International Trade: Promoting Conflict in the Disguise of Peace?

Course No: PA 413

Course Title: International Trade, Protection & Negotiation

Submitted to:

Sheikh Shams Morsalin

Assistant Professor

Department of International Relations

University of Dhaka

Submission Date: May 1, 2016

Index

List of Acronyms:

ACP = African, Caribbean and Pacific countries

AD = Anti-Dumping

EU = European Union

GATT = General Agreement on Tariff and Trade

GDP = Gross Domestic Product

MFN = Most Favored Nations

UK = United Kingdom

WIFO= Austrian Institute for Economic Research

WTO = World Trade Organization

Page No.

Introduction 01-02

Theoretical Framework 02-03

Case Analysis

i) Case 1: The United States of America 03-05

ii) Case 2: The European Union 05-07

iii) Case 3: The U.S.-E.U Case 07-09

The Reasons for Conflicts Among Trading Partners 09-11

Conclusion 11

Bibliography 12-14

Introduction

It has long been a matter of debate that whether interdependence encouraged by trade relations encourages peaceful relations among nations. While the supporters of school of liberals and neo-liberals have claimed the potential of economic integration in promoting peace, the theories grounded in Marxist-Lenin perspectives or the school realism or neo-realism have claimed that international trade only promotes conflict and antagonistic relations among nations. The primary rationale for choosing to work on this topic is that there universal understanding as regards international trade, i.e., there has been a long belief that movement of goods and services and capital as well as through advanced information and communication technologies has effectively reduced tensions and conflicts among states and the growing mutual interdependence in the era of globalization fosters harmony and peace. However, this argument is just one side of the coin and completely ignores the incidences of conflict among nations induced or exacerbated by trade that had at times led to trade wars as well, the evidences of which history bears. Therefore, the study is a quest to shed light on the connections of economic interdependence and conflict as opposed by the liberal states.

This study explores the cases of trade induced conflict among liberal states with high trade volumes, namely the USA & the EU and draws a handful of reasons which accounts for the conflicts led by international trade. The reason behind choosing to study the cases of the USA and the EU is that they highly support the liberal school of thoughts which promotes international trade as a means to establish harmonious relationships among nations. However, these two major powers have been over the years every so often involved in trade induced conflicts with many nations and within themselves too. Therefore in order to shed light on the other side of the coin of international trade which indicates that it is a potential source of conflict, the history of conflict of the USA and the EU seemed to be the finest examples. So, overall the main objective of this paper is to explore the relationship between international trade and interstate conflicts as a result of interdependence encouraged by trade with a hypothesis that international trade does exacerbate conflict among nations.

Many scholars and philosophers have argued that trade can stimulate conflict among nations. The literature regarding trade induced conflict entails the study of Katherine Barbieri (1996, 2002), Barbieri and Schneider (1999) and Barbieri and Peters (2003) find that greater trade among states may enhance the likelihood of militarized dispute. Li and Reuveny offer a theory (2008) to explain how export and import flows in specific sectors influence decisions to initiate bilateral military conflict. Keshk, Pollins, and Reuveny (2004) and Kim & Rousseau (2005) find that conflict impedes trade, but trade does not deter conflict. They argued that policy makers and academics should look beyond the liberal claims of trade of producing a peaceful world. On the other hands, a number of scholars have argued that trade promotes peace. Polachek(1980) argues that cooperation between the nations exists more than the conflicts and the nations with most mutual interdependence through trade exhibit least conflict. Christopher J Smith in his study

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argued that more international trade would decreases the spending of resources in military ventures thus indicating an inverse relationship between trade and conflict. However, some scholars such as Green, Kim, and Yoon (2001) find no statistically significant relationship between international trade and conflict.

This study draws heavily on secondary sources such as various articles, journals and newspaper articles on relevant topics.

Theoretical Framework:

The Liberal & Neo-Liberal Claim: Trade promotes peace

Liberals see the international trade system as interdependent which promotes peace. The Liberals believes that economic activities can able to diminish the political differences between nations due to the growth and benefits derived from such activities.

Liberal economists believe that state provides benefits to its participants. If a state did not enjoy net benefits from a particular relationship, being a rational actor it would terminate the relationship. For some liberals, trades pacifying effect results from more than economic considerations. Many eighteenth century tracts by political economists expressed the view that commerce civilizes polishes and pacifies states and their citizens. Some contemporary liberal analysts portray business interests as more pacific and antiwar than other elements of society. However the argument that business interests always prefer peace to conflict is countered easily by the many instances in which business profit from war or in which economic interests prefer conflict to peace (Barbieri and Levy 1999).

The classic neo-liberal argument is that increased international trade makes conflict too costly, and thus countries that participate in trade are more likely to be peaceful (Polachek, Robst et al. 1999). International conflicts are avoided because they disrupt trade relations and threaten the economic growth countries experience from trade. In addition, trade brings economic growth and improved living conditions within the country, reducing the grievances that are triggers for domestic conflict. A related argument is that economic liberalism actually encourages democratization and peace.

At the heart of neo-liberal argument is a straight-forward expected utility calculation. If a country expects greater welfare gains from trade than from war, it will choose to maintain peaceful relationships. (Polachek 1980). The decision to go to war or take up arms is considered to be irrational, and therefore impervious to rational economic or political solutions. Unfortunately, this neat explanation makes a number of inaccurate assumptions. First, it assumes that the benefits of international trade are evenly spread throughout society. Second, it assumes that trade in all kinds of goods has the same pacifying effect on countries. Lastly, it assumes that conflict is all cost and no gain. Alternative arguments concerning trade and conflict set out to address each of these assumptions (Schneider, Barbieri et al. 2003).

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The closest off-shoot of the neo-liberal argument is the postulation that trade reduces conflict, but only when trade is symmetrical between countries or when countries trade in certain kinds of goods. For example, when two countries are equally dependent on one another, they are unlikely to succumb to the use of force to resolve conflict. Since both countries face the same high cost of violent conflict, they will both opt for peace to preserve their mutually beneficial trade relationship (Dorussen 2004). But if the trade relationship and its benefits are unevenly distributed, trade may actually trigger violent conflict.

Case Analysis

This chapter explores some selected trade conflicts of the USA, the EU and finally the conflicts between the USA and the EU who are the main supporters of the liberal school of thoughts which indicates international trade as means of stimulating peace among nations not conflict. For each case, one trade induced conflict, its background and its impact has been discussed.

Case 1: The United States of America

United States is one of the world’s most significant economic market and one of the largest exporters in the world. They have benefited from international trade enormously. Customers from around 230 countries buy US made goods and services. Liberalization of trade and investment over the past half century made US wealthier. United States has made profound engagement with many countries with the aim of strategic interests. International trade and export play a major role in supporting the growth and employment of US. The following figure shows the growth in the value of the U.S. trade in goods and services from 1990-2013.

(Source: Unites States Census Bureau)

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Anti Dumping against Japan and China

Background:

China and Japan both have followed quiet similar strategies of promoting economic growth. Both countries have accounted for a major share of total world export. They both have trade conflicts with US. Friction between US and Japan started in the mid of 1980s. Whereas China-US friction started in the late 1990s. Imbalances of huge bilateral trade are the main element of this. The following figures show the balance of trade of USA with Japan & China respectively.

Fig: U.S.-Japan Balance of Trade (1945-2013)(Source: Wikipedia)

Fig: U.S.-China Balance of Trade (1985-2015)(Source: U.S. census.gov data)

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US has used anti dumping (AD) policy to slow down the expansion of Chinese and Japanese exports in to the US market. During the period of 1979-2008 p, Japan and China together faced a major share of all US anti dumping activity. 25% of all US anti-dumping investigations targeted either Japanese or Chinese producers and 33% of all US anti-dumping measures imposed targeted either Japanese or Chinese exporters (Bown, 2009). It made two different episodes. One is to manage the growth of Japan’s export to the US through the rise (1979-1988) and fall (1989-2008) of anti dumping use. Another one is the increased use of AD to manage the growth of China’s export to the US. Use of anti-dumping against Japan slowly declined after 1988. At the same time use of anti-dumping shifted dramatically toward imposition of new restrictions on imports from China. During the period of 1999-2008, US imposed about 50 new anti-dumping import restrictions on Chinese exporters. These all restrictions were nearly a third of all AD measures US imposed during this definite period. While US anti dumping activity against Japan started to decline as the yen upgraded in value relative to the US dollar in 1985, AD against China continued unabated even after the Yuan started to appreciate relative to the dollar in 2005.

Impact

Huge bilateral trade imbalance and a reflection of the growth strategy is a common thing followed by China and Japan. Anyhow, the continuous anti-dumping action affected the bilateral trade between US-China and US-Japan. It greatly affected on the export oriented industries. In most cases, anti-dumping measures taken by US against China and Japan ended up with extremely high tariff. The continuous anti-dumping activities affected the robustness of the China and Japan’s international trade. The original intention of this anti-dumping measure is to protect the rights of WTO members which resulted in preservation of the equal trade environment and unfair competition. It was a great weapon to deter and harass particularly the economy of China and Japan.

Case 2: The European Union

European Union is the biggest player on the global trading scene and has achieved a strong position by acting together with one voice on the global stage and has shaped an open global trading system based on fair trade policy which seeks to create growth and jobs by increasing the opportunities for trade and investment with the rest of the world. Although growth is projected to be slow, the EU remains the largest economy in the world with a GDP per head of €25 000 for its 500 million consumers. Every day, Europe exports hundreds of millions of euros worth of manufactured goods and services which makes it the biggest export market for around 80 countries. Together, the European Union's 28 members account for 16% of world imports and exports. The following figure shows the growth in the trade value of the EU from 1996 to 2013.

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(Source: Office for National Statistics)

.

EU-China Trade Disputes: Anti Dumping Measures & Countermeasures.

China and the EU are of major weight in today’s world economy. The mutual benefits based on the economic complementarities serves as the foundation of the trade relation between China and the EU.

Direction of Trade Goods (2010) Services (2010) FDI (2010)EU-China €136,2 billion €22,3 billion €7,1 billionChina-EU €292,1 billion €16,3 billion €0,7 billion

(Source: European Commission)

Background

From time to time, the EU blames China for engaging in unfair trading practices, including failure to live up to its WTO commitments, the slow pace of currency revaluation and intellectual property infringements. In turn China has its own complaints against the EU such as embracing a protectionist approach to trade remedies such as anti-dumping and technical barriers or politicizing trade issues. In response to China’s increasingly assertive trade practices, the EU has begun treating China as a mature WTO member and is likely to push China harder to achieve its own ends, which often leads to an angry response from China, implying more future confrontations and disputes between the two trade giants.

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There are more and more anti-dumping measures taken against Chinese exporting producers because of several factors such as European producers’ the non-market-economy treatment towards China and the complicated ownership structure of Chinese companies. Concerning the EU, factors that led to frequent anti-dumping disputes include the well-established institutions and legal system, the concentrated nature of the market structure of the EU producers and the trade deficit that the EU has been running against China.

Closely related to the EU’s anti-dumping and countervailing measure is China’s non-market economy status. The EU is using the market economy denomination as the most powerful instrument to exert leverage over China. Inappropriate application of stringent and sophisticated technical regulations leads to trade protectionism, which exerts a negative influence on EU-bound Chinese exports that are subjected to no or less sophisticated standards in China. These standards, in reality, are green barriers.

ImpactOnce an anti-dumping investigation is launched, definitive measures are the most likely outcome such as definitive duties on exports from China which are mostly the very high ranging from 10% to 102%. The consequence of such duties is usually devastating. Such duties do not only pose threat to specific producers, but rather, they often form a block of a whole industry in a market. The loss in competitiveness for these industries usually results in the loss of a market share which is obtained from years’ of marketing and hard work. Therefore, the motive of EU’s imposition of retaliatory duties is in question whether they aim to promote fair trade or just to shelter its own producers and block trade.

Case 3: U.S.-EU Trade Relation & Conflicts

Euro-American relations are primarily concerned with trade policy. The United States (U.S.) and the European Union (EU) occupies world’s largest bilateral trade relationship and it is growing. They share a huge, dynamic, and mutually beneficial economic partnership. The two together represent 60% of global GDP, 33% of world trade in goods and 42% of world trade in services. Their trade relationship also greatly influences political cooperation between the two unions. Numerous studies have shown that US-EU GDP could be significantly increased through reducing or eliminating remaining tariffs and non-tariff barriers to market access, such as differing regulations and standards. The details of trade flows between US-EU are as below:

Direction of Trade

Goods Services Investment Total

EU to US €260 billion €139.0 billion €112.6 billion €511.6 billionUS to EU €127.9 billion €180 billion €144.5 billion €452.4 billion

(Source: European Commission, 2012)

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Despite having an impressive record in economic integration, a number of actual and potential trade disputes between the two transatlantic partners U.S.-EU often dominate the headlines. Many of these problems arise because the EU and U.S. are not only partners, but also competitors on the global marketplace, or because of different regulatory systems and approaches, reflecting societal choices. In the past, agricultural products have been the subject of several disputes. And with different public preferences, the greatest divergences are still found in areas of consumer and food safety, environmental protection and subsidies. They include trade issues such as the beef hormones (1989-2009) and the GMO disputes (2004-2006), Bananas (1999- 2009), the subsidization of large civil aircraft industries (since 2004), Poultry dispute (since 1997), Byrd amendment (2000–2007), Steel safeguard measures (2002-2003), Zeroing dispute, Foreign Sales Corporation dispute, wheat gluten dispute, as well as cases on trade mark and copyright protection and so on.

As both U.S. and EU are World Trade Organisation (WTO) members, both sides are committed to addressing the existing and future obstacles to trade and investment in the transatlantic market through the WTO dispute settlement mechanism. But a number of long-running disputes between the EU and the US are indicative of the challenges negotiators of a bilateral trade agreement face.

Beef Hormone Conflict (1989 - 2009)

Background

The beef-hormone conflict between U.S. and EU has established itself as the mother of all food safety trade disputes. The beef hormone dispute concerned EU restrictions, limiting the use of natural hormones, banning synthetic hormones, and prohibiting imports of animals and meat from animals that have been given hormones in the 1980s. Protests from the US and other exporters were to no avail. The amount of trade originally involved was only about $100 million, a small fraction of the billions of dollars of trade which flow across the Atlantic in each direction. But the conflict over hormone-treated beef has had a major impact on trade relations far beyond the confines of the beef sector.

Impact

It is clear that the long-lasting conflict has made its mark on trade relations across the Atlantic. It has also had impacts both direct and indirect on the trade system. The proliferation of conflicts over such issues as beef hormones resulted in the emergence of new proposals for changes in Food Law. In the US, where consumers are supposed to be fearless and rational, a new initiative on food safety to address mounting criticism from the public increasingly concerned about the health risks of food consumption has been introduced (Food and Drug Administration, 1997).

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The broader issue raised by the beef-hormone case is that of “consumer confidence”. The beef hormone dispute is thought by some to illustrate a new kind of trade dispute that raises questions about globalization and local values, political and consumer concerns, and consumer protection issues. This was not a case where ‘appropriate labeling’ or other methods of consumer warning could easily resolve the dispute. The underlying question of the dispute is whether “science” is an acceptable basis for food regulations.

The Reasons for Conflict among Trading Partners:

As levels of trade and investment among great powers like USA, EU, China, Japan and many others are increasing over time, the question that has gained renewed importance is whether economic interdependence increase of decrease the likelihood of conflict. This following discussion draws on the debate among scholars and evidences of conflict among the nations engaged in trade to deduce some the general notions that have been repeatedly indicated as the reasons has led to conflicts among nations induced by trade.

Trade is not exogenous but endogenous:

The first and foremost aspect that the liberal scholars and nations has skipped in their argument of trade reduces conflict is that trade is endogenous. Trade is a reflection of interstate cooperation and conflict which might as well result from a number of social and political dimensions. Intergovernmental consensus is a precondition for trade. Moreover, governments at many instances encourage trade with specific nations solely for political gains and use various forces to affect trade levels. This leads to the private traders incorporating political considerations into their decisions. For all these reasons, trade levels already reflect and embody cooperative and conflictual relations between nations and affect any assessment of the independent effect of trade upon cooperation and conflict. Also, international institutions built around trade agreements might mismanage the crisis prevailing among member states and deepen the intensity of conflict.

Asymmetrical Trade Relations among the Developed & the Developing Nations:

Trade and economic dependence benefit the powerful, but result in political and economic costs for the powerless. When absolute gains exist, concerns about relative gains may dominate leaders’ decisions. Tensions may arise over the gains from trade are distributed. Asymmetrical trade relations are more likely to produce disproportionate costs and benefits, where the more developed state incurs greater costs fewer benefits. It confers unequal power to the less dependent state. As the Dependency theorists argue: i) the gains from trade are enjoyed exclusively by developed state; ii) trading relations between developed and developing nations

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retard the development process of developing states; iii) trade exacerbates inequalities in the wealth of nations.

Pursuit of Capitalist Development & Trade Expansion:

The resource-scarcity perspectives predict greater conflict among nations in the course of trade expansion. Neo-Marxists view competition over markets, sources of raw materials and scarce resources an inherent feature of capitalism. This competition can easily result in violent conflict between major powers, as well as the domination of less powerful states. Pursuing aggressive policies under the guise of national interest for capitalist expansion can result in trade wars, investment wars and even hegemonic wars.

Trade Agreements create Winners & Losers:

Over the last two centuries, little trade has developed without trade agreements that allow trade in specific goods at some non prohibitory rate. However, trade Liberalization creates winners and losers. For example, the Most Favored Nations (MFN) clause in bilateral trade agreements which was a mechanism that allowed trade within a subset of nations linked by trade agreements with MFN clause while effectively excluding its non-members. During the Cold War, trade of most items with the Soviet Union & China was impossible without an MFN argument. Therefore, without careful negotiation & implementation, trade agreements can increase wealth disparities among nations, create tensions and result in conflict.

Public Perceptions of Trade Dominance

Public perceptions of trade dominance can be a powerful force that can result in conflict among nations. Anti globalization riots of Seattle and Genoa as well as the treatment of US headquartered franchises based in developing nations during times of protests against any US foreign policy can be the examples of such sentiments. Trade agreements aid in reinforcing the perception and reality of trade dominance by an external power. In the aforementioned circumstances, strong domestic opinion threatens the peaceful relationship among nations.

Trade as a means of Coercion:

States often use trade as an instrument of coercion by threatening trade disruption as well as imposing trade sanctions. Historical records are filled with cases of economic sanctions of various kinds imposed in the pursuit of political objectives rather than economic objectives. States can and do impose economic sanctions, a form of interstate conflict, to compel others to shift in other’s policy. When markets are not deep and competitive, states can depend on particular buyers and sellers which make them vulnerable to the exercise of trade coercion which may lead to a conflict if the coerced nations choose to retaliate. The USA in order to prevent such trade coercion pursues a policy of energy independence despite the fact that the states on

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which it is dependent are political allies, thereby establishing a centrality of a particular good in the US economy.

Trade liberalization creates Social Tension:

Greater liberalization of trade through concessions a result of agreements of trade is a potential source of conflict within countries. Trade liberalization may involve an agonizing adjustment to new tariff barriers, new regulations and an influx of fierce new competitions. If the new market opportunities fail to materialize, it can result in a short term industrial contraction and unemployment which may set a trend of increased poverty and economic instability over a longer period of time. Such social tensions exacerbate interstate conflicts and may take the form of civil war as well.

Trading of Natural Resources:

An interesting finding shows that countries that trade in natural resources are more prone to conflict than countries that trade in manufactured goods, with the risk of conflict increasing when a country is heavily reliant on natural resources for 30% or more of its GDP. As observed by Keen(1998), the problem with this high level of dependence is that the inequitable manner in which the natural resources are extracted and traded tends to create tensions between the economic elites and the local population.

Conclusion:

The above discussion reveals some highly talked about reasons which justify the notion that despite the prevalence of a common argument that international trade prevents conflict because the possible loss of trade reduces the willingness of both sides to fight, conflicts among trading partners are common as evident in the history. The liberal states, despite promoting the liberal values have employed themselves into conflict with other states from time to time, most of the times intentionally for political or economic gains. Interestingly, most of the trade induced conflicts have resulted into a spill-over effect on the other players in the global market which have at times proved to be beneficial for them while at times proved to be detrimental beyond predictions. Finally, this study reiterates the pressing question which has been debated over for years now that whether international trade inhibits or exacerbates conflict among nations.

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