The Weaponization of Trade A study of modern trade conflicts from the mid-1900s to present Prepared for Eurasia Group Columbia University School of International and Public Affairs Capstone Report, Spring 2020 Advisor: Markus Jaeger [email protected] Lukas Feldhaus [email protected] Yuxin Huang [email protected] Sherry Kim [email protected] Wonjae Kim [email protected] Joon Sung Lee [email protected] Daniel Marechal [email protected] Xinyi Sun [email protected] Samantha Weiss [email protected] 1 Acknowledgement This report was produced for Eurasia Group as a Capstone Consultancy project of Columbia University’s School of International and Public Affairs (SIPA). The authors Lukas Feldhaus, Yuxin Huang, Sherry Kim, Wonjae Kim, Joon Sung Lee, Daniel Marechal, Xinyi Sun, and Samantha Weiss are graduate students in SIPA concentrating in Energy and Environment, International Finance and Economic Policy, and International Security Policy. We would like to extend our gratitude to our advisors who made our research possible. Dr. Markus Jaeger, Adjunct Associate Professor at Columbia SIPA, whose advice and feedback helped and guided us throughout this project. Suzanne Hollmann and Saleha Awal for their logistical support during the project. Our client, Ian Bremmer, President of the Eurasia Group and Leon Levy, Senior Analyst in Eurasia Group's Global Macro practice, who provided us with a wealth of information to understand trade weaponization.Table of contents 2 Table of contents Section Page number 1. Introduction 3 2. Literature review 5 3. Analytical framework 19 4. Historical case studies and analysis 24 I. Geopolitically-motivated case studies 28 A. US-Japan 1940s 28 B. Chicken War 1960s 34 C. Oil Crisis 1970s 39 D. US-Japan 1980s 45 E. Natural Gas and Energy 1980s 49 F. Rare Earth 2010s 54 II. Economically-motivated case studies 58 A. Pasta War 1980s 58 B. Textile Conflict 1980s 60 C. Computer and Software 1980s 61 D. Banana War 1990s 63 E. Steel Tariffs 200s 64 III. Summary and analysis 67 5. The future of trade regimes and weaponization 72 I. Summary and projections 87 6. Conclusion 88 7. Bibliography 90 3 1.0 Introduction 1.1 Abstract Despite the historical trend towards trade liberalization, states have increasingly implemented protectionist trade policies, often to induce some political change. This report analyzes historical case studies of trade conflict since the 1940s, to distill insights regarding the introduction, evolution, and development of trade weaponization. Said insights are subsequently applied to present-day conflicts, to better understand this trend’s continued evolution in geopolitics. Countries weaponize trade tools to impose economic pressure on a target, inducing a change in trade patterns in service of political or broadly-economic objectives. If the target country retaliates by also weaponizing trade, the conflict potentially escalates into a trade war. To understand the motives underlying trade wars, we have organized our case studies by the following variables: country leadership, administratively-led vs. public-led policies, political and geo- strategic goals vs. economic concerns, and implications for technical development. Other variables considered for an analysis of the results include: within vs. across alliances, symmetric vs. asymmetric economic/political/military capabilities. We will consider trade weaponization within the institutional context of international trade organizations and regimes, namely the WTO and GATT. With these variables, we aim to specify the factors that provided the winners with an upper hand, thereby creating a foundation for the team to assess ongoing and future trade wars. 1.2 Executive summary Over the last three years, rhetoric about trade wars has become more salient as the United States (US) and China - two major economic powers - have engaged in tariff escalations within the context of broader economic and financial conflict. Although disputes involving trade have been taking place periodically since Ancient Greece, there has been growing concern that the current structure of global trade is more conducive to trade weaponization, defined as the employment of trade tools to induce a trade partner to change its practices in any issue-area (including economic policy and diplomatic relations) by exploiting its economic vulnerabilities. Albeit usually welfare-enhancing, international trade also generates relations of asymmetric interdependence; one party may accordingly lose more than the other if economic ties are suspended. This makes the weaponization of trade possible. This report proposes a theoretical framework to analyze the weaponization of trade, which draws mainly from the Realist perspective of trade and interdependence. We employ quantitative analysis to bolster the insights gleaned from an extensive literature review. Compiled data reflects potential power sources of the involved parties – such as GDP, population size, and bilateral trade as a share of GDP – as a proxy for the level of vulnerability. As corroborated by the case studies, trade weaponization is usually initiated by the less vulnerable party, except when the aggressor holds a dominant position in the market of certain strategic goods (i.e. oil and rare earth). A quantitative approach alone is insufficient for analyzing the outcomes of trade weaponization. Therefore, we introduce four axes of qualitative analysis: actors’ vulnerability, objectives, diplomatic ties, and international institutions. First, to assess the parties’ vulnerability 4 to trade weaponization, we analyze the political strength of domestic interest groups negatively affected by trade restrictions – the “commercial fifth-columns.'' Second, we categorize objectives as predominantly economic or geopolitical. We argue that when it comes to geopolitical issues, especially security-related ones, the “pain threshold” of the aggressee tends to be higher, and so the weaponization of trade is more likely to escalate to other areas of bilateral relations and even lead to war. Purely economic disputes, however, tend to be settled within an institutional framework. Third, we assess the status of diplomatic relations between the parties and classify it as either inter-alliance or across-alliance. States tend to consider “security externalities'' when it comes to weaponizing trade. This explains why trade conflict between allied countries is less likely to escalate, as the parties are not willing to inflict too much economic pain on a partner on whom its national security relies. Finally, we consider that a strong multilateral trade regime can facilitate negotiations. This is more likely in low-stakes economic conflicts with no relevant geostrategic repercussions. To test our framework, we selected eleven trade disputes that occurred throughout the 20th century. Our objective was not to draw a random sample, but rather to choose a group of cases with enough variation in the aforementioned variables. Since our framework includes several non- hierarchical components, it is not meant to predict the onset or the outcomes of episodes of trade weaponization. Still, it proved successful in helping explain the selected cases. We found that states weaponize trade when they feel strongly about their objective - either due to pressure from domestic interest groups or because of high-level strategic interest. Moreover, weaponization is likely when the asymmetric interdependence plays in their favor. Historical evidence corroborates the relevance of our four analytical axes in the evolution of trade disputes. With a theoretical framework and the conclusions we derived from the case studies, we briefly present an assessment of the evolution of structural variables in the international system, before proceeding to an analysis of two on-going trade conflicts: the US-China trade war and the Japan-Korea trade war. Our view is that international trade is now much more complex than it was until the early-2000s, with high-level economic interdependence among countries in different security alliances and in different stages of economic development. This is different from the mainly Transatlantic trade during the early years of the GATT. This situation is inherently unstable - reflecting a unipolar world that emerged from the Cold War that no longer exists. Eventually, countries will seek to reduce their vulnerabilities. However, while the adjustment takes place, trade weaponization tends to occur more often leading to less predictable outcomes, especially when high-stake political objectives are on the table. The US-China trade war exemplifies this trend. As the conflict includes high stake objectives - potentially, economic and technological dominance - and involves non-allied countries, it tends to escalate in spite of periodic truces, with almost no influence of the WTO. The case of Japan and South Korea is different since, albeit rivals in some specific issues like historical grievances, both parties are in the same security alliance. Their willingness to inflict reciprocal damage is limited. Moreover, as medium-sized countries in the system that rely a lot on an open trade system, they are more likely to accept WTO arbitration rather than break up with the multilateral trade regime. 5 1.3 Introduction Rhetoric regarding trade wars has become more salient in recent years. Nonetheless, disputes involving restrictions on cross-border exchanges of goods and services are not novel phenomenon. In fact, trade conflict can be traced