Economic Interdependence and Conflict – The Case of the US and China

In 1913, Norman Angell declared that the use of military force was now economically futile as international finance and trade had become so interconnected that harming the enemy’s property would equate to harming your own.[1] A year later Europe’s economically interconnected states were embroiled in what would later become known as the First World War. Almost a century later Steven Pinker made a similar claim. Pinker argues, “Though the relationship between America and China is far from warm, we are unlikely to declare war on them or vice versa. Morality aside, they make too much of our stuff and we owe them too much money.”[2] His argument rests upon the liberal assumption that high levels of trade and investment between two states, in this case the US and China, will make war unlikely, if not impossible. It is this assumption that this essay seeks to evaluate.

This essay is divided into three sections. The first briefly outlines the theory that economic interdependence results in a reduced likelihood of conflict, breaking the theory down into smaller components that can be examined. In the second section, this essay suggests that the premise ‘more trade equals less conflict’ is simplistic. It does not take into account many of the variables that can influence the strength of economic interdependence’s conflict reducing attributes. Within this section, the essay considers: the extent to which conflict cuts off trade, theories arguing that how and what a state trades matters, Copeland’s theory of trade expectations and the differences between status quo and revisionist states. The final section deals with the realist perspective, concentrating on arguments pertaining to the primacy of strategic interests and arguments that economic interdependence will increase the likelihood of conflict owing to a reduction of deterrence credibility. Each section will be related back to the US-China relationship with a view to assessing Pinker’s claim. The essay will conclude that economic interdependence does reduce the likelihood of conflict but is insufficient on its own to completely prevent it. To calculate the likelihood of conflict correctly one would need to factor in the nature of the economic interdependence alongside the strength of the strategic interests at stake.

Economic Interdependence and Conflict

The theory that increased economic interdependence reduces conflict rests on three observations: trade benefits states in a manner that decision-makers value; conflict will reduce or completely cut-off trade; and that decision-makers will take the previous two observations into account before choosing to go to war. Based on these observations, one should expect that the higher the benefit of trade, the higher the cost of a potential conflict. After a certain point, the value of trade may become so high that the state in question has become economically dependent on another. Proponents of this theory argue that if two states have reached this point of mutual dependence (interdependence), their decision-makers will value the continuation of trade relations higher than any potential gains to be made through war.[3] It is on this argument that Pinker rests his statement that the economic relationship between the US and China precludes war. One can see evidence of this when analysing US views on China as trade rises. A 2014 Chicago Council on Global Affairs survey indicates that only a minority of Americans see China as a critical threat, compared to a majority in the mid-1990s. This number is even higher when analysing Americans who directly benefit from trade with China.[4]

As compelling as this argument may be, high levels of economic interdependence have not always resulted in peace. The decades preceding WW1 saw an unprecedented growth in international trade, communication, and interconnectivity but needless to say, war broke out.[5] This instance alone is not enough to disprove Pinker’s logic. War may become very unlikely but began nonetheless.[6] Let us take two hypothetical scenarios, one in which the chances of war is 80% and the other in which trade has reduced the likelihood of war to 10%. Just knowing that war did indeed take place does not tell us which scenario was in play. Similarly, the fact that WW1 took place gives us no information about whether economic interdependence made war unlikely or not. In fact, evidence even exists to suggest that economic linkages prevented a war from breaking out during the sequence of crises that led up to WW1.[7] However, the fact that a war as detrimental as WW1 could break out despite a supposed reduction of the likelihood of conflict gives us an impetus to examine whether this reduction does take place. Additionally, if this is the case, what variables can weaken this pacifying effect?

Does Conflict Cut off Trade?

Economic interdependence theory makes the assumption that conflict will reduce or cut-off trade. This assumption appears to be logical, as one would expect that the moment two states are officially adversaries, fear of relative gains would ensure that policy makers want to completely cut-off trade. However, there are many historical examples of trade between warring states carrying on during wartime, including strategic goods that directly affect the ability of the enemy to carry out the war.[8] For example, in the Anglo-Dutch Wars, British insurance companies continued to insure enemy ships and paid to replace ships that were being destroyed by their own army.[9] Even during WW2, there are numerous examples of American firms continuing to trade strategic goods with Nazi Germany.[10] Barbieri and Levy argue that these examples and their own statistical analysis suggest that the outbreak of war does not radically reduce trade between enemies, and when it does, it often quickly returns to pre-war levels after the war has concluded.[11]

In response to this result, Anderton and Carter conducted an interrupted time-series study on the effect war has on trade in which they analysed 14 major power wars and 13 non-major power wars. Seven of the non-major power wars negatively impacted trade (although only four of these reductions were significant), but in the major war category, all results bar one showed a reduction of trade during wartime and a quick return to pre-war levels at its conclusion.[12] Accompanying this contradictory finding one must take into account that even if war does not radically reduce trade, if a state believes that it does then potential opportunity cost would still figure in their calculations.

Variables that Impact the Pacifying Effect of Economic Interdependence

The purpose of this section is to demonstrate that the pacifying effect of economic interdependence is not constant. It achieves this via a discussion of the effect of changes in a number of variables pertaining to how and what a state trades. Once it is established that changes in such variables may alter the effect of economic interdependence on the likelihood of conflict, Pinker’s statement (that the level of trade between the US and China makes conflict unlikely) can be considered to be an over-simplification.

One variable is the relative levels of economic dependence. Some argue that asymmetry of trade can increase the chances of conflict if the trade is more important to one state than it is to the other; their resolve would not be reduced by the same degree. The less dependent state would be far more willing than its adversary to initiate a conflict.[13] An example is the possibility of the prevalent idea in China that ‘Japan needs China more than China needs Japan’ leading to China becoming more assertive in Senkaku/Diaoyu islands dispute.[14] It is important to recognize that all trade is asymmetric in one fashion or another. It is radical asymmetry that one has to fear, which at the moment does not appear to be the case in the China-Japan or US-China case.

Another variable is the specifics of what is being traded. A study by Dorussen suggests that the pacifying effect of trade is less evident if the trade consists of raw materials and agriculture but stronger if the trade consists of manufactured goods. Even within the category of manufactured goods there are differences in effect. Mass consumer goods yield the strongest pacifying results whilst high-technology sectors such as electronics and highly capital-intensive sectors such as transport and metal industries tend to have a relatively weak effect.[15] If it is a sector with alternative trade avenues then embargos and boycotts as a result of conflict will have far less effect.[16] The rule is that the more inelastic the import demand, the higher the opportunity cost and the smaller the probability of conflict.[17] According to these studies, trade still generally reduces the likelihood of conflict however it is by no means homogeneous in its effects. Additionally, the opportunity costs are not the same for importers and exporters. Dorussen’s study suggests that increased trade in oil tends to make the exporters more hostile and the importers friendlier in relations to their foreign policy.[18] Taking this framework into account, in 2014 China’s top five exports to the US (computers, broadcasting equipment, telephones and office machine parts) all fell under the category of electronics,[19] whilst the US’s top five exports to China (air and/or spacecraft, soybeans, cars, integrated circuits and scrap copper) were all either high-capital intensive sectors or raw materials and agriculture.[20] According to Dorussen’s study, these exports should not yield the strongest possible conflict reducing results, which could impact the validity of Pinker’s statement.

Copeland presents another variable, namely expectations of trade. Copeland argues that if a highly dependent state expects future trade to be high, decision makers will behave as many liberals predict and treat war as a less appealing option. However if there are low expectations of future trade, then a highly dependent state will attach a low or even negative value to continued peaceful relations and war would become more likely.[21] As an example, he points out that despite high levels of trade in 1914 German leaders believed that rival great powers would attempt to undermine this trade in the future, so a war to secure control over raw materials was in the interests of German long-term security.[22] Via this framework, if the US began to believe that in future years they would be less dependent on China’s economy, or if it became apparent that a US-China trade war was about to take place, there would be a sharp rise in the probability of conflict.

The final variable this essay will discuss relates to the differences between status quo and revisionist states. Most empirical analyses of economic interdependence tend to group together states as different as the United States, Pakistan, Australia, Germany and China and assume that variations in their behaviour would be the same.[23] Papayoanou on the other hand, argues that when analysing the effects of economic interdependence it is useful to differentiate the effects on great power states and states with revisionist aspirations.[24] If a status quo power has strong economic ties with revisionist state there will be interest groups who advocate engagement and who believe that confrontational stances will threaten the political foundation of economic links. This will constrain the response of the status quo state.[25] One can see evidence of such an interest group in the US, a group Friedberg describes as the Shanghai coalition, who he argues advocate engagement with China at the expense of balancing.[26] A study by Fordham and Kleinberg backs up this argument as they find that US business elites who benefit from trade with China tend to see little benefit in limiting the growth of Chinese power.[27] A 21st Century revisionist power is far less likely to be a democracy, and therefore, interest groups will influence the leadership far less. This means an authoritarian revisionist power will be working under fewer constraints and will be able to take a more aggressive stance.[28] This appears to be the case in China where rather than having domestic constraints on taking an aggressive stance against Japan, one of their biggest trading partners, grassroots nationalism has made explicit cooperation a domestically risky option.[29]

There are many indicators to suggest that China is a revisionist power willing to wage war. Lemke and Werner argue that an extraordinary growth of military expenditures’ reveals when a state is dissatisfied with the status quo.[30] Data provided by the Stockholm International Peace Research Institute certainly indicates that China qualifies as its military expenditure has nominally increased by 1270% between 1995 and 2015.[31] Additionally, the military modernization appears to be aimed at capabilities to contest US primacy in East Asia.[32] Much like German strategists recognized that Britain was operating under significant domestic constraints, China could realize the same of the US.[33] This is not to say that Chinese decision-makers would be cavalier about making a decision that would be to the detriment its economy. A crash in the Chinese economy due to the loss of exports to the US could potentially undermine the legitimacy of the Chinese Communist party and endanger the regime. However, the view that China is a revisionist power indicates that good trade relations alone will not result in a low probability of conflict.

Realist Arguments Pertaining to Dominance of Strategic Interests

Having established that if the pacifying effect of trade does exist, it can rise or fall depending on changes in a series of variables this essay proceeds to deal with realist theories arguing that trade has a negligible or even negative effect on the likelihood of conflict. Buzan argues that noneconomic factors contribute far more to major phenomena than liberal theorists usually cite to support their theory.[34] There is evidence of the primacy of strategic interests in Masterson’s 2012 study on the relationship between China’s economic interdependence and political relations with its neighbours. The study concluded that as economic interdependence with neighbouring states increased the likelihood of conflict did indeed decrease, but that the impact was minimal when compared to the impact of relative power capabilities. In other words, political and military issues dominated interstate relations. Growth in power disparities were associated with decreases in dyadic political relations that were greater than the increase caused by economic interdependence.[35]

If the pacifying effect of trade can rise and fall so can the provocative effect of strategic interests. It is important to distinguish between the existence of a strategic interest and a situation of unbearable strategic vulnerability. China and the US have many opposing strategic interests, but neither is in a strategically vulnerable position. For example, China shares many borders, but none present the same threat of invasion that Tsarist Russia did to Imperial Germany as none of the current maritime tensions between China, Japan, and the US equate to a matter of national survival.[36] This is crucial as some believe that for a crisis to escalate to a major war an actor who is isolated and believes that history is conspiring against them is needed. Only this actor would take an existential risk to try and offset their strategic vulnerability.[37] Imperial Germany fit this description, but neither China nor the US does. This is largely due to the geography of the region. The tension between the US, China and Japan are over maritime regions. Maritime issues still relate to national interests but, as Krause points out, “Land armies are still the only forces that can conquer and hold territory.”[38] Taking this into account one can argue that the benefits of US-China trade are, for each state, currently greater than the benefits of pursing strategic benefits via force, but this situation will only remain as long as the situation does not become one of unbearable strategic vulnerability.

Realist Arguments Pertaining to the Undermining of Deterrence

Having established that scenarios exist where strategic interests and vulnerabilities have a greater effect on the likelihood of war than economic interdependence, this essay will now evaluate arguments that economic interdependence can increase the likelihood of conflict through the undermining of deterrence. The argument proceeds as follows: if economic interdependence constrains the ability or willingness of a state to use its military, security is lowered as the state now has a weakened ability to engage in deterrence and defensive alliances. Deterrence relies on the ability of a state to make credible threats and defensive alliances rely on credible promises to protect one’s allies.[39] Credibility is defined as the product of the operational capability to follow through with a threat and the communication of resolve to use force.[40] What is at risk here is that if economic interconnectivity interferes with the communication of resolve to use force then states may end up with a way that neither side expected or wanted.

Some argue that it was such a failure to communicate resolve that resulted in the beginning of WW1. Indeed, Jolly claims that: “The Austrians had believed that vigorous actions against Serbia and a promise of German support would deter Russia: the Russians had believed that a show of strength against Austria would both check the Austrians and deter Germany. In both cases, the bluff had been called and the three countries were faced with the military consequences of their actions.”[41] The risk in the US-China case would be that the interest groups described earlier would prevent the US from effectively communicating its resolve to use force if China were to cross a redline. The flaw in this argument lies in the fact that whilst interest groups might push back against public statements outlining redlines; the US has many less overt options available to it to communicate resolve. Modern technology and the forms of interconnectivity have resulted in many more lines of communication between China and the US than adversaries had access to in 1914. Private meetings, electronic communication and numerous other methods of communication have the capability to be candid without being visible to interest groups. It is for this reason that this essay discounts the theory that Sino-American economic interdependence results in a reduction of deterrence and therefore increases the likelihood of conflict.

Conclusion

This essay has shown that the strength of the pacifying effect of economic interdependence is subject to change depending on a series of dynamic variables. It has also demonstrated that the strength of the conflict provoking effects of strategic interests can change depending on whether the strategic interest amounts to a situation of unbearable strategic vulnerability. It has discounted the theory that interdependence leads to a higher chance of conflict through an erosion of credibility. To sum up, trade does seem to reduce the likelihood of conflict but should not be seen as a deterministic factor as strategic interests, and vulnerabilities also have a large effect. There is no hard rule as to what will be the driving factor as the nature of economic interdependence and of strategic factors impact their relative values.

Accordingly, Pinker’s statement that the trade between the US and China makes war exceptionally unlikely is simplistic and misleading because it fails to account for a wide array of variables that can radically change the likelihood of a Sino-American war. An intellectually honest thesis would insist upon a comprehensive approach in which the level of economic activity is simply one of many variables that is required.

Bibliography

Anderton, Charles & John Carter. “The impact of war on trade: An interrupted time-series study,” Journal of Peace Research 38:4 (2001), 445-457.

Angell, Norman. “The great illusion”, in Conflict After the Cold War, ed Richard Betts (New Jersey: Pearson, 2013), 229-301.

Buzan, Barry. “Economic structure and international security: the limits of the liberal case,” International Organization 38:4 (1984), 297-264.

Chicago Council on Global Affairs. “Foreign Policy in the Age of Retrenchment,” Chicago Council on Global Affairs, (2014), viewed 05/05/2015 http://survey.thechicagocouncil.org/survey/2014/_resources/ChicagoCouncilSurvey.pdf.

Copeland, Dale. “Economic interdependence and war: A theory of trade expectations,” International Security 20:4 (1996), 5-41.

Drezner, Daniel. “Bad debts: Assessing China’s financial influences in great power politics,” International Security 34:2 (2009), 7-45.

Dorussen, Han. “Heterogeneous trade interests and conflict: What you trade matters,” The Journal of Conflict Resolution 50:1 (2006), 87-107.

Friedberg, Aaron. A contest for supremacy: China, America, and the struggle for mastery in Asia (New York: W.W. Norton & Company, 2011).

Foot, Rosemary. “Constraints on conflict in the Asia-Pacific: Balancing ‘the war ledger’,” Political Science 66:2 (2014), 119-142.

Fordham, Benjamin & Katja Kleinberg. “International trade and US relations with China,” Foreign Policy Analysis 7:3 (2011), 217-236.

Gartzke, Erik & Yonatan Lupu. “Trading on preconceptions: Why world war I was not a failure of economic interdependence,” International Security 36:4 (2012), 115-150.

Higham, Charles. Trading with the enemy: The Nazi-American money plot (Lincoln: iUniverse Inc, 2007).

Joll, James. The origins of the First World War, (New York: Longman Inc, 1984).

Krause, Joachim. “Assessing the danger of war: parallels and differences between Europe in 1914 and East Asia in 2014,” International Security 90:6 (2014), 1421-1451.

Lemke, Douglas & Suzanne Werner. “Power parity, commitment to change and war,” International Studies Quarterly 40:2 (1996), 235-260.

Levy, Jack & Katherine Barbieri. “Sleeping with the enemy: The impact of war on trade,” Journal of Peace Research 36:4 (1999), 463-479.

Lim, Yves-Heng. “How (dis)satisfied is China? A power transition theory perspective,” Journal of Contemporary China 24:92 (2015), 280-297.

Masterson, James. “Analysing China’s economic interdependence and political relations with its neighbours,” China Information 26:1 (2012), 3-33.

McDonald, Judith & Solomon Polachek. “Strategic trade and the incentive for cooperation” in Disarmament, Economic Conversation and Management of Peace, ed Manas Chatterji & Linda Forcey (Westport: Praeger, 1992), 273-284.

McDonald, Patrick. “Peace through trade or free trade?” The Journal of Conflict Resolution 48:4 (2004), 547-572.

Morrow, James. “How could trade affect conflict?” Journal of Peace Research 36:4 (1999), 481-489.

O’Shea, Paul. “How economic, strategic and domestic factors shape patterns of conflict and cooperation in the East China Sea dispute,” Asian Survey 55:3 (2013), 548-571.

Papayoanou, Paul. “Interdependence, institutions and the balance of power: Britain, Germany and World War I,” International Security 20:4 (1996), 42-76.

Pinker, Steven. “Violence vanquished,” The Wall Street Journal, 24 September 2011, viewed 29/04/2016, http://www.wsj.com/articles/SB10001424053111904106704576583203589408180.

Reed, William. “Information and Economic Interdependence,” The Journal of Conflict Resolution 47:1 (2003), 54-71.

Rowe, David. “The tragedy of liberalism: How globalization caused the First World War,” Security Studies 14:3 (2005), 407-447.

Stockholm International Peace Research Institute, “SIPRI Military Expenditure Database”, viewed 05/05/2016, http://www.sipri.org/research/armaments/milex/research/armaments/milex/research/armaments/milex/milex_database.

Stone, John. “Conventional deterrence and the challenge of credibility,” Contemporary Security Policy 33:1 (2012), 108-123.

The Observatory of Economic Complexity, “What does China export to the United States? (2014)”, accessed 06/05/2016 http://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/chn/usa/show/2014/.

Endnotes

[1] Norman Angell, “The great illusion”, in Conflict After the Cold War, ed Richard Betts (New Jersey: Pearson, 2013), 299.

[2] Steven Pinker, “Violence vanquished,” The Wall Street Journal, 24 September 2011, viewed 29/04/2016, http://www.wsj.com/articles/SB10001424053111904106704576583203589408180.

[3] Dale Copeland, “Economic interdependence and war: A theory of trade expectations,” International Security 20:4 (1996), 5.

[4] “Foreign Policy in the Age of Retrenchment,” Chicago Council on Global Affairs, (2014), viewed 05/05/2015 http://survey.thechicagocouncil.org/survey/2014/_resources/ChicagoCouncilSurvey.pdf, 19-41.

[5] Joachim Krause, “Assessing the danger of war: parallels and differences between Europe in 1914 and East Asia in 2014,” International Security 90:6 (2014), 1423.

[6] Erik Gartzke & Yonatan Lupu, “Trading on preconceptions: Why world war I was not a failure of economic interdependence,” International Security 36:4 (2012), 122.

[7] Ibid, 116.

[8] Jack Levy & Katherine Barbieri, “Sleeping with the enemy: The impact of war on trade,” Journal of Peace Research 36:4 (1999), 464.

[9] Ibid, 465.

[10] Charles Higham, Trading with the enemy: The Nazi-American money plot (Lincoln: iUniverse Inc, 2007), 242-258.

[11] Jack Levy & Katherine Barbieri, “Sleeping with the enemy: The impact of war on trade,” Journal of Peace Research 36:4 (1999), 476.

[12] Charles Anderton & John Carter, “The impact of war on trade: An interrupted time-series study,” Journal of Peace Research 38:4 (2001), 451-455.

[13] James Morrow, “How could trade affect conflict?” Journal of Peace Research 36:4 (1999), 486.

[14] Paul O’Shea, “How economic, strategic and domestic factors shape patterns of conflict and cooperation in the East China Sea dispute,” Asian Survey 55:3 (2013), 558-559.

[15] Han Dorussen, “Heterogeneous trade interests and conflict: What you trade matters,” The Journal of Conflict Resolution 50:1 (2006), 89.

[16] Judith McDonald & Solomon Polachek, “Strategic trade and the incentive for cooperation” in Disarmament, Economic Conversation and Management of Peace, ed Manas Chatterji & Linda Forcey (Westport: Praeger, 1992), 276.

[17] Ibid, 276.

[18] Han Dorussen, “Heterogeneous trade interests and conflict: What you trade matters,” The Journal of Conflict Resolution 50:1 (2006), 91.

[19] The Observatory of Economic Complexity, “What does China export to the United States? (2014)”, accessed 06/05/2016 http://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/chn/usa/show/2014/.

[20] The Observatory of Economic Complexity, “What does the United States export to China? (2014)” accessed 06/05/2016 http://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/usa/chn/show/2014/.

[21] Dale Copeland, “Economic interdependence and war: A theory of trade expectations,” International Security 20:4 (1996), 17.

[22] Ibid, 20.

[23] William Reed, “Information and Economic Interdependence,” The Journal of Conflict Resolution 47:1 (2003), 55.

[24] Paul Papayoanou, “Interdependence, institutions and the balance of power: Britain, Germany and World War I,” International Security 20:4 (1996), 44-45.

[25] Ibid, 52.

[26] Aaron Friedberg, A contest for supremacy: China, America, and the struggle for mastery in Asia (New York: W.W. Norton & Company, 2011), 197.

[27] Benjamin Fordham & Katja Kleinberg, “International trade and US relations with China,” Foreign Policy Analysis 7:3 (2011), 229.

[28] Paul Papayoanou, “Interdependence, institutions and the balance of power: Britain, Germany and World War I,” International Security 20:4 (1996), 47.

[29] Paul O’Shea, “How economic, strategic and domestic factors shape patterns of conflict and cooperation in the East China Sea dispute,” Asian Survey 55:3 (2013), 551.

[30] Douglas Lemke & Suzanne Werner, “Power parity, commitment to change and war,” International Studies Quarterly 40:2 (1996), 240.

[31] Stockholm International Peace Research Institute, “SIPRI Military Expenditure Database”, viewed 05/05/2016, http://www.sipri.org/research/armaments/milex/research/armaments/milex/research/armaments/milex/milex_database.

[32] Yves-Heng Lim, “How (dis)satisfied is China? A power transition theory perspective,” Journal of Contemporary China 24:92 (2015), 287.

[33] Paul Papayoanou, “Interdependence, institutions and the balance of power: Britain, Germany and World War I,” International Security 20:4 (1996), 66.

[34] Barry Buzan, “Economic structure and international security: the limits of the liberal case,” International Organization 38:4 (1984), 597.

[35] James Masterson, “Analysing China’s economic interdependence and political relations with its neighbours,” China Information 26:1 (2012), 23.

[36] Rosemary Foot, “Constraints on conflict in the Asia-Pacific: Balancing ‘the war ledger’,” Political Science 66:2 (2014), 122.

[37] Joachim Krause, “Assessing the danger of war: parallels and differences between Europe in 1914 and East Asia in 2014,” International Security 90:6 (2014), 1450.

[38] Ibid, 1440.

[39] David Rowe, “The tragedy of liberalism: How globalization caused the First World War,” Security Studies 14:3 (2005), 432.

[40] John Stone, “Conventional deterrence and the challenge of credibility,” Contemporary Security Policy 33:1 (2012), 110.

[41] James Joll, The origins of the First World War, (New York: Longman Inc, 1984), 21.


Written by: Joel Einstein
Written at: Australian National University
Written for: Dr Charles Miller
Date written: May 2016

Please Consider Donating

Before you download your free e-book, please consider donating to support open access publishing.

E-IR is an independent non-profit publisher run by an all volunteer team. Your donations allow us to invest in new open access titles and pay our bandwidth bills to ensure we keep our existing titles free to view. Any amount, in any currency, is appreciated. Many thanks!

Donations are voluntary and not required to download the e-book - your link to download is below.