The Liberal Peace and the Taiwan Straits
Evan Osborne
Wright State University
Dept. of Economics
3640 Col. Glenn Hwy.
Dayton, OH 45435
evan dot osborne at wright dot edu
0
The nature of the Taiwan-China relationship (in its cultural, social and economic
dimensions), combined with the tangled centuries of history between the two jurisdictions
and the asymmetry of the extent of democracy in the two countries, make Taiwanese
politics among the most unusual in the world. Fundamentally, Taiwanese elections are
arguably always about the same two issues, one of which is the proper nature of the
relationship with China. (The other, involving cultural and political disagreement between
descendents of the 1949 refugees from the mainland and those who can trace their roots
much farther back, is also about relations with China in a sense.) In the last 20 years,
liberalization of Taiwanese politics has happened simultaneously with liberalization of the
Chinese economy, generating hard questions for Taiwanese citizens about how to manage
economic ties between the countries. In particular, residents of the island must confront
the question of whether the growth of such ties generates promise (for both the creation of
wealth and deterrence of conflict) and peril (of economic dependence upon the mainland).
These developments have coincided with the expansion of the literature on what is
known as the commercial peace. This literature focuses on whether or not commercial ties
among nations deter violent conflict between them. The argument is a simple one. Nations
with extensive commercial ties have more to lose from violent conflict, which will usually
disrupt those ties, and are thus more likely to have peaceful relations. But there have long
been theoretical arguments against at least the universality of the commercial-peace
argument. Under certain conditions, claim some, close commercial ties may not only fail to
deter conflict with many actually promote it.
In this paper Taiwanese-Chinese commercial ties are examined, in order to
exploring whether this relationship falls into one of the categories of bilateral trading
1
relationships that some literature claims promote relationships characterized by more
conflict. Section 2 explores the theory and empirics of the commercial and democratic
peace, Section 3 presents both the historical trends in bilateral commercial ties and the role
they have played in Taiwanese politics during the democratic era in that country, Section 4
presents general statistical analysis of the determinants of national conflict, and section 5
applies these findings to the Taiwan-China relationship.
2. The Liberal Peace
Note first that the broad term "liberal peace" actually unites two different
arguments. The first is the commercial or economically liberal peace, the aforementioned
argument that nations that trade more have less incentive to fight. The second is the
democratic or politically liberal peace, which indicates that consensually governed
societies are less, perhaps dramatically less, likely to engage in violent conflict.
The idea behind the liberal peace is not new. Even in the early Enlightenment
Voltaire could write:
“Take a view of the Royal [Stock] Exchange in London, a place more
venerable than many courts of justice, where the representatives of all
nations meet for the benefit of mankind. There the Jew, the Mahometan, and
the Christian transact together, as though they all professed the same
religion, and give the name of infidel to none but bankrupts. There the
2
Presbyterian confides in the Anabaptist, and the Churchman depends on the
Quaker's word.
If one religion only were allowed in England, the Government would
very possibly become arbitrary; if there were but two, the people would cut
one another's throats; but as there are such a multitude, they all live happy
and in peace.”
The Baron de Montesquieu (1989 [1748]) soon after made the argument in a more
extended way. Thus, the argument for the commercial peace is hardly a new one. However,
in the era of modern social science, with its more precise argumentation and capacity to
use statistical techniques to test hypotheses, the argument for the commercial peace
probably begins with Polachek (1978). In addition to formally characterizing the idea, he
uses a simple linear-regression model and finds that individual nations that trade more
have more peaceful interstate relations. A large volume of papers uses a similar technique
and mostly (including but far from limited to Wallenstein (1973), Oneal et al. (1996) and
Hegre (2003)) supports this result.
But these findings have been dented in several ways. First, it is possible that the
correlation between peace and trade is that peace causes trade rather than trade causing
peace. Keshk et al. (2004) and Kim and Rousseau (2005) were the first to use
simultaneous-equation techniques to find that the former holds and the latter does not.
However, in subsequent work Polachek (1992), Oneal et al. (2003), and Robst, Polacheck
and Chang (2007) all found that even taking account of possible two-way effects, increased
trade causes militarized conflict to decline.
3
The other half of the liberal peace, as noted above, is the democratic peace. The
literature is once again not unanimous, but leans toward the hypothesis that liberality, in
this case political, is associated with nonviolent international relations. Among the
skeptical papers are Weede (1984), Vincent (1987) and Bremer (1992a). A much larger
body of papers supporting the democratic peace includes Chan (1984), Ray (1993), Farber
and Gowa (1997), Slantchev et al. (2005) and Kinsella (2005). However, even the
optimistic literature generally suggests that the democratic peace is primarily in play when
both countries of a pair are democratic. When one is democratic and one is not, all rules are
off.
And both aspects of the liberal peace are subject to qualifying remarks on both
national-power and trade-share asymmetries. Kugler and Lemke (1996) and Xiang et al.
(2007) find that, contrary to popular balance-of-terror reasoning, military conflict is most
easily avoided when the two countries in a pair of major power differences. However, the
interpretation of this finding is far from reassuring. It may be that very strong nations and
very weak ones seldom fight because the strong nations gets most of what they want
through threatened violence. Perhaps the most spectacular failure of the liberal peace is
World War I, which began only three years after Angell (1911) claimed that growing
commercial ties among nations made war disastrous and therefore unlikely. Rowe (1999)
has created a startling account of how economic growth, fueled by global economic
liberalism, may have fueled that war by making it harder for the soon-to-be-belligerents to
mobilize their scarcest resources, which were already claimed by commerce. They thus
became more nervous about falling behind other countries in military capacity and
therefore making their national interests subject to challenge. Whether true or not,
4
commercial ties and widespread democracy (among the major war powers in 1914, even
Germany had substantial democratic elements) are no magic bullet in the cause of peace.
3. Asterisks to the commercial peace
This skeptical literature is the point of departure for the analysis in this paper. In a
fairly lengthy study, Barbieri (2002) finds that binational amity is highly contingent on
what she calls “salience” – the extent to which trade with one country of a pair dominates
either trade or overall economic activity of the other. If trade is unbalanced, in the sense
that for country 1 trade with country 2 is small relative to 1’s total trade or economy, while
for country 2 trade with country 1 is quite large relative to 2’s total trade or economy, the
commercial peace breaks down. Figure 1, which is taken directly from Barbieri (2002, p. ),
illustrates the possibilities. On each axis is measured the dominance of trade of one
country in the economy of the other. In quadrant 2, there is a high degree of mutual
dependence, and this is the classic idea of the commercial peace. In quadrant 3, each
nation’s trade with the other is a modest portion of total economic activity, so the deterrent
effect on conflict of trade ties is modest but positive. But quadrants 1 and 4 are of interest
here – the cases of one-sided dependence. She finds that in such relationships substantial
commercial ties actually promote conflict. From the point of view of Taiwan-China
economic engagement and Taiwan security, her relevant findings are that trade does make
some sort of conflict – which she defines to include the threat as well as the actual use of
force – more likely.
5
In addition, there is political asymmetry. If country 1, is substantially democratic
while country 2 is not, either country might in theory be more willing to threaten or resort
to war. On the one hand, dictatorships face less public resistance to the decision to threaten
or go to war. If they restrict free speech they may be more able to take advantage of
nationalist sentiment whipped up among the population. On the other hand, if it has public
support behind it, then a consensual government may be able to demand greater sacrifices
from its population than an autocratic one that must commandeer matériel and public
support.
The problem is easy to conceptualize. Suppose that country 2 has resources in the
amount K*. Absent trade with country 1 (the only potential trading partner), it may
convert resources into output locally through the production function YL = f(K), which is
subject to diminishing returns. It may also apply resources to produce jointly with country
1, which occurs according to the separate production function YJ = g(K), where here K is the
sum total of resources contributed by 1 and 2. In the analogy to traditional models of trade
based on Ricardian comparative, advantage country 1 should devote at least some
resources to trade with country 2, to take advantage of the gains from specialization.
But suppose that country 2 is considerably more powerful than country 1, so much
so that it can dictate the way the gains to joint production are divided among the two
countries, similar to the Osborne (forthcoming) model of ethnic conflict. Country 2 chooses
to keep a proportion t, 0 ≤ t ≤ 1, of YJ, while country 1 retains (1 – t). If the resources
needed for joint production with country 2 are too large, and the tax burden is too onerous,
then country one would simply choose to substitute its joint-production resources back
into domestic production. But suppose that resources devoted to joint production must be
6
transformed in a way that makes them not useful for autarky. Then it is possible or the
decision to devote resources to joint production with a dominant partner to leave country
1 worse off.
Figure 2 illustrates the possibilities. The horizontal axis measures resources from
zero to the country's endowment, K*. Suppose that resources KL are devoted to domestic
production, so that K* - KL are used in joint production. The vertical axis measures income
accruing from the sum of both kinds of production. The lower curve represents the
production function in domestic production f. If all resources were devoted to domestic
production, the country would earn the income 𝑌̅𝐿 in autarky. But country1, starting from
KL already devoted to domestic production, finds that the marginal product of capital
devoted to joint production with country 2 may be now higher than the marginal product
in domestic production. How much higher, and indeed whether or not the condition is true,
depends on the tax rate. If country 1 somehow got one all of the joint production, so that t
= 0 (which might hold if country 1 were itself a dominant country and had infinitely many
potential trading partners to choose from), then its income is Y2. At tax rate t1, country one
receives less of the jointly produced income, but still more than it would if it did not trade
at all with country 2. At t2 > t1, country one is worse off than if it does not participate in
trade. In the limit, where t = 1, country one earns nothing from joint production and is
significantly worse off, because of having devoted now-useless resources to it nonetheless,
with income Y0.
But rational rulers of country 1 with perfect foresight would under such
circumstances not choose to engage with country 2. However, due to lack of such foresight,
a change in the nature of the governance of country 2 after resources in country 1have
7
been committed, the fact that those who rule country 1 might benefit because of private
interests even though the country as a whole does not, or other considerations, the
investment might nonetheless be made. What kinds of circumstances might prompt this
exception to the commercial peace? Clearly, a necessary condition is a large imbalance
between the two countries, which clearly characterizes Taiwanese-Chinese trade. In
addition, if a basic postulate of the democratic peace is correct, then a lack of democracy in
at least one of the two countries may also leave country 1 worse off. Taking for granted the
permanence of liberal democracy in Taiwan, this leaves the question of the extent to which
China itself is or is not democratic.
Two qualifying notes are in order. First, recall that the threat is not necessarily one
of military conflict, but the use of threatened military conflict to achieve the same ends
without the actual use of force. Second, despite this possibility, it is worth noting that the
commercial/democratic peace is a real phenomenon that should not be tossed aside
casually. Some evidence for it exists even in East Asia. The history that does not happen can
of course never be known, but its absence may be the most important fact of all. East Asia
has been subjected recent years to numerous disputes over islands found amidst large
quantities of mineral or fish resources – the Senkaku/Daiyu dispute between Japan and
South Korea, the Dokdo/Takeshima dispute between Japan and China, and the dispute over
the Spratly Islands involving several nations. In centuries past such disputes have
frequently led to war, but so far have not in these countries despite the intense nationalist
feelings they often generate. Indeed, Koo (2009) argues that "economic interdependence"
is responsible for cooler heads prevailing throughout this period of rising prosperity and
national strength.
8
http://www.du.edu/korbel/jais/journal/volume1/volume1_chen.pdf: data-free argument
that growing commercial ties will lead to more peaceful relations.
3. A Brief History of Post-1949 Cross-Straits Economic Integration
Economic integration consists of far more than mere microeconomic statistics,
particularly the limited statistics available in previous decades, can portray. In addition to
broad flows of goods, services and investment, economic integration properly depicted
includes migration, the development of often ethnic-based trading networks, the exchange
of ideas, and other economically meaningful ties unlikely to be captured in the available
data. Any depiction of such phenomena is therefore unavoidably substantially heuristic.
Prior to the triumph of the communists in China, the economic ties between the
island and the People's Republic were for a series of reasons somewhat less than mere
geographical distance might suggest. While there had been substantial migration from the
continent in the latter Ming period, the island was more often than not an afterthought in
the eyes of Imperial authorities. However, with the rise of Europe-based colonial-era
commercial trading networks, Taiwan's location brought it to the attention of various
European political authorities and trading firms. Danshui was made a treaty port by the
Treaty of Tientsin in 1862, and the Treaty of Shimonoseki that ended the Chinese-Japanese
war in 1895 ceded the entire island to Japan, which had had troops there since 1874. As
was true in Japanese colonial rule of Korea, Taiwan during this period became closely
integrated with Japan itself, through the Japanese structuring of the local economy in the
classic colonial manner and the promotion of education of Taiwanese elites in Japan. To a
9
first approximation, we may say that in the three quarters of a century prior to the end of
World War II, the Taiwanese economy was managed in the interest of non-Chinese
foreigners far more than either the interest of mainland Chinese or the Taiwanese
themselves.
The arrival of the nationalist exiles in Taiwan in 1949 extended and strengthened
the restrictions on economic engagement of people in Taiwan with people in China. From
the consolidation of Nationalist rule after 1949 through the early 1980s commerce was
practically nonexistent beyond specifically authorized trade in Chinese medicine,
conducted through Hong Kong.1 During this period Taiwanese policy was marked by the
"Three noes” – no conflict, no negotiation, no compromise. Chinese policy was equally
militant, although Zhou Enlai in 1956 offered the possibility of reunification, albeit total,
through peaceful means. In the watershed year of 1978, when the US switched diplomatic
relations, the Chinese called for mail, travel, and trade links, along with scientific, cultural,
sports and arts exchange, reminiscent of their broader policies of four modernizations and
of engagement with the outside world. At this time the Taiwanese government lifted a
travel ban tourists to the mainland. In 1988 the Chinese mission to Hong Kong bought $80
million worth of Chinese goods, ended tariffs on imports from Taiwan and simplified
import regulations for goods from the island. In September, 1981 Ye Yianjing of the
Standing Committee of the National People's Congress unveiled a "nine-point proposal" for
peaceful reunification through negotiation, and soon after the famous “one country, two
systems” formula was unveiled by Deng Xiaoping for both Taiwan and Hong Kong.
1
The earlier history in this section is taken primarily from Myers and Zhang (2006), Sung (2005), and Bush (2005).
10
Following this ice-breaking period, commercial ties expanded rapidly, in alignment
with China's startling economic transformation. In 1985, the Taiwanese government freed
indirect exports to third countries for regulation, although they retained controls on
imports. However, the number of items allowed to be imported began to expand
dramatically. From 1987, people in Taiwan were allowed to visit mainland relatives. In
October, 1989, regulations enabled indirect trade, foreign investment, and technological
cooperation. China specifically began to cultivate labor-intensive investment from Taiwan
and elsewhere all along China's coastal regions, and enabled fully-owned foreign ventures,
including by Taiwanese-owned firms. Taiwanese companies were given better treatment
than other foreign companies beginning in 1988, which lasted until China and Taiwan
joined the World Trade Organization, which generally prohibits such discrimination, in
2002. The nature of Taiwanese investment in the mainland throughout the 1980s and early
1990s tracked the climb of both nations, with Taiwan in the lead, up the product-lifecycle
latter. Taiwanese investment in the 1980s generally involved labor-intensive industry that
could no longer be done competitively in Taiwan, but by the mid-1990s capital-intensive
production and investment in food processing for the domestic Chinese market had grown
in importance.
Again to a first approximation, Taiwanese authorities began to question the wisdom
of extensive integration into the Chinese economy beginning in 1996. On August 15 of that
year, the government of Lee Teng-Hui announced its policy of "no haste, go slow" (戒急用
忍). As Taiwanese investment continued to create facts on the ground as firms built
factories either without asking for government permission or before applications had been
reviewed, the successor government of Chen Shui-Bian in October of 2001 announced a
11
policy of "proactive liberalization, effective management" (積極開放、有效管理) and
"Taiwan first, global orientation" (全球佈局), which indicated that integration was not per
se a problem, but should be conducted from the point of view of the Taiwanese national
interest rather than the private interests of individual traders and investors. However, the
entry of Taiwan and China into the WTO handcuffed both governments' ability to restrain
the burgeoning commercial flows. Indeed, it was under the Chen government that
remittances were allowed in February of 2002 and mainland residents were allowed to buy
Taiwanese real estate in August of 2002. Since the early part of the last decade cultural and
academic exchanges have soared, reinforcing commercial ties in more closely knitting the
two countries together.
In that sense, developments under the Ma Ying Jeou (“mighty evil”) government are
at least in the arena of economic engagement more an extension than a radical change. Ma
ran for office on a platform of creating a cross-Straits common market (兩岸共同市場), and
air, postal, and other links beneficial to closer commercial ties have been forged on his
watch. By now over 90% of the items governed by Taiwanese regulations on foreign direct
investment in China are now subject to almost automatic approval.
The fruits of these various trade-regime changes can be seen in Figure 3, which
shows the change in the share of total trade with China of Taiwanese GDP since 1990. Note
first that as Hou (2002) points out, Taiwan's official data on trade with China is somewhat
suspect. This is because throughout much of this period, Taiwanese firms trading with
China has entailed some political risk in Taiwan. He argues that Chinese official trade data
on China-Taiwan trade is more reliable than their -Taiwanese counterpart, because of the
tendency of Taiwanese firms to, as he puts it, "launder" trade through Hong Kong. Figure 3
12
contains the shares of GDP for both trade with Taiwan and Hong Kong, according to
Chinese data. The true figures undoubtedly lie somewhere in the middle, with the need to
camouflage greater China perhaps declining over time, subject to changes in political
thinking in Taiwan. The numbers in parentheses in each year represent the rank of China
among all Taiwan's trade partners, using the figures for trade with Taiwan only as the
measure. By 2005 China had replaced Japan as Taiwan's leading trade partner, and total
trade with China summed to almost 32 percent of GDP.2
Figure 4 indicates that the story for foreign direct investment is somewhat different.
While the trend in Taiwan-China trade was relentlessly upward from 1995-2007, foreign
direct investment shows more oscillations. The decline in investments officially categorized
by the Chinese government as being from Taiwan during 1997-2000 might be attributable
to the East Asian financial crisis, but the decline from 2002-2007 occurred during a time of
economic boom in China and respectable economic growth in Taiwan. An economic
explanation thus seems less likely. 2003 was the year Taiwanese president Chen Shui-Bian
proposed a referendum on independence to the great alarm of the Chinese government,
and he was reelected in 2004. It is thus possible that FDI from Taiwan was restricted by the
Chinese government during this period. It is also possible that the Taiwanese government
itself was hostile to FDI, and the fact that investments officially from Hong Kong rose from
2005-2007 suggests an attempt to evade Taiwanese government restrictions. However, no
matter the direct source of the political hostility, the fact that FDI both changes the political
calculus of Taiwanese leaders and is driven by political decisions, with undoubted
economic effects, is clear.
2
Note that in national-accounting calculation, imports represent a subtraction from the total of all goods
purchased domestically and sold abroad.
13
Simple, germane tests for the liberal peace
As noted above, the literature on the liberal peace is extensive, generally finding that
trade and joint political liberalism lead to more peaceful ties, subject to qualifications on
asymmetries in either trade dependence or democracy. This section carries out two types
of tests, employing linear regression models. The first category of tests measures the
extent to which the onset of conflict, military or not, depends on trade ties and political
liberalism, and the second test explores the determinants of the depth of such conflict
contingent on it existing. All data are from Barbieri (2002), and cover the period 18711993.
In the first setof regressions the dependent variables are measures of the likelihood
of conflict. In each case, the observational unit is national dyads, i.e. pairs of nations, e.g.
Taiwan and China. In the left-hand panel the dependent variable is MID, militarized
interstate disputes. This variable takes the value one for a particular year if a dispute that
involves the use or threat of military force begins in that year for that pair of nations, and
zero otherwise. The regression technique used in this case is logit analysis.3
The independent variables include three measures of trade ties. The first is DYT1,
which is the U.S. dollar value (adjusted for inflation) of annual trade (imports and exports
combined) between the two nations. SAL and SYM are measures created by Barbieri (2002)
to measure on a 0-1 scale, respectively, the salience and symmetry of the relation relative
to the nations’ overall economies. Salience measures the joint importance of the trade ties
3
The left-hand variable is log
𝑝
1−𝑝
, where p is the probability of onset, a function of the factors outlined below.
14
relative to the two countries’ combined economies, and SYM measures the extent to which
the trade ties with the partner are equally important to each nation relative to its
importance to the other.4 A high value for SAL, in other words means that for the two
nations combined the trade relationship is quite important as a share of their total
economic activity, and a low value means it is an unimportant relationship. A high value
for SYM means that the trading relationship is of roughly equal importance for both
countries (e.g., France and Germany), while a low value indicates dramatic inequality in the
importance (e.g., China and Mongolia).
Several other variables expected to influence the likelihood of conflict are also
included as covariates. DEM is the combined extent to which governance is democratic in
the dyad, which is derived from the Polity III database, which is archived at the
Interuniversity Consortium for Social and Political Research as study #6695.5 The
democratic peace suggests that a high value makes war less likely, a low value more.
POWERDIFF is a measure of asymmetry in the nations’ capacity to project power, and is
thus similar, in geopolitical terms, to SYM. Finally, CONTIG is a variable that takes the value
one if the nations share a border, and zero otherwise. Nations that border one another are
far more likely than nations that do not to be at war, since war often involves disputes over
territory.
4
The formula for salience is√
symmetry is 1 −
𝐷𝑌𝑇12
𝐺𝐷𝑃1
−
𝐷𝑌𝑇12
𝐷𝑌𝑇12
𝐺𝐷𝑃2
𝐺𝐷𝑃1
+
𝐷𝑌𝑇12
𝐺𝐷𝑃2
, where GDP stands for gross domestic product. The formula for
.
(𝐷𝐸𝑀 −𝐴𝑈𝑇 +10)
(𝐷𝐸𝑀 −𝐴𝑈𝑇 +10)
1
1
2
2
Barbieri (2002) defines the joint-democracy measure as[
][
], where DEM and AUT
2
2
are the Polity III measures of the extent to which government is democratic and autocratic respectively.
𝑉
POWERDIFF is defined as ln 1, where Vi is country i's "share of the interstate system's total military, industrial and
5
𝑉2
demographic resources" (Barbieri, 2002, page 66). The shares in turn come from the Composite Index of National
Capabilities portion of the Correlates of War project.
15
The results are displayed in Table 1. All variables save one are statistically
significant at the 0.1 percent level. Consistent with the Barbieri (2002) analysis (although
her econometric specification is different), when the trade ties assume a greater
importance for the two nations combined, the onset of conflict of some sort is actually more
likely. Greater symmetry is good for peaceful relations, in that the coefficient for SYM is
positive. But this also implies that asymmetrical relations are bad for the prospects of
peace. When two nations are collectively more democratic (and recall that in these data
there is no way to observe each country's democratic component separately), conflict is
less likely, as it is, consistent with standard balance-of-power reasoning, when the power
differential is small.
However, it is possible that the absolute volume of trade ties is actually proxying for
wars between major nations. The right-hand side of Table 1 thus reruns this regression,
while including a variable taking the value one if at least one of the two nations is a major
power, and zero otherwise, the criteria for major-power status defined by the Correlates of
War project.6 In this regression the statistical significance for all trade-related variables
disappears, but the present in a conflict of at least one major power is highly significant,
inducing a greater likelihood of conflict onset. The coefficients for the democracy variables
and the difference in the countries' global heft retain their high degrees of significance and
their signs. At worst, close trade ties, especially in the presence of asymmetry, make
conflict more likely. At best, they fail to deter it, after standardizing for symmetry and
salience effects..
The COW data are also used below. (The codebook is available at
http://www.correlatesofwar.org/COW2%20Data/MIDs/Development/DisputeCodingManual.pdf)
6
16
Another significant question is the level of conflict, contingent on it occurring. Table
2 presents logit estimations for the probability of two events: a lack of war with a
negotiated settlement, and a lack of war but with a settlement imposed by one party. Two
variables are changed from those in Table 1, because of the availability of more relevant
data. Because the set from which these data come (Barbieri (2002), Ch.4, instead of Ch. 3,
which is restricted in ways discussed below) contains data for trade/GDP shares for each
𝑇𝑅𝐴𝐷𝐸12
⁄𝐺𝐷𝑃
𝐴
country in a dyad, it is possible to define RELTRADE = ln 𝑇𝑅𝐴𝐷𝐸12
⁄𝐺𝐷𝑃
𝐵
, where A represents
the country out of 1 and 2 for which the trade/GDP ratio is higher, and B represents the
country for which it is lower. This measures how much more important for the country for
which it is more important trade is. If the dyadic trade amount is an equal share of GDP for
both countries the value is zero, and as it its importance increases for A RELTRADE can
increase without limit. The question is whether more imbalanced trade makes the country
for whom the dyadic trade relationship is relatively more important more vulnerable. It
replaces SYM in the regressions below. The other change is similar, to the democracy
variable. DEMDIFF measures not the sum of democracy in the two countries, which is
JOINTDEM, but the extent to which one country is more democratic than the other. It is
defined as 𝑎𝑏𝑠(𝐷𝐸𝑀1 − 𝐷𝐸𝑀2 ), where DEM1 and DEM2 are the variables referenced in note
4 above. Because both the absolute and relative nature of democracy in both countries can
plausibly affect the seriousness of conflict, DEMDIFF and JOINTDEM are both included.
The results are reported in Table 2. The data set contains four categories of dispute
settlement – negotiated, imposed, none, and unclear. On the left the dependent variable is
whether war is averted, but through an imposed settlement, which the Correlates of War
17
Codebook defines as “an unconditional surrender, the occupation of territory and failure to
withdrawal (sic) prior to the termination phase of the dispute, or the evidence of being
forced into accepting the terms of a termination by one or more protagonists.” I include in
the results reported on the left only those disputes that are both not wars and have
imposed settlements. These settlements presumably favor the stronger party. The righthand results take negotiated settlements as the positive outcome. (A separate logit
regression was run for cases in which war was the outcome being the measured event, but
results were not significant, and are not reported.) It is political and power rather than
trade-dependence differences that drive these outcomes. A higher degree of joint
democracy makes an imposed but peaceful settlement less likely. Greater differences in
democratic levels make imposed but peaceful settlements more likely and negotiated but
peaceful settlements less so. POWERDIFF makes imposed and negotiated settlements more
and less likely respectively. Neither the volume of dyadic trade nor differences in the
economic importance of trade nor the summed importance of it affect these outcomes at a
statistically significant level.
The Promise and Peril of Engagement with China
The above analysis suggests several propositions. First, large absolute volumes of
trade, which indicate larger gains to cooperation, larger economic arenas for dispute, and
larger capacities to threaten, may make some sort of dispute more likely. However, such
ties make it more likely, given that war is avoided, that the dispute will be resolved via
negotiation rather than unilateral imposition. Perhaps the more important consideration is
18
not economic ties as such but the dramatic difference in democracy between the
governments on the two sides of the Straits. For 2008, China and Taiwan score zero and
ten respectively (on a ten-point scale) on the newer Polity IV democracy measures, while
for the autocracy measures the scores are seven and zero respectively. Such a lack of
democracy make it more likely (for a two-sided lack , i.e. a low score for JOINTDEM) that a
dispute will occur, and that is more likely to take the form (separately for both one- and
two-sided lack of democracy) of a unilaterally imposed settlement.
It is striking to consider how extreme the Taiwan-China relationship is compared to
the data set used in the previous section. Although the data set only includes values
through 1994, it is possible to take recent values for the relevant variables for Taiwan and
China and plug them in to the regression formulas in Tables 1 and 2 and obtain predictive
values are the probabilities of an interstate dispute and an imposed settlement. Those
values for the right-hand variables used above are listed in Table 3. Substituting these
values puts the Taiwan-China dyad into the 99.9th and 99th percentiles for the
probabilities of a dispute breaking out in any given year (this figure being q = .112 for any
given year), and of it being settled through imposition rather than war or negotiation
respectively. 7 Another way to think about the outlier nature of this relationship in terms of
trade and democratic asymmetry can be seen from looking at the mean values for all
observations in the Barbieri data for which MID = 1. Recalling that not all variables are
significant in Table 1 (in the regression used here, SAL is not), it is nonetheless striking that
in the dyad every variable save SAL is different in the wrong direction from the point of
view of deterring disputes. The table also reports, in the second term in parentheses, the
7
The regression simulated from Table 1 is the one on the left.
19
standard deviation of each variable. In every case save JOINTDEM and RELTRADE, the
difference in the Taiwan-China dyad and the sample means for the countries beginning
conflict is at least one standard deviation. As the precise value of q depends on the
specification of the model, one can quarrel with the exact degree of difference between the
cross-Straits relation and conflict situations generally. But that, because of power and
democracy differences and contiguity, the Taiwan-China relationship is among the most
distinctive in the world is less arguable.
Summary
Collectively, the econometric findings suggest, first, that at best trade ties fail to
make conflict less likely. Consistent with the Barbieri (2002) results, it appears to be more
likely that, even for the most democratic nations, greater ties make conflict of one sort or
another more likely. However, trade ties do not make war per se more likely. The one
outcome among the varieties of conflict that they do make more likely is an imposed as
opposed to a negotiated peace. Given the extreme nature of the China-Taiwan relationship
with regard to the importance of trade on one side (the Taiwanese), and with regard to the
democratic asymmetry between the countries, the question of whether economic ties
between the two countries can be too close, not because it will lead to war, but to a
settlement of the outstanding issues primarily on China’s terms, is worth asking. As noted
above, there is a huge volume of literature with findings contrary to the ones in this paper
with regard to the relationship between commercial ties and peace, but to the degree one
accepts destabilizing nature of certain kinds of trade ties, cross-Straits relations provide an
20
unusually worrisome case. This is not merely or even primarily because extensive ties
provide China an opportunity to use its economic strength to achieve national-security
goals with non-military means, but because of the simultaneous great-power and antidemocratic nature of the Chinese regime. The shortest distance to better relations is thus
perhaps through political reform in China rather than through the cementing of
commercial relations.
References
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con
24
Table 1
Trade, Democracy and the Likelihood of Conflict Beginning
Independent variables
DYT
SAL
SYM
CON
JOINTDEM
POWERDIFF
MAJPOW
CONSTANT
Coefficient
0.0000161
-1.93763
-2.546234
2.751174
-.0132895
-.0846879
z-statistic
3.42****
-0.55
-3.27****
35.37****
-9.98****
-3.19****
-2.99444
-3.74****
Coefficient
5.93E-06
-.9034905
-.707641
2.668725
-.0159201
-.2096068
1.460865
-4.766172
Number of observations 119,296
Χ2:
1514.04****
Pseudo- R2:
.1577
Log-likelihood:
-4044.0491
119,296
106.45****
.1818
-3928.5021
25
z-statistic
1.00
-.24
-.81
33.95****
-11.62****
-7.38****
16.16****
-5.31****
Table 2
Level of conflict, contingent on conflict occurring (logit estimations)
Dependent Variable
Negotiated peace
Coefficient
z statistic
Independent variables
DYT
-.0002836
SAL
12.0212
RELTRADE
-.0789863
CON
.6834681
JOINTDEM
.0052472
DEMDIFF
-.0655539
POWERDIFF
.2519117
CONSTANT
-2.688292
Number of observations 570
Χ2:
21.96***
Pseudo- R2:
.0522
Log-likelihood:
-199.35869
Imposed peace
Coefficient
z statistic
-1.23
1.05
-0.58
1.77*
1.28
-1.86*
2.19**
-5.16****
.0003306
-13.57261
.0623799
-.6054604
-.0076169
.0717768
-.2276544
2.48329
570
27.76****
.0605
-215.4905
1.44
-1.28
0.49
-1.68*
-1.83*
2.12**
-2.07**
5.08****
C:\Users\evan\Documents\work\research\Taiwan and China\barbieri.ch4.dta"
logit negpeace demd logrel logls poly cont dyt1 gsal
. logit imppeace demd logrel logls poly cont dyt1 gsal
26
Table 3
Updated values for the Taiwan-China relationship for variables used in Tables 1 and 2
DYT (2007): 108367.97*
(699.97, σ = 7048.07)
SAL (2007): 0.600
(.0065, σ = .012)
SYM (2007): 0.713
(.98, σ = .052)
JOINTDEM (2008): 15
(20.39, σ = 24.72)
DEMDIFF (2008): 10*
(4.77, σ = 4.03)
POWERDIFF (2008): .139
(1.97, σ = 1.58)
RELTRADE (2007): 2.173
(1.72, σ = 1.38)
CON (2008): 1
MAJPOW (2008): 1
Sources: Same as Figure 3 (DYT, SAL, SYM, RELTRADE); Polity IV Annual Time Series 1980-2008,
http://www.systemicpeace.org/inscr/inscr.htm (JOINTDEM, DEMDIFF); Correlate of War National
Material Capabilities, http://www.correlatesofwar.org/COW2%20Data/Capabilities/nmc3-02.htm
(POWERDIFF)
27
Trade with Hong Kong and Taiwan as Pct. Of
Taiwan GDP (Current $US)
0.9
0.8
0.7
0.6
1
1
0.5
2
0.4
3
0.3
0.2
0.1
1
4
4
8
26
26
11
7
32
21 16 13 14 12
0
Figure 3
Note: Numbers on each column are China’s ordinal ranking as a trading partner.
28
Hong Kong
Taiwan
China's Inbound FDI From Taiwan and Hong Kong
(current $US)
3.5E+10
3E+10
2.5E+10
2E+10
Hong Kong
1.5E+10
Taiwan
1E+10
5E+09
0
Figure 4
29