Building Scale Through Diplomacy

The United States and China can deploy economic scale in ways that most countries cannot. Their enormous markets allow firms to grow, suppliers to cluster, and governments to support strategic industries at a scale that is prohibitively expensive for smaller economies.

That leaves more than 100 countries facing the same problem. They cannot afford excessive dependence on the two great powers, but neither can they reproduce American or Chinese scale at home. I call this the G-minus-2 problem.

My proposed solution is Diplomatic Global Value Chains: use diplomacy to allow countries to achieve scale together that none can achieve alone.

The starting point is simple. A country may have outstanding firms, technologies and workers, yet still lack a domestic market large enough to sustain a globally competitive industry. Governments can help create the missing scale by building durable international relationships around demand, financing, procurement and investment. Markets alone will underprovide these relationships because individual firms do not capture the geopolitical externalities these relationships create: more secure supply chains, greater resilience to disruption, increased bargaining power, and reduced vulnerability to economic coercion.

Consider rare earths. Canada has enormous resources, but developing a competitive industry requires customers prepared to make long-term commitments, including commitments for environmental cleanup. Diplomatic policy can help secure foreign demand, contracts and financing. Diplomatic Global Value Chains go further.

Suppose South Korea helps create the market needed for Canadian rare earths. Canada, in turn, helps support the scale of South Korea’s semiconductor industry. Germany might participate through another value chain such as biopharma. The reciprocal bargain therefore does not have to occur within the same industry. Countries can support one another across value chains. Critically, G-minus-2 countries build a dense network of reciprocal economic relationships across sectors and countries.

As the network grows, its economics become stronger. Each additional relationship enlarges markets and improves opportunities for specialization. It also increases the cost of using market power coercively: a country threatening a partner in one value chain may depend on that partner—or its allies—in another. The G-minus-2 can thereby generate something none of its members possesses individually: collective economic scale and leverage.

I initially presented these ideas to Canadian government officials, partly through the 2025 O.D. Skelton Lecture at Global Affairs Canada, Canada’s foreign ministry, in an effort to nudge the newly elected Carney government in this direction. The lecture argued that countries outside the United States and China shared a scale problem and could overcome it through Diplomatic Global Value Chains.

The idea, however, generalizes far beyond Canada. It is a framework for how middle powers can prosper in a world increasingly shaped by the economic scale and coercive power of the United States and China.

What happened next is striking. In December 2025, Canada and Germany launched a Digital Alliance encompassing AI, digital infrastructure and quantum technologies, with an explicit emphasis on building commercial champions capable of competing globally. In February 2026, the two countries launched a Sovereign Technology Alliance to help trusted partners pool capabilities, scale innovation and reduce strategic technology dependencies.

The logic became still more concrete in AI. In April 2026, Canada’s Cohere and Germany’s Aleph Alpha announced plans to join forces as a transatlantic AI company. In September they signed a definitive business combination agreement, creating what the companies describe as the first transatlantic sovereign AI solution, rooted in both Canada and Germany.

Diplomatic Global Value Chains anticipated this direction: G-minus-2 countries using diplomacy not simply to manage trade, but to build the scale required to compete.