The impact of economic interdependence on the probability of conflict between states: The case of "American-Chinese relationship on Taiwan since 1995"

Tanious, Mina E. Article The impact of economic interdependence on the probability of conflict between states: The case of "American-Chinese relationship on Taiwan since 1995" Review of Economics and Political Science (REPS) Provided in Cooperation with: Cairo University, Cairo Suggested Citation: Tanious, Mina E. (2019) : The impact of economic interdependence on the probability of conflict between states: The case of "American-Chinese relationship on Taiwan since 1995", Review of Economics and Political Science (REPS), ISSN 2631-3561, Emerald, Bingley, Vol. 4, Iss. 1, pp. 38-53, https://doi.org/10.1108/REPS-10-2018-010 This Version is available at: https://hdl.handle.net/10419/315996 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ The impact of economic interdependence on the probability of conflict between states The case of “American–Chinese relationship on Taiwan since 1995” Mina E. Tanious General Authority for Investment and Free Zones (GAFI), Giza, Egypt and Faculty of Economics and Political Science, Cairo University, Giza, Egypt Abstract Purpose –The purpose of this paper is to explore to what extent the economic interdependence can affect the likelihood of conflict between States. Specially, over the past few decades, there has been a huge interest in the relationship between economic interdependence and political conflict. Liberals argue that economic interdependence lowers the possibility of war by increasing the weight of trading over the alternative of aggression; interdependent states would rather trade than invade; realists dismiss the liberal argument, arguing that high interdependence increases rather than decreases the probability of war. In anarchy, states must constantly worry about their security. Design/methodology/approach –This paper highlights the content and level of economic interdependence between China and the USA since the beginning of China’s economic reform in 1979 and examines the impact of economic interdependence between them on their relationship toward Taiwan since 1995 and the probability of conflict. Findings –Economic interdependence is proved to significantly decrease the onset of conflict between the two parties. This can be shown by comparing the number of armed conflicts during the pre-interdependence period to the number of armed conflicts after the economic interdependence there was an overage of 0.79 militarized interstate disputes (MIDs)/year, compared to 0.26 MIDs/year following China’s economic reforms; also, the length of the hostilities was longer during the pre-interdependence period (with an average of 11.13 months versus 5.33 months). Originality/Value –This means that economic interdependence does not completely prevent the outbreak of international conflicts, but it also plays a major role in influencing the conflict in terms of the conflict’s intensity, the use of armed force and the number of conflicts that occur between the economic interdependence states. Keywords Trade, Economic interdependence, International conflict, Militarized interstate dispute Paper type Research paper © Mina E. Tanious. Published in Review of Economics and Political Science. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode REPS 4,1 38 Received 7 July 2018 Accepted 7 July 2018 Review of Economics and Political Science Vol. 4 No. 1, 2019 pp. 38-53 Emerald Publishing Limited 2631-3561 DOI 10.1108/REPS-10-2018-010 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/2631-3561.htm 1. Introduction The primary aim of this paper is to explore the impact of economic interdependence on the probability of conflict between states, in an attempt to answer a key question: does economic interdependence increase or reduce the likelihood of conflict among states? The views of the researchers differed according to the approach and the theoretical schools to which they belong. In general, there are three main perspectives for analyzing the relationship between interdependence and international conflict: (1) Liberal prospective: Economic interdependence reduces international conflict and enhances opportunities for peace. (2) Realist prospective: Economic interdependence increases international conflict. (3) The impact of economic interdependence depends on the nature and content of relations and the balance of power in the international system. The paper will adopt the third perspective to emphasize that not all the economic relations are equal, some boost peace others not. The paper is divided as follows: Section 2 defines the terms of the argument. Section 3 explores the existing approaches that explain the relationship between economic interdependence and international conflict. Section 4 highlights the content and level of economic interdependence between China and the USA since the beginning of China’s economic reform in 1979 and the establishment of a diplomatic relations. Section 5 examines the impact of economic interdependence between China and the USA on the Taiwan issue since 1995 and the potential for conflict between them. Finally, Section 6 concludes the paper. 2. Conceptual framework: economic interdependence and international conflict 2.1 Economic interdependence There are many ways in which economic interdependence may be defined and quantified. Although many scholars have written about interdependence, the definition continues to evolve and has multiple parts. Most of the existing literature focuses on the ratio between trade and gross domestic product. (Wooten, 2007, p. 15). In 1972, Richard Cooper asserted that “economic interdependence normally refers to the dollar value of economic transactions among regions or countries, either in absolute terms, or relative to their total transactions”(Baldwin et al.,2018, p. 477). He distinguished this “normal usage”from his more restricted concept of “the sensitivity of economic transactions between two or more nations to economic developments within those nations”. In 1979, Marina v. N. Whitman reiterated the assertion of Tollison and Willett that “as generally understood by economists, the term interdependence reefers to the sensitivity of economic behavior in one country to developments or policies originating outside its own borders”(Whitman, 1979, p. 265). Waltz’sdefined interdependence as “a trading link which is costly to break”(Copeland, 1996, p. 13). In the field of international relations, “economic interdependence”has two meanings: First, “a group of countries is considered interdependent if economic conditions in one country are contingent on those found in the other”(Mansfield and Pollins, 2003,p.11),for example, the change in the exchange rate of a country affects the economic conditions of other countries that enter into a relationship of economic interdependence. Second, Probability of conflict between states 39 “countries are considered interdependent if it would be costly for them to rupture or forego their relationship”(Mansfield and Pollins, 2003, p. 11), as would be the case if relations between the Organization of Petroleum Exporting Countries and the advanced industrial countries (which rely heavily on petroleum imports) were severed. 2.1.1 Indicators of economic interdependence The general conception of interdependence can be divided into the following two categories: (1) Sensitivity interdependence: It deals with cases in which economic conditions in countries are largely sensitive to changes in other countries. For example, if a destabilizing monetary policy shift in one country adversely impacts another country, the two would be said to be in a sensitivity interdependent (Wooten, 2007,p.15). (2) Vulnerability interdependence: The more common conception amongst international relations theorists. In this view, countries are irreparably harmed by dissolving their relationships with one another. Thus, vulnerability interdependence highlights the gains of cooperation and the potential losses of destabilizing relationships (Wooten, 2007, p. 15). The study will adopt the definition of ‘economic interdependence’as “countries are considered interdependent if it would be costly for them to rupture or forego their relationship”(Mansfield and Pollins, 2003, p. 11). 2.1.2 Forms of economic interdependence 2.1.2.1 Trade interdependence. It is one of the main forms of economic interdependence which plays a major role in influencing the nature and content of inter-state relations. The level of trade interdependence depends on the volume of trade between the states; the decision to start the war depends on the level of economic interdependence. According to the assumption of John Oneal and Russet, the less constrained state (or less trade dependent state) has the greater influence in determining whether conflict arises (Clarke, 2008,p.59). Throughout history, people have debated the virtues and vices of foreign trade, for many, trade represents a path toward peace and prosperity among nations, for others, trade is viewed as a contributing factor in the impoverishment of some nations and tensions between the nations, still others view trade to be largely irrelevant to leaders decisions to engage, in, or, refrain from, intense forms of interstate conflict (Barbieri, 1996, p. 30). Montesquieu claimed that “the natural effect of commerce is to lead to peace”.Twonations that trade together become mutually dependent “If one has an interest in buying, the other has an interest in selling; and all unions are based on mutual needs”(Mansfield and Pollins, 2003,p.3). It is obvious that not all trading relations are equal, some trading relations may contain the necessary conditions to foster peace, while others instill hostilities or exacerbate pre – existing tensions, to understand how such variations may obtain, it is necessary to consider the nature and the context of economic linkages between states. 2.1.2.2 Monetary interdependence. Monetary interactions may also be a source of interdependence. States may choose to subordinate monetary sovereignty to a foreign power through a fixed exchange rate regime, pool sovereignty in a monetary union, or assert their own sovereignty under a floating exchange-rate regime (Gartzke et al.,1999,p.396). Monetary interaction may be considered as part of the general notion of economic interdependence, although they reduce state autonomy in monetary policymaking, higher levels of monetary dependence raise the incentives to cooperate (Gartzke et al., 1999, p. 396). A state may peg its currency to a precious metal or a foreign currency, engage in a cooperative arrangement with a group of other countries to maintain its exchange rate within a certain “band,”or float the currency to allow the market to determine its equilibrium exchange rate (Gartzke et al.,1999, p. 405). REPS 4,1 40 The choice of exchange-rate regime implies different degrees of monetary interdependence, a peg demands greater interstate commitment and an associated loss of autonomy. Pegging makes it easier to exchange currencies and for the country to maintain price stability. Yet a state that pegs its currency to a foreign currency relies heavily on the economic management of the foreign economy (Gartzke et al.,1999). Therefore, states maintaining fixed exchange rates face a double-edged sword. The regime may facilitate exchange and provide incentives to avoid conflict, but asymmetry may also increase uncertainty about policy acts and ultimately fail to deter disputes. Similarly, states embarked on a cooperative exchange-rate arrangement, such as the European monetary system have greater commitment to each other compared with an independently floating system (Gartzke et al.,1999, p. 405). We see the following three relevant aspects of currency areas and monetary pegs for signaling (Gartzke et al.,1999, p. 406): (1) First: States that possess beneficial regimes can reveal information about the relative value of competitive political objectives by threatsoractsthatjeopardizethestatusquo. (2) Second: Integrating one economy with others restricts a state’s ability to shelter itself from negative economic consequences of political shocks.Finally: it is important to note that other factors that historically lead to monetary integration confound the signaling effect of regimes. 2.1.2.3 Capital interdependence. In Spirit of the Laws, Montesquieu argues that “movable wealth”encourages peace between and within states. Mobile capital constrains the sovereign domestically. The richest trader had only invisible wealth which could be sent everywhere without leaving any trace, so that rulers have been compelled to govern with greater wisdom than they themselves would have thought. Trade is only one manifestation of the global spread of capitalism. As capital markets dwarf the exchange of goods and services, firms should weigh the risks of investment much more heavily than trade. Vittorio Grilli and Gian Maria Milesi-Ferretti suggest that states impose capital controls for the following four reasons (Gartzke et al., 1999, p. 396): (1) limiting volatile short-term capital flows; (2) retaining domestic savings; (3) sustaining structural reform and stabilization programs; and (4) maintaining the tax base. Capital seeks higher risk-adjusted returns. Risk is contingent on government restrictions, the degree of domestic capital market integration into world markets, and the overall exposure of the economy to direct investments. This has the following three implications for international conflict (Gartzke et al., 1999, p. 407): (1) First: States in conflict may place more stringent government restrictions on foreign exchange, payments settlement, capital repatriation or even nationalization. Since conflict threatens investments among disputing states, it makes such investments less desirable and capital becomes relatively scarce. (2) Second: Political shocks produce negative externalities affecting investments. Military conflict increases uncertainty and risk to any capital investment. (3) Third: States that are heavily exposed to capital flows are more vulnerable to disruptions. Probability of conflict between states 41 States that are heavily dependent on international capital markets for national economic well-being are much more vulnerable to the will of these markets. 2.2 International conflict International conflict is one aspect of international interactions, while cooperation is the other side of such interactions; international conflict usually arises because of differences of interest among states. 2.2.1 Elements of international conflict two or more states; a difference of activities, attitudes, interests and objectives adopted by each state; each party uses the means or makes decisions to achieve its goals through which each party can achieve its objectives; and presence of interactions among the actors that can be observed and realized. One method used by Rasler and Thompson is to measure the preponderance of militarized interstate disputes (MIDs) and wars. While wars clearly fit the description of conflict, the various definitions of MIDs are somewhat ambiguous. They may be considered activities which involve the “threat, display or use of military force short of war”by one state “explicitly directed toward the government, official representatives, official forces, property, or territory of another state”.( Wooten, 2007, p. 18). McClelland’s (1971) World Events Interaction Survey (WEIS) presents more serious problems for the aggregation of events into conflict-cooperation time series. WEIS was constructed within a conceptual framework that explicitly denies the possibility of reducing data to one dimension of conflict cooperation. The cooperative and conflictual categories could further be grouped into verbal and action types as follows (the percentage of all events in the WEIS dataset for 1966 is shown (Goldstein, 1992, p. 371): verbal cooperation (approve, promise, agree, request, propose) (24 per cent); cooperative action (yield, grant, reward) (9 per cent); participation (comment, consult) (35 per cent); verbal conflict-defensive (reject, protest, deny) (8 per cent); verbal conflict-offensive (accuse, demand, warn, threaten) (16 per cent); and conflict action (demonstrate, reduce, relationship, expel, seize, force) (8 per cent). 3. Approaches that explain the relationship between economic interdependence and international conflict The effect of economic ties on war and peace is a popular topic in the field of international relations. However, findings concerning the relationship between economic ties and peace vary according to liberals, the economic ties between states lead to peace. 3.1 Liberal view Liberals argue that economic interdependence lowers the likelihood of war by increasing the value of trading over the alternative of aggression; interdependent states would rather trade than invade. As long as high levels of interdependence can be maintained, liberals assert, we have reason for optimism (Copeland, 1996, p. 5). REPS 4,1 42 Liberals view that increasing ties between countries in some fields encourages them to achieve greater cooperation in other fields. These linkages are supposed to strengthen communication and reduce misunderstandings which may cause tension and creates cultural and institutional mechanisms capable of mediating conflicts that may arise between them. At the same time, mutual recognition of mutual benefits enhances peace. Liberals believe that economic relations between nations lead to peace, with liberals pointing to three important points (Korbel and Chen, 2009, p. 15): (1) The costs of waging a war against state’s economic partner are very high because fighting against a partner with which the state trade and invest, the state actually fights against itself because a war between the state and its partner must have a negative effect on the state’s economy. (2) Economic ties change states’preferences when economic ties between two states become stronger and these two states become more economically interdependent or even integrated, economic interests –compared with other national interests such as military buildup –become the most important. (3) Strong economic ties make non-military threats such as economic sanctions credible. Therefore, when there is a conflict between two states that have strong economic ties, a non-military threat is more likely to be the choice. Liberals, assuming that states seek to maximize absolute welfare, maintain that situations of high trade should continue into the foreseeable future as long as states are rational; such actors have no reason to forsake the benefits from trade, especially defection from the trading arrangement will only lead to retaliation. Liberals can argue that interdependence as reflected in high trade at any particular moment in time-will foster peace, given the benefits of trade over war (Copeland, 1996,p.16). The core liberal position is straightforward trade provides valuable benefits, or “gains from trade,”to any particular state. A dependent state should therefore seek to avoid war, as peaceful trading gives it all the benefits of close ties without any of the costs and risks of war. Trade pays more than war, so dependent states should prefer to trade not invade (Copeland, 1996,p.8). 3.2 Realist view Realists dismiss the liberal argument, arguing that high interdependence increases rather than decreases the probability of war. In anarchy, states must constantly worry about their security. Accordingly, interdependence gives states an incentive to initiate war, if only to ensure continued access to necessary materials and goods (Copeland, 1996,p.6). Some realists argue that highly asymmetric interdependence may restrain the weaker partner in a dyad but is unlikely to deter the stronger partner from resorting to force should their strategic interests collide. Thus, economic ties between states may restrain only one party from resorting to armed force should a dispute arise, while having no effect on (or possibly even inflaming the aggressiveness of) the stronger party (Mansfield and Pollins, 2003, p. 14). The history of colonialism and imperialism illustrates how military force may be used in conjunction with trading strategies to establish and maintain inequitable economic relations, thus, the expansion of trade may not promote peace, but may involve increased interstate conflict, as Powerful states vie with one another for control over markets and resources (Barbieri, 1996, pp. 32-33). Probability of conflict between states 43 Barbieri and Jack S. Levy provide evidence that states often trade with the enemy while at war and suggest that liberalism and realism reconsider expectations regarding interdependence and conflict (Gartzke et al., 1999, p. 395). John Mearsheimer, “nations that depend on others for critical economic supplies will fear cutoff or blackmail in time of crisis or war.”Consequently, “they may try to extend political control to the source of supply, giving rise to conflict with the source or with its other customers.”Interdependence, therefore, “will probably lead to greater security competition (Copeland, 1996,p.10). Realists turn the liberal argument on its head, arguing that economic interdependence not only fails to promote peace but also in fact heightens the likelihood of war. 3.3 The impact of economic interdependence depends on the nature and content of relations and the balance of power in the international system A number of studies on the relationship between economic interdependence and international conflict concluded that economic interdependence may not have a systematic effect on political conflict. Conflicts arise mainly because of differences in the distribution of political and military capabilities, thus, the distribution of political-military capabilities and that power relations underlie any apparent effect of economic exchange on conflict .That economic ties among the major powers were significant prior to First World War but far less extensive prior to Second WorldWarwhichisfrequentlypresentedasevidencethatsuchtieshavelittlesystematicimpact on armed conflict when core national interests are at stake (Mansfield and Pollins, 2003,p.4). From the theories that criticize the liberals view, it becomes clear that not all trading relations are similar, some trading relations may contain the necessary conditions to foster peace, while others instill hostilities or exacerbate pre –existing tensions. To understand the difference between the two views (realist and liberal), it is necessary to consider the nature and context of economic ties between states (Barbieri, 1996,p.33). 3.3.1 A theory of trade expectations. Liberalism and realism are theories of “comparative statics,”drawing predictions from a snapshot of the level of interdependence at a single point in time. The strength of liberalism lies in its consideration of how the benefits or gains from trade offer the state a material incentive to avoid war, even when they have unit-level predispositions to favor it. The strength of realism is its recognition that states may be vulnerable to the potential costs of being cut off from trade on which they depend for wealth and ultimate security. Current theories, however, lack a way to fuse the benefits of trade and the costs of severed trade into one theoretical framework (Copeland, 1996,p.17). More significantly, these theories lack an understanding of how rational decision-makers incorporate the future trading environment into their choice between peace and war. High interdependence can be peace inducing, as liberals maintain, as long as states expect future trade levels to rise in the future; positive expectations for future trade will lead dependent states to assign a high expected value to a constant peaceful trade, and making war the less appealing option. If, however, a highly dependent state expects future trade decrease because of the politic decisions of the other party, then realists are likely to be correct; the state will attach a low or even negative expected value to continued peace without trade, making war an attractive alternative if its expected value is greater than peace (Copeland, 1996,p.17). The expectations of future trade variable should have a determinant effect on the likelihood of war. If State A has positive expectations for future trade with B, and A and B are roughly equal in relative power, then state A will assign a high expected value to REPS 4,1 44 continued peaceful trade, will compare this to the low or negative expected value for invasion, and will choose peace as the rational strategy. The higher A’s dependence and the expectations for future trade, the higher the expected value for peaceful trade, and therefore the more likely A is to avoid war. However, if State A is dependent and has negative expectations for future trade with B, then the expected value of trade will be very low or negative. If the expected value for trade is lower than the expected value for invasion, war becomes the rational choice, and this is the case even when the expected value of invasion is itself negative; war becomes the lesser of two evils (Copeland, 1996, p. 21). In making the final decision between peace and war, however, a rational state will have to compare the expected value of trade to the expected value of waging war against the other party (Table I). 4. The content and level of economic interdependence between China and the USA 4.1 Trade interdependence between China and the USA Oneal and Russett looking at the period from the mid-1960s to 2002 they found that the USA and China went from having no trade to a very significant level of economic interdependence, Oneal and Russett are aware that the US–Chinese case represents a uniquely important test of interdependence theory (Clarke, 2008,p.59). Table I. The competing theories Theory Core liberal theory (e.g. Rosecrance) Core realist theory (e.g. Waltz, Mearsheimer) Trade expectations theory (Copeland) Nature of the system Anarchy Anarchy Anarchy Nature of the state Generally a rational, unitary calculator of costs/benefits, but may also have aggressive, unit level drives Rational, unitary actor seeking to reduce vulnerability to improve security Rational, unitary actor calculating the expected stream of benefits and costs over the foreseeable future, to maximize wealth and therefore security Analytical focus The individual state’s concern for its own dependence The individual state’s concern for its own dependence The individual state’s concern for its own dependence State’s decision for war or peace driven by Benefits of trade (the “gains from trade”from specialization) Costs of severed trade (the costs of adjustment after being cut off, because of specialization) Benefits of trade and costs of severed trade, plus expectations of future trade Ultimate reason that state goes to war If level of dependence low (i.e. trade is low), “restraint”on unit level aggressive tendencies removed High dependence creates a systemic incentive to use force to overcome vulnerability High dependence and pessimistic expectations for future trade, creating a low or negative expected value for trade Reason for state choosing to stay at peace If level of dependence high (i.e. trade is high), then high dependence “restrains”by making benefits of trade greater than value of war Low dependence removes another systemic incentive for war High dependence and optimistic expectations for future trade, creating a high expected value for trade Source: (Copeland, 1996, p.24) Probability of conflict between states 45 formal alliances, military capabilities and proximity of states, but it does not address the specific security environment and its impact on conflict. Despite providing statistical evidence that bilateral trade reduce conflict, Oneal and Rusette and other theories cannot predict that in a specific case of bilateral interdependence the result will be a measurable 27 per cent reduction of the risk of military conflict between the members of dyad. According to the Oneal–Russett model, the less constrained states (or the less the state is trade dependent) have the greater influence in determining whether conflict arises. Ironically, then it is the USA, according to Oneal and Russett, which will most determine the potential for conflict in the Sino–American dyad. Whether in a state of economic interdependence, the Taiwan issue drives conflict between the USA and China; this means that economic interdependence does not completely preclude the outbreak of conflicts. While the economic interdependence does not prevent the outbreak of international conflicts, it plays a major role in influencing the conflict in terms of the level of conflict, the use of armed force, and the number of conflicts that erupt between countries with a state of economic interdependence. To influence the length and duration of the conflict “period for the continuation of conflict”. 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