Hidden Costs Shaping Global Power: Transaction Cost Economics in Geopolitics  

Transaction cost economics (TCE) originated from the work of economist Ronald Coase, who in 1937 questioned why firms exist if markets are perfectly efficient. He argued that using markets involves costs—searching for information, negotiating, and enforcing contracts—that sometimes make hierarchical organization more efficient. Building on this foundation, Nobel prize winner Oliver Williamson developed TCE into a rigorous framework in the 1970s and 1980s, explaining how factors like bounded rationality and opportunism shape the way institutions, firms, and states organize themselves. Today, this theory is not just a tool for understanding corporate behavior but a powerful lens for analyzing global geopolitics, where the “costs” of trust, enforcement, and coordination define power and influence.

In a world increasingly fractured by rival power blocs, contested norms, and weaponized interdependence, the cost of doing business between states is no longer just about tariffs or logistics. It’s about trust, institutions, and credibility. This is where transaction cost economics becomes not merely a theoretical framework, but a vital tool for decoding how global power is constructed, exercised, and constrained.

Why Transaction Costs Matter in a Fragmenting World

At its core, TCE examines the costs of negotiating, monitoring, and enforcing agreements. In geopolitics, these costs arise from uncertainty, asymmetrical information, and the ever-present risk of opportunism. They shape how states choose partners, form institutions, structure trade, and engage in strategic competition. Behind every alliance, trade deal, or sanction regime lies an often invisible calculus of transaction costs.

Sovereignty Trade-Offs and Institutional Engineering

States frequently accept constraints on autonomy through alliances, trade blocs, and regional institutions to mitigate the costs of distrust. The institutional design of the EU, NATO, and post-Bretton Woods financial regimes reflects deliberate efforts to raise the cost of defection and reduce enforcement burdens. The failure of the proposed European Defense Community in the 1950s versus the EU’s gradual legal deepening illustrates how institutional “bindingness” is calibrated to perceived transaction risks.

Institutions, in this view, function less as idealistic expressions of shared values than as transaction cost management devices. The more deeply integrated the institution, the lower the cost of monitoring compliance—and the more resilient it is under stress.

Sanctions and the Cost of Fragmentation

Sanctions are often viewed in moral or strategic terms, but their real potency lies in how they alter transaction costs across markets. When states impose sanctions, they introduce:

• Risk escalation: Firms face heightened exposure to non-payment, seizure, and reputational backlash.
• Financial disruption: Established payment systems like SWIFT become inaccessible, forcing reliance on costlier, less trusted channels.
• Opportunity costs: Even when sanctions create market gaps, few actors step in. The cost of verifying counterparties and building new trust ecosystems is often prohibitive.

In effect, sanctions weaponize friction. They raise transaction costs so high that previously viable economic activity becomes too risky to pursue—crippling not only the target but also global supply chains and third-party markets.

The Geopolitics of Trust and Information Asymmetry

Bargaining between states is expensive. TCE explains why: opaque intentions, differing legal systems, and historical grievances all raise negotiation and enforcement costs. Transparent, rules-based institutions help mitigate these through predictable dispute resolution and standardized expectations.

Baccini (2014) shows that institutional transparency can drastically reduce trade agreement negotiation times. This principle scales up: countries, like firms or political parties, build reputational capital over time to reduce the cost of future engagement. A state known for honoring commitments faces lower long-term enforcement costs—just as one that defects, lies, or defaults finds itself excluded or charged a geopolitical risk premium.

Developing Economies and the Cost of Weak Institutions

Emerging economies bear a disproportionate burden of transaction costs. They are often trapped in low-trust equilibria, where weak legal systems, unstable regulations, and underdeveloped markets raise costs for even routine transactions.

• Institutional immaturity: Unpredictable courts, corruption, and bureaucratic opacity raise the price of every deal.
• Opportunism insurance: In post-socialist contexts, parties over-invest in ex-ante protections—lawyers, notarized contracts, complex enforcement clauses—before any real value is created.
• Market erosion: Some markets never emerge at all. For instance, land reform efforts in parts of the Global South fail because identity conflicts override economic rationality, pushing transaction costs beyond viability.

These are not just economic stories—they are geopolitical vulnerabilities.

Geoeconomic Statecraft and Transaction Costs

The growing use of economic tools as instruments of state power—including export controls, supply chain reshoring, and investment screening—reflects a deeper awareness of TCE. States are no longer competing just over resources or influence, but over the architecture of friction.

For example, the U.S. CHIPS Act and outbound investment screening regimes target not just Chinese firms but the transaction infrastructure underpinning critical tech sectors. These measures aim to reconfigure cost-benefit calculations for firms engaging with rival economies—not through brute force, but through shifting institutional and legal terrain.

Digital Infrastructure as a New Transaction Battleground

In the digital era, platforms like SWIFT, CIPS, and Fedwire don’t just facilitate payments—they structure geopolitical dependencies. Removing access to these systems doesn’t merely impose delays; it rewrites entire financial architectures.

At the same time, cybersecurity and digital surveillance introduce new categories of transaction costs: trust in data integrity, vulnerability to hacking, and the costs of ensuring digital sovereignty. As nations build “splinternets” or national firewalls, the friction of transnational commerce increases—even as nominal connectivity expands.

Global Public Goods and the Cost of Breakdown

Globalization relied on stable seas, open skies, neutral internet infrastructure, and predictable legal regimes—public goods that dramatically lowered transaction costs worldwide. Today, those foundations are under threat.

• Maritime security in the Red Sea and South China Sea now carries an insurance premium.
• Disinformation erodes the trust necessary for diplomatic negotiation.
• Climate instability and disaster risks make physical infrastructure more fragile, raising the cost of even insured trade.

The decay of global public goods means rising costs everywhere—even among allies.

Informal Institutions: Hidden Lubricants of Global Commerce

Not all transaction cost reducers are formal. Diasporic networks, shared religions, legal cultures, or linguistic commonalities often function as informal institutions that grease the wheels of commerce and diplomacy.

The Islamic banking system, Chinese business networks across Southeast Asia, and the Commonwealth legacy in Africa all function as low-friction trust zones, reducing the need for formal enforcement mechanisms. These systems—often overlooked by traditional IR theory—are vital components of geopolitical resilience.

Climate Change: The Transaction Cost Multiplier

Climate change functions as a force multiplier for transaction costs. It destabilizes water-sharing agreements, increases cross-border migration, and disrupts infrastructure—each adding new layers of risk, monitoring, and renegotiation.

Access to arable land, fisheries, or potable water becomes not just a security issue, but a coordination problem with spiraling enforcement costs. If transaction costs rise faster than diplomatic bandwidth can scale, entire regions risk institutional paralysis.

Case Study: Trump’s Transactional Approach and Transaction Cost Economics

The transactional nature of Donald Trump’s foreign policy offers a vivid, real-world illustration of how TCE operates at the highest levels of geopolitics. Trump’s approach—blunt, deal-focused, and skeptical of multilateralism—reflected a deliberate effort to rebalance the distribution of costs and benefits in global arrangements, minimizing what he perceived as excessive transaction costs for the United States.

Trump repeatedly questioned the value of multilateral agreements like the TPP, NAFTA, and the Paris Climate Accord, arguing that they imposed high costs on the U.S. while offering limited returns. In TCE terms, he views such institutions as burdened with high negotiation and enforcement costs, slow to adapt, and vulnerable to opportunistic behavior by allies. His preference for bilateral deals allowed the U.S. to exert greater control, shorten negotiation cycles, and improve enforcement mechanisms.

The renegotiation of NAFTA into the USMCA is a prime example. Trump’s administration added more explicit terms on labor and environmental standards and tightened dispute resolution mechanisms, aiming to reduce ex-post transaction costs related to monitoring and compliance. Similarly, the imposition of tariffs on China and Europe can be seen as attempts to raise the cost of defection and compel renegotiation on more favorable terms.

His strategy on critical mineral supply chains further illustrates transaction cost logic. Concerned about dependence on Chinese rare earth exports, the Trump administration pursues reshoring policies, diversified sourcing through allies, and emphasized supply chain security—reducing geopolitical uncertainty and the costs of enforcement under potential embargo conditions.

Yet this strategy came with its own costs. By undermining long-established alliances and institutions, Trump introduced uncertainty into America’s international commitments, raising transaction costs for allies who began to hedge their bets. Germany and Japan increased defense spending; the EU began exploring “strategic autonomy.” These responses indicate that while Trump may have reduced short-term U.S. enforcement costs, he raises long-term systemic transaction costs across the alliance ecosystem.

In sum, Trump’s foreign policy is a form of high-stakes TCE in action—minimizing certain transaction costs through unilateralism and direct negotiation, while generating new ones in the form of reputational risk, alliance volatility, and global market friction.

Conclusion: Geopolitical Power Is Transactional

In the 21st century, power lies not only in land, guns, and GDP—but in the ability to structure, reduce, or redirect transaction costs across geoeconomic networks. The frictionless world promised by globalization is receding. In its place, we face a high-friction future where managing trust, enforcement, and credibility is the essence of strategy.

The next Cold War will be fought not only with sanctions and supply chains, but with spreadsheets, escrow contracts, reputation scores, and platform access rights. Understanding transaction cost economics isn’t just a matter for economists anymore—it’s fast becoming the diplomatic toolkit of modern statecraft.