Economic Interdependence 1. Foreign Policy Considerations: Examining the Importance and Influence of Economic Interdependence Nicholas A.

Transcription

1 Economic Interdependence 1 Foreign Policy Considerations: Examining the Importance and Influence of Economic Interdependence Nicholas A. Volpe

2 Economic Interdependence 2 Introduction International Relations is an interdisciplinary field that considers a wide array of actors. The modern landscape of theory includes viewpoints focusing on diverse aspects of interaction between nations. For the purposes of this study, the scope will be narrowed to focus on the economic aspects of the interaction between governments. Though admittedly cliché, the adage money makes the world go round contains a certain amount of validity. The fact of the matter is that financial concerns are a driving force in foreign policy. The line between economics and politics is often blurred both in theory and in practice. The sheer prevalence of the crossover between these two fields makes it worth examining what happens at their point of intersection. When states have a strong economic relationship their governments tend to ally with each other, and in cases where differences arise, conciliatory policy is often pursued. But how far does this phenomenon go? Is there a tipping point at which conflict will arise no matter how strong economic relations are? Decisions regarding conflict and war can be analyzed through the lens of economic interdependence in order to attempt to answer these questions. The two dominant positivist theories in International Relations today Realism and Liberalism both emphasize the importance of economic ties within the international system. In fact, this is one of the few things that theorists from both sides can actually agree on. Realists and liberalists tend to stress the significance of completely different elements, yet economic interdependence is the only factor that plays an important causal role in the thinking of both camps (Copeland 1996). With that being said, they have a staunchly different interpretation of how economic factors affect interactions between nations. Liberals see economic interdependence as lowering the chance of war. According to this viewpoint, a stable trade

3 Economic Interdependence 3 relationship takes precedence over factors behind aggression. The value of trade is deemed higher than the alternative of war. Realists, on the other hand, see interdependence as increasing the probability of war. Since the international system is anarchic, states are constantly worried about security. The implication, then, is that any sort of dependence increases vulnerability. War becomes more commonplace because states are willing to go to extremes in order to maintain access to needed materials and goods (Copeland 1996). Where the two competing camps come together to agree on the weight of a concept, they take wholly opposite viewpoints on the fundamental nature of that very same idea. How can this be? If Realists and Liberalists have diametrically opposed perspectives on economic interdependence, then which is more accurate? Is there any reconciliation between the two sides? These issues will all be examined in the following study. This work will proceed as follows: it begins with a historical account of the concept of economic interdependence, from its origins with economist Richard Cooper, to the modern development of the term by Robert Keohane and Joseph Nye. It will then outline some of the most prominent viewpoints put forth by contemporary scholars who analyze the concept. The study will then undertake the arguments that the Liberal viewpoint is most accurate, and that economic interdependence fosters peace among nations with strong trade relations particularly when the economic relationship is characterized by free trade. Empirical data will be analyzed in order to test the hypothesis that the modern conceptualization of economic interdependence should include a focus on free trade. Relevant cases will then be analyzed in light of this hypothesis to determine how economic interdependence affects the United States foreign policy. The 2003 Middle East Free Trade Area Initiative (MEFTA) makes an ideal case study. This proposed agreement, which has been in the works for ten years, undoubtedly has both economic and political motives, as the Bush

4 Economic Interdependence 4 administration put forth the MEFTA initiative when tensions between Americans and militant groups in the Middle East were at an all time high (Wagner 2007). It does not seem coincidental that the initiative came during the same year that the Iraq War began, a period when national security was on the forefront of political agenda. This may represent a larger trend whereby the United States government attempts to foster an economic relationship with a nation or region in order to improve political relationships and reduce conflict. The fact that the proposed course of action was to implement a free trade agreement makes this an especially relevant case study. Chapter 1: Literature Review 1.1 Historical Background: Origins of the Term Itself The concept of economic interdependence dates back to the late 1960s. Richard Cooper published The Economics of Interdependence: Economic Policy in the Atlantic Community in 1968, and this work helped to disseminate the term. Interdependence became a buzzword in the 1970s due to Cooper s efforts, as well as those of Raymond Vernon (Keohane and Nye 2000). At this early stage, a political scientist was yet to manipulate and develop the term. Cooper s purely economic conception differs from the contemporary notion of economic interdependence that we will examine. Cooper says 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. I shall use it in a more restricted sense: to refer to the sensitivity of economic transactions between two or more nations to economic developments within those nations

5 Economic Interdependence 5 (Cooper 1972). This early conception of the term considered how established economic linkages affected subsequent economic developments. Thus, the actual level of trade was not the main concern, but instead whether economic ties consciously affected transactions. Cooper goes on to demonstrate that the sensitivity to such factors must be two-way if economies are to be interdependent. That is to say, interdependence is based on both sides considering economic factors between them. The necessity of the shared recognition of economic linkages seems crucially important to me, as the very terminology of the concept of interdependence suggests a mutual relationship. Cooper s early incorporation of our term, interestingly enough, was broadly situated somewhere between the two schools of thought that would eventually develop regarding the concept. Rather than identifying with Liberal notions that see economic interdependence as reducing the likelihood of conflict, or Realist thought which views the occurrence as contributing to further possibility for strife, Cooper planted the seeds for thought at both ends of the spectrum. He mainly considered economic policy changes and responses to the loss of economic autonomy resulting from interdependence. He categorized various tendencies that nations had as a reaction to economic interdependence. Countries could take either passive, exploitative, defensive, aggressive, or constructive responses (Cooper 1972). Interestingly enough, despite the focus on economic outcomes and factors rather than actual aggression or conflict, Cooper s language is reminiscent of war. Defensive responses refer to explicit attempts to reduce economic interdependence by preserving or restoring fragmented markets and reducing mobility. Aggressive responders sought to do more than limit mobility. These nations attempted to extend control over already situated mobile groups such as foreign subsidiaries of firms, or even the foreign parents of subsidiaries operating within the nation s borders. Aggressive responses can

6 Economic Interdependence 6 provoke discontent through their imposition of regulation on other nation s economic agents (Cooper 1972). While Cooper helped to introduce the term, political scientists Robert Keohane and Joseph Nye Jr. brought new light to the concept of economic interdependence. The duo started writing on the idea in the early 1970s. Keohane and Nye drew the distinction between the conception of interdependence used in analysis by scholars, and that which policymakers utilized. Scholars such as Cooper had focused on the sensitivities and vulnerabilities that interdependence created. Since patterns of transaction could be asymmetrical, a reduction of conflict was not guaranteed. This analysis, then, could lead to the design of systems with reduced interdependence (Keohane, Nye, and Bergsten 1975). This idea of interdependence contrasted with the rhetoric surrounding the term actually used by policymakers. Policymakers treated interdependence as inevitable, and stressed that adjustments had to be made to embrace the phenomenon and increase cooperation. Part of this rhetoric was that conflicts of interest are reduced by interdependence (Keohane, Nye, and Bergsten 1975). Keohane, Nye and Bergsten did not accept this conception of interdependence. The rhetoric employed by governments particularly the United States surrounding the symbol of interdependence was subject to corruption by particular interest, and did not represent reality. Nevertheless, we can identify the exploitation of the term that governments employed at this early stage as being in line with Liberal thinking. Economic interdependence was considered something that lowered the likelihood of aggression and should be capitalized on. The early use of symbolic interdependence by governments implicitly suggests that conflicts of interest are passé, while traditional balance of power models of world politics, by contrast, regard such conflicts as fundamental. The theorists reject both of these views, stating

7 Economic Interdependence 7 that they do not provide a satisfactory framework for the analysis of political-economic relations between states. The interdependence rhetoric maintained by policymakers wrongly suggests that conflicts of interest do not exist because of a common threat: the failure of the international economic system itself (Keohane, Nye and Bergsten 1975). The balance of power imagery, which refers to a theory at the heart of realism, was also rejected. Though it recognizes the lasting nature of conflict, balance of power does not take into consideration the difference between economic and military competition. According to this line of thinking, economic gains are not only sought because of their advantages relative to other states, but are desired mostly for the absolute benefits that they bring. In summation, Domestic political pressures will frequently lead governments to approve international economic arrangements that will help others as much as, or even more than, themselves, as long as they stand to benefit as well. Thus the politics of economic relations resemble a mixed-motive game with incentives for both cooperation and conflict (Keohane, Nye and Bergsten 1975). There are several key takeaways from this early writing on the concept of economic interdependence. It makes the crucial distinction between the differences of economic and military competition, effectively setting the stage for later development of the relationship between the two. It also explicitly rejects the political-economic relationship as a zero-sum game. This added complexity and broader spectrum of possibilities allows for the idea that military competition, as well as decisions regarding it, can be linked to economic relationships, but that they are not one in the same. Military and economic considerations can influence and affect one another within the vast international system, which is itself open to both relative and absolute gains. At this point, we enter the development of the modern viewpoints on economic interdependence.

8 Economic Interdependence Liberal Leanings and the Development of Complex Interdependence In 1977, Keohane and Nye published their work entitled Power and Interdependence. This text was considered groundbreaking, putting forth new ideas about the political nature of the concept of interdependence. The duo have also put out multiple articles re-evaluating and recontextualizing this original work, so we have the benefit of multiple channels by which to understand their analysis. Like much of the duo s work, Power and Interdependence stressed the importance of multidimensional economic, social and ecological interdependence. The work echoed the idea laid out earlier that it was inappropriate to trade realism for a view that was just as simple, such as one that saw military force as obsolete, or economic interdependence as being harmless (Keohane and Nye 1987). Power and Interdependence also included the argument that the use of force and engagement in conflict had become increasingly costly for states because of four factors: risks of nuclear escalation; resistance by people in poor or weak countries; uncertain and possibly negative effects on the achievement of economic goals; and domestic opinion opposed to the human costs of the use of force (Keohane and Nye 1987). Clearly, one of the pillars of their argument rested on the idea that military force had become more costly and less likely because of economic concerns and relationships. Keohane s and Nye s work stands as some of the earliest, most foundational thinking that developed the Liberal view of economic interdependence. I find their work to be useful toward thinking on both sides of the spectrum, however, as the duo did not shy away from rejecting the notion that economic interdependence was some sort of infallible concept that guaranteed peace.

9 Economic Interdependence 9 Keohane and Nye emphasized that interdependence would not necessarily lead to cooperation (Keohane and Nye 1987). Rather, their main point was to make clear the link between interdependence patterns and patterns of potential power resources. The intention of the authors, then, was not to discredit the realist perspective. They sought not merely to place realist and liberal perspectives side by side, but to link them together in an integrated analysis (Keohane and Nye 1987). They attempted to achieve these ends through the development of a concept called complex interdependence. While interdependence is a very broad term that refers to situations characterized by reciprocal effects among countries, complex interdependence is an ideal type of international system, deliberately constructed to contrast with a realist ideal type that we outlined on the basis of realist assumptions about the nature of international politics. Thus, complex interdependence, like the realist portrayal, stands as an idealized type of extreme rather than a description of the real world (Keohane and Nye 1987). In fact, the concept of complex interdependence was developed in direct opposition to multiple realist conventions. The three realist assumptions that Keohane and Nye took issue with were the following: states are the predominant international actors, force is a usable and effective instrument of policy, and there exists a hierarchy of issues in world politics, of which military security is the most important (Michalak 1979). The concept of complex interdependence flips these notions and asserts that there are multiple channels between societies made up of a various actors, that there are multiple issues at play not arranged in a specific hierarchy, and that military force is irrelevant and not used by governments against each other (Keohane and Nye 1987, Keohane and Nye 2000). Keohane and Nye maintain that real-world situations fall somewhere between the idealized worlds of complex interdependence and realism.

10 Economic Interdependence 10 Overall, it seems as though the development of complex interdependence as a counterpoint to realism is useful. By providing an idealized model that stands in direct opposition to realist convention, Keohane and Nye provide a valuable critique. One noteworthy problem is that the construction of such a model can often lead to misinterpretation. In their later writings, Keohane and Nye identify that some who read their original work on complex interdependence, particularly those who wrote against it from opposing viewpoints, failed to recognize that the concept was not meant to portray reality. The writers, it seems, could have been at least somewhat clearer about this fact in their writing. In spite of their specified attempts to integrate liberal and realist viewpoints identified earlier, Keohane and Nye assert, the concept of complex interdependence is clearly liberal rather than realist (Keohane and Nye 1987). The very approach is indicative of this, as the concept is set up in opposition to realist assumptions. In fact, the theorists express their regret that they did not draw more upon liberal theory, as it could have helped to develop the concept further and make it more of a theory than a thought experiment. Admittedly, they only partially made use of liberal emphasis on institutions and transnational actors. The theorists concede, also, that their concept of complex interdependence tends to focuses solely on the systemic level. Instead, they feel that both domestic and international structures and processes must be examined in order to determine how preferences are shaped (Keohane and Nye 1987). In more recent years, Keohane and Nye have re-contextualized their concept of complex interdependence to include developments in the information age. They rightly identify the changes to one of the foundations of their concept by discussing the fact that the number of channels of contact between societies has increased as a result of technology. This has broken down the importance of borders, and enabled loosely structured organizations and networks to be

11 Economic Interdependence 11 more effective in penetrating states (Keohane and Nye 1998). The duo has also attempted to translate the language of complex interdependence to that of globalism. They claim that this translation makes the politics of complex interdependence one in which levels of economic, environmental, and social globalism are high and military globalism is low (Keohane and Nye 2000). Here again, we see that the adaptation of their concept to a modern context includes the waning importance of military aspects of the international system. They cite Scandinavia since the early 20 th century as an example of a security community where the expectation is that force will not be used. They also point to the end of the Cold War as a factor in the decline of military globalism. The former Soviet states saw the extension of social and economic globalism, making them part of an expanded area of complex interdependence. Globalism also created incentives for South American leaders to settle territorial disputes out of fear that they would distract them from economic and social development (Keohane and Nye 2000). So while they attempted to mediate between Realism and Liberalism, Keohane and Nye admit that their concept of complex interdependence is grounded in liberal ideas. While they state that interdependence does not necessarily lead to cooperation, the implication is that it does. The original idea of complex interdependence was as an idealized system, yet Keohane and Nye seem to regret that it was not developed into more of an actual theory. Their recent efforts seem also to necessarily equate the idea of complex interdependence with cooperation. This likely explains why the two have been associated with this link, even though their original work, Power and Interdependence, does not explicitly argue that interdependence produces peace (Copeland 1996). 1.3 Modern Offshoots, Variants, and Additional Takes on the Term

12 Economic Interdependence 12 Keohane and Nye are far from the only theorists who have contributed to the development of economic interdependence. Paul Papayoanou theorizes on the concept in several of his works. Like Keohane and Nye, he attempts to straddle the line between liberal and realist conceptions of the term. His focus, however, is on the likelihood of balancing, a component of realist Balance of Power theory. He goes beyond this theory by also incorporating signalinggame logic in order to take state preferences, beliefs, and uncertainties into account. He examines the affect that economic ties have on the decision-making of status quo powers, as well as the beliefs that their allies and adversaries have about those preferences. His argument is that when status quo powers have a great amount of economic interdependence with each other, but few economic linkages with perceived threatening powers, the result will be firm balancing that deters aggression. Societal backing will echo support for this balancing, and this consensus will also be perceived by the threatening power. He points to the Franco-Russian alliance of the late nineteenth-century, and the post World War II NATO alliance as examples of such balancing acts (Papayoanou 1997, Papayoanou 1999). When there is little economic interdependence between the status quo powers, or if links exist with the threatening powers, then there will be low capacities and incentives to balance. He points to the case of Britain leading up to World War I as an example of this. Due to economic ties with both Germany and France, Britain did not pursue strong balancing, and German leaders undertook aggression because of a perceived chance of success (Papayoanou 1997, Papayoanou 1999). His analysis then, in some ways, goes deeper than Keohane and Nye s by taking into account domestic economic and political processes instead of just employing a systemic level analysis.

13 Economic Interdependence 13 Patrick McDonald attempts to build on the theory of commercial liberalism by arguing for a shift in the independent variable from trade to free trade. His analysis, similar to Payoanou s and perhaps even more useful, focuses heavily on domestic decision-making as influenced by economic interdependence in the international system. This helps to effectively illustrate the practical ways that economic interdependence plays out within an individual nation s borders. He maintains that free trade is the important link in understanding how economic factors promote peace across multiple variants of commercial liberalism. By adding the stipulation that it is free trade, not just trade between nations that fosters peace, McDonald is including an inherent focus on domestic interests and institutions. Domestic politics can filter the effects of commerce on peace by imposing trade regulations. Free trade reduces the chance for conflict because it weakens the domestic power of conflict-related interests, and limits the state capacity to enact commercial policies building coalitional support for war. Since states can use coercion and define property and monopoly rights, they can restrict entry into domestic markets and regulate terms of exchange. Industries that rely on government protection may be bound by the state, and thus, likely to support its domestic and foreign policies no matter what. This decreases the capacity of consumers and exporters to lobby the state for peaceful foreign policy due to a high domestic influence of protectionist interest. Since the state may also sell economic regulations, its ability to build supportive coalitions is also increased. Both of these factors reduce chances for peace (McDonald 2004). Dale Copeland advances yet another theory in explaining economic interdependence. He introduces the concept of the theory of trade expectations, which asserts that it is not only the level of trade between nations that matters, but also the speculated level of future trade. Like many others, Copeland makes use of both liberal and realist insights. He combines the liberal

14 Economic Interdependence 14 idea that benefits of trade give states an incentive to avoid war with the realist viewpoint that the costs of being cut off from trade can push states to war in order to secure vital goods (Copeland 1996). This dynamic element of trade considerations can help explain decisions to forgo or pursue war. Interdependence will only follow the liberal viewpoint and create peace when states expect that trading will remain high into the future, otherwise the realist expectations will be realized and states will seek war out of fear of losing wealth. Copeland s analysis, then, explains situations where states engage in war even when they have high current trading levels with another nation. War would be pursued out of the leader s fear that other nations will cut off trade relations in the future. Copeland claims that his theory explains the case of World War I, which is a glaring problem with liberal theories on economic interdependence. Though trade levels were high in , German leaders sought aggression out of declining expectations for future trade (Copeland 1996). 1.4 Moving Forward: Research Design Explained Like the liberal theorists outlined in the preceding pages, I will make the argument that economic interdependence between nations reduces the chances of war. My argument aligns most closely with Patrick McDonald, whose analysis points to free trade between nations as the situation most likely to prevent wars. His version of commercial liberalism is particularly convincing in its consideration of the interplay between domestic factors and the practical effects felt by economic interdependence. Like him, I assert that a system of free trade further enhances the effects of economic interdependence. A model of logistic regression, first employed by Bruce

15 Economic Interdependence 15 Russett and John Oneal, will serve as the basis for my empirical research. The transferability of the study will then be assessed based on the specific method of obtaining empirical data. A model of logistic regression is particularly applicable to the study at hand since it allows the effect of each individual variable to be estimated. Variables such as government system (whether it is democratic or not), level of trade, and economic growth can all be varied individually in order to test their effect on the likelihood of dispute (Russett and Oneal 2001). Like the previously conducted study on which my model is based, the unit analysis will be the dyad-year. Since historical records allow us to ascertain whether or not two nations were engaged in war in any given year, a data pool can be constructed using information about various pairs of states. The model s dependent variable is the probability of a dyadic dispute, while the independent variables are the level of economic interdependence and the openness of the economy. In order to operationalize the value of economic interdependence, IMF data regarding the direction and value of trade can be used. The trade levels between pairs of countries can be considered in relation to the total gross domestic product of both involved. This provides a measure for the degree of dependence on that particular bilateral trade relationship. The openness of economy is measured as the state s trade with all countries divided by its gross domestic product (Russett and Oneal 2001). This model enables the study to assess the validity of several things. In the first place, it provides a measurable test of the correlation between economic interdependence and war. The basic assumption that increased levels of economic interdependence lead to a lower likelihood of conflict can be evaluated. These preliminary results then can be compared with those obtained by adding the variable of free trade. This allows an evaluation of whether or not free trade is a key element to the concept of economic interdependence. Analyzing the two independent variables,

16 Economic Interdependence 16 both in isolation and in comparison to each other, will allow us to either verify or discredit the hypothesis that free trade does in fact represent a central component of economic interdependence. Not only will this model of research allow evaluation of the theory of economic interdependence, but it also helps to analyze practical case studies. The findings obtained through the model can help to understand the Middle East Free Trade Area Initiative proposed by the United States government. The motives behind this proposed policy could be examined in light of the correlation between its fundamental end-result (free-trade and, presumably economic interdependence) and the current state of affairs (the United States political relationship with the Middle East is characterized by many notable examples of conflict). The model can even be reimplemented in order to fit this case study and bring further material for analysis. The data pool can be limited so as to only consider conflicts that have occurred between Middle Eastern nations and the United States. It should be noted that while the breadth of this analysis is substantial, it could not claim to cover all cases. The limitations of the model make it so that only formally declared instances of war can be considered. The very idea of what constitutes a war or dispute is open to interpretation as well, so there is no way to feasibly cover all instances of conflict. According to the proposed model, for example, the Iraq war would factor into the probability of conflict, but disputes between individual terrorist organizations or militant groups would not. Even in instances where factions within society are dominant in both politics and economics, any international disputes that they are involved in are likely lost or not considered for purposes of this model. In order for this model of logistic regression to work, the dependent variable has to

17 Economic Interdependence 17 be drawn in terms of either yes or no with regard to whether there was conflict. Invariably, then, the line as to what constitutes a conflict also has to be drawn somewhere.

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