Economic Globalization and Territorial Disputes

Does increasing economic globalization reduce the likelihood of interstate conflict? Since Kant [1795] proposed conditions for perpetual peace, liberal peace scholars have pointed to many advantages of economic exchange.

Does increasing economic globalization reduce the likelihood of interstate conflict? Since Kant [1795] proposed conditions for perpetual peace, liberal peace scholars have pointed to many advantages of economic exchange. Although the findings still remain controversial, we note that policymakers across nations and international organizations often emphasize the importance of economic interdependence for promoting peace across borders and, in fact, design foreign policies in accordance with the commercial peace idea. Is this really a right answer for building peace and security of a country? How much confidence, if so, do we have for that answer?

Bearing these questions, in this article, I re-evaluate the liberal hypothesis, but go beyond traditional forms of debates. I focus on a qualitatively different type of disagreement between states, territorial disputes, and discuss whether liberals’ argument can survive in this territorial context where states’ interests are highly salient. In a nutshell, I argue that liberals are right. So are their foreign policy recommendations for building peace. I present that there are strong reasons, along with ample evidence, to believe that economically interdependent states, especially connected through foreign direct investment (FDI) and trade, are less likely to engage in militarized disputes even when states are competing over high salience issues.

People might wonder why territorial disputes matter, especially in drawing in such a bold conclusion regarding the relationship between economic globalization and interstate conflict. Research suggests robust support for the idea that states do not treat disagreements over all types of issues the same. Territorial disagreements, for example, have been found to be especially salient and conflict prone. States competing over territory are much more likely to experience militarized disputes, repeated disputes, and those disputes produce higher levels of fatalities and a higher probability of escalation to war. If economic globalization has the capacity to discourage militarized conflict and promote the peaceful resolution of disputes, finding pacific effects for economic globalization in the most contentious set of territorial issues therefore strengthens the liberal peace proposition. Given recent claims that the democratic peace is challenged by the onset and escalation of territorial disputes between democratic states, this is also important.[1]

Historically, territory has been a key factor explaining why countries fight each other. However, there are looming questions about whether territorial issues are still central to causing militarized conflict in current days. A majority of the wealth of nations in the globalized economy comes out of non-traditional assets, such as technology or knowledge, rather than traditional assets like lands. The value of territorial assets thus seems to have declined, so that there should be less incentive to fight for grabbing more territories. Unlike the expectation, it is not difficult to find cases around the world in which countries still engage in militarized disputes to resolve territorial or geopolitical issues. The cases like the Falklands War between Great Britain and Argentina, Iraq’s invasion to Kuwait, disputes between Sudan and South Sudan, and tensions in the South China Sea area are well-known and, in addition, dozens of territorial disputes are reported to be still in progress across regions. From a policy perspective; therefore, this article provides meaningful implications for foreign policies in which leaders in countries with salient issues seek to peacefully resolve territorial disagreements.

Territorial Conflict in an Era of Globalization

Territorial claims have been shown to be one of the most important causes of militarized dispute onset and escalation to interstate war. While conflict scholars show that contiguity is an important predictor of militarized conflict, research on territorial issues demonstrates why contested borders are dangerous. Border issues that remain unresolved are more likely to lead states down the steps to war, while contiguous states with mutually accepted borders are less likely to fight each other. According to the steps-to-war thesis, which assumes that war stems from a long-term process of conflict escalation, territory is different from other types of disagreements. Unlike competition over other issues, territorial threat encourages states to adopt so called power politics strategies–bellicose or coercive rhetoric, alliance formation/counter-formation, rivalries, and military build-ups. States adopt these strategies because they have been conditioned to believe that aggressive foreign policy action is the only way to deter revision-minded states. Rather than deter, however, these power politics strategies instead increase tensions and hostility, making war more, not less, likely.

These patterns have also been observed in a broader set of geopolitical issues, including contestation over maritime areas and cross-border rivers. Research finds that territorial, maritime, and river issues are more likely to result in militarized disputes if the contested stakes are more salient to the opposing sides. Prior militarization and power parity are found to increase the risks of militarized dispute onset for all three types of geopolitical disputes.

As mentioned earlier, territorial and other geopolitical disagreements are central issues of tensions and militarized conflict between countries around the world. Currently, dozens of territorial disputes persist in almost every continent, and many regional conflicts remain linked to unresolved territorial claims (e.g. Armenia vs. Azerbaijan, China vs. Japan, India vs. Pakistan). Studies find that there is little difference in terms of frequencies of territorial disputes between pre- and post-WWII. In particular, a significant number of these territorial disputes are reported to escalate to militarized disputes or wars. For example, a study finds that 348 territorial disputes from 1919 to 1995 are linked to 374 militarized disputes and 40 interstate wars.[2] Recent trends of increased civil war also threaten the dissolution of states due to ethnic conflicts and struggles for political self-determination. But the break-up of states is likely to produce new territorial disputes, including struggles to define where the new international border is to be located (e.g. Eritrea vs. Ethiopia, Croatia vs. Yugoslavia, Sudan vs. South Sudan).

As for why territory triggers this behavior, scholars have focused primarily on tangible and intangible factors. Tangible refers to the fact that territory contains things like populations, natural resources, or strategic value. Intangible factors include factors like cultural or historical factors that give the territory symbolic value. Accordingly, state leaders place a high utility on controlling disputed territory. Furthermore, foreign policy leaders are more likely to mobilize domestic support for territorial claims in which military force becomes an effective instrument for achieving territorial goals.

Economic Globalization and Territorial Disputes

As stated earlier, disagreements over territory are those most likely to lead states down the steps-to-war. Because of the salience of territorial stakes, states are more likely to adopt aggressive, military-oriented foreign policy practices when faced with real or perceived threat to territory. Then, the key question is how and for what reasons economically interdependent countries are driven to take peaceful foreign policy strategies to pursue their goals. For this, I consider a theoretical framework in which territorial disputes experience two stages, the onset and management of geopolitical issue claims. A new issue claim begins when one state challenges another state’s rights over a land or water area. Once an issue claim is underway, states can employ either militarized or peaceful tools to pursue their issue-related goals or do nothing and maintain the status quo. These strategies are certainly not mutually exclusive, as states often pursue both diplomatic and militarized solutions to interstate issues simultaneously. I present that countries connected through FDI and/or trade are less likely to make issue claims and to engage in militarized dispute to resolve territorial disagreements.

Onset of Territorial Issue Claims

Can increasing economic interdependence influence foreign policies toward each other, especially being involved in a geopolitical issue claim? I argue that it certainly does so and reduces the likelihood that a pair of states becomes involved in an issue claim. This stems from the belief that the benefits of territorial conquest decline as states engage in increased economic exchange, trade, and investment.[3] Increases in economic flows reduce the chances for new border disputes because states can gain more from a peaceful, economic exchange of goods and services. Conquering states with highly advanced economies is seen as a costly strategy due to the high costs for appeasing nationalist and rebellious factions in the newly conquered state, which could reduce the economic gains that would accrue to the conqueror. The geographic dispersion of multinational corporations also reduces the payoff of conquest because the conquering state could capture only a percentage of economic assets linked to economic production inside a state. Especially when the economy is based on knowledge or technological development, it becomes harder to capture the assets via conquest. The emergence of knowledge-based economies also reduces the benefits of conquest because citizens, the most important economic assets, are more difficult to capture and because centralized oversight reduces economic innovation.[4]

In particular, rapidly expanding FDI globally provides good explanation for why the benefits of territorial conquest have declined in the past few centuries. Transformation in the global economy has increased the power of global capital. Seizing the wealth of another nation by conquest is no longer an efficient or sustainable instrument for a state to increase its own wealth. Global capital has become more essential for economic productivity, surpassing international trade in total volume in recent years. While capital has become more sensitive to political environments, it has also experienced increased freedom of movement across borders.[5] This decreases the value of conquest because businesses can simply remove their investments after a war is underway. Thus, globalization creates an economic world without borders.

Along with empirical evidence from a large-N statistical analysis, I find many cases illustrating how global FDI influences interactions between countries over territorial issues.[6] For example, in July 2001, British Petroleum (BP) ceased its contractual obligations for oil drilling in the Alov–Sharg–Araz area of the Caspian Sea. Azerbaijan’s maritime dispute with Iran in the Caspian Sea had affected company operations, as an Iranian warship threatened a BP survey vessel.[7] Similarly, Daewoo International imposed an extension on its contract for oil drilling off the west coast of Myanmar in April 2009 due to the unresolved maritime boundary dispute between Myanmar and Bangladesh in the Bay of Bengal.[8] Russia also faced costs in its aggressive territorial dealings with Chechnya, as Japanese investors threatened to withhold foreign investment until the issue was resolved.[9] As multinational corporations seek to protect their interests abroad, and as the total amount of global FDI increases, this results in greater external pressures being brought to bear on governments involved in potentially dangerous territorial disputes.

Claim Management

Once a geopolitical issue claim is underway, states can maintain the status quo, engage in peaceful conflict management strategies to help settle the issue, or employ militarized strategies to reach a favorable settlement. Two possible mechanisms of economic globalization are considered at this stage of the conflict process: increasing opportunity costs of violence and improved information in interstate bargaining. They contend that economic interdependence brings pressure to settle the issue peacefully and provides a form of leverage for the bargaining process.

The basic idea of the opportunity costs argument is that states pay the price for the potential disruption of trade and investment brought about by war. Since states enjoy the benefits of economic exchange and conflict threatens to disrupt that relationship, states must weigh the costs and benefits of the trading or investment relationship versus potential gains from conflict.[10] Given the long-term payoffs of trade and investment, and consequently the high opportunity costs of forgone trade and investment, states are expected to seek non-violent resolution to territorial issues. In particular, the trade-encouraging specialization in the production of goods and services makes traders and consumers dependent on foreign markets, creating incentive to put pressure on governments to avoid militarized conflict with trading partners. Scholars find that FDI ties are even more costly to break than trading ties.[11] With full capital mobility, FDI forces policymakers to choose between peaceful resolution and hostility escalation.

If ongoing territorial disputes generate high opportunity costs, we should observe that private businesses increase pressure on governments to resolve these disputes peacefully. Again, I find many examples in which private businesses act in precisely this manner. In 2009, the Croatia EU Business Council put strong pressure on Croatia and Slovenia to settle their border dispute through mediation or with the assistance of the International Court of Justice.[12] The University of the Thai Chamber of Commerce has repeatedly warned the Thai government about the economic costs of failing to resolve its border dispute with Cambodia.[13] The Chinese government has been vocal about settling its dispute with the Philippines over the Spratly Islands with peaceful means only, especially in light of $2.6 billion in investments by Philippines’ companies in China.[14] China is also cognizant of the significant financial risks of escalating the situation with India over their disputed land border, as the two countries engage in over $50 billion in trade annually.

The argument of improved information asserts that increased economic exchange provides more information to states about their opponents’ capabilities and resolve and mitigates asymmetries of privately held information in dyadic bargaining.[15] This is certainly based on the bargaining model of war, viewing war as the result of incomplete information about capabilities/resolve, commitment problems, or issue indivisibilities. In this perspective, states exposed to FDI and trade are more transparent in their political dealing, so that it is extremely difficult for these states to bluff given the contrasting incentives of sovereigns to both calm markets and compel foreign opponents.[16] The competing forces of market stability and interstate demands make it difficult for leaders of states connected through FDI and trade to bluff, increasing the success of peaceful settlement attempts.

Once a crisis over territorial issues is underway, therefore, I believe that states more heavily invested in or trading with their opponent’s economy can impose higher costs upon themselves and signal their intentions in crises more credibly. For example, consider Vietnam’s actions in 2009 toward China with respect to their historical territorial disputes involving the Gulf of Tonkin, the Paracel and Spratley Islands, and the demarcation of their 840-mile land border. Early in 2009, the Vietnamese government was facing a 40 percent decline in the overall level of FDI in the country and sought to remedy this problem by luring capital investment for the mining of bauxite and aluminum refinement. The Vietnamese signed an agreement with a Chinese multinational corporation, Chinalco, while at the same time seeking investment from Alcoa, an American company. Several individuals and groups in Vietnam protested the government’s cooperation with China. To protect its new investment, the government went so far as to ban a Vietnamese newspaper, Du lich, from publicizing information about the historical Chinese–Vietnamese territorial disputes, arguing that FDI was too crucial to lose.[17] The presence of new FDI between the two sides helped Vietnam signal its peaceful intentions over the disputed border with China more clearly.

Along with these cases, my research relying on statistical analyses also gives strong support for the peace-through-commerce argument. For instance, I analyzed data from the Issues of Correlates of War (ICOW) project on territorial, maritime, and river conflicts in the Western Hemisphere, Europe, and Middle East from 1970 to 2001 and data from Huth and Allee’s territorial dispute data set from 1970 to 1995, finding that an increase in FDI flows reduces the chances for militarized conflict and promote peaceful negotiations in countries with a geopolitical issue.[18] The other research using both data sets, but focusing on trade, also finds similar results that increasing trade between countries with territorial issues reduces the likelihood of militarized conflict.[19]

Conclusion

So far, I have discussed the relationship between economic globalization and territorial disputes. In particular, I provide a theoretical basis and empirical evidence regarding economic exchanges, such as trade and FDI, shape foreign policy choices in countries with a geopolitical issue claim. The declining benefits of territorial conquest in an economically globalized world constrain states from making new diplomatic claims to other states’ land or water territories. Also, an increase in trade and/or FDI flows create opportunity costs for governments seeking to grab contested territory with violent strategies, reducing the chances for severe militarized disputes over border issues. It also helps governments signal credibly each other and reach an agreement in the bargaining processes.

The discussion I have in this paper has important implications in various perspectives. First, it gives support for the Kantian view that economically interdependent states are less likely to engage in militarized conflict. To many policymakers, economic interdependence is still perceived as a naïve tool for achieving peace and security. However, I demonstrate that liberals are right, as countries that trade or invest each other are more restricted in the coercive foreign policy strategies and less likely employ militarized strategies even in the cases where stakes are high. Given that territory and other geopolitical issues still remain as a central concern of state leaders in the twenty-first century, second, I provide an aspect for the debates whether we will continuously watch the resilience of territorial conflict in the so-called “borderless” or “deterritorialized” world. As economic exchange discourages the steps-to-war process, it is certainly identified as a potential path to peace for countries embroiled in long-standing border disputes.

[1] Lektzian, David, Brandon C. Prins, and Mark Souva. 2010. “Rivalry, Territoriality, and Militarized Inter-state Conflict in the Western Hemisphere, 1901-2000.” International Studies Quarterly 54(4): 1073-98.

[2] Huth, Paul K. and Todd L. Allee. 2002. The Democratic Peace and Territorial Conflict in the Twentieth Century. Cambridge, UK: Cambridge University Press.

[3] Rosecrance, Richard. 1999. The Rise of the Virtual State. New York: Basic Books.

[4] Brooks, Stephen G. 2005. Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict. Princeton, NJ: Princeton University Press.

[5] Ruggie, John G. 1993. “Territoriality and Beyond: Problematizing Modernity in International Relations.” International Organization 47(1): 139-74.

[6] Lee, Hoon and Sara M. Mitchell. 2012. “Foreign Direct Investment and Territorial Disputes,” Journal of Conflict Resolution 56(4): 672-700.

[7] AFX European Focus, August 1, 2001.

[8] Yonhap, April 3, 2009.

[9] Associated Press Worldstream, March 3, 1995.

[10] Polachek, Solomon. 1980. “Conflict and Trade.” Journal of Conflict Resolution 24(1): 55-78.

[11] Rosecrance, Richard, and Peter Thompson. 2003. “Trade, Foreign Investment, and Security.” Annual Review of Political Science 6(1): 377-98.

[12] BBC News, March 3, 2009.

[13] The Nation Thailand, November 13, 2009.

[14] BBC News, August 15, 2009.

[15] Gartzke, Erik, Quan Li, and Charles Boehmer. 2001. “Investing in the Peace: Economic Interdependence and International Conflict.” International Organization 55(2): 391-438.

[16] Gartzke, Erik. 2006. “Globalization, Economic Development, and Territorial Conflict.” In Territoriality and Conflict in an Era of Globalization, edited by Miles Kahler and Barbara F. Walter, 156-86. Cambridge: Cambridge University Press.

[17] Economist, April 25, 2009.

[18] Lee and Mitchell. 2012. Ibid.

[19] Lee, Hoon, and Toby Rider. 2013. “Trade, Arms Race, and Territorial Disputes,” Working Paper.