Wars and trade

Empirical data does not support the theory that trade promotes peace nor assumption that vulnerability will snap ties.

One of the fears in the wake of the minor skirmishes at the Line of Control (LoC), which was deliberately hyped in India, was that it can negatively affect the normalisation process between Pakistan and India and, by extension, the movement towards trade and investment.

The Indian prime minister’s statement, under pressure from the opposition right-wing Bharatiya Janata Party as well as a large section of the Indian media, that “this is not business as usual”, followed by partial suspension of the relaxed visa regime, stoppage of the bus service across the LoC, refusing to play Pakistani players in the Hockey India League and returning Pakistani showbiz people enhanced fears that trade agreements effected late last year might next be axed if the situation continued to slide.

While India’s actions boosted the realist argument that ‘relative gains concerns’ will always determine a state’s response and militarised disputes, even short of war, will badly impact trade between them, the liberals fretted over the LoC moment and hoped that it will not become another bad episode in the history of Pakistan and India whose relations have traditionally been fraught.

Better sense has begun to prevail in India. Not unexpected, given the gradual fading of histrionics on Indian TV screens. But fears that trade between the two countries remains hostage to realist assumptions grounded in security as the primary determinant of a state’s response to external stimuli, have again increased.

In other words, while realists are being smug over the fact that the moment proves the realist theory right, liberals, arguing that trade and investment will increase interdependence and thus reduce the chances of conflict, have gone into a trepidation mode. They ask the usual question: how can Pakistan and India be brought to the point where realist assumptions are defeated. To put it another way, the liberals argue that all will be well when Pakistan and India resume full trade but don’t know how to get the two sides there! In sum, they ‘accept’ the realist position implicitly in the first instance, but argue nonetheless that once trade is given a chance, a different causality will kick into play, trumping the realist assumptions. To rub it in, realists further argue that even if trade ties were not to snap because of security concerns and trade in fact increased, high interdependence will increase rather than decrease the chances of conflict. They point to the well-known fact that the European powers had very high levels of trade and high interdependence in the run-up to both world wars. Going by the liberal argument, those levels of trade and interdependence should have prevented war. But war happened, not once, but twice and mutual dependence actually increased vulnerability rather than decrease it.

So, how does one explain that through the interdependence argument? The realist correlation seems to be right but, as David Copeland argues in his International Security article (Vol 20, no 4; Spring 1996), “trade levels had been high for the previous 30 years [in the run-up to WWI]; hence, even if interdependence was a necessary condition for the war, it was not sufficient.”

Copeland offers a different approach and calls it a theory of trade expectations:

“Trade expectations theory introduces a new causal variable, the expectations of future trade, examining its impact on the overall expected value of the trading option if a state decides to forgo war. This supplements the static consideration in liberalism and realism of the levels of interdependence at any point in time, with the importance of leaders’ dynamic expectations into the future.

“Levels of interdependence and expectations of future trade, considered simultaneously, lead to new predictions. Interdependence can foster peace, as liberals argue, but this will only be so when states expect that trade levels will be high into the foreseeable future. If highly interdependent states expect that trade will be severely restricted — that is, if their expectations for future trade are low — realists are likely to be right: the most highly dependent states will be the ones most likely to initiate war, for fear of losing the economic wealth that supports their long-term security. In short, high interdependence can be either peace-inducing or war-inducing, depending on the expectations of future trade.”

The good news, however, is that trade is inevitable. To put it simply, until there is a seller and a buyer, trade will happen. There is empirical data to support this, compiled by Katherine Barbieri. Barbieri also co-authored with Jack Levy an article in the Journal of Peace Research (Vol 36, no 4, 1999), captioned, “Sleeping with the Enemy: The Impact of War on Trade”. Barbieri and Levy maintain that “there are numerous historical cases of trading with the enemy during wartime, including trade in strategic goods that directly affect the ability of a state to prosecute the war.”

Trade will continue even when states are at war. While dyadic trade will be negatively impacted, trade through third parties and circuitously will continue. This is not to say that states must fight or that trade through third parties in such circumstances is preferable to dyadic trade. The point is that empirical data does not support the central tenet of the liberal theory that trade promotes peace or the realist assumption that states, because of vulnerability, will snap those ties. If there’s a demand for item X made by state Y in state Z, X will get to Z, regardless of the conditions of war and peace. This is also borne out by informal trade linkages between Pakistan and India, especially trade through third parties.

But precisely for the reason of the inevitability of trade, and leaving aside the issues of war and peace, it should be clear that sleeping with the enemy is not all that bad. If something is going to happen, it should rather happen in an environment of peace than war. Equally, however, there’s a need to look at certain assumptions, especially the more optimistic “give trade a chance to bring peace” chants, with a more critical eye than the effusive, liberal enclave of Pakistan is prepared to do.

Published in The Express Tribune, January 30^th, 2013.