pass through costs. Foreign firms face uncertainty, demand losses and relocation costs (Europe/Canada stress macro risks; Chinese firms stress relocation). Supply chains shift away from China towards the United States, Vietnam and Mexico, and even tariff threats move firms.

Abstract

The increasing use of geoeconomic pressure is reshaping the global economy. We introduce a methodology using large language models (LLMs) to systematically measure the application of and response to geoeconomic pressure from large textual corpora, classifying which governments apply pressure to which foreign targets, using which in struments, firms, and products. Most importantly, we use LLMs to analyze how and why firms respond to the pressure. We focus on export controls, sanctions, and tariffs as the main instruments of pressure on firms. We find that export controls induce the targeted firms to undertake domestic R&D to build a domestic alternative technology. Western sanctions on Russia cause supply chain re-arrangements, the major beneficiary of which are firms in third-party countries, like China and India, which step into the market vacuum created by the broken business relationships. The threat and impositions of U.S. tariffs cause losses for the majority of U.S. firms, which report absorbing the cost shock on their inputs via their profit margin. Foreign firms are also negatively affected, mostly via the related macroeconomic uncertainty and the cost of relocating production.

• Discussion by Randall S Kroszner