Conclusion
Why do states continue to trade with their enemies during a war? Conventional wisdom expects states to sever trade with their enemies, since any such trade assists the enemy in winning the war. And yet trade is a prevalent feature of warfare. Moreover, there is substantial variation in which belligerents allow wartime trade, which products are traded in which wars, and how long those products are traded during the war. Decision-makers do not simply adhere to military considerations of denying their enemy access to any and all gains from trade. Instead, they balance the military imperative with the economic imperative to minimize the relative losses to neutral states and the long-term interruptions of revenue into the security of the state. States allow as much wartime trade to continue as is militarily sensible and prohibit as much militarily dangerous trade as is economically viable.
The fundamental problem of trade with the enemy was an inadvertent creation of the widespread adoption of maritime neutral rights. Before neutral states were given the freedom to carry enemy commerce without fear of seizure, the military benefits of severing trade were high and the economic costs could be dispersed among all trading states. Severing all trade with the enemy for the duration of the war, as the conventional wisdom suggests, was the dominant strategy. After the adoption of neutral rights, the military advantages of severing wartime trade decreased considerably and the economic costs became localized to the state enacting the policy. States had to develop a more strategic approach to wartime trade.
To solve the fundamental problem of trade with the enemy, a state has to decide which portion of trade to sacrifice to the military necessity of war and which to protect to ensure long-term economic stability. Decision-makers set wartime commercial policy at the product level, using their expectations about the coming war as thresholds against which to judge the conversion time of traded goods and the contribution of the traded goods to the state’s GDP. Products with conversion times longer than the expected length of war can be traded with the enemy as they do not help the enemy increase its military capabilities in the current war. Products, whose circulation in the domestic economy contributes more to the state’s GDP than the state is willing to sacrifice given the expected stakes of the war, can be traded with the enemy, as the generated revenue helps ensure the long-term security of the state. When states update their expectations about the war, they, likewise, change their wartime commercial policy.
The wartime trade theory is evaluated across five case studies. The Crimean War shows how the introduction of neutral rights forced states to grapple with the fundamental problem of trade with the enemy. The belligerents started the war with their tried-and-true wartime commercial policies of severing all wartime trade with the enemy. However, because of some late ice, prepaid produce, and insufficient French merchant marine capacity, Britain, France, and Russia agreed to grant neutral states wide-ranging maritime neutral rights to transport enemy commerce free from attack. As predicted by the wartime trade theory, Britain and Russia responded to this new world by tailoring their wartime commercial policies to their expectations of the coming war. Britain expected a short, peripheral war and therefore permitted a wide range of wartime trade. Russia expected a long war on its own territory and therefore prohibited as much trade as was not economically necessary. France, on the other hand, found a different solution to the fundamental problem of trade with the enemy: taking advantage of its protectionist economic structure, it changed the tariff schedule to divert trade from Russia to other suppliers without many economic consequences.
The formation of Britain’s wartime commercial policy in World War I demonstrates the causal mechanisms of the wartime trade theory. Facing the need to balance the economic requirements of the state with the military exigencies of war, Britain’s leaders allowed almost all indirect trade with the enemy at the start of the war. Expecting a quick war on the Continent, they focused on preventing trade with the enemy in products that could be quickly converted into military capabilities and on protecting trade in products essential to the domestic economy. This wartime commercial policy was adapted to battlefield realities. Trench warfare brought prohibitions on digging implements; poison gas warfare led to prohibitions on chemical compounds used in their manufacture. Prohibitions of wartime trade increased with worsening news from the battlefield, until even bakery utensils partially made from tin could no longer be sold to the enemy.
The exploration of Germany’s wartime trade in World War I shows how overlap forms between two belligerents’ independently set wartime commercial policies. At the start of the conflict, both Germany and Britain expected a short war. Though both states forced trade to take indirect channels, for their own reasons, both allowed wartime trade to continue. Additionally, when Germany experienced a period of short war expectations, even after a lengthy period of intense fighting, the leaders instituted a highly controlled expansion of wartime trade. Believing that unrestricted submarine warfare would end the war within six months of its introduction in 1917, Germany’s leaders permitted the export of dyes directly to enemy countries at exorbitant prices. Since the enemy would not have time to convert the gains from this trade into military capabilities, the export of even militarily sensitive dyes was deemed to be less problematic. In exchange, Germany received much-needed foreign reserves to pay for their own war effort and ensure the survival of one of their key industries.
Comparing the formation of British wartime commercial policy between World War I and World War II reveals a remarkable similarity in rationale. While the horrible experiences of World War I could have instilled the perception that all wars necessitate severing trade with the enemy and imposing the most stringent controls on wartime trade, this was not the lesson Britain’s leaders learned. They created a flexible policy that could be easily adjusted to the expected war: products were sorted into different conceptual categories, which would be treated differently in various types of war and under various geographic constraints. Yet the next war, when it arrived, was again against Germany and was expected to be a long and existential struggle. Therefore, as wartime trade theory predicts, Britain adopted a restrictive wartime commercial policy. And even under these conditions, licenses for trade were still granted for products that could only be sourced from the enemy.
The final empirical chapter indicates how the wartime trade theory applies to modern conflicts by analyzing US wartime commercial policies after the Cold War. While there are some significant differences in these conflicts compared to the other cases—asymmetric wars, asymmetric trade relations, and nontraditional military engagements such as bombing campaigns and proxy wars—the policies adopted by the United States still match the expectations of the wartime trade theory. The chapter demonstrates how the UN Security Council can approximate a world without neutral rights by mandating global policy, consequently severing of all wartime trade. It, likewise, shows that once the unipolar consensus at the UN disintegrated, the US returned to a more strategic formulation of wartime commercial policy.
Questioning the Scope Conditions
The wartime trade theory and analysis presented in this book focus exclusively on economic cooperation between enemies at war. There are two important ways in which this scope condition can be stress tested. First, have the changes in the global economy affected the causal logic of this theory? Was there another significant change—like the widespread adoption of neutral rights—that shifted how states make decisions about wartime trade? Second, to what extent does the causal logic apply outside the war context? Do states resolve the trade-off between security and economic imperatives in the same way without the pressures of war? This section tackles these questions.
changes in the global economy
Most of the structural changes to the global economy over the past century have served the function of greater globalization. These changes include increases in the speed of communication, transportation, and transaction; increases in global financial ties, allowing more outsourcing and the formation of large multinational corporations (MNCs); and the globalization and regionalization of supply chains. Given these changes, wartime trade is considerably more likely to occur in future wars, all else being equal.
One of the most fundamental changes in the global economy is the increase in the speed with which products and information can cover the globe. With the speed of transportation and transaction increasing, all traded products have a shorter conversion time, all else being equal. Trade in products with shorter conversion times, according to the wartime trade theory, is expected to be severed faster during a war. However, the exact direction of this effect depends also on the expected duration of war. And the same factors that have sped up the transportation of products also help transport troops to the battlefield. The speed of war has kept up with the changes in the global economy, which means that while trade is getting, on average, faster, wars are getting, on average, shorter.
Additionally, the majority of world trade continues to be carried out by sea, which, despite the changes in technology, is still a lengthy process. As measured by weight, around 90 percent of global trade is transported by sea.1 High-value products are much more likely to be transported by air; airplanes transport 18 percent of global trade by value but only 1 percent of global trade by weight.2 However, transitioning the majority of trade to air is still highly cost inefficient (not to mention highly limited by the world supply of airplanes and fuel). Wartime trade based on products’ conversion times is still very much possible.
The rise of the MNC as the main mechanism through which global trade operates facilitated several changes to the structure of the global economy.3 Firms have separated the different aspects of production among several countries.4 As transportation speed increases and global tariff rates decrease, the outsourcing of production is less involved in serving the needs of the host domestic market and more focused on producing parts for the value-added manufacturing process.5 This change allows a certain degree of specialization between countries in the specific business functions they provide for the global value chain.6 Within the context of the wartime trade theory, this suggests that the world has become more intricately interconnected. Countries linked by the same value-added manufacturing chain are more reliant on firms upstream and downstream in production—which means that these countries are reliant on trade with different states.7 The more dependent a state is on a specific segment of its trade, the more likely it is to protect this trade, even during wartime.
The logic of outsourcing for MNCs is that production in a foreign country is cheaper than producing in the home state and transporting the resultant products to the foreign country.8 Since states have a much better claim on taxing processes that occur on their territory, outsourcing can remove some funds from state coffers. If enough domestic production leaves the home state, it could be argued that the revenue from trade becomes so insubstantial that states might not care if it is lost—the revenue from traded products will no longer matter for a state’s long-term security. This argument is problematic for two reasons. First, more than half of the world’s manufacturing imports are in intermediate products, and this share continues to grow.9 More than 50 percent of growth in global manufacturing trade can be attributed to intermediate products.10 MNCs shift factories to other geographic locations, globalizing or at least regionalizing trade; however, these factories are largely used to create components that are returned back to the home state for final processing.11 The government of the home state, therefore, can still find points to tax the manufacturing process and continue to profit from trade. Second, while the specialization that global supply chains promote can move production elsewhere, the home state tends to specialize in design and development—high-skilled labor employed to determine what the factories will be producing.12 These services are integral to the manufacturing process and produce revenue for the home state. While globalization is spreading out the manufacturing process, the state still has ample ability to profit from domestic components that integrate into global trade.
Moreover, the fact that intermediate goods make up such a large share of global trade increases the likelihood of wartime trade. Where intermediate goods are highly differentiated, changing producers and suppliers becomes more complicated and lengthier.13 This suggests that under modern conditions, a war between two states will have to come much closer to being existentially threatening for states to consider severing trade in these products. Intermediate goods are also, by definition, incomplete. They require further processing into finished products, either for use on the battlefield or for sale. Thus, the majority of products that make up the global trade have longer conversion times into military capabilities. A war would have to be longer for states to consider severing this trade.
Finally, a major change in the global economy stems from the growing importance of services.14 This raises the question of how the wartime trade theory applies to the service sector. In one respect, many services are connected to physical products.15 For example, installation and training services and the design of new technological products are connected to a specific traded product.16 They are included in that product’s conversion time as they are needed for that product to become functional. Additionally, maintenance or support services on existing products can be incorporated into conversion time if the product in need of maintenance is treated as an intermediate good and the length of the maintenance service counts toward its conversion time into a finished product. At the same time, many services that are harder to connect to a physical product can have conversion times of their own. For example, building custom software could take considerably longer than executing a financial transaction for a client. Wartime trade theory could be applied to services in a similar manner as to traded goods. The services can be ranked by how important they are to the domestic economy and how quickly they can be converted into military capability by the enemy and judged against war expectations.
wartime tools cannot be easily converted to peacetime use
Wartime trade theory is calibrated specifically for wartime use as war substantively limits the number of factors that have an effect on commercial policy. War acts as a focusing mechanism, centralizing decision-making about trade under a unified state policy. Every decision affecting the battlefield is filtered through the lens of its impact on the security of the state. In essence, war simplifies commercial policy to considerations of economic stability and military security. As was noted in the introduction, peacetime commercial policy is considerably more diverse, with more active participants and unique complications for each industry.17 The policies affecting textiles do not have to be similar to those affecting agriculture or automobiles. Moreover, domestic politics and the distributional consequences of trade necessarily play a greater role in peacetime commercial policy.18
Additionally, war presents clear temporal bounds, which further simplifies the number of factors contributing to the formation of commercial policy. In war, states consider the enemy’s conversion time for a traded good and their own potential revenue loss from severing trade in that good; they discount their own conversion times and the enemy’s revenue loss from severed trade. This prioritization is harder to justify in peacetime. States can focus on the enemy’s conversion time over the enemy’s revenue gain because of the expectation that the war will end. Gains made after the end of war do not necessarily have to be spent on security competition and are thus less relevant to wartime decision-making. In peacetime, there is no easy cutoff point at which the state can decrease its concerns about the rival’s gains.19 A strategic embargo—for example, on arms or high-technology products—designed to prevent increases in the target’s military capabilities in peacetime has to be maintained indefinitely.20 As soon as the policy is no longer enforced, the target can catch up, removing all benefits of the preceding policy. The decision to permanently sever trade—in peacetime—requires a different set of considerations than the analysis of a temporary measure for the duration of a war.
In wartime, it is more justifiable to expect that the economic gains from trade will be channeled toward the enemy’s war effort. War is a glutton for blood and treasure; populations, however, prefer not to pay for their wars through direct taxation.21 States are more likely to funnel the GDP generated from the circulation of traded products in the state’s economy to increase their military capabilities. In peacetime, a state can use the efficiency gains from trade to serve any number of purposes, which are not necessarily problematic for their rivals. For example, enriching a rival that uses the gains from trade to provide domestic benefits for supporters of the regime is not as threatening as enriching a rival that channels gains from trade into an aggressive arming policy. Without the war as a simplifying mechanism, it is more difficult for a state to ascertain how detrimental to its own security the rival’s gains from trade will be.
As militarily problematic as neutral trade with the enemy is in wartime, access to belligerent rights provides states with the tools to limit this trade. Without these policy options, severing trade comes with even lower military benefits at substantially higher economic costs. Blockading an enemy’s port, bombing land-based trade routes, and searching commercial traffic for contraband goods are all permissible measures to limit enemy resupply in wartime. In peacetime, such actions would provide a casus belli. Even less intrusive tools of economic warfare raise concerns of escalation in peacetime use.22 On the other hand, without recourse to the tools of economic warfare to control indirect trade, states do not have many levers to affect a rival’s ability to diversify trade to alternative suppliers. Severing trade with a rival does not stop the rival from acquiring necessary products; thus, the policy carries few military advantages. At the same time, severing trade with the rival comes with the economic costs of lost trade, or the lower profits of doing business with the second-best customer, and the potential relative loss compared to the third party now supplying the rival. As much as the adoption of neutral rights changed the balance of military benefits and economic costs in favor of continued wartime trade, the loss of belligerent rights in peacetime shifts that balance even further toward continued peacetime trade.
Finally, using tools of economic warfare is more legitimate in war, causing less damage to established institutions governing trade between states. Weaponizing commercial relations between nations to increase pressure on the enemy is almost expected in war, with the implicit understanding that with peace normal economic relations will resume. Indeed, many economic institutions, such as the World Trade Organization (WTO), have a national security exception to agreed-upon rules of peacetime trade.23 In many cases, trade reverts to prewar levels fairly quickly after the cessation of conflict.24 The same cannot be said of weaponizing commercial relations in peacetime.25 There is no easy focusing mechanism for the removal of economic punishment applied in peacetime.26 Frequently, the necessary conditions for lifting sanctions shift, or the sanctions do not have explicit conditions for removal.27 With no way to ascertain when, if ever, normal relations will return, the frequent use of these tools in peacetime unravels the institutions designed to manage international trade. States are incentivized to create redundant economic institutions to lower the potential damage from any other state using economic ties against them. For example, after removing states from the SWIFT system became a popular choice for US policy, China, Russia, and India began working on parallel and separate payment systems.28 Having multiple channels for executing transactions lowers the damage to the target state caused by removal from any specific system. However, such redundant institutions also reduce the utility of economic institutions globally.29
security competition short of war
Although wartime trade theory is not calibrated for application in peacetime, the solution to the fundamental problem of trade with the enemy can shed some light on how states make trade-offs between security and economic factors in determining the level of cooperation with geopolitical rivals. Specifically, the costs of severing trade with a security competitor have to be balanced by equal or greater security benefits.
If security rivals—states engaged in an enduring security competition but not yet in open warfare—have an established trading relationship, they expect the relative gains from this trade to be equal.30 With equal relative gains, the economic exchange will not affect the balance of power between the two rivals. Three issues can complicate this dynamic: (1) states could be bad at calculating relative gains; (2) states could be forced to enter into harmful relative-gains agreements; (3) states could be less concerned about relative-gains considerations and more worried about trade being used as leverage in a crisis.
In the first case, the state is blissfully unaware of any harm from the economic exchange, and this factor will never enter into its calculations. Over time, the state might be at a military disadvantage, but this outcome will not be attributed to trade policy. If the state is aware that some portion of its trade relationship comes at a relative loss compared to the trade partner, it will take any opportunity to get out—no need to wait for a crisis to sever trade. The Donald Trump tariffs and renegotiation of the North American Free Trade Agreement were justified on the basis of relative losses stemming from trade and did not require a precipitating crisis.31 It should be noted that ending a net negative bilateral relationship is not always beneficial for a state. In the case of a developed nation trading with a quickly industrializing nation, ending the economic relationship frequently places the developed nation at an even worse relative loss than maintaining the relationship.32
The remaining concern of trade with a security rival is leverage: states fear that the rival will sever trade during a crisis, thereby preventing the state from acquiring critical supplies at a crucial moment. The greatest leverage stems from trade in energy, raw materials for value-added manufacturing, or bottleneck intermediate goods in supply chains. These products either are of crucial importance to states for both civilian and military use or are at the start of supply chains and contribute greatly to the state’s GDP. The same characteristics that make these products excellent sources of leverage also ensure that they have long conversion times into military capabilities. In a short crisis, severing trade in high-leverage products will not actually produce much leverage. The crisis will be resolved before the economic pain from the severed trade is felt.
If there is no expectation that the crisis will end quickly or even at all, the target still does not face the same constraints as in war to make the shock of severed trade, even in high-leverage products, difficult to bear. War creates its own demand for military and security-adjacent products, depleting stockpiles and requiring additional supply with great urgency. Outside of war, states can absorb the cost of adjusting to alternative sources of supply or alternate markets much easier, since there is no additional urgency driven by increased demand. Only in rare cases when the rival has no options for changing trade partners, despite the long-term crisis, will the leverage have a substantial effect. The frequently cited example of such a rare case of leverage is the US embargo on oil exports to Japan in 1941. Japan imported more than 80 percent of its oil from the United States and did not have an alternate source available to it; the leverage from the US commercial policy was so great that it led to the counterproductive effect of the Japanese attack on Pearl Harbor.33 Even this example of rare economic leverage being effectively exercised comes from a wartime context, not a security crisis, as Japan was in the midst of a protracted war with China at the time. In the majority of cases, however, the target state can either diversify trade to alternate partners or continue to import the exact same products through indirect channels. Despite Western sanctions on Russia in response to the invasion of Ukraine, Western components, such as sanctioned microchips and processors, are still being identified in Russian weapons.34 While severing trade in critical products necessary for the Russian war effort, the West is still failing to exert much leverage over Russian foreign policy.
Given the availability of alternative trade partners and the possibilities of transshipment through third-party states, severing trade with a security rival, in general, provides the military benefit of increasing the rival’s cost of doing business. This is not an insignificant effect. Over the long term, the increased cost of the rival’s chosen foreign policy could add up to a substantial burden on the rival. But this is necessarily a long-term policy, which does not come without costs to the imposing state. Severing trade with a rival great power requires losing access to the rival’s necessarily large market, thus giving up a huge opportunity to grow one’s own economy. Non-great-power rivals, for lack of power projection capabilities, tend to be neighboring states. Severing trade with a neighboring state requires paying for longer transportation routes and therefore accepting lower profits. In addition to these direct costs of severing trade, there is also the relative loss compared to the third-party state that is now supplying the rival or profiting from the severed trade as a transshipment hub. For example, after the sanctions on Russia limited US and EU trade with the state, Turkey’s exports to Russia nearly doubled in 2022 compared to 2021, as Turkey served as an intermediary between the West and Russia in sanctioned products.35 To justify severing trade with a security rival in some segment of the commercial relationship, the military benefit of increasing the rival’s cost of doing business has to be greater than the economic cost of the lost access to the rival’s market and the relative loss to third parties. This is a very high bar to clear.
Some scholars suggest that the security benefit of severing trade with the security rival is preventing the rise of that rival. By allowing China into the WTO, investing in its development, and trading heavily with it, the argument goes, the United States fueled China’s rise.36 This is deemed irrational because the United States now has to contend with a monster it has created; the correct policy would have been not to engage deeply in a commercial relationship with China after the Cold War.37 The problem with this argument is that it requires both perfect knowledge of the future and global adherence to US trade preferences.
Severing direct trade with another state does not end the trade relationship; indirect trade springs up as intermediaries grow wealthy from connecting the two economies. Had the United States simply failed to engage directly with China, China could have still benefited from the US market and technological development through third-party intermediaries. The United States could have created multiple monsters for the price of one. Alternatively, the United States could have invested in a much more expensive policy of actively denying China US products and access to the US market. This could have somewhat slowed but not stopped China’s rise while also souring relations between the two countries.38 Given the Chinese level of development at the end of the Cold War, trade with Japan or Europe would have accomplished much the same outcome as trade with the United States.39 And in this counterfactual world, Japan and the European states would have grown relative to the United States, which would be denying itself the benefits of investing in a huge market.40 The only possibility for the United States to contain the rise of China would have stemmed from persuading all the major developed economies to likewise sever economic ties with the state. Such a policy is nearly impossible to achieve when there is universal agreement that the target is a threat; at the end of the Cold War, China was not perceived as one.
At the same time, even considering such a costly policy at the end of the Cold War would have required foreknowledge that China would, indeed, rise.41 The inevitability of China’s rise is an easy claim to make after the fact; however, history is full of states that were expected to rise but failed to do so. In the 1980s, Japan was supposed to have been the next economic behemoth. At the end of the Cold War, great expectations fell on both Brazil and India, which had all the requisite markers for a rising great power. If the United States were to sever trade with every large, populous state that might at some point rise, it would have no one left to trade with; gains from trade require a trading partner. In the absence of a crystal ball and in the expectation that third-party trade would take the place of severed direct trade ties, growing alongside the potential riser seems a reasonable course of action.
Some might suggest the US Cold War policy of containment toward the Soviet Union as a counterargument. According to this argument, severing trade with the Eastern Bloc, over the long term, allowed the United States to win the great-power competition. However, it was not the general lack of trade with the West that created problems for the Soviet Union. The technological leap in computing power that the United States managed to keep from the Soviet Union generated the shift in growth rates between the two blocs.42 To recreate the effect with a different rival, the state pursuing containment would need to kick off the next technological revolution and prevent its global spread. Here again, third parties present a problem. Exchanging the benefits of this new technological revolution, even with allies, introduces the potential for the allies to be tempted by economic gains to transship the technology to the contained rival. During the Cold War, European states supplied computing technology to the Soviet Union, against US objections.43 The current US policy of denying China access to US-made chips of certain specifications in some respects attempts to recreate this aspect of the containment policy of the Soviet Union. A major difference is the lack of the Coordinating Committee for Multilateral Export Controls (CoCom) enforcing the same policy across all major suppliers of the chips.44 Without it, the US policy of severing trade increases China’s cost of doing business, but it does not prevent China from accessing the technology. All the while, some third party will profit from the exchange instead of the United States.
In discussions of security competition short of war, the commercial policy in question is peacetime commercial policy. Thus, more than just state-level considerations of security and economic stability affect its formation. As was mentioned previously, peacetime commercial policy is affected by many more determinants than wartime commercial policy. To substantiate the costs of severing trade with a security rival, the potential benefits can stem from domestic politics, international reputation, alliance politics, proliferation concerns, and the signaling of solidarity with victimized states, among many other factors. States can prohibit trade amid security competition short of war for reasons outside of those predicted by the wartime trade theory.
Implications
The explanation for wartime trade advocated in this book suggests several implications for the study of international relations. First, it improves our understanding of how states make relative-gains comparisons. Cooperative endeavors depend on states reaching an agreement where each is satisfied with the relative distribution of gains; however, how states measure relative gains is underspecified. For ease of calculation, international relations scholars typically assess relative gains in dollar equivalents. This overlooks both differences between states and differences between the products being exchanged. Some states can stretch their dollar equivalents further than others by investing in a more efficient economic structure. Different products traded between states, likewise, have varying effects on the domestic economies of the state. Importing $1 million worth of chairs is hardly the same as $1 million worth of microchips. The microchips can be included in value-added supply chains and generate considerably more value for the economy than the initial $1 million suggests.
This book’s findings suggest that states do not necessarily use the same benchmarks to calculate relative gains in all economic exchanges and, furthermore, that states do not necessarily calculate their own gains using the same benchmarks as they apply to their interlocutors. In the context of wartime trade, states focus on the enemy’s conversion time into military capabilities as the relevant aspect of the enemy’s gains from cooperation. Whereas before the war a state might find the sale of truck engines to a rival at market value to be an equal exchange, after the start of the war this same sale constitutes a relative loss as the enemy can convert truck engines into military capabilities for use on the battlefield. The exigencies of war make states prioritize the speed of conversion as the relevant metric for assessing the enemy’s portion of the gain. On the other hand, when considering their own gains from the same exchange, states focus on the revenue generated by the circulation of the traded products in the state’s economy, as this ensures domestic economic stability and long-term investment in the security of the state. It is not the market value of the truck engine that matters but the contribution to GDP of the firm creating that truck engine. States assess relative gains using different metrics for different situations and for themselves compared to their interlocutors. This makes determining who benefits more from an economic exchange more difficult, which might increase the scope of cooperation between states.
How states calculate relative gains matters greatly for policy decisions such as decoupling from a rival economy or invoking the less extreme version of economic separation—the imposition of sanctions. From the perspective of counting dollar equivalents, if the state initiating a decoupling policy loses less trade value than the opponent, then decoupling is said to make logical sense. This calculation overlooks the content of the trade, as some products are more important to the state’s economy than others, just as some trade is more important to one trading partner than the other. Moreover, this calculation overlooks the temporal effects of the policy. The costs of sanctions or decoupling could affect the initiating state earlier than the punishment affects the target state. Maintaining the policy would require the population of the enacting state to suffer costs without any visible benefits. Even if the resulting punishment of the target state would ultimately overshadow the costs to the enacting state, the policy might become politically unsustainable before that point is reached. The leaders of the initiating state might not be willing to take the blame for economic pain that seems to bear no fruit.45
Present calculations about the United States and China decoupling their economies are centered on the question of who would suffer more from this possibility. The relative gain, or relative loss, is considered in terms of the cost of severed trade: How much GDP will the US lose? How much output will China lose? How many jobs will be destroyed?46 In such considerations, either the United States or China has to pay a heavier price for decoupling, and the other is declared the winner. In many respects these assessments miss the point completely: the cost of separating the two economies is likely the least significant aspect of decoupling. It is a onetime switching cost of enacting the policy. The real relative gains or losses stem from how the world looks after decoupling has been achieved. Once each rival has settled into its respective trading bloc, the state that benefits more from the resulting structure of global trade has achieved relative gains from decoupling.
Second, the ideas presented in this book have implications for theorizing security externalities. States can use the gains from cooperation to increase their military capabilities, throwing relative gains into sharper relief.47 Scholars conclude that states prefer to cooperate with friendlier states than with adversarial states, denying gains to enemies and simultaneously channeling the military-boosting consequences toward allies.48 This is a good insight, yet assuming that all states are equally capable and equally interested in converting the gains from trade into military capabilities leaves a lot of ground untrodden. How effectively and quickly states convert gains from trade into military capabilities determines the extent to which cooperative ventures with them produce security externalities. Trade with an unfriendly state might not be terribly dangerous if the other state, for example, has an inefficient taxation system. This expands the scope of cooperation possible in the world, even for a state deeply concerned about security externalities. The domestic will to invest in the military, likewise, influences the extent to which security externalities matter for deciding trading partners. Much to the consternation of the United States, its European allies prefer not to invest in their military capabilities, despite considerable gains from trade with the United States.
Security externalities do not only vary by state; they also vary by the specific content of the trading relationship between two states. As emphasized in this book, products vary in the amount of security externalities they produce, which is based on the contribution to GDP their circulation in the economy provides, just as they vary in the speed with which they generate security externalities. Even when it comes to cooperative ventures with security rivals, not all aspects of the trading relationship are equally dangerous. This once again expands the scope of cooperation possible between security adversaries. The US commercial policy toward China, in some respects, reflects these considerations. With the goal of preventing China’s military modernization, the United States prohibited Chinese access to chips smaller than fourteen nanometers, allowing trade to continue in the rest of the products in the semiconductor industry.49
Third, the logic of wartime trade theory has implications for the commercial peace. This book shows that economically interdependent states have reason to continue their economic exchange even as they engage in conflict. The commercial peace argument asserts that expectations of lost trade in war deter states from engaging in military confrontations.50 The greater the opportunity cost of lost trade, the more likely states are to avoid warfare with each other. Wartime trade theory shows that state leaders control the extent to which wartime trade is allowed or prohibited; the opportunity cost of severed trade is in the hands of leaders making the decision to go to war. The strategic decision to partake in the economic benefits of wartime trade may also undercut the deterrent effect of economic interdependence.
Leaders’ expectations about the coming war indicate how restrictive the wartime commercial policy will be. More wartime trade is expected in short peripheral engagements than in protracted existential struggles. This suggests that the deterrent effects of economic interdependence might vary among different types of wars, having a greater effect when wartime trade is least likely to be permitted. Furthermore, wartime trade theory proposes that the more intertwined two economies are—the more they require each other as a market for their goods or as a unique source of inputs into their value-added manufacturing—the more likely they are to protect wartime trade even if it comes with military consequences. Greater economic interdependence between two states is likely to lead to more wartime trade and therefore might be less likely to serve as a deterrent to conflict.
This implication is particularly salient given the heightened security competition between the United States and China. Despite the recent export control policies imposed by the United States and the Chinese efforts at creating a resilient, self-sufficient economy, the two states are still deeply interconnected.51 Optimistic predictions suggest that the large costs of losing these significant economic ties, and thus the prospect of undermining domestic prosperity, will deter these states from initiating military hostilities against each other.52 However, the findings of this book suggest that the economic relationship between the United States and China and the type of war most likely to occur between these two states point toward greater wartime trade rather than toward trade acting as a deterrent to conflict. Because states with secure second-strike capabilities generally refrain from engaging in prolonged, existentially threatening conflicts with each other for fear of nuclear escalation,53 if a war between the United States and China occurs, it is more likely to be short and peripheral. A substantial portion of the US-China trade portfolio is in intermediate goods and raw materials—products with longer conversion times, in which wartime trade is likely to continue during a short, peripheral war.54 The more likely wartime trade is between these two states in a potential future conflict, the less opportunity cost of lost trade there is to deter such a conflict.