Geopolitics and International Trade Infrastructure

We develop a simple (incumbent versus entrant) strategic deterrence model to study the economic and geopolitical interactions underlying a strategic international activity, such as trade-related infrastructure projects like the Panama Canal. We study the incentives for global geopolitical players to support allied satellite countries where the strategic activity takes place or could potentially be initiated. We show that even if no effective competitor emerges, the appearance of a geopolitical challenger capable of credibly supporting the entrant has a pro-competition economic effect which benefits consumers all over the world. Thus, we provide a mechanism through which geopolitical rivalry between global powers leads to better economic outcomes for the global economy (i.e., less market power in the provision of international trade-related infrastructure). This contrasts with previous research on politics and market power which emphasizes the negative effects of political interference as well as research on international relations which often highlights the negative global effects of rising geopolitical tensions between an established power and a emerging challenger.