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date: 21 September 2017

Economic Interdependence and Conflict

Summary and Keywords

Recent studies on commercial liberalism have paid more attention to microfoundations linking economic interdependence to peace. Using a bargaining model of war, these studies have specified and tested different causal mechanisms through which economic ties function as a constraint, a source of information, or a transformative agent. Recent scholarly efforts in theoretical development and some empirical testing of different causal processes suggest the need to consider scope conditions to see when an opportunity cost or a signaling mechanism is likely to be salient. Future research can be best benefited by focusing on how economic interdependence affects commitment problems and empirically assessing the relative explanatory power of different causal arguments.

Keywords: empirical international relations theory, economic interdependence, commercial liberalism, conflict, war, peace, bargaining, opportunity costs, signaling

Introduction

In an increasingly globalized world, the liberal proposition that commerce reduces conflict is reassuring.1 Consider, for example, the ongoing debate over the rise of China. China’s rapid ascent as an economic and military power is worrisome, as Beijing is clearly dissatisfied with the status quo in the South China Sea, Taiwan, and the East China Sea. Yet at the same time, China has extensive economic ties with key potential adversaries, such as Japan, Taiwan, the United States, and Vietnam. To the degree that liberal arguments are valid, it gives reason for optimism that military conflict can be avoided in the region despite longstanding and deeply entrenched maritime disputes.

Commercial liberalism—the argument that commerce reduces conflict—has a longstanding history. The liberal idea can be traced back to ancient writings but was prominently expressed in works of enlightenment scholars such as Montesquieu, Kant, and Adam Smith. Despite a temporary setback caused by World War I, the proposition remained throughout the twentieth century and drew more attention with increasing economic interdependence and globalization in the late twentieth century (Angell, 1911; Doyle, 1997; Rosecrance, 1986). Intuitively, the argument makes sense: as countries trade more with each other, they have more to lose when they fight costly wars. Indeed, even the possibility of war will probably have deleterious economic impacts. Meanwhile, commerce enables countries to obtain what they want through markets rather than via risky wars of conquest.2

Nevertheless, the commercial liberal argument has long been—and remains—highly disputed. Mercantilists and realists assert that economic interdependence might actually increase conflict. Hirschman (1945) points out that asymmetric economic relations create dependencies which translate into bargaining advantages for powerful states, and Waltz (1979) emphasizes that economic ties can create new sources of friction between states. Since the 1980s, a large empirical literature has examined the commercial liberal argument more systematically. Many studies have found that trade, measured in different ways, reduces conflict (Hegre, Oneal, & Russett, 2010; Oneal & Russett, 1997, 2001; Polachek, 1980). Other studies have found that other forms of economic ties, such as foreign direct investment (Bussmann, 2010; Lee & Mitchell, 2012; Souva & Prins, 2006) and preferential trade agreements (Bearce, 2003; Mansfield & Pevehouse, 2000), also reduce the propensity of armed conflict. In addition, recent studies have further considered how trade with third parties and trade networks affect prospects for conflict among pairs of states (Dorussen & Ward, 2010; Kinne, 2012, 2014; Kleinberg, Robinson, & French, 2012; Peterson, 2011). Yet other quantitative and some qualitative studies have disconfirmed the commercial liberal argument (Barbieri, 1996, 2002; Ripsman & Blanchard, 1996; Keshk, Pollins, & Reuveny, 2004; Ward, Siverson, & Cao, 2007). As Gartzke and Zhang (2015) point out, much of the existing literature on trade and conflict “consists of empirical findings intended to resolve pragmatic debates,” while insufficient attention has been paid to theoretical development and focus on microfoundations underpinning the trade–conflict relationship. But this is changing. In recent years, a growing number of studies have paid closer attention to the precise causal processes potentially linking commerce and conflict, and some recent empirical studies have even tested different causal arguments against each other.

This article focuses on these efforts to specify and test the causal mechanisms underpinning the commercial liberal argument. Much attention is given to studies that aim to specify the conditions under which economic interdependence is more or less likely to reduce armed conflict between countries. That is, rather than reviewing the literature on whether economic interdependence makes conflict less likely, the focus here is instead on studies that consider how and when cross-border economic ties affect conflict. The article concludes by emphasizing the need for further theoretical development of causal mechanisms and, especially, more empirical testing of the different causal processes—while also noting difficulties in this regard given the complexity of the relationship between economic interdependence and conflict.3

How Might Economic Interdependence Affect Conflict? Different Causal Mechanisms

Existing scholarship that examines the relationship between economic interdependence and conflict proposes several different causal processes through which economic ties could reduce the likelihood of armed conflict. As a number of scholars have convincingly argued (Bearce, 2003; Gartzke, Li, & Boehmer, 2001; Gartzke & Zhang, 2015; McDonald, 2009; Morrow, 1999), proposed mechanisms linking economic interdependence to military conflict are most compelling when they can be integrated into a theory of armed conflict. Since much of this literature is premised—at least implicitly—on a rationalist approach to state behavior, this section reviews different variants of commercial liberal arguments in a way that ties directly into rationalist explanations for war.4

The rationalist bargaining model of war provides what Lake (2010, p. 8) has referred to as the “workhorse model” on crises, escalation, and war. In a standard setup of the bargaining model, two states—A and B—compete for an excludable good. Under the assumption of rationality, states weigh the benefits and costs of using military force while considering the other’s response and combined outcomes. Because war is a costly method of settling disagreements, there should be a negotiated settlement that would leave both states better off than they are in the war outcome. From this perspective, war is seen as a bargaining failure. The rationalist literature highlights two broad causal mechanisms that help to explain this bargaining failure: private information with incentives to misrepresent, and credible commitment problems.5 As Fearon (1995) explains, leaders often have private information about their relative capabilities and resolve, and it can be difficult for them to reveal this information credibly. For instance, states often have a strategic incentive to overstate true capabilities or resolve so as to obtain a more favorable bargain. War can occur, in turn, if state leaders mistake credible threats for bluffs. Even in cases where information problems are not salient, credible commitment problems can prevent states from reaching negotiated settlements due to a fear of future defection on agreements. A shifting balance of power between two states, for instance, can make it difficult for the rising state to credibly commit not to use its growing power to make more expansive demands in the future; in turn, the other state may have incentives to launch a preventive war to try to lock in a more favorable distribution of benefits (Fearon, 1995; Powell, 2006).

Following Gartzke and Zhang (2015), Kahler and Kastner (2006), Kastner (2009), and Lee and Mitchell (2012), the rest of this section focuses primarily on three broad causal processes linking economic interdependence to reduced conflict that are both prominent in the literature and consistent with the bargaining model of war. First, economic ties can act as a constraint on state behavior by increasing the costs associated with armed conflict, thereby increasing the range of bargains states would prefer over fighting. Second, economic interdependence can make it easier for states to communicate resolve, thereby reducing the risk of war as a consequence of information problems. Third, economic interdependence can have a transformative effect on conflict by changing state preferences over outcomes.6 Some additional causal logics relating to reduced benefits of conquest and credible commitments are also briefly discussed. Scholarly efforts are then reviewed to assess the relative explanatory power of these different causal arguments.

Economic Ties as a Constraint

Most of the literature linking economic interdependence to a reduction in military conflict implicitly or explicitly makes a relatively straightforward constraint (or opportunity costs) argument. Simply put, because military conflict has the potential to disrupt commerce between countries, and because such disruptions are costly, leaders should be reluctant to risk military conflict with economic partner countries. Trade, for instance, produces efficiency gains that could be lost in the event of armed conflict (Polachek, 1980; Polachek, Robst, & Chang, 1999; Russett & Oneal, 2001). Some scholars have also made constraint-based arguments with regard to foreign direct investment (Bussmann, 2010; Lee & Mitchell, 2012; Souva & Prins, 2006). And Copeland (1996, 2014) develops a modified version of a constraint-based argument, suggesting that it is expectations of future trade, rather than trade per se, that act as a constraint on state behavior.

However, a number of scholars have questioned the degree to which the constraint logic is compatible with rationalist explanations for armed conflict (Gartzke et al., 2001; Morrow, 1999; Levy, 2003). These scholars suggest that the opportunity cost theory does not consider strategic interactions in bargaining where states have an incentive to take advantage of their opponents’ reluctance to fight. But as Dafoe and Kelsey (2014, p. 621) note, the constraint logic is not necessarily incompatible with the bargaining model of war. Polachek and Xiang (2010), for instance, develop a formal crisis bargaining model with incomplete information, where increased expected costs of war associated with economic interdependence reduce the probability of war.7

Economic Ties as a Source of Information

A second set of arguments linking economic interdependence to peace suggests that high levels of economic interdependence make it easier for countries to communicate their resolve credibly. More specifically, economic interdependence makes it easier for states to send costly signals of resolve. As economic ties deepen on a bilateral level, for instance, it becomes possible for a country to impose an economic sanction that is costly. Integration into global markets more generally can likewise facilitate costly signals, because threats and tough talk are likely to scare international investors away. In turn, the risk of war as a consequence of private information with incentives to misrepresent is diminished (Gartzke & Li, 2003a; Gartzke et al., 2001; Morrow, 1999, 2003; Reed, 2003; Stein, 2003).8 In a useful recent development, Dafoe and Kelsey (2014) elaborate in more concrete terms how exactly a signaling mechanism might link economic interdependence to peace. Focusing in particular on capital account openness, they make three distinctions. First, costly signals can be either self-inflicted (where information is revealed to the degree that a leader takes actions that impose costs on himself) or imposed (where information is revealed by how a leader responds to costs imposed by a rival). Second, economic costs can rise either automatically as a consequence of escalation (for instance, investors start to flee as war looks more probable) or as a product of deliberate policy choices (such as the decision to impose economic sanctions during a crisis). Finally, the authors outline three possible types of economic costs that might be facilitated by open capital markets in times of military conflict: capital costs from political risk (such as capital flight as conflict looks more likely), monetary coercion (the use of monetary instruments to impose costs on an adversary during a crisis), and business sanctions. Dafoe and Kelsey find some evidence to support the information logic in their case study analysis (discussed at greater length in the section Economic Interdependence as a Transformative Agent).9

It is worth noting here that the information logic only applies to one rationalist explanation for war (private information with incentives to misrepresent), and thus likely does not apply to some subset of potential international conflicts that are rooted in credible commitment problems. Powell (2006), for instance, suggests that informational models do not adequately explain prolonged wars. As fighting continues, states should have more accurate understandings of the other side’s capabilities and resolve. Because information is no longer asymmetric in a protracted war, there must be other mechanisms that explain continued fighting. Powell (2006) further suggests that the information logic offers at best limited insight into some important historical cases, such as the outbreak of World War II in Europe. The prevalence of commitment problems as a cause of war suggests, in turn, a need to better understand how increasing economic ties affect commitment problems.

Economic Interdependence as a Transformative Agent

A third causal logic centers on what might be termed a transformative effect, where economic interdependence reduces the likelihood of conflict by facilitating change in state preferences over outcomes. More specifically, in these sorts of arguments, economic interdependence can generate a process whereby the goals held by a state that are in conflict with the goals of other states—such as, for instance, the desire to control a contested piece of territory—become less important relative to other goals. In turn, the potential benefits that could be accrued from military conflict are diminished, since the issues in dispute are seen as less important. As the stakes go down in interstate disputes, the risk of armed conflict likewise declines, for the same reasons that increased costs of war should make war less likely.10

Existing literature suggests there are at least two ways that economic interdependence can have this sort of transformative effect on state goals. The first is a sociological process: when two states have a high level of economic ties, actors within their respective societies will come into greater contact with each other and will interact on a much larger scale. In this environment, they may come to view their interests as shared, and to see prior goals as less important than before.11 A second type of transformational process centers on the vested interests that economic interdependence creates. The logic here is similar to the constraint logic, where economic interdependence increases the costs that certain domestic actors would pay in the event of armed conflict. These actors, in turn, may simply be less inclined to identify with state goals that conflict with the goals of key trading partners. An owner of a Japanese factory in China, for instance, might plausibly be less inclined than someone less invested in China to view the Senkaku/Diaoyu Islands as an important Japanese interest. Moreover, the political clout of actors benefiting from economic ties is itself partly endogenous to the depth of those ties.12 As economic ties become more extensive, a growing coalition with a vested interest in stability will appear; in turn, this internationalist coalition will have increasing ability to influence state goals and perhaps force a change in the makeup of the governing coalition itself. In other words, economic interdependence can help to foster a process whereby leaders who hold goals at the root of international conflict (territorial conquest, for example) are replaced by other rulers who do not share such goals.13

Some recent studies have found empirical support for the underlying causal processes suggested by a transformative logic. One observable implication of a transformative logic, for instance, is that economic interdependence should change state goals and promote harmonization of interests. Along these lines, two recent studies have found that increased trade dependence on China is correlated with convergence of interests in the United Nations General Assembly (Flores-Macías & Kreps, 2013; Struever, 2016), and Kastner (2016) finds some evidence that increased trade dependence on China leads to increased accommodation of Chinese interests—at least on relatively low-stakes issues. The transformative logic should also have individual-level observable implications, with the expectation that actors benefiting from economic ties with a rival state will have more positive views of that rival and will be less inclined to care about issues that could lead to conflict (such as disputed territory). Kleinberg and Fordham (2010) find some support for this type of effect: using data from the Pew Global Attitudes Survey, they find that individuals with more favorable views of trade tend to have more favorable views of the United States and China. In a somewhat more direct test, Kleinberg and Fordham (2013) find evidence that members of the United States Congress were more supportive of measures hostile to China if their districts were more sensitive to Chinese imports, and were less supportive of such measures as their districts became more oriented toward Chinese exports.

Other Causal Arguments

In addition to the three causal logics summarized above, it is worth briefly touching on two additional mechanisms linking commercial ties to peace that have received some attention in the literature. The first, related to the constraint argument, is a substitution argument. Here, trade not only increases the opportunity costs of conflict, but it also reduces the potential gains from conquest. Brooks (2005) argues, for example, that in addition to raising the costs of conflict, economic interdependence in today’s world is also lowering the potential gains from conflict: the rise of global production networks imply that conquest simply does not pay, particularly for more developed countries. Lee and Mitchell (2012) similarly contend that states do not have to rely on military conquest because FDI serves as a mechanism for them to peacefully extract wealth from other countries. A separate causal argument views economic interdependence as a source of credible self-restraint. For instance, Chan (2009, 2016), focusing on the Taiwan Strait, suggests that deep economic ties—because they generate high opportunity costs—enable states to credibly communicate reassurance and commitment to cooperation. Others focus on institutions: in particular, to the degree that economic integration leads to the creation of international institutions, these institutions can serve as mechanisms of credible self-restraint. Eilstrup-Sangiovanni and Verdier (2005) argue, for example, that European integration served as a means of reassurance that a temporarily weak West Germany would not use its future power to dominate Europe, obviating the possibility of preventive war arising due to a credible commitment problem and contributing to the peace in the region. Bearce (2003) emphasizes, meanwhile, that commercial institutions can help states overcome credible commitment problems to the degree that they facilitate regular interactions among high-level leaders, since such interaction can help to build trust.14

Testing Different Causal Arguments against Each Other

Despite the growing literature exploring the causal underpinnings of the commercial peace, there have been to date relatively few efforts to test the relative explanatory power of the different causal mechanisms. This section briefly summarizes some noteworthy exceptions in this regard.

Three recent studies have focused more specifically on assessing the relative explanatory power of the information (or signaling) logic versus the constraint (or opportunity cost) logic underpinning the commercial peace. The first work, Kim (2014), builds on Schultz’s (1999, 2001) investigation into the causal underpinnings of the democratic peace. Following Schultz, Kim theorizes that in a crisis bargaining situation, the signaling logic implies that target states should be more likely to back down to the degree that a challenging state is highly integrated economically with the target and with global markets more broadly, since such economic ties facilitate the credible signaling of resolve. On the other hand, the constraint logic implies that target states should be less likely to back down when confronted by economically integrated challenger states, since the target will infer that such interdependence increases the costs to the challenger of carrying out its threat. Kim further theorizes that both causal logics (constraint and signaling) imply that economically integrated states should be less likely to initiate crises in the first place. To test these hypotheses, Kim employs a two-stage model where the dependent variable in the selection equation is whether or not a potential challenger state threatened, displayed, or used force in a given year, and the dependent variable in the outcome equation is whether or not the target state responds with a threat, display, or use of force of its own. The findings reveal more support for the signaling logic than the constraint logic. In particular, the challenger’s trade dependence on the target is statistically significant and negatively correlated with target state reciprocation. Other measures of the challenger’s economic integration, including total trade dependence, FDI inflow, and financial openness, are negatively correlated with reciprocation, but are not statistically significant.15

A second work, Dafoe and Kelsey (2014), devises a qualitative research design through which to test the signaling mechanism. The authors focus in particular on the finding (Gartzke, 2007; Gartzke & Li, 2003a; Gartzke et al., 2001) that open capital markets are associated with a reduced likelihood of military conflict. If the signaling logic explains the correlation, the authors reason, then there should be “visible footprints in the historical record” of market-mediated costs occurring during periods of potential conflict (Dafoe & Kelsey, 2014, p. 622); informed observers at the time, moreover, should have been able to perceive these costs. The authors adopt a most-likely crucial case design: that is, they aim to choose cases where there is a high likelihood that the implications of a theory will be observable if the theory is true. As a first cut, this should include cases with both high conflict and high capital account openness (since high openness is needed for the signaling mechanism to be operative, and high conflict is needed for a signaling process to occur during escalation). The authors choose two cases in this regard, the UK–Argentina war over the Falkland Islands and the 1989 US invasion of Panama. But the authors also note the risk of selection bias, where market-mediated signaling might be influenced by some unknown scope conditions; selecting cases of high conflict and high capital account openness will in turn yield a biased sample where the scope conditions are relatively unlikely to be present. The authors thus look at two cases of moderate conflict (non-fatal MIDs) and two cases where a MID was probable but did not actually occur. In their case study analysis, the authors find what they describe as “mixed support” for the signaling argument: especially in the high conflict cases, states tended to pay substantial economic costs, and actors at the time observed this. But economic costs were less evident in the less serious MIDs and the probable MIDs, and in some cases (such as a non-fatal Singapore–Malaysia MID in 1992) the authors find suggestive evidence in favor of a constraint logic.

The third study, Kinne (2014), focuses on the role of trade with third parties. While previous studies (Dorussen & Ward, 2010; Kinne, 2012; Maoz, 2009; Peterson, 2011) have explored the effects of third-party trade on conflict, these prior studies have not explicitly tested the causal logic underpinning a pacifying third-party trade effect. Kinne (2014) argues, however, that this sort of effect can plausibly occur due to either a constraint logic (third party trade increases a potential initiator’s opportunity costs for conflict, thereby deterring the state) or an information logic (or both).16 In the information logic, third-party reliance on trade with a particular dyad gives the third party an incentive to discourage conflict within that dyad; moreover, that reliance also gives the third party the means to signal disapproval of conflict via costly economic sanctions, thereby revealing resolve to intervene and making the potential initiator less likely to start a conflict. Kinne reasons that, empirically, if one imagines a dyad composed of a potential conflict initiator (state i) and a target (state j), the opportunity costs logic implies that state i’s dependence on trade with third-party states k should be negatively correlated with conflict between i and j (since i would worry more about disruptions to its trade with k as its dependence grows). On the other hand, the information logic implies that the greater the dependence of third-party states k on trade with i, the lower the likelihood of i–j conflict (because when third parties depend on trade with i they have both the motivation and the means to signal willingness to pay costs to prevent i–j conflict). Quantitative tests on a large sample of dyads in the period 1950–2001 find more support for the signaling logic: measures of k dependence on i consistently outperform measures of i dependence on k.

A separate study, Lee and Mitchell (2012), aims to test a broader range of possible causal mechanisms in examining whether and how FDI promotes peace. Focusing in particular on the origination and escalation of territorial disputes, the authors consider four separate logics linking FDI to a reduced likelihood of military conflict: FDI can act as a constraint by raising the opportunity costs of conflict; FDI reduces the potential gains of conquest; FDI facilitates costly signaling between states; and FDI facilitates preference convergence (or a transformative effect). Lee and Mitchell theorize that the different casual mechanisms have different empirical implications. More specifically, if access to FDI reduces the benefits of conquest, fewer new territorial disputes should emerge as global FDI flows increase. If FDI facilitates preference convergence, one should see fewer territorial disputes emerge as bilateral FDI flows increase. If FDI acts as a constraint due to increased opportunity costs of conflict, fewer disputes should escalate as monadic or dyadic FDI increases. And if FDI reduces conflict via the information logic, one should observe that FDI’s marginal conflict-reducing effect should decline the longer a particular dispute exists (since, as disputes drag on, states learn more about each other so the marginal added information revealed as a consequence of FDI should decrease). Quantitative tests reveal support for the reduced benefits of conquest logic and the opportunity costs logic; the authors find, for instance, that new territorial disputes are less likely to emerge as global FDI increases, and that disputes are less likely to escalate to fatal MIDs as bilateral and monadic FDI flows increase. Lee and Mitchell find less support, however, for the transformative and information logics. Bilateral FDI flows do not lead to reduced issue claims, and the marginal effect of bilateral and monadic FDI flows does not decline as disputes drag on (in fact, the opposite is true).

Finally, though not focused on economic interdependence per se, it is worth briefly touching on work that assesses the causal mechanisms underpinning the commercial institutional peace—the finding that international commercial institutions, such as preferential trade agreements (PTAs), are correlated with reduced likelihood of military conflict (Mansfield & Pevehouse, 2000; Mansfield, Pevehouse, & Bearce, 1999). Bearce’s (2003) groundbreaking study outlines three different plausible causal logics linking commercial institutions to a reduced likelihood of military conflict: a constraint logic (where commercial institutions increase the economic opportunity costs of fighting); an information logic (where commercial institutions often include cooperation on security issues, facilitating the transmission of information on capabilities and intentions); and a commitment logic (where commercial institutions facilitate the building of trust, which in turn reduces the likelihood of conflict arising as a consequence of commitment problems). He then explores these causal logics in the context of case studies of the Gulf Cooperation Council and the Economic Community of West African States. In a follow–up article, Bearce and Omori (2005) aim to empirically assess the relative importance of Bearce’s three causal logics. The authors code three characteristics of regional commercial institutions: their depth (ranging from free trade arrangements on one end to monetary union on the other) to assess the constraint logic; whether or not they incorporate nested security structures to assess the information logic; and whether they include organs that bring together high-level officials from member states to assess the trust/commitment logic. They find that only the high-level organs variable has a consistently significant and negative effect on the outbreak of militarized interstate disputes, and conclude in turn that the commercial institutional peace is primarily rooted in the increased trust that some (but not all) commercial institutions facilitate (though the authors also note that the presence of high-level organs may also promote peace due to an information logic).17

While each of the studies surveyed in this section is quite interesting and each utilizes a creative and well-thought-out research design, when considered together the conclusions become somewhat murky. Several of the studies find at least some evidence in support of a signaling mechanism. Kim (2014) and Kinne (2014) in particular find more empirical evidence of a signaling logic than a constraint logic. Although Bearce and Omori (2005) do not find direct support for the signaling mechanism, their findings concerning high-level organs are consistent with a signaling logic. And Dafoe and Kelsey (2014) also find some evidence of market-mediated signaling, though they emphasize that signaling only appears to take place when conflict escalates to a relatively high level and they doubt that a signaling process explains most of the relationship between openness and peace. Meanwhile, Lee and Mitchell (2012) do not find support for the signaling logic. They do, however, find more evidence in support of the constraint logic, and Dafoe and Kelsey also find “suggestive evidence” in favor of a constraint mechanism in some of their case studies. Kim’s findings are likewise consistent with the operation of a constraint mechanism when states consider whether or not to initiate disputes. But Bearce and Omori and Kinne do not find support for a constraint logic. Only one study (Lee & Mitchell, 2012) directly assesses a transformative logic, and it finds little support, though Bearce & Omori’s findings concerning high-level organs might conceivably be explained by a transformative mechanism in addition to the credible commitments logic that they propose. Finally, only Lee and Mitchell directly assess a reduced benefits of conquest logic, which is supported in their empirical findings. Table 1 briefly summarizes these different findings. It is fair to conclude, then, that the existing literature (when considered in the aggregate) does not definitively reveal the relative explanatory power of various causal mechanisms underpinning the commercial liberal peace. Rather, it appears likely that different causal mechanisms are likely at play, and that each mechanism may be more or less salient in different circumstances.

Table 1: Testing Different Casual Mechanisms Linking Economic Interdependence to Conflict

Unit of Analysis

Independent Variable

Dependent Variable

Causal Mechanisms (tested)

Empirical Findings (supportive of)

Kim (2014)

Dyadic

Trade, FDI, financial openness

MID (reciprocation)

Signaling vs. opportunity costs

Signaling

Kinne (2014)

Triadic

Trade

MID (initiation)

Signaling vs. opportunity costs

Signaling

Dafoe & Kelsey (2014)

Dyadic

Financial openness

Militarized disputes and war

Market-mediated signaling

Signaling (only in major conflicts)

Lee & Mitchell (2012)

Dyadic

FDI

Territorial disputes (onset of issue claim & claim management)

Substitution vs. transformative (onset of issue claim)

Signaling vs. opportunity costs (claim management)

Substitution opportunity costs

Bearce & Omori (2005)

Dyadic

Commercial institutions

MID (onset)

Signaling vs. opportunity costs vs. commitment

Commitment

When Does Economic Interdependence Affect Conflict?

Dafoe and Kelsey (2014) suggest in their analysis that the signaling mechanism is subject to a number of relatively strict scope conditions, including that the underlying conflict must occur due to information problems (rather than commitment problems), the dispute must escalate gradually, audience costs have to be limited, and the costs of war have to be greater than the costs of major economic disruptions. If any of these conditions are absent, then it is unlikely that an economic signaling process will help to mitigate the risk of armed conflict in any particular dispute. But their analysis also suggests that even in cases where the signaling logic fails to produce a pacific effect, other causal logics linking economic interdependence to peace—such as a constraint mechanism—may still be salient. Dafoe and Kelsey’s conclusions suggest to us that future work on the commercial liberal peace should focus on both the causal processes potentially linking economic interdependence to peace, as well as the scope conditions that determine when those processes are likely to be most salient.

In fact, a large literature already considers—theoretically and empirically—some of these different scope conditions. A number of studies, for instance, find or suggest that the effects of economic interdependence are conditioned on domestic political factors, such as regime type (where the pacifying effects of economic ties are more pronounced in democratic settings—see Gelpi & Grieco, 2008; Russett & Oneal, 2001) or the political clout of particular domestic groups such as internationalist economic interests broadly conceived (Papayoanou & Kastner, 1999; see also Papayoanou, 1996) and the finance industry in particular (Kirshner, 2007). Other studies suggest that different types of economic exchange will have differential effects on conflict. For example, Dorussen (2006), Goenner (2010), and Li and Reuveny (2011) focus on trade in different commodities or sectors, and Brooks (2005) focuses on the globalization of production. Other studies have identified additional conditioning factors such as the degree to which states are relatively symmetrically dependent on trade (Barbieri, 1996; Hegre, 2004), the level of economic development (Hegre, 2000), the presence of preferential trading arrangements (Aydin, 2010; Mansfield & Pevehouse, 2000), and geography (Robst et al., 2007). For the most part, these studies tend to be constructed around a constraint logic, whereby economic interdependence has the strongest conflict-reducing effects in circumstances where conflict is most likely to cause costly disruptions in trade or where trade disruptions are likely to impose direct or indirect costs on leaders. One interesting recent study (Gartzke & Westerwinter, 2016) is an exception in this regard, as the authors explore the contingent effects of asymmetry and third-party trade in the context of a theory that incorporates both a constraint mechanism and an information mechanism.18

Future work should continue to tease out scope conditions along these lines, though the work of Dafoe and Kelsey (2014) suggests that fully specifying these conditions may prove to be intractable. Dafoe and Kelsey show that scope conditions are likely quite complex even for the operation of a single mechanism—in their case, the economic signaling mechanism. Yet the somewhat ambiguous findings highlighted in the previous section suggest that it is likely that multiple causal mechanisms likely drive the economic interdependence/conflict relationship, and there is no reason to expect that the scope conditions of these different mechanisms will be the same.

Conclusions and Suggestions for Future Research

Recent years have seen a great deal of theoretical progress concerning the underlying causal processes that might help explain the commercial liberal peace. Most important in this regard have been efforts to construct arguments that are consistent with a theory of why armed conflict occurs in the first place. However, with a few notable exceptions, most efforts along these lines have focused on one specific explanation for war: as a consequence of private information and incentives to misrepresent. Yet even the rationalist literature highlights a number of other causal processes that could give rise to armed conflict, including most notably several different problems relating to credible commitment (Fearon, 1995, Powell, 2006). Future work should explore at greater length how economic interdependence affects the risk of war arising due to credible commitment problems. Some studies have already touched on this sort of logic, highlighting the potential for economic ties to facilitate increased trust (Bearce & Omori, 2005) and the sending of credible assurance signals (Chan, 2016). Future work might consider at greater length how economic interdependence affects and interacts with shifts in the balance of power—which Powell identifies as lying at the heart of many commitment problems. One might imagine, for instance, that under some circumstances economic interdependence could reduce the risk of these types of conflicts by increasing the opportunity costs of initiating war to lock in a current stream of benefits. On the other hand, economic interdependence might under certain conditions help to accelerate power transitions, increasing the risk of conflict. For example, trade with a rising state that is also a developing economy—particularly if that trade leads to the transfer of strategic technologies—could enable that country to close the gap with established powers more rapidly than would be possible absent commercial exchange.

Several recent studies have also devised empirical tests to assess the relative explanatory power of different causal arguments linking economic interdependence to peace. Although these studies have been well designed, in the aggregate the findings are somewhat ambiguous (as summarized in Table 1). The ambiguity of these findings, in turn, suggests that it is important for studies in this vein to recognize the complexity of the interdependence/conflict relationship. Consider first that, even within the rationalist framework, several different causal processes could give rise to armed conflict, and that the salience of these processes likely varies considerably across cases. Second, economic interdependence can plausibly affect these different processes through a variety of causal mechanisms (opportunity costs, economic signaling, transformed preferences, etc.). Finally, as suggested by Dafoe and Kelsey (2014) with regard to economic signaling, each of these causal mechanisms may themselves be subject to various scope conditions. These complexities will continue to impose considerable challenges for researchers seeking to unravel the relative explanatory power of different causal mechanisms linking interdependence to peace. Future research in this area will be more valuable to the degree that it can explore more fully the conditions under which these different mechanisms are most likely to operate, and to the degree that it can account for some of the differential findings in this literature to date.

Still, it is fair to say that the focus on causal mechanisms and scope conditions has greatly advanced the interdependence/conflict literature in the early 21st century. Moreover, one upshot of these theoretical advances is that it has become much more feasible to undertake systematic analysis of how economic interdependence affects the likelihood of armed conflict in specific—even contemporary—cases. Consider, for instance, the contemporary relationship across the Taiwan Strait, a case widely seen as a potential flashpoint for armed conflict but also characterized by extensive bilateral economic ties and two states that are highly integrated into global markets more broadly. To what degree does this extensive economic interdependence help to explain the absence of war in this case? Answering this question is quite complicated, and requires thinking through the different ways war could arise in the Taiwan Strait, identifying the different causal processes through which economic interdependence could affect these different war scenarios, and then assessing whether these processes are actually operating in this case. Though somewhat daunting, the theoretical literature reviewed in this chapter has made the task much more manageable than it otherwise would have been.19

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Notes:

(1.) Throughout this chapter, conflict refers more specifically to militarized conflict—including wars—between states.

(2.) While commercial liberalism has typically been associated with the idea that trade reduces conflict, this chapter considers other types of economic exchange as well, including in particular cross-border investment flows.

(3.) For good recent reviews of this literature, see especially Gartzke and Zhang (2015), Schultz (2015), and Copeland (2014).

(4.) Gartzke and Zhang (2015) pursue a similar approach, arguing that it is first necessary to have a theory of war before theorizing about how economic interdependence affects the likelihood of conflict. Of course, the literature on the causes of war is immense, and much of this literature is non-rationalist. The focus here on rationalist bargaining theory is due to bargaining theory’s prominence in the literature; the tendency of much of the commercial liberalism literature to build (at least implicitly) from rationalist assumptions; and simple space constraints.

(5.) Fearon (1995) identifies a third causal logic centered on issue indivisibilities. However, he downplays this logic (expecting that most issues can be made divisible via side-payments), and Powell (2006) shows that problems of indivisibility are really credible commitment problems.

(6.) See also Bearce (2003) and Bearce and Omori (2005), whose third causal mechanism is slightly different: economic interdependence can foster trust, which helps to obviate credible commitment problems. Lee and Mitchell (2012) add a fourth mechanism centered on reduced attractiveness of conquest. Both of these mechanisms are addressed under other causal arguments.

(7.) See also Reed (2003).

(8.) On sanctions as costly signals, see also Baldwin (1985) and Drezner (1999).

(9.) Gartzke and Li (2003b), in a case study of cross–Taiwan Strait relations, likewise find some suggestive evidence in favor of information effects.

(10.) If the costs of war are held constant and the value of the issue in dispute declines, then the costs of war relative to the value of the good being bargained over increase.

(11.) In the aftermath of World War II, some American policymakers believed that integrating Germany’s economy with the rest of Western Europe would help insure a transformed German foreign policy: George Kennan wrote that such integration would lead German citizens “to see things in larger terms, to have interests elsewhere in Europe and elsewhere in the world, and to learn to think of themselves as world citizens and not just Germans.” See Gaddis (1982, p. 38). Deutsch et al. (1957) likewise emphasize the importance of social communication as a condition facilitating the formation of security communities. See also Brooks (2005), who argues that the consolidation of MERCOSUR helped to transform the security relationship between Argentina and Brazil.

(12.) On the effects of commerce on domestic political coalitions, see Rogowski (1989). A large literature also considers, of course, how domestic political coalitions and institutions affect foreign commercial policy.

(13.) See, e.g., Solingen (1998, 2003). On strategic use of economic interdependence to achieve transformative effects, see, e.g., Kahler and Kastner (2006). McDonald (2004, 2009) argues that free trade (low protectionist barriers), rather than trade per se, has the effect of increasing the relative political clout of actors most likely to oppose war.

(14.) Though this particular part of his argument does not focus on international economic ties, it is worth noting McDonald’s (2009) argument that a predominance of privately held property reduces commitment problems by reducing fiscal autonomy for governments and undercutting their ability to sustain arms races.

(15.) Most of the economic integration variables are negatively correlated with the decision by a challenger to initiate a dispute, though only financial openness is statistically significant when all economic variables are included in the model.

(16.) Though it is worth noting that Kinne theorizes that the constraint—or opportunity cost—mechanism is less plausible when trying to explain the pacifying effect of third-party trade. He notes, for instance, that having multiple outside partners can actually embolden states by giving them confidence that they will be able to divert trade elsewhere (p. 34). He thus hypothesizes that third-party trade-related opportunity costs have an indeterminate effect on conflict.

(17.) Haftel’s (2007) study likewise finds that regional commercial institutions reduce the likelihood of MIDs when they include regular meetings among high-level officials, a finding that he attributes to an informational logic (such meetings facilitate a better communication and exchange of information). It is worth noting that Haftel also finds that scope or depth matters. Using a more comprehensive measure of scope than Bearce and Omori (2005), based on twenty-seven different indicators meant to capture the range of integration brought about by a regional commercial agreement, Haftel finds that increased scope is correlated with reduced likelihood of a militarized interstate dispute. His theory attributes this finding to an informational logic, though he does not attempt to test explicitly between an informational versus a constraint (opportunity cost) logic. For more recent work on PTAs and conflict, see also Hafner–Burton and Montgomery (2012) and Peterson (2015). Focusing on the network of PTAs that states become enmeshed in, Hafner–Burton and Montgomery find that dyadic asymmetries in dependence (where state A is more dependent on B to the extent that most of A’s PTAs include B) and asymmetries in access centrality (where access centrality increases as state A is tied to a larger number of states, especially states that are themselves highly connected) are associated with increased conflict, which the authors attributed to lower levels of trust in such dyads. Peterson (2015) finds that PTAs can increase conflict with third parties to the degree that they lead to a reduction in the third party’s exports.

(18.) For another exception, see Li and Reuveny (2011), who aim in their argument and empirical analysis to synthesize the constraint logic with the Marxist/realist argument that asymmetric trade can increase conflict.

(19.) For an example of a study along these lines, see Kastner (2015/2016).