The Chimera of Economic Interdependence

The Chimera of Economic Interdependence

Scott E. Bruck

The impression that trade has had a pacifying effect throughout history is an almost universal assumption in arguments regarding global affairs.  Economic interdependence influences a manner in which a country behaves by giving it a false sense of security.  The aforementioned argument is currently being misapplied to the United States’ foreign relations, with many over-stating the weight of trade relations with nations such as China and Russia.  The idea that all types of trade are the same, and equally support peace, is a gross oversimplification.  Countries should not feel secure simply because they have trade relations with possible enemies. 

The theory that countries’ interconnected economies promote peace is not new and has been at the heart of the liberal school of international relations for years.  The most well known theorist to posit this claim was Norman Angell in his 1909 work, The Great Illusion.  In short, The Great Illusion argued that because of economic interdependence, war had become too costly. Modern history has disproved Angell’s thesis numerous times.  Positive trade relations are usually the result of a myriad of circumstances.  When taken as a whole, these positive relations can include: political, economic, environmental and even cultural attributes.   It seems that a major reason for Angell’s enduring idea is the confusion of cause and effect.  The trade between two countries is most likely the result of peaceful relations, caused by varied circumstances, as opposed to the trade promoting peaceful relations.[1]

In her recent behavior, The United States views trade as a buffer against aggression.  One needs to look no further than the 2015 National Security Strategy, in which “economics” is mentioned 97 times throughout its pages.  Specifically, in a section labeled prosperity, it states, “the American economy is […] a source of stability for the international system”.  Further through the document, we are confronted with the idea that, “[…] trade agreements have economic and strategic benefits for the United States.”         

More recently, Angell’s thesis has been re-branded with the moniker of the, “Golden Arches Theory of Conflict Prevention”.  First posited by triple Pulitzer Award Winner Thomas Friedman, the Golden Arches Theory of Conflict Prevention states that no two countries that have a McDonald’s restaurant will go to war.[2]  Quit possibly an oversimplification, the phenomenon described in the theory was a result of Post-Cold War optimism.  During this time, the international presence of McDonald’s was seen as a stabilizing force.  Since its introduction in 1999, like Angell’s theory, it has been proven wrong on multiple occasions.  

The idea that trade promotes peace has limited historical evidence. There are numerous cases throughout history where trade did not promote peace.  Furthermore, the increased trade relations with China have often been cited as a buffer against war[3]. 

Throughout recent history, there have been three specific trade relationships that promoted conflict.  These three relationships deal with: incompatible types of government, asymmetry of trade volume, and possibilities for third-party influence.  The future of the United States’ trade relations shows a risk for entering into each of these traps.     

Incompatible Governments 

The type of government involved in trade has significant power in either insulating against war, or if incompatible, causing it.  In a democracy, the leaders are much more attuned to the opportunity costs of engaging in a military conflict, which may disrupt trade.  Furthermore, the free market economies within democracies usually adapt much better to changes in trade.  In an autocratic government, leaders are much less sensitive to public opinion.  Specifically, minority groups tend to have more influence within autocratic regimes.  It is these groups that fear that interdependence only increases vulnerability.[4]  Historically, Pre-World War One Germany displayed the negative effects of an autocratic regime.   Pre-World War One Germany’s contemporary equivalent is modern-day Russia.

The government ruling Germany Pre-World War One can be defined as “an autocratic monarchy with a few parliamentary trimmings.”[5]  Within the system, the landed aristocracies were known as the Junkers.  The Junkers wielded disproportionate power throughout the government. 

Germany was not only geographically encircled by the Allied Powers before World War One, but its economy was as well.  There was active denial of German goods in the allied markets.  An example of this is the extremely high protectionist tariffs levied on German goods by the United States.  The Junkers did not agree with the methods of the allied powers because they were the ones with the most to lose in the export market.  At the same time, the Junkers-backed industry was growing and highly dependent on resource imports.  No less than one of the fathers of modern economics, John Maynard Keynes, stated of this time that, “The statistics of the economic interdependence of Germany and her neighbors are overwhelming.  Germany was the best customer of Russia, Norway, Holland, Belgium, Switzerland, Italy, and Austria-Hungary.”[6] The high level of dependence on outside resources made the Junkers’ infrastructure extremely vulnerable.  Because of these issues, the Junkers were highly influential in the German adoption of an aggressive foreign policy, Weltpolitik.

Modern day Russia has unnerving similarities to Pre World War One Germany.  The Putin Regime most assuredly is not a Western Democracy and well-connected individuals have disproportionate influence on foreign policy.[7]  Like Germany’s Junkers, Putin’s Oligarchs wield extensive power over foreign policy. 

Due to Russia being the world’s number one exporter of energy, its “Resource Curse” removes the incentive for more productive economic development.  This scenario only serves to strengthen rent-seeking oligarchs.[8]   An example of the control of foreign policy by rent-seeking oligarchs is Russia’s notorious energy company, Gazprom.  Gazprom, sensing a decrease in their monopoly on energy exports, succeeded in influencing the Putin Regime to pull out of the United Nation’s Energy Charter Treaty.[9]  A great many democratic governments rely on energy imports from Russia.  Russia’s oligarchic system is incompatible with positive trade relations and will only serve to increase tensions, which may lead to conflict.

Asymmetry of Trade

Asymmetrical trade volume can also significantly increase the likelihood for conflict.  For example, country “X’s” national economic and defense well-being is directly proportional to the volume of trade it has with country “Y.”  If, conversely, country “Y” does not have such a strong reciprocal trade relationship with country “X,” one country has unequal power over the other.  Countries apprehensive about security will loathe dependence.  If relationships deteriorate, the more powerful country may limit oil and raw materials exports to the less powerful country.[10]  Historically, an example of trade asymmetry existed between Japan and the United States before World War Two.

During World War Two, as the Roosevelt administration began to see Japan’s goals change for the worse, they utilized their trade relationship to harm Japan’s war preparations.  Roosevelt’s ultimate decision was to impose a complete embargo on oil and raw materials to Japan.  Being an Island nation with little natural resources, the embargo was extremely deleterious to Japan. An accepted cause for Pearl Harbor is that Japan was driven to war through progressively pessimistic trade expectations in a position of high dependence.[11]

A current example of asymmetrical trade volume having no influence on preventing conflict is the recent conflict between Ukraine and Russia.  Russia’s annexation of Crimea ostensibly began in February 2014.[12]  Russia was the Ukraine’s largest trading partner before the conflict, whereas Russia was much more diversified in their trade relations.  Russia remained the Ukraine’s largest trading partner for approximately a year after the invasion.[13]  Again, a high level of interconnectedness did not insulate either party from conflict.  Quite unexpectedly, interconnectedness even continued throughout the conflict.

Influence of Third Parties

Finally, third party influence has the potential to undo any positive aspects of economic interconnectedness.  If countries “X” and “Y” both rely on country “Z” for an important portion of their economy, actions regarding country “Z’s” sovereignty can cause conflict.  Country “X” and country “Y’s” dependence on country “Z” can serve as a catalyst to conflict if either country feels threatened in their access to country “Z’s” economy. 

The beginnings of the Cold War between the United States and Russia can be attributed to influence of third parties.  If Western Europe were viewed as the third party, its acceptance of a communist economy would have essentially disconnected the United States from any meaningful trade.  Regardless of any trade that existed between the United States and Russia during World War II, The Western European economies represented a third party that essentially broke the relationship between Russia and the United States.

The ubiquitous, contemporary third party scenario that has the potential to embroil both the United States and China into conflict is Taiwan.  Though there is no formal agreement between the United States and the defense of Taiwan,[14] American rhetoric is rife with allusions to the defense of Taiwan.  For example, the 2015 National Security Strategy stresses that the United States must remain alert for China’s, “role for intimidation in resolving territorial disputes.”  Vying for Taiwan’s economic influence remains difficult for the United States when Taiwan has invested 83 percent of their outward direct investment in China.[15]  As previously mentioned with the Russia/Ukraine situation, this direct investment is no guarantee of conflict prevention.  Furthermore, China just recently overtook Canada as the United States’ largest trade partner.  The United States currently has a trade deficit of $342.7 billion with China.[16] The trade deficit puts the United States in an asymmetric trade relationship with China on the dependent side.   

In conclusion, the idea that interconnected economies promote peace needs review.  There are numerous cases throughout history that underscore the error in this myth.  Three        specific relationships: incompatible types of government, asymmetry of trade volume, and third-party influence have been shown to support conflict.  The current trade relationships of the United States need to be viewed in light of the reality that not all trade relationships are positive.  A much more succinct explanation as to the effects of trade on conflict can be found in a quote from Jan Pieterszoon Coen, an early member of the Dutch East India Company, when he stated: “We cannot make war without trade, nor trade without war.”[17]

End Notes