Economic interdependence

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Economic interdependence is the mutual dependence of the participants in an economic system who trade in order to obtain the products they cannot produce efficiently for themselves. Such trading relationships require that the behavior of a participant affects its trading partners and it would be costly to rupture their relationship. [1] The subject was addressed by A. A. Cournot who wrote: "...but in reality the economic system is a whole in which all of the parts are connected and react on one another. An increase in the income of the producers of commodity A will affect the demands for commodities B, C, etc. and the incomes of their producers, and by its reaction will affect the demand for commodity A." [2] Economic Interdependence is evidently a consequence of the division of labour.

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David Baldwin conceptualizes international economic interdependence as the opportunity costs incurred from potential exit costs that incur as a result of breaking existing economic ties between nations. Others argue that it entails the degree of sensitivity of a country's economic behavior to policies and development of countries outside its border. [3] Global economic interdependence has grown in the post-World War II period as a result of technological progress (e.g. computerization, containerization, low-cost travel, low-cost communications) and associated policies that were aimed at opening national economies internally and externally to global competition. [4] [5] [6]

Some international relations scholars posit that economic interdependence contributes to peaceful relations between states. [7] [8] [9] [10] [11] [12] Other scholars argue that the relationship is more nuanced or emphasize the ways in which interdependence can contribute to conflict between states. [13] [14] [15] [16] [17] For example, through their work on "weaponized interdependence", Abraham Newman and Henry Farrell have outlined how states that possess effective jurisdiction over central economic nodes can use these nodes for coercive economic leverage against adversaries. [13] Viktor Cha has argued that economic interdependence in East Asia can both be a tool of coercion by China but can also be exploited by China's neighbors to deter China if they all work together against China. [18]

Economic interdependence and conflict

International relations scholars are divided as to whether economic interdependence contributes to peace or conflict. Statistical analyses indicate that economic interdependence can lead both to war and peace, with various factors that condition the effect of interdependence. [16] Dale C. Copeland argues that expectations about future trade affects whether economic interdependence is likely to lead to peace or conflict; when leaders do not believe that future trade patterns will be favorable, they are more likely to engage in conflict and competition than when they believe that future trade patterns will be beneficial to their state. [16] According to Henry Farrell and Abraham L. Newman, states can "weaponize interdependence" by fighting over control of important nodes in global networks of informational and financial exchange. [13] Realists such as John Mearsheimer and Joseph Grieco argue that interdependence increase the risk of conflict by creating dependencies and vulnerabilities that states will seek to rid themselves off; for example, states will fear that other states cut off access to key resources. [14] [15]

Beth Simmons and Patrick McDonald argue that interdependence creates groups in liberal capitalist states with vested interests in the status quo, which makes conflict less likely. [7] [8] However, illiberal states or states where domestic groups benefit from trade barriers may be more likely to end up in conflict over trade relations. [19] [7] According to Stephen G. Brooks, globalization of production has had a pacifying impact on great powers by (i) making it hard for great powers to have cutting edge military technology without being part of global supply chains, (ii) reducing incentives to conquer the territory of economically advanced countries, and (iii) facilitating regional integration. [9]

The outbreak of World War I during a period of unprecedented globalization and economic interdependence has often been cited as an example of how economic interdependence fails to prevent war or even contributes to it. [20] Other scholars dispute that World War I was a failure for liberal theory. [10] [21]

According to a 2005 assessment of existing research, the existing research indicated that trade linkages reduce conflict. [9]

Approaches to measure international economic interdependence

As economic interdependence may be perceived differently depending on the scale and context involved, various methods are used to measure the degree of interdependence between and within countries. The below documents some of the approaches that have been adopted to measure the degree of economic interdependence.

Hierarchical Network Approach

This approach is based on the precept that globalisation increases the integration and interdependence between the economy of different countries. The Hierarchical Network Approach is used to measure economic interdependence by analysing growth clusters and cross-country liaison, and business cycle synchronisations. The cross-country liaison or economic interaction between countries or states is most commonly measured by Pearson's cross-correlation coefficient. [22] The correlation matrix is a methodical method which exhibits the mutual relationship of countries over a specified time period. [23] To measure growth clusters, economists need to get hold and analyse changes in GDP for each country over a specified period of time. The relationship between interdependence and business cycles is calculated by the distance correlation matrices over a period of 10 years. The combination of results from the data presents the economic interdependence of countries over time. By this measure, trends from the data has shown that the degree of world economic interdependence is growing due to globalisation. [22]

Geopolitical Approach

Another way of measuring the degree of economic interdependence is via a geopolitical approach, which is based on the presumption that economic interdependence may exist because states trade with each other to obtain strategic goods that are needed for national industry and defence. The geopolitical approach is based on both vertical and horizontal interdependence. Vertical interdependence measures how a change in the price of a good in Country X will affect Country Y (or how changes in price in State A will affect State B), whilst horizontal interdependence calculates the degree of bilateral trade, transactions and investment involved between both countries. [24] Both vertical and horizontal interdependence data must be used to measure economic interdependence. This is because that in the given situation that there is a high correlation of vertical interdependence between country X and country Y, if there is no horizontal interdependence (transaction of goods, services or capitals) between both countries, country X and country Y will have little/no economic interdependence. Vertical interdependence without horizontal may arise due to other factors such as changes in worldwide economic forces. For instance, consider the case of trade and the flow of factors among Arab states (which is typically very limited); whilst we observe parallel movements in factor prices, this may just be due to the effect of global market forces that affect all economies in the same fashion. [25]

Exit Model Approach

As suggested by Baldwin and Crescenzi, economic interdependence may be modelled as a function of potential economic exit costs, which may deter, motivate or fail to affect political conflict. A key challenge that is faced is the need for a valid method to measure exit costs and interdependence, whilst maintaining a systematic approach with many countries involved (a large-n analysis). Crescenzi addresses this by interacting bilateral price elasticity data with trade activity data, to represent both market structure and the intensity of potential economic exit costs. Whilst the price elasticity data reflects one state's ability to react to economic change that is initiated by another state, its interaction with trade share data is vital as it indicates how intense the interdependent relationship is relative to each state's economy and trade portfolio within the global market. Given these two components, Crescenzi furthers his study by explaining the relationship between economic interdependence and its association with political conflict. [26]

Related Research Articles

International relations theory is the study of international relations (IR) from a theoretical perspective. It seeks to explain behaviors and outcomes in international politics. The four most prominent schools of thought are realism, liberalism, constructivism, and rational choice. Whereas realism and liberalism make broad and specific predictions about international relations, constructivism and rational choice are methodological approaches that focus on certain types of social explanation for phenomena.

In international relations, power is defined in several different ways. Material definitions of state power emphasize economic and military power. Other definitions of power emphasize the ability to structure and constitute the nature of social relations between actors. Power is an attribute of particular actors in their interactions, as well as a social process that constitutes the social identities and capacities of actors.

<span class="mw-page-title-main">Military alliance</span> Alliance between different states with the purpose to cooperate militarily

A military alliance is a formal agreement between nations that specifies mutual obligations regarding national security. In the event a nation is attacked, members of the alliance are often obligated to come to their defense regardless if attacked directly. Military alliances can be classified into defense pacts, non-aggression pacts, and ententes. Alliances may be covert or public.

<span class="mw-page-title-main">Economic sanctions</span> Financial penalties applied by nations

Economic sanctions are commercial and financial penalties applied by states or institutions against states, groups, or individuals. Economic sanctions are a form of coercion that attempts to get an actor to change its behavior through disruption in economic exchange. Sanctions can be intended to compel or deterrence.

<span class="mw-page-title-main">Democratic peace theory</span> International relations theory; posits that democracies are reluctant to go to war

Proponents of democratic peace theory argue that both electoral and republican forms of democracy are hesitant to engage in armed conflict with other identified democracies. Different advocates of this theory suggest that several factors are responsible for motivating peace between democratic states. Individual theorists maintain "monadic" forms of this theory ; "dyadic" forms of this theory ; and "systemic" forms of this theory.

International political economy (IPE) is the study of how politics shapes the global economy and how the global economy shapes politics. A key focus in IPE is on the distributive consequences of global economic exchange. It has been described as the study of "the political battle between the winners and losers of global economic exchange."

The resource curse, also known as the paradox of plenty or the poverty paradox, is the phenomenon of countries with an abundance of natural resources having less economic growth, less democracy, or worse development outcomes than countries with fewer natural resources. There are many theories and much academic debate about the reasons for and exceptions to the adverse outcomes. Most experts believe the resource curse is not universal or inevitable but affects certain types of countries or regions under certain conditions.

<span class="mw-page-title-main">Linkage (policy)</span> Cold War-era American policy

Linkage was a foreign policy that was pursued by the United States and championed by Richard Nixon and Henry Kissinger in the 1970s détente, during the Cold War. The policy aimed to persuade the Soviet Union to co-operate in restraining revolutions in the Third World in return for concessions in nuclear and economic fields. Soviet interventions occurred in various conflicts such as the Angolan Civil War, the Mozambican Civil War, and the Ogaden War, while many revolutions still occurred in Third World countries, undermining the policy.

Interventionism, in politics, typically refers to the practice of governments that interfere in the political affairs of other countries, staging military or trade interventions. A different term, economic interventionism, refers to intervention in economic policy at home.

Stephen William Van Evera is a professor of Political Science at the Massachusetts Institute of Technology, specializing in international relations. His research includes U.S. foreign and national security policy as well as causes and prevention of war. He is a member of the Council on Foreign Relations.

<span class="mw-page-title-main">Realism (international relations)</span> Belief that world politics is always and necessarily a field of conflict among actors pursuing power

Realism, a school of thought in international relations theory, is a theoretical framework that views world politics as an enduring competition among self-interested states vying for power and positioning within an anarchic global system devoid of a centralized authority. It centers on states as rational primary actors navigating a system shaped by power politics, national interest, and a pursuit of security and self-preservation.

Polarity in international relations is any of the various ways in which power is distributed within the international system. It describes the nature of the international system at any given period of time. One generally distinguishes three types of systems: unipolarity, bipolarity, and multipolarity for three or more centers of power. The type of system is completely dependent on the distribution of power and influence of states in a region or globally.

Multi-level governance is a term used to describe the way power is spread vertically between levels of government and horizontally across multiple quasi-government and non-governmental organizations and actors. This situation develops because countries have multiple levels of government including local, regional, state, national or federal, and many other organisations with interests in policy decisions and outcomes. International governance operates based on multi-level governance principles. Multi-level governance can be distinguished from multi-level government which is when different levels of government share or transfer responsibility amongst each other. Whereas multi-level governance analyses the relationship of different state levels and interaction with different types of actors.'

"Long Peace", also described as the Pax Americana, is a term for the unprecedented historical period following the end of World War II in 1945 to the present day. The period of the Cold War (1945–1991) was marked by the absence of major wars between the great powers of the period, the United States and the Soviet Union. First recognized in 1986, the period of "relative peace" has been compared to the relatively-long stability of the Roman Empire, the Pax Romana, or the Pax Britannica, a century of relative peace that existed between the end of the Napoleonic Wars in 1815 and the outbreak of World War I in 1914, during which the British Empire held global hegemony.

<span class="mw-page-title-main">Complex interdependence</span>

Complex interdependence in international relations and international political economy is a concept put forth by Robert Keohane and Joseph Nye in the 1970s to describe the emerging nature of the global political economy. The concept entails that relations between states are becoming increasingly deep and complex. These increasingly complex webs of economic interdependence undermine state power and elevate the influence of transnational non-state actors. These complex relationships can be explored through both the liberal and realism lenses and can later explain the debate of power from complex interdependence.

Liberal institutionalism is a theory of international relations that holds that international cooperation between states is feasible and sustainable, and that such cooperation can reduce conflict and competition. Neoliberalism is a revised version of liberalism. Alongside neorealism, liberal institutionalism is one of the two most influential contemporary approaches to international relations.

The capitalist peace, or capitalist peace theory, or commercial peace, posits that market openness contributes to more peaceful behavior among states, and that developed market-oriented economies are less likely to engage in conflict with one another. Along with the democratic peace theory and institutionalist arguments for peace, the commercial peace forms part of the Kantian tripod for peace. Prominent mechanisms for the commercial peace revolve around how capitalism, trade interdependence, and capital interdependence raise the costs of warfare, incentivize groups to lobby against war, make it harder for leaders to go to war, and reduce the economic benefits of conquest.

International economic structures range from complete autarky to complete market openness. This structure has undergone numerous changes since the beginning of the nineteenth century. The state-power theory as put into perspective by Stephen Krasner (1976), explains that the structure of international trade is determined by the interests and power of states acting to maximize their aggregate national income, social stability, political power and economic growth. Such state interests can be achieved under free trade.

In international relations, international order refers to patterned or structured relationships between actors on the international level.

In international relations, credibility is the perceived likelihood that a leader or a state follows through on threats and promises that have been made. Credibility is a key component of coercion, as well as the functioning of military alliances. Credibility is related to concepts such as reputation and resolve. Reputation for resolve may be a key component of credibility, but credibility is also highly context-dependent.

References

  1. ↑ Mansfield, Edward Deering; Pollins, Brian M. (2003). Economic Interdependence and International Conflict: New Perspectives on an Enduring Debate. University of Michigan Press. ISBN   978-0-472-09827-9.
  2. ↑ Cournot, Antoine (1838). Researches into the Mathematical Theory of Wealth. Translated by Nathaniel Bacon. p. 127.
  3. ↑ Baldwin, David A. (1980). "Interdependence and power: a conceptual analysis". International Organization. 34 (4): 471–506. doi:10.1017/S0020818300018828. ISSN   1531-5088. S2CID   10757441.
  4. ↑ "UN DESA | Office for Economic and Social Council Support and Coordination". www.un.org.
  5. ↑ Paehlke, Robert (2009). Globalization, Interdependence and Sustainability. In Introduction to Sustainable Development – Volume 1. Encyclopedia of Life Support Systems (EOLSS).
  6. ↑ World Trade Organization (2008). "World Trade Report 2008 (Trade in a Globalizing World)" (PDF). Retrieved 26 October 2015.
  7. 1 2 3 McDonald, Patrick (2009). The invisible hand of peace: capitalism, the war machine, and international relations theory. Princeton University Press. ISBN   978-7-5097-9283-4. OCLC   988390516.
  8. 1 2 Simmons, Beth (2003). "Pax Mercatoria and the Theory of the State". Economic interdependence and international conflict: new perspectives on an enduring debate. University of Michigan Press. ISBN   0-472-09827-6. OCLC   51304096.
  9. 1 2 3 Brooks, Stephen G. (2005). Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict. Princeton University Press. ISBN   978-0-691-13031-6. JSTOR   j.ctt7sjz7.
  10. 1 2 Gartzke, Erik; Lupu, Yonatan (2012). "Trading on Preconceptions: Why World War I Was Not a Failure of Economic Interdependence" (PDF). International Security. doi:10.2139/ssrn.1706942. ISSN   1556-5068.
  11. ↑ Gent, Stephen E.; Crescenzi, Mark J. C. (2021). Market Power Politics: War, Institutions, and Strategic Delay in World Politics. Oxford University Press. ISBN   978-0-19-752982-9.
  12. ↑ Lupu, Yonatan; Traag, Vincent A. (2012). "Trading Communities, the Networked Structure of International Relations, and the Kantian Peace". Journal of Conflict Resolution. 57 (6): 1011–1042. doi:10.1177/0022002712453708. ISSN   0022-0027. S2CID   220643183.
  13. 1 2 3 Farrell, Henry; Newman, Abraham L. (2019). "Weaponized Interdependence: How Global Economic Networks Shape State Coercion". International Security. 44 (1): 42–79. doi: 10.1162/isec_a_00351 . ISSN   0162-2889. S2CID   198952367.
  14. 1 2 Mearsheimer, John J. (1994). "The False Promise of International Institutions". International Security. 19 (3): 5–49. doi:10.2307/2539078. ISSN   0162-2889. JSTOR   2539078. S2CID   153472054.
  15. 1 2 Grieco, Joseph M. (1988). "Anarchy and the Limits of Cooperation: A Realist Critique of the Newest Liberal Institutionalism". International Organization. 42 (3): 485–507. doi:10.1017/S0020818300027715. ISSN   0020-8183. JSTOR   2706787. S2CID   148193812.
  16. 1 2 3 Copeland, Dale C. (2015). Economic Interdependence and War. Princeton University Press. pp. 1–25. ISBN   978-0-691-16159-4. JSTOR   j.ctt7ztkw2.
  17. ↑ Copeland, Dale C. (2024). A World Safe for Commerce: American Foreign Policy from the Revolution to the Rise of China. Princeton University Press. ISBN   978-0-691-17255-2.
  18. ↑ Cha, Victor D. (2023). "Collective Resilience: Deterring China's Weaponization of Economic Interdependence". International Security. 48 (1): 91–124. doi:10.1162/isec_a_00465. ISSN   0162-2889.
  19. ↑ Mcdonald, Patrick J.; Sweeney, Kevin (2007). "The Achilles' Heel of Liberal Ir Theory? Globalization and Conflict in the Pre-World War I Era". World Politics. 59 (3): 370–403. doi:10.1017/S0043887100020864. ISSN   0043-8871. JSTOR   40060163. S2CID   154331885.
  20. ↑ Rowe, David M. (2005). "The Tragedy of Liberalism How Globalization Caused the First World War". Security Studies. 14 (3): 407–447. doi:10.1080/09636410500323153. ISSN   0963-6412. S2CID   144723501.
  21. ↑ Gowa, Joanne; Hicks, Raymond (2017). "Commerce and Conflict: New Data about the Great War". British Journal of Political Science. 47 (3): 653–674. doi:10.1017/S0007123415000289. ISSN   0007-1234. S2CID   155842355.
  22. 1 2 Gomez, David Matesanz; Torgler, Benno; Ortega, Guillermo J. (2013). "Measuring Global Economic Interdependence: A Hierarchical Network Approach" (PDF). The World Economy. 36 (12): 1632–1648. doi:10.1111/twec.12080. hdl:11336/28749. ISSN   1467-9701. S2CID   153947881. Archived from the original (PDF) on 2020-05-05. Retrieved 2019-12-10.
  23. ↑ Mantegna, R. N. (2012). "Hierarchical structure in financial markets". The European Physical Journal B. 11 (1): 193–197. arXiv: cond-mat/9802256 . Bibcode:1999EPJB...11..193M. doi:10.1007/s100510050929. ISSN   1434-6028. S2CID   16976422.
  24. ↑ Blanchard, Jean-Marc F.; Ripsman, Norrin M. (1996). "Measuring economic interdependence: A geopolitical perspective". Geopolitics and International Boundaries. 1 (3): 225–246. doi:10.1080/13629379608407567. ISSN   1362-9379.
  25. ↑ Rosecrance, Richard; Gutowitz, William (1981). "Measuring interdependence: a rejoinder". International Organization. 35 (3): 553–556. doi:10.1017/S0020818300032586. ISSN   1531-5088. S2CID   155029854.
  26. ↑ Crescenzi, Mark J. C. (2002). Economic Interdependence and Conflict in World Politics. Lexington Books.
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