TCS Daily

Peace Through Trade?

By Alan Oxley - January 16, 2004 12:00 AM

History has recorded many examples of war being waged to win trade. The English adventurers Jardine and Matheson contrived the Opium War between Britain and China to secure trade rights in China. A Japanese strategy in the Pacific War was to advance its mercantilist trade ambitions. In more modern -- dare we say, civilized -- times we have observed countries make peace to trade. The announcement that India and Pakistan will negotiate a free trade agreement is welcome since it helps defuse tension that threatened war. But they will fail if think they can succeed in using free trade to make peace. What they need to do is to make peace to trade.

Historians regularly debate how much free trade promotes peace. The European Economic Community, the precursor to the European Union, actively promoted free trade to build economic interdependence between France and Germany. It succeeded. Between 1870 and 1945, they fought three wars. In the sixty years since, they have fought none. The idea is now unthinkable.

Furthermore, the losers of the Second World War have since then arguably achieved levels of global influence and prestige they have never previously enjoyed. They built wealth and traded in the global markets created by the liberalization of the General Agreement on Tariffs and Trade. Even struggling as it is today, Japan exercises global influence unprecedented in its history and Germany has finally realized Bismark's ambition to lead Europe. Isn't that tangible evidence free trade promotes peace and prosperity? Doesn't it show that if the economic stake of a country in another is so large the prosperity of the second country becomes a national interest of the first?

There are free traders who caution that the first true era of free trade in Europe between 1870 and 1915 did not demonstrate that. We still had the First World War. They are right. But there are differences. It is a stretch to equate the era of open trade then with today's global market economy. Today we have global brands, globally integrated manufacturing and vast and virtual capital markets. These were not features of trade and commerce in the nineteenth century. And free trade was not universal in the nineteenth century. The Netherlands, Britain and France ran mercantilist colonial trading systems. The G8 countries meet today with the specific intent of collaborating to advance common economic interests in an open, global economy.

Of course the terms of peace, including demilitarization, were forced on Germany and Japan after World War Two. West Germany had little choice but to join the European Economic Community. This doesn't help much in working through the peace/free trade equation in the Indian Subcontinent. There is no external power capable of forcing terms of peace on India and Pakistan.

But there is example to draw from Latin America. A decade ago the Mercorsur agreement to establish an economic community in Latin America through free trade was created. As a result, Brazil and Argentina have become each other's largest trading partners. Most people would say "So what? It is natural for neighbors to trade." Never underestimate the capacity of government to act against the best interest of its people. For decades, the Argentine and Brazilian Governments ensured that that was not the natural pattern.

Each regarded the other as military threat. Until the mid-eighties, both countries had secret programs to build nuclear weapons to threaten use against the other. Both refused to join the global Nuclear Non-Proliferation Treaty and a regional Latin American nuclear non-proliferation treaty.

It was not until the military regimes in Buenos Aires and Brasilia were replaced with democratic governments and the nuclear weapons programs were publicly disbanded in the eighties that each country could contemplate dismantling barriers to trade with the other. This makes sense. Like peace, free trade depends on trusting foreigners. Under protectionism, foreign products are shunned. If you believe a neighbor is warlike, you are unlikely to allow its products to compete with yours.

It may be too soon to say Mercorsur will prevent Argentina and Brazil going to war, but it is undeniable that the economic interdependence and the level of trust between the two countries have never been greater.

In contrast, India and Pakistan not only have nuclear weapons deployed against each other, they are in a state of constant mini-war in Kashmir and a large part of the border between India and Pakistan still remains undefined. Investors not should be rushing to raise funds to cash in any economic bonanza from a sub-continental free trade agreement. They should wait at least until a formal and enduring peace is secured. Completing the border between the two countries would help.


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