Peace Through Trade

Strategic Vision vol. 6, no. 34 (August, 2017)

Theorists see economic integration with China as contributing to stability

Shao-shuang Wen & Hua-Hsi Huang

ASEAN leaders and senior US officials display unity and cooperation during the first ASEAN-US Summit held 9 October, 2013 in Brunei.

photo: US Department of State

With rapid economic development and remarkable advancements being made in the fields of science and technology, economic globalization has become inevitable. Economic globalization also promotes economic interdependence, which is a concept wherein “in the division of labor, individuals depend on others to produce all or most of the goods they need to sustain their lives.” Analyzing the effects of economic interdependence on political relations has become a focal point among international relations scholars. A considerable volume of recent scholarship has focused on the relationship between economic interdependence and interstate relations following the Second World War. There is a divergence of opinion between adherents of liberalism and realism, with liberal theorists arguing that economic interdependence decreases and mitigates interstate conflict, while realists contend that asymmetries in trade increase and exacerbate interstate conflict.

Economic interdependence

Scholars first began to argue that de jure economic interdependence, as exercised through such mechanisms as free trade agreements (FTAs), tends to decrease international conflict and enhance world peace, interpreting the European Economic Community as a force that has contributed significantly to peace between France and Germany since the end of the Second World War. They found that multilateral FTAs and bilateral FTAs act differently in terms of war.

In order to drive the economy and supply vital resources to the region, large container ships require peaceful seas to transport their cargo.

photo: Gnovick

Some scholars argue that economic globalization, which makes possible easier access to foreign markets (i.e. multilateral FTAs), tends to increase multilateral trade at the expense of bilateral trade. In this sense, bilateral FTAs raise the relative cost of a bilateral conflict and therefore reduce its probability. However, at the same time, it lowers the relative costs of a bilateral conflict with third countries as well. As a result, a bilateral FTA may increase the likelihood of military conflict with third countries.

Other scholars have contended that bilateral FTAs deter bilateral war, while multilateral FTAs increase the probability of war between any given pair of countries in the FTA agreement. Bilateral trade increases the opportunity cost of bilateral conflict. In multilateral FTAs, since all members comply with the same principles of trading and face the same level of policy-controlled barriers, they might have very few incentives to make concessions to avert escalation of any conflicts with another member country.

FTAs are used to solve trade problems that occur in complex and dense economic interdependencies, and to exploit the trade potential between less-developed economic relationships. Bilateral FTAs promote economic interdependence as they significantly reduce policy-controlled barriers to trade. Therefore, bilateral FTAs should increase the degree of economic interdependence through regulating and solving trade conflicts and exploiting trade potential. Moreover, the opportunity cost hypothesis holds that the huge opportunity cost of conflict leads interdependent states to seek other alternatives to the use of force in order to solve disputes. There are several factors which support this hypothesis.

Countries decide whether to enter into a bilateral FTA as they evaluate existing FTA relationships with third countries.

A Marine F-35B prepares to land on the flight deck of the amphibious assault ship USS Essex.

photo: Erwin Sampagav

Safer alternative

First, the nature and motivation for disputes and conflicts between two countries is to acquire scarce resources and to defend state sovereignty. Compared with direct military confrontation, bilateral FTAs are a more efficient, more economical, and safer alternative to acquire scarce resources based on a formal document with the satisfaction of both sides. Therefore, most countries look for economic cooperation opportunities via bilateral FTAs rather than military confrontation.

Second, countries decide whether to enter into a bilateral FTA as they evaluate existing FTA relationships with third countries. According to economists Sumit Joshi and Maggie Xiaoyang Chen, “when one country has an existing FTA with a third country, the incentive of that country to form a new FTA with a new partner country is unambiguously stronger compared to a benchmark case of no pre-existing FTA.” Specifically, it creates an “own-FTA effect,” which economists Scott Baier, Jeffrey Bergstrand, and Ronald Mariutto define as “the impact on the net welfare gains of an FTA between two countries owing to either already having other FTAs.”

In this sense, if conflict disturbs the validity of bilateral FTAs due to trade destruction or trade sanctions, then both sides face a high cost by losing the opportunity to pursue bilateral FTAs with third countries. Therefore, the existence of bilateral FTAs could become an important political and economic factor during conflict, and eventually mitigate interstate conflict.

The South China Sea is one potential flashpoint in Asia where economic interdependence and trade have arguably worked against conflict.

Finally, the opportunity cost of not forming bilateral FTAs includes less trading, a lower level of economic interdependence, distrust between two countries, lower national welfare, a less-efficient export market, domestic tensions caused by companies and a public who loses faith in the economy, shortages of resources, the cost of establishing ties with new trading partners, and the cost of forming new FTAs with new trading partners. Therefore, opportunity cost should remain high during conflict and thereby helps conflict to be solved more quickly. Using the above reasoning, bilateral FTAs would tend to reduce bilateral conflicts.

Potential flashpoint

The South China Sea is one potential flashpoint in Asia where economic interdependence and trade have arguably worked against conflict, and contributed to peace and cooperation. In recent years, overlapping maritime claims in the South China Sea have been a source of friction between China, and countries like the Philippines and Vietnam. China’s extensive maritime claims in the South China Sea, represented by the so-called nine dash line, extensively overlap with those of the Philippines and Vietnam, as well as Malaysia and Brunei.

These overlapping maritime claims have sometimes resulted in periods of heightened tensions. In May 2014, China and Vietnam experienced a tense standoff when China moved an oil exploration rig into Vietnam’s Exclusive Economic Zone near the disputed Paracel Islands. Although direct conflict between the two countries did not occur, there were extensive public protests in Vietnam which resulted in damage to Chinese-owned businesses in the country. China and the Philippines experienced a similar standoff in 2012 near the disputed Scarborough Shoal, located northwest of the Philippine’s main island of Luzon. In response to Chinese fishing vessels operating in the Shoal, the Philippines sent its largest warship to arrest the Chinese fisherman. Chinese ships from China Marine Surveillance subsequently intervened and blocked attempts by the Philippines to arrest the suspects, producing a brief standoff.

Vietnam saw anti-China protests followed by unrest and riots in May 2014 after China deployed an oil rig in a disputed region of the South China Sea.

photo: Erwin Sampaga

Despite the ongoing territorial disagreements in the South China Sea, serious conflict has not yet erupted, and some disputes in the region may have actually stabilized somewhat. An important factor in regional stability has been the deepening economic relations between countries in the region. It is estimated that trade between China and members of the Association of Southeast Asian Nations (ASEAN) will reach US$1 trillion by 2020. The lure of trade and mutual economic benefit has already worked to reduce tensions in the region.

President Rodrigo Duterte and President Xi Jinping shake hands prior to their meeting at the Great Hall of the People in Beijing on 20 October, 2016.

photo: VOA

Improved relations

Recently, relations between China and the Philippines have improved dramatically. Shortly after his election, Philippine President Rodrigo Duterte announced his decision to shelve territorial disputes with China, and went on to secure US$24 billion in investment and financing agreements from Beijing in 2016. In 2017, an unnamed Chinese company reached an agreement to build a high-speed rail network in the Philippines. At least during Duterte’s term in office, deeper economic relations between China and the Philippines will likely take priority over maritime territorial disputes, and thus contribute to stability.

The sea lines of communication which pass through the South China Sea are vital for trade and energy imports for countries in the region. Several trillion dollars worth of goods passes through the South China Sea each year, so conflict or instability in this vital waterway would have a profoundly negative effect on regional economies, and world trade in general. Roughly one-third of worldwide shipping traverses the South China Sea.

Given the importance of the South China Sea to the global economy, any move towards conflict in the region would be met with worldwide diplomatic and economic pressure to resolve the situation. Thus, economic interdependence will work to keep maritime tensions in the region from growing out of proportion. In order to better safeguard regional peace and stability, countries in the region should continue to pursue bilateral and multilateral trade agreements which will further increase mutual economic gains, and reduce the likelihood of opportunism.

Shao-shuang Wen and Hua-hsi Huang are currently PhD students in the Department of Political Scienceat the University of South Carolina. They can be reached at huahsi@email.sc.edu and swen@email.sc.edu