The Natural Effect of Trade -An Enquiry into the Relationship between Trade and Conflict Patterns in China from a Liberal Perspective

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THE NATURAL EFFECT OF TRADE

-An Enquiry into the Relationship Conflict Patterns in China

Ulrika Andersson

Master Thesis in International Relations

One Year Masters Programme in International Relations

Department of Global Political Studies International Relations Supervisor: Magnus Ericson

THE NATURAL EFFECT OF TRADE

An Enquiry into the Relationship between Trade and Conflict Patterns in China from a Liberal Perspective

Master Thesis in International Relations

One Year Masters Programme in International Relations

Malmö University Department of Global Political Studies

International Relations Supervisor: Magnus Ericson

Spring 2009

THE NATURAL EFFECT OF TRADE

and from a Liberal Perspective

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Abstract

The purpose of this study is to examine the effect that international trade, or trade dependency, had on China’s propensity to achieve peaceful international relations in the period between 1970 and 2005. The hypothesis put forward is that there will be a negative correlation between China’s international trade pattern, or trade dependency, and the state’s aggressive international relations towards other states.

For easy assessment three research themes are formed; trade, conflict and peace, each considered separately. Evaluation of the research themes is done by means of simple regression and statistical analysis. In order to support the hypothesis, a negative and significant correlation between the two variables has to be found.

The conclusion of the study is that no negative correlation between the variables can be established, proving the hypothesis wrong. Furthermore no significant correlation, negative or positive, is found. However, there are indications in the data that there might be something to the liberal peace theories that form the basis of this study and further study is encouraged and recommendations for alterations are given.

Related keywords: liberal peace, interdependence, trade, conflict, international relations, China

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Acknowledgements

This thesis marks the end of my studies at Malmö University. Writing it has not always been easy and I owe a great deal to those around me who encouraged, inspired and challenged me.

I would like to express my sincerest gratitude to those who have been supportive of my work along the way; I could not have done it without you. Thank you to Magnus Ericson for guidance and support when needed. To all the teachers, lecturers and academic mentors that throughout the years have built up my passion for the world of economics at Filbornaskolan Helsingborg, The University of Nottingham and Malmö University. To Karin for motivating me when the going was tough. To Marianne for timely feedback and great ideas. To Gavin for keeping me on track. And finally, to friends and family who continuously encouraged and inspired me in my work.

To all the abovementioned and to those who I might have forgotten; Thank You.

Ulrika Andersson August 2009

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List of Tables

Table 8:1 Economic Indicators of Chinese Success...27

Table 8:2 Comparative Economic Indicators of Selected Economies...28

Table 8:3 Intensity of Inter-state Disputes by Hostility (1970-2001)...34

Table 8:4 Likelihood of Hostile Response by Time Periods...36

Table 8:5 Most Significant Correlation Coefficients...38

List of Figures

Figure 3.1 Causal Relationships Between Sectors...14

Figure 8:1 The Trade Development of the Chinese Economy (1970-2005)...26

Figure 8:2 Chinese Trade Dependency (1970-2005)...29

Figure 8:3 Inter-state Disputes by Incidences (1970-2001)...30

Figure 8:4 Inter-state Dispute Trends by Incidences (1970-2001)...31

Figure 8:5 Intensity of Inter-state Disputes by Average Duration (1970-2001)....33

Figure 8:6 Intensity of Inter-state Disputes by Level of Hostility (1970-2001)....35

Figure 8:7 Intensity of Inter-state Dispute by Average Level of Hostility (1970-2001)...37

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1. Introduction

”There is no alternative to working together and using collective power to create a better world.”1

Speaking at the “Searching for Global Partnerships” conference in 2002, former Foreign Minister of Sweden, Anna Lindh encapsulated in this one sentence the essence of the liberal agenda. Although she probably had in mind a more centrally organised “collective power”, it well describes the liberal idea of mutually beneficial cooperation, sprung from selfish and rational individuals seeking to promote themselves. The liberal dream in a sense, is the unconstrained development of the market in order for an efficient allocation of resources to take place and the belief that rational self interest may lead to mutually beneficial cooperation. In no way better is this idea epitomised than in the concept of international trade. International trade is the mutual cooperation of economic agents at an international level which leads to mutual benefits which spill over onto other agents as well. David Ricardo, one of the most influential International Political Economists in modern times, wrote that “a system of perfectly free commerce [...] diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.”2 The pursuit of the individual advantage that trade revolves around in this sense creates a bond between actors, making the interests of me and my closest inevitably connected to those of actors on the other side of the globe. It is this “common tie of interest and intercourse” that the liberals maintain is the key to a world society of peaceful cooperation, and in this manner they continue on in the spirit of 18th century philosopher Baron de Montesquieu, who famously proclaimed that peace is the natural effect of trade.

Yet trade is, and maybe even more so today than when Ricardo published his work in the 19th century, a contentious topic. From a theoretical perspective it is straightforward to argue for the benefits of free international trade in terms of the related

1

Regeringskansliet, Government of Sweden website; Speech by FM Anna Lindh in the Helsinki

Conference - Searching for Global Partnerships 4 Decem (2002)

2

Ricardo, David; On the Principles of Political Economy, and Taxation, 3rd edition, Woodfall , London,

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growth effects experienced by the trading economies. In today’s politicised world however, free trade is rarely just that. The amount of bureaucracy and political meandering that goes into determining trade flows nowadays leaves the theoretical benefits of free and unhindered trade in limbo. As an economist one of the hardest, but perhaps most essential things to do is to realise that theoretical benefits may be just that; theoretical. Economics and politics are so intricately intertwined at present that it may at times appear that they are indeed one and the same. International trade in particular suffers from this schizophrenic condition, making trade as Balaam and Veseth puts it “more political than ever now.”3 However regardless of the nature of the relationship between the economic and political sectors it is safe to say that “[t]his is the liberal hour.”4

On the matter Robert Kuttner proposes that “in the absence of a world government, cross border trade is always subject to rules that must be politically negotiated among nations that are sovereign in their own realm but not outside their borders.”5 This need for political negotiation, in trade related matters as well as others, has prompted the creation of a plethora of international forums, if not world governments as such, during the last hundred years or so, including the United Nations (initially the League of Nations), the Organisation for Economic Co-operation and Development and for trading issues; the World Trade Organization (replacing the General Agreement on Tariffs and Trade). These platforms for cooperation have nurtured an interdependence between countries that liberals would predict will also foster peaceful interaction. This is made possible, at least theoretically, by the natural diffusion of power that is fuelled by rational self-interest by economic agents.

There is no doubt that trade and economic links between virtually every actor on the planet has flourished in the last century, but is the world a more peaceful place for it? Has the liberal dream really come to pass; are we really building our very own perpetual peace? That is what this study sets out to investigate

3

Balaam, David N and Veseth, Michael; Introduction to International Political Economy, 3rd edition, Pearson Prentice Hall,United States of America, 2005, pp 118

4

Balaam and Veseth (2005), pp 49

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2. Background

... Section Two provides a historical recapitulation of China’s recent development and proceeds to explain why this empirical case is both interesting and important to study. ... Until recently, a great wall of protectionism has shielded China from the outside world and international trade has only recently started playing a major role in Chinese life again. For a very long time China was considered a country very much on the periphery by the most powerful countries of the world. China was far away, poor and weak; in fact despite being one of the victorious allies in the First World War, China was excluded from the negotiations that lead to the Treaty of Versailles.6

In the 15th century the Chinese were one of the world’s most powerful civilisations. China was far developed by the standards of the time, had advanced technology and a mighty sea-faring fleet that traded around the world. Then the fleet was decommissioned and international expansion ceased. The international system’s largest player withdrew in behind its walls and did not come out again until several hundreds year later and fell behind relative to the rest of the expanding world.7

After a prolonged civil war, the Communist party came to power in China in 1949 and the Peoples’ Republic of China8 was formed. The installation to power was followed in the late 1950’s by The Great Leap Forward, aimed at transforming China from a peasant-based agrarian society to a modern communist society, which ended in a great famine, the death of an uncountable number of people and the return to a more classical socialist agenda.

1966 was the final, but chaotic, stage of the trade isolated era. In an attempt to drive out supposed liberal bourgeois suspected of trying to reinstitute capitalism in China, the Cultural Revolution was initiated in May by the chairman of the Communist Party of China Mao Zedong. Several economic, educational and social reforms were introduced, however the revolution erupted in mass suffering, political upheaval and

6

Chan, Steve; “Chinese Perspectives on World Order” in John, T. V. and Hall, John A.(Ed); International

Order and the Future of World Politics, Cambridge University Press, Cambridge, United Kingdom, 2000, pp 201

7

O’Brien, Robert and Williams, Marc; Global Political Economy –Evolution and Dynamics, 2nd edition,

Palgrave Macmillan, Hong Kong, 2007, pp 48

8

The terms The People’s Republic of China and China will be used interchangeably throughout this study. China will refer to mainland China excluding areas such as Hong Kong, Macau and Taiwan.

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economic dismay and although Mao Zedong himself announced the Cultural Revolution ended in 1969, it is believed it carried on until Mao’s death in 1978.

In late 1978 new leader of the Communist Party Deng Xiaoping, commenced the programme of the Four Modernisations and with it started China on its path towards trade integration, a process termed “the open door”. The Programme was aimed at economic reform and included measures such as market liberalisation, export promotion and import allowances of foreign capital and technology.9 Its success marked the end of an isolationist era and a move towards the West in terms of economic ideals. Notably though, economic reform was not accompanied by the political liberalisation characterising the reforms of Eastern and Central Europe.10

In this sense, China has certainly taken the path less travelled when it comes to the reform of socialistic or communistic regimes. Where many others have had to reform their entire political standpoint and economic structure, China has succeeded, at least temporarily to both have the cake and eat it. China has invited the market-based economy, with all its inherent individuality, and a mild form of state capitalism, yet democracy and political reorganisation are still left banging on the gates. By this step, it appears that China is making a move from “classical socialism to market socialism.”11 And the country has been remarkably resilient to political pressure to change, even though some predicts that “using the market to infuse [China’s] political economy with the spirit of individual initiative”12 should eventually lead the country down the democratic path. According to Chan (2005) even in 2000, China’s primary policy orientation was still inward looking, placing main focus on economic modernisation “a goal that requires conducive conditions from a peaceful and stable external environment.”13 Therefore China would presumably also hold a line of peaceful international relations to allow themselves the environment from which to assert their economic and political dominance, but is probably strong enough to withstand immediate international pressure for political change.

In the year 2009, not only has China emerged as a significant actor in the economic arena, but also in the political sphere has China started to take the lead. Its

9 Chan (2000), pp 206 10 Ibid., pp 206 11

12

Ibid., pp 48

13

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remarkable development from the political nobody that was left out at major negotiations to one of the world’s most influential economic players, has forced the world to stand up and take notice of China once again. Its ofttimes criticised interaction with, and financial support of, less democratically inclined Asian and African countries has been in the limelight for many years and the Olympic Games in Beijing in 2008 drew mass protests from both politicians and the public with regards to the Chinese human rights’ records. "The opportunity lies in greater exchange with the outside world"14 Vice Chairman of the State Development Planning Commission of the People's Republic of China Chunzheng Wang, told an assembly in Switzerland in 2001, shortly before China’s installation into the WTO, clearly indicating China’s will and ability to integrate itself internationally.

In its 2007 rankings, The World Trade Organization (WTO) ranked China as the 2nd and 3rd largest trader of merchandise goods, for exports and imports respectively, and the 7th and 6th largest exporter and importer respectively of commercial services.15 This is not a trend that looks likely to turn in the 2008-09 figures either, given the remarkable immunity China appears to have experienced to the global financial crisis of 2008. WTO estimated that in 2008 China represented 7.87% of world merchandise trade (imports and exports) whereas the United States represented 10.65%; a remarkably altered scenario to the figures from 1970 when China and the United States contributed with 0.71% and 13.26% respectively. Given this increasing influence on world trade, world politics and world culture, The People’s Republic of China is becoming a progressively more exciting specimen for economists and political scientists alike, especially as no one really knows what economic and political factors affect them and in what direction they are heading.16 And these are they very reasons why China should form the basis of this study. Its sheer size and volume of trade makes for an interesting comparison against the rest of the world.17 As a country it is unlike any other, from an economical as well as political perspective, and its increasing power hold justifies the attempt to better understand the country’s past, present and future.

14

The World Trade Organization website; Trade resources –Quotes –mts –Countries and Multilateral

System

15

The World Trade Organization website; China Trading Profile WTO

16

Gilpin, Robert; Global Political Economy –Understanding the International Economic Order, Princeton University Press, Princeton, 2001, pp 333

17

Just as if one would compare, say Germany to the rest of Europe. Comparing China against individual countries that are not of similar size to this giant may empirically give an advantage to the Chinese.

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3. Purpose

The purpose of this study is to examine the effect of international trading, or trade dependency more specifically, on a country’s propensity to maintain peaceful international relations. The study will be carried out in relation to the rather unique case of the People’s Republic of China during the time period 1970 until 2005. By examining the correlation between trade dependency and conflict prone behaviour, one should be able to deduce whether this particular empirical case strengthens or contradicts the prediction of liberal theory or leaves evaluation inconclusive.

The topic of trade dependence in itself is an interesting topic, in a world becoming increasingly interconnected by trade flows. If there can be found a negative link between trade and war, then not only would the key to peace be straightforward, it would not be directly dependent on politicians for its successful implementation.

4. Theoretical Perspectives

... The section on theoretical perspectives presents briefly the relevant theoretical perspectives for approaching the research, starting with the most comprehensive namely liberalism, followed by traditional economic trade theory and finally, the trade liberalisation assumption.

...

4.1. Liberalism

The natural starting point for the evaluation of classical trade economics would be a rendering of the liberal perspective which constitutes the foundation of the subsequent discussion. Unlike realism, in which the state constitutes the principal actor, liberalism concentrates on a spectrum of actors ranging from the individual to the corporation to the state to various other interest groups.18 This plurality of economic entities, connected by a legal framework in a web of individual desires and needs is what forms the basis of liberal thought. This web, the economic market, arises as the liberal arena and is at the centre of a liberal perspective which builds upon the individual. Assuming

18

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rational19 and essentially self-regarding20 actors which act upon impulses of reason not emotion in a competitive manner; this is what makes up the life blood of the prosperous state and the natural state of life, whereby competition weeds out the faint and feeble. In the words of the father of modern economics, Adam Smith “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”21 It is the liberal opinion that selfish interests can be engaged in a constructive manner to achieve a socially optimal outcome whereby the fruits from the specialisation of the more productive members of society form the basis for the wealth of nations. Granted the realist focus is also on the competitive nature of humankind but in a manner that places greater emphasis on the aggressive and suspicious nature of individuals rather than the self-fulfilling aspiration. Competitive selection in the realist universe is for the most basic protection of one self, for survival.

It is no coincidence that the words liberal and liberty share the same linguistic roots. In the liberal point of view freedom, individual rights and free markets22 are the key concepts for any successful economic transaction. Liberalism seeks to liberate the individual from state intervention into its affairs on all levels. This results in a laissez-faire angle on international political relations in the sense that the actors in the international arena is as well as in the domestic equivalent, made up of individuals rather than states as in the realist perspective.

Whereas realism perhaps is best described by Thucydides’ statement “right [...] is only in question between equals in power, while the strong do what they can and the weak suffer what they must,”23 liberalism finds support from free thinking men such as Adam Smith and David Ricardo, the creator of classical trade theory. Essentially liberals, as opposed to their realist counterparts, predict a world of interdependence where the gains of one actor are not at the expense of another but where “the pie grows bigger and everyone gains.”24 Realism on the one hand stresses the inevitability of

19

Economic rationality refers to the optimisation of decision making conditional upon consulting all available information, leading to agent behaviour consistent with the liberal economic model.

20

Economic selfishness relies upon the assumption that rational economic agents are the best judges of their own interests.

21

Smith, Adam; Wealth of Nations, 5th edition, Methuen & Co., Ltd, London, 1904, Book I, Chapter 2, Section 1.2.2

22

23

Thucydides; History of the Peloponnesian War in translation by Richard Crawley, ca 431 B.C.E., Book V, Chapter XVII

24

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conflict between actors, or in this case states, and predicts a polar power structure, while on the other hand liberalism highlights the mutual benefits of cooperation between actors. It makes for a tale of two worlds where competition leads to abundance or destruction respectively.

Summary

The liberal world system is one of interdependence and mutually beneficial cooperation. By seeing to the individual needs and wants of one self, one in fact sees to the needs and wants of others as well.

4.2. Traditional Trade Theory

Epitomising the concept of liberalism is economic trade theory. While the subject of international trade may be foreign in its nature, the fundamental proposition of the term international trade is not a foreign concept to most. International trade25 involves the exportation and importation of goods and services of all types across international borders. This cross border trade allows the nationals of the trading countries to consume not only a more diverse selection of produce than the nationals of non-trading or autarkic economies, but it would furthermore allow them to consume more of each and every good as trade, through productive specialisation, would make production more efficient and thereby increase total world output.

The formal expression of the international trade mechanisms comes in form of the Heckscher-Ohlin factor endowment model26 (H-O model) named after its two Swedish originators. Ever since its inception in the 1930’s, the H-O model has been accepted as the standard explanation of international trade27 and still seems to most robustly explain the patterns of trade. Yet the H-O model addresses solely inter-industry trade and does not attempt to explain intra-industry trade28 which has prompted many

25

The terms international trade and trade will be used interchangeably throughout the text.

26

The H-O model is not the first of the classical trade theories but follows in the steps of, and builds upon, the theory of trade by David Ricardo. Whereas there are many similarities between the two models the main difference is that the Ricardian theory does not take into account the role of factor endowments in explaining trade flows. In view of the fact that the H-O model is slightly more sophisticated than the Ricardian model, it will be the H-O model that will be considered the classical or traditional trade theory of choice forming the basis for this study.

27

Gilpin (2001), pp 206

28

Black, John; Oxford Dictionary of Economics, 2nd edition, Oxford University Press, Great Britain, 2002

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to provide adaptations and alternative models, none yet as accepted or rigorous as the H-O model.

The H-O model recognises that countries differ, not only in their respective production technologies but also in the natural abundance of scarce resources. This recognition can be found in the number of basic assumptions the original H-O model builds upon namely;

(i) constant returns to scale of production;29

(ii) universal dispersion of production technologies;

(iii) determination of the relative production advantages of countries and the resulting trade patterns by their relative factor endowments of capital to labour;30

(iv) and the understanding that no two countries are identical in their resource abundances.

Based on these assumptions it becomes clear that all countries have similar constant returns to scale production functions of goods produced (derived from assumptions (i) and (ii)) however dissimilar relative factor endowments, or in other words different capital endowment relative to labour supply (assumption (iv)). In the event of an autarkic or non-trading environment, goods and services which are productively intensive in the relatively more abundant resource of a country will become relatively cheaper, whereas the produce which is intensive in the relatively more scarce resource will become dearer.

The term comparative advantage refers to this relative advantage in the production of certain goods and should not be confused with the term absolute advantage. The absolute advantage of a country in the production of a good is their ability to with an equal quantity of resources “produce more of a good than another country.”31 A comparative advantage implies the relatively more cost-effective production of similar goods or put in other words, production with lower opportunity

29

This assumption can be upheld if one considers human capital as an additional factor of production together with the traditional factors land, labour and capital. Human capital was a concept not incorporated in the original theory but which has allowed ever increasing returns to scale and strengthened the model.

30

Capital in international trade theory refers not to financial but to physical or man-made means of production, such as machinery.

31

Gillespie, Andrew; Advanced Economics through Diagrams, Oxford University Press, Oxford, Great Britain, 2000, pp 86

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cost.32 Implied in the concept of opportunity cost is that the production of one good must necessarily be compared to the production of another good. Out of the two goods one good will cost less to produce; by using the domestic factor endowment more can be produced of one good than of the other. Sheep can be bred in both Luxembourg and Ireland as both countries have knowledge of the most efficient production technology based on assumption (ii), however Ireland with its more expansive, green and sparsely populated land will likely experience a lower cost per sheep produced. If Ireland furthermore had a higher number of educated engineers they may perhaps also be better equipped to produce solutions to infrastructure problems and thereby they have an absolute advantage in the production of both tradeables. However Luxembourg may have relatively more engineers than farmland and thus they have a comparative advantage in the production of infrastructure solutions. If Ireland and Luxembourg specialise in sheep and infrastructure solutions respectively and then trade with one another, factor endowments in both countries have been utilised in their most productive and efficient way. In the words of Adam Smith “if a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”33

Should international trade become feasible, countries will focus their resources in the production of the good which is cheapest for them to assemble and that they would earn more from and which also happens to be the good which they are more efficient at producing. Consequentially then, the H-O model predicts that international trade will transpire between countries which experience different comparative advantages and their comparative advantage to export will be in the good whose production is intensive in the naturally more plentiful resource; capital abundant countries export capital intensive goods and import labour intensive goods and vice versa. The result is a minimum of wasted resources worldwide and benefits to all trading parties since the outcome would be a higher level of production and consumption in all countries.

32

The opportunity cost of a good, say good X, refers to the value of the second best thing, say good Y, which could be produced with the same resources. The more naturally endowed a country is to produce something, the lower the opportunity cost of the production of that good. A baker would for example have a lower opportunity cost of making bread than he or she would in making shoes.

33

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The H-O model of economic trade builds on the assumption of states’ comparative advantage in production and therefore in trade. International trade minimises inefficiencies in the trading economies and worldwide and allows for a mutual benefits of consumption and production.

4.3. The Trade Liberalisation Assumption

Rooted in the liberal doctrine and derived directly from the classical trade theories, the trade liberalisation assumption is essentially a reiteration of the conclusions of the classical trade theory. It recognises that there are imperfections in the international trade flow, many of which are unnatural and imposed on the economy by political rather than economic or rational forces. By eliminating such unnatural obstructions to the free and unhindered movement of goods and services, or in other words liberalising trade, a previously trade discriminating state may benefit from the predictions of the classical trade theory. Essentially the state is by liberalisation allowing the specialisation of production at its real cost.34 This specialisation will depend on the comparative advantage of various actors and therefore lead to an efficient reallocation of scare resources, nationally and internationally. The relative prices of the factors of production (land, labour and capital) of individual states that become apparent as trade is liberalised is predicted to “lead to efficient trade patterns.”35

Adhering to the principle of comparative advantage initiates a chain of events which alters the economic climate of the liberalising state. At the individual and firm level, the opening up of domestic markets to free trade brings about the elimination of anticompetitive practices resulting in an increase in market competition. As imperfect competition leads to artificially high prices, free trade will reduce domestic prices and also with more producers now active in the market place, increase the amount of products that consumers may choose between. As a result of a more competitive market structure there will be a reallocation of resources so that factors of production are utilised in the most efficient way.36

34

Real cost here refers to the actual cost of production, unaffected by trading impediments such as tariffs.

35

Gilpin (2001), pp 198

36

This follows logically as the firm which can produce more output per unit of input than its competitors can lower sales price and out compete its more inefficient opponent. China (01/09)

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Furthermore, on the level of the state as a whole, specialisation in the production of the goods in which the state has comparative advantage and exporting these in exchange for products in which the state lacks comparative advantage, allows national as well as global wealth to increase.

On the global level, the uninhibited flow of trade encourages the diffusion of technological processes and know-how by increasing the quantity and quality of international encounters. Thereby poorer or less productive states may learn new and more efficient production technologies and catch up with the richer and more productive countries of the world.

Finally, the increased interaction and closer interdependence that follows trade liberalisation increases the prospects of world peace.37 Liberal philosopher Immanuel Kant was reasoning along these very lines in his publication Perpetual Peace: A Philosophical Sketch, when he predicted that perpetual peace could only be accomplished by a global federation of republican states adhering to one another in a cosmopolitan manner.38

Summary

The predictions of the trade liberalisation assumption in short form are as follows: (i) the domestic competitive climate transforms and the economy moves towards

more open market features after trade liberalisation,

(ii) technologies and ideas disperse globally and more efficient production translates into increased domestic and global wealth and

(iii) closer economic interdependence between international actors increase the propensity for peace.

37

Gilpin (2001), pp 198

38

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5. Analytical Framework

... The section on analytical framework weaves together the theoretical perspectives into an analytical framework forming the basis for the study, first by outlining it and secondly by discussing briefly its practical implications.

...

5.1. Theoretical Framework

The liberal doctrine recapitulated above, conveys the idea that state interest and thus behaviour is not inevitably conflicting with other states’ interests and behaviour. The market and the freedom of decision which it provides epitomises the liberal idea both in domestic and international affairs. In particular economic trade theory posits that economic relationships create a mutual interdependency between the dyadic members of an economic coalition, which concurrently results in less conflict prone behaviour towards the economic partner state. Peaceful behaviour, the theory forecasts, rests on the foundation of states’ self interest, in its turn based on shared economic structures, domestically and internationally. Opening up the state to international trade allows the invisible hand of the economic market to become the norm for the domestic economic organisation, creating economic interests tied to the economies of the trading partners and diffusing power from relatively few actors (for example the governments of the states) to a wider spectra (firms, individuals, non-governmental organisations and so on). Furthermore, diffusion of ideas and technology transfers also political ideas and other ideals from state to state. One may loosely conclude that the three legs of the liberal tripod of peaceful international relations are essentially economic interdependence, political accord and international cooperation.

Figure 3.1 below depicts in schematic form this very idea. It shows the simplified cause and effect flows between the four variables involved in the liberal tango; domestic economic organisation (ed), domestic political organisation (pd),

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Figure 3.1 Causal Relationships Between Sectors

Economic and political organisation on the domestic level regards the structure of the state internally. In coherence with the liberalist perspective upon which the trade theories build, individual freedom is placed in the centre of any such organisation, so that economic organisation relates to the structure of the market or absence of it, and of supply and demand. Political organisation relates to the institutional structure of the state. On the international level economic organisation or structure refers to the economic relations between states made up of individuals, for example international trade, and political organisation to the political relations between states, for the purpose of this study; peace.

Standard international relations analysis focuses ofttimes on the flow marked in Figure 3.1 as a, namely between pd (political constitution) and pi (peace). Flow a is

probably better known as the theory of the democratic peace or the supposition that states with a democratic political structure will not wage war against another democracy, meaning that “regime type should be a strong indicator of threat [for democracies].”39 However as revealed by the heading “democratic peace” this concept relates to peaceful relations between two states with a shared domestic political

39

Farnham, Barbara; The Theory of Democratic Peace and Threat Perception, International Studies Quarterly; Vol 47 (2003), pp 395-415 Domestic economic organisation (

e

_d) Domestic political organisation (

p

_d) International political organisation (

p

_i) International economic organisation (

e

_i) a b INTERNATIONAL (ii) (i) (iii) DOMESTIC

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structure of democratic rule. China is a people’s republic and a “one-party state without free elections.”40 Moreover it is a Communist party-led state41 which by Freedom House; a non-profit, non-partisan organisation, can neither be counted as an electoral democratic state nor as a free state.42 Thus attempting to apply the democratic peace concept on China would appear to make little sense. In a world where far from all nation-states are democratic entities the concept of democratic peace is insufficient on its own. This leaves the flow marked b in Figure 3.1, between ei (international

economy) and pi (peace), to illustrate a peace theory for those actors that are not

democracies.

Flow b is the effect that economic organisation has on political organisation, in this case the effect that trade has on peaceful cooperation. Philosophical writer Ayn Rand in an interview quipped “if you do not regulate production and trade, you will have peaceful cooperation, harmony, and justice among men”43 and that is broadly speaking the general idea of economic trade theory. By changing ei (initiating

international trade for example) one effectively affects ed (domestic economy) via flow

(i) and ed affects pi (international relations) via flow (iii); a change in the power

structure and interests of state nationals as well as foreign nationals. Tying your economic interests to those of others elsewhere effectively implies creating an aversion to military conflict as this may damage your economic power, which has replaced political power as the means by which success is measured. This complex web of interdependence is what makes this area of study intriguing, yet its complexity is moreover what makes it problematical to address in a logical manner.

5.2. Practical Application of the Theoretical Perspectives

In order to allow for coherent analysis of the topic of this study; examining the effect of international trading on a country’s propensity to peaceful international relations, the predictions of liberalised trade in relation to its peace creating effects are divided into three research themes: trade, conflict and peace. These are separately examined, upon which a conclusion on the relation between economic processes and structures, and

40

Regeringskansliet, Government of Sweden website; Kina, authors translation

41

United States Department of State website; China (01/09)

42

Freedom House website; Freedomhouse.org -Electoral Democracies 2009

43

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political outcomes may be reached. In other words, this will allow an answer to be given to the question of whether trade dependency affects conflict prone behaviour in the case of China during the time span 1970 to 2005, be it positive, negative or inconclusive.

6. Research Questions

... This section introduces the three research themes of the study, followed by its operationalisation.

... In order to examine the correlation between trade dependency and conflict prone behaviour in the case of China, three research themes, each to be addressed separately, are defined. The three themes are Trade, Conflict and Peace.

6.1. Theme One: Trade

Theme One investigates the economic development of China for the time span 1970-2005, in terms of economic wealth and trade patterns. From these results one should be able to deduce the Chinese attitude to trade and the dependency on trade experienced by China, which will serve as an indicator of the reliance and dependence on economic partners the country experiences.

Economic wealth can be defined as the net worth of an agent, in this case a country, which equates to the value of tangible and non-tangible assets owned, less the value of the liabilities outstanding to foreign agents at any point in time. There are two ways to measure economic wealth; by stock or by flow. For the purpose of this research the stock of wealth, in other words the accumulated flows of wealth, and will be evaluated by mapping the development of Chinese Gross Domestic Product (GDP), GDP being “one of the main measures of economic activity”44 and “the standard measure of the size of the economy.”45 It is more specifically defined as “the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports,

44

Black (2002)

45

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minus the value of imports.”46 Figures will be adjusted for inflation and thus represent real GDP.

Trade will be looked at from two angles; exports from China and imports into China. This study is limited to merchandise trade47 only as this is the area that China has had their main comparative advantage in historically, and since it limits the amount of double counting that might occur with regards to re-imports to and from Hong Kong48, since 1997 under Chinese sovereignty.

Wealth and trade will be looked at quantitatively and assessed by statistical means. By the mapping of temporal economic trends the Chinese dependency, defined as “the total of merchandise trade between two states as a percentage of each state’s national income as measured by GDP,”49 can be calculated. For the purpose of this study, and given China’s rather unique size economically, instead of a dyadic dependency between two states, the dependency will be calculated between China and the rest of the world. 50

6.2. Theme Two: Conflict

Theme Two explores China’s political development in terms of their predisposition towards liberal cooperation rather than aggressive behaviour51 towards their economic counterparts.

Aggressive behaviour is defined as recorded inter-state conflict, by intention or action. Data from the Correlates of War Project is employed to define inter-state disputes (ID) as well as militarised interstate disputes (MID) on an indexed scale of one to five.52 Data on the intensity of the recorded disputes will also be consulted in order to determine the level of aggressive behaviour during the specified time period.

46

InvestorWords.com website; GDP Definition

47

Trade in services thereby not included.

48

Hong Kong trades mainly in services.

49

Clarke, Paul; Interdependence Theory, China and American Security Interests, 2006

50

This assumption is appropriate since what this study attempts is to correlate Chinese international economic dependence (approximated by international trade) and Chinese overall international behaviour (approximated by aggressive behaviour), not limited to their international relations to specific states.

51

As in the case of Theme One, Theme Two has been limited to an approximation of political development, namely propensity to internationally aggressive behaviour. Like in the case of economic development, political development approximations could probably be extended by other variables indefinitely.

52

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By looking at data relating to recorded Chinese conflict behaviour during the years between 1970 and 2005, patterns of or changes in international behaviour can be examined.

6.3. Theme Three: Peace

The framework of the research builds upon the assumption, supported by liberal theory, that closer economic interdependence between economic agents breeds a mutual interest in peaceful relations. By correlating the findings in Theme One and Two, the hypothesis that closer economic interdependence promotes peaceful behaviour can be tested. Peaceful behaviour is approximated by a decrease in the number and intensity of IDs and MIDs.

By statistical methods the hypothesised correlation between dependence and aggressive behaviour will be mapped for visual interpretation and furthermore the level of correlation calculated.

7. Methodology

... The following section introduces the methodology of this thesis and establishes the chosen method, procedure and underlying assumptions made in approaching the matter at hand and relevant discussions on all the aspects of these.

...

7.1. Research Design

Testing the strength of any theoretical model or prediction is best carried out by empirical research on a relevant case; in this instance China has been selected for its interesting economic and political features. Empirical research allows the “use [of] observable, real-world experience, evidence and information as the way of developing and testing ideas,”53 in this case the idea that trade dependency affects the propensity to maintain peaceful international relations. Since the purpose of this study is posed in the manner of a general question, in order to achieve a general answer that could be applied indiscriminately to other cases as well, a qualitative design would be insufficient. For

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these two reasons, the design of this study will take the form of a quantitative single case study.

However, it should be understood that whereas this study attempts to investigate the more general relationship between the variables indicated, a one sample case study is likely to be insufficient in allowing greater inference of the results. Therefore the aim of this research is to study the relationship between variables in the specific case of China, but using a method that could be replicated on a wider level to reach general conclusions.

The sectors of analysis are first and foremost the economic and the military sectors. To an extent the political sectors are touched upon, however the purpose of this study is to find a link between trade and aggressive behaviour, best translated into a link between the economic sector and the military sector, without involving the political side if possible.

Given the liberal philosophy which forms the basis for trade theoretic prediction, the level of analysis of this thesis will naturally be a wide one. In analysing the effects of economic processes, such as trade, on political outcomes, here non-aggressive behaviour, the unit level, in which the state is the unit of analysis, will constitute the initial and main level of analysis together with the system level of analysis.

7.2. Case Selection

This study will examine the empirical case of the People’s Republic of China during the time period from 1970 to 2005. The choice will hopefully allow for some rather interesting observations given China’s remarkable rise to fame in recent times. Their very recent move from an almost entirely closed state to one of the largest traders in the world is unprecedented and its undemocratic constitution allows the study of a case where the theory of democratic peace is not automatically applicable.

7.3. Delimitations

The sample of study is limited to one case only; China, implying mainland China not including areas such as Hong Kong, Macau and Taiwan.

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This case study will consist of a closed time series commencing at t0=1970 and

concluding at tn=2005 where n=36, whereby each recording is an annual value. Data

prior to 1970 or post 2005 will not feature in this analysis.

Trade dependency is approximated by the increasing amount of international trade China takes part in, together with the calculated trade dependency values based on such data. Trade is furthermore in this study treated as a single entity consisting of the exchange of goods and services across borders. As such it does not address the matter of globalisation, nor does it consider the many possible subdivisions of trade. Other forms of economic interdependence measurements will not be considered in this study.

Non-aggressive behaviour is approximated by involvement in IDs, militarised or not, and the intensity of any such IDs and in doing so this study relies on data from the Correlates of War Project. Other forms of non-peaceful behaviour are not considered at this time.

In addressing Research Themes One to Three and evaluating whether the predictions of economic interdependence breeding non-aggressive international relations hold in the empirical case of China, this thesis attempts to make neither value judgements nor recommendations with regards to the status of trade.

7.4. Possible Outcomes and Hypotheses

The hypothesis that this study with theoretical support from the liberal trade theories proposes is that trade dependency would affect the behaviour of states towards economic partner states positively. As the economic bond between two states increase there is an increased economic interest in less aggressive international behaviour in terms of action and intention. By continuing aggressive behaviour against foreign states, the state is risking the loss of economic wealth by disrupted trade and also to suffer from decreases in essential inputs that are imported from abroad.

The possible outcomes in examining the effect of international trade, or trade dependency more specifically, on a country’s propensity to peaceful international relations are three; first there could be a positive correlation between the variables whereby dependency translates into an increase in aggressive behaviour internationally. Secondly, as hypothesised by this study, there could be a negative correlation between

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dependency and the number or intensity of conflicts. Finally there could be no substantial or significant correlation which would leave evaluation inconclusive.

All three outcomes appear equally possible and so this thesis does not favour any particular outcome over the other.

7.5. Potential Analytical Hazards

Economists and political economists alike tend to have a way of always simplifying and idealising assumptions54 to allow for greater generalisation of results as well as to facilitate the analysis of data. For obvious reasons this might instead prove a hindrance to understanding reality which is why great care must be taken in making assumptions. Thorough contemplation has therefore gone into the selection of indicators to approximate the variables trade and conflict prone behaviour. There is however, still the possibility that these indicators should prove not appropriate or not completely fitting. The possibility exists that the variables have been too narrowly defined and that any trade measures for example should include services as well as merchandise trade, or that non-aggression should be defined in terms of diplomatic rather than conflict behaviour.

Furthermore, the choice of theoretical perspectives and the analytical framework constructed based on these could prove incompatible with the choice of the sample. The liberal perspective might be the wrong to assume for China or the traditional trade theoretic modelling not sufficient to explain trade flows to and from China.

Finally, in terms of establishing state behaviour, a sample of 36 years could prove too short for any inference to be possible.

7.6. Data Collection Procedure

Data collected will be discrete rather than continuous, implying that observations have been recorded at regularly spaced intervals in time rather than at every instance in time.55 Time constitutes an independent variable, while the data collected is dependent.

54

Dow, Sheila, C.; Economic Methodology –An Inquiry, Oxford University Press, New York, 2002, pp 162

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Trade data will be secondary and collected from reputable and recognised sources. Where appropriate and available, other sources have been sought to cross check the data for further accuracy.

Conflict data will primarily be secondary and the utmost will be done to cross check data provided against alternative sources to verify accuracy. In this manner, although the data is secondary in nature, cross referencing it with other independent secondary data should allow for greater validity and reliability of data.

7.7. Data Processing and Analysis

Collected data will after compilation be grouped and subjected to regression and statistical analysis by means of standard computer software56 and basic statistical functions, in order to uncover any trends in the data that would either support or contest the predictions of the trade liberalisation assumption. Compiled observations will be arranged in temporal sequences so as to comply with a natural one-way ordering of time, subject to time irreversibility. This implies that successive observations are likely to suffer from dependency on one another, in such a way that any observation is to some extent derived from its antecedent and must therefore be recorded in a sequence that reflects this interrelation.

Once such a sequence has been compiled the data can be processed and analysed by means of time series analysis, linear regression and schematic observations. Time series analysis consists essentially of the “analysis of real data by means of statistical methods”57 dependent on the temporal aspect, linear regression refers to the study of a relationship between variables58 and schematic observation relates to the transformation of data into observable diagrams. By means of such analysis a tabular and graphical examination of the data can be performed and give rise to conclusions addressing the purpose of the study.

56

The operating system utilised is Microsoft Vista 2007 with related applications such as Microsoft Excel.

57

Julius Maximilians Universität Wurzburg website; A First Course of Time Series Analysis

58

Punch, Keith, F; Introduction to Social Research – Quantitative and Qualitative Approaches, 2nd edition, SAGE Publications, Trowbridge, Great Britain, 2005, pp78

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Resources for statistical analysis will be provided by the research institution and by the researcher and will consist of standard operating systems and software, such as Microsoft 2007 with associated applications.

7.8. Validity and Reliability

Validity refers to ensuring that the correct variables are being measured and that therefore the results of any research are applicable; meaning it is a goal rather than a product59 of the research design. As such, “validity is not a commodity that can be purchased with techniques”60 yet the correct framing of a study significantly increases the chances of an environment in which results are valid. This quantitative study has attempted to build in several validity checks such as framing a specific hypothesis prior to data collection and testing for statistical significance of data,61 in an attempt to increase the validity of the research.

This study aims to achieve a high degree of reliability by clearly outlining the logic behind variable selection and procedure, and by the reproduction of data and results in the Appendices. In this manner future research using the same method and modus operandi would arrive at similar results, thereby ensuring consistency of measurement and transparency of results.

7.9. Source Criticism

This study makes use of data from international organisations such as the WTO, the International Monetary Fund (IMF) and the World Bank (WB). As these are reputable and recognised institutions with several years of experience in coordinating standards of measurement and collection and compiling data, they can be considered accurate sources of information. Data will also be collected from the Correlates of War Project, a database of aggregated war statistics based out of Pennsylvania State University in the United States. Although based at a recognised university the information collected from this source cannot in itself be considered accurate. In order to ensure accuracy of the

59

Maxwell, Joseph A.; Qualitative Research Design –An interactive Approach, 2nd edition, SAGE publications, United States, 2005, pp 13

60

Bringberg, D. and McGrath, J. E.; Validity and the Research Process, SAGE, Beverly Hills, CA, United States, 1985 from Maxwell (2005), pp 13

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data collected from this source, records from the dataset has been cross referenced to other literature and sources of information whenever possible.

7.10. Ontological Position

Any scientific study, be it within the natural or social sciences, is naturally affected by the scientist or researcher carrying out the study. The conscious or subconscious subjective interpretation of the results of the scientist is permeated by values and beliefs that the same has already formed and is basing his or her conclusions upon. As the social sciences in particular suffer from this risk of limited intersubjectivity, or non-transparency of conclusions, it is of great importance that care is taken to address this matter and define the underlying assumptions that the research is based upon. This thesis takes as its underlying assumption a positivistic position and by doing so makes “an ontological assumption of an objective reality”62; in other words the nature of reality is one that can be objectively observed and “the function of science is to develop explanations in the form of universal laws,”63 or in other words nomothetic knowledge. This stands in stark contrast to the relativistic position by which reality is subject to individual interpretation and not universal.

In addition to the assumption of an objective reality, an epistemological assumption of objectivism is furthermore made. In contradiction to subjectivism, which is closely related to a relativistic position, objectivism confers a reality that can be observed objectively and without individual interpretation.

For the purpose of this study and for examining whether the prediction of the theory of trade liberalisation holds in the case of recent Chinese trade liberalisation, the application of these two ontological and epistemological assumptions allows a greater degree of intersubjectivity of the results.

62

Esaiasson, Peter, Mikael Gilljam, Henrik Oscarsson and Lena Wägnerud; Metodpraktikan -Konsten att

studera samhälle, individ och marknad, 2nd revised edition, Norstedts, Stockholm, 2003, pp 17, author’s translation

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Futility is always a risk with any research carried out and every researcher should aspire, not only to produce accurate and transparent results, but to add to the collective wealth of already existing research. Any new research carried out should be relevant, well thought-through and well presented.

Furthermore, in performing quantitative studies, data should not knowingly be misrepresented or taken out of context to suit the purposes of the researcher and due recognition should be given to the work of others. Therefore appropriate and correct citations should form part of any significant study. This in addition to the reproduction of results and clear description of the work carried out, adds to the transparency of the study and allows other researchers to replicate or critique the work done.

This thesis throughout respects these and other ethical standards of research and attempts to live up to them.

8. Empirical Analysis and Results

8.1. Theme One: Trade

The first part of the empirical analysis relates to the variable trade and trade-related dependency in China. Data collated is annual and analysed by standard mathematical examination and regression analysis.

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Figure 8:1 The Trade Development of the Chinese Economy (1970-2005)

Source: United States Department of Agriculture Economic Research Service,64 and the WTO; Appendix I

Figure 8:1 depicts graphically the economic trends of China since 1970 in terms of economic wealth and trade value. By visual observation it is quite clear that the trend has unambiguously been upward. Since 1970 there has been a steady but slow increase in Chinese real GDP and trade volumes, a trend which has continued at an accelerated pace ever since. In 2005 Chinese real GDP reached US$ 2,300 billion, comparable to the real GDP of the United States at 12,433 billion and Japan at 4,284 billion in the same year.65 Furthermore, only once since 1970 has the Chinese economy experienced a negative rate of growth in GDP, in 1976, and only twice decreases in traded volume by value, in 1976 and 1982. This extraordinary development is also

64

Henceforth, USDA ERS

65

United States Department of Agriculture Economic Research Service website; ERS/USDA Data –

International Macroeconomics Data Set

0 500 1,000 1,500 2,000 2,500 Year

Real GDP Total trade Imports Exports

Billion USD at current prices

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illustrated in Table 8:1, where the incredible increase in value of the Chinese economy over the last 35 years is clearly seen.

Year

Real GDP Total Trade¹ Imports¹ Exports¹ US$ billions² US$ billions³ US$ billions³ US$ billions³

1970 121.5802 2.5095 2.2788 0.2307

2005 2,300.3124 1,421.9060 659.9530 761.9530

¹ merchandise trade only ² 2005 base year ³ at current prices

Table 8:1 Economic Indicators of Chinese Success

Source: adapted from Appendix I

In terms of GDP, points of particular interest in Figure 8:1 are the years 1978, 1991 and 2001 when the rate of increase in GDP increases significantly, thereby setting China on its fast path to success. 1978 and 2001 both denote landmark economic turning points for China; 1978 being the starting year for the Four Modernisations programme in China and 2001 marking the first year of membership in the WTO. Both these events quite clearly would have positive effects on economic wealth.

When it comes to trading trends, they appear to follow a similar pattern. Again 1978 and 2001 show an increase in the rate of growth of trade, imports, exports and total trade values. Quite naturally when one considers the significance both events had on Chinese openness and international relations.

Following the line of investigation the Chinese dependency on trade can be calculated. In effect dependency relates a country’s value of trade to its value of domestic output, such that the trade dependency ratio of China is calculated by taking the combined total trade value and dividing it by the GDP for any given year. The dependency arrived at is a measure of the reliance China has on international trade or in other words, economic interaction with the world. Table 8:2 shows the development in dependency percentages between the first and last year of the time span. In 1970, China’s dependency ratio was a moderate 2.0641% whereas in 2005 it has surged to a staggering 61.8136% (see Appendix I). By comparison with other trade-inclined countries this development is quite remarkable. Table 8:2 shows that China, Japan and the United States all started out in 1970 with a trade dependency of about two percent,

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but their development has finished quite different. In fact, China’s dependence ratio in 2005 looks more similar to that of Sweden; another export oriented state.

Country Year

Real GDP Total Trade¹ Dependency US$ billions² US$ billions³ Percentage

China 1970 121.5802 2.5095 2.0641 2005 2,300.3124 1,421.9060 61.8136 Japan 1970 1,538.0426 38.1989 2.4836 2005 4,284.1589 1,110.8073 25.9282 Sweden 1970 170.5992 13.8021 8.0904 2005 357.1743 242.6590 67.9385 United States 1970 4,262.2470 85.6300 2.0090 2005 12,433.3900 2,636.9950 21.2090

¹ merchandise trade only ² 2005 base year ³ at current prices

Table 8:2 Comparative Economic Indicators of Selected Economies

Source: USDA ERS and the WTO; Appendix I.

Figure 8:2 shows China’s development in diagrammatical form. Again 2001 appear for logical reasons to be a crunch year when it comes to trade dependency.