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GROWTH, TRADE AND WAR: Economic history lessons for today’s global powers

Industrialisation requires the import of natural resources, potentially leading a rising power to trigger war either against a resource-rich country or against the country that is the current global hegemon. That is the process analysed in new research by Roberto Bonfatti and Kevin O’Rourke, which combines theory and history to explore strategic tensions between China and the United States.

Their study, published in the September 2018 issue of the Economic Journal, helps to explain why it was Japan that attacked the United States in 1941, and not the other way around, as well as Hitler’s invasion of Poland.

Fortunately, the world is a much safer place today than it was in the late nineteenth and early twentieth centuries, the researchers note. 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 will reduce the risks identified by the analysis in the new study. 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.

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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. Not surprisingly, Chinese policy-makers 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 nineteenth century’s Pax Britannica, and the United States 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 United States 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. But in the context of a two-country world in which 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 which party 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 catch-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.

The new research shows that if international trade is taken into account, the implications can be quite different. Central to the model 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. But this does not necessarily imply that it is actually becoming militarily weaker over time.

Industrial catch-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 that 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, the researchers 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 that 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.

The researchers argue that their model can shed light on why it was Japan that attacked the United States in 1941, and not the other way around. 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 1904-05. 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 United States.

Indeed, the United States 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 the model, prior to an eventual attack on the leader.

Like Japan, late nineteenth and early twentieth century Germany had been rapidly catching up on Britain and the United States, and her military apparatus had become relatively more powerful. But 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 the new study does not argue that this strategic dependence explains the origins of either world war in Europe, Avner Offer has argued that it was a key factor explaining the Anglo-German naval rivalry that preceded the First World War, and which helped shift British strategic thinking in an anti-German, rather than a pro-German, direction. After the First World War, 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 Adam Tooze’s classic book on the Nazi economy. One obvious solution was to attack Eastern Europe, which corresponded to the resource-rich peripheral region in the model, even though attacking Poland risked war with Britain 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 United States retains control over maritime choke points, a policy that is probably globally welfare-enhancing, it may be China, rather than the United States, which fears becoming more vulnerable over time. In that context, Chinese expansionism in the South China Sea, while potentially dangerous, may not be so surprising.

Growth, Import Dependence, and War’ by Roberto Bonfatti and Kevin Hjortshøj O’Rourke is published in the September 2018 issue of the Economic Journal.

Roberto Bonfatti

Roberto.Bonfatti@nottingham.ac.uk

Kevin Hjortshøj O’Rourke

kevin.orourke@all-souls.ox.ac.uk