Economic Competition, Market Power, and Conflict∗
Mark J.C. Crescenzi
Department of Political Science
University of North Carolina
[email protected]
April 7, 2010
Abstract
This paper represents a departure from standard empirical investigations of
the link between trade and conflict. Instead, the goal is a more targeted search for
causal mechanisms linking trade and conflict. In this paper, I investigate a scenario where two states are competing in an economic market rather than directly
exchanging goods and services. Under what circumstances does this competition
spill over into the political realm, increasing the probability of militarized violence? I argue that market context is key to identifying situations when states
turn to political means to resolve problems associated with economic competition in imperfect markets. In such a case, two states may find themselves at odds
politically as a result of economic commerce despite a lack of direct trade interaction. More broadly, the research adds to the puzzle of when economic interaction
leads to political conflict. Ultimately, whether this competition is resolved militarily or institutionally is a function of the broader political environment (i.e.,
treaties, organizations), economic environment (market context, preferences of
other trading states), and each states domestic political environment.
Prepared for the War and Trade Conference, Sponsored by Yale and Princeton Universities, and the
Niehaus Center for Globalization and Governance. Special thanks to Andrew Enterline for help with the
project, and to Joanne Gowa and Giovanni Maggi for the opportunity to present this research.
∗
Introduction
In the mid seventeenth century an economic relationship emerged in a hostile environment.
As the American colonies solidified their presence and overcame the first challenges to survival, colonists and native american tribes both profited from trade. Initially, the trade
relationships were primitive and focused on helping the colonists survive in exchange for
woven cloth, guns, and alcohol. As the colonists improved upon their ability to survive and
even thrive in their new environment, they became less dependent on their neighbors. But
the decreased dependence didn’t dampen trade between the settlers and neighboring tribes.
On the contrary, trade increased significantly as the Indian tribes provided beaver pelts
for export to Europe. Fur hats were in high demand back in Europe, and the supply of pelts
from Russia had markedly diminished. As the discovery of vast quantities of beavers spiked
the fur market, colonists and Indians both took advantage of the economic opportunities.
competition emerged among Indian tribes to deliver their beaver pelts to the white colonists.
Colonists provided guns, bullets, and alcohol in exchange for the pelts, with the bullets and
alcohol being goods with long-term dependence. The trade ties between colonists and indigenous tribes dampened violence between the groups. Inter-nation violence on the frontier
was fierce and frequent, but it typically occurred between peoples that were not trading
(expansionism was often the motivation for violence).
While there was certainly intense and brutal conflict between whites and Indians throughout this period, the competition among suppliers of beaver pelts generated intra-Indian violence as well. In fact, conflict between the indigenous peoples was more prevalent than
conflict between Indians and colonists. Conflict often ensued as tribes positioned themselves
within the market. Tribes that were geographically proximate to colonists sought roles as
middle-men, and alliances formed between European settlers and individual tribes. Trade
lines were fiercely defended, as were hunting grounds as the animals were exploited for their
coats. Trade between whites and Indians may have delayed broad violence between them,
1
but competition triggered major inter-tribal violence.1
The relationship between trade and war has long been a staple of liberal peace explanations. Frequently the economic side of this discussion is focused on either the direct
interaction between two states or the openness of economies. Even in the example of 17th
Century colonial life, signs of the pacific effects of trade are evident. But the direct trade ties
between political actors are not the only important link between trade and conflict. In this
paper I focus on the impact of competition that can result from international trade. I argue
that when two states are engaged in similar trade in the marketplace, under some circumstances competition can lead to incentives to change one’s market position. In this case, the
direct trade between the two states may be irrelevant, and the political interaction within
the dyad is influenced by trade but not direct dyadic trade. In this way, I hope to identify
one of the causal mechanisms within the complex interdependence between economics and
foreign policy.
How we typically theorize the link between trade and conflict
The classic theoretical argument is rooted in two mechanisms: decreased animosity and
increased costs . The first and most prevalent assumption in the literature is that an increase
in trade will lead to increased costs to fighting, such that governments are deterred from
fighting when/where they otherwise would fight. This basic cost-benefit change is modeled
in Polachek (1980), demonstrating that increased trade generates costs when this trade is
interrupted or damaged by conflict. The assumption is not without its challengers. Barbieri
and Levy (1999) show evidence that trade ties are often only temporarily disrupted, and there
is some question about whether the disruption is more a shift from reported to unreported
trade. Nevertheless, the question isn’t so much one of whether a disruption occurs, but
rather what are the expected costs of the disruption when governments make the decision
to engage in or forego conflict.2 The assumption is rooted in Kant’s work on the liberal
1
2
This discussion is culled from Sowell (1999). See esp. pp: 290-99.
Levy 2003 nicely reviews this as the ”Economic-Opportunity-Costs-Hypothesis”
2
peace as well as Hirschman’s (1945) pioneering work on economic statecraft, and it is still
a central motivator behind models of political decision making (Russett and Oneal, 2001;
Martin, Mayer and Thoenig, 2008).
Using these mechanisms, scholars often develop an argument linking trade and conflict
with the expectation that dyadic trade and/or trade openness will lead to linear decreases in
the probability of violence. Much blood (well . . . , ink)3 has been spilt over the right measures
of a state’s openness or a dyad’s level of interdependence, and studies will sometimes focus
on strategic goods instead of trade as a whole, but the basic hypotheses rarely waver. At
this time, more often than not the extant research points to the conclusion that increased
levels of dyadic trade coupled with increased state openness will decrease the hazard of war.
Limits of the Linear-Dyadic Approach
The goal here is not to dismiss the large body of evidence that pacifically connects trade with
military violence. The quantitative empirical relationships are well established (although not
well explained) at this point. Instead, I identify a causal mechanism that may link the trade
patterns of two states with the occurrence of military violence between them. The goal isn’t
to find the causal mechanism, just an arrow in the quiver of causal linkages between trade
and conflict. Given the body of evidence linking higher levels of bilateral trade with lower
levels of dyadic violence, one might ask why I’m so interested in this causation business.
There’s no hidden agenda to chip away at the Liberal Peace here, but perhaps we’ve spent
enough time on the linear-dyadic approach to understanding economics and conflict.
There are also two reasons to suspect that trade can influence conflict in ways we don’t
typically specify in our current research. First, we have now accumulated a significant number of voices that suggest the linear-dyadic trade-conflict hypothesis is logically indeterminate, or at least more complicated than it is currently theorized to be (Gowa, 1995; Morrow,
3
A Trade-War panel at the 1998 ISA meeting in Minneapolis almost led to fisticuffs over data and
measurement issues, but luckily Jim Morrow stepped in to let them know it was all moot because the group
didn’t have a theory to split between the entire lot.
3
1999; Gartzke, 2003; Levy, 2003; Morrow, 2003; Crescenzi, 2005). One line of critique comes
from observing dyadic trade ties within the context of markets. For example, Gowa (1995)
points out that there is no reason to expect trade to have a simple linear impact on conflict.
Even when granting the tenuous assumption that democracies like trading with one another,
Gowa argues
“. . . the conclusion that trade reduces the probability of conflict between them
would not necessarily follow. If global markets are competitive, any disruption
of trade between two states will simply lead both to alternative markets.” (520)
When states operate within “competitive” markets, we can expect them to face some costs
when adjusting to trade disruptions,4 but no serious hurdles to maintaining the flow of goods
and services. When markets are not operating in text book fashion, market power can lead
to more serious adaptation costs which in turn can influence political conflict (Crescenzi,
2005).5 But even market power is not guaranteed to generate political constraint (Wagner,
1988; Gowa, 1995). At the very least, these studies suggest that trade between countries
has to be evaluated within the broader context of substitutability both internally and in
the market. Ultimately, the costs of adaptation have domestic sources, which also suggests
that a complete understanding of the influence of trade ties has to include domestic political
survival and perhaps electoral politics.
Besides the issue of market context with respect to dyadic trade, scholars have also
been concerned with the causal impact of potential trade disruption based on the implicit
assumption of a lack of ex ante strategic adaptation by firms and governments. Morrow
(1999) points out that “[if] economic actors arrange their trading activities to account for the
possibility of political disruptions of trade, then states have already paid the costs of conflict
in trade before a dispute occurs” (488). As such, we should worry that the relationship
between trade and conflict may be indeterminate (Levy, 2003; Morrow, 2003).
4
5
The old guard refers to these costs as sensitivity costs (Baldwin, 1980; Keohane and Nye, 1989)
These more serious adaptation costs are also known as vulnerability costs (same references).
4
The second reason to shift our focus to the possibility that trade can influence conflict in
a myriad of ways comes from observing other economic units interact. In the next section I
suggest that firms may offer interesting lessons about how units interact in economic markets
in ways other than direct exchange, and how these interactions may potentially motivate
political behavior.
Economic Competition and Market Context
One of the analogies for state reaction to economic competition is to examine firm behavior
in the same context. Of course, cooperation and conflict take different forms for firms than
they do for states, but inter-firm behavior may help shed some light on when we expect
economic interaction to generate opportunities and willingness for conflict. The competitiveness of firms (as well as nations and governments) has received a considerable amount of
attention (Krugman, 1994; Porter, 1998, 2008). Porter uses a broader definition of competition than I do, as one of his goals is to help economic units identify win-win competitive
diversity. Throughout this paper I focus on the more traditional, zero-sum conceptualization
of competition. The discussion, however, raises an interesting question about the qualities of
competition that may trigger hostilities. Let’s first look at an illustration of firm competition
leading to conflict, then return to the question of triggers.
Cooperation can falter in the face of increased competition. For example, consider recent
interactions between two high-profile firms: Apple and Google. Until 2009, Apple and Google
had a long tradition of cooperation. They shared a common threat in Microsoft, which
led to an alliance that allowed Apple to focus on its operating system. Apple integrated
Google’s search engine into its own web browser on both the Mac OS and iPhone OS. Apple
Google’s CEO, Eric Schmidt, served on Apples Board of Directors from 2006 until August,
2009 (Apple, 2009). But the resignation signaled changes in the fundamental relationship
between the two companies. What changed?
Cooperation turned to conflict based on an infusion of competition into the relationship.
5
Google’s decision to enter the smartphone business was interpreted by Apple’s CEO, Steve
Jobs, as a betrayal of the partnership (Oliver, 2010). The emergence of competition in the
smartphone market had also led to new conflict in the form of lawsuits between Apple and
HTC (which makes hardware for several Google phones) (Patel, 2010a,b). The lawsuit was
conflict designed to respond to the new competition and to block a potential change in market
power. Jobs summarized the change of heart toward Google (via its hardware partner) as a
reaction to competition: “We can sit by and watch competitors steal our patented inventions,
or we can do something about it. Weve decided to do something about it” (Apple, 2010).
An examination of the patent infringement claims reveals that the focus on the lawsuit is
on Google’s Android operating system, which was designed as a direct challenger to Apple’s
iPhone OS (Patel, 2010c). Clearly, one can’t push the analogy between conflict in the form
of lawsuits with conflict in the form of militarized violence, but the motivation to use a
dispute resolution mechanism is what is useful here.
Apple’s change of strategy illustrates its reaction to a perceived threat to its share of the
smart phone market. As long as Google and Apple were producing complementary products,
cooperation typified the relationship. Indeed, as a pair the two companies represented two
specialized firms that together generated competition for Microsoft. Once Google developed
the Android phone, however, Apple took steps to try and block Google’s entry into the
market. This is not meant to imply that Apple holds a monopoly in the market, but there are
relatively few major competitors (RIM’s Blackberry, Palm’s Pre are examples of successful
and failed competition). Apple’s response to the Android phone is likely in part a reaction
to feeling betrayed by a partner, and in part an attempt to be more successful at preserving
their property than they faired when Microsoft launched Windows 95. But the simplest
explanation is that Apple is defending its market share from competition that was widely
perceived as a serious threat.
More broadly, when we think about the interaction of firms, we are far more likely to
consider their competitive actions as they seek profits and growth in the market rather
6
than their direct interactions. Why do we maintain different expectations when we examine
economic ties between governments? The causal mechanism is very different than what we
have been focusing on with traditional trade–conflict studies. The classic mechanism is an
inhibitor. Trade raises the costs of fighting through the specter of economic exit. It raises
the risks of capital flight, or raises the risks of domestic political challenge. All of these
versions suggest trade as a source of constraint.
The kind of economic competition I’m focusing on here, however, smacks of rivalry and
zero-sum games. This causal mechanism is an instigator, either through the desire to improve one’s position within the competition or in defense of the status quo. Imagine two
governments as they seek to optimize the position of their industries, whether in an attempt
to preserve market share or to expand it. To simplify things I assume that only one state has
revisionist goals, the other prefers the status quo. This kind of bargaining goes on constantly
in international politics, often via semi-structured environments such as GATT/WTO rounds
or within FTAs. I’m particularly interested in issues that arise from competition that are
not successfully resolved in these standard bargaining environments.
Like most sources of political conflict, the majority of these disputes that arise from economic competition are resolved through non-violent dispute resolution mechanisms (e.g., the
WTO Dispute Settlement Body). Since the goal is to link competition to the use of political
violence, this begs the question of when do these non-violent bargaining environments fail to
offer a viable solution? As with all modern theories of conflict with rationalist assumptions,
the answer has to be grounded in the presence of either private (asymmetric) information,
commitment problems, or indivisibility (Fearon, 1995; Morrow, 1989; Powell, 2006). The
problem of credible commitments is particularly salient here. Economic resources rarely face
indivisibility problems, so I do not consider this as a source of violence. Private information
may be problematic, but prior economic activity has been logically shown to be adept at
providing meaningful signals (Morrow, 1999, 2003).
Under what conditions do states face obstacles to credible commitments that would
7
placate their competitors? For Choucri and North (1975) this was a natural process of
expansion and conflict driven by resource scarcity and lateral pressure. Although their
lateral pressure models precede the rationalist arguments, the logic is similar: the natural
growth of nations leads to the perception of threat by others. This implicit threat (or,
more specifically, the expectation of threat in the future) undermines the ability of states to
commit to borders, agreements, or in the case of economic competitors, status quo market
position. With firms, this inability to rely on the status quo is a function of innovation
as well as complex changes in supply and demand. These changes influence states as well,
but states are inevitably representing a diverse aggregation of internal industry and firm
behavior. Economic competition is therefore most likely to trigger political conflict when
the market structure of important industries makes states vulnerable to change in relative
competitiveness.
When markets are structured such that nobody is a price taker or price setter, changes in
competitiveness are unlikely to trigger conflict. When market structure is limited, however,
with a small number of producers or consumers than can influence prices, if the economic
activity is sufficiently salient to the state it will respond to changes (or threats to changes)
in the status quo. States that enjoy an advantage in an important market may be willing to
fight to keep it, and states that see the potential to obtain an advantage over competitors
may be willing to fight to get it. Those advantages (both real and potential) are more likely
to exist in imperfect market structures like those characterized by oligopolistic competition.
Of course, what deems a market ‘important’ to the state is a complicated (and internal)
issue that wreaks havoc with empirical testing. Nevertheless, the market structure is an
important factor in understanding when economic competition can lead to violence.
Finally, commitment problems with respect to the agreements competitors live by can
be exacerbated by weak economic institutions. For example, in 1958 Mexico and Guatemala
tussled over fishing rights (Brecher and Wilkenfeld, 1997: :504).6 The conflict occurred at
6
The dispute was over access to shrimp grounds. At its peak, Mexico sent over 200 boats into the disputed
waters to protest Guatemala’s attempt to restrict what was previously considered international waters.
8
a time when Latin and South American states were negotiating local rules governing the
law of the sea (Suman, 1981), and Mexican shrimp boats were encroaching on Guatemalan
fishing waters. Guatemalan planes intimidated the boats, leading to three deaths before
the states negotiated a settlement a month later. That same dispute would play out very
differently today in the context of the WTO’s Dispute Settlement Mechanism. While the
WTO is unlikely to offer enough credibility to settlements over goods that are core to a
state’s survival, strong economic institutions improve the ability of states to avoid conflict
over competition.
To summarize, the following statements represent the beginnings of a theory of economic
competition and conflict:
Economic Competition Economic competition, defined as two states exporting/importing
similar goods and services, can be a source (trigger) of militarized conflict when one
or both sides cannot credibly commit to the status quo.
Market Size Economic competition is more likely to trigger conflict when the competitors
operate within small markets (oligopolistic competition). This quality may hold locally
and/or globally.
Market Power Economic competition is more likely to trigger conflict when a state has
the opportunity to use violence to alter or respond to an alteration in market power.
Resource Scarcity Economic competition is more likely to trigger conflict when the produced/consumed goods are perceived to be scarce.
Market Governance Economic competition within a dyad is more likely to trigger conflict
when institutional solutions are weak.
In the next section, I examine the role of economic competition within an oligopolistic
competition market structure as illustrated by the Iraqi invasion of Kuwait in August 1990.
This case highlights the use of force to improve Iraq’s position within the global oil market
at a time when it desperately needed new resources. Kuwait was able to fend off the attack
only with the help of the world’s major oil consumers who stood to lose from Iraq’s increased
market power and feared that his pledge to not subsequently invade Saudi Arabia was not
credible.
9
Illustrating the Economic Competition Hypothesis
It may be useful to walk through an example of how economic competition and market
structure combine to generate commitment problems that can lead to militarized violence.
My intent here is merely to illustrate. I do not claim to test my arguments with this brief
case history. Hopefully the moving parts in my argument will become clearer to the reader
as a result.
I have chosen the Iraqi invasion of Kuwait in 1990 to highlight the impact economic
competition can have on war. Iraq and Kuwait were and are members of a small market of
oil producers (small in number of exporters, not in volume of exports). Problems associated
with competition among oil exporters have long been a boon for oil consumers and a source
of frustration to oil states and OPEC. The 1970s brought power to the block of oil states as a
result of their strong institutional coordination (via OPEC) which mitigated the challenges
of competition. But by 1990 OPEC was significantly weakened and the war between Iran and
Iraq left Iraq desperate for changes that would improve its economy and economic potential.
All of these factors suggest that this was an environment where economic competition could
instigate political conflict that turned violent.
Iraq and Kuwait: Historical Perspective
One could characterize the pre-oil relations between Iraq and Kuwait as always close by, but
never close. The two states shared a history of being governed, first under the Ottoman
Empire throughout the 18th and 19th centuries, then under British influence until Iraq’s
independence in the 1930s. Kuwait itself comes into existence in the early 18th century,
settled by the Bani Utub, and shortly thereafter emerges as a small and unassuming vassal
state of the Ottoman Empire. Oil didn’t become the economic resource for Kuwait until after
World War II ended, but its existence in the small state was first identified by oil exploration
efforts in the 1930s. Before oil transformed the little state, it relied principally on its pearl
harvesting industry. A glut of pearls in the global supply of pearls in the 1930s along with
10
the effects of the Great Depression left Kuwait in a sorry state of affairs until oil introduced
a steady source of income (Casey, 2007).
Once oil was discovered in Kuwait, Iraq’s interest in the small neighbor increased markedly.
The Iraqi regime protested when Kuwait was awarded independence from the British and
the United Nations in 1961. Iraq claimed that Kuwait should not be granted independence
but should instead be a part of the southern province of Basra. Kuwait’s ties with Basra
go back to its days in the Ottoman Empire, but only in that Basra was the local source of
Ottoman authority and contact for the Kuwaiti settlement. These protests continued until
Iraq became distracted by its war with Iran in 1979 (Kuwait allied itself with Iraq, and
provided supplies and loans throughout the war). While Iraq never formally relinquished its
desires to expand its borders to the southeast, the alliance between the two states during
the Iran-Iraq war seemed to indicate a normalization of relations was at hand.
Oil and Debt in 1990
As Iraq limped away from a devastating decade of conflict with the Iranians, it was forced
to attend to its damaged economy. Rapidly, Iraq’s focus shifted to Kuwait as a solution
to its economic woes. In the summer of 1990 Iraq resurrected its old challenges concerning
its border with Kuwait. Iraq argued that (a) Kuwait was never truly independent and
always properly considered a part of the Basra province of Iraq, and (b) even if Kuwait
was independent, the borders between Iraq and Kuwait were never properly established.
Iraq also protested Kuwait’s overproduction of oil (exceeding the current OPEC quota) and
demanded that Kuwait forgive Iraq’s $13 Billion war debt. Most importantly, Iraq claimed
that Kuwait was illegally slant drilling at its ‘border’, effectively stealing from Iraq’s reserves
to the tune of $89 Billion in lost revenue (Casey, 2007; Crystal, 1995; Finnie, 1992).
The Iraqi demands culminated in an attempt to integrate Kuwaiti land (land with oil)
into Iraqi territory. The Kuwaiti government conceded to several of Iraq’s demands. They
agreed to forgive the war debt permanently, and pledged to return their production of oil to
11
OPEC quota levels. Kuwait offered an additional $9 Billion in loans to Iraq, and the Saudi’s
offered financial support as well. Egypt’s Hosni Mubarak and Jordan’s King Hussein both
attempted to mediate the dispute. Saddam Hussein pledged to both of them (and the U.S.,
and the U.N.) that he would not invade Kuwait. Negotiations broke down on August 1, and
the invasion began at 1:00 AM on August 2. Iraq controlled Kuwait by noon.
War as a Means to Market Share
Kuwait’s concessions on the eve of the Iraqi invasion were significant along every dimension
except the issue of territory. The border joining Iraq and Kuwait held no religious or spiritual
value to either state, and both states maintained oil operations close to one another. Multiple
third parties got involved to offer pecuniary rewards to Iraq if it backed down from the crisis.
So why wasn’t this enough to deter Iraq from invading? Part of the story lies in the inability
or unwillingness of the United States to signal its intentions to come to Kuwait’s aid. But this
part of the story is more about perceptions of outside involvement, and it does not address
the fundamental motivation Hussein had to invade in the first place. This motivation came
in part from Hussein’s desire to expand his oil reserves, and in part from Kuwait’s inability
to credibly commit to restrict its oil exports to the OPEC quota or to commit to not drawing
oil that might deplete the reserves on Iraq’s side of the border.
Commitment problems were also at the root of the United States’ decision to intervene.
Once Saddam Hussein demonstrated his willingness to buck international pressure and absorb Kuwait, the fear was that no agreement could stop him from moving next into Saudi
territory. The proximity of Saudi oil fields to the southern border of Kuwait made the next
land grab tantalizing. Hussein’s explicit promises to the United States and others that he
would not invade Kuwait exacerbated this commitment problem in that he damaged his
ability to credibly signal future intentions.
In short, the opportunity to improve Iraq’s oil position worked in tandem with the classic
commitment problems that plague international bargaining environments to lead to conflict.
12
Iraq’s decision to invade triggered a military response that continues to reverberate through
the region and the world today. But even after Hussein learned that the United States
and Operation Desert Storm would successfully compel his forces back home, he maintained
his strategy of using force to revise Iraq’s competitiveness in the oil market. In the wake
of the initial conflict, when Iraq made a hasty withdrawal, Hussein’s army endeavored to
irrevocably alter the competitiveness of Kuwait.
Environmental Terrorism
Iraq’s withdrawal from Kuwait was so destructive that scholars coined the term “environmental terrorism” (Finnie, 1992; Hawley, 1992). Once Hussein realized that his attempt to
increase his market power in the oil world had failed, he employed a second strategy to improve his economic competitiveness by dismantling the Kuwaiti oil infrastructure. The Iraqi
military set fire to and damaged/destroyed over 750 oil installations in Kuwait, damaged almost all of its oil storage facilities, pipelines, and infrastructure, and crippled Kuwaiti GDP
to less than one third of its pre-war levels (Casey, 2007: 107). Oil was dumped into the Gulf
and onto Kuwaiti soil, contaminating wells and desalinization facilities. Oil fires set by the
Iraqis burned for nine months, and the subsequent health effects on the Kuwaiti population
were devastating (pp. 108-9).
This destruction was economic warfare by Iraq. While Hussein’s first preference was to
horizontally integrate this infrastructure and resources into the Iraqi economy, his second
preference was to destroy it. Compared to leaving Kuwait intact, this middle option had
the potential to improve Iraq’s power in the oil market. The sanctions imposed by the
international community in the wake of the war likely undid any of this advantage, but
Hussein could not have predicted these costs accurately.
Before moving on to a more systematic analysis of my economic competition hypothesis,
it is worth considering some of the plausible alternative explanations to Iraq’s invasion into
Kuwait. Below I address these alternatives individually and collectively as extensions of the
13
primary motivating factor of economic competition.
Alternative Explanations: Territorial Claims and Gulf Access
There are two alternative explanations to consider when assessing the motivations of the
Iraqi regime and its decision to invade Kuwait: Iraq’s territorial claim to Kuwait and Iraq’s
desire for expanded access to the Persian Gulf. I attend to each possible alternative here, but
conclude that both were ultimately a function of the underlying desire to absorb Kuwait’s
oil production and export capacity.
The first and most obvious is Iraq’s longstanding territorial claim of Kuwait. Iraq has
maintained since Kuwait’s entrance into the international system in 1961 that Kuwait is
rightfully a southern part of the Basra province of Iraq. Moreover, the 1990 invasion was not
Iraq’s first attempt to use force to challenge Kuwait’s statehood. Beyond an initial protest in
1961, Iraq initiated several border incidents. The most intense incident involved the massing
of troops at the border in 1973. The Iran-Iraq war altered Iraq’s focus, however, and Kuwait
actually allied with Iraq during this war (Casey, 2007; Finnie, 1992).
There are three reasons in particular to doubt the validity of Iraq’s territorial claim
and its impetus for Iraq’s decision to invade in 1991. First, the claim itself is rather weak.
The claim is tied to pre-World War I days when both Iraq and Kuwait were within the
Ottoman Empire. Subsequent to the War, both nations came under the protectorate of
the British. Iraq was granted statehood by the League of Nations in 1932, but Kuwait
did not seek independence from the British until 1961. Throughout the pre-World War I
period, Kuwait’s ties to Basra were simply tied to the fact that Basra housed the regional
Ottoman influence. Second, Iraq’s territorial claims over Kuwait did not begin until after
oil was discovered in Kuwait. Apparently, the desire to make Kuwait a part of Iraq was less
appealing when Kuwait’s main industry was pearl harvesting. The new found wealth led to
the desire for horizontal integration. Third, Iraq backed off of its territorial claim during the
Iran-Iraq war, and enjoyed Kuwaiti assistance throughout the war. Only in the wake of the
14
exhaustive war did Iraq return its focus on the border dispute.
The second challenge to my interpretation of the 1991 invasion is that Iraq simply changed
its strategy from seeking broader control of the Shatt-al-Arab to a new strategy of using
Kuwait’s Warbah island and the Port of Shuwaikh to improve its access to the Persian Gulf
(Anscombe, 1997; Crystal, 1995; Casey, 2007). The dispute between Iran and Iraq over the
Shatt-al-Arab was one of the primary motivations for that war, and the resolution of the
war left Iraq with no improvement over its control of the Shatt. These goals may have been
part of the Iraqi motivation, but they are in essence identical to the motivation to integrate
Kuwaiti oil. Even if they were a priori goals, however, they did not appear as major issues
in the pre-war negotiations between Iraq and Kuwait that took place in Saudi Arabia in
1990 (Casey, 2007).
This illustration of the way in which economic competition and the opportunity for
changing one’s market power can motivate conflict are useful for understanding this causal
linkage between trade and conflict. Admittedly, the inability or unwillingness by the U.S.,
U.K., and U.N. to deter the Iraqi invasion is harder to explain especially given that they
subsequently forced Iraq back out of Kuwait.7 The next section shifts gears to see if I can find
a systematic empirical link between competition and conflict using a large-N quantitative
approach.
Export Competition and Militarized Dispute Onset
Given the quantitative, large-n nature of the work that has been done on the trade-conflict
topic over the last thirty years, it may be useful to demonstrate the plausibility of the
economic competition hypothesis in the same venue. Since I’ve been critical of past studies
with respect to their ability to accurately evaluate the causal mechanism in their quantitative
analyses, a similar evaluation here is appropriate.
While a quantitative test of the entire economic competition argument would be quite
7
A problem of asymmetric information, or off the path behavior? Discuss. . .
15
difficult, I may be able to assess the basic economic competition hypothesis: Dyads with states
that compete economically are more likely to experience militarized conflict than dyads with
states with no economic competition. The strategy employed here is to identify situations
of economic competition in the international system. The presence of this competition
is necessary in order for it to trigger violence. At this time, I do not have systematic
observations of market structure to accompany the economic competition data, so the flaws
in this research design are clearly evident. What follows, therefore, is a partial test of
my argument, but it may prove useful to see if there is any systematic evidence linking
competition rather than direct trade with conflict.
One way to measure economic competition is to assume that states with similar export
portfolios are more likely to compete in the international marketplace. The assumption has
its strengths and weaknesses, of course. Such a measure would give us an ability to identify
a dimension of economic competition that does not entail direct trade. Another advantage
lies in similarities in asset specificity. Export similarity should mean that the specificity of
the assets needed to make the products being exported is also similar. Thus, if an imperfect
market is constraining the trade options of one state, it may also be constraining the options
of both states.
What is missing, of course, is the structure of the market within which the states are
competing, as well as the expected market response in the event that one state seeks to revise
the status quo. Without this data we risk pooling dyads where the market is deterring the
use of conflict with dyads where the market fails to constrain the revisionist state. With
that caveat in mind, I turn to the research design and results of the analysis.
Research Design
I use a semiparametric Cox event history model to test the hypothesis that export similarity
increases the hazard of conflict. The data are restricted to 1962-2000 due to the availability
of the export similarity variable, but no spatial restrictions are imposed (I include all possible
16
dyads in this time period). This results in a large amount of analysis time with relatively few
failures (conflict), but the Cox model is well suited to this data structure (Box-Steffensmeier
and Jones, 1997).
In this analysis I focus on the onset of militarized conflict, as it best represents the decision
by one of the governments in the dyad to use force. A standard measurement of this type
of force is the Militarized Interstate Dispute (Ghosn and Bremer, 2004; Jones, Bremer and
Singer, 1996). MID onset can range from low levels of conflict (Hostility Level = 1 refers
to no militarized action) all the way to war (Hostility Level = 5). I therefore run the Cox
models on three variants of dispute onset: All MIDs, High Force MIDs (Hostility Level =
4 or 5), and Wars. The idea is to be able to discriminate between the onset of low-level
militarized conflict and more significant events like wars. Previous research suggests that
economic interdependence can inflate lower levels of conflict without risking war (Crescenzi,
2005).
Export Similarity
The Export Similarity measure comes from Elkins and Simmons (2004). Elkins and Simmons
created the variable as an indicator of competitive economic pressure. Specifically, they
calculated (at the dyad-year level) the degree to which states’ exports were correlated across
nine sectors. The result is an n × n × t matrix of dyadic scores reflecting export similarity.
This measure is particularly useful because it is agnostic about with whom these exports are
being traded. Two states that share similar export portfolios are likely be jointly impacted
by price shocks or supply/demand changes. In this way, I can tap into the interdependence
of competing states even if they do not have a direct trade relationship.
An increase in the score represents a higher correlation of exports across commodities.
The expectation is for the coefficient on this variable to be positive, indicating that greater
similarity in exports leads to an increased hazard of conflict. The data vary across time and
space, which suggests the need to check the proportional hazard assumption in the models
17
below.
Control Variables
The control variables are designed to account for alternative explanations of MID onset, with
a focus on finding variables that may influence the opportunity and/or willingness to use
force. No model can fully capture the necessary controls, and there is considerable debate
about the extent to which one should try to do so (Achen, 2005; Clarke, 2005; Kadera and
Mitchell, 2005). I’ve chosen a set of variables that is fairly concise, but taps into three
important dimensions of international relations that influence conflict. First, I employ the
Interstate Interaction Score (IIS) to account for the behavioral history of a dyad (Crescenzi
and Enterline, 2001). This variable is informed by prior cooperation (joint IGO behavior) and
conflict (militarized disputes) and uses an exponential decay function to gradually diminish
the importance of historical events as they recede into the past. Scores theoretically range
from −1 (total animosity) to 1 (BFF). The IIS is a useful control variable because it picks
up any long-lasting influences such as territorial disputes or rivalry.8 This is also a useful
control for dyads that have a lot of common IGO membership. I expect the coefficient
to be negative, which means a cooperative history diminishes the hazard of conflict but a
conflictual history increases it.
Second, I use two variables to control for the opportunity to engage in militarized conflict.
I log the capability ratio (based on CINC scores) to represent the relative capabilities of the
two states, and add a simple dummy variable to identify dyads with only minor powers
(Singer, Bremer and Stuckey, 1972). I expect the coefficients to be negative, diminishing
the hazard of conflict when both states are minor powers and/or when power is relatively
balanced.
8
The IIS has a tendency to be a bit too powerful in that it often knocks variables out of significance.
Its not quite as brutish as a lagged dependent variable (and considerably smarter), but variables that retain
statistical significance in the presence of this control tend to be robust to alternate specifications.
18
Results
The first task is to make sure that the export similarity variable has some qualitative impact
on the survival function and that it does not violate the proportional hazard assumption
required by the Cox model. Figures 1 & 2 provide Kaplan-Meier survival estimates for two
populations in the data. I use a dummy variable to identify the dyad-years with Export
Similarity scores greater than one standard deviation from the mean (High) versus the rest
of the dyad-years (Low). The red lines indicate the survival estimates for the dyads with
high export similarity. Figure 1 is the standard K-M graph we tend to see, but Figure 2
makes more sense in that I have limited the analysis time to 50 years to match the temporal
spans of my analyses. Both graphs suggest that export similarity has a qualitative impact
on the survival function, and Figure 2 indicates that the proportional hazard assumption
with respect to export similarity is in good shape.
Table I provides the results of the analysis with controls for all three types of dispute
onset, along with a null model baseline. Overall these results suggest that export similarity
is positively related to the onset of militarized violence at all levels except for wars. Model 1
gives us the simple, bivariate regression analysis. Model 2 provides a null model, and Models
3-5 are ‘full’ models with three variants on militarized dispute categories. Model 3 looks at
the effect of these inputs on all types of militarized disputes (MID levels 1-5). Model 4
restricts the dependent variable to either the use of force (MID level = 4) or war (MID level
= 5). Lastly, Model 5 looks only at the onset of war (MID level = 5). The models as a group
point to a consistent effect of export similarity on conflict, with the exception of war. Note
also that the number of ‘failures’, or disputes, drops when comparing Model 1 with Models
2-3, 4, & 5. The initial drop is due to the lagged nature of the IIS variable. The result is
that 170 disputes that occurred in the first year of the dyad’s existence are dropped. Given
that a large number of those disputes are likely to be about territorial issues, this shouldn’t
be problematic. Moreover, the coefficient for export similarity remains fairly stable across
Models 1, 3 & 4.
19
Substantive results are always relative, and should thus be interpreted skeptically. Figure
3 provides a glimpse of how high export similarity increases the hazard of conflict. The graph
indicates that early on the effect of high export similarity may increase the hazard of violence
by about 50%. Graphs such as these are also a valuable reminder that we are modeling rare
events when we model the onset of conflict (thankfully). The best interpretation of figure 3
is that export similarity has a real and systematic impact on the hazard of political violence
between states. The full Cox models can give us some confidence that this impact is robust
to controls.
Controlling for Alternative Explanations: Trade Partner Similarity
This focus on export similarity is a good way to identify dyads peddling similar goods,
but what if there is an alternative explanation to these findings? Specifically, the export
similarity measure taps into similarity in goods being exported but not similarity in the
targets of these exports. To control for the possibility that the increased hazard of conflict
is due to common trade partners instead of common exports, I analyze similar Cox models
in Table II substituting Trade Partner Similarity for export similarity. The TPS variable
also comes from Elkins and Simmons (2004), and it is calculated by measuring the degree
of trade target similarity in IMF bilateral trade data. In this case, the nature of the goods
traded is irrelevant, as the focus is on trade partners. Two states that share similarly high
ratio’s of trade with a third state (ratio here refers to trade with the third state over total
trade) will score higher on the TPS variable than states with different trade partners. If
trade partner similarity increases the hazard of conflict, the role of export similarity may be
difficult to isolate.
The Elkins & Simmons data for trade partner similarity ranges from 1948 to 1996, so I
adjust my sample accordingly. Because I’m now focusing on third party states instead of
types of exports, I include additional controls for contiguity and alliance similarity.9
9
The results in Table II hold when I drop alliance similarity, but Trade Partner Similarity becomes
statistically zero when I drop contiguity. TPS is never positive, however, indicating that competition over
20
The results in Table II indicate that Trade Partner Similarity decreases the hazard of
conflict, except in the case of wars. All of the control variables behave as expected, and
overall this control exercise suggests that competition over goods, services, and industries
has a very different impact than competition over trade partners. One reason for this may
be that common trade partners may empower that third party to deter violence.
Conclusion
The quantitative analysis above provides modest evidence suggesting that economic competition can lead states to the use of force. The tests are limited, however, in that I am
unable in this first pass to provide measures of important market characteristics that provide
context for the bargaining environment that may or may not lead to conflict. Without this
information, the analysis can only be seen as a partial test of the economic competition
hypothesis.
Overall, however, there is enough here to warrant more attention to the idea of alternative
causal linkages between trade and conflict. Scholars of the Liberal Peace will no doubt
continue to investigate the direct linear-dyadic trade–conflict relationship, and the research
presented here is not designed to dethrone that approach. But for over three decades we
have known that interdependence is complex (Keohane and Nye, 1989). We also quickly
learned that knowing interdependence is complex is very different from knowing how to
systematically identify, measure, and evaluate the more intricate ties between trade and
conflict. Hopefully this is a step toward a more diverse research platform for the trade–
conflict puzzle.
goods, not partners, is what drives up the hazard of conflict.
21
0.00
0.25
0.50
0.75
1.00
Kaplan−Meier survival estimates
0
50
100
Analysis Time
Export Similarity is Low
150
200
Export Similarity is High
Figure 1: The Effect of High Export Similarity on Peace (All MIDS)
22
0.85
0.90
0.95
1.00
Kaplan−Meier survival estimates
0
10
20
30
Analysis Time
Export Similarity is Low
40
50
Export Similarity is High
Figure 2: The Effect of High Export Similarity on Peace (Fixed Analysis Time)
23
.0015
.002
.0025
.003
.0035
Smoothed hazard estimates
0
10
20
30
Analysis Time
Export Similarity is Low
40
50
Export Similarity is High
Figure 3: Smoothed Hazard Function by Export Similarity Category (All MIDs)
24
Table I: The Effect of Export Similarity on Militarized Dispute Onset, 1962–2000
Variable
Export Similarity
1
2
3
4
5
Solo
Null
All MIDs
High Force
Wars
0.44***
(0.11)
0.29**
(0.12)
-0.03
(0.28)
0.67***
(0.11)
Interaction History (IIS )
-5.54***
(0.15)
-5.36***
(0.15)
-5.45***
(0.16)
-5.54***
(0.43)
Capability Ratio (logged)
-0.18***
(0.04)
-0.17***
(0.04)
-0.21***
(0.04)
-0.51***
(0.12)
Minor Powers
-1.13***
(0.19)
-1.17***
(0.19)
-1.51***
(0.17)
-1.1**
(0.43)
387,660
(910)
345,786
(780)
345,786
(780)
337,013
(671)
337,013
(69)
-7156
-5290
-5273
-5410
551
1882.2***
324.15***
N (failures)
Log likelihood
χ2 (Wald)
33.12*** 1,581.9*** 1606.2***
Coefficients are presented in log-relative hazard format.
Robust std. errors adjusted for clustering on dyad in ( ).
***=significant at the .001 level, **=.01, *=.05., two-tailed
25
Table II: The Effect of Similar Trade Targets on Militarized Dispute Onset, 1948–1996
Variable
Trade Partner Similarity
1
2
3
4
5
Solo
Null
All MIDs
High Force
Wars
-0.69***
(0.17)
-0.63***
(0.17)
0.12
(0.47)
-0.68***
(0.21)
Interaction History (IIS )
-2.78***
(0.22)
-2.76***
(0.22)
-2.86***
(0.23)
-2.92***
(0.63)
Capability Ratio (logged)
-0.11***
(0.04)
-0.11**
(0.04)
-0.12**
(0.04)
-0.44***
(0.12)
Minor Powers
-1.29***
(0.19)
-1.20***
(0.20)
-1.25***
(0.20)
-1.91***
(0.36)
Alliance Similarity
-0.83*
(0.38)
-0.82*
(0.38)
-0.91**
(0.34)
-2.47**
(0.78)
Contiguous Traders
3.91***
(0.18)
3.94***
(0.17)
3.60***
(0.18)
2.92***
(0.48)
351,664
(978)
310,383
(808)
310,383
(808)
310,383
(767)
310,383
(69)
-8665
-5333
-5319
-5264
485
2009.2***
412.1***
N (failures)
Log likelihood
χ2 (Wald)
10.41***
2,235.1*** 2,496.1***
Coefficients are presented in log-relative hazard format.
Robust std. errors adjusted for clustering on dyad in ( ).
***=significant at the .001 level, **=.01, *=.05., two-tailed
26
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