International economic structures range from complete autarky to complete market openness. This structure has undergone numerous changes since the beginning of the nineteenth century. The state-power theory as put into perspective by Stephen Krasner (1976), explains that the structure of international trade is determined by the interests and power of states acting to maximize their aggregate national income, social stability, political power and economic growth. Such state interests can be achieved under free trade.
The relationship between these interests and the level of openness depends upon the economic power of states. Power is dependent upon a states size and level of economic development.
Krasner contends that distributions of potential power may vary from multipolar to hegemonic; and different international trading structures are made of either of these. The key to this argument is that a hegemonic distribution of potential economic power is likely to result in an open trading system. Since states act to maximize their aggregate economic utility, maximum global welfare is achieved under free trade.
Neoclassical trade theory posits that the greater the degree of openness in the international trading system, the greater the level of aggregate economic income.
Theoretical perspectives
Realism
Robert Gilpin and Stephen Krasner are advocates of the realist tradition, which emphasizes the hegemonic system. The hegemonic system contends that there are states that are much larger and more developed than their trading partners and therefore, the costs and benefits of openness are not symmetrical for all members of the system. Krasner (1976) contends that the hegemonic state will have a preference for an open structure because it will increase its aggregate national income and power.
Realism emphasizes states' demands for power and security. Military force is therefore, the most important power resource. States must rely ultimately on their own resources and must strive to maintain their power positions in the system, even at high economic costs. For realism, the most important variables are the economic and military strength of hegemonic states; and international hostilities are mainly because of variations in the distribution of political-military capabilities between states.
Hegemonic stability
The theory of hegemonic stability by the realist school argues that dominance of one country is necessary for the existence of an open and stable international economy. The relationship between hegemony and an open, stable economy has been challenged by some scholars “As US behavior during the interwar period illustrates, the possession of superior resources by a nation does not translate automatically into great influence or beneficial outcomes for the world.”
Development policy
Realist trade encourages Import substitution industrialization (ISI) replacing imports with domestic production. Realism recognizes that trade regulations can be used to correct domestic distortions and to promote new industries.
Under realism, states possess a high degree of discretionary power to influence many variables and prices in the economy. The government influences the distribution of investment, thus protecting national industries.
International institutions
Realists with their focus on power and the struggle for survival in an anarchical world, criticize the role of international institutions that govern the world economy, such as the World Bank, World Trade Organization (WTO), EU, and the International Monetary Fund (IMF). Scholars argue that the influence exerted by international institutions is dependent upon the states that form part of them, and therefore international institutions have little independent impact. Accordingly, the realist school emphasizes the impact of state power over the strength of the institution per se.
Liberalism
The liberal tradition consists of two schools of thought on the causes of peace, one emphasizes representative government and international institutions and the other advocates global markets and economic development.
Liberalism traces back to Immanuel Kant. Kantian Liberalism posits that democracy, economic interdependence and international organizations are optimal solutions for reducing the incidence of conflict. It is not individual factors, which lead to a more peaceful world, but rather all three elements working in conjunction, which eliminates conflict.
Oneal and Russett's (2001) research design has become a standard choice of replications in studies assessing the Kantian peace triangle where democracies tend to be interdependent and members of the same International Government Organizations (IGOs). Their research is consistent with the argument that democratic peace advocates economic interdependence and a joint need to attain membership in IGOs in order to prevent the incidence of conflict. However, the empirical findings on the Kantian peace triangle as a joint force to eliminate conflict presents some limitations, as one study found that the three Kantian peace variables are less robust in explaining leaders’ conflict behavior. Keohane and Nye (2000) go further to include the lack of additional components in this theory including environmental and military measurements.
Trade
Liberals emphasize two main aspects of the benefits of trade. First, trade promotes states to work together and cooperatively, reinforcing peaceful relations among trading partners. The second benefit is based on the expected utility model of trade and conflict which emphasizes the potential economic consequences of a disruption in trade. Countries are therefore deterred from initiating conflict against a trading partner for fear of losing the welfare gains associated with trade.
Interdependence
Liberals argue that economic interdependence between states reduces conflict because conflict discourages commerce.
Recent cost-benefit calculations of trade take into account information as an important component in the explanation of the pacifying aspect of economic interdependence. Through open trade, states reveal their intentions and capabilities and thus “relations become more transparent and reduce uncertainty.”
Furthermore, economic interdependence makes costly signals possible. If military action did not entail loss, national leaders would not be able to communicate their capabilities and resolve. This acts as a deterrent and promotes peace between states. “Mechanisms that facilitate the transmission of credible information across international boundaries limit bargaining failure, enhancing interstate peace.”
There is some disagreement about the interdependence liberal thesis among some scholars. Kenneth Waltz, for example, argues that since "close interdependence means closeness of contact and raises the prospect of at least occasional conflict . . . the [liberal] myth of interdependence . . . asserts a false belief about the conditions that may promote peace."
Despite the scrutiny, there is a long-held position that economic interdependence has a pacifying effect on interstate relations, evidenced by research conducted by Oneal & Russett 1999 and Xiang et al. 2007.
According to the liberal view, the costly nature of conflict is central to contemporary bargaining theory.
Keohane & Nye (1987) put forth four conditions that make the use of force by large states costly:
Risks of nuclear escalation Resistance by people in poor or weak countries Uncertain and possibly negative effects on the achievement of economic goals Domestic opinion opposed to the human costs of the use of force
Development policy
Liberal trade encourages export led growth (ELG), leaving traders and consumers dependent on foreign markets. Liberals argue that these actors have an incentive to avoid hostilities with their trading partners, since any disruption in commercial relations would be costly.
International institutions
International institutions are a key feature of the liberal peace, because they represent credible signals of resolve to defend member states in times of crisis, regulate state behavior, facilitate communication and create common security interests between member states.
The argument about trade and conflict
The relationship between international trade and conflict has been a source of controversy among international relations scholars. Some scholars argue that trade does not reduce conflict even though conflict reduces trade; while others report that international trade fosters a peaceful disposition among states, which are less likely to resort to armed conflict in times of crisis.
The argument that open trade inhibits conflict dates back to the classical liberal movement of free trade and world peace. This view argues that increasing interaction among traders and consumers (interdependence) promotes peace; free trade fosters a sense of international community that reduce interstate conflict and tensions. Liberals posit that free markets and economic development contribute to a reduction in interstate conflict. The contrasting contemporary view is that open trade dampens political conflict by promoting economic dependence.
Economic dependence has negative consequences for interstate conflict. Albert O. Hirschman (1945) for example, has pointed out that the “gains from trade do not accrue to states proportionately and the distribution of these gains can affect interstate power relations. Moreover, shifts in power relations are widely regarded as a potent source of military conflict.”
Economic interdependence
Economic interdependence and greater openness exposes domestic economies to the exigencies of the world market. Social instability is therefore increased by exposure to international competition. This negative force undermines the Kantian peace and remains a cause for concern in international conflict. Although this concern seems legitimate given the economic disparities between developed and developing countries, studies fail to provide comprehensive empirical evidence.
Another view at odds with liberalism is that technological innovation and industrialization increase the ability of some countries to exercise power. As trade flows and the level of interdependence increases, so do the incentives for states to take military actions to reduce their economic vulnerability.
The adverse effect of trade on state security is difficult to determine, however the more competition, the more aggressive the environment. Openness and competition increases social instability because domestic prices need to adjust to changes in international prices. Consistent with the realists view that states are essentially always in conflict, social instability and resource competition are motives for conflict and states will rely on the use of force to attain their own political goals and interests.
The role of military power
A number of international relations scholars, notably Xiang, Xu & Keteku 2007; Mearsheimer 2001, recognize the role of military power in initiating conflict, as well as the role militarily powerful countries play in international trade. One argument suggests that militarily capable countries are more likely to have the motivation to initiate armed conflict due to their awareness of their capabilities and to their confidence in achieving favorable outcomes.
A second argument suggests that power facilitates trade. Third, there are positive benefits from economic interdependence on military power. Finally, the economic stature of a country determines both the military power and level of trade of that country, hinting that economic powerful states trade more. Because powerful countries are better positioned to take advantage of the benefits resulting from international trade and to transform welfare gains into military power, they also are more likely to use force when their positions are threatened.