Rule of Law, Rents, and Integration: How the Trilemma is Reshaping Geopolitics

The global economy is undergoing a strategic rupture. The once-cohesive promise of globalization is giving way to a fractured geopolitical landscape, shaped by three interlocking forces: the erosion of the rule of law, escalating rent-seeking behavior, and the fragile retreat of economic integration. At the heart of this upheaval lies Dani Rodrik’s political trilemma: the structural impossibility of simultaneously achieving deep economic integration, democratic legitimacy, and national sovereignty. In our current world, you can have two—but never all three.

[https://www.aeaweb.org/articles?id=10.1257/jep.14.1.177]

This trilemma is no longer a theoretical curiosity. It is now the framework through which we must understand capital flows, institutional decay, digital governance, and the new geopolitics of supply chains. The global order is being rewritten—not through grand treaties, but through the quiet collapse of legal norms, the reassertion of state sovereignty, and the geopolitical weaponization of markets.

Why We Can’t Have It All

In the post–Cold War era, the dominant model sought to combine integration and sovereignty while sidelining democratic accountability. Global trade agreements, investor-state dispute mechanisms, and supranational institutions took precedence over national parliaments and public referenda. This technocratic consensus delivered efficiency—but alienated citizens.

The backlash is now visible across continents. Populist movements, protectionist trade policies, and resurgent industrial strategies are symptoms of a deeper rebalancing. Sovereign democracies are reclaiming control—often at the expense of global economic cohesion. Even ambitious models of pooled sovereignty like the European Union face legitimacy crises, as fiscal and legal integration clash with diverse democratic wills.

From Rule of Law to Rule by Exception

The rule of law—once the invisible scaffolding of global capitalism—is fragmenting under geopolitical stress. Where courts and legal standards once promoted trust, transparency, and contract enforcement, we now see competing legal regimes colliding.

U.S. sanctions contradict WTO jurisprudence. China’s expanding national security laws challenge Western due process. The EU’s regulatory assertiveness in digital markets creates a separate zone of compliance. Arbitration is politicized, enforcement is uneven, and legal predictability is fading.

This isn’t just legal entropy—it’s strategy. “Lawfare” has become a tool of geopolitical influence. The rule of law is no longer a neutral good; it is a contested space where strategic actors shape rules to lock in advantages or coerce rivals.

Rent-Seeking and the New Geoeconomics

In this fractured legal landscape, rents—not trade—are the new currency of power. Control over semiconductors, rare earths, data infrastructures, and pharmaceutical patents has replaced tariffs and subsidies as the key levers of global competition. The U.S.-China technology cold war, the Ukraine energy crisis, and the rush for critical minerals are not separate events—they are different fronts of the same rent-seeking realignment.

Multinational corporations are adapting by becoming geopolitical actors. Microsoft and OpenAI align with Western defense strategies. Semiconductor giants like TSMC and Intel are redrawing their global footprints based on security imperatives, not market efficiency. Financial firms are navigating an increasingly fragmented compliance landscape, where asset exposure is filtered through sanctions regimes and sovereign risk.

This convergence of national interest and private capital is blurring the line between business and diplomacy. Firms are no longer just market participants—they are tools of statecraft.

The Digital Sovereignty Front

The most consequential frontier of this trilemma may be digital. As data, algorithms, and cloud infrastructure become global strategic assets, the question of who controls digital rules is now central to economic sovereignty.

The U.S. promotes an open, innovation-led model. China champions a closed, state-controlled regime. The EU tries to anchor a middle ground through privacy protections, digital rights, and “technological humanism.” But these systems are not interoperable—and the result is a fragmented, contested digital space.

AI standards, data localization laws, and 5G networks are becoming geopolitical flashpoints. Global tech platforms now face conflicting regulatory demands in every major jurisdiction. As digital fragmentation accelerates, so too does the challenge of maintaining trust, fairness, and access across borders.

The Global South: Trapped in the Middle

While the Global North retools its systems, the Global South is caught in a bind. Many emerging economies rely on access to global capital, trade, and technology—but now face mounting pressure to pick sides in a polarized world.

Some countries are hedging: joining alternative trade pacts, cultivating regional alliances, or practicing transactional non-alignment. But others are suffering the consequences of systemic fragmentation—reduced investment, volatile currencies, and exclusion from critical supply chains.

The global trilemma imposes unequal burdens. As advanced economies rewire their economic systems for resilience, developing nations are left with shrinking policy space and growing vulnerability. Multilateralism, once a lifeline for the periphery, is being replaced by transactional geopolitics.

Financial Fragmentation and Systemic Risk

These shifts have profound implications for global financial stability. Capital flows are increasingly politicized. Since 2016, geopolitical alignment has explained a 15% reduction in cross-border portfolio allocations. Sanctioned states like Russia have seen foreign debt investment collapse. Banks in geopolitically exposed markets pay higher risk premiums and face elevated liquidity constraints.

This fragmentation exacerbates existing economic contradictions. The monetary trilemma—free capital flows, fixed exchange rates, and sovereign monetary policy—remains unresolved. Meanwhile, the financial trilemma—between open markets, national regulation, and crisis containment—adds complexity. When financial instruments are weaponized (e.g., freezing central bank reserves), trust in the system erodes.

Markets designed for efficiency are now instruments of coercion. The financial plumbing that once dampened shocks now transmits them faster and harder.

MENA and Israel: Navigating the Trilemma at the Crossroads

The Middle East and North Africa (MENA) region—and particularly Israel—illustrates how the trilemma plays out in a contested, high-stakes geopolitical environment. The region is experimenting with new forms of partial integration: the Abraham Accords, regional energy grids, and tech corridors linking Tel Aviv, Dubai, and Manama reflect an effort to balance sovereignty with strategic economic alignment.

Israel, as a technological powerhouse embedded in Western security alliances yet geographically located in a volatile region, embodies the paradoxes of Rodrik’s model. Its challenge is acute: how to preserve democratic integrity while navigating U.S.-China tech rivalry, Arab normalization, and increasing digital surveillance regimes. The stakes are high—not only for economic competitiveness, but for civil liberties, diplomatic autonomy, and the future architecture of regional cooperation.

In MENA, where resource rents, legal pluralism, and digital fragmentation intersect, the trilemma is not abstract—it defines the daily calculus of policymaking. Regional integration can unlock prosperity, but only if it carefully manages the trade-offs between legitimacy, stability, and openness.

Choosing a Post-Globalization Future

There is no perfect solution to Rodrik’s trilemma—but there are better choices. Managed globalization, built on democratic consent and strategic sovereignty, offers the most legitimate and stable foundation for future cooperation. It won’t be as efficient, fast, or frictionless as the old order. But it will be more resilient—and more just.

As Rodrik argues, we must make globalization safe for democracy. The alternative is not just slower growth or more protectionism—it is systemic breakdown. If law becomes power, if markets become weapons, and if integration becomes coercion, then global cooperation—on climate, health, and peace—becomes impossible.

The challenge ahead is not to salvage what was, but to build something more sustainable. The future of the global order depends not on perfect equilibrium—but on honest choices.