Growth, import dependence, and war in the context of international trade

Roberto Bonfatti, Kevin O'Rourke 26 May 2017

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World trade has increased tremendously in recent decades, driven by the rise of China and other emerging economies. Rapid industrialisation has meant that China has become increasingly dependent on imported natural resources. A huge share of this trade is channelled through maritime choke points. For example, 40% of China’s crude oil imports pass through the Strait of Hormuz, and 80% through the Malacca Strait and the South China Sea (Kaplan 2014). Not surprisingly, Chinese policymakers have on occasion expressed unease at their country’s ‘Malacca dilemma’.

The reliance of world trade on choke points creates the need for someone to guarantee the freedom of navigation. Traditionally, this role has been upheld by the naval hegemon of the day – Britain during the 19th century’s Pax Britannica, and the US today. For example, the US Navy’s 5th and 7th fleets, which are headquartered in Bahrain and Japan respectively, frequently engage in ‘Freedom of Navigation’ missions to the Strait of Hormuz, the Malacca Strait, and the South China Sea. While the naval hegemon may in fact be providing a global public good by behaving in this manner, its activities may not always reassure everyone, especially if strategic tensions are gradually building up between itself and rising powers such as China.

Rising tension between the US and China is often analysed in the context of the broader challenge that the rise of China poses to US military hegemony. Political scientists have long cautioned against the risks posed by shifts in relative power. In fact, in the eyes of some theorists, such shifts are the main reason why war can occur. War is, from a rational choice perspective, a paradox. Since fighting always costs one country more than it benefits the other, one would expect that rivals should always be able to settle their issues in a peaceful way. However, Powell (2006) shows, in the context of a two-country world, that if one of the two countries is catching up militarily on the other, it may be impossible to dissuade the established power from launching a pre-emptive war against the rising power.

This is because from the perspective of the established power, not going to war carries a future cost (mirrored by a future gain to the rising power). In the future, the rising power, having become more powerful, will be better able to impose its will on the established hegemon when it comes to disputes between the two (think of a contest to see who can gain the larger share of a pre-determined pie). The follower has an incentive to forestall a pre-emptive war by the leader, by promising the leader a sufficiently big slice of the pie in the future. Since it cannot pre-commit to this, and has an incentive to use its greater power in the future to secure a greater share of the pie, the leader may choose to launch a pre-emptive war in order to lock in a higher share of the spoils while it still has the chance.

Applied to the case of industrial catching up, this model seems to have clear implications. Military power goes hand in hand with growth and industrial development. Thus, an established industrial leader should be the one to consider launching a pre-emptive war against a catching-up, late industrialising, follower.

In a forthcoming paper, we show that if international trade is taken into account, the implications of the model can be quite different (Bonfatti and O’Rourke, forthcoming). Central to our analysis are the assumptions that the follower needs to import increasing amounts of raw materials from the rest of the world, as it undergoes structural change, and that the leader may be able to blockade the follower’s trade.

An industrial leader may well be losing out to a catching-up follower in terms of potential military power. However, this does not necessarily imply that it is actually becoming militarily weaker over time. Industrial catching up is a double-edged sword for the follower – while it makes its military apparatus potentially more powerful, rapid growth and structural change also makes it more dependent on imported raw materials. If the leader has the capacity to blockade these imports in case of war, the follower may actually become militarily weaker, rather than stronger, over time. In this case, it may be the follower who launches a pre-emptive war on the leader, and not the other way around.

By generalising the model in this manner, by endogenising the share of GDP devoted to the military, and by introducing a third, resource-rich region, we open up a rich menu of theoretical possibilities. For example, the rising cost to consumers of wartime blockades may give the follower an incentive to go to war, even in circumstances when its relative power is not declining. The follower may also decide to attack resource-rich peripheral areas in an attempt to become more self-sufficient, or entirely self-sufficient, in raw materials. It may do so instead of, or prior to, launching an attack on the leader. Sequential attacks on first the resource-rich region, and later the leader, can occur if conquering the former increases the follower’s chances of defeating the latter, but still leaves the follower dependent on imported raw materials and vulnerable to blockade. The follower may even attack the resource-rich region in circumstances when it knows that this will provoke an attack upon it by the leader, when otherwise the two countries would not have gone to war. If the follower is not only becoming rapidly more import-dependent, but is also converging rapidly on the leader, then conquering the country supplying raw materials can transform what would have been a follower-led war into a leader-led war. In this case, while it is the leader who decides to go to war against the follower, the root cause of the war remains the follower’s incentive to fight, arising from its import-dependence and the leader’s ability to blockade.

We argue that our model can shed light on why it was Japan who attacked the US in 1941, and not the other way around (Barnhart 1987). This was unambiguously a case of an industrial follower catching up on the leader – Japan’s industrial output had been growing more rapidly than American output since 1890. Rapid growth meant an increase in Japan’s relative military power, displayed during the Russo-Japanese war of 1904-5. And yet Japan, a country endowed with few natural resources, was also becoming rapidly more dependent on imported raw materials, several of which (such as oil) were supplied to it by the US. Indeed, the US would ban oil exports to Japan in July 1941, in what was seen by the latter as a de facto declaration of war. Japan’s invasions of resource-rich Manchuria, China, and Southeast Asia were attempts to break free from this pattern of increased dependence – they correspond to attacks on the resource-rich region in our model, prior to an eventual attack on the leader.

Like Japan, late 19th and early 20th century Germany had been rapidly catching up on Britain and the United States, and her military apparatus had become relatively more powerful. However, Germany had also become more dependent on imports of food and raw materials, the majority of which arrived by sea and could be blockaded by the Royal Navy. While we do not argue that this strategic dependence explains the origins of either world war in Europe, Offer (1989) has argued that it was a key factor explaining the Anglo-German naval rivalry which preceded WWI, and which helped shift British strategic thinking in an anti-German, rather than a pro-German, direction. After WWI, Hitler was obsessed with German dependence on imports of food and strategic raw materials. The importance of securing the resources needed to fight his wars is a constant theme of Tooze’s (2006) classic book on the Nazi economy. One obvious solution was to attack Eastern Europe, which corresponded to the resource-rich peripheral region in our model, even though attacking Poland risked war with the UK and France. And in the long run, conquering Russia was seen as the only way to achieve complete self-sufficiency in raw materials.

Such theoretical and historical considerations suggest that it is Chinese vulnerability, rather than American, that we should be worried about. As long as the US retains control over maritime choke points, a policy which is probably globally welfare-enhancing, it may be China, rather than the US, that fears becoming more vulnerable over time. In that context, Chinese expansionism in the South China Sea, while potentially dangerous, may not be so surprising.

Fortunately, the world is a much safer place today than it was in the late 19th and early 20th centuries. Globalisation, and, especially, nuclear weapons, have made war between the leading powers so costly that it is much less likely than it was a hundred years ago. Nonetheless, anything that can be done by China and other rising powers to diversify their supplies of energy, and other crucial resources, reduces the risks identified by our model. And an unambiguous commitment by all countries to a rules-based international trade regime, including a blanket prohibition of strategically-motivated export restraints, can contribute to making the world a safer place.

References

Barnhart, M A (1987), Japan Prepares for Total War: The Search for Economic Security, 1919-1941, Cornell University Press.

Bonfatti, R, and K H O’Rourke (forthcoming), “Growth, Import Dependence and War”, Economic Journal. An earlier version is available as CEPR Discussion Paper 10073.

Kaplan, R (2014), Asia’s Cauldron: The South China Sea and the End of a Stable Pacific, Random House.

Offer, A (1989), The First World War: An Agrarian Interpretation, Clarendon Press.

Powell, R (2006), “War as a Commitment Problem”, International Organization 60(1), 169-203.

Tooze, A (2006), The Wages of Destruction: The Making and Breaking of the Nazi Economy, Allen Lane. 

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Topics:  Economic history International trade

Tags:  war, industrialisation, global powers, game theory

Assistant Professor of Economics, University of Nottingham

Chichele Professor of Economic History, All Souls College, University of Oxford; and Research Director, CEPR

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