Economic Statecraft in Multipolar Times

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BÄTZ, Konstantin, 2022. Economic Statecraft in Multipolar Times [Dissertation]. Konstanz: University of Konstanz

@phdthesis{Batz2022Econo-57320, title={Economic Statecraft in Multipolar Times}, year={2022}, author={Bätz, Konstantin}, address={Konstanz}, school={Universität Konstanz} }

2022-04-20T06:52:47Z In the present work I answer pressing questions on the nature of economic statecraft and economic leverage. I provide an integrated model of economic coercion and military statecraft within an interstate bargaining model. Furthermore, this thesis identifies and discusses two failure points of economic statecraft: lack of trade leverage and sanction busting by third parties. This thesis consists of five chapters, starting with an extended theoretical overview and literature review. The main body of work is structured into three substantive chapters, each representing a unique and independent contribution. The final chapter summarizes the results and spells out scientific as well as policy conclusions.<br /><br />The first chapter motivates and frames the thesis by reference to current developments in international relations. In addition, it gives an overview of the previous literature on trade, its connection to war, economic sanctions, and the multipolarity of the international system. Drawing from the collective understanding of economic statecraft, I draw out the overall research question of this thesis: What is the nature of economic leverage and economic statecraft? Furthermore, which factors determine the success and failure of economic statecraft? The three substantive chapters in this work then proceed to shine light on all of these questions.<br /><br />According to conventional wisdom, domestic political concerns govern trade policies. In chapter 2, I develop a theoretical model that reconsiders the role of trade policy as a foreign policy instrument, arguing that the choice between protectionism and other foreign policy instruments depends on the nature and level of economic interdependence. Economic interdependence empowers states to use trade and investment as a bargaining chip during interstate disputes, but trade wars and sanctions can also "use up'' this leverage and thus make a violent conflict more likely. This theoretical argument is supported by a case study of pre-World War I Balkan politics as well as a game theoretical model of bargaining that includes both economic policy and military deterrence. The corresponding chapter extends both the currently existing literature on trade policy by taking into consideration national security considerations, and the commercial liberalism literature by incorporating determination of trade levels via an endogenous foreign policy choice.<br /><br />The third chapter further extends the empirical literature on the trade-conflict nexus so as to include economic statecraft. Traditionally, this literature has been divided into the realist and the liberal schools of thought. While the realist position is that trade either has negative or no effect at all on peace, realists argue that trade indeed ensures peace. In order to cross this divide, I argue that trade interdependence leads to peace in general, even though states still can and do exploit asymmetries. To this end, I construct empirical measures of trade leverage and economic coercion. I further argue that the presence or absence of trade leverage determines whether states choose economic coercion or military statecraft when faced with an international crisis. This is supported by empirical testing of the theoretically derived hypotheses on a data set of post-World War II trade flows and conflict indicators. I conclude that trade leverage leads states to prefer economic coercion, but a lack of trade leverage makes it more likely that they choose war to resolve their differences.<br /><br />Chapter 4 focuses on the issue of sanction busting. Sanctions are one common instrument of economic statecraft, and sanction busting is a major obstacle to the their success. Sanctions research has largely neglected the impact of sanctions on trade with third countries, focusing much more on the relationship between the sender and the target. Up to now, no systematic overview of the factors that determine the diversion of trade between the sender and its target towards third countries during a sanction case exists. To fill the gap, in chapter 4 I first formulate a theoretical account of sanction busting that focuses on the attributes of potentially sanction busting third countries, rather than the relationship between the sender and the target. In particular, I point out that the state capacity of sanction busting countries has been previously overlooked. This leads to two complementary explanations of sanction busting: politically motivated sanction busting driven by political calculations and market based sanction busting driven by economic incentives. I empirically test the hypotheses derived from this theoretical argument, employing different measures of state capacity and comparing their effect on sanction busting with that of political alignment. Measures of state capacity as well as political alignment are both associated with the prevalence of sanction busting, with state capacity consistently being the more important factor. The weaker a third country’s state capacity, the more prone it is to become a jurisdiction through which sanction busting trade is conducted. Finally, I show that including measures of state capacity in supervised machine learning algorithms meaningfully improves out of sample predictions of sanction busting trade flows. I conclude by suggesting that taking into account state capacity when designing sanctions will improve sanction success compared to focusing solely on the political alignment of potential sanction busters. In the final chapter, I summarize my contribution to our collective understanding of economic statecraft. In addition, I draw out concrete policy prescriptions as well as potential avenues for future research.<br /><br />The main contribution of this thesis lies in its theoretical definition of economic leverage as a function of economic costs states can impose upon each other. This definition is complemented empirically by a formulation of trade leverage as a function of relative market exposures of two interacting states. Beyond this vital definitional work, my thesis shows that economic leverage broadly, and trade leverage narrowly, can lead states to choose economic coercion over war. On the flipside, economic coercion in the form of sanctions may fail if low state capacity sanction busters succeed in sabotaging the sanction sender's efforts. Bätz, Konstantin Economic Statecraft in Multipolar Times eng terms-of-use 2022 Bätz, Konstantin 2022-04-20T06:52:47Z

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