Economic Interdependence and Conflict

PO 4700: Contemporary International Relations

Today's puzzle

Country A tells country B that it will be attacked at noon on one weekday in the following week.

"The bombing will come as a surprise", says A.

People in country B rejoice.

Today's Lecture

Trade Promotes Peace

Three versions of the liberal proposition

Welfare loss if trading stops
Contact hypothesis
Business interests

Notes:

Perhaps the argument receiving the most attention suggests that states are deterred from initiating conflict against a trading partner for fear of losing the welfare gains associated with the trading relationship. The diminution of trade or barriers to trade that accompany conflict lead to welfare losses.
Contact hypothesis. pacifying effect. "For some liberals, trade's pacifying effect results from more than economic considerations. Many eighteenth-century tracts by political economists expressed the view that commerce civilizes, polishes, and pacifies states and their citizens (Hirschman 1977, 1982). Montesquieu was among the first to cite the positive transformations that commerce brings to society (Forbes 1997). In 1749, he wrote "Commerce […] polishes and softens […] barbaric ways as we can see every day (quoted in Hirschman 1982, 1464). Those who engaged in commerce were assumed to become more peaceful, more civilized. In 1781,

In The Spirit of the Laws (1749) Montesquieu wrote that "commerce cures destructive prejudices". Greater contacts, according to this view, produce greater understanding and more peaceful unions. In addition, increased contact necessitates the creation of mech- anisms, such as laws, to resolve con??????icts of interest that might arise. Trade facilitates the creation of additional linkages that bind states together.

The economic argument suggests that business interests will mobilize their opposition to war in the interest of maintaining trade ties (economic profits). Some liberals add that this is particularly true in democratic societies, where public opinion has a greater impact on policymakers (Domke 1988; Ray 1995). Alternatively, one might argue that in nondemocratic regimes, the power of the business class is even more enhanced relative to democratic regimes, where alternative groups have an equal opportunity to exert influence over foreign policy. This arrangement may be due to the nondemocratic state's reliance on powerful economic actors for subsidizing state objectives. However, the argument that business interests always prefer peace to conflict is countered easily by the many instances in which businesses profit from war or in which economic interests prefer conflict to peace (Barbieri and Levy 1999).

But Is Conflict Really Costly in Terms of Trade?

It Depends

Dependency Theory

Trade as a means of influence

Trade is unfavourable to developing nations
Wealthy nations actively perpetuate a state of dependence, possibly through military means
Powerful states more likely to intervene militarily in weaker, economically dependent states (Wallensteen 1973)

Notes:

Short Intro video to dependency theory

Emerged 1960s-70s
Idea: some countries are not developing because the international system is preventing them
Dependence arises from a state's inability to spread its imports and exports equally over a large number of countries This is in contrast to liberals, for whom the more dependent state, such as a developing nation, generally enjoys greater economic benefits from an opportunity to trade with a large state than the large state derives from the relationship
Gains from trade enjoyed exclusively by developed states. Poor nations provide natural resources, cheap labour, a destination for obsolete technology, and markets for developed nations, without which the latter could not have the standard of living they enjoy.
Trade retards the development of developing states.
Trade exacerbates inequality
Wallensteen (1973): powerful states are more likely than minor powers to intervene militarily with underdogs that are dependent upon them economically. (e.g., Latin American states)
Wealthy nations actively perpetuate a state of dependence by various means. This influence may be multifaceted, involving economics, media control, politics, banking and finance, education, culture, and sport.

Relative Gains

Unequal gains from trade
- Dissatisfaction with the distribution
- Concern over shifts in power
Security externalities
- Increased productive efficiency \(\rightarrow\) military productivity
- Transfers of technology

Notes:

Neorealists contribute to the debate by adding that even when absolute gains exist, concerns about relative gains may domi- nate leaders' decisions (see Baldwin 1993; Grieco 1990; Mastanduno 1993; Powell 1991; Snidal 1991, 1993). Tensions may arise over how the gains from trade are distributed. Thus, trade may be devoid of the benefits and incentives presumed by liberals to serve as a restraint to conflict.

The pacifying influence of trade may also give way to discord when one state believes that its partner is enjoying disproportionate benefits within the relationship. Neorealists' focus on relative gains provides a basis for understanding why the presence of absolute gains may neither be sufficient to satisfy states nor create a disincentive to conflict. Although concerns about relative gains are not limited to asymmetric relations, there may be greater concerns about relative gains, since the costs and benefits in asymmetrical relations may be more pronounced in such relationships compared to those that are more balanced. Even when states are thought to benefit absolutely from trade, one state might con- sider its partner's disproportionate gain to be a loss to itself in terms of relative power. This is particularly the case when trading relations possess characteristics of cooperation as well as competition. For example, trad- ing relations between the United States and Japan exemplify a contemporary case of the tensions that erupt over relative gains. Most liberal economists would argue that the United States and Japan both derive net benefits from their trading relationship, but we frequently see that con- cerns over relative gains often dominate trade disputes.

The relevance of relative gains to trading relationships is highlighted in the work of Gowa (1994). Gowa assesses the security externalities associated with trade and argues that states choose to trade with allies in order to avoid granting the gain from trade to adversaries, which results in security externalities. She argues that it is not the increased income that is of greatest concern in trade with an adversary, but the ability of the adversary to enjoy the gains arising from specialization. Permitting an adversary the opportunity to increase its productive efficiency and redi- rect resources away from alternative productive ventures could allow it to increase production of military resources, which would pose a potential challenge.

Does Conquest Pay?

Trade and conquest as alternative means of obtaining goods
Trade only when conquest is not profitable \(\rightarrow\) when is conquest profitable?

Notes

We can imagine instances in which the acquisition of resources through conflict remains a viable and at times more desirable option than trade

The question, then, is: when is conquest profitable?

Traditional argument: only when resources are easily monopolised (e.g., raw material)
But industrialised societies can be exploited too. Peter Libermanargues that invaders can exploit industrial societies for short periods of time and can maintain control and economic performance over the long term. This is because modern societies are uniquely vulnerable to coercion and repression. Hence, by wielding a gun in one hand and offering food with the other, determined conquerors can compel collaboration and suppress resistance. Liberman's argument is supported by several historical case studies: G
- Belgium and Luxembourg in WWI
- Most of Europe in WWII
- France's seizure of the Ruhr in 1923-24
- Japanese empire 1910-45
- Soviet control of Eastern Europe, 1945-89

What Trade?

The answer might depend on the type of trade

elasticity
- inelastic \(\rightarrow\) increased vulnerability \(\rightarrow\) fewer conflicts
- inelastic -> increased vulnerability -> take military action to reduce vulnerability
Lootability

Notes:

Elasticity: Goods that are more difficult and thus more costly to substitute should have a stronger pacifying effect (see Polachek and McDonald (1992) for empirical evidence) But trade also increases dependence -> take military action to reduce econ vulnerability (e.g., raw material)

Unfortunately, it is difficult to measure the importance of different types of trade for a country, particularly if one wishes to focus on a broad historical and temporal domain.

See also Dorussen, JCR 2006: "The central hypotheses are tested using dyadic United Nations trade data disaggregated at industry level from 1970 to 1997. The main findings are that trade generally reduces the likelihood of conflict, the relationship is weaker for commodities that are more easily appropriable by force, and the relationship is generally stronger for manufactured goods with the notable exceptions of chemical and metal industries and the high-technology sector."

Trade Breeds Conflict

Trade itself is not always peaceful

Trade Wars
- E.g., Anglo-Irish trade war, 1932-38
Trade as an instrument of coercion
- Econ sanctions as a form of conflict
Trade increases uncertainty about costs of war. Uncertainty breeds conflict
- But trade reduce probability that disputes escalate to conflict

Notes:

Stein: The historical record is replete with trade wars (Conybeare 1987), and these arise only among countries with extensive commercial ties that are, typically, politically close. The growth of trade generates trade frictions and disputes

Trade has, moreover, been used as an instrument of coercion. Countries with extensive economic links have been prepared to cut such ties to compel a change in others?????? policies. But econ sanctions are a form of conflict, and they presuppose some interdependence.

However, trade reduces the chance that disputes escalate to conflict because it provides additional ways of signalling resolve and commitment.. In that sense, econ sanctions are an intermediate step between mere diplomacy and military measures. In conflicts of interest in which there are no economic links, states have little choice between mere diplomacy and military steps. Military measures short of war are then coded as MIDs. It is because trade makes it possible to use sanctions that war is avoided.

Now you may note that sanctions often don??????t work. But they don??????t work at obtaining concessions. But they may still be a deterrent and prevent escalation. They also deter THIRD parties!

Finally, an empirical relationship between trade and conflict may simply capture the uncertainty in the relationship. higher levels of trade are associated with greater certainty in the relationship between states, and lower levels of trade are associated with greater uncertainty.

WTO

Marxist Approaches

Trade siphons off resources from poor countries
Lenin: Competition over markets and resources as an inherent feature of capitalism
Difference with dependency theorists: collusion vs clash between great powers

Notes:

Neo-Marxists reject the assumption that trade provides net benefits to all states. Trade and economic dependence bene??????t the powerful, but result in political and economic costs for the powerless.

The relative-gain argument depicts one state's gain in trade as being another state's potential loss. This characterization of trade is made more explicit in Marxist arguments about the structure of unequal exchange relations. For example, some neo-Marxists argue that trade between developed and developing nations siphons off resources from the poor to the rich state (see Galtung 1971). In this scenario, poor states have little power to break free from exploitative trade relations, particularly when the legacy of colonialism and neoimperialism have left poor states struc- turally linked to the dominant states. As noted earlier, liberals maintain that smaller states enjoy disproportionate benefits in their trading relations with large states. Whether one accepts the liberal economist or Marxist interpretation of who benefits more in relations between developing and developed states, it is clear that perceptions about the distribution of benefits might affect one's assessment of trading relations, in both theory and practice, and that perceptions seem to differ depending upon the type of trading relationship that exists. And it is perception, as well as objective reality, that creates tensions and shapes leaders' decisions to engage in conflict.

Within the tradition of Lenin's theory of imperialism, neo-Marxists view competition over markets and resources as an inherent feature of capitalism (Baran 1957; Sweezy 1942). This competition can easily result in violent conflict between major powers, as well as the domination of less powerful states. Lateral pressure theory also envisions conflict corresponding with shortages of resources and markets (Choucri and North 1975, 1989). Similarly, neomercantilist theories anticipate greater conflict emerging when states pursue aggressive policies for capitalist expansion under the guise of the national interest. When such behavior emerges among major powers, the result can be trade wars, investment wars, or even hegemonic wars

Theories maintaining that conflict is inherently related to exchange relations primarily originate as outgrowths of Marx's ([1887] 1906) notion that capitalism is exploitative in its very nature and results in conflict between classes, as well as between factions of capital. In fact, Marx favored free trade, rather than protectionism, because he felt free trade would create tensions that would accelerate the inevitable crisis and inevitable demise of capitalism (see Marx 1848). Similarly, Lenin??????s the- ory of imperialism is grounded in the aggressive nature of monopoly cap- italism, whereby con??????ict is an integral part of capitalist expansion.

Rosecrance (1986) provides a useful distinction between Marxist- Leninist and dependency theories in terms of their predictions about the impact of trade on international con??????ict. He notes that dependency the- ories assume a degree of collusion among developed capitalist states with con??????ict arising in relations between unequal partners. Lenin, however, argues that the highest stage of capitalist development??????imperialism?????? leads to con??????ict among the most advanced capitalist nations as they vie for control over new markets, sources of raw materials, and scarce resources. But Rosecrance??????s distinction may not capture the full ??????avor of Lenin??????s theory. Lenin clearly sees capitalist states vying for control over less powerful states. In the process, capitalist states employ force to gain control over desired territories and to subjugate the inhabitants of these territories.

Insignificant Effect on Conflict

Realists

Trade is secondary to security \(\rightarrow\) not a sufficient deterrent

The Bargaining Approach

Expected loss of trade is an added cost… But the other side should raise its demand as a result \(\rightarrow\) unclear effect
Trade creates more uncertainty \(\rightarrow\) increased probability of war … But also more opportunities for signalling

Notes:

Morrow (1999): The loss of trade as a consequence of war produces an added cost and so should make a state more willing to make concessions to avoid war. At the same time, though, the other side should raise its demand as a result, because it knows that the first state is more willing to make concessions \(\rightarrow\) the relationship between trade and war is therefore indeterminate.

Any factor that disadvantages one party in a contest generally provides added leverage to opponents.

So changes in the level of costs should have little effect on the probability of disputes because factors that alter the relative bargaining power of competitors are also likely to result in changes in the settlements that ensue from bargaining, rather than leading to changes in the frequency of bargaining failures.

However, trade can create more uncertainty about how costly the war is, and in that sense increase the proba of war.

On the other hand, trade provides more opportunities for signalling (e.g., sanctions, etc.)

The Endogeneity of Trade

This section will have three columns

Today's lecture: summary

Trade promotes peace:
- Welfare loss
- Contact hypothesis
- Business interests
It depends:
- Conflict may not affect trade
- Asymmetric trade
- Relative gains
- Trade vs conquest
- Different goods, different effects
Trade breeds conflict
- Trade wars
- Marxism: Capitalism -> Competition over resources
- Third parties
Insignificant effect
- Security primes trade
- More costs -> more demands
- Trade \(\rightarrow\) peace, peace \(\rightarrow\) trade, or alliances \(\rightarrow\) trade \(\rightarrow\) peace?

Answer to Today's Puzzle

"Unexpected hanging paradox"

If no bombing on Saturday night, then there can be no bombing on Sunday, as this would not be a surprise. So Sunday is out. But by the same reasoning, Saturday is out, etc.